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, or in the case of restructurings of troubled credits, the Company may underwrite new issuances that one or more of the rating agencies may rate below-investment-grade ("BIG") as part of its loss mitigation strategy. The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, maintains rigorous subordination or collateralization requirements. Reinsurance is utilized in order to reduce net exposure to certain insured transactions.

Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings.

Structured finance obligations insured by the Company are generally issued by special purpose entities, including variable interest entities ("VIEs"), and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 9, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and Debt Service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated.

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 the Company's internal credit ratings focus on future performance rather than lifetime performance.

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG and 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 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 the performance of many of its structured finance transactions as part of its periodic internal credit rating review of them. The Company models most assumed residential mortgage-backed security ("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, for additional information. 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. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for calculating the expected loss for financial statement purposes.)

More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. 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. 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.

Components of Outstanding Exposure

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Financial Guaranty

Debt Service Outstanding



	Gross Debt Service Outstanding				Net Debt Service Outstanding
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
	(in millions)
Public finance	$	605,569	$	650,924	$	569,974	$	610,011
Structured finance	66,479		86,456		61,479		80,524
Total financial guaranty	$	672,048	$	737,380	$	631,453	$	690,535

In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $140 million as of September 30, 2014 related to loans originated in Ireland and the U.K.

Financial Guaranty Portfolio by Internal Rating

As of September 30, 2014



	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	$	4,173	1.3	%	$	1,011	3.0	%	$	23,193	51.7	%	$	6,442	61.8	%	$	34,819	8.3	%
AA	96,107		29.2		388		1.2		8,115		18.1		539		5.2		105,149		25.2
A	178,484		54.2		9,451		28.2		1,849		4.1		558		5.4		190,342		45.5
BBB	41,919		12.7		21,159		63.2		3,044		6.8		1,937		18.5		68,059		16.3
BIG	8,542		2.6		1,478		4.4		8,673		19.3		953		9.1		19,646		4.7
Total net par outstanding (excluding loss mitigation bonds)	$	329,225	100.0	%	$	33,487	100.0	%	$	44,874	100.0	%	$	10,429	100.0	%	$	418,015	100.0	%
Loss Mitigation Bonds	29				—				1,260				—				1,289
Net Par Outstanding (including loss mitigation bonds)	$	329,254			$	33,487			$	46,134			$	10,429			$	419,304

Financial Guaranty Portfolio by Internal Rating

As of December 31, 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	$	4,998	1.4	%	$	1,016	3.0	%	$	32,317	54.9	%	$	9,684	69.1	%	$	48,015	10.5	%
AA	107,503		30.5		422		1.2		9,431		16.0		577		4.1		117,933		25.7
A	192,841		54.8		9,453		27.9		2,580		4.4		742		5.3		205,616		44.8
BBB	37,745		10.7		21,499		63.2		3,815		6.4		1,946		13.9		65,005		14.1
BIG	9,094		2.6		1,608		4.7		10,764		18.3		1,072		7.6		22,538		4.9
Total net par outstanding (excluding loss mitigation bonds)	$	352,181	100.0	%	$	33,998	100.0	%	$	58,907	100.0	%	$	14,021	100.0	%	$	459,107	100.0	%
Loss Mitigation Bonds	32				—				1,163				—				1,195
Net Par Outstanding (including loss mitigation bonds)	$	352,213			$	33,998			$	60,070			$	14,021			$	460,302

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $294 million for structured finance and $459 million for public finance obligations at September 30, 2014. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between October 1, 2014 and February 25, 2017, with $335 million expiring prior to December 31, 2014. 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.

Components of BIG Portfolio

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of September 30, 2014



	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	70	$	266	$	29	$	365	$	488
Alt-A first lien	601		653		658		1,912		2,986
Option ARM	18		58		118		194		700
Subprime	214		681		768		1,663		4,247
Second lien U.S. RMBS:
Closed-end second lien	21		19		97		137		224
Home equity lines of credit (“HELOCs”)	1,306		17		283		1,606		1,817
Total U.S. RMBS	2,230		1,694		1,953		5,877		10,462
Trust preferred securities (“TruPS”)	1,175		—		343		1,518		4,549
Other structured finance	1,111		405		715		2,231		40,292
U.S. public finance	6,934		1,188		420		8,542		329,225
Non-U.S. public finance	891		587		—		1,478		33,487
Total	$	12,341	$	3,874	$	3,431	$	19,646	$	418,015

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of December 31, 2013



	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	52	$	321	$	30	$	403	$	541
Alt-A first lien	656		1,137		935		2,728		3,590
Option ARM	71		60		467		598		937
Subprime	297		908		740		1,945		6,130
Second lien U.S. RMBS:
Closed-end second lien	8		20		118		146		244
HELOCs	1,499		20		378		1,897		2,279
Total U.S. RMBS	2,583		2,466		2,668		7,717		13,721
TruPS	1,587		135		—		1,722		4,970
Other structured finance	1,367		309		721		2,397		54,237
U.S. public finance	8,205		440		449		9,094		352,181
Non-U.S. public finance	1,009		599		—		1,608		33,998
Total	$	14,751	$	3,949	$	3,838	$	22,538	$	459,107

BIG Net Par Outstanding

and Number of Risks

As of September 30, 2014



	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	$	10,572	$	1,769	$	12,341	176	23	199
Category 2	2,786		1,088		3,874		79	19	98
Category 3	2,870		561		3,431		116	26	142
Total BIG	$	16,228	$	3,418	$	19,646	371	68	439

BIG Net Par Outstanding

and Number of Risks

As of December 31, 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	$	12,391	$	2,360	$	14,751	185	25	210
Category 2	2,323		1,626		3,949		80	21	101
Category 3	3,031		807		3,838		119	27	146
Total BIG	$	17,745	$	4,793	$	22,538	384	73	457

_____________________

(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.

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 the Company believes heightened uncertainties exist are: Greece, Hungary, Italy, Portugal and Spain (collectively, the “Selected European Countries”). The Company is closely monitoring its exposures in the Selected European Countries where it believes heightened uncertainties exist. Previously, the Company had included Ireland on this list but removed it during Third Quarter 2014 because of Ireland's strengthening economic performance and improving prospects; in 2014, Ireland's long-term foreign currency rating was upgraded one notch by S&P (to ‘A-’) and three notches by Moody’s (to ‘Baa1’). 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 Direct Economic Exposure to Selected European Countries(1)

As of September 30, 2014



	Hungary		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Non-infrastructure public finance (2)	$	—	$	929	$	95	$	250	$	1,274
Infrastructure finance	327		15		11		140		493
Sub-total	327		944		106		390		1,767
Non-sovereign exposure:
Regulated utilities	—		229		—		—		229
RMBS	197		280		—		—		477
Sub-total	197		509		—		—		706
Total	$	524	$	1,453	$	106	$	390	$	2,473
Total BIG (See Note 5)	$	524	$	—	$	106	$	390	$	1,020

____________________

(1)

While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. 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)	The exposure shown in the “Non-infrastructure 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.

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. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies, in which case the Company depends upon geographic information provided by the primary insurer.

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and 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. Total net indirect exposure to Selected European Countries in non-sovereign pooled corporate and non-sovereign commercial receivables is $425 million and $68 million, respectively, based on the proportion of the insured par equal to the proportion of obligors identified as being domiciled in a Selected European Country.

Exposure to Puerto Rico

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.9 billion net par as of September 30, 2014. The Company rates $4.7 billion net par of that amount BIG.

Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits have been covered primarily with the net proceeds of bond issuances, with interim financings provided by Government Development Bank for Puerto Rico (“GDB”) and, in some cases, with onetime revenue measures or expense adjustment measures. In addition to high debt levels, Puerto Rico faces a challenging economic environment.

In June 2014, the Puerto Rico legislature passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the "Recovery Act") in order to provide a legislative framework for certain public corporations experiencing severe financial stress to restructure their debt. In its Quarterly Report dated as of July 17, 2014, the Commonwealth stated the Puerto Rico Electric Power Authority (“PREPA”) may need to seek relief under the Recovery Act due to liquidity constraints. In the same report, the Commonwealth disclosed PREPA utilized approximately $42 million on deposit in its reserve account in order to pay debt service due on its bonds on July 1, 2014. Investors in bonds issued by PREPA have filed suit in the United States District Court for the District of Puerto Rico asserting the Recovery Act violates the U.S. Constitution. On August 14, 2014, PREPA entered into forbearance agreements with the GDB, its bank lenders, and bondholders and financial guaranty insurers (including AGM and AGC) that hold or guarantee more than 60% of PREPA's outstanding bonds, in order to address its near-term liquidity issues. Creditors, including those who have challenged the constitutionality of the Recovery Act, agreed not to exercise available rights and remedies until March 31, 2015, and the bank lenders agreed to extend the maturity of two revolving lines of credit to the same date. PREPA agreed it would continue to make principal and interest payments on its outstanding bonds, and interest payments on its lines of credit, and would develop a five year business plan and a recovery program in respect of its operations.

Following the enactment of the Recovery Act, S&P, Moody’s and Fitch Ratings lowered the credit rating of the Commonwealth’s bonds and the ratings on certain of Puerto Rico’s public corporations. The Commonwealth disclosed its liquidity has been adversely affected by rating agency downgrades and by the limited market access for its debt. The Commonwealth noted it has relied on short-term financings and interim loans from the GDB and other private lenders, which reliance has constrained its liquidity and increased its near-term refinancing risk. The Commonwealth has also noted it is committed to addressing its fiscal and economic challenges and to repaying the general obligation debt of the Commonwealth and the debt of GDB and the public corporations that are not eligible to seek relief under the Recovery Act.

On October 30, 2014, legislation designed to stabilize the Puerto Rico Highway and Transportation Authority ("PRHTA") (“Bill 2212”) was introduced in the Commonwealth legislature. This bill provides for new tax revenues that will support PRHTA and requires the transfer of certain revenues from PHRTA to the Puerto Rico Infrastructure Finance Authority (“PRIFA”) in exchange for PRIFA assuming PRHTA’s debt obligations to GDB and amounts owed under its Bond Anticipation Notes. In addition, Bill 2212 provides for the transfer of operations of the Tren Urbano mass transit system to a new agency, which will reduce PRHTA’s future operating expenses. If the legislation is passed, GDB has indicated that this will allow PRHTA to become self-sufficient and avoid a restructuring through the Recovery Act.

Puerto Rico

Gross Par and Gross Debt Service Outstanding

As of September 30, 2014



	Gross Par Outstanding		Gross Debt Service Outstanding
	(in millions)
Subject to the terms of the Recovery Act	$	3,058	$	5,328
Not subject to the terms of the Recovery Act	2,977		4,749
Total	$	6,035	$	10,077

The following table shows the Company’s exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

Puerto Rico

Net Par Outstanding



	As of September 30, 2014			As of December 31, 2013
	Total		Internal Rating	Total		Internal Rating
	(in millions)
Exposures subject to the terms of the Recovery Act:
PRHTA (Transportation revenue)	$	844	BB-	$	872	BB-
PREPA	772		B-	860		BB-
Puerto Rico Aqueduct and Sewer Authority	384		BB-	384		BB-
PRHTA (Highway revenue)	273		BB	302		BB
Puerto Rico Convention Center District Authority	174		BB-	185		BB-
Puerto Rico Public Finance Corporation	—		-	44		B
Total	2,447			2,647

Exposures not subject to the terms of the Recovery Act:
Commonwealth of Puerto Rico - General Obligation Bonds	1,672		BB	1,885		BB
Puerto Rico Municipal Finance Agency	400		BB-	450		BB-
Puerto Rico Sales Tax Financing Corporation	268		BBB	268		A-
Puerto Rico Public Buildings Authority	101		BB	139		BB
GDB	33		BB	33		BB
PRIFA	18		BB-	18		BB-
University of Puerto Rico	1		BB-	1		BB-
Total	2,493			2,794
Total net exposure to Puerto Rico	$	4,940		$	5,441

The following table shows the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured and rated BIG by the Company. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.

Amortization Schedule of Puerto Rico BIG Net Par Outstanding

and BIG Net Debt Service Outstanding

As of September 30, 2014



	Scheduled BIG Net Par Amortization						Scheduled BIG Net Debt Service Amortization
	Subject to the Terms of the Recovery Act		Not Subject to the Terms of the Recovery Act		Total		Subject to the Terms of the Recovery Act		Not Subject to the Terms of the Recovery Act		Total
	(in millions)
2014 (October 1 - December 31)	$	—	$	—	$	—	$	2	$	1	$	3
2015	126		205		331		249		318		567
2016	84		183		267		199		287		486
2017	41		166		207		153		262		415
2018	48		109		157		158		195		353
2019	61		126		187		168		207		375
2020	73		182		255		176		258		434
2021	51		58		109		151		124		275
2022	42		67		109		140		129		269
2023	102		40		142		198		99		297
2024-2028	581		351		932		983		597		1,580
2029-2033	375		320		695		650		490		1,140
2034 -2038	460		405		865		613		459		1,072
2039 -2043	157		13		170		234		15		249
2044 -2047	246		—		246		284		—		284
Total	$	2,447	$	2,225	$	4,672	$	4,358	$	3,441	$	7,799