Outstanding Exposure

The Company’s financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its insured 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. Some of these VIEs are consolidated as described in Note 9, 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
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
	(in millions)
Public finance	$	678,792	$	722,562	$	637,104	$	677,369
Structured finance	97,754		112,388		90,893		104,811
Total financial guaranty	$	776,546	$	834,950	$	727,997	$	782,180

In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance in force was approximately $148 million as of June 30, 2013. The net mortgage guaranty insurance in force is assumed excess of loss business written between 2004 and 2006 and comprises $137 million covering loans originated in Ireland and $11 million covering loans originated in the United Kingdom ("U.K.").

Financial Guaranty Portfolio by Internal Rating

As of June 30, 2013



	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)
AAA	$	4,311	1.2	%	$	1,657	4.9	%	$	36,292	55.5	%	$	11,079	65.8	%	$	53,339	11.0	%
AA	115,820		31.2		487		1.4		9,808		15.0		669		4.0		126,784		26.0
A	202,440		54.6		8,965		26.6		2,872		4.4		863		5.1		215,140		44.2
BBB	43,554		11.7		20,701		61.5		3,526		5.4		2,313		13.7		70,094		14.4
Below-investment-grade (“BIG”)	4,930		1.3		1,890		5.6		12,898		19.7		1,914		11.4		21,632		4.4
Total net par outstanding	$	371,055	100.0	%	$	33,700	100.0	%	$	65,396	100.0	%	$	16,838	100.0	%	$	486,989	100.0	%

Financial Guaranty Portfolio by Internal Rating

As of December 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)
AAA	$	4,502	1.2	%	$	1,706	4.5	%	$	42,187	56.5	%	$	13,169	66.8	%	$	61,564	11.9	%
AA	124,525		32.1		875		2.3		9,589		12.8		722		3.7		135,711		26.1
A	210,124		54.1		9,781		26.1		4,670		6.2		1,409		7.2		225,984		43.4
BBB	44,213		11.4		22,885		61.0		3,717		5.0		2,427		12.3		73,242		14.1
BIG	4,603		1.2		2,293		6.1		14,532		19.5		1,964		10.0		23,392		4.5
Total net par outstanding	$	387,967	100.0	%	$	37,540	100.0	%	$	74,695	100.0	%	$	19,691	100.0	%	$	519,893	100.0	%

The Company classifies those portions of risks benefiting from reimbursement obligations collateralized, or expected to be collateralized, by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Securities purchased for loss mitigation purposes, which are generally rated BIG, represented $1,193 million and $1,133 million of gross par outstanding as of June 30, 2013 and December 31, 2012, respectively. In addition, under the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and recorded in other invested assets in the consolidated balance sheets. Such amounts totaled $219 million and $220 million in gross par outstanding as of June 30, 2013 and December 31, 2012, respectively.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $1.0 billion for structured finance and $1.5 billion for public finance obligations at June 30, 2013. 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 July 1, 2013 and February 25, 2017, with $1.4 billion expiring prior to December 31, 2013. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled 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 continue to experience 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 European countries where it believes heightened uncertainties exist are: Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). The Company is closely monitoring its exposures in Selected European Countries where it believes heightened uncertainties exist. 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)

June 30, 2013



	Greece		Hungary (2)		Ireland		Italy		Portugal		Spain (2)		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	—	$	—	$	—	$	981	$	102	$	261	$	1,344
Infrastructure finance	—		413		23		83		97		167		783
Sub-total	—		413		23		1,064		199		428		2,127
Non-sovereign exposure:
Regulated utilities	—		—		—		215		—		0		215
RMBS	—		214		137		479		—		—		830
Commercial receivables	—		1		12		59		14		3		89
Pooled corporate	22		—		172		224		15		499		932
Sub-total	22		215		321		977		29		502		2,066
Total	$	22	$	628	$	344	$	2,041	$	228	$	930	$	4,193
Total BIG	$	—	$	591	$	7	$	2	$	118	$	412	$	1,130

____________________

(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 $137 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining legacy mortgage reinsurance business. 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.


(2)	See Note 5, Expected Loss to be Paid.

When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For direct exposure this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies. In the case of assumed business for direct exposures, the Company depends upon geographic information provided by the primary insurer.

The Company has included in the exposure tables above its indirect economic exposure to the Selected European Countries through exposure it provides on (a) pooled corporate and (b) commercial receivables transactions. The Company considers economic exposure to a selected European Country to be indirect when the exposure relates to only a small portion of an insured transaction that otherwise is not related to a Selected European Country. In most instances, the trustees and/or servicers for such transactions provide reports that identify the domicile of the underlying obligors in the pool, although occasionally such information is not available to the Company. The Company has reviewed transactions through which it believes it may have indirect exposure to the Selected European Countries that is material to the transaction and included in the tables above the proportion of the insured par equal to the proportion of obligors so identified as being domiciled in a Selected European Country. The Company may also have indirect exposures to Selected European Countries in business assumed from unaffiliated monoline insurance companies. However, in the case of assumed business for indirect exposures, unaffiliated primary insurers generally do not provide such information to the Company.

The Company no longer guarantees any sovereign bonds of the Selected European Countries. The exposure shown in the “Public Finance Category” is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal. Sub-sovereign debt is 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. The Company models most 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 5, Expected Loss to be Paid). 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 ultimately will have 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.)

More extensive 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.

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

As of June 30, 2013



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	26	$	406	$	10	$	442	$	595	0.1	%
Alt-A first lien	94		1,834		1,394		3,322		4,258		0.7
Option ARM	17		369		314		700		1,212		0.1
Subprime	168		1,162		1,023		2,353		6,894		0.5
Second lien U.S. RMBS:
Closed end second lien	—		20		301		321		428		0.1
Home equity lines of credit (“HELOCs”)	130		24		2,326		2,480		2,881		0.5
Total U.S. RMBS	435		3,815		5,368		9,618		16,268		2.0
Trust preferred securities (“TruPS”)	1,488		—		924		2,412		5,223		0.5
Other structured finance	1,177		439		1,166		2,782		60,743		0.5
U.S. public finance	3,389		659		882		4,930		371,055		1.0
Non-U.S. public finance	992		898		—		1,890		33,700		0.4
Total	$	7,481	$	5,811	$	8,340	$	21,632	$	486,989	4.4	%

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

As of December 31, 2012



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	28	$	436	$	11	$	475	$	641	0.1	%
Alt-A first lien	109		1,987		1,479		3,575		4,589		0.7
Option ARM	61		392		643		1,096		1,550		0.2
Subprime (including net interest margin securities)	152		1,161		1,024		2,337		7,330		0.4
Second lien U.S. RMBS:
Closed end second lien	—		247		157		404		521		0.1
HELOCs	91		—		2,627		2,718		3,196		0.5
Total U.S. RMBS	441		4,223		5,941		10,605		17,827		2.0
TruPS	1,920		—		952		2,872		5,693		0.6
Other structured finance	1,310		384		1,325		3,019		70,866		0.6
U.S. public finance	3,290		500		813		4,603		387,967		0.9
Non-U.S. public finance	2,293		—		—		2,293		37,540		0.4
Total	$	9,254	$	5,107	$	9,031	$	23,392	$	519,893	4.5	%

Below-Investment-Grade Credits

By Category

As of June 30, 2013



	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	$	5,976	$	1,505	$	7,481	144	27	171
Category 2	3,309		2,502		5,811		83	25	108
Category 3	6,549		1,791		8,340		148	31	179
Total BIG	$	15,834	$	5,798	$	21,632	375	83	458

Below-Investment-Grade Credits

By Category

As of December 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	$	7,049	$	2,205	$	9,254	153	30	183
Category 2	2,606		2,501		5,107		76	27	103
Category 3	7,028		2,003		9,031		142	32	174
Total BIG	$	16,683	$	6,709	$	23,392	371	89	460

_____________________

(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.