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.

In Third Quarter 2013, the Company changed the manner in which it presents par outstanding and Debt Service in two ways. First, the Company had included securities purchased for loss mitigation purposes both in its invested assets portfolio and its financial guaranty insured portfolio. Beginning with Third Quarter 2013, the Company excluded such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated) because it manages such securities as investments and not insurance exposure; it has taken this approach as of both September 30, 2013 and December 31, 2012. This reduced its below investment grade net par as of September 30, 2013 by $1,211 million from what it would have been without the change. Second, the Company refined its approach to its internal credit ratings and surveillance categories. Please refer to "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below for additional information.

Debt Service Outstanding



	Gross Debt Service Outstanding				Net Debt Service Outstanding
	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
	(in millions)
Public finance	$	665,855	$	722,478	$	624,425	$	677,285
Structured finance	91,723		110,620		85,218		103,071
Total financial guaranty	$	757,578	$	833,098	$	709,643	$	780,356

In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance in force was approximately $150 million as of September 30, 2013. The net mortgage guaranty insurance in force constitutes assumed excess of loss business written between 2004 and 2006 and comprises $142 million covering loans originated in Ireland and $8 million covering loans originated in the U.K.

Financial Guaranty Portfolio by Internal Rating

As of September 30, 2013



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category (1)	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,169	1.2	%	$	1,711	4.9	%	$	34,924	55.8	%	$	10,125	69.0	%	$	50,929	10.8	%
AA	112,319		31.1		488		1.4		9,438		15.1		590		4.0		122,835		25.9
A	197,403		54.6		9,358		26.8		2,587		4.1		797		5.5		210,145		44.4
BBB	42,684		11.8		21,729		62.2		4,329		6.9		2,162		14.7		70,904		15.0
Below-investment-grade (“BIG”)	4,628		1.3	%	1,626		4.7		11,306		18.1		997		6.8		18,557		3.9
Total net par outstanding (excluding loss mitigation bonds)	$	361,203	100.0	%	$	34,912	100.0	%	$	62,584	100.0	%	$	14,671	100.0	%	$	473,370	100.0	%
Loss Mitigation Bonds	34				—				1,263				—				1,297
Net Par Outstanding (including loss mitigation bonds)	$	361,237			$	34,912			$	63,847			$	14,671			$	474,667

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 (1)	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	56.6	%	$	13,169	70.2	%	$	61,564	11.9	%
AA	124,525		32.1		875		2.3		9,543		12.8		722		3.9		135,665		26.1
A	210,124		54.1		9,781		26.1		4,670		6.3		1,409		7.5		225,984		43.6
BBB	44,213		11.4		22,885		61.0		3,737		5.0		2,427		12.9		73,262		14.1
BIG	4,565		1.2		2,293		6.1		14,398		19.3		1,041		5.5		22,297		4.3
Total net par outstanding (excluding loss mitigation bonds)	$	387,929	100.0	%	$	37,540	100.0	%	$	74,535	100.0	%	$	18,768	100.0	%	$	518,772	100.0	%
Loss Mitigation Bonds	38				—				1,083				—				1,121
Net Par Outstanding (including loss mitigation bonds)	$	387,967			$	37,540			$	75,618			$	18,768			$	519,893

____________________


(1)	In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below. This approach is reflected in the "Financial Guaranty Portfolio by Internal Rating" tables as of both September 30, 2013 and December 31, 2012.

In accordance with the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company, and they therefore are included in the investment portfolio. Such amounts are still included in the financial guaranty insured portfolio, and totaled $218 million and $220 million in gross par outstanding as of September 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 $0.6 billion for structured finance and $0.8 billion for public finance obligations at September 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 October 1, 2013 and February 25, 2017, with $0.4 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.

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, except that, beginning this quarter, the Company's internal credit ratings focus on future performance, rather than lifetime performance. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below.

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 future loss is expected and whether a claim has been paid. The Company expects “future 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 future of that transaction than it 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. In Third Quarter 2013, the Company refined the definitions of its BIG surveillance categories to be consistent with its new approach to assigning internal credit ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories". The three BIG categories are:


•	BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.


•	BIG Category 2: Below-investment-grade transactions for which future 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 future losses are expected and on which claims (other than liquidity claims) have been paid.

Refinement of Approach to Internal Credit Ratings and Surveillance Categories

Typically, when an issuer of a debt security has defaulted on a payment and has not made up that missed payment, the debt security is considered by the rating agencies to be below-investment-grade regardless of its current credit condition. Similarly, the Company had previously considered those securities on which it has made an insurance claim payment that had not been reimbursed to be BIG regardless of their current credit condition.

Structured finance transactions often include mechanisms for reimbursing the Company for its insurance claim payments from assets underlying the transactions to the extent permitted by asset performance. With improvements beginning to occur in the performance of the assets underlying some of the structured finance securities the Company has insured, the Company is receiving reimbursements on some transactions on which it had paid claims in the past. As a result of these improvements, it now projects receiving reimbursements (rather than making claims) in the future on some of those transactions. Under the old approach, a transaction with a projected lifetime loss, no matter how strong on a prospective basis, was required to be rated BIG. During Third Quarter 2013, the Company revised its approach to internal credit ratings. Under its revised approach, a transaction may be rated investment grade if it (a) has turned generally cash-flow positive and (b) is projected to have net future reimbursements with sufficient cushion to warrant an investment grade rating, even if it is projected to have ending lifetime unreimbursed insurance claim payments. The new approach resulted in the upgrade to investment grade of four RMBS transactions with a net par of $264 million that would have been BIG under the previous approach at September 30, 2013 and of one RMBS transactions with a net par of $25 million at December 31, 2012.

The Company also applied its change in approach to internal credit ratings to the Surveillance BIG Category definitions. Previously the BIG Category definitions were based in large part on whether lifetime losses were projected. Under the new approach, the BIG Category definitions are based on whether future losses are projected. In addition to the upgrades out of BIG described above, the change in approach resulted in the migration of a number of risks within BIG Categories. The following table shows the BIG exposure as it would have been categorized under the previous approach and how it is categorized under the new approach:

Below-Investment-Grade

Net Par Outstanding

As of September 30, 2013



	Previous Approach		New Approach		Difference
	(in millions)
BIG 1	$	7,032	$	8,986	$	1,954
BIG 2	4,805		4,805		—
BIG 3	6,984		4,766		(2,218		)
Total	$	18,821	$	18,557	$	(264	)

Below-Investment-Grade

Net Par Outstanding

As of December 31, 2012



	Previous Approach		New Approach		Difference
	(in millions)
BIG 1	$	9,254	$	10,820	$	1,566
BIG 2	4,617		4,617		—
BIG 3	8,451		6,860		(1,591		)
Total	$	22,322	$	22,297	$	(25	)

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

As of September 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	$	75	$	333	$	9	$	417	$	561	0.1	%
Alt-A first lien	913		1,454		434		2,801		3,993		0.6
Option ARM	68		353		211		632		1,014		0.2
Subprime	172		921		890		1,983		6,335		0.4
Second lien U.S. RMBS:
Closed end second lien	9		20		121		150		252		0.0
Home equity lines of credit (“HELOCs”)	1,461		22		472		1,955		2,365		0.4
Total U.S. RMBS	2,698		3,103		2,137		7,938		14,520		1.7
Trust preferred securities (“TruPS”)	941		136		919		1,996		5,164		0.4
Other structured finance	1,192		312		865		2,369		57,571		0.5
U.S. public finance	3,154		629		845		4,628		361,203		1.0
Non-U.S. public finance	1,001		625		—		1,626		34,912		0.3
Total	$	8,986	$	4,805	$	4,766	$	18,557	$	473,370	3.9	%

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	753		1,962		739		3,454		4,469		0.7
Option ARM	333		392		317		1,042		1,450		0.2
Subprime (including net interest margin securities)	152		988		921		2,061		7,048		0.4
Second lien U.S. RMBS:
Closed end second lien	97		76		58		231		348		0.0
HELOCs	644		—		1,932		2,576		3,079		0.5
Total U.S. RMBS	2,007		3,854		3,978		9,839		17,035		1.9
TruPS	1,920		—		953		2,873		5,694		0.6
Other structured finance	1,310		263		1,154		2,727		70,574		0.5
U.S. public finance	3,290		500		775		4,565		387,929		0.9
Non-U.S. public finance	2,293		—		—		2,293		37,540		0.4
Total	$	10,820	$	4,617	$	6,860	$	22,297	$	518,772	4.3	%

Below-Investment-Grade Credits

By Category

As of September 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	$	7,453	$	1,533	$	8,986	154	21	175
Category 2	2,537		2,268		4,805		76	25	101
Category 3	3,588		1,178		4,766		136	29	165
Total BIG	$	13,578	$	4,979	$	18,557	366	75	441

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	$	7,929	$	2,891	$	10,820	163	33	196
Category 2	2,116		2,501		4,617		76	27	103
Category 3	5,543		1,317		6,860		131	29	160
Total BIG	$	15,588	$	6,709	$	22,297	370	89	459

_____________________

(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.

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)

September 30, 2013



	Greece		Hungary (2)		Ireland		Italy		Portugal		Spain (2)		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	—	$	—	$	—	$	1,020	$	101	$	271	$	1,392
Infrastructure finance	—		417		24		85		96		171		793
Sub-total	—		417		24		1,105		197		442		2,185
Non-sovereign exposure:
Regulated utilities	—		—		—		229		—		—		229
RMBS	—		220		142		314		—		—		676
Commercial receivables	—		0		9		62		14		2		87
Pooled corporate	17		—		103		168		15		502		805
Sub-total	17		220		254		773		29		504		1,797
Total	$	17	$	637	$	278	$	1,878	$	226	$	946	$	3,982
Total BIG	$	—	$	599	$	7	$	1	$	113	$	425	$	1,145

____________________

(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 $142 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 policies 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.

Exposure to Puerto Rico

The Company insures general obligations of the Commonwealth of Puerto Rico and various obligations of its instrumentalities. In recent months, investors have expressed concern about Puerto Rico's high debt levels and weak economy. Of the net insured par related to Puerto Rico, $2.1 billion is supported principally by a pledge of the good faith, credit and taxing power of the Commonwealth or by Commonwealth lease rental payments or appropriations. Puerto Rico’s Constitution provides that public debt constitutes a first claim on available Commonwealth resources. Public debt includes general obligation bonds and notes of the Commonwealth and payments required to be made under its guarantees of bonds and notes issued by its public instrumentalities. Of the remaining exposures, a significant portion, $2.9 billion, is secured by dedicated revenues such as special taxes, toll collections and revenues from essential utilities. In aggregate, the Company insures $5.5 billion net par to Puerto Rico obligors.

Neither Puerto Rico nor its instrumentalities are eligible debtors under Chapter 9 of the U.S. bankruptcy code.

Puerto Rico credits insured by the Company are presently current on their debt service payments, and the Commonwealth has never defaulted on any of its debt payments. Further, 92% of the Company’s exposure is rated investment grade internally and by both Moody’s and S&P, while 8%, substantially all of the balance of the exposure, is rated no more than one-notch below investment grade.

The Company has reduced its aggregate net par exposure to Puerto Rico credits by approximately 17% since January 2010, and limited its insurance of new issues to transactions that refunded existing exposure, with a general focus on lowering interest rates.

Management believes recent measures announced by the new Governor of Puerto Rico and his administration in adopting its fiscal 2014 budget in June reflect a strong commitment to improve the financial stability of the Commonwealth and several of its key authorities. In addition, other actions -- including plans to increase the excise tax on petroleum products, signed into law in June 2013; a 60% average rate increase for the Puerto Rico Aqueduct and Sewer Authority, implemented in July 2013; adoption in April 2013 of substantive pension reform plans that have been upheld by Puerto Rico’s Supreme Court; and the government’s reduction in the use of deficit financing and responsiveness to capital markets -- demonstrate that officials of the Commonwealth are focused on making the necessary choices to help Puerto Rico operate within its financial resources and maintain its access to the capital markets, which is a critical source of funding for the Commonwealth.

The table below presents the Company’s exposure to Puerto Rico credits:



	Net Par Outstanding		Internal Rating
	(in millions)
Commonwealth of Puerto Rico	$	1,885	BBB-
Puerto Rico Highways and Transportation Authority (Transportation revenue)	928		BBB-
Puerto Rico Electric Power Authority	860		BBB
Puerto Rico Municipal Finance Authority	450		BBB-
Puerto Rico Aqueduct and Sewer Authority	384		BB+
Puerto Rico Highways and Transportation Authority (Highway revenue)	303		BBB
Puerto Rico Sales Tax Financing Corporation	267		A
Puerto Rico Convention Center District Authority	185		BBB
Puerto Rico Public Buildings Authority	139		BBB-
Puerto Rico Public Finance Corporation	44		BB+
Government Development Bank for Puerto Rico	33		BBB-
Puerto Rico Infrastructure Financing Authority	18		BBB-
University of Puerto Rico	1		BBB-
Total	$	5,497