Financial Guaranty Insurance Contracts

3 Months Ended

Mar. 31, 2012

Financial Guaranty Insurance Contracts

Financial Guaranty Insurance Contracts

4. Financial Guaranty Insurance Contracts

Change in accounting for deferred acquisition costs

In October 2010, the FASB adopted Accounting Standards Update (“Update”) No. 2010-26. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company adopted this new guidance with retrospective application. The amendment in the Update specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include direct costs of contract acquisition that result directly from and are essential to the contract transaction. These costs include expenses such as ceding commissions and the cost of underwriting personnel. Management uses its judgment in determining the type and amount of cost to be deferred. The Company conducts an annual study to determine which operating costs vary with, and are directly related to, the acquisition of new business, and therefore qualify for deferral. Ceding commission income on business ceded to third party reinsurers reduces policy acquisition costs and is deferred. Costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs are charged to expense as incurred.

Expected losses, loss adjustment expenses (“LAE”) and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of deferred acquisition costs. When an insured issue is retired early, the remaining related deferred acquisition cost is expensed at that time. Ceding commission expense and income associated with future installment premiums on assumed and ceded business, respectively, are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to net premium receivable or reinsurance balances payable.

As of January 1, 2011, the effect of retrospective application of the new guidance was a reduction to deferred acquisition costs of $94.4 million and a reduction to retained earnings of $64.0 million.

Effect of Retrospective Application of New Deferred Acquisition Cost Guidance

On Consolidated Statements of Operations

	As ReportedFirst Quarter 2011		RetroactiveApplication Adjustment			As RevisedFirst Quarter 2011
	(in millions except per share amounts)
Amortization of deferred acquisition costs	$	7.4	$	(3.7	)	$	3.7
Other operating expenses	56.8		6.0			62.8
Total expenses	63.5		2.3			65.8
Income (loss) before income taxes	215.5		(2.3		)	213.2
Total provision (benefit) for income taxes	74.9		(1.0		)	73.9
Net income (loss)	140.6		(1.3		)	139.3
Earnings per share:
Basic	$	0.76	$	—		$	0.76
Diluted	0.75		(0.01		)	0.74

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of derivative contracts. Amounts presented in this note relate to financial guaranty insurance contracts. Tables presented herein also present reconciliations to financial statement line items for other less significant types of insurance.

Net Earned Premiums

	First Quarter
	2012		2011
	(in millions)
Scheduled net earned premiums	$	152.0	$	214.9
Acceleration of premium earnings	36.6		29.6
Accretion of discount on net premiums receivable	4.7		9.0
Total financial guaranty	193.3		253.5
Other	0.4		0.5
Total net earned premiums(1)	$	193.7	$	254.0

(1)Excludes $17.0 million and $19.1 million in First Quarter 2012 and 2011, respectively, related to consolidated FG VIEs.

Gross Premium Receivable, Net of Ceding Commissions Roll Forward

	First Quarter
	2012			2011
	(in millions)
Gross premium receivable, net of ceding commissions payable:
Balance beginning of period	$	1,002.9		$	1,167.6
Premium written, net	56.3			48.0
Premium payments received, net	(86.1		)	(72.8		)
Adjustments to the premium receivable:
Changes in the expected term of financial guaranty insurance contracts	32.7			(51.1		)
Accretion of discount	6.1			9.2
Foreign exchange translation	12.2			15.9
Consolidation of FG VIEs	(5.4		)	—
Other adjustments	—			1.2
Balance, end of period (1)	$	1,018.7		$	1,118.0

(1)Excludes $32.6 million and $19.8 million as of March 31, 2012 and 2011, respectively, related to consolidated FG VIEs.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 48%, 47% and 45% of installment premiums at March 31, 2012, December 31, 2011 and March 31, 2011, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro and British Pound Sterling.

Actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, refundings, accelerations, commutations and changes in expected lives.

Expected Collections of Gross Premiums Receivable,

Net of Ceding Commissions (Undiscounted)

	March 31, 2012
	(in millions)
2012 (April 1 – June 30)	$	56.6
2012 (July 1 – September 30)	30.8
2012 (October 1 – December 31)	44.6
2013	109.5
2014	95.9
2015	85.7
2016	79.8
2017-2021	315.9
2022-2026	214.6
2027-2031	158.7
After 2031	194.4
Total(1)	$	1,386.5

(1)Excludes expected cash collections on FG VIEs of $38.9 million.

Components of Unearned Premium Reserve

	As of March 31, 2012									As of December 31, 2011
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue	$	5,918.8		$	647.8		$	5,271.0		$	6,046.3		$	727.4		$	5,318.9
Contra-paid	(87.9		)	(16.7		)	(71.2		)	(92.2		)	(18.8		)	(73.4		)
Total financial guaranty	5,830.9			631.1			5,199.8			5,954.1			708.6			5,245.5
Other	8.3			0.3			8.0			8.7			0.3			8.4
Total	$	5,839.2		$	631.4		$	5,207.8		$	5,962.8		$	708.9		$	5,253.9

(1)Total net unearned premium reserve excludes $249.7 million and $274.2 million related to FG VIE’s as of March 31, 2012 and December 31, 2011, respectively.

The following table provides a schedule of the expected timing of the income statement recognition of financial guaranty insurance net deferred premium revenue and the present value of net expected losses to be expensed, pretax which are not included in loss and LAE reserve. The amount and timing of actual premium earnings and loss and LAE may differ from the estimates shown below due to factors such as refundings, accelerations, commutations, changes in expected lives and updates to loss estimates. A loss and LAE reserve is only recorded for the amount by which net expected loss to be expensed exceeds deferred premium revenue determined on a contract-by-contract basis. This table excludes amounts related to consolidated FG VIEs.

Expected Timing of Financial Guaranty Insurance

Premium and Loss Recognition

	As of March 31, 2012
	Scheduled Net Earned Premium		Net Expected Loss to be Expensed		Net
	(in millions)
2012 (April 1–June 30)	$	144.3	$	17.8	$	126.5
2012 (July 1–September 30)	138.2		17.0		121.2
2012 (October 1–December 31)	131.6		15.5		116.1
Subtotal 2012	414.1		50.3		363.8
2013	474.1		58.4		415.7
2014	436.6		46.8		389.8
2015	387.1		41.2		345.9
2016	351.9		33.2		318.7
2017 - 2021	1,334.4		136.9		1,197.5
2022 - 2026	838.9		74.0		764.9
2027 - 2031	508.2		35.8		472.4
After 2031	525.7		27.2		498.5
Total present value basis(1)(2)	5,271.0		503.8		4,767.2
Discount	298.8		292.6		6.2
Total future value	$	5,569.8	$	796.4	$	4,773.4

(1)Balances represent discounted amounts.

(2)Consolidation of FG VIEs resulted in reductions of $396.2 million in future scheduled amortization of deferred premium revenue and $211.0 million in net present value of expected loss to be expensed.

Selected Information for Policies Paid in Installments

	As ofMarch 31, 2012		As ofDecember 31, 2011
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	1,018.7	$	1,002.9
Gross deferred premium revenue	2,125.6		2,192.6
Weighted-average risk-free rate used to discount premiums	3.7		3.4
Weighted-average period of premiums receivable (in years)	10.0		9.8

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid. Surveillance personnel present analysis related to potential losses to the Company’s loss reserve committees for consideration in estimating the expected loss to be paid. Such analysis includes the consideration of various scenarios with potential probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company’s loss reserve committees review and refresh the estimate of expected loss to be paid each quarter. The Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance as a result of economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management.

The following table presents a roll forward of the present value of net expected loss to be paid for financial guaranty insurance contracts by sector. Net expected loss to be paid is the estimate of the present value of future claim payments, net of reinsurance and net of salvage and subrogation, which includes the present value benefit of estimated recoveries for breaches of representations and warranties (“R&W”). The Company used weighted average risk-free rates for U.S. dollar denominated obligations, which ranged from 0.0% to 3.94% as of March 31, 2012 and 0.0% to 3.27% as of December 31, 2011. The weighted average risk-free rates for Euro denominated obligations was 0.0% - 2.84% as of March 31, 2012 and 0.0% - 2.69% as of December 31, 2011.

Financial Guaranty Insurance

Present Value of Net Expected Loss to be Paid

Roll Forward by Sector(1)

	Net Expected Loss to be Paid as of December 31, 2011(4)			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Net Expected Loss to be Paid as of March 31, 2012(4)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.8		$	0.4		$	—		$	2.2
Alt-A first lien	134.9			(8.6		)	(9.4		)	116.9
Option ARM	152.9			(1.7		)	(75.9		)	75.3
Subprime	140.3			11.3			(1.2		)	150.4
Total first lien	429.9			1.4			(86.5		)	344.8
Second lien:
Closed-end second lien	(79.6		)	(1.1		)	(9.0		)	(89.7		)
HELOCs	(31.1		)	7.6			(19.0		)	(42.5		)
Total second lien	(110.7		)	6.5			(28.0		)	(132.2		)
Total U.S. RMBS	319.2			7.9			(114.5		)	212.6
Other structured finance	252.8			(23.8		)	(23.7		)	205.3
Public finance(5)	66.0			220.7			47.8			334.5
Total	$	638.0		$	204.8		$	(90.4	)	$	752.4

	Net Expected Loss to be Paid as of December 31, 2010			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Expected Loss to be Paid as of March 31, 2011(4)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.4		$	0.1		$	—		$	1.5
Alt-A first lien	184.4			6.5			(19.5		)	171.4
Option ARM	523.7			(114.7		)	(86.9		)	322.1
Subprime	200.4			(17.8		)	(15.1		)	167.5
Total first lien	909.9			(125.9		)	(121.5		)	662.5
Second lien:
Closed-end second lien	56.6			(106.4		)	(27.1		)	(76.9		)
HELOCs	(805.7		)	77.6			(64.6		)	(792.7		)
Total second lien	(749.1		)	(28.8		)	(91.7		)	(869.6		)
Total U.S. RMBS	160.8			(154.7		)	(213.2		)	(207.1		)
Other structured finance	159.1			16.3			(2.4		)	173.0
Public finance(5)	88.9			(13.6		)	(9.0		)	66.3
Total	$	408.8		$	(152.0	)	$	(224.6	)	$	32.2

(1)	Amounts include all expected payments whether or not the insured VIE is consolidated. Amounts exclude reserves for mortgage business of $1.9 million as of March 31, 2012 and December 31, 2011.
(2)	Economic loss development includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.
(3)	Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets.
(4)	Includes expected LAE to be paid for mitigating claim liabilities of $26.9 million as of March 31, 2012 and $35.5 million as of December 31, 2011.
(5)	Includes expected loss to be paid of $231.9 million as of March 31, 2012 and $42.6 million as of December 31, 2011 related to Greek sovereign debt.

The table below provides a reconciliation of expected loss to be paid to expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid because the payments have been made but have not yet been expensed, (2) for transactions with a net expected recovery, the addition of claim payments that have been made (and therefore are not included in expected loss to be paid) that are expected to be recovered in the future (and therefore have also reduced expected loss to be paid), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Present Value of Net Expected Loss to be Paid

and Net Present Value of Net Expected Loss to be Expensed

	As ofMarch 31, 2012
	(in millions)
Net expected loss to be paid	$	752.4
Less: net expected loss to be paid for FG VIEs	(155.5		)
Total	907.9
Contra-paid, net	71.2
Salvage and subrogation recoverable	367.3
Ceded salvage and subrogation recoverable(1)	(42.9		)
Loss and LAE reserve	(951.3		)
Reinsurance recoverable on unpaid losses	151.6
Net expected loss to be expensed(2)	$	503.8

(1)Recorded in reinsurance balances payable on the consolidated balance sheet.

(2)Excludes $211.0 million related to consolidated FG VIEs.

The Company’s Approach to Projecting Losses in U.S. RMBS

The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and either establishes a recovery for claims already paid or reduces its projected claim payments accordingly.

The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” Liquidation rates may be derived from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates, then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the liquidation of currently delinquent loans represent defaults of currently performing loans. A conditional default rate is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral pool balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal repayments, and defaults.

In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on its experience to date. Further detail regarding the assumptions and variables the Company used to project collateral losses in its U.S. RMBS portfolio may be found below in the sections “U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien” and “U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime.”

The Company is in the process of enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. The Company calculates a credit from the RMBS issuer for such recoveries where the R&W were provided by an entity the Company believes to be financially viable and where the Company already has access or believes it will attain access to the underlying mortgage loan files. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement) or where it is in advanced discussions on a potential agreement, that credit is based on the agreement or potential agreement. In second lien RMBS transactions where there is no agreement or advanced discussions, this credit is based on a percentage of actual repurchase rates achieved across those transactions where material repurchases have been made, while in first lien RMBS transactions where there is no agreement or advanced discussions, this credit is estimated by reducing collateral losses projected by the Company to reflect a percentage of the recoveries the Company believes it will achieve, based on the number of breaches identified to date and incorporating scenarios based on the amounts the Company was able to negotiate under the Bank of America Agreement. The first lien approach is different from the second lien approach because the Company’s first lien transactions have multiple tranches and a more complicated method is required to correctly allocate credit to each tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses generally increases the R&W credit calculated by the Company for the RMBS issuer. Further detail regarding how the Company calculates these credits may be found under “Breaches of Representations and Warranties” below.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for (a) the collateral losses it projects as described above, (b) assumed voluntary prepayments and (c) recoveries for breaches of R&W as described above. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

First Quarter-End 2012 U.S. RMBS Loss Projections

The shape of the RMBS loss projection curves used by the Company assume that the housing and mortgage markets will eventually improve. The Company retained the same general shape of the RMBS loss projection curves at March 31, 2012 as December 31, 2011, reflecting the Company’s view, based on its observation of continued elevated levels of early stage delinquencies, that the housing and mortgage market recovery is occurring at a slower than previously expected pace.

The scenarios the Company used to project RMBS collateral losses for second lien RMBS transactions at March 31, 2012 were essentially the same as those it used at December 31, 2011, except that based on its observation of the continued elevated levels of early stage delinquencies, as noted above, the Company retained the same general shape of its RMBS loss projection curves. This had the effect of reflecting a slower recovery in the housing market than had been assumed at December 31, 2011.

The Company used the same general approach to project RMBS collateral losses for first lien RMBS transactions at March 31, 2012 as it did at December 31, 2011, except that, as noted above, based on its observation of the continued elevated levels of early stage delinquencies, the Company retained the same general shape of its RMBS loss projection curves. This had the effect of reflecting a slower recovery in the housing market than had been assumed at December 31, 2011.

The Company also used generally the same methodology to project the credit received for recoveries in R&W at March 31, 2012 as December 31, 2011. The primary differences relate to the refinement of the calculation of benefits due to potential agreements with R&W providers with which it is having discussions.

U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien

The Company insures two types of second lien RMBS: those secured by HELOCs and those secured by closed end second lien mortgages. HELOCs are revolving lines of credit generally secured by a second lien on a one to four family home. A mortgage for a fixed amount secured by a second lien on a one to four family home is generally referred to as a closed end second lien. Both first lien RMBS and second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority of the collateral. The Company has material exposure to second lien mortgage loans originated and serviced by a number of parties, but the Company’s most significant second lien exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America. See “—Breaches of Representations and Warranties.”

The delinquency performance of HELOC and closed end second lien exposures included in transactions insured by the Company began to deteriorate in 2007, and such transactions, particularly those originated in the period from 2005 through 2007, continue to perform below the Company’s original underwriting expectations. While insured securities benefit from structural protections within the transactions designed to absorb collateral losses in excess of previous historically high levels, in many second lien RMBS projected losses now exceed those structural protections.

The Company believes the primary variables affecting its expected losses in second lien RMBS transactions are the amount and timing of future losses in the collateral pool supporting the transactions and the amount of loans repurchased for breaches of R&W (or agreements with R&W providers related to such obligations). Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as conditional prepayment rate of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity. These variables are interrelated, difficult to predict and subject to considerable volatility. If actual experience differs from the Company’s assumptions, the losses incurred could be materially different from the estimate. The Company continues to update its evaluation of these exposures as new information becomes available.

The following table shows the key assumptions used in the calculation of estimated expected loss to be paid for direct vintage 2004 - 2008 second lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

Second Lien RMBS(1)

HELOC Key Variables	As ofMarch 31, 2012	As ofDecember 31, 2011
Plateau conditional default rate	3.3 – 26.3%	4.0 – 27.4%
Final conditional default rate trended down to	0.4 – 3.2%	0.4 – 3.2%
Expected period until final conditional default rate	36 months	36 months
Initial conditional prepayment rate	2.6 – 15.1%	1.4 – 25.8%
Final conditional prepayment rate	10%	10%
Loss severity	98%	98%
Initial draw rate	0.0 – 7.8%	0.0 – 15.3%

Closed end second lien Key Variables	As of March 31, 2012	As of December 31, 2011
Plateau conditional default rate	5.4 – 24.9%	6.9 – 24.8%
Final conditional default rate trended down to	3.3 – 9.2%	3.5 – 9.2%
Expected period until final conditional default rate	36 months	36 months
Initial conditional prepayment rate	1.2 – 8.6%	0.9 – 14.7%
Final conditional prepayment rate	10%	10%
Loss severity	98%	98%

(1)Represents assumptions for most heavily weighted scenario (the “base case”).

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected representative transactions and then applying an average of the preceding 12 months’ liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a conditional default rate. The first four months’ conditional default rate is calculated by applying the liquidation rates to the current period past due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the conditional default rate is calculated using the average 30-59 day past due balances for the prior three months. An average of the third, fourth and fifth month conditional default rates is then used as the basis for the plateau period that follows the embedded five months of losses.

As of March 31, 2012, for the base case scenario, the conditional default rate (the “plateau conditional default rate”) was held constant for one month. Once the plateau period has ended, the conditional default rate is assumed to gradually trend down in uniform increments to its final long-term steady state conditional default rate. In the base case scenario, the time over which the conditional default rate trends down to its final conditional default rate is 30 months. Therefore, the total stress period for second lien transactions is 36 months, comprising five months of delinquent data, a one month plateau period and 30 months of decrease to the steady state conditional default rate. This is the same as December 31, 2011. The long-term steady state conditional default rates are calculated as the constant conditional default rates that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally a very low recovery. Based on current expectations of future performance, the Company assumes that it will only recover 2% of the collateral, the same as December 31, 2011.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (which is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (which is the excess of the interest paid by the borrowers on the underlying loan over the amount of interest and expenses owed on the insured obligations). In the base case, the current conditional prepayment rate is assumed to continue until the end of the plateau before gradually increasing to the final conditional prepayment rate over the same period the conditional default rate decreases. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant. The final conditional prepayment rate is assumed to be 10% for both HELOC and closed end second lien transactions. This level is much higher than current rates for most transactions, but lower than the historical average, which reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the conditional prepayment rate at December 31, 2011. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to a final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 1.5% in all but one instance where the final draw rate was 3.9%.

In estimating expected losses, the Company modeled and probability weighted three possible conditional default rate curves applicable to the period preceding the return to the long-term steady state conditional default rate, the same three scenarios and weightings as December 31, 2011. Given that draw rates have been reduced to levels below the historical average and that loss severities in these products have been higher than anticipated at inception, the Company believes that the level of the elevated conditional default rate and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer (before considering the effects of repurchases of ineligible loans). The Company continues to evaluate the assumptions affecting its modeling results.

At March 31, 2012, the Company’s base case assumed a one month conditional default rate plateau and a 30 month ramp-down (for a total stress period of 36 months), the same as December 31, 2011. Increasing the conditional default rate plateau to four months and keeping the ramp-down at 30-months (for a total stress period of 39 months) would increase the expected loss by approximately $49.9 million for HELOC transactions and $4.8 million for closed end second lien transactions. On the other hand, keeping the conditional default rate plateau at one month but decreasing the length of the conditional default rate ramp-down to a 24 month assumption (for a total stress period of 30 months) would decrease the expected loss by approximately $46.7 million for HELOC transactions and $2.6 million for closed-end second lien transactions.

U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime

First lien RMBS are generally categorized in accordance with the characteristics of the first lien mortgage loans on one-to-four family homes supporting the transactions. The collateral supporting “subprime RMBS” transactions consists of first-lien residential mortgage loans made to subprime borrowers. A “subprime borrower” is one considered to be a higher risk credit based on credit scores or other risk characteristics. Another type of RMBS transaction is generally referred to as “Alt-A first lien.” The collateral supporting such transactions consists of first-lien residential mortgage loans made to “prime” quality borrowers who lack certain ancillary characteristics that would make them prime. When more than 66% of the loans originally included in the pool are mortgage loans with an option to make a minimum payment that has the potential to amortize the loan negatively (i.e., increase the amount of principal owed), the transaction is referred to as an “Option ARM.” Finally, transactions may be composed primarily of loans made to prime borrowers. First lien RMBS sometimes include a portion of loan collateral that differs in priority from the majority of the collateral.

The performance of the Company’s first lien RMBS exposures began to deteriorate in 2007 and such transactions, particularly those originated in the period from 2005 through 2007 continue to perform below the Company’s original underwriting expectations. The Company currently projects first lien collateral losses many times those expected at the time of underwriting. While insured securities benefited from structural protections within the transactions designed to absorb some of the collateral losses, in many first lien RMBS transactions, projected losses exceed those structural protections.

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent or in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). An increase in non-performing loans beyond that projected in the previous period is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquency categories. The Company arrived at its liquidation rates based on data in Loan Performance and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The Loan Performance securities databases, provided by CoreLogic, Inc., are said to be the industry’s largest and most comprehensive and include loan-level data on more than $2.2 trillion in mortgage-backed and asset-backed securities (more than 90% of the market) as well as analytical tools designed to help evaluate that data. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations to occur over two years.The Company used the same liquidation rates for March 31, 2012 as it did for December 31, 2011. The following table shows liquidation assumptions for various delinquency categories.

First Lien Liquidation Rates

	As ofMarch 31, 2012		As ofDecember 31, 2011
30 – 59 Days Delinquent
Alt A and Prime	35	%	35	%
Option ARM	50		50
Subprime	30		30
60 – 89 Days Delinquent
Alt A and Prime	55		55
Option ARM	65		65
Subprime	45		45
90+ Days Delinquent
Alt A and Prime	65		65
Option ARM	75		75
Subprime	60		60
Bankruptcy
Alt A and Prime	55		55
Option ARM	70		70
Subprime	50		50
Foreclosure
Alt A and Prime	85		85
Option ARM	85		85
Subprime	80		80
Real Estate Owned (REO)
All	100		100

While the Company uses liquidation rates as described above to project defaults of non-performing loans, it projects defaults on presently current loans by applying a conditional default rate trend. The start of that conditional default rate trend is based on the defaults the Company projects will emerge from currently nonperforming loans. The total amount of expected defaults from the non-performing loans is translated into a constant conditional default rate (i.e., the conditional default rate plateau), which, if applied for each of the next 24 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The conditional default rate thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the conditional default rate curve used to project defaults of the presently performing loans.

In the base case, each transaction’s conditional default rate is projected to improve over 12 months to an intermediate conditional default rate (calculated as 20% of its conditional default rate plateau); that intermediate conditional default rate is held constant for 36 months and then trails off in steps to a final conditional default rate of 5% of the conditional default rate plateau. Under the Company’s methodology, defaults projected to occur in the first 24 months represent defaults that can be attributed to loans that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected conditional default rate trend after the first 24 month period represent defaults attributable to borrowers that are currently performing.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historic high levels, and the Company is assuming that these high levels generally will continue for another year (in the case of subprime loans, the Company assumes the unprecedented 90% loss severity rate will continue for six months then drop to 80% for six months before following the ramp described below). The Company determines its initial loss severity based on actual recent experience. (The Company’s loss severity assumptions for March 31, 2012 were the same as it used for December 31, 2011.) The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in March 2013, and in the base case scenario, decline over two years to 40%.

The following table shows the key assumptions used in the calculation of expected loss to be paid for direct vintage 2004 - 2008 first lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS

	As of March 31, 2012	As of December 31, 2011
Alt-A First Lien
Plateau conditional default rate	2.7% – 33.9%	2.8% – 41.3%
Intermediate conditional default rate	0.5% – 6.8%	0.6% – 8.3%
Final conditional default rate	0.1% – 1.7%	0.1% – 2.1%
Initial loss severity	65%	65%
Initial conditional prepayment rate	0.0% – 34.1%	0.0% – 24.4%
Final conditional prepayment rate	15%	15%
Option ARM
Plateau conditional default rate	9.7% – 32.2%	11.7% –31.5%
Intermediate conditional default rate	1.9% – 6.4%	2.3% – 6.3%
Final conditional default rate	0.5% – 1.6%	0.6% – 1.6%
Initial loss severity	65%	65%
Initial conditional prepayment rate	0.1% – 5.3%	0.3% – 10.8%
Final conditional prepayment rate	15%	15%
Subprime
Plateau conditional default rate	8.3% – 30.0%	8.6% – 29.9%
Intermediate conditional default rate	1.7% – 6.0%	1.7% – 6.0%
Final conditional default rate	0.4% – 1.5%	0.4% – 1.5%
Initial loss severity	90%	90%
Initial conditional prepayment rate	0.0% – 8.8%	0.0% – 16.3%
Final conditional prepayment rate	15%	15%

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the conditional prepayment rate follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final conditional prepayment rate, which is assumed to be either 10% or 15% depending on the scenario run. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant.

The ultimate performance of the Company’s first lien RMBS transactions remains highly uncertain and may be subject to considerable volatility due to the influence of many factors, including the level and timing of loan defaults, changes in housing prices and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust the loss projections for those transactions based on actual performance and management’s estimates of future performance.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed conditional prepayment rates and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) at March 31, 2012, the same as December 31, 2011. In a somewhat more stressful environment than that of the base case, where the conditional default rate plateau was extended three months (to be 27 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over four rather than two years (and subprime loss severities were assumed to recover only to 60%), expected loss to be paid would increase from current projections by approximately $26.7 million for Alt-A first liens, $31.0 million for Option ARM, $120.0 million for subprime and $0.7 million for prime transactions. In an even more stressful scenario where other loss severities were assumed to recover over eight years (and subprime severities were assumed to recover only to 60% and other assumptions were the same as the other stress scenario), expected loss to be paid would increase from current projections by approximately $67.8 million for Alt-A first liens, $65.9 million for Option ARM, $167.1 million for subprime and $2.3 million for prime transactions. The Company also considered two scenarios where the recovery was faster than in its base case. In a scenario with a somewhat less stressful environment than the base case, where conditional default rate recovery was somewhat less gradual and the initial subprime loss severity rate was assumed to be 80% for 12 months and was assumed to recover to 40% over two years (the same scenario used for the base case at December 31, 2010), expected loss to be paid would decrease from current projections by approximately $5.2 million for Alt-A first lien, $30.1 million for Option ARM, $22.1 million for subprime and $0.2 million for prime transactions. In an even less stressful scenario where the conditional default rate plateau was three months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, expected loss to be paid would decrease from current projections by approximately $24.4 million for Alt-A first lien, $67.7 million for Option ARM, $46.3 million for subprime and $0.6 million for prime transactions.

Breaches of Representations and Warranties

The Company is pursuing reimbursements for breaches of R&W regarding loan characteristics. Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company’s original expectations. The Company has employed several loan file diligence firms and law firms as well as devoted internal resources to review the mortgage files surrounding many of the defaulted loans. The Company’s success in these efforts has resulted in three negotiated agreements in respect of the Company’s R&W claims, including one on April 14, 2011 with Bank of America and one on May 8, 2012 with Deutsche Bank AG as described under “Deutsche Bank Agreement” in Note 2, Business Changes, Uncertainties and Accounting Developments.

For the RMBS transactions as to which the Company had not settled its claims for breaches of R&W as of March 31, 2012, the Company had performed a detailed review of approximately 16,500 second lien and 20,300 first lien non-performing loan files, representing approximately $1.1 billion in second lien and $5.9 billion in first lien outstanding par of non-performing loans underlying insured transactions. The Company identified approximately 15,300 second lien transaction loan files and approximately 18,100 first lien transaction loan files that breached one or more R&W regarding the characteristics of the loans, such as misrepresentation of income or employment of the borrower, occupancy, undisclosed debt and non-compliance with underwriting guidelines at loan origination. The Company continues to review new files as new loans become non-performing and as new loan files are made available to it. The Company generally obtains the loan files from the originators or servicers (including master servicers). In some cases, the Company requests loan files via the trustee, which then requests the loan files from the originators and/or servicers. On second lien loans, the Company requests loan files for all charged-off loans. On first lien loans, the Company requests loan files for all severely (60+ days) delinquent loans and all liquidated loans. Recently, the Company started requesting loan files for all the loans (both performing and non-performing) in certain deals to limit the number of requests for additional loan files as the transactions season and loans charge-off, become 60+ days delinquent or are liquidated. (The Company takes no repurchase credit for R&W breaches on loans that are expected to continue to perform.) As of March 31, 2012, excluding settled transactions, the Company had reached agreement with R&W providers for the repurchase of $41.8 million of second lien and $74.8 million of first lien mortgage loans. The $41.8 million for second lien loans represents the calculated repurchase price for 514 loans and the $74.8 million for first lien loans represents the calculated repurchase price for 285 loans. The repurchase proceeds are paid to the RMBS transactions and distributed in accordance with the payment priorities set out in the transaction agreements, so the proceeds are not necessarily allocated to the Company on a dollar-for-dollar basis. Much of the repurchase proceeds already agreed to by R&W providers other than Bank of America have already been paid to the RMBS transactions.

The Company has included in its net expected loss estimates as of March 31, 2012 an estimated benefit from loan repurchases related to breaches of R&W of $1.4 billion, which includes amounts from Bank of America. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement) or, where potential recoveries may be higher due to settlements, that benefit is based on the agreement or probability of a potential agreement. For other transactions, the amount of benefit recorded as a reduction of expected losses was calculated by extrapolating each transaction’s breach rate on defaulted loans to projected defaults and applying a percentage of the recoveries the Company believes it will receive. Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims, projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company’s exposure. These amounts reflect payments made pursuant to the negotiated transaction agreements and not payments made pursuant to legal settlements. See “—Recovery Litigation” below for a description of the related legal proceedings the Company has commenced.

The Company did not incorporate any gain contingencies or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty’s ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company’s estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the creditworthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches across those transactions where material repurchases have been made and the potential amount of time until the recovery is realized.

The calculation of expected recovery from breaches of R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing limited recoveries. The Company did not include any recoveries related to breaches of R&W in amounts greater than the losses it paid or expected to pay under any given cash flow scenario. These scenarios were probability weighted in order to determine the recovery incorporated into the Company’s estimate of expected losses. This approach was used for both loans that had already defaulted and those assumed to default in the future. As noted above, in circumstances where potential recoveries may be higher due to settlements, the recovery assumption is based on the probability of the potential agreement.

Balance Sheet Classification of R&W Benefit, Net of Reinsurance

	As of March 31, 2012							As of December 31, 2011
	For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet		For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet
	(dollars in millions)
Salvage and subrogation recoverable	$	389.1	$	(216.4	)	$	172.7	$	401.8	$	(197.3	)	$	204.5
Loss and LAE reserve	818.5		(74.5		)	744.0		857.5		(74.6		)	782.9
Unearned premium reserve	190.0		(56.2		)	133.8		175.5		(49.9		)	125.6
Total	$	1,397.6	$	(347.1	)	$	1,050.5	$	1,434.8	$	(321.8	)	$	1,113.0

The following table represents the Company’s total estimated R&W recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures.

Roll Forward of Estimated Benefit from Recoveries from Representation and Warranty Breaches,

Net of Reinsurance

	Future Net R&W Benefit as of December 31, 2011		R&W Development and Accretion of Discount During 2012			R&W Recovered During 2012(1)			Future Net R&W Benefit as of March 31, 2012(2)
	(in millions)
Prime first lien	$	3.0	$	0.6		$	—		$	3.6
Alt-A first lien	202.7		9.4			(1.0		)	211.1
Option ARM	713.9		27.5			(17.6		)	723.8
Subprime	101.5		(5.1		)	—			96.4
Closed end second lien	223.8		(2.2		)	—			221.6
HELOC	189.9		2.2			(51.0		)	141.1
Total	$	1,434.8	$	32.4		$	(69.6	)	$	1,397.6

	Future Net R&W Benefit as of December 31, 2010		R&W Development and Accretion of Discount During 2011		R&W Recovered During 2011(1)			Future Net R&W Benefit as of March 31, 2011(2)
	(in millions)
Prime first lien	$	1.1	$	1.2	$	—		$	2.3
Alt-A first lien	81.0		39.7		—			120.7
Option ARM	309.3		335.3		(25.6		)	619.0
Subprime	26.8		54.3		—			81.1
Closed end second lien	178.2		95.0		—			273.2
HELOC	1,004.1		154.5		(33.9		)	1,124.7
Total	$	1,600.5	$	680.0	$	(59.5	)	$	2,221.0

(1)Gross amounts recovered were $77.2 million and $64.2 million in First Quarter 2012 and 2011, respectively.

(2)Includes R&W benefit of $482.1 million as of March 31, 2012 and $1,324.3 million as of March 31, 2011 attributable to transactions covered by the Bank of America Agreement.

Financial Guaranty Insurance U.S. RMBS Risks with R&W Benefit

	Number of Risks (1) as of		Debt Service as of
	March 31,2012	December 31, 2011	March 31,2012		December 31, 2011
	(dollars in millions)
Prime first lien	1	1	$	40.5	$	41.9
Alt-A first lien	21	22	1,670.0		1,732.6
Option ARM	11	12	1,337.6		1,459.7
Subprime	5	5	825.7		905.8
Closed-end second lien	4	4	262.8		361.4
HELOC (2)	7	15	731.2		2,978.5
Total	49	59	$	4,867.8	$	7,479.9

(1)A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

(2)The decline in number of HELOC risks and debt service relates to the final payment from Bank of America for covered HELOC transactions.

The following table provides a breakdown of the development and accretion amount in the roll forward of estimated recoveries associated with alleged breaches of R&W.

	First Quarter
	2012			2011
	(in millions)
Inclusion of new deals with breaches of R&W during period	$	—		$	107.1
Change in recovery assumptions as the result of additional file review and recovery success	79.7			198.4
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	(51.3		)	39.8
Results of settlements	—			334.1
Accretion of discount on balance	4.0			0.6
Total	$	32.4		$	680.0

The R&W development during First Quarter 2012 resulted in large part from the change in recovery assumption related to a select group of transactions where the Company believes there is an increased probability of a settlement.  The remainder of the development relates to changes in collateral losses.

The Company assumes that recoveries on transactions backed by HELOC and closed-end second lien loans that were not subject to the Bank of America Agreement or projected settlements will occur in two to four years from the balance sheet date depending on the scenarios and that recoveries on transactions backed by Alt-A first lien, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions. Recoveries on second lien transactions subject to the Bank of America Agreement were paid in full by March 31, 2012.

As of March 31, 2012, cumulative collateral losses on the 20 first lien RMBS transactions executed as financial guaranties and subject to a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, “Bank of America”) (the “Bank of America Agreement”) were approximately $2.1 billion. The Company estimates that cumulative projected collateral losses for these first lien transactions will be $4.8 billion, which will result in estimated gross expected losses to the Company of $626.5 million before considering R&W recoveries from Bank of America, and $125.3 million after considering such R&W recoveries, all on a discounted basis.  The Bank of America Agreement covers cumulative collateral losses up to $6.6 billion for these transactions plus one CDS transaction. As of March 31, 2012, and before cessions to reinsurers, AGC and AGM had collected $76.3 million, sent invoices for an additional $13.9 million in claims paid in March 2012 and expected to collect an additional $487.2 million, on a discounted basis, for covered first lien transactions under the Bank of America Agreement. Bank of America had placed approximately $1.0 billion of eligible assets in trust in order to collateralize the reimbursement obligation relating to these and one covered first lien CDS transaction. The amount of assets required to be posted may increase or decrease from time to time as determined by rating agency requirements.

Student Loan Transactions

The Company has insured or reinsured $2.8 billion net par of student loan securitizations, $1.3 billion issued by private issuers and classified as asset-backed and $1.5 billion issued by public authorities and classified as public finance. Of these amounts, $170.7 million and $609.6 million, respectively, are rated BIG. The Company is projecting approximately $65.4 million of net expected loss to be paid in these portfolios. In general, the losses are due to: (i) the poor credit performance of private student loan collateral; (ii) high interest rates on auction rate securities with respect to which the auctions have failed or (iii) high interest rates on variable rate demand obligations (“VRDO”) that have been put to the liquidity provider by the holder and are therefore bearing high “bank bond” interest rates. The largest of these losses was approximately $24.7 million and related to a transaction backed by a pool of private student loans ceded to AG Re by another monoline insurer. The guaranteed bonds were issued as auction rate securities that now bear a high rate of interest due to the downgrade of the primary insurer’s financial strength rating. Further, the underlying loan collateral has performed below expectations. The decrease of approximately $9.2 million in net expected loss during First Quarter 2012 is primarily due to the increase in risk free rates used for discounting as well as some favorable experience with respect to prospective commutations potentially achieved by the primary insurer on some transactions.

Trust Preferred Securities Collateralized Debt Obligations

The Company has insured or reinsured $1.8 billion of net par of collateralized debt obligations (“CDOs”) backed by TruPS and similar debt instruments, or “TruPS CDOs.” Of that amount, $796.7 million is rated BIG. The underlying collateral in the TruPS CDOs consists of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts (“REITs”) and other real estate related issuers.

The Company projects losses for TruPS CDOs by projecting the performance of the asset pools across several scenarios (which it weights) and applying the CDO structures to the resulting cash flows. At March 31, 2012, the Company has projected expected losses to be paid for TruPS CDOs that are accounted for as financial guaranty insurance of $8.5 million. The decrease of approximately $4.7 million in net expected loss during First Quarter 2012 was driven primarily by the increase in the risk free rate used to discount loss projections (which was partially offset by refinements and updates of the model used to project losses).

“XXX” Life Insurance Transactions

The Company’s $2.3 billion net par of XXX life insurance transactions includes, as of March 31, 2012, $882.5 million rated BIG. The BIG “XXX” life insurance reserve securitizations are based on discrete blocks of individual life insurance business. In each such transaction the monies raised by the sale of the bonds insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers.

The BIG “XXX” life insurance transactions consist of two transactions: Ballantyne Re p.l.c and Orkney Re II p.l.c. These transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at March 31, 2012, the Company’s projected net expected loss to be paid is $122.7 million. The decrease of $6.8 million during First Quarter 2012 is due primarily to the increase in the risk free rate used to discount loss projections (offset in part by loss development related to updated mortality experience).

Other Notable Loss or Claim Transactions

The Company projects losses on, or is monitoring particularly closely, a number of other individual transactions, the most significant of which are described in the following paragraphs.

As of March 31, 2012 the Company had exposure to sovereign debt of Greece through financial guarantees of €200.0 million of debt (€165.1 million on a net basis) due in 2037 with a 4.5% fixed coupon and €114.1 million of inflation-linked debt (€52.6 million on a net basis) due in 2057 with a 2.085% coupon. On February 24, 2012, Greece announced the terms of exchange offers and consent solicitations that requested the voluntary participation by holders of certain Greek bonds, including the insured 2037 and 2057 bonds, in an exchange that would result in the cancellation of such bonds in exchange for a package of replacement securities with lower principal amounts, and requested the consent of holders to amendments of the bonds that could be used to impose the same terms on holders that do not voluntarily participate in the exchange. In March 2012, the exchange was imposed through collective action clauses on the Company’s exposure to the 2037 bonds. In April 2012, the Company consented to the exchange with respect to its exposure on the 2057 bonds. The exchanges have caused the Company to recognize inception to date economic loss development of $334.1 million gross of reinsurance and $231.9 million, net of reinsurance and net of salvage received in the form of such exchanged securities, as of March 31, 2012. This represents an increase from the equivalent amounts of $64.7 million gross of reinsurance and $42.6 million net of reinsurance as of December 31, 2011.

The Company has net exposure to Jefferson County, Alabama of $710.4 million. On November 9, 2011, Jefferson County filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Alabama (Southern Division).

·Most of the Company’s net exposure relates to $478.5 million of warrants issued by Jefferson County in respect of its sewer system, of which $205.4 million is direct and $273.1 million is assumed. Jefferson County’s sewer revenue warrants are secured by a pledge of the net revenues of the sewer system, and the bankruptcy court has affirmed that the net revenues constitute “special revenue” under Chapter 9. Therefore, the net revenues of the sewer system are not subject to an automatic stay during the pendency of the County’s bankruptcy case. However, whether sufficient net revenues will be made available for the payment of regularly scheduled debt service will be a function of the bankruptcy court’s determination of “necessary operating expenses” under the bankruptcy code and the valuation of the sewer revenue stream which the bankruptcy court ultimately approves. The Company has projected loss to be paid of $50.4 million as of March 31, 2012 and $26.7 million as of December 31, 2011 on the sewer revenue warrants, which is an estimate based on a number of probability-weighted scenarios. The economic development of $23.7 million during First Quarter 2012 was due primarily to market factors, namely the increase in the discount rate and the increase in the forward London Interbank Offered Rate (“LIBOR”) curve.

·The Company’s remaining net exposure of $231.8 million relates to bonds issued by Jefferson County that are secured by, or payable from, certain revenues, taxes or lease payments that may have the benefit of a statutory lien or a lien on “special revenues” or other collateral. Of this, $168.1 million is direct and $63.7 million is assumed. The Company projects less than $1 million of expected loss to be paid as of March, 31 2012 and December 31, 2011 on these bonds.

The Company expects that bondholder rights will be enforced. However, due to the early stage of the bankruptcy proceeding, and the circumstances surrounding Jefferson County’s debt, the nature of the action is uncertain. The Company will continue to analyze developments in the matter closely.

As of March 31, 2012 the Company had purchased all of the Company’s net outstanding insured bonds backed by telephone directory “yellow pages” (both print and digital) in various jurisdictions with a net par of $110 million and guaranteed by Ambac Assurance Corporation (“Ambac”).

The Company insures a total of $326.9 million net par of securities backed by manufactured housing loans, a total of $221.3 million rated BIG. The Company has expected loss to be paid of $16.6 million as of March 31, 2012 compared to $18.4 million as of December 31, 2011 on two direct transactions from 2000-2001 with an aggregate net par of $140.9 million and one assumed transaction from 2001 with an aggregate net par of $4.9 million.

The Company has $168.8 million of net par exposure to The City of Harrisburg, Pennsylvania, of which $94.8 million is BIG. The Company has paid $8.0 million in net claims to date, and expects a full recovery.

Recovery Litigation

RMBS Transactions

As of March 31, 2012, AGM and AGC have filed lawsuits with regard to the following U.S. RMBS transactions insured by them, alleging breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to AGM and AGC, and failure to cure or repurchase defective loans identified by AGM and AGC to such persons:

·ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1 (a second lien transaction in which AGM has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp.);

·ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL2 and the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL3 (both second lien transactions in which AGC has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp.);

·Flagstar Home Equity Loan Trust, Series 2005-1 and Series 2006-2 (both second lien transactions in which AGM has sued Flagstar Bank, FSB, Flagstar Capital Markets Corporation and Flagstar ABS, LLC);

·SACO I Trust 2005-GP1 (a second lien transaction in which AGC has sued JPMorgan Chase & Co.’s affiliate EMC Mortgage LLC (formerly known as EMC Mortgage Corporation), J.P. Morgan Securities Inc. (formerly known as Bear, Stearns & Co. Inc.) and JPMorgan Chase Bank, N.A.); and

·Bear Stearns Asset Backed Securities I Trust 2005-AC5 and Bear Stearns Asset Backed Securities I Trust 2005-AC6 (both first lien transactions in which AGC has sued EMC Mortgage LLC).

In these lawsuits, AGM and AGC seek damages, including indemnity or reimbursement for losses.

In September 2010, AGM also filed a lawsuit in the Superior court of the State of California, County of Los Angeles, against UBS Securities LLC and Deutsche Bank Securities, Inc., as underwriters, as well as several named and unnamed control persons of IndyMac Bank, FSB and related IndyMac entities, with regard to two U.S. RMBS transactions that AGM had insured, seeking damages for alleged violations of state securities laws and breach of contract, among other claims:

·IndyMac Home Equity Loan Trust 2007-H1 (a second lien transaction in which AGM has sued Deutsche Bank Securities, Inc.); and

·IndyMac IMSC Mortgage Loan Trust 2007-HOA-1 (a first lien transaction in which AGM has sued UBS Securities LLC).

In October 2011, AGM and AGC brought an action in the Supreme Court of the State of New York against DLJ Mortgage Capital, Inc. (“DLJ”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”) with regard to six first lien U.S. RMBS transactions insured by them:

·CSAB Mortgage-Backed Pass Through Certificates, Series 2006-2 (AGM insured);

·CSAB Mortgage-Backed Pass Through Certificates, Series 2006-3 (AGM insured);

·CSAB Mortgage-Backed Pass Through Certificates, Series 2006-4 (AGM insured);

·CMSC Mortgage-Backed Pass Through Certificates, Series 2007-3 (AGM insured);

·CSAB Mortgage-Backed Pass Through Certificates, Series 2007-1 (AGC insured); and

·TBW Mortgage-Backed Pass Through Certificates, Series 2007-2 (AGC insured).

The complaint alleges breaches of R&W by DLJ in respect of the underlying loans in the transactions, breaches of contract by DLJ and Credit Suisse in procuring falsely inflated shadow ratings (a condition to the issuance by AGC and AGM of its policies) by providing false and misleading information to the rating agencies, and failure by DLJ to cure or repurchase defective loans identified by AGM and AGC.

In February 2012, AGM filed a complaint in the Supreme Court of the State of New York against UBS Real Estate Securities Inc. with respect to three first lien U.S. RMBS transactions it had insured:

·MASTR Adjustable Rate Mortgages Trust 2006-OA2;

·MASTR Adjustable Rate Mortgages Trust 2007-1; and

·MASTR Adjustable Rate Mortgages Trust 2007-3.

The complaint alleges breaches of R&W by UBS Real Estate in respect of the underlying loans in the transactions, breaches of UBS Real Estate’s repurchase obligations with respect to the defective loans identified by AGM, and breaches of contract by UBS Real Estate in procuring falsely inflated shadow ratings (a condition to the issuance by AGM of its policies) by providing false and misleading information to the rating agencies concerning the underlying loans in the transactions.

In connection with the Deutsche Bank Agreement, Assured Guaranty will dismiss lawsuits it has filed against Deutsche Bank involving the following RMBS transactions:

·ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL2;

·ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL3; and

·IndyMac Home Equity Loan Trust 2007-H1.

The Deutsche Bank Agreement does not resolve the litigation filed by AGM against Deutsche Bank regarding the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1 securitization transaction, which involves second lien mortgage loans originated by a third party.

“XXX” Life Insurance Transactions

In December 2008, Assured Guaranty (UK) Ltd. (“AGUK”) filed an action against J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager in the Orkney Re II transaction, in the Supreme Court of the State of New York alleging that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II. After AGUK’s claims were dismissed with prejudice in January 2010, AGUK was successful in its subsequent motions and appeals and, as of December 2011, all of AGUK’s claims for breaches of fiduciary duty, gross negligence and contract were reinstated in full. Separately, at the trial court level, discovery is ongoing.

Public Finance Transactions

In June 2010, AGM sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, “JPMorgan”), the underwriter of debt issued by Jefferson County, in the Supreme Court of the State of New York alleging that JPMorgan induced AGM to issue its insurance policies in respect of such debt through material and fraudulent misrepresentations and omissions, including concealing that it had secured its position as underwriter and swap provider through bribes to Jefferson County commissioners and others. In December 2010, the court denied JPMorgan’s motion to dismiss. AGM has filed a motion with the Jefferson County bankruptcy court to confirm that continued prosecution of the lawsuit against JPMorgan will not violate the automatic stay applicable to Jefferson County notwithstanding JPMorgan’s interpleading of Jefferson County into the lawsuit. AGM is continuing its risk remediation efforts for this exposure.

In September 2010, AGM, together with TD Bank, National Association and Manufacturers and Traders Trust Company, as trustees, filed a complaint in the Court of Common Pleas of Dauphin County, Pennsylvania against The Harrisburg Authority, The City of Harrisburg, Pennsylvania, and the Treasurer of the City in connection with certain Resource Recovery Facility bonds and notes issued by The Harrisburg Authority, alleging, among other claims, breach of contract by both The Harrisburg Authority and The City of Harrisburg, and seeking remedies including an order of mandamus compelling the City to satisfy its obligations on the defaulted bonds and notes and the appointment of a receiver for The Harrisburg Authority. Acting on its own, the City Council of Harrisburg filed a purported bankruptcy petition for the City in October 2011, which petition and a subsequent appeal were dismissed by the bankruptcy judge in November 2011. The City Council has appealed the dismissal of the appeal. As a result of the dismissal, however, the actions brought by AGM and the trustees against The City of Harrisburg and The Harrisburg Authority are no longer stayed. A receiver for The City of Harrisburg (the “City Receiver”) was appointed by the Commonwealth Court of Pennsylvania in December 2011. The City Receiver filed a motion to intervene in the mandamus action and action for the appointment of a receiver for the resource recovery facility. In March 2012, the Court of Common Pleas of Dauphin County, Pennsylvania issued an order granting the motion for the appointment of a receiver for the resource recovery facility, which order has been appealed by The Harrisburg Authority.

Net Loss Summary

The following table provides information on loss and LAE reserves net of reinsurance and salvage and subrogation recoverable on the consolidated balance sheets.

Loss and LAE Reserve (Recovery)

Net of Reinsurance and Salvage and Subrogation Recoverable

	As of March 31, 2012									As of December 31, 2011
	Loss and LAE Reserve			Salvage and Subrogation Recoverable			Net			Loss and LAE Reserve			Salvage and Subrogation Recoverable			Net
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.6		$	—		$	1.6		$	1.2		$	—		$	1.2
Alt-A first lien	59.9			57.1			2.8			69.8			55.4			14.4
Option ARM	139.0			147.6			(8.6		)	141.7			140.3			1.4
Subprime	59.7			0.2			59.5			51.4			0.3			51.1
Total first lien	260.2			204.9			55.3			264.1			196.0			68.1
Second lien:
Closed-end second lien	9.3			139.8			(130.5		)	11.2			136.2			(125.0		)
HELOC	54.8			186.5			(131.7		)	61.1			177.2			(116.1		)
Total second lien	64.1			326.3			(262.2		)	72.3			313.4			(241.1		)
Total U.S. RMBS	324.3			531.2			(206.9		)	336.4			509.4			(173.0		)
Other structured finance	176.2			9.8			166.4			233.0			5.9			227.1
Public finance (1)	362.3			75.6			286.7			100.0			69.9			30.1
Total financial guaranty	862.8			616.6			246.2			669.4			585.2			84.2
Other	1.9			—			1.9			1.9			—			1.9
Subtotal	864.7			616.6			248.1			671.3			585.2			86.1
Effect of consolidating FG VIEs	(63.1		)	(292.2		)	229.1			(61.6		)	(258.1		)	196.5
Total (2)	$	801.6		$	324.4		$	477.2		$	609.7		$	327.1		$	282.6

(1)Includes $275.5 million of net loss reserves as of March 31, 2012 and $32.6 million of net loss reserves as of December 31, 2011 related to sovereign debt of Greece.

(2)See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.

The following table reconciles the loss and LAE reserve and salvage and subrogation components on the consolidated balance sheet to the financial guaranty net reserves (salvage) in the financial guaranty BIG transaction loss summary tables above.

Components of Net Reserves (Salvage)

	As of March 31, 2012			As of December 31, 2011
	(in millions)
Loss and LAE reserve	$	954.5		$	679.0
Reinsurance recoverable on unpaid losses	(152.9		)	(69.3		)
Subtotal	801.6			609.7
Salvage and subrogation recoverable	(367.3		)	(367.7		)
Salvage and subrogation payable(1)	42.9			40.6
Subtotal	(324.4		)	(327.1		)
Total	477.2			282.6
Less: other	1.9			1.9
Financial guaranty net reserves (salvage)	$	475.3		$	280.7

(1)Recorded as a component of reinsurance balances payable.

The following table presents the loss and LAE recorded in the consolidated statements of operations by sector for financial guaranty insurance contracts. Amounts presented are net of reinsurance and net of the benefit for recoveries from breaches of R&W.

Loss and LAE Reported

on the Consolidated Statements of Operations

	First Quarter
	2012			2011
	(in millions)
Financial Guaranty:
U.S. RMBS:
First lien:
Prime first lien	$	0.4		$	(0.1	)
Alt-A first lien	(1.3		)	8.2
Option ARM	52.5			(29.1		)
Subprime	7.8			(9.4		)
Total first lien	59.4			(30.4		)
Second lien:
Closed end second lien	(0.8		)	(9.9		)
HELOC	15.1			61.0
Total second lien	14.3			51.1
Total U.S. RMBS	73.7			20.7
Other structured finance	(32.4		)	20.3
Public finance(1)	208.7			(15.8		)
Total	250.0			25.2
Effect of consolidating FG VIEs	(3.2		)	(50.7		)
Total loss and LAE	$	246.8		$	(25.5	)

(1) Includes $189.3 million related to sovereign debt of Greece for First Quarter 2012.

The following table provides information on financial guaranty insurance and reinsurance contracts categorized as BIG.

Financial Guaranty Insurance BIG Transaction Loss Summary

March 31, 2012

	BIG Categories
	BIG 1						BIG 2						BIG 3									Effect of
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net			Consolidating FG VIEs			Total
	(dollars in millions)
Number of risks(1)	164			(58		)	79			(27		)	125			(48		)	368			—			368
Remaining weighted-average contract period (in years)	10.3			9.1			13.3			25.5			9.3			6.5			10.6			—			10.6
Net outstanding exposure:
Principal	$	9,048.8		$	(1,345.6	)	$	4,192.3		$	(289.5	)	$	7,512.5		$	(599.2	)	$	18,519.3		$	—		$	18,519.3
Interest	4,143.5			(464.5		)	3,206.1			(515.4		)	2,401.3			(163.8		)	8,607.2			—			8,607.2
Total(2)	$	13,192.3		$	(1,810.1	)	$	7,398.4		$	(804.9	)	$	9,913.8		$	(763.0	)	$	27,126.5		$	—		$	27,126.5
Expected cash outflows (inflows)	$	1,567.6		$	(646.0	)	$	2,203.4		$	(233.3	)	$	2,691.8		$	(123.6	)	$	5,459.9		$	(818.2	)	$	4,641.7
Potential recoveries(3)	(1,688.0		)	669.8			(1,049.2		)	50.0			(2,423.4		)	94.0			(4,346.8		)	905.6			(3,441.2		)
Subtotal	(120.4		)	23.8			1,154.2			(183.3		)	268.4			(29.6		)	1,113.1			87.4			1,200.5
Discount	9.9			(4.8		)	(279.1		)	23.1			(110.5		)	0.7			(360.7		)	68.1			(292.6		)
Present value of expected cash flows	$	(110.5	)	$	19.0		$	875.1		$	(160.2	)	$	157.9		$	(28.9	)	$	752.4		$	155.5		$	907.9
Deferred premium revenue	$	112.3		$	(13.6	)	$	311.5		$	(32.0	)	$	899.0		$	(107.5	)	$	1,169.7		$	(343.8	)	$	825.9
Reserves (salvage)(4)	$	(136.6	)	$	24.1		$	637.0		$	(141.7	)	$	(145.5	)	$	8.9		$	246.2		$	229.1		$	475.3

Financial Guaranty Insurance BIG Transaction Loss Summary

December 31, 2011

	BIG Categories
	BIG 1						BIG 2						BIG 3									Effect of
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net			Consolidating FG VIEs			Total
	(dollars in millions)
Number of risks(1)	171			(68		)	71			(26		)	126			(48		)	368			—			368
Remaining weighted-average contract period (in years)	10.0			9.2			13.7			20.5			9.2			6.4			10.4			—			10.4
Net outstanding exposure:
Principal	$	9,675.8		$	(1,378.0	)	$	3,731.6		$	(274.0	)	$	7,830.8		$	(627.7	)	$	18,958.5		$	—		$	18,958.5
Interest	4,307.9			(485.6		)	2,889.4			(404.8		)	2,486.4			(170.0		)	8,623.3			—			8,623.3
Total(2)	$	13,983.7		$	(1,863.6	)	$	6,621.0		$	(678.8	)	$	10,317.2		$	(797.7	)	$	27,581.8		$	—		$	27,581.8
Expected cash outflows (inflows)	$	1,730.6		$	(658.8	)	$	1,833.3		$	(120.3	)	$	2,423.0		$	(133.4	)	$	5,074.4		$	(998.4	)	$	4,076.0
Potential recoveries(3)	(1,798.0		)	664.0			(1,079.3		)	38.5			(2,040.5		)	100.3			(4,115.0		)	1,059.8			(3,055.2		)
Subtotal	(67.4		)	5.2			754.0			(81.8		)	382.5			(33.1		)	959.4			61.4			1,020.8
Discount	15.7			(4.6		)	(240.6		)	31.6			(125.1		)	1.6			(321.4		)	45.3			(276.1		)
Present value of expected cash flows	$	(51.7	)	$	0.6		$	513.4		$	(50.2	)	$	257.4		$	(31.5	)	$	638.0		$	106.7		$	744.7
Deferred premium revenue	$	260.8		$	(69.1	)	$	280.9		$	(12.3	)	$	991.8		$	(126.6	)	$	1,325.5		$	(390.7	)	$	934.8
Reserves (salvage)(4)	$	(96.6	)	$	6.9		$	319.5		$	(41.9	)	$	(110.2	)	$	6.5		$	84.2		$	196.5		$	280.7

(1)	A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.
(2)	Includes BIG amounts related to FG VIEs which are not eliminated.
(3)	Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.

(4) See table “Components of net reserves (salvage).”

Ratings Impact on Financial Guaranty Business

A downgrade of one of the Company’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company, if the insured obligors were unable to pay.

For example, AGM and AGC have issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. Under the swaps, AGM or AGC, as the case may be, insures periodic payments owed by the municipal obligors to the bank counterparties. Under certain of the swaps, AGM or AGC also insures termination payments that may be owed by the municipal obligors to the bank counterparties. The bank counterparty benefiting from AGM or AGC’s insurance policy may have the right to terminate the swap if AGM or AGC’s financial strength rating declines below a certain level. The particular level varies on a transaction by transaction basis; a significant amount of swap exposure would be terminable by the bank counterparty if AGM or AGC were downgraded below “A” by S&P or below “A2” by Moody’s. The amount that AGM or AGC may be obligated to pay upon termination could be limited both in the aggregate and on an annual basis by the terms of the swap. In many cases, the bank counterparty is not entitled to terminate the swap if the municipal obligor either replaces AGM or AGC, or posts collateral under the swap. If AGM or AGC has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment; the municipal obligor has failed to post collateral or replace AGM or AGC, as the case may be, or to otherwise cure the downgrade of AGM or AGC; the bank counterparty has elected to terminate the swap; a termination payment is payable by the municipal obligor; and the municipal obligor has failed to make the termination payment payable by it, in an amount that equals or exceeds the limit set forth in the financial guaranty relating to such swap, then AGM and AGC would be required to pay the termination payments due by the municipal obligor. The claim payment would be subject to recovery from such municipal obligor.

As another example, with respect to VRDOs for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of March 31, 2012, AGM and AGC has insured approximately $1.1 billion of par of VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. For a number of such obligations, a downgrade of AGM or AGC below “A+” by S&P or below “A1” by Moody’s triggers the ability of the bank to notify bondholders of the termination of the liquidity facility and to demand accelerated repayment of bond principal over a period of five to ten years. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

See also Note 13, Long Term Debt and Credit Facilities for a discussion of the impact of a downgrade in the financial strength rating on the Company’s insured leveraged lease transactions and Note 12, Commitments and Contingencies for a discussion of the impact of a downgrade in the financial strength rating on guaranteed investment contracts (“GICs”) that AGM has insured.