Employee Benefit Plans

Accounting Policy

The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with the exception of retirement eligible employees. For retirement eligible employees, the expense is recognized immediately.

Share-based compensation expense is based on the grant date fair value using grant date closing price, the lattice, Monte Carlo or Black-Scholes pricing models. The Company amortizes the fair value of share-based awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the exception of retirement‑eligible employees. For retirement-eligible employees, certain awards contain retirement provisions and therefore are amortized over the period through the date the employee first becomes eligible to retire and is no longer required to provide service to earn part or all of the award.

The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan (the “Stock Purchase Plan”) is estimated at the beginning of each offering period using the Black-Scholes option valuation model.

Assured Guaranty Ltd. 2004 Long-Term Incentive Plan

Under the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended (the “Incentive Plan”), the number of AGL common shares that may be delivered under the Incentive Plan may not exceed 10,970,000. In the event of certain transactions affecting AGL's common shares, the number or type of shares subject to the Incentive Plan, the number and type of shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may be adjusted.

The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and full value awards that are based on AGL's common shares. The grant of full value awards may be in return for a participant's previously performed services, or in return for the participant surrendering other compensation that may be due, or may be contingent on the achievement of performance or other objectives during a specified period, or may be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become vested upon a change in control of AGL.

The Incentive Plan is administered by a committee of the Board of Directors. The Compensation Committee of the Board serves as this committee except as otherwise determined by the Board. The Board may amend or terminate the Incentive Plan. As of December 31, 2013, 3,189,396 common shares were available for grant under the Incentive Plan.

Time Vested Stock Options

Nonqualified or incentive stock options may be granted to employees and directors of the Company. Stock options are generally granted once a year with exercise prices equal to the closing price on the date of grant. To date, the Company has only issued nonqualified stock options. All stock options, except for performance stock options, granted to employees vest in equal annual installments over a three-year period and expire seven years or ten years from the date of grant. Stock options granted to directors vest over one year and expire in seven years or ten years from grant date. None of the Company's options, except for performance stock options, have a performance or market condition.

Time Vested Stock Options



	Options for Common Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value Per Share		Number of Exercisable Options	Year of Expiration
Balance as of December 31, 2012	4,229,555		$	20.10			4,047,374
Options granted	102,355		19.36		$	8.94		2020
Options exercised	(1,199,339	)	17.75
Options forfeited/expired	(3,320	)	24.21
Balance as of December 31, 2013	3,129,251		$	20.97			2,987,088

As of December 31, 2013, the aggregate intrinsic value and weighted average remaining contractual term of stock options outstanding were $11 million and 3.5 years, respectively. As of December 31, 2013, the aggregate intrinsic value and weighted average remaining contractual term of exercisable stock options were $10 million and 3.4 years, respectively.

As of December 31, 2013 the total unrecognized compensation expense related to outstanding nonvested stock options was $1 million, which will be adjusted in the future for the difference between estimated and actual forfeitures. The Company expects to recognize that expense over the weighted average remaining service period of 1.4 years.

Lattice Option Pricing

Weighted Average Assumptions(1)



	2013			2012
Dividend yield	2.07		%	2.06	%
Expected volatility	53.41		%	58.89	%
Risk free interest rate	1.35		%	1.45	%
Expected life	6.6 years			6.6 years
Forfeiture rate	4.5		%	4.5	%
Weighted average grant date fair value	$	8.94		8.62

____________________


(1)	No options were granted in 2011.

The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The expected volatility is estimated at the date of grant based on an average of the 7-year historical share price volatility and implied volatilities of certain at-the-money actively traded call options in the Company. The risk-free interest rate is the implied 7-year yield currently available on U.S. Treasury zero-coupon issues at the date of grant. The forfeiture rate is based on the historical employee termination information.

The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $7.5 million, $0.1 million and $0.3 million, respectively. During the years ended December 31, 2013, 2012 and 2011, $2.6 million, $44 thousand and $0.6 million, respectively, was received from the exercise of stock options. In order to satisfy stock option exercises, the Company issues new shares.

Performance Stock Options

In 2012 and 2013, the Company granted performance stock options under the Incentive Plan. These awards are non-qualified stock options with exercise prices equal to the closing price an AGL common share on the applicable date of grant. These awards vest 35%, 50% or 100%, if the price of AGL's common shares using the highest 40-day average share price during the relevant performance period reaches certain hurdles. If the share price is between the specified levels, the vesting level will be interpolated accordingly. These awards expire seven years from the date of grant.

Performance Stock Options



	Options for Common Shares	Weighted Average Exercise Price		Weighted Average Grant Date Fair Value Per Share		Number of Exercisable Options	Year of Expiration
Balance as of December 31, 2012	293,077	$	17.44			0
Options granted	72,640	19.24		$	8.17		2020
Options exercised	—	—
Options forfeited/expired	—	—
Balance as of December 31, 2013	365,717	$	17.80			0

In order to satisfy stock option exercises, the Company issues new shares.

As of December 31, 2013, the aggregate intrinsic value and weighted average remaining contractual term of performance stock options outstanding were $2 million and 5.3 years, respectively. As of December 31, 2013, no performance options were exercisable.

As of December 31, 2013 the total unrecognized compensation expense related to outstanding nonvested performance stock options was $1 million, which will be adjusted in the future for the difference between estimated and actual forfeitures. The Company expects to recognize that expense over the weighted average remaining service period of 1.4 years.

Monte Carlo and Lattice Option Pricing

Weighted Average Assumptions



	2013			2012
Dividend yield	2.07		%	2.06		%
Expected volatility	53.5		%	58.89		%
Risk free interest rate	1.36		%	1.45		%
Expected life	6.3 years			6.3 years
Forfeiture rate	4.5		%	4.5		%
Weighted average grant date fair value	$	8.17		$	7.84

Restricted Stock Awards

Restricted stock awards to employees generally vest in equal annual installments over a four-year period and restricted stock awards to outside directors vest in full in one year. Restricted stock awards are amortized on a straight-line basis over the requisite service periods of the awards, and restricted stock awards to outside directors are amortized over one year, which are generally the vesting periods, with the exception of retirement‑eligible employees, discussed above.

Restricted Stock Award Activity



Nonvested Shares	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2012	88,549		$	12.93
Granted	48,273		23.20
Vested	(88,549	)	12.93
Forfeited	—		—
Nonvested at December 31, 2013	48,273		$	23.20

As of December 31, 2013 the total unrecognized compensation cost related to outstanding nonvested restricted stock awards was $0.4 million, which the Company expects to recognize over the weighted‑average remaining service period of 0.4 years. The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was $1 million, $1 million and $4 million, respectively.

Restricted Stock Units

Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. Restricted stock units awarded to employees have vesting terms similar to those of the restricted stock awards and are delivered on the vesting date. The Company has granted restricted stock units to directors of the Company. Restricted stock units awarded to directors vest over a one-year period and are delivered after directors terminate from the board of directors.

Restricted Stock Unit Activity

(Excluding Dividend Equivalents)



Nonvested Stock Units	Number of Stock Units		Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2012	1,006,411		$	16.78
Granted	93,580		19.29
Delivered	(361,157	)	15.04
Forfeited	(2,425	)	17.85
Nonvested at December 31, 2013	736,409		$	17.63

As of December 31, 2013, the total unrecognized compensation cost related to outstanding nonvested restricted stock units was $4 million, which the Company expects to recognize over the weighted‑average remaining service period of 1.5 years. The total fair value of restricted stock units delivered during the years ended December 31, 2013, 2012 and 2011 was $5 million, $6 million and $5 million, respectively.

Performance Restricted Stock Units

Beginning in 2012, the Company has granted performance restricted stock units under the Incentive Plan. These awards vest 35%, 100%, or 200%, if the price of AGL's common shares using the highest 40-day average share price during the relevant performance period reaches certain hurdles. If the share price is between the specified levels, the vesting level will be interpolated accordingly.

Performance Restricted Stock Unit Activity



Performance Restricted Stock Units	Number of Performance Share Units	Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2012	178,970	$	27.35
Granted	44,440	29.54
Delivered	—	—
Forfeited	—	—
Nonvested at December 31, 2013	223,410	$	27.79

As of December 31, 2013, the total unrecognized compensation cost related to outstanding nonvested performance share units was $3 million, which the Company expects to recognize over the weighted‑average remaining service period of 1.4 years.

Employee Stock Purchase Plan

The Company established the AGL Employee Stock Purchase Plan ("Stock Purchase Plan") in accordance with Internal Revenue Code Section 423, and participation is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10% of the participant's compensation or, if less, shares having a value of $25,000. Participants may purchase shares at a purchase price equal to 85% of the lesser of the fair market value of the stock on the first day or the last day of the subscription period. The Company has reserved for issuance and purchases under the Stock Purchase Plan 600,000 Assured Guaranty Ltd. common shares.

The fair value of each award under the Stock Purchase Plan is estimated at the beginning of each offering period using the Black‑Scholes option‑pricing model and the following assumptions: a) the expected dividend yield is based on the current expected annual dividend and share price on the grant date; b) the expected volatility is estimated at the date of grant based on the historical share price volatility, calculated on a daily basis; c) the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; and d) the expected life is based on the term of the offering period.

Stock Purchase Plan



	Year Ended December 31,
	2013		2012		2011
	(dollars in millions)
Proceeds from purchase of shares by employees	$	0.9	$	0.6	$	0.7
Number of shares issued by the Company	57,980		54,612		50,523
Recorded in share-based compensation, after the effects of DAC	$	0.3	$	0.2	$	0.2

Share‑Based Compensation Expense

The following table presents stock based compensation costs by type of award and the effect of deferring such costs as policy acquisition costs, pre-tax. Amortization of previously deferred stock compensation costs is not shown in the table below.

Share‑Based Compensation Expense Summary



	Year Ended December 31,
	2013		2012		2011
	(in millions)
Share‑Based Employee Cost:
Recurring amortization	$	7	$	6	$	5
Accelerated amortization for retirement eligible employees	—		1		5
Subtotal	7		7		10
ESPP	—		—		—
Total Share‑Based Employee Cost	7		7		10
Total Share‑Based Directors Cost	1		1		1
Total Share‑Based Cost	8		8		11
Less: Share‑based compensation capitalized as DAC	—		1		3
Share‑based compensation expense	$	8	$	7	$	8
Income tax benefit	$	2	$	2	$	2

Defined Contribution Plan

The Company maintains a savings incentive plan, which is qualified under Section 401(a) of the Internal Revenue Code for U.S. employees. The savings incentive plan is available to eligible full-time employees upon hire. Eligible participants could contribute a percentage of their salary subject to a maximum of $17,500 for 2013. Contributions are matched by the Company at a rate of 100% up to 6% of participant's compensation, subject to IRS limitations. Any amounts over the IRS limits are contributed to and matched by the Company into a nonqualified supplemental executive retirement plan for employees eligible to participate in such nonqualified plan. The Company also makes a core contribution of 6% of the participant's compensation to the qualified plan, subject to IRS limitations, and the nonqualified supplemental executive retirement plan for eligible employees, regardless of whether the employee contributes to the plan(s). Employees become fully vested in Company contributions after one year of service, as defined in the plan. Plan eligibility is immediate upon hire. The Company also maintains similar non-qualified plans for non-U.S. employees.

The Company recognized defined contribution expenses of $10 million, $9 million and $10 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Cash-Based Compensation

Performance Retention Plan

The Company has established the Assured Guaranty Ltd. Performance Retention Plan (“PRP”) which permits the grant of cash based awards to selected employees. PRP awards may be treated as nonqualified deferred compensation subject to the rules of Internal Revenue Code Section 409A. The PRP is a sub-plan under the Company's Long-Term Incentive Plan (enabling awards under the plan to be performance based compensation exempt from the $1 million limit on tax deductible compensation).

Generally, each PRP award is divided into three installments, with 25% of the award allocated to a performance period that includes the year of the award and the next year, 25% of the award allocated to a performance period that includes the year of the award and the next two years, and 50% of the award allocated to a performance period that includes the year of the award and the next three years. Each installment of an award vests if the participant remains employed through the end of the performance period for that installment. Awards may vest upon the occurrence of other events as set forth in the plan documents. Payment for each performance period is made at the end of that performance period. One half of each installment is increased or decreased in proportion to the increase or decrease of per share adjusted book value during the performance period, and one half of each installment is increased or decreased in proportion to the operating return on equity during the performance period. Operating return on equity and adjusted book value are defined in each PRP award agreement.

A payment otherwise subject to the $1 million limit on tax deductible compensation, will not be made unless performance satisfies a minimum threshold.

As described above, the performance measures used to determine the amounts distributable under the PRP are based on the Company's operating return on equity and growth in per share adjusted book value, as defined. Adjustments may be made by the AGL Compensation Committee at any time before distribution, except that, for certain senior executive officers, any adjustment made after the grant of the award may decrease but may not increase the amount of the distribution.

In the event of a corporate transaction involving the Company, including, without limitation, any share dividend, share split, extraordinary cash dividend, recapitalization, reorganization, merger, amalgamation, consolidation, split-up, spin-off, sale of assets or subsidiaries, combination or exchange of shares, the Compensation Committee may adjust the calculation of the Company's adjusted book value and operating return on equity as the Compensation Committee deems necessary or desirable in order to preserve the benefits or potential benefits of PRP awards.

The Company recognized performance retention plan expenses of $17 million, $13 million and $8 million for the years ended December 31, 2013, 2012 and 2011, respectively.