Outstanding Exposure

3 Months Ended

Mar. 31, 2012

Outstanding Exposure

Outstanding Exposure

3. Outstanding Exposure

The Company’s financial guaranty contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest (“Debt Service”) on public finance and structured finance obligations. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third-party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Based on accounting standards in effect during any given reporting period, some of these VIEs are consolidated as described in Note 7, Consolidation of Variable Interest Entities. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs whether or not they are consolidated.

Debt Service Outstanding

	Gross Debt Service Outstanding				Net Debt Service Outstanding
	March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011
	(in millions)
Public finance	$	786,373	$	798,471	$	735,829	$	716,890
Structured finance	130,802		137,661		122,698		128,775
Total financial guaranty	$	917,175	$	936,132	$	858,527	$	845,665

As of March 31, 2012, the Company’s net mortgage guaranty insurance in force was approximately $176.7 million. Of the $176.7 million, $140.1 million covers loans originated in Ireland and $36.6 million covers loans originated in the UK.

Financial Guaranty Portfolio by Internal Rating

	As of March 31, 2012
	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
Super senior	$	—	—	%	$	1,165	2.9	%	$	15,756	18.0	%	$	5,219	22.8	%	$	22,140	3.9	%
AAA	4,931		1.2		1,384		3.5		34,974		39.8		10,286		44.9		51,575		9.1
AA	144,987		34.8		973		2.4		10,537		12.0		936		4.1		157,433		27.7
A	219,095		52.6		11,126		27.9		4,759		5.4		1,389		6.1		236,369		41.7
BBB	42,916		10.3		22,913		57.4		4,726		5.4		3,027		13.2		73,582		13.0
Below-investment-grade (“BIG”)	4,570		1.1		2,352		5.9		17,032		19.4		2,045		8.9		25,999		4.6
Total net par outstanding	$	416,499	100.0	%	$	39,913	100.0	%	$	87,784	100.0	%	$	22,902	100.0	%	$	567,098	100.0	%

	As of December 31, 2011
	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
Super senior	$	—	—	%	$	1,138	2.9	%	$	16,756	18.2	%	$	5,660	23.9	%	$	23,554	4.2	%
AAA	5,074		1.3		1,381		3.5		35,736		38.7		10,231		43.2		52,422		9.4
AA	139,693		34.6		1,056		2.7		12,575		13.6		976		4.1		154,300		27.7
A	213,164		52.9		11,744		30.1		4,115		4.5		1,518		6.4		230,541		41.3
BBB	40,635		10.1		21,399		54.8		5,044		5.5		3,391		14.3		70,469		12.6
BIG	4,507		1.1		2,328		6.0		18,008		19.5		1,919		8.1		26,762		4.8
Total net par outstanding	$	403,073	100.0	%	$	39,046	100.0	%	$	92,234	100.0	%	$	23,695	100.0	%	$	558,048	100.0	%

In First Quarter 2012, the Company reclassified as AA 80% of the net par outstanding of those first lien transactions that are covered by the Bank of America Agreement (see Note 4, Financial Guaranty Insurance Contracts) and that the Company otherwise internally rated below AA. The Company reclassified those amounts as AA exposure due to the eligible assets that Bank of America has placed into trust in order to collateralize its reimbursement obligation relating to 21 first lien transactions. This reclassification resulted in a decrease of net outstanding par rated BIG as of December 31, 2011 by $1,452 million from that previously reported and, without this change, net outstanding par rated BIG as of March 31, 2012 would have been $1,382 million higher. Prior periods have been revised to conform to this presentation.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $2.1 billion for structured finance and $1.0 billion for public finance obligations at March 31, 2012. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between April 1, 2012 and February 25, 2017, with $0.7 billion expiring prior to December 31, 2012. All the commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Economic Exposure to the Selected European Countries

Several European countries are experiencing significant economic, fiscal and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The Company is closely monitoring its exposures in European countries where it believes heightened uncertainties exist, specifically, Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). Published reports have identified countries that may be experiencing reduced demand for their sovereign debt in the current environment. The Company selected these European countries based on these reports and its view that their credit fundamentals are deteriorating. The Company’s economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following table net of ceded reinsurance.

Net Economic Exposure to Selected European Countries(1)

March 31, 2012

	Greece		Hungary		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	291	$	—	$	—	$	1,040	$	113	$	270	$	1,714
Infrastructure finance	—		453		25		341		104		174		1,097
Sub-total	291		453		25		1,381		217		444		2,811
Non-sovereign exposure:
Regulated utilities	—		—		—		226		—		17		243
RMBS	—		249		140		522		—		—		911
Commercial receivables	—		1		20		27		15		18		81
Pooled corporate	33		—		244		251		14		544		1,086
Sub-total	33		250		404		1,026		29		579		2,321
Total	$	324	$	703	$	429	$	2,407	$	246	$	1,023	$	5,132
Total BIG	$	291	$	540	$	15	$	252	$	130	$	145	$	1,373

(1)While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, including U.S. dollars, Euros and British pounds sterling. Included in the table above is $140.1 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining $176.7 million legacy mortgage reinsurance business. The legacy mortgage reinsurance business is not included in the Company’s exposure tables elsewhere in this document because the amount of the exposure is relatively immaterial. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the table.

Included in “Public Finance” in the tables above are $291 million (net of reinsurance) of bonds of the Hellenic Republic of Greece. The Company has not guaranteed any other sovereign bonds of the Selected European Countries. The remainder of the “Public Finance Category” is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal. Debt issued by a governmental entity or government backed entity, or supported by such an entity, that is other than direct sovereign debt of the ultimate governing body of the country.

Surveillance Categories

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies.

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. For example, the Company models all assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 4, Financial Guaranty Insurance Contracts). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects “lifetime losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it will ultimately have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk free rate is used for recording of reserves for financial statement purposes.)

Intense monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The three BIG categories are:

·BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.

·BIG Category 2: Below-investment-grade transactions for which lifetime losses are expected but for which no claims (other than liquidity claims which is a claim that the Company expects to be reimbursed within one year) have yet been paid.

·BIG Category 3: Below-investment-grade transactions for which lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

Included in the first lien RMBS BIG exposures below is $345.6 million of net par outstanding related to transactions covered by the Bank of America Agreement which represents the portion of the covered first lien transactions (20%) that are not subject to reimbursement from Bank of America as of March 31, 2012. Under the Bank of America Agreement, 80% of first lien claims paid by Assured Guaranty will be reimbursed, until such time as losses on the collateral underlying the RMBS on which Assured Guaranty is paying claims reach $6.6 billion. See Note 4, Financial Guaranty Insurance Contracts.

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

	As of March 31, 2012
	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	77	$	448	$	—	$	525	$	713	0.1	%
Alt-A first lien	962		1,717		1,493		4,172		5,208		0.7
Option ARM	1		687		775		1,463		2,256		0.3
Subprime (including net interest margin securities)	208		1,745		498		2,451		7,976		0.4
Second lien U.S. RMBS:
Closed end second lien	—		493		504		997		1,020		0.2
Home equity lines of credit (“HELOCs”)	401		—		2,716		3,117		3,700		0.6
Total U.S. RMBS	1,649		5,090		5,986		12,725		20,873		2.3
Trust preferred securities (“TruPS”)	2,140		—		952		3,092		6,272		0.5
Other structured finance	1,410		465		1,385		3,260		83,541		0.6
U.S. public finance	3,480		270		820		4,570		416,499		0.8
Non-U.S. public finance (1)	2,061		291		—		2,352		39,913		0.4
Total	$	10,740	$	6,116	$	9,143	$	25,999	$	567,098	4.6	%

	As of December 31, 2011
	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	77	$	465	$	—	$	542	$	739	0.1	%
Alt-A first lien	1,695		1,028		1,540		4,263		5,329		0.8
Option ARM	25		689		882		1,596		2,433		0.3
Subprime (including net interest margin securities)	795		1,200		513		2,508		8,136		0.4
Second lien U.S. RMBS:
Closed end second lien	—		495		520		1,015		1,040		0.2
HELOCs	421		—		2,858		3,279		3,890		0.6
Total U.S. RMBS	3,013		3,877		6,313		13,203		21,567		2.4
TruPS	2,501		—		951		3,452		6,334		0.6
Other structured finance	1,295		548		1,429		3,272		88,028		0.6
U.S. public finance	3,395		274		838		4,507		403,073		0.8
Non-U.S. public finance (1)	2,046		282		—		2,328		39,046		0.4
Total	$	12,250	$	4,981	$	9,531	$	26,762	$	558,048	4.8	%

(1)     Include $291 million in net par and $231.9 million in expected loss to be paid as of March 31, 2012 and $282 million in net par and $42.6 million in expected loss to be paid as of December 31, 2011 for bonds of the Hellenic Republic of Greece.

By Category Below-Investment-Grade Credits

	As of March 31, 2012
	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	7,703	$	3,037	$	10,740	164	33	197
Category 2	3,903		2,213		6,116		79	35	114
Category 3	6,913		2,230		9,143		125	26	151
Total BIG	$	18,519	$	7,480	$	25,999	368	94	462

		As of December 31, 2011
		Net Par Outstanding						Number of Risks(2)
Description		Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1		$	8,297	$	3,953	$	12,250	171	40	211
Category 2		3,458		1,523		4,981		71	33	104
Category 3		7,204		2,327		9,531		126	26	152
Total BIG		$	18,959	$	7,803	$	26,762	368	99	467

(1)Includes net par outstanding for FG VIEs.

(2)A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments.