Exhibit 99.1

Assured Guaranty Corp.

Consolidated Financial Statements

June 30, 2012

Assured Guaranty Corp.

Index to Consolidated Financial Statements

June 30, 2012

	Page(s)
Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited)	2
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011	3
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011	4
Consolidated Statements of Shareholder’s Equity (unaudited) for the Six Months Ended June 30, 2012	5
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2012 and 2011	6
Notes to Consolidated Financial Statements (unaudited)	7

1

Assured Guaranty Corp.

Consolidated Balance Sheets (unaudited)

(dollars in thousands except per share and share amounts)

	As of June 30, 2012		As of December 31, 2011
Assets
Investment portfolio:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $2,584,931 and $2,621,713)	$	2,734,670	$	2,748,806
Short-term investments, at fair value	160,394		151,943
Other invested assets	47,638		12,500
Total investment portfolio	2,942,702		2,913,249
Cash	33,217		30,562
Premiums receivable, net of ceding commissions payable	225,126		231,860
Ceded unearned premium reserve	361,584		364,373
Reinsurance recoverable on unpaid losses	140,833		132,375
Salvage and subrogation recoverable	49,965		49,651
Credit derivative assets	277,698		305,881
Deferred tax asset, net	298,672		209,039
Current income tax receivable	8,945		—
Financial guaranty variable interest entities’ assets, at fair value	780,677		762,510
Other assets	107,545		105,358
Total assets	$	5,226,964	$	5,104,858
Liabilities and shareholder’s equity
Unearned premium reserve	$	1,159,206	$	1,190,443
Loss and loss adjustment expense reserve	294,210		295,739
Reinsurance balances payable, net	81,871		92,681
Note payable to affiliate	300,000		300,000
Credit derivative liabilities	1,277,844		927,116
Current income tax payable	—		819
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	468,632		470,782
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	352,039		357,997
Other liabilities	129,682		129,194
Total liabilities	4,063,484		3,764,771
Commitments and contingencies (See Note 12)
Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding)	—		—
Common stock ($720.00 par value, 500,000 shares authorized; 20,834 shares issued and outstanding)	15,000		15,000
Additional paid-in capital	1,037,413		1,037,087
Retained earnings	21,742		213,921
Accumulated other comprehensive income, net of tax of $48,098 and $39,888	89,325		74,079
Total shareholder’s equity	1,163,480		1,340,087
Total liabilities and shareholder’s equity	$	5,226,964	$	5,104,858

The accompanying notes are an integral part of these consolidated financial statements.

2

Assured Guaranty Corp.

Consolidated Statements of Operations (unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues
Net earned premium	$	26,290		$	24,626		$	46,542		$	53,332
Net investment income	24,611			24,547			49,249			49,067
Net realized investment gains (losses):
Other-than-temporary impairment losses	(7,230		)	(531		)	(34,193		)	(2,710		)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income	(5,567		)	—			(30,380		)	—
Other net realized investment gains (losses)	2,397			611			3,167			2,837
Net realized investment gains (losses)	734			80			(646		)	127
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	(12,364		)	(18,719		)	(64,460		)	(8,314		)
Net unrealized gains (losses)	195,118			(54,535		)	(277,823		)	(289,827		)
Net change in fair value of credit derivatives	182,754			(73,254		)	(342,283		)	(298,141		)
Fair value gain (loss) on committed capital securities	1,551			295			(6,960		)	580
Fair value gains (losses) on financial guaranty variable interest entities	102,544			(68,790		)	96,649			(59,277		)
Other income (loss)	(1,567		)	1,167			(1,412		)	2,385
Total revenues	336,917			(91,329		)	(158,861		)	(251,927		)
Expenses
Loss and loss adjustment expenses	31			18,230			15,805			(153		)
Amortization of deferred acquisition costs	1,268			1,216			3,236			1,869
Interest expense	3,750			3,750			7,500			7,500
Other operating expenses	17,592			18,256			38,127			39,059
Total expenses	22,641			41,452			64,668			48,275
Income (loss) before income taxes	314,276			(132,781		)	(223,529		)	(300,202		)
Provision (benefit) for income taxes
Current	(10,226		)	(13,617		)	(8,964		)	(31,076		)
Deferred	116,093			(37,047		)	(77,387		)	(81,590		)
Total provision (benefit) for income taxes	105,867			(50,664		)	(86,351		)	(112,666		)
Net income (loss)	$	208,409		$	(82,117	)	$	(137,178	)	$	(187,536	)

The accompanying notes are an integral part of these consolidated financial statements.

3

Assured Guaranty Corp.

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income (loss)	$	208,409		$	(82,117	)	$	(137,178	)	$	(187,536	)
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $7,016, $18,683, $18,564 and $17,722	13,029			34,694			34,473			32,913
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(2,376), $(887), $(10,879) and $716	(4,413		)	(1,646		)	(20,203		)	1,329
Unrealized holding gains (losses) arising during the period, net of tax	8,616			33,048			14,270			34,242
Less: reclassification adjustment for gains (losses) included in net income (loss),net of tax provision (benefit) of $257, $544, $(226) and $560	477			1,009			(420		)	1,040
Change in net unrealized gains on investments	8,139			32,039			14,690			33,202
Change in cumulative translation adjustment, net of tax provision (benefit) of $(615), $11, $299 and $531	(1,141		)	21			556			986
Other comprehensive income (loss)	6,998			32,060			15,246			34,188
Comprehensive income(loss)	$	215,407		$	(50,057	)	$	(121,932	)	$	(153,348	)

The accompanying notes are an integral part of these consolidated financial statements.

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Assured Guaranty Corp.

Consolidated Statement of Shareholder’s Equity (unaudited)

For the Six Months Ended, June 30, 2012

(in thousands)

	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholder’s Equity
Balance, December 31, 2011	$	—	$	15,000	$	1,037,087	$	213,921		$	74,079	$	1,340,087
Net loss	—		—		—		(137,178		)	—		(137,178		)
Dividends	—		—		—		(55,001		)	—		(55,001		)
Excess of net assets of AG PFC Holding LLC	—		—		326		—			—		326
Other comprehensive income	—		—		—		—			15,246		15,246
Balance, June 30, 2012	$	—	$	15,000	$	1,037,413	$	21,742		$	89,325	$	1,163,480

The accompanying notes are an integral part of these consolidated financial statements.

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Assured Guaranty Corp.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

	Six Months Ended June 30,
	2012			2011
Net cash flows provided by (used in) operating activities	$	(470	)	$	143,644
Investing activities
Fixed maturity securities:
Purchases	(208,118		)	(317,601		)
Sales	98,792			175,286
Maturities	142,438			67,594
Net sales (purchases) of short-term investments	(6,862		)	28,612
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	40,565			40,866
Repayment of notes receivable from PFC LLC	48,959			—
Other	(200		)	—
Net cash flows provided by (used in) investing activities	115,574			(5,243		)
Financing activities
Dividends paid	(55,001		)	(10,000		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(57,578		)	(72,117		)
Net cash flows provided by (used in) financing activities	(112,579		)	(82,117		)
Effect of exchange rate changes	130			(34		)
Increase (decrease) in cash	2,655			56,250
Cash at beginning of period	30,562			17,811
Cash at end of period	$	33,217		$	74,061
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	(636	)	$	(38,819	)
Interest	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (unaudited)

June 30, 2012

1. Business and Basis of Presentation

Business

Assured Guaranty Corp. (“AGC” and, together with its subsidiaries, including Assured Guaranty (UK) Ltd. (“AGUK”), the “Company”), a Maryland domiciled insurance company, is an indirect and wholly-owned operating subsidiary of Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty”). AGL is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (“U.S.”) and international public finance, infrastructure and structured finance markets.

AGC owns 100% of AGUK, a company incorporated in the United Kingdom (“U.K.”) as a U.K. insurance company which AGC elected to place into runoff in October of 2010. In addition, in connection with loss mitigation efforts for a film library securitization transaction that AGC had previously guaranteed under a credit derivative contract, effective January 1, 2012, AGC formed a new wholly-owned subsidiary AG PFC Holding LLC (“AGPFC”), a Delaware limited liability company, which entered into an agreement with its affiliate AG Financial Products Inc. (“AGFP”) pursuant to which AGFP transferred its ownership and other interests held in AGFP Holding LLC to AGPFC, assigned certain rights to AGPFC and caused AGPFC to assume certain obligations of AGFP.

The Company has applied its credit underwriting judgment, risk management skills and capital markets experience to offer insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The securities insured by the Company include tax-exempt and taxable obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities that are generally issued by special purpose entities. The Company markets its credit protection products directly to issuers and underwriters of public finance, infrastructure and structured finance securities as well as to investors in such debt obligations. The Company guarantees debt obligations issued in many countries, although its principal focus is on the U.S., Europe and Australia.

Financial guaranty insurance policies provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest ("Debt Service") when due. Upon an obligor’s default on scheduled principal or interest payments due on the obligation, the Company is required under the financial guaranty policy to pay the principal or interest shortfall. The Company has issued financial guaranty insurance policies on both public finance obligations and structured finance obligations. Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the issuers’ taxing powers, tax-supported bonds and revenue bonds and other obligations of states, their political subdivisions and other municipal issuers supported by the issuers’ or obligors’ covenant to impose and collect fees and charges for public services or specific projects. Public finance obligations include obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including government office buildings, toll roads, health care facilities and utilities. Structured finance obligations insured by the Company are generally issued by special purpose entities and backed by pools of assets such as residential or commercial mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. The Company also insures other specialized financial obligations.

In the past, the Company had sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives. Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty insurance contracts and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents with respect to one or more third party referenced securities or loans. Financial guaranty contracts accounted for as credit derivatives are primarily comprised of credit default swaps (“CDS”). The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation.

The Company has not entered into any CDS in order to sell new credit protection since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) also

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contributed to the decision of the Company not to enter into such new CDS in the foreseeable future. The Company actively pursues opportunities to terminate existing CDS, and in certain cases, has converted existing CDS exposure into a financial guaranty insurance contract. These actions have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

The Company has historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks. In January 2012, AGC and its affiliate Assured Guaranty Municipal Corp. (“AGM”) entered into a $435 million excess of loss reinsurance facility with third-party reinsurers, which reduced rating agency capital charges.

When a rating agency assigns a public rating to a financial obligation guaranteed by AGC or its subsidiary AGUK, it generally awards that obligation the same rating it has assigned to the financial strength of AGC or AGUK. Investors in products insured by AGC or AGUK frequently rely on ratings published by nationally recognized statistical rating organizations (“NRSROs”) because such ratings influence the trading value of securities and form the basis for many institutions’ investment guidelines as well as individuals’ bond purchase decisions. Therefore, AGC and AGUK manage their businesses with the goal of achieving high financial strength ratings. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.

Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect internal ratings. The Company’s ratings scale is similar to that used by the NRSROs; however, the ratings in these financial statements may not be the same as those assigned by any such rating agency. For example, the super senior category, which is not generally used by rating agencies, is used by the Company in instances where the Company’s AAA-rated exposure on its internal rating scale (which does not take into account the Company’s financial guaranty) has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to the Company’s exposure or (2) the Company’s exposure benefiting from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management’s opinion, causes the Company’s attachment point to be materially above the AAA attachment point.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company and its consolidated financial guaranty variable interest entities (“FG VIEs”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements are as of June 30, 2012 and cover the three-month period ended June 30, 2012 (“Second Quarter 2012”), the three-month period ended June 30, 2011 (“Second Quarter 2011”), the six-month period ended June 30, 2012 (“Six Months 2012”) and the six-month period ended June 30, 2011 (“Six Months 2011”). The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

The unaudited interim consolidated financial statements include the accounts of AGC and its subsidiary AGUK and its consolidated FG VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. Certain prior year balances have been reclassified to conform to the current year’s presentation.

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements included as Exhibit 99.1 in AGL’s Form 8-K dated March 22, 2012, filed with the U.S. Securities and Exchange Commission (the “SEC”).

2. Business Changes, Risks, Uncertainties and Accounting Developments

Summarized below are updates of the most significant recent events that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company.

8

Rating Actions

Standard and Poor’s Ratings Services (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) have downgraded the financial strength ratings of AGC and AGUK over the course of the last several years. On March 20, 2012, Moody’s placed the Insurance Financial Strength ratings of AGC and AGUK on review for possible downgrade. As of the date of this document, S&P rates AGC and AGUK AA- (outlook stable) while Moody's rates AGC and AGUK Aa3 (on review for possible downgrade). There can be no assurance that S&P and Moody’s will not take further action on the Company’s ratings. See Note 4, Financial Guaranty Insurance Contracts, Note 6, Financial Guaranty Contracts Accounted for as Credit Derivatives and Note 11, Reinsurance and Other Monoline Exposures for more information regarding the effect of S&P and Moody’s rating actions on the financial guaranty business, the credit derivative business and the assumed reinsurance business of the Company. AGC’s financial strength ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of AGC were reduced below current levels, AGC expects it could have adverse effects on its future business opportunities as well as the premiums it could charge for its insurance policies and consequently, a downgrade could harm AGC’s new business production and results of operations in a material respect.

Accounting Changes

There has recently been significant GAAP rule making activity which has affected the accounting policies and presentation of the Company’s financial information beginning on January 1, 2012, particularly:

• adoption of new guidance that restricted the types and amounts of financial guaranty insurance acquisition costs that may be deferred. See Note 4, Financial Guaranty Insurance Contracts.

• adoption of guidance that changed the presentation of other comprehensive income (“OCI”). See “Consolidated Statements of Comprehensive Income.”

• adoption of guidance requiring additional fair value disclosures. See Note 5, Fair Value Measurement.

Deutsche Bank Agreement

On May 8, 2012, Assured Guaranty reached a settlement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), resolving claims related to certain residential mortgage-backed securities (“RMBS”) transactions issued, underwritten or sponsored by Deutsche Bank that were insured by Assured Guaranty under financial guaranty insurance policies and to certain RMBS exposures in re-securitization transactions as to which AGC provides credit protection through CDS. As part of the settlement agreement (the “Deutsche Bank Agreement”), Assured Guaranty settled its litigation against Deutsche Bank on three RMBS transactions. Assured Guaranty received a cash payment of $165.6 million from Deutsche Bank upon signing of the Deutsche Bank Agreement, a portion of which partially reimbursed Assured Guaranty for past losses on certain transactions. Of the $165.6 million received by Assured Guaranty, $79.3 million was paid to the Company.

Pursuant to the Deutsche Bank Agreement, Assured Guaranty and Deutsche Bank also entered into two loss sharing arrangements (the "FG Reinsurance Agreement" and the "Re-REMIC Reinsurance Agreement") covering future RMBS related losses, which are described below. As of June 30, 2012, Deutsche Bank had placed approximately $282.7 million of eligible assets in trust in order to collateralize the obligations of a reinsurance affiliate under the loss-sharing arrangements, and the Deutsche Bank reinsurance affiliate may post additional collateral in the future to satisfy rating agency and regulatory requirements.

The settlement includes six AGM and two AGC RMBS transactions (“Covered Transactions”) insured through financial guaranty insurance policies. The Covered Transactions are backed by first lien and second lien mortgage loans. Under the FG Reinsurance Agreement, the Deutsche Bank reinsurance affiliate will reimburse 80% of Assured Guaranty’s future losses on the Covered Transactions until Assured Guaranty’s aggregate losses (including those to date that are partially reimbursed by the $165.6 million cash payment) reach $318.8 million. Assured Guaranty currently projects that the Covered Transactions will not generate aggregate losses in excess of $318.8 million. In the event aggregate losses exceed $388.8 million, the Deutsche Bank reinsurance affiliate is required to resume reimbursement at the rate of 85% of Assured Guaranty’s losses in excess of $388.8 million until such losses reach $600.0 million. The two AGC Covered Transactions represented $104.2 million of gross par outstanding as of June 30, 2012. AGM and AGC will be reimbursed under the FG Reinsurance Agreement for their respective future losses on the Covered Transactions as they pay claims on such Covered Transactions, and Assured Guaranty quarterly will allocate such reimbursements between the two insurers pro rata based on the cumulative amounts, net of recoveries, paid to date by each insurer with respect to the Covered Transactions.

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Certain uninsured tranches (“Uninsured Tranches”) of three of the Covered Transactions are included as collateral in RMBS re-securitization transactions as to which AGC provides credit protection through CDS. Under the REMIC Reinsurance Agreement, the Deutsche Bank reinsurance affiliate will reimburse losses on the CDS in an amount equal to 60% of losses in these Uninsured Tranches until the aggregate losses in the Uninsured Tranches reach $141.1 million. Assured Guaranty currently projects that the Uninsured Tranches will not generate losses in excess of $141.1 million in the base case scenario. In the event aggregate losses exceed $161.1 million, reimbursement resumes at the rate of 60% until the aggregate losses reach $185.1 million. The Deutsche Bank reinsurance affiliate is required to reimburse any losses in excess of $185.1 million at the rate of 100% until the aggregate losses reach $247.8 million. The Uninsured Tranches represent $329.3 million of par outstanding as of June 30, 2012.

Except for the Uninsured Tranches, the settlement does not include AGC’s CDS with Deutsche Bank. The parties have agreed to continue efforts to resolve CDS-related claims.

3. 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 and affiliated 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	$	156,210	$	159,738	$	109,812	$	112,146
Structured finance	52,281		57,040		38,674		42,168
Total financial guaranty	$	208,491	$	216,778	$	148,486	$	154,314

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(1)		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
Super senior	$	—	—	%	$	726	19.0	%	$	4,883	16.8	%	$	1,894	26.4	%	$	7,503	7.4	%
AAA	167		0.3		—		—		11,415		39.2		3,139		43.7		14,721		14.6
AA	9,169		15.0		266		6.9		2,049		7.0		142		2.0		11,626		11.5
A	39,163		64.3		1,279		33.4		1,477		5.1		412		5.7		42,331		41.9
BBB	11,500		18.9		1,374		35.9		2,389		8.2		1,048		14.6		16,311		16.1
Below-investment- grade (“BIG”)	944		1.5		182		4.8		6,887		23.7		547		7.6		8,560		8.5
Total net par outstanding	$	60,943	100.0	%	$	3,827	100.0	%	$	29,100	100.0	%	$	7,182	100.0	%	$	101,052	100.0	%

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	As of December 31, 2011
	Public Finance U.S.				Structured Finance 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	$	—	—	%	$	747	19.1	%	$	5,605	17.6	%	$	1,830	24.3	%	$	8,182	7.8	%
AAA	162		0.3		—		—		11,900		37.2		3,287		43.7		15,349		14.6
AA	9,264		15.0		260		6.6		2,784		8.7		197		2.6		12,505		12.0
A	40,860		66.3		1,288		32.9		1,273		4.0		425		5.6		43,846		41.7
BBB	10,479		17.0		1,415		36.2		2,755		8.6		1,238		16.5		15,887		15.1
BIG	873		1.4		202		5.2		7,640		23.9		549		7.3		9,264		8.8
Total net par outstanding	$	61,638	100.0	%	$	3,912	100.0	%	$	31,957	100.0	%	$	7,526	100.0	%	$	105,033	100.0	%

For RMBS transactions collateralized under R&W settlement agreements, such as the Deutsche Bank Agreement and the Bank of America Agreement,  a portion of the BIG exposure has been reclassified as investment grade beginning in the First Quarter 2012. This reclassification resulted in a decrease in BIG net par outstanding as of December 31, 2011 by $377 million from that previously reported.

In addition to amounts shown in the tables above, AGC had outstanding commitments to provide guaranties of $1.6 billion for structured finance and, together with affiliate AGM, up to $396.1 million 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 $60.5 million 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 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 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.

11

Net Economic Exposure to Selected European Countries(1)

June 30, 2012

	Greece		Hungary		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	—	$	—	$	—	$	—	$	—	$	0	$	0
Infrastructure finance	—		28		17		50		64		23		182
Sub-total	—		28		17		50		64		23		182
Non-sovereign exposure:	—		—		—		—		—		—		—
Regulated utilities	—		—		—		—		—		—		—
RMBS	—		3		—		—		—		—		3
Commercial receivables	—		1		15		21		12		14		63
Pooled corporate	22		—		83		125		1		270		501
Sub-total	22		4		98		146		13		284		567
Total	$	22	$	32	$	115	$	196	$	77	$	307	$	749
Total BIG	$	—	$	—	$	—	$	2	$	2	$	7	$	11

 ____________________

(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.

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, 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 (and the Company relies on such reports), 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, unaffiliated primary insurers generally do not provide such information to the Company.

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

12

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		BIG Net Par as a % of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
	(in millions)
First lien U.S. RMBS:
Prime first lien	$	52	$	351	$	—	$	403	$	443	0.4	%
Alt-A first lien	300		1,280		607		2,187		2,862		2.2
Option ARM	49		393		95		537		727		0.5
Subprime	72		165		359		596		3,339		0.6
Second lien U.S. RMBS:
Closed-end second lien	—		35		46		81		157		0.1
Home equity lines of credit (“HELOCs”)	3		—		358		361		375		0.3
Total U.S. RMBS	476		2,224		1,465		4,165		7,903		4.1
Trust preferred securities (“TruPS”)	1,669		—		716		2,385		4,454		2.4
Other structured finance	421		62		401		884		23,925		0.9
U.S. public finance	661		34		249		944		60,943		0.9
Non- U.S. public finance	182		—		—		182		3,827		0.2
Total	$	3,409	$	2,320	$	2,831	$	8,560	$	101,052	8.5	%

13

	As of December 31, 2011
	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
	(in millions)
First lien U.S. RMBS:
Prime first lien	$	52	$	377	$	—	$	429	$	474	0.4	%
Alt-A first lien	1,264		486		632		2,382		3,101		2.3
Option ARM	20		490		33		543		801		0.5
Subprime	78		234		305		617		3,521		0.6
Second lien U.S. RMBS:							—
Closed-end second lien	—		36		118		154		175		0.1
HELOCs	3		—		398		401		419		0.4
Total U.S. RMBS	1,417		1,623		1,486		4,526		8,491		4.3
TruPS	2,015		—		715		2,730		4,698		2.6
Other structured finance	430		63		440		933		26,294		0.9
U.S. public finance	619		35		219		873		61,638		0.8
Non-U.S. public finance	202		—		—		202		3,912		0.2
Total	$	4,683	$	1,721	$	2,860	$	9,264	$	105,033	8.8	%

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	$	1,682	$	1,727	$	3,409	83	34	117
Category 2	326		1,994		2,320		46	32	78
Category 3	1,477		1,354		2,831		54	14	68
Total BIG	$	3,485	$	5,075	$	8,560	183	80	263

	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	$	1,840	$	2,843	$	4,683	83	39	122
Category 2	438		1,283		1,721		38	30	68
Category 3	1,461		1,399		2,860		52	15	67
Total BIG	$	3,739	$	5,525	$	9,264	173	84	257

 ____________________

(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.

14

4. Financial Guaranty Insurance Contracts

Change in accounting for deferred acquisition costs

In October 2010, the Financial Accounting Standards Board adopted Accounting Standards Update (“Update”) No. 2010-26. This guidance was effective January 1, 2012, with retrospective application. The Update specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include direct costs of contract acquisition that result directly from and are essential to the contract transaction. These costs include expenses such as ceding commissions and the cost of underwriting personnel. Management uses its judgment in determining the type and amount of cost to be deferred. The Company conducts an annual study to determine which operating costs qualify for deferral. Ceding commission income on business ceded to third party reinsurers reduces policy acquisition costs and is deferred. Costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs are charged to expense as incurred.

Expected losses, loss adjustment expenses (“LAE”) and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of deferred acquisition costs. When an insured issue is retired early, the remaining related deferred acquisition cost is expensed at that time. Ceding commission expense and income associated with future installment premiums on assumed and ceded business, respectively, are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to net premium receivable or reinsurance balances payable.

As of January 1, 2011, the effect of retrospective application of the new guidance was a reduction to deferred acquisition costs of $76.6 million and a reduction to retained earnings of $49.8 million.

Effect of Retrospective Application of New Deferred Acquisition Cost Guidance

On Consolidated Statements of Operations

	As Reported Second Quarter 2011			Retroactive Application Adjustment			As Revised Second Quarter 2011
	(in millions)
Amortization of deferred acquisition costs	$	4.5		$	(3.3	)	$	1.2
Other operating expenses	16.2			2.1			18.3
Net income (loss)	(82.9		)	0.8			(82.1		)

	As Reported Six Months 2011			Retroactive Application Adjustment			As Revised Six Months 2011
	(in millions)
Amortization of deferred acquisition costs	$	8.3		$	(6.4	)	$	1.9
Other operating expenses	33.8			5.3			39.1
Net income (loss)	(188.3		)	0.8			(187.5		)

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of derivative contracts. Amounts presented in this note relate to financial guaranty insurance contracts.

15

Net Earned Premiums

	Second Quarter				Six Months
	2012		2011		2012			2011
	(in millions)
Scheduled net earned premiums	$	16.6	$	20.8	$	33.9		$	39.5
Acceleration of premium earnings	8.7		2.7		12.8			11.0
Accretion of discount on net premiums receivable	0.9		1.1		(0.2		)	2.8
Total net earned premiums(1)	$	26.2	$	24.6	$	46.5		$	53.3

 ___________________

(1) Excludes $0.4 million and $0.4 million in Second Quarter 2012 and 2011, respectively, and $1.2 million and $0.3 million for the Six Months 2012 and 2011, respectively, related to consolidated FG VIEs.

Gross Premium Receivable, Net of Ceding Commissions Roll Forward

	Six Months
	2012			2011
	(in millions)
Balance beginning of period	$	231.9		$	269.6
Premium written, net	22.2			20.2
Premium payments received, net	(40.6		)	(26.7		)
Adjustments to the premium receivable:
Changes in the expected term of financial guaranty insurance contracts	11.1			(52.3		)
Accretion of discount	1.0			3.9
Foreign exchange translation	(0.4		)	0.5
Consolidation of FG VIEs	(0.1		)	(2.8		)
Other adjustments	—			4.9
Balance, end of period (1)	$	225.1		$	217.3

 ___________________

(1) Excludes $10.4million and $13.1million as of June 30, 2012 and 2011, respectively, related to consolidated FG VIEs.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 16%, 9% and 11% of installment premiums at June 30, 2012, December 31, 2011 and June 30, 2011, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro and British Pound Sterling.

Actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changes in expected lives.

16

Expected Collections of Gross Premiums Receivable,

Net of Ceding Commissions (Undiscounted)

	June 30, 2012
	(in millions)
2012 (July 1 - September 30)	$	16.1
2012 (October 1 - December 31)	8.3
2013	29.9
2014	25.0
2015	22.4
2016	20.1
2017 - 2021	76.3
2022 - 2026	39.6
2027 - 2031	27.7
After 2031	33.3
Total(1)	$	298.7

 ___________________

(1) Excludes expected cash collections on FG VIEs of $12.7 million.

The following table provides a schedule of the expected timing of the income statement recognition of pre-tax financial guaranty insurance net unearned premium reserve and the present value of net expected losses to be expensed. The amount and timing of actual premium earnings and loss and LAE may differ from the estimates shown below due to factors such as refundings, accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to consolidated FG VIEs.

Expected Timing of

Premium and Loss Recognition

	As of June 30, 2012
	Scheduled Net Earned Premium		Net Expected Loss to be Expensed		Net
	(in millions)
2012 (July 1 – September 30)	$	16.4	$	0.4	$	16.0
2012 (October 1 – December 31)	15.9		0.4		15.5
Subtotal 2012	32.3		0.8		31.5
2013	60.7		1.4		59.3
2014	59.3		1.3		58.0
2015	55.2		1.2		54.0
2016	51.2		1.1		50.1
2017 - 2021	207.9		4.5		203.4
2022 - 2026	143.6		3.5		140.1
2027 - 2031	94.4		2.5		91.9
After 2031	93.0		1.7		91.3
Total present value basis(1)(2)	797.6		18.0		779.6
Discount	39.6		17.8		21.8
Total future value	$	837.2	$	35.8	$	801.4

__________________

(1) Balances represent discounted amounts.

(2) Consolidation of FG VIEs resulted in reductions of $8.8 million in future scheduled unearned premium reserve and $3.9 million in net expected loss to be expensed.

17

Selected Information for Policies Paid in Installments

	As of June 30, 2012			As of December 31, 2011
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	225.1		$	231.9
Gross unearned premium reserve	210.5			219.3
Weighted-average risk-free rate used to discount premiums	4.0		%	3.1		%
Weighted-average period of premiums receivable (in years)	9.0			8.0

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid. Surveillance personnel present analyses related to potential losses to the Company’s loss reserve committees for consideration in estimating the expected loss to be paid. Such analyses include the consideration of various scenarios with potential probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company’s loss reserve committees review and refresh the estimate of expected loss to be paid each quarter. The Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance as a result of economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management.

The following table presents a roll forward of the present value of net expected loss to be paid for financial guaranty insurance contracts by sector. Net expected loss to be paid is the estimate of the present value of future claim payments, net of reinsurance and net of salvage and subrogation, which includes the present value benefit of estimated recoveries for breaches of representations and warranties (“R&W”). The Company used weighted-average risk-free rates for U.S. dollar denominated obligations, which ranged from 0.0% to 3.04% as of June 30, 2012 and 0.0% to 3.27% as of December 31, 2011.

18

Present Value of Net Expected Loss to be Paid

Roll Forward by Sector(1)

	Net Expected Loss to be Paid as of March 31, 2012			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Net Expected Loss to be Paid as of June 30, 2012
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.4		$	0.5		$	—		$	1.9
Alt-A first lien	26.3			4.3			(0.4		)	30.2
Option ARM	18.5			3.8			(3.2		)	19.1
Subprime	3.0			—			(0.3		)	2.7
Total first lien	49.2			8.6			(3.9		)	53.9
Second lien:
Closed-end second lien	(53.5		)	2.5			63.3			12.3
HELOCs	18.3			(0.2		)	(8.6		)	9.5
Total second lien	(35.2		)	2.3			54.7			21.8
Total U.S. RMBS	14.0			10.9			50.8			75.7
TruPS	6.4			(1.3		)	(0.1		)	5.0
Other structured finance	42.7			(4.4		)	(1.2		)	37.1
U.S. public finance	34.1			(1.2		)	(0.8		)	32.1
Non-U.S. public finance	3.5			—			—			3.5
Total financial guaranty	$	100.7		$	4.0		$	48.7		$	153.4

	Net Expected Loss to be Paid as of March 31, 2011			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Net Expected Loss to be Paid as of June 30, 2011
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	0.3		$	1.1		$	—		$	1.4
Alt-A first lien	28.8			1.9			(0.3		)	30.4
Option ARM	23.0			4.1			—			27.1
Subprime	36.6			(2.1		)	0.2			34.7
Total first lien	88.7			5.0			(0.1		)	93.6
Second lien:
Closed-end second lien	(33.0		)	(3.7		)	(7.5		)	(44.2		)
HELOCs	(112.1		)	6.7			121.9			16.5
Total second lien	(145.1		)	3.0			114.4			(27.7		)
Total U.S. RMBS	(56.4		)	8.0			114.3			65.9
TruPS	(0.7		)	4.4			(0.2		)	3.5
Other structured finance	27.0			(2.2		)	0.4			25.2
U.S. public finance	32.8			(1.0		)	(0.1		)	31.7
Non-U.S. public finance	5.3			(1.7		)	—			3.6
Total financial guaranty	$	8.0		$	7.5		$	114.4		$	129.9

19

	Net Expected Loss to be Paid as of December 31, 2011			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Net Expected Loss to be Paid as of June 30, 2012
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.1		$	0.8		$	—		$	1.9
Alt-A first lien	32.3			(1.7		)	(0.4		)	30.2
Option ARM	14.2			8.1			(3.2		)	19.1
Subprime	3.0			0.3			(0.6		)	2.7
Total first lien	50.6			7.5			(4.2		)	53.9
Second lien:
Closed-end second lien	(48.0		)	1.9			58.4			12.3
HELOCs	20.2			1.6			(12.3		)	9.5
Total second lien	(27.8		)	3.5			46.1			21.8
Total U.S. RMBS	22.8			11.0			41.9			75.7
TruPS	9.9			(4.7		)	(0.2		)	5.0
Other structured finance	44.1			(5.6		)	(1.4		)	37.1
U.S. public finance	20.6			15.4			(3.9		)	32.1
Non-U.S. public finance	3.4			0.1			—			3.5
Total financial guaranty	$	100.8		$	16.2		$	36.4		$	153.4

	Net Expected Loss to be Paid as of December 31, 2010			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Net Expected Loss to be Paid as of June 30, 2011
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	0.8		$	0.6		$	—		$	1.4
Alt-A first lien	28.8			2.2			(0.6		)	30.4
Option ARM	49.6			(22.4		)	(0.1		)	27.1
Subprime	28.8			5.8			0.1			34.7
Total first lien	108.0			(13.8		)	(0.6		)	93.6
Second lien:
Closed-end second lien	(6.3		)	(13.8		)	(24.1		)	(44.2		)
HELOCs	(118.3		)	26.3			108.5			16.5
Total second lien	(124.6		)	12.5			84.4			(27.7		)
Total U.S. RMBS	(16.6		)	(1.3		)	83.8			65.9
TruPS	(0.5		)	4.4			(0.4		)	3.5
Other structured finance	28.0			(2.9		)	0.1			25.2
U.S public finance	44.1			(12.2		)	(0.2		)	31.7
Non-U.S. public finance	3.2			0.4			—			3.6
Total financial guaranty	$	58.2		$	(11.6	)	$	83.3		$	129.9

20

___________________

(1) Amounts include all expected payments whether or not the insured VIE is consolidated.

(2) Economic loss development includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.

(3) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets.

(4) Includes expected LAE to be paid for mitigating claim liabilities of $8.1 million as of June 30, 2012 and $8.7 million as of December 31, 2011.

The table below provides a reconciliation of expected loss to be paid to expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the addition of claim payments that have been made (and therefore are not included in expected loss to be paid) that are expected to be recovered in the future (and therefore have also reduced expected loss to be paid, and (2) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Financial Guaranty Insurance Present Value of Net Expected Loss to be Paid

and Net Present Value of Net Expected Loss to be Expensed

	As of June 30, 2012
	(in millions)
Net: expected loss to be paid	$	153.4
Less: net expected loss to be paid for FG VIEs	22.7
Total	130.7
Salvage and subrogation recoverable	50.0
Ceded salvage and subrogation recoverable (1)	(9.3		)
Loss and LAE reserve	(293.2		)
Reinsurance recoverable on unpaid losses	139.8
Net expected loss to be expensed(2)	$	18.0

 ___________________

(1) Recorded in reinsurance balances payable on the consolidated balance sheet.

(2) Excludes $3.9 million related to consolidated FG VIEs.

The Company’s Approach to Projecting Losses in U.S. RMBS

The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and either establishes a recovery for claims already paid or reduces its projected claim payments accordingly.

The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” Liquidation rates may be derived from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from

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liquidation rates into a vector of conditional default rates (“CDR”), then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the liquidation of currently delinquent loans represent defaults of currently performing loans. A conditional default rate is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral pool balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.

In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on its experience to date. Further detail regarding the assumptions and variables the Company used to project collateral losses in its U.S. RMBS portfolio may be found below in the sections “U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien” and “U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime.”

The Company is in the process of enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. The Company calculates a credit from the RMBS issuer for such recoveries where the R&W were provided by an entity the Company believes to be financially viable and where the Company already has access or believes it will attain access to the underlying mortgage loan files. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement or the Deutsche Bank Agreement) or where it is in advanced discussions on a potential agreement, that credit is based on the agreement or potential agreement. In second lien RMBS transactions where there is no agreement or advanced discussions, this credit is based on a percentage of actual repurchase rates achieved across those transactions where material repurchases have been made. In first lien RMBS transactions where there is no agreement or advanced discussions, this credit is estimated by reducing collateral losses projected by the Company to reflect a percentage of the recoveries the Company believes it will achieve, based on a percentage of actual repurchase rates achieved or based on the amounts the Company was able to negotiate under the Bank of America Agreement and Deutsche Bank Agreement. The first lien approach is different from the second lien approach because the Company’s first lien transactions have multiple tranches and a more complicated method is required to correctly allocate credit to each tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses generally increases the R&W credit calculated by the Company for the RMBS issuer. Further detail regarding how the Company calculates these credits may be found under “Breaches of Representations and Warranties” below.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for (a) the collateral losses it projects as described above, (b) assumed voluntary prepayments and (c) recoveries for breaches of R&W as described above. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

Second Quarter-End 2012 U.S. RMBS Loss Projections

The Company retained the same general approach and methodology to projecting RMBS performance at June 30, 2012 as it did at March 31, 2012 and December 31, 2011. The approach combines using each transaction's observed data with the Company's estimate of how the transaction will ultimately perform based on the Company's view of the magnitude and timing of a recovery in the mortgage market. During the quarter the Company observed both positive and negative developments in the market. These developments were reflected by moderately lowering the initial CDR's which are a function of the observed delinquency data, and by adjusting the scenarios used to project the amount of time until the RMBS market stabilizes.

The scenarios the Company used to project first and second lien RMBS collateral losses at June 30, 2012 were essentially the same as those it used at March 31, 2012 and December 31, 2011, except that (i) based on its observation of the continued elevated levels of early stage delinquencies, the Company updated its projections to reflect a slower recovery in its base cases and (ii) the Company reduced the time until the market stabilizes in its most optimistic case by three months, so it assumed that the recovery projected last quarter was occurring at the expected pace and (iii) the Company adjusted its most pessimistic case, where it assumed the recovery would happen six months more slowly than what was assumed last quarter.

The Company also used generally the same methodology and assumptions to project the credit received for recoveries in R&W at June 30, 2012 as March 31, 2012 and December 31, 2011. The primary differences relate to a change in assumption regarding the likelihood and amount of recovery from certain R&W providers.

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U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien

The Company insures two types of second lien RMBS: those secured by HELOCs and those secured by closed-end second lien mortgages. HELOCs are revolving lines of credit generally secured by a second lien on a one to four family home. A mortgage for a fixed amount secured by a second lien on a one to four family home is generally referred to as a closed-end second lien. Second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority of the collateral. The Company has material exposure to second lien mortgage loans originated and serviced by a number of parties, but the Company’s most significant second lien exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America. See “—Breaches of Representations and Warranties.”

The delinquency performance of HELOC and closed-end second lien exposures included in transactions insured by the Company began to deteriorate in 2007, and such transactions, continue to perform below the Company’s original underwriting expectations. While insured securities benefit from structural protections within the transactions designed to absorb collateral losses in excess of previous historically high levels, in many second lien RMBS projected losses now exceed those structural protections.

The Company believes the primary variables affecting its expected losses in second lien RMBS transactions are the amount and timing of future losses in the collateral pool supporting the transactions and the amount of loans repurchased for breaches of R&W (or agreements with R&W providers related to such obligations). Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as conditional prepayment rate (“CPR”) of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity. These variables are interrelated, difficult to predict and subject to considerable volatility. If actual experience differs from the Company’s assumptions, the losses incurred could be materially different from the estimate. The Company continues to update its evaluation of these exposures as new information becomes available.

The following table shows the key assumptions used in the calculation of estimated expected loss to be paid for direct vintage 2004 - 2008 second lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

Second Lien RMBS(1)

HELOC Key Assumptions	As of June 30, 2012	As of March 31, 2012	As of December 31, 2011
Plateau CDR	7.7 - 13.4%	7.7 - 22.1%	6.4 - 21.1%
Final CDR trended down to	0.5 - 2.2%	0.5 - 2.2%	0.5 - 2.2%
Expected period until final CDR	36 months	36 months	36 months
Initial CPR	3.2 - 13.5%	3.9 - 9.8%	3.5 - 24.6%
Final CPR	10%	10%	10%
Loss severity	98%	98%	98%
Initial draw rate	0.0 - 0.1%	0.0 - 0.5%	0.0 - 0.4%

Closed-end second lien Key Assumptions	As of June 30, 2012	As of March 31, 2012	As of December 31, 2011
Plateau CDR	4.3 - 20.7%	5.4 - 24.9%	6.9 - 24.8%
Final CDR trended down to	3.5 - 9.1%	3.5 - 9.2%	3.5 - 9.2%
Expected period until final CDR	36 months	36 months	36 months
Initial CPR	1.1 - 11.0%	1.2 - 8.6%	0.9 - 14.7%
Final CPR	10%	10%	10%
Loss severity	98%	98%	98%

 ___________________

(1) Represents variables for most heavily weighted scenario (the “base case”).

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the

23

securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected representative transactions and then applying an average of the preceding twelve months’ liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a CDR. The first four months’ CDR is calculated by applying the liquidation rates to the current period past due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the CDR is calculated using the average 30-59 day past due balances for the prior three months. An average of the third, fourth and fifth month CDR is then used as the basis for the plateau period that follows the embedded five months of losses.

As of June 30, 2012, for the base case scenario, the CDR (the “plateau CDR”) was held constant for one month. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. In the base case scenario, the time over which the CDR trends down to its final CDR is 30 months. Therefore, the total stress period for second lien transactions is 36 months, comprising five months of delinquent data, a one month plateau period and 30 months of decrease to the steady state CDR. This is the same as March 31, 2012 and December 31, 2011. The long-term steady state CDRs are calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally a very low recovery. Based on current expectations of future performance, the Company assumes that it will only recover 2% of the collateral, the same as March 31, 2012 and December 31, 2011.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (which is a function of the CDR and the loan balance over time) as well as the amount of excess spread (which is the excess of the interest paid by the borrowers on the underlying loan over the amount of interest and expenses owed on the insured obligations). In the base case, the current CPR is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant. The final CPR is assumed to be 10% for both HELOC and closed-end second lien transactions. This level is much higher than current rates for most transactions, but lower than the historical average, which reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the CPR at March 31, 2012 and December 31, 2011. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to a final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 0.1%.

In estimating expected losses, the Company modeled and probability weighted three possible CDR curves applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer (before considering the effects of repurchases of ineligible loans). The Company continues to evaluate the assumptions affecting its modeling results.

At June 30, 2012, the Company’s base case assumed a one month CDR plateau and a 30 month ramp-down (for a total stress period of 36 months), the same as March 31, 2012 and December 31, 2011. The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults and weighted them the same as of March 31, 2012 and December 31, 2011, but in each case changed the length of the ramp-downs by three months (and so the length of elevated defaults) in order to reflect both positive and negative developments observed by the Company in the market. Increasing the CDR plateau to four months and increasing the ramp-down by three months to 33-months (rather than 30 months at March 31, 2012 and December 31, 2011, for a total stress period of 42 months rather than 39 months as at March 31, 2012 and December 31, 2011) would increase the expected loss by approximately $9.3 million for HELOC transactions and $0.9 million for closed-end second lien transactions. On the other hand, keeping the CDR plateau at one month but decreasing the length of the CDR ramp-down to 21 months (rather than 24 months as of March 31, 2012 and December 31, 2011, for a total stress period of 33 months rather than 30 months as of March 31, 2012 and December 31, 2011) would decrease the expected loss by approximately $9.4 million for HELOC transactions and $1.0 million for closed-end second lien transactions.

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U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime

First lien RMBS are generally categorized in accordance with the characteristics of the first lien mortgage loans on one-to-four family homes supporting the transactions. The collateral supporting “subprime RMBS” transactions consists of first-lien residential mortgage loans made to subprime borrowers. A “subprime borrower” is one considered to be a higher risk credit based on credit scores or other risk characteristics. Another type of RMBS transaction is generally referred to as “Alt-A first lien.” The collateral supporting such transactions consists of first-lien residential mortgage loans made to “prime” quality borrowers who lack certain ancillary characteristics that would make them prime. When more than 66% of the loans originally included in the pool are mortgage loans with an option to make a minimum payment that has the potential to amortize the loan negatively (i.e., increase the amount of principal owed), the transaction is referred to as an “Option ARM.” Finally, transactions may be composed primarily of loans made to prime borrowers. First lien RMBS sometimes include a portion of loan collateral that differs in priority from the majority of the collateral.

The performance of the Company’s first lien RMBS exposures began to deteriorate in 2007 and such transactions continue to perform below the Company’s original underwriting expectations. The Company currently projects first lien collateral losses many times those expected at the time of underwriting. While insured securities benefited from structural protections within the transactions designed to absorb some of the collateral losses, in many first lien RMBS transactions, projected losses exceed those structural protections.

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent or in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). Changes in the amount of non-performing loans from the amount projected in the previous period is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquency categories. The Company arrived at its liquidation rates based on data purchased from a third party and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations to occur over two years. The Company used the same liquidation rates for June 30, 2012 as it did for March 31, 2012 and December 31, 2011. The following table shows liquidation assumptions for various delinquency categories.

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First Lien Liquidation Rates

as of June 30, 2012

30 – 59 Days Delinquent
Alt-A and Prime	35%
Option ARM	50
Subprime	30
60 - 89 Days Delinquent
Alt-A and Prime	55
Option ARM	65
Subprime	45
90+ Days Delinquent
Alt-A and Prime	65
Option ARM	75
Subprime	60
Bankruptcy
Alt A and Prime	55
Option ARM	70
Subprime	50
Foreclosure
Alt-A and Prime	85
Option ARM	85
Subprime	80
Real Estate Owned ("REO")
All	100

While the Company uses liquidation rates as described above to project defaults of non-performing loans, it projects defaults on presently current loans by applying a CDR trend. The start of that CDR trend is based on the defaults the Company projects will emerge from currently nonperforming loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 24 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.

In the base case, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. Under the Company’s methodology, defaults projected to occur in the first 24 months represent defaults that can be attributed to loans that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 24 month period represent defaults attributable to borrowers that are currently performing.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historic high levels, and the Company is assuming that these high levels generally will continue for another year (in the case of subprime loans, the Company assumes the unprecedented 90% loss severity rate will continue for six months then drop to 80% for six months before following the ramp described below). The Company determines its initial loss severity based on actual recent experience. The Company’s loss severity assumptions for June 30, 2012 were the same as it used for March 31, 2012 and December 31, 2011. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in June 2013, and in the base case scenario, decline over two years to 40%.

The following table shows the key assumptions used in the calculation of expected loss to be paid for direct vintage 2004 - 2008 first lien U.S. RMBS.

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Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS

	As of June 30, 2012	As of March 31, 2012	As of December 31, 2011
Alt-A First Lien
Plateau CDR	3.3% - 16.9%	2.7% - 15.9%	2.8% - 15.8%
Intermediate CDR	0.7% - 3.4%	0.5% - 3.2%	0.6% - 3.2%
Final CDR	0.2% - 0.8%	0.1% - 0.8%	0.1% - 0.8%
Initial loss severity	65%	65%	65%
Initial CPR	1.5% - 27.1%	0.0% - 34.1%	1.1% - 24.4%
Final CPR	15%	15%	15%
Option ARM
Plateau CDR	13.1% - 26.5%	13.0% - 25.8%	12.4% - 26.0%
Intermediate CDR	2.6% - 5.3%	2.6% - 5.2%	2.5% - 5.2%
Final CDR	0.7% - 1.3%	0.6% - 1.3%	0.6% - 1.3%
Initial loss severity	65%	65%	65%
Initial CPR	0.7% - 4.5%	1.3% - 2.3%	0.3% - 6.4%
Final CPR	15%	15%	15%
Subprime
Plateau CDR	7.2% - 13.3%	8.3% - 13.7%	8.6% - 13.8%
Intermediate CDR	1.4% - 2.7%	1.7% - 2.7%	1.7% - 2.8%
Final CDR	0.4% - 0.7%	0.4% - 0.7%	0.4% - 0.7%
Initial loss severity	90%	90%	90%
Initial CPR	2.1% - 8.8%	0.3% - 8.8%	0.0% - 16.3%
Final CPR	15%	15%	15%

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the CPR follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be either 10% or 15% depending on the scenario run. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant.

The ultimate performance of the Company’s first lien RMBS transactions remains highly uncertain and may be subject to considerable volatility due to the influence of many factors, including the level and timing of loan defaults, changes in housing prices and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust the loss projections for those transactions based on actual performance and management’s estimates of future performance.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed CPRs and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) at June 30, 2012, the same number of scenarios as March 31, 2012 and December 31, 2011. For June 30, 2012 the Company assumed in the most stressful scenario that the recovery would occur three months more slowly and in the most optimistic scenario that it would occur three months more quickly than it had for March 31, 2012 and December 31, 2011, but otherwise used the same scenarios and weightings for June 30, 2012 as March 31, 2012 and December 31, 2011.

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In a somewhat more stressful environment than that of the base case, where the conditional default rate plateau was extended three months (to be 27 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over four rather than two years (and subprime loss severities were assumed to recover only to 60%), expected loss to be paid would increase from current projections by approximately $3.3 million for Alt-A first liens, $5.4 million for Option ARM, $0.1 million for subprime and $0.8 million for prime transactions. In an even more stressful scenario where loss severities were assumed to rise and then recover over eight years and the initial ramp-down of the conditional default rate was assumed to occur over 15 months (rather than 12 months as at March 31, 2012 and December 31, 2011) and other assumptions were the same as the other stress scenario), expected loss to be paid would increase from current projections by approximately $9.2 million for Alt-A first liens, $16.6 million for Option ARM, $0.1 million for subprime and $2.4 million for prime transactions. The Company also considered two scenarios where the recovery was faster than in its base case. In a scenario with a somewhat less stressful environment than the base case, where conditional default rate recovery was somewhat less gradual and the initial subprime loss severity rate was assumed to be 80% for 12 months and was assumed to recover to 40% over two years (the same scenario used for the base case at December 31, 2010) , expected loss to be paid would decrease from current projections by approximately $0.4million for Alt-A first lien, $1.5million for Option ARM, $0.2million for subprime and $0.1million for prime transactions. In an even less stressful scenario where the conditional default rate plateau was three months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, (including an initial ramp-down of the conditional default rate over nine months rather than 12 months as at March 31, 2012 and December 31, 2011) expected loss to be paid would decrease from current projections by approximately $3.4million for Alt-A first lien, $6.9million for Option ARM, $0.3million for subprime and $0.6million for prime transactions.

Breaches of Representations and Warranties

The Company is pursuing reimbursements for breaches of R&W regarding loan characteristics. Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company’s original expectations. The Company has employed several loan file diligence firms and law firms as well as devoted internal resources to review the mortgage files surrounding many of the defaulted loans. The Company’s success in these efforts has resulted in three negotiated agreements, in respect of the Company’s R&W claims, including one on April 14, 2011 with Bank of America and one on May 8, 2012 with Deutsche Bank AG as described under “Deutsche Bank Agreement” in Note 2, Business Changes, Uncertainties and Accounting Developments.

The Company has included in its net expected loss estimates as of June 30, 2012 an estimated benefit from loan repurchases related to breaches of R&W of $140.9million, which includes $77.5 million from Bank of America and Deutsche Bank AG under their respective agreements and $63.4 million in transactions where the Company does not yet have such an agreement. Through June 30, 2012 the Company has already received $228.1 million net of reinsurance under its agreements with Bank of America and Deutsche Bank AG for both first and second lien transactions. Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims, projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company’s exposure. These amounts reflect payments made pursuant to the negotiated transaction agreements and not payments made pursuant to legal settlements. See “—Recovery Litigation” below for a description of the related legal proceedings the Company has commenced.

The Company did not incorporate any gain contingencies or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty’s ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company’s estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the creditworthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches across those transactions where material repurchases have been made and the potential amount of time until the recovery is realized.

The calculation of expected recovery from breaches of R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing limited recoveries. The Company did not include any recoveries related to breaches of R&W in amounts greater than the losses it paid or expected to pay under any given cash flow scenario. These scenarios were probability weighted in order to determine the recovery incorporated into the Company’s estimate of expected losses. This approach was used for both loans that had already defaulted and those assumed to default in the future.

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Balance Sheet Classification of R&W Benefit, Net of Reinsurance

	As of June 30, 2012							As of December 31, 2011
	For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet(1)		For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet(1)
	(in millions)
Salvage and subrogation recoverable	$	29.0	$	—		$	29.0	$	86.0	$	(57.3	)	$	28.7
Loss and LAE reserve	111.5		(29.5		)	82.0		121.3		(37.2		)	84.1

____________________

(1)      The remaining benefit for R&W is not recorded on the balance sheet until the expected loss, net of R&W, exceeds unearned premium reserve.

The following table represents the Company’s total estimated R&W recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures.

Roll Forward of Estimated Benefit from Recoveries from Representation and Warranty Breaches,

Net of Reinsurance

	Future Net R&W Benefit as of December 31, 2011		R&W Development and Accretion of Discount During Six Months 2012			R&W Recovered During Six Months 2012(1)			Future Net R&W Benefit as of June 30, 2012
	(in millions)
Prime first lien	$	1.5	$	0.5		$	—		$	2.0
Alt-A first lien	16.5		3.7			(0.2		)	20.0
Option ARM	75.4		4.7			—			80.1
Closed-end second lien	89.4		(1.3		)	(67.4		)	20.7
HELOC	25.7		0.7			(8.3		)	18.1
Total	$	208.5	$	8.3		$	(75.9	)	$	140.9

	Future Net R&W Benefit as of December 31, 2010		R&W Development and Accretion of Discount During Six Months 2011		R&W Recovered During Six Months 2011(1)			Future Net R&W Benefit as of June 30, 2011
	(in millions)
Prime first lien	$	0.6	$	0.9	$	—		$	1.5
Alt-A first lien	10.1		3.9		—			14.0
Option ARM	14.3		66.7		(20.0		)	61.0
Closed-end second lien	67.0		18.3		—			85.3
HELOC	162.5		21.1		(141.1		)	42.5
Total	$	254.5	$	110.9	$	(161.1	)	$	204.3

 ___________________

(1)    Gross amounts recovered were $91.5million and $227.5million in Six Months 2012 and 2011, respectively.

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Financial Guaranty Insurance U.S. RMBS Risks with R&W Benefit

	Number of Risks (1) as of		Debt Service as of
	June 30, 2012	December 31, 2011	June 30, 2012		December 31, 2011
	(dollars in millions)
Prime first lien	1	1	$	19.7	$	20.9
Alt-A first lien	9	11	319.0		374.1
Option ARM	2	2	167.2		181.6
Closed-end second lien	2	2	69.7		119.7
HELOC(2)	1	3	20.3		480.9
Total	15	19	$	595.9	$	1,177.2

 ___________________

(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

(2) The decline in number of HELOC risks and debt service relates to the final payment from Bank of America for covered HELOC transactions.

The following table provides a breakdown of the development and accretion amount in the roll forward of estimated recoveries associated with alleged breaches of R&W.

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Inclusion or removal of deals with breaches of R&W during period	$	(1.1	)	$	—		$	(1.1	)	$	23.5
Change in recovery assumptions as the result of additional file review and recovery success	—			—			—			3.3
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	3.7			(17.3		)	8.2			(8.1		)
Results of settlements	—			17.7			—			92.1
Accretion of discount on balance	0.6			—			1.2			0.1
Total	$	3.2		$	0.4		$	8.3		$	110.9

The R&W development during Second Quarter 2012 resulted primarily from the change in projected future defaults offset by elimination of the credit in one instance where the Company has become less confident that it will obtain the loan files.

The Company assumes that recoveries on transactions backed by HELOC and closed-end second lien loans that were not subject to the Bank of America Agreement or Deutsche Bank Agreement will occur in two to four years from the balance sheet date depending on the scenarios, and that recoveries on transactions backed by Alt-A first lien, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions. Recoveries on second lien transactions subject to the Bank of America Agreement were paid in full by March 31, 2012.

As of June 30, 2012, cumulative collateral losses on Assured Guaranty’s 20 first lien RMBS transactions (of which eight are insured by AGC) executed as financial guaranties and one CDS transaction (which is insured by AGC), subject to a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, “Bank of America”) (the “Bank of America Agreement”) were approximately $2.5 billion and $0.09billion, respectively. Assured Guaranty estimates that cumulative projected collateral losses for the 20 financial guaranty insurance transactions and one CDS transaction will be $5.0billion and $0.2 billion, respectively. The Bank of America Agreement covers cumulative collateral losses up to $6.6 billion for all these transactions. Bank of America had placed approximately $1.0billion of eligible assets in trust in order to collateralize the reimbursement obligation relating to these and one covered first lien CDS transaction. The amount of assets required to be posted may increase or decrease from time to time as determined by rating agency requirements.

On May 8, 2012, Assured Guaranty reached a settlement with Deutsche Bank AG and certain of its affiliates

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(collectively, “Deutsche Bank”), resolving claims related to certain RMBS transactions issued, underwritten or sponsored by Deutsche Bank that were insured by Assured Guaranty under financial guaranty insurance policies and to certain RMBS exposures in re-securitization transactions as to which Assured Guaranty provides credit protection through CDS. See Note 2, Business Changes, Risks, Uncertainties and Accounting Developments for more information.

Student Loan Transactions

The Company has insured or reinsured $1.2billion net par of student loan securitizations, $0.6 billion issued by private issuers and classified as asset-backed and $0.6 billion issued by public authorities and classified as public finance. Of these amounts, $7.5 million and $36.0 million, respectively, are rated BIG. The Company is projecting approximately $1.5 million of net expected loss to be paid in these portfolios. In general the losses are due to: (i) the poor credit performance of private student loan collateral and high loss severities; (ii) high interest rates on auction rate securities with respect to which the auctions have failed or (iii) lower risk-free rates used for discounting, which result in higher present value losses on transactions where losses are payable at final maturity. The guaranteed bonds were issued as auction rate securities that now bear a high rate of interest due to the downgrade of the primary insurer's financial strength rating. Further, the underlying loan collateral has performed below expectations. The overall increase of $0.6 million in net expected loss during Second Quarter 2012 is primarily due to the decrease in risk-free rates used to discount losses as well as an increase in the projected loss severities of certain transactions.

Trust Preferred Securities Collateralized Debt Obligations

The Company has insured or reinsured $1.2 billion of net par of collateralized debt obligations (“CDOs”) backed by TruPS and similar debt instruments, or “TruPS CDOs.” Of that amount, $588.6 million is rated BIG. The underlying collateral in the TruPS CDOs consists of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts (“REITs”) and other real estate related issuers.

The Company projects losses for TruPS CDOs by projecting the performance of the asset pools across several scenarios (which it weights) and applying the CDO structures to the resulting cash flows. At June 30, 2012, the Company has projected expected losses to be paid for TruPS CDOs that are accounted for as financial guaranty insurance of $5.0million. The decrease of $1.4 million in net expected loss during Second Quarter 2012 was driven primarily by a modest improvement in performance, which was partially offset by lower risk-free rates used to discount losses.

“XXX” Life Insurance Transactions

The Company’s $491.0 million net par of XXX life insurance transactions as of June 30, 2012, include $248.2 million rated BIG. The BIG “XXX” life insurance reserve securitizations are based on discrete blocks of individual life insurance business. In each such transaction the monies raised by the sale of the bonds insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers.

The BIG “XXX” life insurance transactions consist of two transactions: Ballantyne Re p.l.c and Orkney Re II p.l.c. These transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance and projected credit impairments on the invested assets and performance of the blocks of life insurance business at June 30, 2012, the Company’s projected net expected loss to be paid is $27.1million. The decrease of $6.1 million during Second Quarter 2012 is due primarily to the purchase of additional insured bonds for one of the transactions.

Other Notable Transactions

U.S. municipalities and related entities have been under increasing pressure over the last few quarters, and a few have filed for protection under the U.S. Bankruptcy Code, entered into state processes designed to help municipalities in fiscal distress or otherwise indicated they may consider not meeting their obligations to make timely payments on their debts. The Company expects that bondholder rights will be enforced. However, due to the early stage of these developments, and the circumstances surrounding each instance, the ultimate outcome cannot be certain. The Company will continue to analyze developments in each of these matters closely.

The Company has net exposure to Jefferson County, Alabama of $183.6 million. On November 9, 2011, Jefferson County filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Alabama (Southern Division).

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• Most of AGC’s net exposure relates to $183.0 million in Jefferson County sewer revenue exposure, all of which is assumed reinsurance. The sewer revenue warrants are secured by a pledge of the net revenues of the sewer system. The bankruptcy court has affirmed that the net revenues constitute a “special revenue” under Chapter 9. Therefore, the net revenues of the sewer system are not subject to an automatic stay during the pendency of Jefferson County’s bankruptcy case. BNY Mellon, as trustee, had brought a lawsuit regarding the amount of net revenues to which it is entitled. Since its bankruptcy filing, Jefferson County had been withholding estimated bankruptcy-related legal expenses and an amount representing a monthly reserve for future expenditures and depreciation and amortization from the monthly payments it had been making to the trustee from sewer revenues for debt service. On June 29, 2012 the Bankruptcy Court ruled that “Operating Expenses” as determined under the bond indenture do not include (1) a reserve for depreciation, amortization, or future expenditures, or (2) an estimate for professional fees and expenses, such that, after payment of Operating Expenses (as defined in the indenture), monies remaining in the Revenue Account created under the bond indenture must be distributed in accordance with the waterfall set forth in the indenture without withholding any monies for depreciation, amortization, reserves, or estimated expenditures that are the subject of this litigation. The court did not rule on whether actual incurred legal and professional fees constituted Operating Expenses that could be paid prior to debt service and Jefferson County filed a motion in July 2012 to clarify this point. Whether sufficient net revenues will be available for the payment of regularly scheduled debt service ultimately depends on the bankruptcy court's valuation of the sewer revenue stream.

• The Company also has assumed exposure of $0.6 million to warrants that are payable from Jefferson County's general fund. During the past quarter Jefferson County chose not to make payment under its General Obligation bonds, so the Company has established a projected loss for these warrants as well.

On June 26, 2012, the City of Stockton filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code due to drains on the general fund and projected deficits. On August 9, 2012, the Company challenged the eligibility of Stockton to make such filing. The Company's net exposure to Stockton's general fund is $34.3 million, consisting of lease revenue bonds. As of June 30, 2012, the Company has paid $0.3 million in net claims.

The Company has $8.4 million of net par exposure to The City of Harrisburg, Pennsylvania, all of which is BIG. The Company has not paid any claims to date, and expects a full recovery.

The Company projects that its total expected net loss from troubled U.S. public finance credits will be $32.1 million as of June 30, 2012, down from $34.1 million as of March 31, 2012. This decrease was due primarily to changes in the interest and discount rates the Company uses to project cash flow related to the Jefferson County sewer revenue bonds and the establishment of expected losses related to the decision by Jefferson County not to make payments on its General Obligation bonds and the City of Stockton's filing for protection under Chapter 9 of the U.S. Bankruptcy Code.

Recovery Litigation

RMBS Transactions

As of August 1, 2012, AGC had lawsuits pending on the following U.S. RMBS transactions, which it insures. In the lawsuits, AGC has alleged breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to AGC, and failure to cure or repurchase defective loans identified by AGC to such persons:

• SACO I Trust 2005-GP1 (a second lien transaction in which AGC has sued JPMorgan Chase & Co.’s affiliate EMC Mortgage LLC , J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A.); and

• Bear Stearns Asset Backed Securities I Trust 2005-AC5 and Bear Stearns Asset Backed Securities I Trust 2005-AC6 (both first lien transactions in which AGC has sued EMC Mortgage LLC).

In these lawsuits, AGC seeks damages, including indemnity or reimbursement for losses.

In October 2011, AGC and its affiliate AGM brought an action in the Supreme Court of the State of New York against DLJ Mortgage Capital, Inc. (“DLJ”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”) with regard to six first lien U.S. RMBS transactions insured by them. The two insured by AGC are CSAB Mortgage-Backed Pass Through Certificates, Series 2007-1 and TBW Mortgage-Backed Pass Through Certificates, Series 2007-2. The complaint alleges breaches of R&W by DLJ in respect of the underlying loans in the transactions, breaches of contract by DLJ and Credit Suisse in procuring

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falsely inflated shadow ratings (a condition to the issuance by AGC and AGM of its policies) by providing false and misleading information to the rating agencies, and failure by DLJ to cure or repurchase defective loans identified by AGC and AGM.

“XXX” Life Insurance Transactions

In December 2008, Assured Guaranty (UK) Ltd. ("AGUK") filed an action against J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager in the Orkney Re II transaction, in the Supreme Court of the State of New York alleging that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II. After AGUK’s claims were dismissed with prejudice in January 2010, AGUK was successful in its subsequent motions and appeals and, as of December 2011, all of AGUK’s claims for breaches of fiduciary duty, gross negligence and contract were reinstated in full. Separately, at the trial court level, discovery is ongoing.

Net Loss Summary

The following table provides information on loss and LAE reserves net of reinsurance and salvage and subrogation recoverable on the consolidated balance sheets.

Loss and LAE Reserve (Recovery)

Net of Reinsurance and Salvage and Subrogation Recoverable

	As of June 30, 2012								As of December 31, 2011
	Loss and LAE Reserve			Salvage and Subrogation Recoverable		Net			Loss and LAE Reserve			Salvage and Subrogation Recoverable			Net
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1.3		$	—	$	1.3		$	0.8		$	—		$	0.8
Alt-A first lien	28.7			—		28.7			30.8			—			30.8
Option ARM	29.6			11.1		18.5			24.9			11.3			13.6
Subprime	2.8			0.2		2.6			3.1			0.2			2.9
Total first lien	62.4			11.3		51.1			59.6			11.5			48.1
Second lien:
Closed-end second lien	9.6			—		9.6			7.3			57.3			(50.0		)
HELOC	26.0			17.9		8.1			37.4			18.7			18.7
Total second lien	35.6			17.9		17.7			44.7			76.0			(31.3		)
Total U.S. RMBS	98.0			29.2		68.8			104.3			87.5			16.8
TruPS	3.5			—		3.5			8.3			—			8.3
Other structured finance	36.8			6.6		30.2			44.0			6.0			38.0
U.S. public finance	30.6			4.9		25.7			21.7			4.0			17.7
Non-U.S. public finance	3.2			—		3.2			3.2			—			3.2
Subtotal	172.1			40.7		131.4			181.5			97.5			84.0
Effect of consolidating FG VIEs	(18.7		)	—		(18.7		)	(18.2		)	(67.4		)	49.2
Total(1)	$	153.4		$	40.7	$	112.7		$	163.3		$	30.1		$	133.2

 ___________________

(1) See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.

The following table reconciles the loss and LAE reserve and salvage and subrogation components on the consolidated balance sheet to the financial guaranty net reserves (salvage) in the financial guaranty BIG transaction loss summary tables.

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Components of Net Reserves (Salvage)

	As of June 30, 2012			As of December 31, 2011
	(in millions)
Loss and LAE reserve	$	294.2		$	295.7
Reinsurance recoverable on unpaid losses	(140.8		)	(132.4		)
Subtotal	153.4			163.3
Salvage and subrogation recoverable	(50.0		)	(49.7		)
Salvage and subrogation payable(1)	9.3			19.6
Subtotal	(40.7		)	(30.1		)
Financial guaranty net reserves (salvage)	$	112.7		$	133.2

 ___________________

(1) Recorded as a component of reinsurance balances payable.

The following table presents the loss and LAE recorded in the consolidated statements of operations by sector for financial guaranty insurance contracts. Amounts presented are net of reinsurance and net of the benefit for recoveries from breaches of R&W.

Loss and LAE Reported

on the Consolidated Statements of Operations

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Financial Guaranty:
U.S. RMBS:
First lien:
Prime first lien	$	0.4		$	0.9		$	0.7		$	1.0
Alt-A first lien	3.0			2.3			(2.9		)	2.2
Option ARM	4.2			4.3			8.5			(22.1		)
Subprime	—			(1.2		)	0.3			6.6
Total first lien	7.6			6.3			6.6			(12.3		)
Second lien:
Closed-end second lien	1.5			(4.4		)	1.0			(12.3		)
HELOC	(19.6		)	10.9			(17.7		)	23.8
Total second lien	(18.1		)	6.5			(16.7		)	11.5
Total U.S. RMBS	(10.5		)	12.8			(10.1		)	(0.8		)
TruPS	(1.2		)	2.8			(4.5		)	2.8
Other structured finance	19.1			(1.2		)	18.0			2.3
U.S. public finance	(3.3		)	1.8			13.4			(4.3		)
Non-U.S. public finance	(2.2		)	0.4			(2.1		)	0.4
Subtotal	1.9			16.6			14.7			0.4
Effect of consolidating FG VIEs	(1.9		)	1.6			1.1			(0.6		)
Total loss and LAE	$	0.0		$	18.2		$	15.8		$	(0.2	)

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The following table provides information on financial guaranty contracts categorized as BIG.

Financial Guaranty Insurance BIG Transaction Loss Summary

June 30, 2012

	BIG Categories
	BIG 1						BIG 2						BIG 3						Total			Effect of Consolidating
	Gross			Ceded			Gross			Ceded			Gross			Ceded			BIG, Net			VIEs			Total
	(dollars in millions)
Number of risks(1)	83			(31		)	46			(19		)	54			(17		)	183			—			183
Remaining weighted-average contract period (in years)	13.5			(12.6		)	9.8			(8.5		)	12.8			(15.0		)	12.3			—			12.3
Outstanding exposure:
Principal	$	2,171.2		$	(490.0	)	$	399.5		$	(73.4	)	$	2,493.0		$	(1,015.9	)	$	3,484.4		$	—		$	3,484.4
Interest	1,277.2			(229.7		)	183.5			(27.9		)	725.3			(186.7		)	1,741.7			—			1,741.7
Total(2)	$	3,448.4		$	(719.7	)	$	583.0		$	(101.3	)	$	3,218.3		$	(1,202.6	)	$	5,226.1		$	—		$	5,226.1
Expected cash outflows (inflows)	$	34.4		$	(3.9	)	$	185.7		$	(37.5	)	$	1,120.5		$	(433.3	)	$	865.9		$	(126.3	)	$	739.6
Potential recoveries(3)	(28.6		)	1.3			(133.6		)	22.7			(756.5		)	212.7			(682.0		)	90.9			(591.1		)
Subtotal	5.8			(2.6		)	52.1			(14.8		)	364.0			(220.6		)	183.9			(35.4		)	148.5
Discount	4.4			0.2			(17.5		)	3.3			(106.0		)	85.1			(30.5		)	12.7			(17.8		)
Present value of expected cash flows	$	10.2		$	(2.4	)	$	34.6		$	(11.5	)	$	258.0		$	(135.5	)	$	153.4		$	(22.7	)	$	130.7
Unearned premium reserve	$	10.2		$	(0.8	)	$	5.6		$	(1.4	)	$	25.5		$	(13.9	)	$	25.2		$	(3.8	)	$	21.4
Reserves (salvage)(4)	$	4.3		$	(1.9	)	$	29.4		$	(10.1	)	$	228.2		$	(118.5	)	$	131.4		$	(18.7	)	$	112.7

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Financial Guaranty Insurance BIG Transaction Loss Summary

December 31, 2011

	BIG Categories
	BIG 1						BIG 2						BIG 3						Total			Effect of Consolidating
	Gross			Ceded			Gross			Ceded			Gross			Ceded			BIG, Net			VIEs			Total
	(dollars in millions)
Number of risks(1)	83			(34		)	38			(19		)	52			(14		)	173			—			173
Remaining weighted-average contract period (in years)	13.3			12.2			8.7			7.7			12.9			15.3			12.1			—			12.1
Outstanding exposure:
Principal	$	2,395.9		$	(555.8	)	$	532.4		$	(94.3	)	$	2,482.9		$	(1,022.0	)	$	3,739.1		$	—		$	3,739.1
Interest	1,350.1			(243.0		)	196.2			(29.8		)	717.1			(189.0		)	1,801.6			—			1,801.6
Total(2)	$	3,746.0		$	(798.8	)	$	728.6		$	(124.1	)	$	3,200.0		$	(1,211.0	)	$	5,540.7		$	—		$	5,540.7
Expected cash outflows (inflows)	$	120.4		$	(19.9	)	$	246.3		$	(27.7	)	$	644.8		$	(269.0	)	$	694.9		$	(137.9	)	$	557.0
Potential recoveries(3)	(128.3		)	20.4			(169.0		)	14.4			(343.7		)	66.1			(540.1		)	167.9			(372.2		)
Subtotal	(7.9		)	0.5			77.3			(13.3		)	301.1			(202.9		)	154.8			30.0			184.8
Discount	(1.0		)	0.1			(13.3		)	2.3			(131.8		)	89.7			(54.0		)	16.1			(37.9		)
Present value of expected  cash flows	$	(8.9	)	$	0.6		$	64.0		$	(11.0	)	$	169.3		$	(113.2	)	$	100.8		$	46.1		$	146.9
Unearned premium reserve	$	3.8		$	(0.9	)	$	5.5		$	(0.9	)	$	27.1		$	(14.0	)	$	20.6		$	(4.5	)	$	16.1
Reserves (salvage)(4)	$	(11.2	)	$	1.0		$	58.7		$	(10.2	)	$	148.5		$	(102.8	)	$	84.0		$	49.2		$	133.2

 ___________________

(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.

(2) Includes BIG amounts related to FG VIEs which are not eliminated.

(3) Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.

(4) See table “Components of net reserves (salvage).”

The Company also has outstanding exposures to certain infrastructure transactions in its insured portfolio that may expose it to refinancing risk. These transactions generally involve long-term infrastructure projects that are financed by bonds that mature prior to the expiration of the project concession. While the cash flows from these projects were expected to be sufficient to repay all of the debt over the life of the project concession, in order to pay the principal on the early maturing debt, the Company expected it to be refinanced in the market at or prior to its maturity. Due to market dislocation and increased credit spreads, the Company may have to pay a claim at the maturity of the securities, and then recover its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. The projected inflows and outflows are included in the Company's “Financial Guaranty Insurance BIG Transaction Loss Summary” table in this note.

Ratings Impact on Financial Guaranty Business

A downgrade of AGC or AGUK may result in increased claims under financial guaranties issued by the Company if the insured obligors were unable to pay.

For example, with respect to variable rate demand obligations (“VRDOs”) for which a bank has agreed to provide a liquidity facility, a downgrade of AGC may provide the bank with the right to give notice to bondholders that the bank will

36

terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00%—3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGC under its financial guaranty policy. As of June 30, 2012, AGC has insured approximately $0.2 billion of par of VRDOs issued by municipal obligors rated BBB– or lower pursuant to the Company’s internal rating. For a number of such obligations, a downgrade of AGC below "A+", by “S&P” or below "A1", by Moody’s triggers the ability of the bank to notify bondholders of the termination of the liquidity facility and to demand accelerated repayment of bond principal over a period of 5 to 10 years. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating AGC, vary depending on the transaction.

5. Fair Value Measurement

The Company carries the majority of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).

Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices, or with the assistance of an independent third-party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure such as collateral rights, as applicable.

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness, constraints on liquidity and unobservable parameters. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During Second Quarter 2012, no changes were made to the Company’s valuation models that had or are expected to have, a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.

The Company’s methods for calculating fair value produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows, with Level 1 being the highest and Level 3 the lowest. An asset or liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. All three levels require the use of observable market data when available.

Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.

Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or

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estimation.

Transfers between Levels 1, 2 and 3 are recognized at the beginning of the period when the transfer occurs. The Company reviews the classification between Levels 1, 2 and 3 quarterly to determine, based on the definitions provided, whether a transfer is necessary. During the periods presented, there were no transfers between Level 1 and Level 2 and no transfers in or out of Level 3.

Measured and Carried at Fair Value

Fixed Maturity Securities and Short-term Investments

The fair value of bonds in the investment portfolio is generally based on prices received from third party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, the valuation of fixed maturity investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. The vast majority of fixed maturities are classified as Level 2.

Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and are based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.

Prices determined based upon model processes where at least one significant model assumption or input is unobservable, are considered to be Level 3 in the fair value hierarchy. At June 30, 2012, the Company used model processes to price five fixed maturity securities, which was 1.4% of the Company’s fixed maturity securities and short-term investments at fair value. Level 3 securities were priced with the assistance of an independent third-party. The pricing is based on a discounted cash flow approach using the third-party’s proprietary pricing models. The models use inputs such as projected prepayment speeds;  severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); house price depreciation/appreciation rates based on macroeconomic forecasts and recent trading activity.  The yield used to discount the projected cash flows is determined by reviewing various attributes of the bond including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities.  Significant changes to any of these inputs could materially change the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.

Other Assets

Committed Capital Securities

The fair value of committed capital securities (“CCS”), which is recorded in “other assets” on the consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s CCS (the “AGC CCS Securities”) and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (see Note 13, Note Payable and Credit Facilities). The estimated current cost of the Company’s CCS depends on several factors, including broker-dealer quotes for the outstanding securities, the U.S. dollar forward swap curve, London Interbank Offered Rate (“LIBOR”) curve projections and the term the securities are estimated to remain outstanding.

Changes in fair value of the AGC CCS were recorded in the consolidated statements of operations. As of June 30, 2012 these securities were classified as Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including the broker-dealer quote and the Company’s estimate of the term the securities will be outstanding. Prior to the third quarter 2011, the significant market inputs used were observable, therefore, the Company classified this fair value measurement as Level 2. The CCS were transferred to Level 3 on the fair value hierarchy in the third quarter of 2011 because the Company was no longer able to obtain the same level of pricing information as in past quarters.

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Supplemental Executive Retirement Plans

The Company classifies the fair value measurement of the assets of AGC’s supplemental executive retirement plan as Level 1. The fair value of these assets is valued based on the observable published daily values of the underlying mutual fund and company stock investments included in the aforementioned plan.

Financial Guaranty Contracts Accounted for as Credit Derivatives

The Company’s credit derivatives consist primarily of insured CDS contracts that fall under derivative accounting standards requiring fair value accounting through the statement of operations. The Company does not enter into CDS with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions.

The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells or purchases for credit protection purposes, except under specific circumstances such as mutual agreements with counterparties to terminate certain CDS contracts.

Due to the lack of quoted prices for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through modeling that uses various inputs to derive an estimate of the fair value of the Company’s contracts in principal markets. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to the credit derivative contracts issued by the Company. Management does not believe there is an established market where financial guaranty insured credit derivatives are actively traded. The terms of the protection under an insured financial guaranty credit derivative do not, except for certain rare circumstances, allow the Company to exit its contracts. Management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s deals to establish historical price points in the hypothetical market that are used in the fair value calculation. These contracts are classified as Level 3 in the fair value hierarchy since there is reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and of the Company’s current credit standing.

The Company’s models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely and relevant market information.

The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining net premiums the Company expects to receive or pay for the credit protection under the contract and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay the Company for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual cash flows are the most readily observable inputs since they are based on the CDS contractual terms. These cash flows include premiums to be received or paid under the terms of the contract. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. If credit spreads of the underlying obligations change, the fair value of the related credit derivative changes. Market liquidity also affects valuations of the underlying obligations. Market conditions at June 30, 2012 were such that market prices of the Company’s CDS contracts were not available. Since market prices were not available, the Company used proprietary valuation models that used both unobservable and observable market data inputs as described under “Assumptions and Inputs” below. These models are primarily developed internally based on market conventions for similar transactions.

Valuation models include management estimates and current market information. Management is also required to make assumptions of how the fair value of credit derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, when available, performance of underlying assets, life of the instrument, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these credit derivative products, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.

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Assumptions and Inputs

Listed below are various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts.

• How gross spread is calculated: Gross spread is the difference between the yield of a security paid by an issuer on an insured versus uninsured basis or, in the case of a CDS transaction, the difference between the yield and an index such as the LIBOR. Such pricing is well established by historical financial guaranty fees relative to the credit spread on risks assumed as observed and executed in competitive markets, including in financial guaranty reinsurance and secondary market transactions.

• How gross spread is allocated: Gross spread on a financial guaranty contract accounted for as CDS is allocated among:

1. the profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction (“bank profit”);

2. premiums paid to the Company for the Company’s credit protection provided (“net spread”); and

3. the cost of CDS protection purchased by the originator to hedge their counterparty credit risk exposure to the Company (“hedge cost”).

• The weighted average life which is based on expected remaining contractual cash flows and debt service schedules, which are readily observable inputs since they are based on the CDS contractual terms.

• The rates used to discount future expected losses.

The expected future premium cash flows for the Company’s credit derivatives were discounted at rates ranging from 0.25% to 2.47% at June 30, 2012 and 0.4% to 2.7% at December 31, 2011.

Gross spread is used to ultimately determine the net spread a comparable financial guarantor would charge the Company to transfer its risk at the reporting date. The Company obtains gross spreads on risks assumed from market data sources published by third parties (e.g. dealer spread tables for the collateral similar to assets within the Company’s transactions) as well as collateral- specific spreads provided by trustees or obtained from market sources. If observable market credit spreads are not available or reliable for the underlying reference obligations, then market indices are used that most closely resemble the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. These indices are adjusted to reflect the non-standard terms of the Company’s CDS contracts. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders who are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process.

With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spreads reflects a higher allocation to the cost of credit rather than the bank profit component. In the current market, it is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.

The following spread hierarchy is utilized in determining which source of gross spread to use, with the rule being to use CDS spreads where available. If not available, the Company either interpolates or extrapolates CDS spreads based on similar transactions or market indices.

• Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).

• Deals priced or closed during a specific quarter within a specific asset class and specific rating.

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• Credit spreads interpolated based upon market indices.

• Credit spreads provided by the counterparty of the CDS.

• Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

Information by Credit Spread Type

	As of June 30, 2012		As of December 31, 2011
Based on actual collateral specific spreads	11	%	10	%
Based on market indices	81	%	82	%
Provided by the CDS counterparty	8	%	8	%
Total	100	%	100	%

Over time the data inputs can change as new sources become available or existing sources are discontinued or are no longer considered to be the most appropriate. It is the Company’s objective to move to higher levels on the hierarchy whenever possible, but it is sometimes necessary to move to lower priority inputs because of discontinued data sources or management’s assessment that the higher priority inputs are no longer considered to be representative of market spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.

The Company interpolates a curve based on the historical relationship between the premium the Company receives when a credit derivative is closed to the daily closing price of the market index related to the specific asset class and rating of the deal. This curve indicates expected credit spreads at each indicative level on the related market index. For transactions with unique terms or characteristics where no price quotes are available, management extrapolates, credit spreads based on an alternative transaction for which the Company has received a spread quote from one of the first three sources within the Company’s spread hierarchy. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transactions’ current spread. Counterparties determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. These quotes are validated by cross- referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness.

The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its deals. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. For credit spreads on the Company’s name the Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS deals that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGC decreases, the amount of premium the Company retains on a deal generally increases. In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. Given the current market conditions and the Company’s own credit spreads, approximately 62%, as of June 30, 2012 and approximately 65%, as of December 31, 2011 of the Company’s CDS contracts are fair valued using this minimum premium. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties each reporting period. The current level of AGC’s own credit spread has resulted in the bank or deal originator hedging a significant portion of its exposure to AGC. This reduces the amount of contractual cash flows AGC can capture as premium for selling its protection.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the Company’s contracts’ contractual terms typically do not require the posting of collateral by the guarantor. The

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widening of a financial guarantor’s own credit spread increases the cost to buy credit protection on the guarantor, thereby reducing the amount of premium the guarantor can capture out of the gross spread on the deal. The extent of the hedge depends on the types of instruments insured and the current market conditions.

A credit derivative asset on protection sold is the result of contractual cash flows on in-force deals in excess of what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the current reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would be able to realize a gain representing the difference between the higher contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts.

Example

Following is an example of how changes in gross spreads, the Company’s own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. The assumptions used in these examples are hypothetical amounts. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.

	Scenario 1			Scenario 2
	bps	% of Total		bps	% of Total
Original gross spread/cash bond price (in bps)	185			500
Bank profit (in bps)	115	62	%	50	10	%
Hedge cost (in bps)	30	16		440	88
The Company premium received per annum (in bps)	40	22		10	2

In Scenario 1, the gross spread is 185 basis points. The bank or deal originator captures 115 basis points of the original gross spread and hedges 10% of its exposure to AGC, when the CDS spread on AGC was 300 basis points (300 basis points × 10% = 30 basis points). Under this scenario the Company received premium of 40 basis points, or 22% of the gross spread.

In Scenario 2, the gross spread is 500 basis points. The bank or deal originator captures 50 basis points of the original gross spread and hedges 25% of its exposure to AGC, when the CDS spread on AGC was 1,760 basis points (1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread. Due to the increased cost to hedge AGC’s name, the amount of profit the bank would expect to receive, and the premium the Company would expect to receive decline significantly.

In this example, the contractual cash flows (the Company premium received per annum above) exceed the amount a market participant would require the Company to pay in today’s market to accept its obligations under the CDS contract, thus resulting in an asset. This credit derivative asset is equal to the difference in premium rates discounted at the corresponding LIBOR over the weighted average remaining life of the contract.

Strengths and Weaknesses of Model

The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.

The primary strengths of the Company’s CDS modeling techniques are:

• The model takes into account the transaction structure and the key drivers of market value. The transaction structure includes par insured, weighted average life, level of subordination and composition of collateral.

• The model maximizes the use of market-driven inputs whenever they are available. The key inputs to the model are market-based spreads for the collateral, and the credit rating of referenced entities. These are viewed by the Company to be the key parameters that affect fair value of the transaction.

• The model is a consistent approach to valuing positions. The Company has developed a hierarchy for market-based spread inputs that helps mitigate the degree of subjectivity during periods of high illiquidity.

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The primary weaknesses of the Company’s CDS modeling techniques are:

• There is no exit market or actual exit transactions. Therefore the Company’s exit market is a hypothetical one based on the Company’s entry market.

• There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.

• At June 30, 2012 and December 31, 2011, the markets for the inputs to the model were highly illiquid, which impacts their reliability.

• Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.

Fair Value Option on FG VIEs’ Assets and Liabilities

The Company elected the fair value option for all the FG VIEs’ assets and liabilities. See Note 7, Consolidation of Variable Interest Entities.

The FG VIEs that are consolidated by the Company issued securities collateralized by closed-end second lien RMBS and other loans and receivables. The lowest level input that is significant to the fair value measurement of these assets and liabilities in its entirety was a Level 3 input (i.e. unobservable), therefore management classified them as Level 3 in the fair value hierarchy. Prices were determined with the assistance of an independent third-party. The pricing is based on a discounted cash flow approach and the third- party’s proprietary pricing models. The models to price the FG VIEs’ liabilities used, where appropriate, inputs such as estimated prepayment speeds; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; house price depreciation/appreciation rates based on macroeconomic forecasts and, for those liabilities insured by the Company, the benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest for the FG VIE tranches insured by the Company, taking into account the timing of the potential default and the Company’s own credit rating. These inputs are utilized to project the future cash flows of the security and to evaluate the overall bond profile. The third-party also utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithm’s designed to aggregate market color, received by the third-party, on comparable bonds.

Changes in fair value of the FG VIEs’ assets and liabilities are included in fair value gains (losses) on FG VIEs within the consolidated statement of operations. Except for net credit impairment that triggers a claim on the financial guaranty contract, the unrealized fair value adjustments related to the consolidated FG VIEs will reverse to zero over the terms of these financial instruments.

The fair value of the Company’s FG VIE assets is sensitive to changes relating to estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could materially change the market value of the FG VIE’s assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIE is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically leads to a decrease in the fair value of FG VIE assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets. These factors also directly impact the fair value of the Company’s uninsured VIE liabilities.

The fair value of the Company’s insured FG VIE liabilities is also sensitive to changes relating to estimated prepayment speeds; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. In addition, the Company’s insured FG VIE liabilities are also sensitive to changes in the Company’s implied credit worthiness. Significant changes to any of these inputs could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit from the Company’s

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insurance policy guaranteeing the timely payment of principal and interest for the FG VIE tranches insured by the Company. In general, when the timing of expected loss payments by the Company is extended into the future, this typically leads to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s insured FG VIE liabilities, while a shortening of the timing of expected loss payments by the Company typically leads to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s insured FG VIE liabilities.

Not Carried at Fair Value

Other Invested Assets

Within other invested assets, $12.5 million is comprised of surplus notes that are carried at their expected recovery value, which is a significant unobservable input, and is classified as Level 3 in the fair value hierarchy.

Financial Guaranty Contracts in Insurance Form

The fair value of the Company’s financial guaranty contracts accounted for as insurance was based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. This amount was based on the pricing assumptions management has observed for portfolio transfers that have occurred in the financial guaranty market and included adjustments to the carrying value of unearned premium reserve for stressed losses, ceding commissions and return on capital. The significant inputs were not readily observable. The Company accordingly classified this fair value measurement as Level 3.

Note Payable to Affiliate

The fair value of the Company’s note payable to affiliate is determined by calculating the present value of the expected cash flows. The Company uses a market approach to determine discounted future cash flows using the effect of changes in U.S. Treasury yield at the end of each reporting period as well as the change in its own credit spread. The significant inputs were not readily observable. The Company accordingly classified this fair value measurement as Level 3.

Other Assets and Other Liabilities

The Company's other assets and other liabilities consist predominantly of accrued interest, receivables for securities sold and payables for securities purchased, which approximate fair value.

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Financial Instruments Carried at Fair Value

Amounts recorded at fair value in the Company’s financial statements are included in the tables below.

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of June 30, 2012

			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale :
Fixed maturity securities
U.S. government and agencies	$	441.5	$	—	$	441.5	$	—
Obligations of state and political subdivisions	1,825.9		—		1,825.9		—
Corporate securities	167.2		—		167.2		—
Mortgage-backed securities:
RMBS	104.0		—		81.2		22.8
Commercial mortgage-backed securities (“CMBS”)	79.3		—		79.3		—
Asset-backed securities	28.0		—		11.6		16.4
Foreign government securities	88.8		—		88.8		—
Total fixed maturity securities	2,734.7		—		2,695.5		39.2
Short-term investments	160.4		2.5		157.9		—
Credit derivative assets	277.7		—		—		277.7
FG VIEs’ assets, at fair value	780.7		—		—		780.7
Other assets(1)	36.8		12.4		—		24.4
Total assets carried at fair value	$	3,990.3	$	14.9	$	2,853.4	$	1,122.0
Liabilities:
Credit derivative liabilities	$	1,277.8	$	—	$	—	$	1,277.8
FG VIEs’ liabilities with recourse, at fair value	468.6		—		—		468.6
FG VIEs’ liabilities without recourse, at fair value	352.1		—		—		352.1
Total liabilities carried at fair value	$	2,098.5	$	—	$	—	$	2,098.5

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Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of December 31, 2011

			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed maturity securities
U.S. government and agencies	$	506.9	$	—	$	506.9	$	—
Obligations of state and political subdivisions	1,727.5		—		1,727.5		—
Corporate securities	190.1		—		190.1		—
Mortgage-backed securities:
RMBS	123.8		—		99.0		24.8
CMBS	87.7		—		87.7		—
Asset-backed securities	17.8		—		11.7		6.1
Foreign government securities	95.0		—		95.0		—
Total fixed maturity securities	2,748.8		—		2,717.9		30.9
Short-term investments	151.9		1.8		150.1		—
Credit derivative assets	305.9		—		—		305.9
FG VIEs’ assets, at fair value	762.5		—		—		762.5
Other assets(1)	45.7		14.4		—		31.3
Total assets carried at fair value	$	4,014.8	$	16.2	$	2,868.0	$	1,130.6
Liabilities:
Credit derivative liabilities	$	927.1	$	—	$	—	$	927.1
FG VIEs’ liabilities with recourse, at fair value	470.8		—		—		470.8
FG VIEs’ liabilities without recourse, at fair value	358.0		—		—		358.0
Total liabilities carried at fair value	$	1,755.9	$	—	$	—	$	1,755.9

 ____________________

(1) Includes fair value of CCS and supplemental executive retirement plan assets.

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Changes in Level 3 Fair Value Measurements

The table below presents a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Second Quarter and Six Months 2012 and 2011.

Fair Value Level 3 Rollforward

Recurring Basis

	Second Quarter 2012
	Fixed Maturity Securities
	RMBS				Asset- Backed Securities				FG VIEs’ Assets at Fair Value				Other Assets			Credit Derivative Asset (Liability), net(5)				FG VIEs’ Liabilities with Recourse, at Fair Value				FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value at March 31, 2012	$	24.9			$	7.3			$	777.8			$	22.8		$	(1,200.7	)		$	(484.1	)		$	(361.2	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0.1			(2)	(0.1		)	(2)	23.9			(3)	1.6		(4)	182.7			(6)	1.8			(3)	(7.4		)	(3)
Other comprehensive income(loss)	(0.7		)		(8.0		)		—				—			—				—				—
Purchases	—				17.2				—				—			—				—				—
Settlements	(1.5		)		—				(21.0		)		—			17.9				13.7				16.5
FG VIE consolidations	—				—				—				—			—				—				—
Fair value at June 30, 2012	$	22.8			$	16.4			$	780.7			$	24.4		$	(1,000.1	)		$	(468.6	)		$	(352.1	)
Change in unrealized gains/(losses) related to financial instruments held at June 30, 2012	$	(0.7	)		$	(8.0	)		$	15.4			$	1.6		$	195.1			$	3.1			$	(16.7	)

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	Second Quarter 2011
	Fixed Maturity Securities
	RMBS				Asset- Backed Securities				FG VIEs’ Assets at Fair Value				Credit Derivative Asset (Liability), net(5)				FG VIEs’ Liabilities with Recourse, at Fair Value				FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value at March 31, 2011	$	23.6			$	11.0			$	1,000.7			$	(1,203.6	)		$	(529.2	)		$	(511.3	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	1.1			(2)	0.1			(2)	(73.6		)	(3)	(73.2		)	(6)	(7.2		)	(3)	58.7			(3)
Other comprehensive income (loss)	(3.8		)		(2.1		)		—				—				—				—
Sales	—				—				—				—				—				—
Settlements	(1.5		)		—				(17.8		)		20.3				25.9				18.4
FG VIE consolidations	(1.3		)		—				18.1				—				(45.4		)		—
Fair value at June 30, 2011	$	18.1			$	9.0			$	927.4			$	(1,256.5	)		$	(555.9	)		$	(434.2	)
Change in unrealized gains/(losses) related to financial instruments held at June 30, 2011	$	(3.8	)		$	(2.1	)		$	(32.6	)		$	(35.2	)		$	(9.5	)		$	41.5

	Six Months 2012
	Fixed Maturity Securities
	RMBS				Asset- Backed Securities				FG VIEs’ Assets at Fair Value				Other Assets				Credit Derivative Asset (Liability), net(5)				FG VIEs’ Liabilities with Recourse, at Fair Value				FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value at December 31, 2011	$	24.8			$	6.1			$	762.5			$	31.3			$	(621.2	)		$	(470.8	)		$	(358.0	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	(0.8		)	(2)	0.2			(2)	52.3			(3)	(6.9		)	(4)	(342.3		)	(6)	(16.8		)	(3)	(26.7		)	(3)
Other comprehensive income (loss)	1.2				(7.1		)		—				—				—				—				—
Purchases	—				17.2				—				—				(99.5		)	(7)	—				—
Settlements	(2.4		)		—				(40.7		)		—				62.9				26.9				32.6
FG VIE consolidations	—				—				6.6				—				—				(7.9		)		—
Fair value at June 30, 2012	$	22.8			$	16.4			$	780.7			$	24.4			$	(1,000.1	)		$	(468.6	)		$	(352.1	)
Change in unrealized gains/(losses) related to financial instruments held at June 30, 2012	$	1.2			$	(7.1	)		$	95.0			$	(6.9	)		$	(277.8	)		$	(20.5	)		$	(70.0	)

48

	Six Months 2011
	Fixed Maturity Securities
	RMBS				Asset- Backed Securities				FG VIEs’ Assets at Fair Value				Credit Derivative Asset (Liability), net(5)				FG VIEs’ Liabilities with Recourse, at Fair Value				FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value at December 31, 2010	$	23.0			$	11.7			$	966.0			$	(958.2	)		$	(519.9	)		$	(495.7	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	2.1			(2)	0.1			(2)	(13.3		)	(3)	(298.1		)	(6)	(29.2		)	(3)	23.7			(3)
Other comprehensive income (loss)	2.6				(2.8		)		—				—				—				—
Sales	(4.1		)		—				—				—				—				—
Settlements	(4.2		)		—				(43.4		)		(0.2		)		38.6				37.8
FG VIE consolidations	(1.3		)		—				18.1								(45.4		)		—
Fair value at June 30, 2011	$	18.1			$	9.0			$	927.4			$	(1,256.5	)		$	(555.9	)		$	(434.2	)
Change in unrealized gains/(losses) related to financial instruments held at June 30, 2011	$	3.1			$	(2.8	)		$	62.9			$	(271.9	)		$	(32.5	)		$	(21.3	)

 ____________________

(1) Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3.

(2) Included in net realized investment gains (losses) and net investment income.

(3) Included in fair value gains (losses) on FG VIEs.

(4) Recorded in fair value gain (loss) on committed capital securities.

(5) Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure.

(6) Reported in net change in fair value of credit derivatives.

(7) Represents transferred ownership and assumed obligations related to a film securitization that AGC had previously guaranteed under a credit derivative contract.

49

Level 3 Fair Value Disclosures

Quantitative Information About Level 3 Fair Value Inputs

Financial Instrument Description	Fair Value as of June 30, 2012 (in millions)			Valuation Technique	Significant Unobservable Inputs	Range
Assets:
Fixed maturity securities:
RMBS	$	22.8		Discounted cash	CPR	0.0% - 7.4%
				flow	CDR	3.7% - 34.4%
					Loss severity	48.9% - 104.4%
					Yield	6.7% - 16.0%
Asset-backed securities:
XXX life insurance	16.4			Discounted cash	Yield	15.0%
transactions				flow	Discount on asset cash flows	50.0%
FG VIEs’ assets, at fair value	780.7			Discounted cash	CPR	0.3% - 9.4%
				flow	CDR	2.6% - 39.1%
					Loss severity	51.8% - 110.1%
					Yield	7.5% - 22.4%
Other assets	24.3			Discounted cash	Quotes from third party
				flow	pricing	$38 - $42
					Term (in years)	3
Liabilities:
Credit derivative liabilities, net	(1,000.1		)	Discounted cash	Year 1 loss estimates	0.0% - 69.0%
				flow	Hedge cost (in bps)	157.3 bps - 904.0 bps
					Bank profit (in bps)	4.0 bps - 1,287.0 bps
					Internal floor (in bps)	7.0 bps - 30.0 bps
					Internal credit rating	AAA - BIG
FG VIEs’ liabilities, at fair value	(820.7		)	Discounted cash	CPR	0.3% - 9.4%
				flow	CDR	2.6% - 39.1%
					Loss severity	51.8% - 110.1%
					Yield	7.5% - 22.4%

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The carrying amount and estimated fair value of the Company’s financial instruments are presented in the following table.

Fair Value of Financial Instruments

	As of June 30, 2012				As of December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in millions)
Assets:
Fixed maturity securities	$	2,734.7	$	2,734.7	$	2,748.8	$	2,748.8
Short-term investments	160.4		160.4		151.9		151.9
Other invested assets	12.5		12.5		12.5		12.5
Credit derivative assets	277.7		277.7		305.9		305.9
FG VIEs’ assets, at fair value	780.7		780.7		762.5		762.5
Other assets	67.0		67.0		77.4		77.4
Liabilities:
Financial guaranty insurance contracts(1)	757.8		945.5		800.6		501.5
Note payable to affiliate(2)	300.0		233.1		300.0		254.7
Credit derivative liabilities	1,277.8		1,277.8		927.1		927.1
FG VIEs’ liabilities with recourse, at fair value	468.7		468.6		470.8		470.8
FG VIEs’ liabilities without recourse, at fair value	352.0		352.0		358.0		358.0
Other liabilities	9.1		9.1		—		—

 ____________________

(1) Carrying amount includes the balance sheet amounts related to financial guaranty insurance contract premiums and losses, net of reinsurance.

(2) Carrying amount represented principal less accumulated discount or plus accumulated premium.

6. Financial Guaranty Contracts Accounted for as Credit Derivatives

The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with GAAP (primarily CDS). Until the Company ceased selling credit protection through credit derivative contracts in the beginning of 2009, following the issuance of regulatory guidelines that limited the terms under which the credit protection could be sold, management considered these agreements to be a normal part of its financial guaranty business. The potential capital or margin requirements that may apply under the Dodd-Frank Wall Street Reform and Consumer Protection Act contributed to the decision of the Company not to sell new credit protection through CDS in the foreseeable future.

Credit derivative transactions are governed by ISDA documentation and have different characteristics from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, while the Company’s exposure under credit derivatives, like the Company’s exposure under financial guaranty insurance contracts, has been generally for as long as the reference obligation remains outstanding, unlike financial guaranty insurance contracts, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events. A loss payment is made only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. A credit event may be a non-payment event such as a failure to pay, bankruptcy or restructuring, as negotiated by the parties to the credit derivative transactions. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination. The Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

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Credit Derivative Net Par Outstanding by Sector

The estimated remaining weighted average life of credit derivatives was 5.0 years at June 30, 2012 and 5.6 years at December 31, 2011. The components of the Company’s credit derivative net par outstanding are presented below.

Credit Derivatives Net Par Outstanding

	As of June 30, 2012							As of December 31, 2011
Asset Type	Net Par Outstanding		Original Subordination  (1)		Current Subordination (1)		Weighted Average Credit Rating	Net Par Outstanding		Original Subordination (1)		Current Subordination (1)		Weighted Average Credit Rating
	(dollars in millions)
Pooled corporate obligations:
CLOs/Collateralized bond obligations	$	12,054	37.9	%	36.0	%	AAA	$	12,405	37.2	%	35.2	%	AAA
Synthetic investment grade pooled corporate	430		30.0		29.1		AAA	704		29.9		30.0		AAA
TruPS CDOs	3,257		46.9		31.3		BB	3,409		46.9		31.4		BB
Market value CDOs of corporate obligations	1,812		44.5		26.2		AAA	2,304		38.7		27.1		AAA
Total pooled corporate obligations	17,553		40.0		33.9		AA+	18,822		38.9		33.3		AA+
U.S. RMBS:
Option ARM and Alt-A first lien	2,840		20.1		11.8		BB-	3,114		19.6		13.6		BB−
Subprime first lien	2,919		29.6		53.6		A+	3,085		30.1		53.9		A+
Prime first lien	306		10.9		7.1		B	331		10.9		8.4		B
HELOCs	7		—		—		A+	8		—		—		AA−
Total U.S. RMBS	6,072		24.1		31.5		BBB	6,538		24.1		32.2		BBB
CMBS	3,394		33.5		41.0		AAA	3,605		32.6		38.9		AAA
Other	3,925		—		—		A	4,098		—		—		A
Total	$	30,944					AA	$	33,063					AA

____________________

(1) Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

Except for TruPS CDOs, the Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and industries. Most pooled corporate transactions are structured to limit exposure to any given obligor and industry. The majority of the Company’s pooled corporate exposure consists of collateralized loan obligation (“CLO”) or synthetic pooled corporate obligations. Most of these CLOs have an average obligor size of less than 1% of the total transaction and typically restrict the maximum exposure to any one industry to approximately 10%. The Company’s exposure also benefits from embedded credit enhancement in the transactions which allows a transaction to sustain a certain level of losses in the underlying collateral, further insulating the Company from industry specific concentrations of credit risk on these deals.

The Company’s TruPS CDO asset pools are generally less diversified by obligors and industries than the typical CLO asset pool. Also, the underlying collateral in TruPS CDOs consists primarily of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, REITs and other real estate related issuers while CLOs typically contain primarily senior secured obligations. However, to mitigate these risks TruPS CDOs were typically structured with higher levels of embedded credit enhancement than typical CLOs.

The Company’s exposure to “Other” CDS contracts is also highly diversified. It includes $1.8 billion of exposure to three pooled infrastructure transactions comprising diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels at origination. The remaining $2.1 billion of exposure in “Other” CDS contracts comprises numerous deals across

52

various asset classes, such as commercial receivables, international RMBS, infrastructure, regulated utilities and consumer receivables.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating

	As of June 30, 2012				As of December 31, 2011
Ratings	Net Par Outstanding		% of Total		Net Par Outstanding		% of Total
	(dollars in millions)
Super Senior	$	6,978	22.6	%	$	7,357	22.3	%
AAA	12,741		41.2		13,328		40.3
AA	1,673		5.4		2,309		7.0
A	2,235		7.2		2,138		6.4
BBB	2,242		7.2		2,406		7.3
BIG	5,075		16.4		5,525		16.7
Total credit derivative net par outstanding	$	30,944	100.0	%	$	33,063	100.0	%

Credit Derivative

U.S. Residential Mortgage-Backed Securities

	As of June 30, 2012					Net Change in Unrealized Gain (Loss)
Vintage	Net Par Outstanding (in millions)		Original Subordination(1)	Current Subordination(1)	Weighted Average Credit Rating	Second Quarter 2012		Six Months 2012
						(in millions)
2004 and Prior	$	98	6.4%	19.4%	A-	$	1.6	$	0.1
2005	2,088		30.8	65.8	AA	2.9		1.3
2006	1,002		29.4	35.1	BBB+	15.2		(10.9		)
2007	2,884		18.4	9.8	B+	168.0		(312.3		)
Total	$	6,072	24.1%	31.5%	BBB	$	187.7	$	(321.8	)

____________________

(1) Represents the sum of subordinate tranches and overcollateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

Credit Derivative

Commercial Mortgage-Backed Securities

	As of June 30, 2012					Net Change in Unrealized Gain (Loss)
Vintage	Net Par Outstanding (in millions)		Original Subordination(1)	Current Subordination(1)	Weighted Average Credit Rating	Second Quarter 2012			Six Months 2012
						(in millions)
2004 and Prior	$	80	27.4%	66.6%	AAA	$	—		$	(0.1	)
2005	502		18.0	35.0	AAA	(0.1		)	(0.3		)
2006	1,655		34.0	40.7	AAA	0.4			0.9
2007	1,157		40.2	42.7	AAA	(0.2		)	(0.3		)
Total	$	3,394	33.5%	41.0%	AAA	$	0.1		$	0.2

____________________

(1) Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

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Net Change in Fair Value of Credit Derivatives

Net Change in Fair Value of Credit Derivatives Gain (Loss)

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Net credit derivative premiums received and receivable	$	13.2		$	17.0		$	27.8		$	38.2
Net ceding commissions (paid and payable) received and receivable	1.4			1.8			2.8			3.9
Realized gains on credit derivatives	14.6			18.8			30.6			42.1
Terminations	—			(17.4		)	—			(17.4		)
Net credit derivative losses (paid and payable) recovered and recoverable	(27.0		)	(20.1		)	(95.1		)	(33.0		)
Total realized gains (losses) and other settlements on credit derivatives	(12.4		)	(18.7		)	(64.5		)	(8.3		)
Net unrealized gains (losses) on credit derivatives	195.1			(54.5		)	(277.8		)	(289.8		)
Net change in fair value of credit derivatives	$	182.7		$	(73.2	)	$	(342.3	)	$	(298.1	)

In Second Quarter 2012 and Six Months 2012, CDS contracts totaling $0.2 billion and $0.3 billion in net par were terminated. In Second Quarter 2011 and Six Months 2011, CDS contracts totaling $3.1 billion and $4.7 billion in net par were terminated. The increase in paid losses was due primarily to higher losses on Alt-A transactions in Second Quarter 2012 and claims paid on an insured film securitization in Six Months 2012.

Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, credit ratings of the referenced entities, realized gains (losses) and other settlements, and the issuing company’s own credit rating, credit spreads and other market factors. Except for net estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives are expected to reduce to zero as the exposure approaches its maturity date. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

Net Change in Unrealized Gains (Losses) on Credit Derivatives By Sector

	Second Quarter						Six Months
Asset Type	2012			2011			2012			2011
	(in millions)
Pooled corporate obligations:
CLOs/Collateralized bond obligations	$	0.2		$	3.2		$	5.6		$	3.3
Synthetic investment grade pooled corporate	(0.2		)	(0.1		)	(0.2		)	(0.2		)
TruPS CDOs	14.3			(10.1		)	3.7			(26.2		)
Market value CDOs of corporate obligations	—			(0.2		)	(0.3		)	(0.3		)
Total pooled corporate obligations	14.3			(7.2		)	8.8			(23.4		)
U.S. RMBS:
Option ARM and Alt-A first lien	138.4			26.4			(266.1		)	(175.0		)
Prime first lien	29.9			(58.8		)	(43.8		)	(79.7		)
Subprime first lien	19.4			(11.1		)	(11.9		)	(10.5		)
Total U.S. RMBS	187.7			(43.5		)	(321.8		)	(265.2		)
CMBS	0.1			7.6			0.2			8.1
Other	(7.0		)	(11.4		)	35.0			(9.3		)
Total	$	195.1		$	(54.5	)	$	(277.8	)	$	(289.8	)

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In Second Quarter 2012, U.S. RMBS unrealized fair value gains were generated in the prime first lien, Alt-A, Option ARM and subprime RMBS sectors due to tighter implied net spreads. The tighter implied net spreads were primarily a result of the increased cost to buy protection in AGC's name as the market cost of AGC's credit protection increased. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, increased the implied spreads that the Company would expect to receive on these transactions decreased. In addition, Second Quarter 2012 includes a $70.0 million unrealized gain net of reinsurance relating to R&W benefits from the Deutsche Bank Agreement.

During Six Months 2012, the cost to buy protection on AGC's name declined. This led to U.S. RMBS unrealized fair value losses which were generated primarily in the prime first lien, Alt-A, Option ARM and subprime RMBS sectors due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC's name as the market cost of AGC's credit protection decreased. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased the implied spreads that the Company would expect to receive on these transactions increased.

In Second Quarter 2011 U.S. RMBS unrealized fair value losses were generated primarily in the prime first lien and Subprime RMBS sectors due to wider implied net spreads. During Six Months 2011, U.S. RMBS unrealized fair value losses were generated primarily in the Option ARM, Alt-A first lien, and Subprime RMBS sectors due to wider implied net spreads. For both time periods, the wider implied net spreads were a result of price deterioration as well as the decreased cost to buy protection in AGC's name as the market cost of AGC's credit protection declined. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGC declined the implied spreads that the Company would expect to receive on these transactions increased. The unrealized fair value gain within the Other asset class resulted from price improvement on a XXX life-securitization policy. In Second Quarter 2011, the unrealized fair value gains in the Option ARM and Alt-A first lien sectors, were a result of an increase in fair value attributable to R&W benefits on several Alt-A first lien and Option ARM credit derivative transactions, as a result of a settlement with a CDS counterparty.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.

Five Year CDS Spread on AGC

	As of June 30, 2012	As of March 31, 2012	As of December 31, 2011
Quoted price of CDS contract (in basis points)	904	743	1,140

Components of Credit Derivative Assets (Liabilities)

	As of June 30, 2012			As of December 31, 2011
	(in millions)
Credit derivative assets	$	277.7		$	305.9
Credit derivative liabilities	(1,277.8		)	(927.1		)
Net fair value of credit derivatives	$	(1,000.1	)	$	(621.2	)

	As of June 30, 2012			As of December 31, 2011
Fair value of credit derivatives before effect of AGC credit spread	$	(3,715.9	)	$	(3,369.8	)
Plus: Effect of AGC credit spread	2,715.8			2,748.6
Net fair value of credit derivatives	$	(1,000.1	)	$	(621.2	)

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The fair value of CDS contracts at June 30, 2012 before considering the implications of AGC’s credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets, and ratings downgrades. The asset classes that remain most affected are recent vintages of prime first lien, Alt-A, Option ARM, and subprime RMBS deals, as well as trust-preferred securities. When looking at June 30, 2012 compared with December 31, 2011, there was a widening of spreads primarily relating to the Company’s Alt-A first lien and subprime RMBS transactions, as well as the Company’s trust-preferred securities. This widening of spreads resulted in a loss of approximately $346.1 million before taking into account AGC’s credit spreads.

Management believes that the trading level of AGC’s credit spread is due to the correlation between AGC’s risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against AGC as the result of its financial guaranty volume, as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGC’s credit spread were higher credit spreads in the fixed income security markets. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high yield CDO, Trust-Preferred CDO, and CLO markets as well as continuing market concerns over the most recent vintages of subprime RMBS.

The following table presents the fair value and the present value of expected claim payments or recoveries for contracts accounted for as derivatives.

Net Fair Value and Expected Losses of Credit Derivatives by Sector

	Fair Value of Credit Derivative Asset (Liability), net(1)						Present Value of Expected Claim (Payments) Recoveries(2)
Asset Type	As of June 30, 2012			As of December 31, 2011			As of June 30, 2012			As of December 31, 2011
	(in millions)
Pooled corporate obligations:
CLOs/Collateralized bond obligations	$	10.5		$	2.3		$	—		$	—
Synthetic investment grade pooled corporate	0.9			1.2			—			—
TruPS CDOs	(1.6		)	(3.3		)	(24.9		)	(29.5		)
Market value CDOs of corporate obligations	0.6			2.6			—			—
Total pooled corporate obligations	10.4			2.8			(24.9		)	(29.5		)
U.S. RMBS (3):
Option ARM and Alt-A first lien	(727.6		)	(446.6		)	(109.3		)	(155.3		)
Subprime first lien	(2.7		)	(3.0		)	(61.5		)	(59.7		)
Prime first lien	(81.8		)	(37.8		)	—			—
Total U.S. RMBS	(812.1		)	(487.4		)	(170.8		)	(215.0		)
CMBS	(3.3		)	(3.9		)	—			—
Other	(195.1		)	(132.7		)	(67.2		)	(65.3		)
Total	$	(1,000.1	)	$	(621.2	)	$	(262.9	)	$	(309.8	)

____________________

(1) Includes R&W benefit of $206.0 million as of June 30, 2012 and $87.4 million as of December 31, 2011.

(2) Represents amount in excess of the present value of future installment fees to be received of $38.8 million as of June 30, 2012 and $35.6 million as of December 31, 2011. Includes R&W benefit of $185.4 million as of June 30, 2012 and $164.7 million as of December 31, 2011.

(3) Includes four transactions which are covered under R&W settlement agreements.

Ratings Sensitivities of Credit Derivative Contracts

Within the Company’s insured CDS portfolio, the transaction documentation for $2.2 billion in CDS par insured provides that a downgrade of the financial strength rating of AGC past a specified level (which level varies from transaction to transaction), would constitute a termination event that would allow the CDS counterparty to terminate the affected transactions. If the CDS counterparty elected to terminate the affected transactions, under some transaction documents, AGFP could be required to make a termination payment (or may be entitled to receive a termination payment from the CDS counterparty) and under other transaction documents the credit protection would be cancelled and no termination payment would be owing by either party. Under certain

56

documents, AGFP has the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a third party guaranty of the obligations of AGC. AGFP currently has three ISDA master agreements under which the applicable counterparty could elect to terminate transactions upon a rating downgrade of AGC. If AGC’s financial strength ratings were downgraded to BBB- or Baa3, $89.0 million in par insured could be terminated by one counterparty; and if AGC’s ratings were downgraded to BB+ or Ba1, an additional approximately $2.1 billion in par insured could be terminated by the other two counterparties. The Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with AGFP. These payments could have a material adverse effect on the Company’s liquidity and financial condition.

Under a limited number of other CDS contracts, AGC may be required to post eligible collateral to secure its obligation to make payments under such contracts. Eligible collateral is generally cash or U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. For certain of such contracts, the CDS counterparty has agreed to have some exposure to AGC on an unsecured basis, but as the financial strength ratings of AGC’s insurance subsidiaries decline, the amount of unsecured exposure to AGC allowed by the CDS counterparty decreases until, at a specified rating level (which level varies from transaction to transaction), the Company must collateralize all of the exposure. The amount of collateral required is based on a mark-to-market valuation of the exposure that must be secured. Under other contracts, the Company has negotiated caps such that the posting requirement cannot exceed a certain fixed amount, regardless of the financial strength ratings of AGC’s insurance subsidiaries. As of June 30, 2012 the amount of insured par that is subject to collateral posting is approximately $14.1 billion (which amount is not reduced by unsecured exposure to AGC allowed by CDS counterparties at current financial strength rating levels), for which AGC has agreed to post approximately $687.4 million of collateral (which amount reflects some of the eligible collateral being valued at a discount to the face amount). AGC may be required to post additional collateral from time to time, depending on its financial strength ratings and on the market values of the transactions subject to the collateral posting. For approximately $13.7 billion of that $14.1 billion, at AGC’s current ratings, AGC need not post on a cash basis more than $625.0 million, regardless of any change in the market value of the transactions, due to caps negotiated with counterparties. For the avoidance of doubt, the $625.0 million is already included in the $687.4 million that AGC has agreed to post. In the event AGC’s ratings are downgraded to A+ or A3, the maximum amount to be posted against the $13.7 billion increases by $50.0 million to $675.0 million.

Sensitivity to Changes in Credit Spread

The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and on the risks that it assumes.

Effect of Changes in Credit Spread

	As of June 30, 2012
Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss) (Pre-Tax)
	(in millions)
100% widening in spreads	$	(2,120.8	)	$	(1,120.7	)
50% widening in spreads	(1,560.4		)	(560.3		)
25% widening in spreads	(1,280.2		)	(280.1		)
10% widening in spreads	(1,112.1		)	(112.0		)
Base Scenario	(1,000.1		)	—
10% narrowing in spreads	(891.8		)	108.3
25% narrowing in spreads	(729.5		)	270.6
50% narrowing in spreads	(466.5		)	533.6

____________________

(1) Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread.

7. Consolidation of Variable Interest Entities

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. AGC does not sponsor any VIEs when underwriting third party financial guaranty insurance or credit derivative transactions, nor has either of them acted as the servicer or collateral manager for any VIE obligations that it insures. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the

57

case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate cash flows that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

As a condition to issuing a financial guaranty contract in respect of certain of a VIE's debt obligations, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor transaction performance or a deterioration in a servicer or collateral manager’s financial condition. At the inception of a transaction, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company’s control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company, such as its ability to unilaterally terminate and replace the servicer upon the occurrence of certain triggering events and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. The protective rights that the Company obtains under its insurance contract for a particular transaction give the Company additional controls over a VIE if there is either deterioration in the performance of the transaction or in the financial health of the servicer or collateral manager. The Company is deemed to be the control party for financial reporting purposes, typically when its protective rights give it the power to both terminate and replace the servicer or collateral manager, which are rights typically given to a financial guaranty insurer. If the Company’s protective rights that could make it the control party have not been triggered, then it does not consolidate the VIE. As of June 30, 2012, the Company had issued financial guaranty contracts for approximately 600 VIEs that it did not consolidate.

AGC is not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on these debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. AGC’s creditors do not have any rights with regard to the assets of the VIEs. Proceeds from sales, maturities, prepayments and interest from VIE assets may only be used to pay debt service on VIE liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero at maturity of the VIE debt, except for net premiums received and claims paid by AGC under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 3, Financial Guaranty Insurance Contracts.

Consolidated FG VIEs

During Second Quarter 2012, the Company determined that based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the FG VIEs’ most significant activities, no additional VIEs required consolidation. There were a total of eight consolidated FG VIEs at June 30, 2012, compared to seven FG VIEs at December 31, 2011.

The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately $268.3 million. The aggregate unpaid principal of the FG VIEs’ assets was approximately $763.6 million greater than the aggregate fair value at June 30, 2012. The change in the instrument-specific credit risk of the FG VIEs’ assets for the Second Quarter 2012 and Six Months 2012 were gains of $11.4 million and $65.4 million, respectively. The change in the instrument-specific credit risk of the FG VIE's assets for the Second Quarter 2011 and Six Months 2011 were losses of $112.8 million and $34.8 million, respectively. The gain in instrument-specific credit risk was determined by calculating the change in credit impairment for the Company’s VIE assets during the period, which are provided by a third party pricing source.

The aggregate unpaid principal balance was approximately $699.3 million less than the aggregate fair value of the FG VIEs’ liabilities as of June 30, 2012.

The trustee reports of the consolidated FG VIEs are prepared by outside parties and are not available within the time constraints that the Company requires to ensure the financial accuracy of the operating results. As such, the financial results of the FG VIEs are consolidated on a lag; however, the Company adjusts the financial statements for the effects of material events occurring from the lag period until the balance sheet date. Interest income and interest expense are derived from the trustee reports and included in “fair value gains (losses) on FG VIEs” in the consolidated statement of operations. The Company has elected the fair value option for assets and liabilities classified as FG VIEs’ assets and liabilities. Upon consolidation of FG

58

VIEs, the Company elected the fair value option because the carrying amount transition method was not practical.

The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the consolidated financial statements, segregated by the types of assets that collateralize their respective debt obligations.

Consolidated FG VIEs

By Type of Collateral

	As of June 30, 2012					As of December 31, 2011
	Number of FG VIEs	Assets		Liabilities		Number of FG VIEs	Assets		Liabilities
	(dollars in millions)
With recourse:
Subprime	1	$	6.7	$	7.8	—	$	—	$	—
Closed-end second lien	6	131.7		170.6		6	114.7		181.0
Life insurance	1	290.2		290.2		1	289.8		289.8
Total with recourse	8	428.6		468.6		7	404.5		470.8
Without recourse	—	352.1		352.1		—	358.0		358.0
Total	8	$	780.7	$	820.7	7	$	762.5	$	828.8

Gross Unpaid Principal for FG VIEs’ Liabilities

With Recourse

	As of June 30, 2012		As of December 31, 2011
	(in millions)
Gross unpaid principal for FG VIEs’ liabilities with recourse	$	746.0	$	766.4

Contractual maturities of financial guaranty VIE liabilities with recourse are due in 2027, 2033, 2037 and 2038 for the amounts of $42.1 million, $11.1 million, $651.3 million, and $41.5 million, respectively.

The consolidation of FG VIEs has a significant effect on net income and shareholder’s equity due to (1) changes in fair value gains (losses) on FG VIE assets and liabilities, (2) the eliminations of premiums and losses related to the AGC insured FG VIE liabilities and (3) the elimination of investment balances related to the Company’s purchase of AGC insured FG VIE debt. Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. Such eliminations are included in the table below to present the full effect of consolidating FG VIEs.

Effect of Consolidating FG VIEs on Net Income

and Shareholder’s Equity(1)

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Net earned premiums	$	(0.4	)	$	(0.4	)	$	(1.2	)	$	(0.3	)
Net investment income	(0.2		)	(0.4		)	(1.0		)	(0.7		)
Fair value gains (losses) on FG VIEs	102.5			(68.8		)	96.6			(59.3		)
Loss and LAE	1.9			(1.5		)	(1.1		)	0.7
Total pretax effect on net income	103.8			(71.1		)	93.3			(59.6		)
Less: tax provision (benefit)	36.2			(24.9		)	32.6			(20.8		)
Total effect on net income (loss)	$	67.6		$	(46.2	)	$	60.7		$	(38.8	)

59

	As of June 30, 2012			As of December 31, 2011
	(in millions)
Total (decrease) increase on shareholder’s equity	$	(19.7	)	$	(79.9	)

____________________

(1) Includes the effect of eliminating insurance balances related to the financial guaranty insurance contracts.

Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. During Second Quarter 2012, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $102.5 million. This gain is a result of a $103.6 million R&W settlement with Deutsche Bank during the period. This was also the primary driver of the $96.6 million pre-tax fair value gain of consolidated FG VIEs during Six Months 2012. The Six Months 2012 amount was partially offset by an unrealized loss in First Quarter 2012, which resulted from price appreciation on wrapped FG VIE liabilities, as market participants gave more value to the guarantees provided by monoline insurers. A pre-tax fair value loss of approximately $68.8 million was recorded on the consolidated FG VIEs during Second Quarter 2011 and was primarily driven by the consolidation of two new VIEs. This was also the primary driver of the $59.3 million pre-tax net unrealized loss in the fair value of consolidated FG VIEs during Six Months 2011. The Six Months 2011 amount was partially offset by an unrealized gain in the three-months period ended March 31, 2011, which resulted from longer liquidation time lines on RMBS transactions, which resulted in an increased value for the FG VIE asset.

Non-Consolidated VIEs

To date, the Company’s analyses have indicated that it does not have a controlling financial interest in any other VIEs and, as a result, they are not consolidated in the consolidated financial statements. The Company’s exposure provided through its financial guaranties with respect to debt obligations of special purpose entities is included within net par outstanding in Note 3, Outstanding Exposure.

8. Investments

Investment Portfolio

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Net investment income remained flat quarter to quarter due to a shift to longer duration assets offset by lower reinvestment yields. Accrued investment income on fixed maturity and short-term investments was $30.2 million and $30.2 million as of June 30, 2012 and December 31, 2011, respectively.

Net Investment Income

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Income from fixed maturity securities	$	25.2		$	25.1		$	50.4		$	50.1
Income from short-term investments	—			0.1			0.1			0.2
Gross investment income	25.2			25.2			50.5			50.3
Investment expenses	(0.6		)	(0.6		)	(1.3		)	(1.2		)
Net investment income	$	24.6		$	24.6		$	49.2		$	49.1

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Net Realized Investment Gains (Losses)

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Realized gains on investment portfolio	$	2.4		$	2.1		$	3.3		$	5.0
Realized losses on investment portfolio	—			(1.5		)	(0.1		)	(2.2		)
Other-than-temporary impairment (“OTTI”):
Intent to sell	—			(0.5		)	—			(2.0		)
Credit component of OTTI securities	(1.6		)	—			(3.8		)	(0.7		)
OTTI	(1.6		)	(0.5		)	(3.8		)	(2.7		)
Net realized investment gains (losses)	$	0.8		$	0.1		$	(0.6	)	$	0.1

The following table presents the roll-forward of the credit losses of fixed maturity securities for which the Company has recognized OTTI and where the portion of the fair value adjustment related to other factors was recognized in OCI.

Roll Forward of Credit Losses in the Investment Portfolio

	Second Quarter				Six Months
	2012		2011		2012		2011
	(in millions)
Balance, beginning of period	$	5.7	$	2.3	$	3.5	$	1.6
Additions for credit losses on securities for which an OTTI was not previously recognized	1.6		—		3.7		—
Additions for credit losses on securities for which an OTTI was previously recognized	—		—		0.1		0.7
Balance, end of period	$	7.3	$	2.3	$	7.3	$	2.3

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Fixed Maturity Securities and Short Term Investments

by Security Type

	As of June 30, 2012
Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain(2) (Loss) on Securities with OTTI			Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	15	%	$	417.3	$	24.2	$	—		$	441.5	$	—		AA+
Obligations of state and political subdivisions	62		1,694.3		131.9		(0.3		)	1,825.9		2.2			AA
Corporate securities	6		156.8		10.4		—			167.2		0.1			A+
Mortgage-backed securities(4):
RMBS	4		124.6		6.2		(26.8		)	104.0		(24.2		)	A+
CMBS	3		73.0		6.3		—			79.3		—			AAA
Asset-backed securities	1		39.2		0.8		(12.0		)	28.0		(6.1		)	BIG
Foreign government securities	3		79.7		9.1		—			88.8		—			AAA
Total fixed maturity securities	94		2,584.9		188.9		(39.1		)	2,734.7		(28.0		)	AA
Short-term investments	6		160.4		—		—			160.4		—			AAA
Total investment portfolio	100	%	$	2,745.3	$	188.9	$	(39.1	)	$	2,895.1	$	(28.0	)	AA

	As of December 31, 2011
Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain(2) (Loss) on Securities with OTTI		Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	17	%	$	478.9	$	28.0	$	—		$	506.9	$	—	AA+
Obligations of state and political subdivisions	59		1,625.4		102.5		(0.4		)	1,727.5		1.7		AA
Corporate securities	7		181.5		8.9		(0.3		)	190.1		—		A+
Mortgage-backed securities(4):
RMBS	5		146.2		6.7		(29.1		)	123.8		1.3		A+
CMBS	3		82.0		5.7		—			87.7		—		AAA
Asset-backed securities	1		21.9		0.8		(4.9		)	17.8		—		BBB+
Foreign government securities	3		85.8		9.2		—			95.0		—		AAA
Total fixed maturity securities	95		2,621.7		161.8		(34.7		)	2,748.8		3.0		AA
Short-term investments	5		151.9		—		—			151.9		—		AAA
Total investment portfolio	100	%	$	2,773.6	$	161.8	$	(34.7	)	$	2,900.7	$	3.0	AA

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___________________

(1) Based on amortized cost.

(2) Accumulated Other Comprehensive Income ("AOCI").

(3) Ratings in the tables above represent the lower of the Moody’s and S&P classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-quality, liquid instruments.

(4) Government agency obligations were approximately 44% of mortgage backed securities as of June 30, 2012 and 47% as of December 31, 2011 based on fair value.

The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. As of June 30, 2012, amounts net of tax, in AOCI included a net unrealized loss of $18.2 million for securities for which the Company had recognized OTTI and a net unrealized gain of $115.4 million for securities for which the Company had not recognized OTTI. As of December 31, 2011, amounts, net of tax, in AOCI included a net unrealized gain of $2.0 million for securities for which the Company had recognized OTTI and a net unrealized gain of $80.5 million for securities for which the Company had not recognized OTTI.

The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories. This is a high quality portfolio of municipal securities with an average rating of AA as of June 30, 2012 and AA as of December 31, 2011. Securities rated lower than A-/A3 by S&P or Moody’s are not eligible to be purchased for the Company’s portfolio unless acquired for loss mitigation or risk management strategies.

The following tables present the fair value of the Company’s available-for-sale municipal bond portfolio as of June 30, 2012 and December 31, 2011 by state, excluding $132.8million and $160.9 million of pre-refunded bonds, respectively. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

Fair Value of Available-for-Sale Municipal Bond Portfolio by State

	As of June 30, 2012
State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	32.8	$	124.1	$	148.5	$	305.4	$	282.6	AA
New York	—		35.8		173.2		209.0		193.4		AA
California	—		48.3		143.4		191.7		176.5		AA
Massachusetts	21.8		9.7		70.2		101.7		92.9		AA
Florida	—		27.0		70.6		97.6		89.4		AA
Washington	27.1		—		44.1		71.2		66.8		AA
Illinois	—		19.1		46.8		65.9		62.6		AA
Georgia	—		7.6		52.3		59.9		58.0		AA
Arizona	—		—		57.8		57.8		53.7		AA
Hawaii	21.3		6.8		17.0		45.1		42.4		AA
All others	100.1		76.6		311.1		487.8		455.1		AA
Total	$	203.1	$	355.0	$	1,135.0	$	1,693.1	$	1,573.4	AA

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	As of December 31, 2011
State	State General Obligation		Local General Obligation		Revenue		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
Texas	$	31.5	$	113.9	$	146.5	$	291.9	$	275.2	AA
New York	—		35.9		167.3		203.2		192.9		AA
California	—		38.4		124.8		163.2		153.1		AA
Massachusetts	21.2		9.7		65.6		96.5		89.4		AA
Florida	—		26.5		69.3		95.8		89.6		AA
Washington	26.7		—		39.0		65.7		62.3		AA
Illinois	—		18.7		37.9		56.6		53.7		AA
Arizona	—		—		49.5		49.5		46.9		AA
Wisconsin	17.7		—		21.4		39.1		35.3		AA
Hawaii	21.3		—		16.7		38.0		35.8		AA
All others	87.1		84.1		295.9		467.1		443.6		AA
Total	$	205.5	$	327.2	$	1,033.9	$	1,566.6	$	1,477.8	AA

The revenue bond portfolio is comprised primarily of essential service revenue bonds issued by water and sewer authorities and other utilities, transportation authorities, universities and healthcare providers.

Revenue Sources

	As of June 30, 2012				As of December 31, 2011
Type	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Tax backed	$	261.9	$	242.7	$	257.9	$	243.5
Water and sewer	246.7		230.3		215.9		205.3
Transportation	221.8		205.8		194.5		183.9
Municipal utilities	156.1		145.2		160.0		151.9
Higher education	149.2		139.6		113.0		106.6
All others	99.3		95.7		92.6		89.3
Total	$	1,135.0	$	1,059.3	$	1,033.9	$	980.5

The Company’s investment portfolio is managed by four outside managers. As municipal investments are a material portion of the Company’s overall investment portfolio, the Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. Each of the portfolio managers perform independent analysis on every municipal security they purchase for the Company’s portfolio. The Company meets with each of its portfolio managers quarterly and reviews all investments with a change in credit rating as well as any investments on the manager’s watch list of securities with the potential for downgrade. The Company does not independently assign investments within the Company’s portfolio an individual rating.

The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

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Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

	As of June 30, 2012
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	36.3	$	—		$	—	$	—		$	36.3	$	—
Obligations of state and political subdivisions	35.3		(0.3		)	3.5		—			38.8		(0.3		)
Corporate securities	9.9		—			—		—			9.9		—
Mortgage-backed securities:
RMBS	14.2		(24.5		)	7.7		(2.3		)	21.9		(26.8		)
CMBS	—		—			—		—			—		—
Asset-backed securities	10.6		(6.4		)	5.8		(5.6		)	16.4		(12.0		)
Foreign government securities	—		—			—		—			—		—
Total	$	106.3	$	(31.2	)	$	17.0	$	(7.9	)	$	123.3	$	(39.1	)
Number of securities			18					5					23
Number of securities with OTTI			3					3					6

	As of December 31, 2011
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of state and political subdivisions	10.8		—			11.1		(0.4		)	21.9		(0.4		)
Corporate securities	11.2		(0.3		)	—		—			11.2		(0.3		)
Mortgage-backed securities:
RMBS	16.8		(26.5		)	6.5		(2.6		)	23.3		(29.1		)
CMBS	—		—			—		—			—		—
Asset-backed securities	—		—			6.1		(4.9		)	6.1		(4.9		)
Foreign government securities	—		—			—		—			—		—
Total	$	38.8	$	(26.8	)	$	23.7	$	(7.9	)	$	62.5	$	(34.7	)
Number of securities			9					6					15
Number of securities with OTTI			1					1					2

The increase in gross unrealized losses was primarily attributable to asset-backed securities and partially offset by a decrease in unrealized losses in RMBS. Of the securities in an unrealized loss position for 12 months or more as of June 30, 2012, three securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2012 was $7.4million. The Company has determined that the unrealized losses recorded as of June 30, 2012 are yield related and not the result of other-than-temporary impairments.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of June 30, 2012 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Distribution of Fixed-Maturity Securities

by Contractual Maturity

	As of June 30, 2012
	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	144.5	$	146.0
Due after one year through five years	504.1		532.2
Due after five years through 10 years	456.0		503.3
Due after 10 years	1,282.7		1,369.9
Mortgage-backed securities:
RMBS	124.6		104.0
CMBS	73.0		79.3
Total	$	2,584.9	$	2,734.7

To fulfill state licensing requirements the Company has placed on deposit eligible securities of $9.0 million and $9.0 million as of June 30, 2012 and December 31, 2011, respectively, for the protection of policyholders. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account which amounted to $3.5million and $3.5 million as of June 30, 2012 and December 31, 2011, respectively. In connection with an excess of loss reinsurance facility $4.4 million of short term securities have been deposited into a trust for the benefit of the reinsurers.

Under certain derivative contracts, AGC is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based fair value assessments in excess of contractual thresholds. The fair value of AGC’s pledged securities totaled $687.3 million and $779.2 million as of June 30, 2012 and December 31, 2011, respectively.

No material investments of the Company were non-income producing for Six Months 2012 and 2011, respectively.

The Company purchased securities that it has insured, and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses ("loss mitigation bonds"). These securities were purchased at a discount and are accounted for excluding the effects of the Company’s insurance on the securities. As of June 30, 2012, securities purchased for loss mitigation purposes included in the fixed maturity portfolio on the consolidated balance sheet had a fair value of $39.2 million representing $219.0 million of par.

9. Insurance Company Regulatory Requirements

Dividend Restrictions and Capital Requirements

AGC is a Maryland domiciled insurance company. As of June 30, 2012, the amount available for distribution from AGC during 2012 with notice to, but without prior approval of, the Maryland Commissioner of Insurance under the Maryland insurance law is approximately $94.7 million. During Six Months 2012 and 2011, AGC declared and paid $55.0 million, and $10.0 million, respectively, in dividends to Assured Guaranty US Holdings Inc. (“AGUS”).

10. Income Taxes

Provision for Income Taxes

AGC and AGUK are subject to U.S. and United Kingdom income tax, respectively. AGC and AGUK are subject to income taxes imposed by U.S. and United Kingdom authorities at marginal corporate income tax rates of 35% and 24.5%, respectively, and file applicable tax returns. For periods subsequent to April 1, 2012, the U.K. corporation tax rate has been reduced to 24%, for the period April 1, 2011 to April 1, 2012 the U.K. corporation tax rate was 26% resulting in a blended tax rate of 24.5% in 2012 and prior to April 1, 2011, the U.K. corporation tax rate was 28% resulting in a blended tax rate of 26.5% in 2011.

The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in fair value of its credit derivatives, which prevents the Company from projecting a reliable

66

estimated annual effective tax rate and pretax income for the full year 2012. A discrete calculation of the provision is calculated for each interim period.

A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below.

Effective Tax Rate Reconciliation

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Expected tax provision (benefit) at statutory rates in taxable jurisdictions	$	110.0		$	(46.4	)	$	(78.2	)	$	(105.1	)
Tax-exempt interest	(4.8		)	(5.0		)	(9.6		)	(9.1		)
Change in liability for uncertain tax positions	0.5			0.6			1.1			1.2
Other	0.2			0.1			0.4			0.3
Total provision (benefit) for income taxes	$	105.9		$	(50.7	)	$	(86.3	)	$	(112.7	)
Effective tax rate	33.7		%	38.2		%	38.6		%	37.5		%

The expected tax provision at statutory rates in taxable jurisdictions is calculated as the sum of pretax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Pretax income of the Company’s subsidiaries which are not U.S. domiciled but are subject to U.S. tax as controlled foreign corporations is included at the U.S. statutory tax rate.

Valuation Allowance

The Company came to the conclusion that it is more likely than not that its net deferred tax asset will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative operating income the AGUS consolidated group has earned over the last three years and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with this deferred tax asset. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.

Uncertain Tax Positions

It is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next twelve months due to the closing of IRS audits or the lapse of statute of limitations.  Based on the information currently available, the Company does not expect any changes to be material to the consolidated financial condition or results of operations.

11. Reinsurance and Other Monoline Exposures

AGC assumes exposure on insured obligations (“Assumed Business”) and cedes portions of its exposure on obligations it has insured (“Ceded Business”) in exchange for premiums, net of ceding commissions.

Assumed and Ceded Business

The Company is party to reinsurance agreements as a reinsurer to other monoline financial guaranty insurance companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums. The Company’s facultative and treaty agreements are generally subject to termination:

(a) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria that are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary, or

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(b) upon certain changes of control of the Company.

Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all unearned premiums calculated on a statutory basis of accounting, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements after which the Company would be released from liability with respect to the Assumed Business. Upon the occurrence of the conditions set forth in (a) above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.

With respect to a significant portion of the Company’s in-force financial guaranty Assumed Business, due to the downgrade of AGC to AA-, subject to the terms of each policy, the ceding company may have the right to recapture Assumed Business ceded to AGC and assets representing substantially all of the statutory unearned premium (net of ceding commissions) and loss reserves (if any) associated with that business. Subject to the terms of each reinsurance agreement, upon recapture the ceding company typically is owed assets representing substantially all of the statutory unearned premium (net of ceding commissions) and loss reserves (if any) associated with that business. As of June 30, 2012, if all of AGC’s Assumed Business was recaptured, it would result in a corresponding one-time reduction to net income of approximately $10.1 million.

The Company has Ceded Business to affiliated and non-affiliated companies to limit its exposure to risk. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers. The Company’s ceded contracts generally allow the Company to recapture Ceded Business after certain triggering events, such as reinsurer downgrades.

Effect of Reinsurance on Statement of Operations

	Second Quarter						Six Months
	2012			2011			2012			2011
	(in millions)
Premiums Written
Direct	$	(1.1	)	$	(14.3	)	$	8.8		$	(31.3	)
Assumed(1)	2.5			0.5			24.6			(1.3		)
Ceded(2)	(0.5		)	0.9			(15.9		)	7.7
Net	$	0.9		$	(12.9	)	$	17.5		$	(24.9	)
Premiums Earned
Direct	$	30.1		$	25.9		$	53.4		$	61.2
Assumed	7.8			10.8			13.1			14.9
Ceded	(11.7		)	(12.1		)	(20.0		)	(22.8		)
Net	$	26.2		$	24.6		$	46.5		$	53.3
Loss and LAE
Direct	$	33.5		$	28.1		$	26.9		$	15.0
Assumed	(15.6		)	0.7			8.6			(2.4		)
Ceded	(17.9		)	(10.6		)	(19.7		)	(12.8		)
Net	$	—		$	18.2		$	15.8		$	(0.2	)

____________________

(1)Negative assumed premiums written were due to changes in expected debt service schedules.

(2)Positive ceded premiums written were due to changes in expected debt service schedules.

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Reinsurer Exposure

In addition to assumed and ceded reinsurance arrangements, the Company may also have exposure to some financial guaranty reinsurers (i.e., monolines) in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by other monolines. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed maturity securities that are wrapped by monolines and whose value may decline based on the rating of the monoline. At June 30, 2012, based on fair value, the Company had $128.7 million of fixed maturity securities in its investment portfolio wrapped by Ambac Assurance Corporation (“Ambac”), $107.5 million by National Public Finance Guarantee Corporation, $87.4 million by AGM and $10.2 million by other guarantors.

Exposure by Reinsurer

	Ratings as of August 22, 2012		Par Outstanding as of June 30, 2012
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(4)		Second-to-Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
Affiliated Companies(1)			$	37,595	$	42	$	—
Non-Affiliated Companies:
American Overseas Reinsurance Company Limited(2)	WR(3)	WR	2,251		—		—
Radian Asset Assurance Inc.	Bal	B+	187		1		1,332
Ambac	WR	WR	85		1,943		1,431
ACA Financial Guaranty Corp.	NR	WR	20		1		1
MBIA Inc.	(5)	(5)	—		1,561		4,486
CIFG Assurance North America Inc.	WR	WR	—		109		2,847
Financial Guaranty Insurance Co.	WR	WR	—		1,369		310
Syncora Guarantee Inc.	Ca	WR	—		751		16
Other	Various	Various	1		—		—
Non-Affiliated Companies			2,544		5,735		10,423
Total			$	40,139	$	5,777	$	10,423

 ____________________

(1) The affiliates of AGC are Assured Guaranty Re Ltd. and its subsidiaries (“AG Re”) rated A1 (rating under review) by Moody’s and AA− (stable) by S&P and AGM and its subsidiaries rated Aa3 (rating under review) by Moody’s and AA− (stable) by S&P.

(2) Formerly RAM Reinsurance Company Ltd.

(3) Represents “Withdrawn Rating.”

(4) Includes $11,459 million in ceded par outstanding related to insured credit derivatives.

(5) MBIA Inc. includes various subsidiaries which are rated BBB by S&P and Baa2, B3, WR and NR by Moody’s.

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Amounts Due (To) From Reinsurers

	As of June 30, 2012
	Assumed Premium, net of Commissions		Ceded Premium,  net of Commissions			Assumed Expected Loss and LAE			Ceded Expected Loss and LAE
	(in millions)
Affiliated Companies	$	—	$	(67.3	)	$	—		$	201.0
American Overseas Reinsurance Company Ltd.	—		(1.8		)	—			2.0
Ambac	4.7		—			(9.2		)	—
MBIA Inc.	0.1		—			(14.1		)	—
Financial Guaranty Insurance Company	—		—			(17.0		)	—
Syncora Guarantee Inc.	—		—			0.5			—
Other	—		(5.6		)	—			—
Total	$	4.8	$	(74.7	)	$	(39.8	)	$	203.0

Excess of Loss Reinsurance Facility

On January 22, 2012, AGC and AGM entered into an aggregate excess of loss reinsurance facility, effective as of January 1, 2012. At AGC’s and AGM’s option, the facility will cover losses occurring from January 1, 2012 through December 31, 2019 or from January 1, 2013 through December 31, 2020. The contract terminates, unless AGC and AGM choose to extend it on January 1, 2014. The facility covers U.S. public finance credits insured or reinsured by AGC and AGM as of September 30, 2011, excluding credits that were rated non-investment grade as of December 31, 2011 by Moody’s or S&P or internally by AGC or AGM and subject to certain per credit limits. The facility attaches when AGC’s or AGM’s net losses (net of AGC’s and AGM other reinsurance, other than pooling reinsurance provided to AGM by AGM’s subsidiaries and net of recoveries) exceed in the aggregate $2 billion and covers a portion of the next $600 million of losses, with the reinsurers assuming pro rata in the aggregate $435 million of the $600 million of losses and AGC and AGM jointly retaining the remaining $165 million of losses. The reinsurers are required to be rated at least AA−(Stable Outlook) through December 31, 2014 or to post collateral sufficient to provide AGM and AGC with the same reinsurance credit as reinsurers rated AA−. AGM and AGC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. This obligation is secured by a pledge of the recoveries, which will be deposited into a trust for the benefit of the reinsurers. The Company has paid approximately $4.4 million of premiums during Six Months 2012. The remaining $4.4 million of premiums, which are due in January 2013, have been deposited into a trust for the benefit of the reinsurers as of June 30, 2012.

Reinsurance Agreement with Radian Asset Assurance Inc.

On January 24, 2012, AGC entered into an agreement under which it has reinsured approximately $1.8 billion of Radian Asset Assurance Inc. public finance par. In connection with the reinsurance assumption, the Company received a payment of $22 million. The reinsured portfolio was composed entirely of selected credits that met the Company’s underwriting standards.

12. Commitments and Contingencies

Legal Proceedings

Litigation

Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations in a particular quarter or year. In addition, in the ordinary course of its business, AGC and AGUK assert claims in legal proceedings against third parties to recover losses paid in prior periods. For example, as described in Note 4 (Financial Guaranty Insurance Contracts—Recovery Litigation), as of the date of this filing, AGC has filed complaints against certain sponsors and underwriters of RMBS securities that AGC had insured, alleging, among other claims, that such persons had breached R&W in the transaction documents, failed to cure or repurchase defective loans and/or violated state securities

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laws. The amounts, if any, the Company will recover in proceedings to recover losses are uncertain, and recoveries, or failure to obtain recoveries, in any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year.

The Company receives subpoenas duces tecum and interrogatories from regulators from time to time.

On April 8, 2011, AGC and its affiliate AG Re filed a Petition to Compel Arbitration with the Supreme Court of the State of New York, requesting an order compelling Ambac to arbitrate Ambac’s disputes with AGC and AG Re concerning their obligations under reinsurance agreements with Ambac. In March 2010, Ambac placed a number of insurance policies that it had issued, including policies reinsured by AGC and AG Re pursuant to the reinsurance agreements, into a segregated account. The Wisconsin state court has approved a rehabilitation plan whereby permitted claims under the policies in the segregated account will be paid 25% in cash and 75% in surplus notes issued by the segregated account. Ambac has advised AGC and AG Re that it has and intends to continue to enter into commutation agreements with holders of policies issued by Ambac, and reinsured by AGC and AG Re, pursuant to which Ambac will pay a combination of cash and surplus notes to the policyholder. AG Re and AGC have informed Ambac that they believe their only current payment obligation with respect to the commutations arises from the cash payment, and that there is no obligation to pay any amounts in respect of the surplus notes until payments of principal or interest are made on such notes. Ambac has disputed this position on one commutation and may take a similar position on subsequent commutations. On April 15, 2011, attorneys for the Wisconsin Insurance Commissioner, as Rehabilitator of Ambac’s segregated account, and for Ambac filed a motion with Lafayette County, Wis., Circuit Court Judge William Johnston, asking him to find AGC and AG Re to be in violation of an injunction protecting the interests of the segregated account by their seeking to compel arbitration on this matter and failing to pay in full all amounts with respect to Ambac’s payments in the form of surplus notes. On June 14, 2011, Judge Johnston issued an order granting the Rehabilitator’s and Ambac’s motion to enforce the injunction against AGC and AG Re and the parties filed a stipulation dismissing the Petition to Compel Arbitration without prejudice. AGC and AG Re have appealed Judge Johnston’s order to the Wisconsin Court of Appeals.

On November 28, 2011, Lehman Brothers International (Europe) (in administration) (“LBIE”) sued AG Financial Products Inc. (“AG Financial Products”), an affiliate of AGC which in the past had provided credit protection to counterparties under credit default swaps. AGC acts as the credit support provider of AG Financial Products under these credit default swaps. LBIE’s complaint, which was filed in the Supreme Court of the State of New York, alleged that AG Financial Products improperly terminated nine credit derivative transactions between LBIE and AG Financial Products and improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions between LBIE and AG Financial Products. With respect to the 28 credit derivative transactions, AG Financial Products calculated that LBIE owes AG Financial Products approximately $24.8 million, whereas LBIE asserted in the complaint that AG Financial Products owes LBIE a termination payment of approximately $1.4 billion. LBIE is seeking unspecified damages. Following defaults by LBIE, AG Financial Products properly terminated the transactions in question in compliance with the requirements of the agreement between AG Financial Products and LBIE, and calculated the termination payment properly. On February 3, 2012, AG Financial Products filed a motion to dismiss certain of the counts in the complaint. The Company cannot reasonably estimate the possible loss that may arise from this lawsuit.

Beginning in December 2008, AGC’s affiliate AGM and various other financial guarantors were named in complaints filed in the Superior Court, San Francisco County, California. Since that time, plaintiffs’ counsel has filed amended complaints against AGC and AGM and added additional plaintiffs. As of the date of this filing, the plaintiffs with complaints against AGC and AGM, among other financial guaranty insurers, are: (a) City of Los Angeles, acting by and through the Department of Water and Power; (b) City of Sacramento; (c) City of Los Angeles; (d) City of Oakland; (e) City of Riverside; (f) City of Stockton ; (g) County of Alameda; (h) County of Contra Costa; (i) County of San Mateo; (j) Los Angeles World Airports; (k) City of Richmond; (l) Redwood City; (m) East Bay Municipal Utility District; (n) Sacramento Suburban Water District; (o) City of San Jose; (p) County of Tulare; (q) The Regents of the University of California; (r) The Redevelopment Agency of the City of Riverside; (s) The Public Financing Authority of the City of Riverside; (t) The Jewish Community Center of San Francisco; (u) The San Jose Redevelopment Agency; (v) The Redevelopment Agency of the City of Stockton; (w) The Public Financing Authority of the City of Stockton; and (x)The Olympic Club. Complaints filed by the City and County of San Francisco and the Sacramento Municipal Utility District were subsequently dismissed against AGC and AGM. These complaints allege that the financial guaranty insurer defendants (i) participated in a conspiracy in violation of California’s antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance, (ii) participated in risky financial transactions in other lines of business that damaged each insurer’s financial condition (thereby undermining the value of each of their guaranties), and (iii) failed to adequately disclose the impact of those transactions on their financial condition. In addition to their antitrust claims, various plaintiffs in these actions assert claims for breach of the covenant of good faith and fair dealing, fraud, unjust enrichment, negligence, and negligent misrepresentation. At hearings held in July and October 2011 relating to AGC, AGM and the other

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defendants’ motion to dismiss, the court denied the motion to dismiss on the following claims: breach of contract, violation of California’s antitrust statute and of its unfair business practices law, and fraud. The remaining claims were dismissed. On December 2, 2011, AGC and the other bond insurer defendants filed an Anti-SLAPP (“Strategic Lawsuit Against Public Participation”) motion to strike the complaints under California’s Code of Civil Procedure. On May 1, 2012, the court ruled in favor of the bond insurer defendants on the Anti-SLAPP motion as to the causes of action arising from the alleged conspiracy, but denied the bond insurer defendants’ Anti-SLAPP motion for those causes of action based on transaction specific representations and omissions about the bond insurer defendants’ credit ratings and financial health. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits.

13. Note Payable to Affiliate and Credit Facilities

Note Payable to Affiliate

On December 18, 2009, AGC issued a surplus note with a principal amount of $300.0 million to AGM. This Note Payable to Affiliate carries a simple interest rate of 5.0% per annum and matures on December 31, 2029. Principal is payable at the option of AGC prior to the final maturity of the note in 2029 and interest is payable on the note annually in arrears as of December 31st of each year, commencing December 31, 2010. Payments of principal and interest are subject to AGC having policyholders’ surplus in excess of statutory minimum requirements after such payment and to prior written approval by the Maryland Insurance Administration.

Letters of Credit

AGC entered into a letter of credit agreement in December 2011 with Bank of New York Mellon totaling approximately $2.9 million in connection with a 2008 lease for office space, which space was subsequently sublet. As of June 30, 2012, $2.9 million was outstanding under this letter of credit.

Committed Capital Securities

On April 8, 2005, AGC entered into separate agreements (the “Put Agreements”) with four custodial trusts (each, a “Custodial Trust”) pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50.0 million of perpetual preferred stock of AGC (the “AGC Preferred Stock”). The custodial trusts were created as a vehicle for providing capital support to AGC by allowing AGC to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, AGC would receive $200.0 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose, including the payment of claims. The put options have not been exercised through the date of this filing. Initially, all of AGC CCS were issued to a special purpose pass-through trust (the “Pass-Through Trust”). The Pass-Through Trust was dissolved in April 2008 and the AGC CCS were distributed to the holders of the Pass-Through Trust’s securities. Neither the Pass-Through Trust nor the custodial trusts are consolidated in the Company’s financial statements.

Income distributions on the Pass-Through Trust Securities and AGC CCS were equal to an annualized rate of one-month LIBOR plus 110 basis points for all periods ending on or prior to April 8, 2008. Following dissolution of the Pass-Through Trust, distributions on the AGC CCS Securities are determined pursuant to an auction process. On April 7, 2008 this auction process failed, thereby increasing the annualized rate on the AGC CCS to one-month LIBOR plus 250 basis points. Distributions on the AGC preferred stock will be determined pursuant to the same process.

Committed Capital Securities

Fair Value Gain (Loss)

	Second Quarter				Six Months
	2012		2011		2012			2011
	(in millions)
AGC CCS	$	1.6	$	0.3	$	(6.9	)	$	0.6

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14. Other Comprehensive Income

Three Months Ended June 30, 2012

	Net Unrealized Gains (Losses) on Investments		Cumulative Translation Adjustment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, March 31, 2012	$	89.0	$	(6.7	)	$	82.3
Other comprehensive income (loss)	8.2		(1.2		)	7.0
Balance, June 30, 2012	$	97.2	$	(7.9	)	$	89.3

Three Months Ended June 30, 2011

	Net Unrealized Gains (Losses) on Investments		Cumulative Translation Adjustment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, March 31, 2011	$	15.3	$	(6.4	)	$	8.9
Other comprehensive income (loss)	32.1		0.0			32.1
Balance, June 30, 2011	$	47.4	$	(6.4	)	$	41.0

Six Months Ended June 30, 2012

	Net Unrealized Gains (Losses) on Investments		Cumulative Translation Adjustment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2011	$	82.5	$	(8.4	)	$	74.1
Other comprehensive income (loss)	14.7		0.5			15.2
Balance, June 30, 2012	$	97.2	$	(7.9	)	$	89.3

Six Months Ended June 30, 2011

	Net Unrealized Gains (Losses) on Investments		Cumulative Translation Adjustment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2010	$	14.2	$	(7.4	)	$	6.8
Other comprehensive income (loss)	33.2		1.0			34.2
Balance, June 30, 2011	$	47.4	$	(6.4	)	$	41.0

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