Outstanding Exposure

The Company’s financial guaranty contracts are written in different forms, 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 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 7, 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, 2012		December 31, 2011		June 30, 2012		December 31, 2011
	(in millions)
Public finance	$	767,155	$	798,471	$	719,301	$	716,890
Structured finance	123,437		137,661		115,787		128,775
Total financial guaranty	$	890,592	$	936,132	$	835,088	$	845,665

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, 2012. The net mortgage guaranty insurance in force comprises $133 million covering loans originated in Ireland and $15 million covering loans originated in the UK.

Financial Guaranty Portfolio by Internal Rating



	As of June 30, 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)
Super senior	$	—	—	%	$	1,109	2.8	%	$	15,157	18.2	%	$	4,777	22.9	%	$	21,043	3.8	%
AAA	4,771		1.2		1,388		3.6		32,947		39.5		9,225		44.2		48,331		8.7
AA	136,709		33.3		998		2.6		10,416		12.5		889		4.3		149,012		27.0
A	220,154		53.7		10,657		27.5		4,692		5.6		1,352		6.5		236,855		42.8
BBB	43,836		10.7		22,102		57.0		4,201		5.0		2,740		13.1		72,879		13.2
Below-investment-grade (“BIG”)	4,407		1.1		2,515		6.5		16,017		19.2		1,875		9.0		24,814		4.5
Total net par outstanding	$	409,877	100.0	%	$	38,769	100.0	%	$	83,430	100.0	%	$	20,858	100.0	%	$	552,934	100.0	%



	As of December 31, 2011
	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)
Super senior	$	—	—	%	$	1,138	2.9	%	$	16,756	18.2	%	$	5,660	23.9	%	$	23,554	4.2	%
AAA	5,074		1.3		1,381		3.5		35,736		38.7		10,231		43.2		52,422		9.4
AA	139,693		34.6		1,056		2.7		12,575		13.6		976		4.1		154,300		27.7
A	213,164		52.9		11,744		30.1		4,115		4.5		1,518		6.4		230,541		41.3
BBB	40,635		10.1		21,399		54.8		5,044		5.5		3,391		14.3		70,469		12.6
BIG	4,507		1.1		2,328		6.0		18,008		19.5		1,919		8.1		26,762		4.8
Total net par outstanding	$	403,073	100.0	%	$	39,046	100.0	%	$	92,234	100.0	%	$	23,695	100.0	%	$	558,048	100.0	%

In First Quarter 2012, the Company reclassified to AA 80% of the net par outstanding of those first lien transactions that are covered by the Bank of America Agreement (see Note 4, Financial Guaranty Insurance Contracts) and that the Company otherwise internally rated below AA. The Company reclassified those amounts as AA exposure due to the eligible assets that Bank of America has placed into trust in order to collateralize its reimbursement obligation relating to such first lien transactions. This reclassification resulted in a decrease in BIG net par outstanding as of December 31, 2011 of $1,452 million from that previously reported.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $1.8 billion for structured finance and $0.5 billion for public finance obligations at June 30, 2012. 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, 2012 and February 25, 2017, with $0.2 billion expiring prior to December 31, 2012. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled 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 are experiencing 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 Company is closely monitoring its exposures in European countries where it believes heightened uncertainties exist, specifically, Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). 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, 2012



	Greece(2)		Hungary		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	276	$	—	$	—	$	977	$	110	$	257	$	1,620
Infrastructure finance	—		430		23		322		99		165		1,039
Sub-total	276		430		23		1,299		209		422		2,659
Non-sovereign exposure:
Regulated utilities	—		—		—		222		—		12		234
RMBS	—		215		133		489		—		—		837
Commercial receivables	—		1		19		26		14		18		78
Pooled corporate	31		—		208		227		14		492		972
Sub-total	31		216		360		964		28		522		2,121
Total	$	307	$	646	$	383	$	2,263	$	237	$	944	$	4,780
Total BIG	$	276	$	516	$	8	$	238	$	127	$	391	$	1,556

____________________

(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 $133 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) As of June 30, 2012, the Company had established a full limit loss on this exposure. The Company accelerated claims under its financial guaranty on the July payment date with respect to the 2057 bonds and intends to accelerate claims on or after the September payment date with respect to the 2037 bonds.

The Company has not guaranteed any sovereign bonds of the Selected European Countries except Greece (see Note 4, Financial Guaranty Insurance Contracts). The remainder of 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 4, Financial Guaranty Insurance Contracts). 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 been 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.)

Intense 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, 2012
	BIG Net Par Outstanding								Net Par Outstanding		BIG Net Par as a % of Net Par Outstanding
	BIG 1		BIG 2		BIG 3		Total BIG		Net Par Outstanding		BIG Net Par as a % of Net Par Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	76	$	430	$	3	$	509	$	690	0.1	%
Alt-A first lien	436		2,039		1,374		3,849		4,939		0.7
Option ARM	61		471		827		1,359		1,991		0.3
Subprime	218		1,276		864		2,358		7,754		0.4
Second lien U.S. RMBS:
Closed end second lien	—		450		419		869		997		0.2
Home equity lines of credit (“HELOCs”)	394		—		2,587		2,981		3,521		0.5
Total U.S. RMBS	1,185		4,666		6,074		11,925		19,892		2.2
Trust preferred securities (“TruPS”)	2,071		—		952		3,023		6,006		0.5
Other structured finance	1,261		459		1,224		2,944		78,390		0.5
U.S. public finance	3,285		407		715		4,407		409,877		0.8
Non-U.S. public finance (1)	2,239		276		—		2,515		38,769		0.5
Total	$	10,041	$	5,808	$	8,965	$	24,814	$	552,934	4.5	%



	As of December 31, 2011
	BIG Net Par Outstanding								Net Par Outstanding		BIG Net Par as a % of Net Par Outstanding
	BIG 1		BIG 2		BIG 3		Total BIG		Net Par Outstanding		BIG Net Par as a % of Net Par Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	77	$	465	$	—	$	542	$	739	0.1	%
Alt-A first lien	1,695		1,028		1,540		4,263		5,329		0.8
Option ARM	25		689		882		1,596		2,433		0.3
Subprime (including net interest margin securities)	795		1,200		513		2,508		8,136		0.4
Second lien U.S. RMBS:
Closed end second lien	—		495		520		1,015		1,040		0.2
HELOCs	421		—		2,858		3,279		3,890		0.6
Total U.S. RMBS	3,013		3,877		6,313		13,203		21,567		2.4
TruPS	2,501		—		951		3,452		6,334		0.6
Other structured finance	1,295		548		1,429		3,272		88,028		0.6
U.S. public finance	3,395		274		838		4,507		403,073		0.8
Non-U.S. public finance (1)	2,046		282		—		2,328		39,046		0.4
Total	$	12,250	$	4,981	$	9,531	$	26,762	$	558,048	4.8	%

_____________________

(1) Includes $276 million and $282 million in net par as of June 30, 2012 and December 31, 2011, respectively, for bonds of the Hellenic Republic of Greece, a portion of which was accelerated in July 2012 and a portion of which the Company intends to accelerate on or after September 2012. See Note 4, Financial Guaranty Insurance Contracts.

Below-Investment-Grade Credits

By Category



	As of June 30, 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	$	7,467	$	2,574	$	10,041	164	35	199
Category 2	3,353		2,455		5,808		79	34	113
Category 3	6,894		2,071		8,965		132	25	157
Total BIG	$	17,714	$	7,100	$	24,814	375	94	469



	As of December 31, 2011
	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	$	8,297	$	3,953	$	12,250	171	40	211
Category 2	3,458		1,523		4,981		71	33	104
Category 3	7,204		2,327		9,531		126	26	152
Total BIG	$	18,959	$	7,803	$	26,762	368	99	467

_____________________

(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.