ASSURED GUARANTY LTD - Quarter Report: 2013 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________________________

FORM 10-Q



ý		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition Period from to

Commission File No. 001-32141

ASSURED GUARANTY LTD.

(Exact name of registrant as specified in its charter)



Bermuda		98-0429991
(State or other jurisdiction		(I.R.S. employer
of incorporation)		identification no.)

30 Woodbourne Avenue

Hamilton HM 08

Bermuda

(Address of principal executive offices)

(441) 279-5700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 1, 2013 was 181,968,895 (includes 48,273 unvested restricted shares).

Table of Contents

ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q



		Page
PART I	Financial Information	1
Item 1.	Financial Statements:	1
	Consolidated Balance Sheets (unaudited) as of September 30, 2013 and December 31, 2012	1
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012	2
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012	3
	Consolidated Statement of Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2013	4
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements (unaudited)	6
	1. Business and Basis of Presentation	6
	2. Business Changes and Accounting Developments	7
	3. Outstanding Exposure	8
	4. Financial Guaranty Insurance Premiums	17
	5. Expected Loss to be Paid	19
	6. Financial Guaranty Insurance Losses	46
	7. Fair Value Measurement	52
	8. Financial Guaranty Contracts Accounted for as Credit Derivatives	70
	9. Consolidation of Variable Interest Entities	76
	10. Investments and Cash	79
	11. Insurance Company Regulatory Requirements	84
	12. Income Taxes	86
	13. Reinsurance and Other Monoline Exposures	88
	14. Commitments and Contingencies	92
	15. Long Term Debt and Credit Facilities	96
	16. Earnings Per Share	99
	17. Other Comprehensive Income	100
	18. Subsidiary Information	102
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	109
	Forward Looking Statements	109
	Introduction	111
	Available Information	111
	Executive Summary	112
	Results of Operations	118
	Non-GAAP Financial Measures	133
	Insured Portfolio	136
	Exposure to Residential Mortgage Backed Securities	146
	Liquidity and Capital Resources	149
	Tax Matters	163
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	164
Item 4.	Controls and Procedures	164
PART II	Other Information	165
Item 1.	Legal Proceedings	165
Item 1A.	Risk Factors	165
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	167
Item 6.	Exhibits	167

Table of Contents


PART I.	FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

Assured Guaranty Ltd.

Consolidated Balance Sheets (unaudited)

(dollars in millions except per share and share amounts)



	As of September 30, 2013		As of December 31, 2012
Assets
Investment portfolio:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,587 and $9,346)	$	9,873	$	10,056
Short term investments, at fair value	761		817
Other invested assets	126		212
Total investment portfolio	10,760		11,085
Cash	106		138
Premiums receivable, net of ceding commissions payable	906		1,005
Ceded unearned premium reserve	480		561
Deferred acquisition costs	125		116
Reinsurance recoverable on unpaid losses	59		58
Salvage and subrogation recoverable	275		456
Credit derivative assets	106		141
Deferred tax asset, net	767		721
Financial guaranty variable interest entities’ assets, at fair value	2,515		2,688
Other assets	255		273
Total assets	$	16,354	$	17,242
Liabilities and shareholders’ equity
Unearned premium reserve	$	4,676	$	5,207
Loss and loss adjustment expense reserve	601		601
Reinsurance balances payable, net	160		219
Long-term debt	819		836
Credit derivative liabilities	2,027		1,934
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	1,828		2,090
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	1,047		1,051
Other liabilities	362		310
Total liabilities	11,520		12,248
Commitments and contingencies (See Note 14)
Common stock ($0.01 par value, 500,000,000 shares authorized; 182,208,465 and 194,003,297 shares issued and outstanding)	2		2
Additional paid-in capital	2,471		2,724
Retained earnings	2,151		1,749
Accumulated other comprehensive income, net of tax of $85 and $198	206		515
Deferred equity compensation (320,193 and 320,193 shares)	4		4
Total shareholders’ equity	4,834		4,994
Total liabilities and shareholders’ equity	$	16,354	$	17,242

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Operations (unaudited)

(dollars in millions except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues
Net earned premiums	$	159		$	222		$	570		$	635
Net investment income	99			102			286			301
Net realized investment gains (losses):
Other-than-temporary impairment losses	(3		)	(4		)	(20		)	(41		)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income	5			0			0			(30		)
Other net realized investment gains (losses)	1			6			43			11
Net realized investment gains (losses)	(7		)	2			23			0
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	24			2			(44		)	(78		)
Net unrealized gains (losses)	330			(38		)	(120		)	(388		)
Net change in fair value of credit derivatives	354			(36		)	(164		)	(466		)
Fair value gains (losses) on committed capital securities	9			(2		)	(4		)	(12		)
Fair value gains (losses) on financial guaranty variable interest entities	40			34			253			161
Other income	16			16			(5		)	112
Total revenues	670			338			959			731
Expenses
Loss and loss adjustment expenses	55			86			69			446
Amortization of deferred acquisition costs	4			4			8			14
Interest expense	21			21			63			71
Other operating expenses	54			48			166			163
Total expenses	134			159			306			694
Income (loss) before income taxes	536			179			653			37
Provision (benefit) for income taxes
Current	67			(9		)	125			(9		)
Deferred	85			46			69			10
Total provision (benefit) for income taxes	152			37			194			1
Net income (loss)	$	384		$	142		$	459		$	36

Earnings per share:
Basic	$	2.10		$	0.73		$	2.44		$	0.19
Diluted	$	2.09		$	0.73		$	2.43		$	0.19
Dividends per share	$	0.10		$	0.09		$	0.30		$	0.27

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (unaudited)

(in millions)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net income (loss)	$	384		$	142	$	459		$	36
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $(1), $34, $(99), and $61	(11		)	95		(280		)	169
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(2), $4, $(17) and $(4)	(2		)	5		(34		)	(13		)
Unrealized holding gains (losses) arising during the period, net of tax	(13		)	100		(314		)	156
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(2), $(1), $(4) and $(6)	(3		)	—		(4		)	(5		)
Change in net unrealized gains on investments	(10		)	100		(310		)	161
Other, net of tax provision	7			1		1			2
Other comprehensive income (loss)	$	(3	)	$	101	$	(309	)	$	163
Comprehensive income (loss)	$	381		$	243	$	150		$	199

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statement of Shareholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2013

(dollars in millions, except share data)



	Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Deferred Equity Compensation		Total Shareholders’ Equity
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Deferred Equity Compensation		Total Shareholders’ Equity
Balance at December 31, 2012	194,003,297		$	2	$	2,724		$	1,749		$	515		$	4	$	4,994
Net income	—		—		—			459			—			—		459
Dividends ($0.30 per share)	—		—		—			(57		)	—			—		(57		)
Common stock repurchases	(12,221,621	)	0		(259		)	—			—			—		(259		)
Share-based compensation and other	426,789		0		6			—			—			—		6
Other comprehensive loss	—		—		—			—			(309		)	—		(309		)
Balance at September 30, 2013	182,208,465		$	2	$	2,471		$	2,151		$	206		$	4	$	4,834

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)

(in millions)



	Nine Months Ended September 30,
	2013			2012
Net cash flows provided by (used in) operating activities	$	146		$	(223	)
Investing activities
Fixed maturity securities:
Purchases	(1,563		)	(1,322		)
Sales	812			683
Maturities	643			758
Net sales (purchases) of short-term investments	44			282
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	553			407
Acquisition of Municipal Assurance Corp., net of cash acquired	—			(91		)
Other	81			85
Net cash flows provided by (used in) investing activities	570			802
Financing activities
Proceeds from issuance of common stock	—			173
Dividends paid	(57		)	(51		)
Repurchases of common stock	(259		)	(24		)
Share activity under option and incentive plans	—			(3		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(409		)	(553		)
Repayment of long-term debt	(22		)	(204		)
Net cash flows provided by (used in) financing activities	(747		)	(662		)
Effect of exchange rate changes	(1		)	1
Increase (decrease) in cash	(32		)	(82		)
Cash at beginning of period	138			215
Cash at end of period	$	106		$	133
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	81		$	(11	)
Interest	$	47		$	56

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

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2013


1.	Business and Basis of Presentation

Business

Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”) 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 (including infrastructure) and structured finance markets. The Company applies 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 Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the United States and the United Kingdom ("U.K."). The Company also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

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 public finance obligations and structured finance obligations. Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings. Structured finance obligations insured by the Company are generally issued by special purpose entities 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 includes within structured finance obligations 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; the Company's 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 new CDS in order to sell 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 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, which have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

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 September 30, 2013 and cover the three-month period ended September 30, 2013 ("Third Quarter 2013") and the three-month period ended September 30, 2012 ("Third Quarter 2012"), the nine-month period ended September 30, 2013 ("Nine Months 2013") and the nine-month period

Table of Contents

ended September 30, 2012 ("Nine Months 2012"). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end balance sheet data was derived from audited financial statements.

The unaudited interim consolidated financial statements include the accounts of AGL and its direct and indirect subsidiaries (collectively, the “Subsidiaries”) 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 in AGL’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (the “SEC”).

As of the date of this filing, the Company's principal insurance company subsidiaries are:


•	Assured Guaranty Municipal Corp. ("AGM"), domiciled in New York;


•	Assured Guaranty Corp. ("AGC"), domiciled in Maryland;


•	Municipal Assurance Corp. ("MAC"), domiciled in New York;


•	Assured Guaranty (Europe) Ltd., organized in the United Kingdom; and


•	Assured Guaranty Re Ltd. (“AG Re”), domiciled in Bermuda.

The Company’s organizational structure includes various holdings companies, two of which — Assured Guaranty US Holdings Inc. (“AGUS”) and Assured Guaranty Municipal Holdings Inc. (“AGMH”) — have public debt outstanding. See Note 15, Long Term Debt and Credit Facilities.


2.	Business Changes 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.

Rating Actions

When a rating agency assigns a public rating to a financial obligation guaranteed by one of AGL’s insurance company subsidiaries, it generally awards that obligation the same rating it has assigned to the financial strength of the AGL subsidiary that provides the guaranty. Investors in products insured by AGL’s insurance company subsidiaries 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, the Company manages its business with the goal of achieving high financial strength ratings. If the financial strength ratings of the Company’s insurance subsidiaries were reduced below current levels, the Company 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 further downgrade could harm the Company’s new business production and results of operations in a material respect. 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.

In the last several years, Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) have downgraded the financial strength ratings of the Company's insurance subsidiaries that they rated at the time of such downgrades. The latest downgrade took place on January 17, 2013, when Moody’s downgraded the financial strength ratings of the Company's insurance subsidiaries, including AGM to A2 from Aa3, AGC to A3 from Aa3, and AG Re to Baa1 from A1. In the same rating action, Moody's also downgraded the senior unsecured debt ratings of AGUS and AGMH to Baa2 from A3. While the outlook for the ratings from S&P and Moody's is now stable, there can be no assurance that S&P and Moody's will not take further action on the Company’s ratings. For a discussion of the effect of rating actions on the Company, see the following:

Table of Contents


•	Note 5, Expected Loss to be Paid


•	Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives


•	Note 13, Reinsurance and Other Monoline Exposures


•	Note 15, Long Term Debt and Credit Facilities (regarding the impact on the Company's insured leveraged lease transactions)

In July 2013, MAC was assigned a financial strength rating of AA+ (stable outlook) from Kroll Bond Rating Agency and of AA- (stable outlook) from S&P.

Significant Transactions

•

On November 11, 2013, the Company's share repurchase authorization of $400 million replaced the prior authorization. The Company expects the repurchases to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date. Through November 11, 2013, under the Company’s prior $315 million share repurchase authorization, the Company had repurchased a total of 12.5 million common shares for approximately $264 million at an average price of $21.12 per share. This included 5.0 million common shares purchased on June 5, 2013 from funds associated with WL Ross & Co. LLC and its affiliates (collectively, the “WLR Funds”) and Wilbur L. Ross, Jr., a director of the Company, for $109.7 million. This share purchase reduced the WLR Funds’ and Mr. Ross’s ownership of AGL's common shares to approximately 14.9 million common shares, or to approximately 8% of its total common shares outstanding, from approximately 10.5% of such outstanding common shares.


•	On October 10, 2013, the Company and Deutsche Bank AG terminated one below investment grade transaction under which the Company had provided credit protection to Deutsche Bank through a credit default swap. The transaction had a net par outstanding of $294 million at the time of termination.


•	In August 2013, AGC entered into a settlement agreement with a provider of representations and warranties ("R&W") that resolved AGC’s claims relating to specified residential mortgage-backed securities ("RMBS") transactions that AGC had insured, and AGM entered into a settlement agreement with a servicer of certain RMBS transactions that AGM had insured.

•

On June 21, 2013, AGM entered into a settlement agreement with Flagstar Bank in connection with its litigation for breach of contract against Flagstar on the Flagstar Home Equity Loan Trust, Series 2005-1 and Series 2006-2 second lien transactions. The agreement followed judgments by the court in February and April 2013 in favor of AGM, which Flagstar had planned to appeal. As part of the settlement, AGM received a cash payment of $105 million and Flagstar withdrew its appeal. Flagstar also will reimburse AGM in full for all future claims on AGM’s financial guaranty insurance policies for such transactions. This settlement resolved all RMBS claims that AGM had asserted against Flagstar and each party agreed to release the other from any and all other future RMBS-related claims between them.


•	On May 6, 2013, the Company entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") and a third party resolving the Company’s claims and liabilities related to specified RMBS transactions that were issued, underwritten or sponsored by UBS and insured by AGM or AGC under financial guaranty insurance policies.


3.	Outstanding Exposure

The Company’s financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its insured portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third-party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Some of these VIEs are consolidated as described in Note 9, Consolidation of Variable Interest Entities. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs, whether or not they are consolidated.

Table of Contents

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

Debt Service Outstanding



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

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

Financial Guaranty Portfolio by Internal Rating

As of September 30, 2013



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

Table of Contents

Financial Guaranty Portfolio by Internal Rating

As of December 31, 2012



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category (1)	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,502	1.2	%	$	1,706	4.5	%	$	42,187	56.6	%	$	13,169	70.2	%	$	61,564	11.9	%
AA	124,525		32.1		875		2.3		9,543		12.8		722		3.9		135,665		26.1
A	210,124		54.1		9,781		26.1		4,670		6.3		1,409		7.5		225,984		43.6
BBB	44,213		11.4		22,885		61.0		3,737		5.0		2,427		12.9		73,262		14.1
BIG	4,565		1.2		2,293		6.1		14,398		19.3		1,041		5.5		22,297		4.3
Total net par outstanding (excluding loss mitigation bonds)	$	387,929	100.0	%	$	37,540	100.0	%	$	74,535	100.0	%	$	18,768	100.0	%	$	518,772	100.0	%
Loss Mitigation Bonds	38				—				1,083				—				1,121
Net Par Outstanding (including loss mitigation bonds)	$	387,967			$	37,540			$	75,618			$	18,768			$	519,893

____________________


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

In accordance with the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company, and they therefore are included in the investment portfolio. Such amounts are still included in the financial guaranty insured portfolio, and totaled $218 million and $220 million in gross par outstanding as of September 30, 2013 and December 31, 2012, respectively.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $0.6 billion for structured finance and $0.8 billion for public finance obligations at September 30, 2013. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between October 1, 2013 and February 25, 2017, with $0.4 billion expiring prior to December 31, 2013. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Surveillance Categories

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that, beginning this quarter, the Company's internal credit ratings focus on future performance, rather than lifetime performance. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" below.

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. The Company models most assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.

Table of Contents

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 5, Expected Loss to be Paid). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. The Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims over the future of that transaction than it will have reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for recording of reserves for financial statement purposes.)

More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. In Third Quarter 2013, the Company refined the definitions of its BIG surveillance categories to be consistent with its new approach to assigning internal credit ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories". The three BIG categories are:


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


•	BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims which is a claim that the Company expects to be reimbursed within one year) have yet been paid.


•	BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Refinement of Approach to Internal Credit Ratings and Surveillance Categories

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

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

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

Table of Contents

Below-Investment-Grade

Net Par Outstanding

As of September 30, 2013



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

Below-Investment-Grade

Net Par Outstanding

As of December 31, 2012



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

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

As of September 30, 2013



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

Table of Contents

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

As of December 31, 2012



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	28	$	436	$	11	$	475	$	641	0.1	%
Alt-A first lien	753		1,962		739		3,454		4,469		0.7
Option ARM	333		392		317		1,042		1,450		0.2
Subprime (including net interest margin securities)	152		988		921		2,061		7,048		0.4
Second lien U.S. RMBS:
Closed end second lien	97		76		58		231		348		0.0
HELOCs	644		—		1,932		2,576		3,079		0.5
Total U.S. RMBS	2,007		3,854		3,978		9,839		17,035		1.9
TruPS	1,920		—		953		2,873		5,694		0.6
Other structured finance	1,310		263		1,154		2,727		70,574		0.5
U.S. public finance	3,290		500		775		4,565		387,929		0.9
Non-U.S. public finance	2,293		—		—		2,293		37,540		0.4
Total	$	10,820	$	4,617	$	6,860	$	22,297	$	518,772	4.3	%

Below-Investment-Grade Credits

By Category

As of September 30, 2013



	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	7,453	$	1,533	$	8,986	154	21	175
Category 2	2,537		2,268		4,805		76	25	101
Category 3	3,588		1,178		4,766		136	29	165
Total BIG	$	13,578	$	4,979	$	18,557	366	75	441

Table of Contents

Below-Investment-Grade Credits

By Category

As of December 31, 2012



	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	7,929	$	2,891	$	10,820	163	33	196
Category 2	2,116		2,501		4,617		76	27	103
Category 3	5,543		1,317		6,860		131	29	160
Total BIG	$	15,588	$	6,709	$	22,297	370	89	459

_____________________

(1) Includes net par outstanding for FG VIEs.


(2)	A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments.

Economic Exposure to the Selected European Countries

Several European countries continue to experience significant economic, fiscal and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The European countries where it believes heightened uncertainties exist are: Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). The Company is closely monitoring its exposures in Selected European Countries where it believes heightened uncertainties exist. Published reports have identified countries that may be experiencing reduced demand for their sovereign debt in the current environment. The Company selected these European countries based on these reports and its view that their credit fundamentals are deteriorating. The Company’s economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following table, net of ceded reinsurance.

Table of Contents

Net Economic Exposure to Selected European Countries(1)

September 30, 2013



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

____________________

(1) While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, including U.S. dollars, Euros and British pounds sterling. Included in the table above is $142 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining legacy mortgage reinsurance business. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the table.


(2)	See Note 5, Expected Loss to be Paid.

When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For direct exposure this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies. In the case of assumed business for direct exposures, the Company depends upon geographic information provided by the primary insurer.

The Company has included in the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on (a) pooled corporate and (b) commercial receivables transactions. The Company considers economic exposure to a selected European Country to be indirect when the exposure relates to only a small portion of an insured transaction that otherwise is not related to a Selected European Country. In most instances, the trustees and/or servicers for such transactions provide reports that identify the domicile of the underlying obligors in the pool, although occasionally such information is not available to the Company. The Company has reviewed transactions through which it believes it may have indirect exposure to the Selected European Countries that is material to the transaction and included in the tables above the proportion of the insured par equal to the proportion of obligors so identified as being domiciled in a Selected European Country. The Company may also have indirect exposures to Selected European Countries in business assumed from unaffiliated monoline insurance companies. However, in the case of assumed business for indirect exposures, unaffiliated primary insurers generally do not provide such information to the Company.

The Company no longer guarantees any sovereign bonds of the Selected European Countries. The exposure shown in the “Public Finance Category” is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal. Sub-sovereign debt is debt issued by a governmental entity or government backed entity, or supported by such an entity, that is other than direct sovereign debt of the ultimate governing body of the country.

Table of Contents

Exposure to Puerto Rico

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

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

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

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

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

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



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

Table of Contents


4.	Financial Guaranty Insurance Premiums

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 a derivative under GAAP. Amounts presented in this note relate only to financial guaranty insurance contracts. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives, for a discussion of credit derivative revenues.

Net Earned Premiums



	Third Quarter				Nine Months
	2013		2012		2013		2012
	(in millions)
Scheduled net earned premiums	$	117	$	144	$	358	$	441
Acceleration of premium earnings	40		73		199		178
Accretion of discount on net premiums receivable	2		4		12		15
Total financial guaranty insurance	159		221		569		634
Other	0		1		1		1
Total net earned premiums(1)	$	159	$	222	$	570	$	635

___________________


(1)	Excludes $14 million and $17 million for Third Quarter 2013 and 2012, respectively, and $47 million and $50 million for the Nine Months 2013 and 2012, respectively, related to consolidated FG VIEs.

Components of Unearned Premium Reserve



	As of September 30, 2013									As of December 31, 2012
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue:
Financial guaranty	$	4,787		$	503		$	4,284		$	5,349		$	586		$	4,763
Other	6			—			6			7			—			7
Total deferred premium revenue	$	4,793		$	503		$	4,290		$	5,356		$	586		$	4,770
Contra-paid	(117		)	(23		)	(94		)	(149		)	(25		)	(124		)
Total	$	4,676		$	480		$	4,196		$	5,207		$	561		$	4,646

____________________


(1)	Excludes $197 million and $262 million of deferred premium revenue, and $64 million and $98 million of contra-paid related to FG VIEs as of September 30, 2013 and December 31, 2012, respectively.

Table of Contents

Gross Premium Receivable, Net of Ceding Commissions Roll Forward



	Nine Months
	2013			2012
	(in millions)
Balance beginning of period	$	1,005		$	1,003
Premium written, net of ceding commissions	72			134
Premium payments received, net of ceding commissions	(167		)	(225		)
Adjustments:
Changes in the expected term of financial guaranty insurance contracts	(14		)	12
Accretion of discount, net of ceding commissions	15			19
Foreign exchange translation	(7		)	10
Consolidation of FG VIEs	—			(5		)
Other adjustments	2			(4		)
Balance, end of period (1)	$	906		$	944

____________________


(1)	Excludes $19 million and $30 million as of September 30, 2013 and September 30, 2012, 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 47%, 47% and 50% of installment premiums at September 30, 2013, December 31, 2012 and September 30, 2012, respectively, are denominated in currencies other than the U.S. dollar, primarily Euro and British Pound Sterling.

The timing and cumulative amount of 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.

Expected Collections of Gross Premiums Receivable,

Net of Ceding Commissions (Undiscounted)



	As of September 30, 2013
	(in millions)
2013 (October 1 – December 31)	$	40
2014	108
2015	92
2016	85
2017	78
2018-2022	313
2023-2027	191
2028-2032	132
After 2032	153
Total(1)	$	1,192

____________________


(1)	Excludes expected cash collections on FG VIEs of $24 million.

Table of Contents

Scheduled Net Earned Premiums

Financial Guaranty Insurance Contracts



	As of September 30, 2013
	(in millions)
2013 (October 1–December 31)	$	112
2014	429
2015	375
2016	331
2017	296
2018 - 2022	1,149
2023 - 2027	734
2028 - 2032	443
After 2032	415
Total present value basis(1)	4,284
Discount	246
Total future value	$	4,530

____________________


(1)	Excludes scheduled net earned premiums on consolidated FG VIEs of $197 million.

Selected Information for Policies Paid in Installments



	As of September 30, 2013			As of December 31, 2012
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	906		$	1,005
Gross deferred premium revenue	1,647			1,908
Weighted-average risk-free rate used to discount premiums	3.4		%	3.5		%
Weighted-average period of premiums receivable (in years)	9.5			9.6


5.	Expected Loss to be Paid

The following table presents a roll forward of the present value of net expected loss to be paid for all contracts, whether accounted for as insurance, credit derivatives or FG VIEs, by sector, after the benefit for net expected recoveries for contractual breaches of R&W. The Company used weighted average risk-free rates for U.S. dollar denominated obligations, which ranged from 0.0% to 4.36% as of September 30, 2013 and 0.0% to 3.28% as of December 31, 2012.

Table of Contents

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward

Third Quarter 2013



	Net Expected Loss to be Paid as of June 30, 2013			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of September 30, 2013(2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	18		$	3		$	—		$	21
Alt-A first lien	288			(85		)	3			206
Option ARM	(20		)	25			2			7
Subprime	274			38			(9		)	303
Total first lien	560			(19		)	(4		)	537
Second lien:
Closed-end second lien	(14		)	—			1			(13		)
HELOCs	(97		)	(42		)	10			(129		)
Total second lien	(111		)	(42		)	11			(142		)
Total U.S. RMBS	449			(61		)	7			395
TruPS	33			9			8			50
Other structured finance	158			(13		)	(17		)	128
U.S. public finance	71			44			68			183
Non-U.S public finance	66			(1		)	(12		)	53
Other	(3		)	—			—			(3		)
Total	$	774		$	(22	)	$	54		$	806

Table of Contents

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward

Third Quarter 2012



	Net Expected Loss to be Paid as of June 30, 2012			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of September 30, 2012
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	4		$	1		$	—		$	5
Alt-A first lien	321			14			(24		)	311
Option ARM	3			3			(96		)	(90		)
Subprime	236			13			(10		)	239
Total first lien	564			31			(130		)	465
Second lien:
Closed-end second lien	(29		)	4			—			(25		)
HELOCs	(64		)	(13		)	(30		)	(107		)
Total second lien	(93		)	(9		)	(30		)	(132		)
Total U.S. RMBS	471			22			(160		)	333
TruPS	50			5			(2		)	53
Other structured finance	320			(3		)	(2		)	315
U.S. public finance	59			7			(56		)	10
Non-U.S public finance	302			33			(289		)	46
Other	(4		)	—			—			(4		)
Total	$	1,198		$	64		$	(509	)	$	753

Table of Contents

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward

Nine Months 2013



	Net Expected Loss to be Paid as of December 31, 2012 (2)			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of September 30, 2013(2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	6		$	16		$	(1	)	$	21
Alt-A first lien	315			(83		)	(26		)	206
Option ARM	(131		)	(92		)	230			7
Subprime	242			86			(25		)	303
Total first lien	432			(73		)	178			537
Second lien:
Closed-end second lien	(39		)	7			19			(13		)
HELOCs	(111		)	(76		)	58			(129		)
Total second lien	(150		)	(69		)	77			(142		)
Total U.S. RMBS	282			(142		)	255			395
TruPS	27			7			16			50
Other structured finance	312			(39		)	(145		)	128
U.S. public finance	7			138			38			183
Non-U.S public finance	52			13			(12		)	53
Other	(3		)	(10		)	10			(3		)
Total	$	677		$	(33	)	$	162		$	806

Table of Contents

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward

Nine Months 2012



	Net Expected Loss to be Paid as of December 31, 2011			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of September 30, 2012 (2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	2		$	3		$	—		$	5
Alt-A first lien	295			27			(11		)	311
Option ARM	210			12			(312		)	(90		)
Subprime	241			39			(41		)	239
Total first lien	748			81			(364		)	465
Second lien:
Closed-end second lien	(86		)	—			61			(25		)
HELOCs	(31		)	9			(85		)	(107		)
Total second lien	(117		)	9			(24		)	(132		)
Total U.S. RMBS	631			90			(388		)	333
TruPS	64			(6		)	(5		)	53
Other structured finance	342			7			(34		)	315
U.S. public finance	16			65			(71		)	10
Non-U.S public finance	51			215			(220		)	46
Other	2			(6		)	—			(4		)
Total	$	1,106		$	365		$	(718	)	$	753

____________________


(1)	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.


(2)	Includes net expected loss adjustment expenses ("LAE") to be paid for mitigating claim liabilities of $34 million as of September 30, 2013 and $39 million as of December 31, 2012. The Company paid $12 million and $14 million in LAE for Third Quarter 2013 and 2012, respectively, and $41 million and $33 million in LAE for Nine Months 2013 and 2012, respectively.

Table of Contents

Net Expected Recoveries from

Breaches of R&W Rollforward

Third Quarter 2013



	Future Net R&W Benefit as of June 30, 2013(2)		R&W Development and Accretion of Discount During Third Quarter 2013			R&W Recovered During Third Quarter 2013(1)			Future Net R&W Benefit as of September 30, 2013(2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	4	$	(1	)	$	—		$	3
Alt-A first lien	348		37			(16		)	369
Option ARM	293		40			(80		)	253
Subprime	108		7			—			115
Total first lien	753		83			(96		)	740
Second lien:
Closed end second lien	102		1			(3		)	100
HELOC	109		2			(56		)	55
Total second lien	211		3			(59		)	155
Total	$	964	$	86		$	(155	)	$	895

Net Expected Recoveries from

Breaches of R&W Rollforward

Third Quarter 2012



	Future Net R&W Benefit as of June 30, 2012(2)		R&W Development and Accretion of Discount During Third Quarter 2012			R&W Recovered During Third Quarter 2012(1)			Future Net R&W Benefit as of September 30, 2012 (2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	4	$	—		$	—		$	4
Alt-A first lien	387		—			(3		)	384
Option ARM	711		(7		)	(81		)	623
Subprime	93		11			—			104
Total first lien	1,195		4			(84		)	1,115
Second lien:
Closed end second lien	137		2			(3		)	136
HELOC	122		6			(8		)	120
Total second lien	259		8			(11		)	256
Total	$	1,454	$	12		$	(95	)	$	1,371

____________________


(1)	Gross amounts recovered were $159 million and $99 million for Third Quarter 2013 and 2012, respectively.


(2)	Includes excess spread that the Company will receive as salvage as a result of a settlement agreement with an R&W provider.

Table of Contents

Net Expected Recoveries from

Breaches of R&W Rollforward

Nine Months 2013



	Future Net R&W Benefit as of December 31, 2012		R&W Development and Accretion of Discount During 2013			R&W Recovered During 2013(1)			Future Net R&W Benefit as of September 30, 2013(2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	4	$	(1	)	$	—		$	3
Alt-A first lien	378		24			(33		)	369
Option ARM	591		206			(544		)	253
Subprime	109		6			—			115
Total first lien	1,082		235			(577		)	740
Second lien:
Closed end second lien	138		(11		)	(27		)	100
HELOC	150		70			(165		)	55
Total second lien	288		59			(192		)	155
Total	$	1,370	$	294		$	(769	)	$	895

Net Expected Recoveries from

Breaches of R&W Rollforward

Nine Months 2012



	Future Net R&W Benefit as of December 31, 2011		R&W Development and Accretion of Discount During 2012		R&W Recovered During 2012(1)			Future Net R&W Benefit as of September 30, 2012(2)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	3	$	1	$	—		$	4
Alt-A first lien	407		44		(67		)	384
Option ARM	725		55		(157		)	623
Subprime	101		3		—			104
Total first lien	1,236		103		(224		)	1,115
Second lien:
Closed end second lien	224		—		(88		)	136
HELOC	190		6		(76		)	120
Total second lien	414		6		(164		)	256
Total	$	1,650	$	109	$	(388	)	$	1,371

____________________


(1)	Gross amounts recovered were $794 million and $410 million for Nine Months 2013 and 2012, respectively.


(2)	Includes excess spread that the Company will receive as salvage as a result of a settlement agreement with an R&W provider.

Table of Contents

The following tables present the present value of net expected loss to be paid for all contracts by accounting model, by sector and after the benefit for estimated and contractual recoveries for breaches of R&W.

Net Expected Loss to be Paid

By Accounting Model

As of September 30, 2013



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives			Total
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	3		$	—		$	18		$	21
Alt-A first lien	90			29			87			206
Option ARM	(14		)	11			10			7
Subprime	144			73			86			303
Total first lien	223			113			201			537
Second lien:
Closed-end second lien	(36		)	25			(2		)	(13		)
HELOCs	(43		)	(86		)	—			(129		)
Total second lien	(79		)	(61		)	(2		)	(142		)
Total U.S. RMBS	144			52			199			395
TruPS	4			—			46			50
Other structured finance	170			—			(42		)	128
U.S. public finance	183			—			—			183
Non-U.S. public finance	51			—			2			53
Subtotal	$	552		$	52		$	205		809
Other										(3		)
Total										$	806

Table of Contents

Net Expected Loss to be Paid

By Accounting Model

As of December 31, 2012



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives			Total
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	4		$	—		$	2		$	6
Alt-A first lien	164			27			124			315
Option ARM	(114		)	(37		)	20			(131		)
Subprime	118			50			74			242
Total first lien	172			40			220			432
Second lien:
Closed-end second lien	(60		)	31			(10		)	(39		)
HELOCs	56			(167		)	—			(111		)
Total second lien	(4		)	(136		)	(10		)	(150		)
Total U.S. RMBS	168			(96		)	210			282
TruPS	1			—			26			27
Other structured finance	224			—			88			312
U.S. public finance	7			—			—			7
Non-U.S. public finance	51			—			1			52
Subtotal	$	451		$	(96	)	$	325		680
Other										(3		)
Total										$	677

___________________

(1) Refer to Note 9, Consolidation of Variable Interest Entities.

Table of Contents

The following tables present the net economic loss development for all contracts by accounting model, by sector and after the benefit for estimated and contractual recoveries for breaches of R&W.

Net Economic Loss Development

By Accounting Model

Third Quarter 2013



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	—		$	—		$	3		$	3
Alt-A first lien	(53		)	3			(35		)	(85		)
Option ARM	20			1			4			25
Subprime	25			5			8			38
Total first lien	(8		)	9			(20		)	(19		)
Second lien:
Closed-end second lien	2			(3		)	1			—
HELOCs	(49		)	8			(1		)	(42		)
Total second lien	(47		)	5			—			(42		)
Total U.S. RMBS	(55		)	14			(20		)	(61		)
TruPS	1			—			8			9
Other structured finance	(13		)	—			—			(13		)
U.S. public finance	43			—			1			44
Non-U.S. public finance	(1		)	—			—			(1		)
Subtotal	$	(25	)	$	14		$	(11	)	(22		)
Other										—
Total										$	(22	)

Table of Contents

Net Economic Loss Development

By Accounting Model

Third Quarter 2012



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1		$	—		$	—		$	1
Alt-A first lien	38			(34		)	10			14
Option ARM	(69		)	76			(4		)	3
Subprime	32			(21		)	2			13
Total first lien	2			21			8			31
Second lien:
Closed-end second lien	63			(64		)	5			4
HELOCs	62			(75		)	—			(13		)
Total second lien	125			(139		)	5			(9		)
Total U.S. RMBS	127			(118		)	13			22
TruPS	3			—			2			5
Other structured finance	—			—			(3		)	(3		)
U.S. public finance	8			—			(1		)	7
Non-U.S. public finance	33			—			—			33
Subtotal	$	171		$	(118	)	$	11		64
Other										—
Total										$	64

Table of Contents

Net Economic Loss Development

By Accounting Model

Nine Months 2013



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	(1	)	$	—		$	17		$	16
Alt-A first lien	(60		)	3			(26		)	(83		)
Option ARM	(58		)	(32		)	(2		)	(92		)
Subprime	40			25			21			86
Total first lien	(79		)	(4		)	10			(73		)
Second lien:
Closed-end second lien	—			(4		)	11			7
HELOCs	(66		)	(10		)	—			(76		)
Total second lien	(66		)	(14		)	11			(69		)
Total U.S. RMBS	(145		)	(18		)	21			(142		)
TruPS	1			—			6			7
Other structured finance	(32		)	—			(7		)	(39		)
U.S. public finance	137			—			1			138
Non-U.S. public finance	12			—			1			13
Subtotal	$	(27	)	$	(18	)	$	22		(23		)
Other										(10		)
Total										$	(33	)

Table of Contents

Net Economic Loss Development

By Accounting Model

Nine Months 2012



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	2		$	—		$	1		$	3
Alt-A first lien	30			(12		)	9			27
Option ARM	15			(9		)	6			12
Subprime	29			4			6			39
Total first lien	76			(17		)	22			81
Second lien:
Closed-end second lien	4			(9		)	5			—
HELOCs	3			6			—			9
Total second lien	7			(3		)	5			9
Total U.S. RMBS	83			(20		)	27			90
TruPS	(3		)	—			(3		)	(6		)
Other structured finance	12			—			(5		)	7
U.S. public finance	66			—			(1		)	65
Non-U.S. public finance	216			—			(1		)	215
Subtotal	$	374		$	(20	)	$	17		371
Other										(6		)
Total										$	365

_________________

(1) Refer to Note 9, Consolidation of Variable Interest Entities.

(2) Refer to Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives.

Third Quarter 2013 U.S. RMBS Loss Projections

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will eventually improve. Each quarter the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the quarter of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend. Based on such observations the Company chose to use essentially the same assumptions and scenarios to project RMBS losses as of September 30, 2013 as it used as of June 30, 2013 and, with respect to its first lien RMBS, as it used as of December 31, 2012. The Company's use of essentially the same assumptions and scenarios to project RMBS losses as of September 30, 2013, as of June 30, 2013 and, with respect to its first lien RMBS, December 31, 2012, was consistent with its view at September 30, 2013 that the housing and mortgage market recovery is not being reflected as quickly in the performance of those transactions as it had anticipated at June 30, 2013 or December 31, 2012. During second quarter 2013 the Company had observed improvements in the performance of its second lien RMBS transactions that, when viewed in the context of their performance in previous quarters, suggested those transactions were beginning to respond to the improvements in the residential property market and economy being widely reported. Based on such observations, in projecting losses for its second lien RMBS the Company chose to decrease by two months in its base scenario and by three months in its optimistic scenario the period it assumed it would take the mortgage market to recover as compared to March 31, 2013 and December 31, 2012. The Company retained this change to its scenarios in its projections as of September 30, 2013.

Table of Contents

The Company observed some improvement in delinquency trends in most of its RMBS transactions during the third quarter, with some of that improvement in second liens driven by a servicing transfer it effectuated. Such improvement is naturally transmitted to its projections for each individual RMBS transaction, since the projections are based on the delinquency performance of the loans in that individual RMBS transaction. The Company also made adjustments during the quarter to its assumptions for specific transactions to reflect loss mitigation developments. The methodology and assumptions the Company uses to project RMBS losses and the scenarios it employs are described in more detail below under " - U.S. First Lien RMBS Loss Projections: Alt A First Lien, Option ARM, Subprime and Prime" and "- U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien".

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

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 are 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 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 arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The Company projects these liquidations to occur over two years. Based on its review of that data, the Company maintained the same liquidation assumptions at December 31, 2012 as December 31, 2011. It chose to use those same liquidation rates at September 30, 2013 and June 30, 2013. The following table shows liquidation assumptions for various delinquency categories.

First Lien Liquidation Rates



	September 30, 2013	June 30, 2013	December 31, 2012
30 – 59 Days Delinquent
Alt A and Prime	35%	35%	35%
Option ARM	50	50	50
Subprime	30	30	30
60 – 89 Days Delinquent
Alt A and Prime	55	55	55
Option ARM	65	65	65
Subprime	45	45	45
90+ Days Delinquent
Alt A and Prime	65	65	65
Option ARM	75	75	75
Subprime	60	60	60
Bankruptcy
Alt A and Prime	55	55	55
Option ARM	70	70	70
Subprime	50	50	50
Foreclosure
Alt A and Prime	85	85	85
Option ARM	85	85	85
Subprime	80	80	80
Real Estate Owned
All	100	100	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 conditional default rate ("CDR") trend. The start of that CDR trend is based

Table of Contents

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, after the initial 24-month CDR plateau period, 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. The CDR trend the Company used in its base case for September 30, 2013 was the same as it used for June 30, 2013 and December 31, 2012 but, because the initial CDR is calculated from currently delinquent loans, a reduction in the proportion of loans in a transaction currently delinquent will reduce that transaction's CDR (similarly, an increase in the proportion of loans currently delinquent will increase its CDR). This quarter the initial CDR calculated for most of first lien transactions was lower than that calculated last quarter, reflecting a reduction in the proportion of loans that are currently delinquent in those transactions.

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 September 30, 2013 were the same as it used for June 30, 2013 and December 31, 2012. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in one year, and in the base case scenario, decline from there over two years to 40%.

Table of Contents

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

Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS(1)



	As of September 30, 2013				As of June 30, 2013				As of December 31, 2012
Alt-A First Lien
Plateau CDR	3.4	%	–	22.1%	3.7	%	–	22.3%	3.8	%	–	23.2%
Intermediate CDR	0.7	%	–	4.4%	0.7	%	–	4.5%	0.8	%	–	4.6%
Final CDR	0.2	%	–	1.1%	0.2	%	–	1.1%	0.2	%	–	1.2%
Initial loss severity	65%				65%				65%
Initial conditional prepayment rate ("CPR")	0.0	%	–	39.5%	0.4	%	–	32.2%	0.0	%	–	39.4%
Final CPR	15%				15%				15%
Option ARM
Plateau CDR	6.4	%	–	24.7%	5.6	%	–	24.2%	7.0	%	–	26.1%
Intermediate CDR	1.3	%	–	4.9%	1.1	%	–	4.8%	1.4	%	–	5.2%
Final CDR	0.3	%	–	1.2%	0.3	%	–	1.2%	0.4	%	–	1.3%
Initial loss severity	65%				65%				65%
Initial CPR	0.2	%	–	10.9%	0.3	%	–	7.7%	0.0	%	–	10.7%
Final CPR	15%				15%				15%
Subprime
Plateau CDR	6.5	%	–	23.7%	6.7	%	–	24.7%	7.3	%	–	26.2%
Intermediate CDR	1.3	%	–	4.7%	1.3	%	–	4.9%	1.5	%	–	5.2%
Final CDR	0.3	%	–	1.2%	0.3	%	–	1.2%	0.4	%	–	1.3%
Initial loss severity	90%				90%				90%
Initial CPR	0.0	%	–	11.8%	0.0	%	–	14.8%	0.0	%	–	17.6%
Final CPR	15%				15%				15%

____________________

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

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 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant. These assumptions are the same as those the Company used for June 30, 2013 and December 31, 2012.

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 CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) as of September 30, 2013. For September 30, 2013 the Company used the same five scenarios and weightings as it used for June 30, 2013 and December 31, 2012. 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 $60 million for Alt-A first liens, $17 million for Option

Table of Contents

ARM, $100 million for subprime and $4 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 and other assumptions were the same as the other stress scenario, expected loss to be paid would increase from current projections by approximately $165 million for Alt-A first liens, $42 million for Option ARM, $158 million for subprime and $13 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, expected loss to be paid would decrease from current projections by approximately $6 million for Alt-A first lien, $12 million for Option ARM, $28 million for subprime and $1 million 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 CDR over nine months), expected loss to be paid would decrease from current projections by approximately $60 million for Alt-A first lien, $36 million for Option ARM, $81 million for subprime and $5 million for prime transactions.

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

The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as 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 range of key assumptions for the calculation of expected loss to be paid for individual transactions 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 September 30, 2013				As of June 30, 2013				As of December 31, 2012
Plateau CDR	1.4	%	–	8.9%	3.4	%	–	9.8%	3.8	%	–	15.9%
Final CDR trended down to	0.4	%	–	3.2%	0.4	%	–	3.2%	0.4	%	–	3.2%
Expected period until final CDR	34 months				34 months				36 months
Initial CPR	4.5	%	–	20.0%	2.1	%	–	20.1%	2.9	%	–	15.4%
Final CPR	10%				10%				10%
Loss severity	98%				98%				98%



Closed-end second lien key assumptions	As of September 30, 2013				As of June 30, 2013				As of December 31, 2012
Plateau CDR	6.2	%	–	14.4%	7.3	%	–	15.8%	7.3	%	–	20.7%
Final CDR trended down to	3.5	%	–	9.1%	3.5	%	–	9.1%	3.5	%	–	9.1%
Expected period until final CDR	34 months				34 months				36 months
Initial CPR	3.0	%	–	13.0%	1.7	%	–	14.0%	1.9	%	–	12.5%
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

Table of Contents

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, adjusted as necessary to reflect one-time servicing events. The fifth month CDR is then used as the basis for the plateau period that follows the embedded five months of losses. During the Third Quarter the Company observed material improvements in the delinquency measures of certain second lien RMBS for which the servicing had been transferred, and determined that much of this improvement was due to loan modifications and reinstatements made by the new servicer. To reflect the possibility that such recently modified and reinstated loans may have a higher likelihood of defaulting again, for such transactions the Company treated as past due 150-179 days a portion of the loans that are current or less than 150 days delinquent that it identified as having been recently modified or reinstated. Even with that adjustment, the improvement in delinquency measures for those transactions resulted in a lower initial CDR for those transactions than the initial CDR calculated last quarter.

As of September 30, 2013, 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. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprising five months of delinquent data, a one month plateau period and 28 months of decrease to the steady state CDR. This is the same period as used for June 30, 2013 but two months shorter than used for December 31, 2012. 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 June 30, 2013 and December 31, 2012.

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 (based on experience of the most recent three quarters) 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 June 30, 2013 and December 31, 2012. 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, the loss severity, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of current outstanding advances). These variables have been relatively stable over the past several quarters and in the relevant ranges have less impact on the projection results than the variables discussed above.

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.

As of September 30, 2013, the Company’s base case assumed a one month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). 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 June 30, 2013 and December 31, 2012. Increasing the CDR plateau to four months and increasing the ramp-down by five months to 33-months (for a total stress period of 42 months) would increase the expected loss by approximately $30 million for HELOC transactions and $2 million for closed-end second lien transactions. On the other hand, keeping the CDR plateau at one month but decreasing the length of

Table of Contents

the CDR ramp-down to 18 months (for a total stress period of 24 months) would decrease the expected loss by approximately $28 million for HELOC transactions and $2 million for closed-end second lien transactions.

Breaches of Representations and Warranties

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these R&W provisions. Soon after the Company observed the deterioration in the performance of its insured RMBS following the deterioration of the residential mortgage and property markets, the Company began using internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W on a loan-by-loan basis. Where a provider of R&W refused to honor its repurchase obligations, the Company sometimes chose to initiate litigation. See “Recovery Litigation” below. The Company's success in pursuing these strategies permitted the Company to enter into agreements with R&W providers under which those providers made payments to the Company, agreed to make payments to the Company in the future, and / or repurchased loans from the transactions, all in return for releases of related liability by the Company. Such agreements provide the Company with many of the benefits of pursuing the R&W claims on a loan by loan basis or through litigation, but without the related expense and uncertainty. The Company continues to pursue these strategies against R&W providers with which it does not yet have agreements.

Using these strategies, through September 30, 2013 the Company has caused entities providing R&Ws to pay or agree to pay approximately $3.5 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided insurance.



	(in millions)
Agreement amounts already received	$	2,421
Agreement amounts projected to be received in the future	492
Repurchase amounts paid into the relevant RMBS prior to settlement (1)	574
Total R&W payments, gross of reinsurance	$	3,487

____________________

(1)

These amounts were paid into the relevant RMBS transactions (rather than to the Company as in most settlements) and distributed in accordance with the priority of payments set out in the relevant transaction documents. Because the Company may insure only a portion of the capital structure of a transaction, such payments will not necessarily directly benefit the Company dollar-for-dollar, especially in first lien transactions.

Based on this success, the Company has included in its net expected loss estimates as of September 30, 2013 an estimated net benefit related to breaches of R&W of $895 million, which includes $476 million from agreements with R&W providers and $419 million in transactions where the Company does not yet have such an agreement, all net of reinsurance.

Representations and Warranties Agreements (1)



	Agreement Date	Current Net Par Covered		Receipts to September 30, 2013 (net of reinsurance)		Estimated Future Receipts (net of reinsurance)		Eligible Assets Held in Trust (gross of reinsurance)
	(in millions)
Bank of America - First Lien	April 2011	$	1,094	$	456	$	230	$	615
Bank of America - Second Lien	April 2011	1,426		968		N/A		N/A
Deutsche Bank	May 2012	2,071		176		105		240
UBS	May 2013	850		378		92		195
Others	Various	561		241		49		N/A
Total		$	6,002	$	2,219	$	476	$	1,050

____________________

(1)

This table relates to past and projected future recoveries under R&W and related agreements. Excluded is the $419 million of future net recoveries the Company projects receiving from R&W counterparties in transactions with $1,965 million of net par outstanding as of September 30, 2013 not covered by current agreements and $841 million of net par already covered by agreements but for which the Company projects receiving additional amounts.

Table of Contents

The Company's agreements with the counterparties named in the table above required an initial payment to the Company to reimburse it for past claims as well as an obligation to reimburse it for a portion of future claims. The named counterparties placed eligible assets in trust to collateralize their future reimbursement obligations, and the amount of collateral they are required to post may be increased or decreased from time to time as determined by rating agency requirements. Reimbursement payments under these agreements are made either monthly or quarterly and have been made timely. With respect to the reimbursement for future claims:

•

Bank of America. Under the Company's agreement with Bank of America Corporation and certain of its subsidiaries (“Bank of America” or “BofA”), Bank of America agreed to reimburse the Company for 80% of claims on the first lien transactions covered by the agreement that the Company pays in the future, until the aggregate lifetime collateral losses (not insurance losses or claims) on those transactions reach $6.6 billion. As of September 30, 2013 aggregate lifetime collateral losses on those transactions was $3.7 billion, and the Company was projecting in its base case that such collateral losses would eventually reach $5.2 billion.

•

Deutsche Bank. Under the Company's May 2012 agreement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), Deutsche Bank agreed to reimburse the Company for certain claims it pays in the future on eight first and second lien transactions, including 80% of claims it pays on those transactions until the aggregate lifetime claims (before reimbursement) reach $319 million. As of September 30, 2013, the Company was projecting in its base case that such aggregate lifetime claims would remain below $319 million. In the event aggregate lifetime claims paid exceed $389 million, Deutsche Bank must reimburse Assured Guaranty for 85% of such claims paid (in excess of $389 million) until such claims paid reach $600 million.

The agreement also requires Deutsche Bank to reimburse AGC for future claims it pays on certain RMBS re-securitizations. The amount available for reimbursement of claim payments is based on a percentage of the losses that occur in certain uninsured tranches (“Uninsured Tranches”) within the eight transactions described above: 60% of losses on the Uninsured Tranches (up to $141 million of losses), 60% of such losses (for losses between $161 million and $185 million), and 100% of such losses (for losses from $185 million to $248 million). Losses on the Uninsured Tranches from $141 million to $161 million and above $248 million are not included in the calculation of AGC's reimbursement amount for re-securitization claim payments. As of September 30, 2013, the Company was projecting in its base case that losses on the Uninsured Tranches would be $148 million. Pursuant to the CDS termination on October 10, 2013 described below, a portion of Deutsche Bank's reimbursement obligation was applied to the terminated CDS. After giving effect to application of the portion of the reimbursement obligation to the terminated CDS, as well as to reimbursements related to other covered RMBS re-securitizations, and based on the Company's base case projections for losses on the Uninsured Tranches, the Company expects that $26 million will be available to reimburse AGC for re-securitization claim payments on the remaining re-securitizations. Except for the reimbursement obligation based on losses occurring on the Uninsured Tranches and the termination agreed to described below, the agreement with Deutsche Bank does not cover transactions where the Company has provided protection to Deutsche Bank on RMBS transactions in CDS form.

On October 10, 2013, the Company and Deutsche Bank terminated one below investment grade transaction under which the Company had provided credit protection to Deutsche Bank through a CDS. The transaction had a net par outstanding of $294 million at the time of termination. In connection with the termination, Assured Guaranty agreed to release to Deutsche Bank $60 million of assets held in trust that was in excess of the amount of assets required to be held in trust for regulatory and rating agency capital relief.


•	UBS. Under the Company's agreement with UBS and a third party, UBS agreed to reimburse the Company for 85% of future losses on three first lien RMBS transactions.

The Company includes in the table above payments it has received under agreements with various other counterparties for breaches of R&W. Included in the table are benefits of the settlement AGM reached with Flagstar in connection with the favorable judgment AGM had won against Flagstar, under which Flagstar paid AGM $105 million and agreed to reimburse AGM for all future losses on certain insured RMBS transactions. Also included in the table above are payments the Company received for breaches of underwriting and servicing obligations. Some of the agreements with various other counterparties include obligations to reimburse the Company for all or a portion of future claims. In one instance, the Company is entitled to reimbursement from the cash flow from the mortgage loans still outstanding from a securitization as to which the insured notes have been paid off, and the Company includes in its projected R&W benefit an amount based on the cash flow it projects receiving from those mortgage loans.

Table of Contents

Finally, based on its experience to date, the Company calculated an expected recovery of $419 million from breaches of R&W in transactions not covered by agreements with $1,965 million of net par outstanding as of September 30, 2013 and $841 million of net par already covered by agreements but for which the Company projects receiving additional amounts. 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 such 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 not already covered by agreements, 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 such contractual 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. 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. For the RMBS transactions as to which the Company had not yet reached an agreement with the R&W counterparty as of September 30, 2013, the Company had performed a detailed review of approximately 21,700 loan files, representing approximately $6.1 billion loans underlying insured transactions. In the majority of its loan file reviews, the Company identified breaches of one or more R&W regarding the characteristics of the loans, such as misrepresentation of income or employment of the borrower, occupancy, undisclosed debt and non-compliance with underwriting guidelines at loan origination.

The Company uses the same RMBS projection scenarios and weightings to project its future R&W benefit as it uses to project RMBS losses on its portfolio. To the extent the Company increases its loss projections, the R&W benefit (whether pursuant to an R&W agreement or not) generally will also increase, subject to the agreement limits and thresholds described above.

The Company accounts for the loss sharing obligations under the R&W agreements on financial guaranty insurance contracts as subrogation, offsetting the losses it projects by an R&W benefit from the relevant party for the applicable portion of the projected loss amount. 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. See Notes 7, Fair Value Measurement and 9, Consolidation of Variable Interest Entities.

Table of Contents

U.S. RMBS Risks with R&W Benefit



	Number of Risks (1) as of		Debt Service as of
	September 30, 2013	December 31, 2012	September 30, 2013		December 31, 2012
			(dollars in millions)
Prime first lien	1	1	$	38	$	44
Alt-A first lien	25	26	3,607		4,173
Option ARM	9	10	695		1,183
Subprime	5	5	991		989
Closed-end second lien	4	4	164		260
HELOC	6	7	436		549
Total	50	53	$	5,931	$	7,198

____________________

(1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments. This table shows the full future Debt Service (not just the amount of Debt Service expected to be reimbursed) for risks with projected future R&W benefit, whether pursuant to an agreement or not.

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.



	Third Quarter				Nine Months
	2013		2012		2013		2012
	(in millions)
Inclusion (removal) of deals with breaches of R&W during period	$	—	$	—	$	6	$	(5	)
Change in recovery assumptions as the result of additional file review and recovery success	69		—		86		70
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	13		10		10		(14		)
Results of settlements	—		—		180		48
Accretion of discount on balance	4		2		12		10
Total	$	86	$	12	$	294	$	109

The Company assumes that recoveries on second lien transactions that were not subject to the settlement agreements 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.

“XXX” Life Insurance Transactions

The Company’s $2.8 billion net par of XXX life insurance transactions as of September 30, 2013 include $623 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 September 30, 2013, the Company’s projected net expected loss to be paid is $85 million. The overall decrease of approximately $30 million in expected loss to be paid during Third Quarter 2013 is due primarily to the higher risk free rates used to discount the long dated projected losses in the transactions and the purchase of certain insured certificates.

Table of Contents

Student Loan Transactions

The Company has insured or reinsured $2.8 billion net par of student loan securitizations, of which $1.9 billion was issued by private issuers and classified as asset-backed and $0.9 billion was issued by public authorities and classified as public finance. Of these amounts, $209 million and $257 million, respectively, are rated BIG. The Company is projecting approximately $64 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, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The largest of these losses was approximately $27 million and related to a transaction backed by a pool of private student loans assumed by AG Re from another monoline insurer. 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 approximately $8 million in net expected loss during Third Quarter 2013 is primarily due to worse than expected collateral performance.

Trust Preferred Securities Collateralized Debt Obligations

The Company has insured or reinsured $5.2 billion of net par (71% of which is in CDS form) of collateralized debt obligations (“CDOs”) backed by TruPS and similar debt instruments, or “TruPS CDOs.” Of the $5.2 billion, $2.0 billion 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 September 30, 2013, the Company has projected expected losses to be paid for TruPS CDOs of $50 million. The increase of approximately $17 million in net expected loss during Third Quarter 2013 is due primarily to additional defaults and deferrals in the underlying assets.

Selected U.S. Public Finance Transactions

Many U.S. municipalities and related entities continue to be under increased pressure, 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. Given some of these developments, and the circumstances surrounding each instance, the ultimate outcome cannot be certain and may lead to an increase in defaults on some of the Company's insured public finance obligations. The Company will continue to analyze developments in each of these matters closely. The municipalities whose obligations the Company has insured that have filed for protection under Chapter 9 of the U.S Bankruptcy Code are: Detroit, Michigan; Jefferson County, Alabama; and Stockton, California. The City Council of Harrisburg, Pennsylvania had also filed a purported bankruptcy petition, which was later dismissed by the bankruptcy court; a receiver for the City of Harrisburg was appointed by the Commonwealth Court of Pennsylvania on December 2, 2011.

The Company has net par exposure to the City of Detroit, Michigan of $2.1 billion as of September 30, 2013. On July 18, 2013, the City of Detroit filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. Most of the Company's net par exposure relates to $1.0 billion of sewer revenue bonds and $784 million of water revenue bonds, both of which the Company rates BBB. Both the sewer and water systems provide services to areas that extend beyond the city limits, and the bonds are secured by a lien on "special revenues." The Company also has net par exposure of $146 million to the City's general obligation bonds (which are secured by a pledge of the unlimited tax, full faith, credit and resources of the City) and $175 million of the City's Certificates of Participation (which are unsecured unconditional contractual obligations of the City), both of which the Company rates below investment grade. A proceeding to determine the City's eligibility for protection under Chapter 9 took place in October and November 2013. On November 8, 2013, AGM filed a complaint in the U.S. Bankruptcy Court for the Eastern District of Michigan against the City seeking a declaratory judgment with respect to the City’s unlawful treatment of its Unlimited Tax General Obligation Bonds. Detail about the lawsuit is set forth under "Recovery Litigation -- Public Finance Transactions" below.

The Company has net exposure to Jefferson County, Alabama of $681 million as of September 30, 2013. On November 9, 2011, Jefferson County filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. Most of the Company's net Jefferson County exposure relates to $464 million in sewer revenue exposure, of which $192 million is direct and $272 million is assumed reinsurance exposure. 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 special revenues under Chapter 9. The Company also has assumed exposure of $30 million to warrants that are payable from the County's general fund on a "subject

Table of Contents

to appropriation" basis. In 2012, the County chose not to make payment under its General Obligation bonds, so the Company has established a projected loss for these warrants as well. The Company's remaining net exposure of $187 million to Jefferson County relates to obligations that are secured by, or payable from, certain taxes that may have the benefit of a statutory lien or a lien on “special revenues” or other collateral. In June 2013, AGM and several other monoline insurers and financial institutions having claims against the County entered into plan support agreements with the County, and in July 2013, the County filed its Chapter 9 plan of adjustment, disclosure statement, motion to approve the disclosure statement and motion to approve solicitation procedures with the Bankruptcy Court. In August 2013, the Bankruptcy Court approved the disclosure statement and related solicitation, balloting and tabulation procedures to be employed in the plan confirmation process. In October 2013, the County completed the plan approval solicitation process and, of the creditors entitled to vote on the plan and inclusive of all voting classes, over $3.9 billion in claims voted to accept the plan and the holders of less than $18 million in claims voted to reject the plan. On November 6, 2013, the County entered into supplements to the various plan support agreements and filed a revised plan of adjustment with the Bankruptcy Court in order to address changes in the municipal finance market, consumption patterns, and actual and projected revenues. The County expects the plan to become effective in December 2013.

On June 28, 2012, the City of Stockton, California filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. The Company's net exposure to the City's general fund is $119 million, consisting of pension obligation bonds. The Company also had exposure to lease obligation bonds and, as of September 30, 2013, the Company owned all of these bonds which are included in its investment portfolio. As of September 30, 2013, the Company had paid $25 million in net claims. On October 3, 2013, the Company reached a tentative settlement with the City regarding the treatment of the bonds insured by the Company in the City's proposed plan of adjustment. Under the terms of the settlement, the Company will receive title to an office building, the ground lease of which secures the lease revenue bonds, and will also be entitled to certain fixed payments and certain variable payments contingent on the City's revenue growth. The settlement is subject to a number of conditions, including a sales tax increase (which was approved by voters on November 5, 2013), confirmation of a plan of adjustment that implements the terms of the settlement and definitive documentation. Plan confirmation is expected to be completed in 2014.

The Company has $155 million of net par exposure to The City of Harrisburg, Pennsylvania, of which $92 million is BIG. The Company has paid $17 million in net claims as of September 30, 2013. The Commonwealth of Pennsylvania appointed receiver for the City has filed a fiscal recovery plan in state court that provides for full payment of the Company insured bonds through proceeds of asset sales and contributions by the Company, Dauphin County, Pennsylvania and other creditors. The plan is expected to be implemented in December 2013.

The Company has $337 million of net par exposure to the Louisville Arena Authority. The bond proceeds were used to construct the KFC Yum Center, home to the University of Louisville men's and women's basketball teams. Actual revenues available for Debt Service are well below original projections, and under the Company's internal rating scale, the transaction is BIG.

During Third Quarter 2013 and as part of a negotiated restructuring, the Company paid off the insured bonds secured by the excess free cash flow of the Foxwoods Casino run by the Mashantucket Pequot Tribe. The Company made cumulative claims payments of $116 million (net of reinsurance) on the insured bonds. In return for participating in the restructuring, the Company received new notes with a principal amount of $145 million with the same seniority as the bonds the Company had insured ("New Pequot Notes"). The Company currently projects full recovery of its claims paid from amounts to be received on the New Pequot Notes. The New Pequot Notes are held as an investment and accounted for as such.

The Company projects that its total future expected net loss across its troubled U.S. public finance credits as of September 30, 2013 will be $183 million. As of June 30, 2013 the Company was projecting a net expected loss of $71 million across it troubled U.S. public finance credits. While the deterioration was due to a number of factors, it was attributable primarily to the elimination of the recoverable for claims paid on the bonds secured by cash flow from the Foxwoods Casino upon the receipt of the New Pequot Notes now held in the investment portfolio, along with loss developments in Detroit and Stockton.

Certain Selected European Country Transactions

The Company insures and reinsures credits with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish or Portuguese sovereign default may cause the regions also to default. The Company's gross exposure to these Spanish and Portuguese credits is €450 million and €159 million, respectively and exposure net of reinsurance for Spanish and Portuguese credits is €327 million and €146 million, respectively. The Company rates most of these issuers in the BB category due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's

Table of Contents

Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities and covered mortgage bonds issued by Hungarian banks. The Company's gross exposure to these Hungarian credits is $673 million and its exposure net of reinsurance is $637 million of which $599 million is rated BIG. The Company estimated net expected losses of $48 million related to these Spanish, Portuguese and Hungarian credits, down from $49 million as of June 30, 2013 largely due to movements in exchange rates, interest rates and timing of projected defaults. Information regarding the Company's exposure to other Selected European Countries may be found under Note 3, Outstanding Exposure, – Economic Exposure to the Selected European Countries.

Manufactured Housing

The Company insures or reinsures a total of $267 million net par of securities backed by manufactured housing loans, a total of $185 million rated BIG. The Company has expected loss to be paid of $26 million as of September 30, 2013, down from $30 million as of June 30, 2013, due primarily to the higher risk free rates used to discount losses and additional amortization on certain transactions.

Infrastructure Finance

The Company has insured exposure of approximately $3.1 billion to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued; the aggregate amount of the claim payments may be substantial and reimbursement may not occur for an extended time, if at all. These transactions generally involve long-term infrastructure projects that were 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 conditions, 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. However, the recovery of the payments is uncertain and may take a long time, ranging from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. The Company’s exposure to infrastructure transactions with refinancing risk was reduced during Third Quarter 2013 by the termination of its insurance on A$413 million of infrastructure securities having maturities commencing in 2014. The Company estimates total claims for the remaining two largest transactions with significant refinancing risk, assuming no refinancing, could be $1.8 billion gross before reinsurance and $1.3 billion net after reinsurance; such claims would be payable from 2017 through 2022. This estimate is based on certain assumptions the Company has made as to the performance of the transactions.

Puerto Rico

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

For additional information on the Company's exposure to Puerto Rico, please refer "Puerto Rico Exposure" in Note 3, Outstanding Exposure.

Table of Contents

Recovery Litigation

RMBS Transactions

As of the date of this filing, AGM and AGC have lawsuits pending against a number of providers of representations and warranties in U.S. RMBS transactions insured by them, seeking damages. In all the lawsuits, AGM and AGC have alleged breaches of R&W in respect of the underlying loans in the transactions, and failure to cure or repurchase defective loans identified by AGM and AGC to such persons. In addition, in the lawsuits against DLJ Mortgage Capital, Inc. (“DLJ”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”), AGM and AGC have alleged breaches of contract in procuring falsely inflated shadow ratings (a condition to the issuance by AGM and AGC of its policies) by providing false and misleading information to the rating agencies:


•	Deutsche Bank: AGM has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp. in the Supreme Court of the State of New York on the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1 second lien transaction.

•

ResCap: AGM has sued GMAC Mortgage, LLC (formerly GMAC Mortgage Corporation; Residential Asset Mortgage Products, Inc.; Ally Bank (formerly GMAC Bank); Residential Funding Company, LLC (formerly Residential Funding Corporation); Residential Capital, LLC (formerly Residential Capital Corporation, "ResCap"); Ally Financial (formerly GMAC, LLC); and Residential Funding Mortgage Securities II, Inc. on the GMAC RFC Home Equity Loan-Backed Notes, Series 2006-HSA3 and GMAC Home Equity Loan-Backed Notes, Series 2004-HE3 second lien transactions. On May 14, 2012, ResCap and several of its affiliates (the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court. The automatic stay of Bankruptcy Code Section 362 (a) stays lawsuits (such as the suit brought by AGM) against the Debtors. The Bankruptcy Court approved a plan support agreement which has the support of Ally Financial Inc. and a majority of the Debtors' largest claimants on June 26, 2013 and entered an order approving the disclosure statement regarding the Joint Chapter 11 Plan of Residential Capital, LLC, et al. and establishing procedures for the solicitation process on August 23, 2013. A hearing on confirmation of the plan is scheduled for November 19, 2013.

•

Credit Suisse: AGM and AGC have sued DLJ and Credit Suisse on first lien U.S. RMBS transactions insured by them. The ones insured by AGM are: CSAB Mortgage-Backed Pass Through Certificates, Series 2006-2; CSAB Mortgage-Backed Pass Through Certificates, Series 2006-3; CSAB Mortgage-Backed Pass Through Certificates, Series 2006-4; and CMSC Mortgage-Backed Pass Through Certificates, Series 2007-3. The ones insured by AGC are: CSAB Mortgage-Backed Pass Through Certificates, Series 2007-1 and TBW Mortgage-Backed Pass Through Certificates, Series 2007-2. On December 6, 2011, DLJ and Credit Suisse filed a motion to dismiss the cause of action asserting breach of the document containing the condition precedent regarding the rating of the securities and claims for recissionary damages and other relief in the complaint, and on October 11, 2012, the Supreme Court of the State of New York granted the motion to dismiss. AGM and AGC have appealed the dismissal of certain of its claims. The causes of action against DLJ for breach of R&W and breach of its repurchase obligations remain. On October 21, 2013, AGM and AGC filed an amended complaint against DLJ and Credit Suisse (and added Credit Suisse First Boston Mortgage Securities Corp. as a defendant), asserting claims of fraud and material misrepresentation in the inducement of an insurance contract, in addition to their existing breach of contract claims.

On March 26, 2013, AGM filed a lawsuit against RBS Securities Inc., RBS Financial Products Inc. and Financial Asset Securities Corp. (collectively, “RBS”) in the United States District Court for the Southern District of New York on the Soundview Home Loan Trust 2007-WMC1 transaction. The complaint alleges that RBS made fraudulent misrepresentations to AGM regarding the quality of the underlying mortgage loans in the transaction and that RBS's misrepresentations induced AGM into issuing a financial guaranty insurance policy in respect of the Class II-A-1 certificates issued in the transaction. On July 19, 2013, AGM amended its complaint to add a claim under Section 3105 of the New York Insurance Law. RBS has filed motions to dismiss AGM's complaint.

On August 9, 2012, AGM filed a complaint against OneWest Bank, FSB, the servicer of the mortgage loans underlying the HOA1 Transaction and the IndyMac Home Equity Mortgage Loan Asset-Backed Trust, Series 2007-H1 HELOC transaction seeking damages, specific performance and declaratory relief in connection with OneWest failing to properly service the mortgage loans. In August 2013, AGM reached a settlement with OneWest resolving AGM's claims and dismissed the lawsuit.

Table of Contents

“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.

Public Finance Transactions

In June 2010, AGM sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, “JPMorgan”), the underwriter of debt issued by Jefferson County, in the Supreme Court of the State of New York alleging that JPMorgan induced AGM to issue its insurance policies in respect of such debt through material and fraudulent misrepresentations and omissions, including concealing that it had secured its position as underwriter and swap provider through bribes to Jefferson County commissioners and others. In December 2010, the court denied JPMorgan’s motion to dismiss. After JPMorgan interpleaded Jefferson County into the lawsuit, the Jefferson County bankruptcy court ruled in April 2013 that the lawsuit against JPMorgan was subject to the automatic stay applicable to Jefferson County. As described above under "Selected U.S. Public Finance Transactions," AGM, JPMorgan and various other financial institutions entered into plan support agreements with Jefferson County in June 2013, which were amended in November 2013, and Jefferson County has filed a plan of adjustment with the bankruptcy court. As a result, the litigation is currently subject to a standstill order. AGM will dismiss the litigation if the Jefferson County bankruptcy plan is confirmed and is continuing its risk remediation efforts for its Jefferson County exposure.

In September 2010, AGM, together with TD Bank, National Association and Manufacturers and Traders Trust Company, as trustees, filed a complaint in the Court of Common Pleas of Dauphin County, Pennsylvania against The Harrisburg Authority, The City of Harrisburg, Pennsylvania, and the Treasurer of the City in connection with certain Resource Recovery Facility bonds and notes issued by The Harrisburg Authority, alleging, among other claims, breach of contract by both The Harrisburg Authority and The City of Harrisburg, and seeking remedies including an order of mandamus compelling the City to satisfy its obligations on the defaulted bonds and notes and the appointment of a receiver for The Harrisburg Authority ("RRF receiver"). The Commonwealth Court of Pennsylvania appointed a receiver for The City of Harrisburg (the “City receiver”) in December 2011. The City receiver filed a motion to intervene in the mandamus action and action for the appointment of the RRF receiver, and asserted that the provisions of Pennsylvania's Financially Distressed Municipalities Act (“Act 47”), which authorized his appointment, preempted AGM's statutory remedies. Subsequently, the City receiver has been negotiating the sale of Harrisburg's resource recovery facility and the lease of its parking system. On August 26, 2013, the City receiver filed a fiscal recovery plan for the City with the Commonwealth Court for its review and approval, and on September 23, 2013, the Commonwealth Court approved the fiscal recovery plan. AGM will dismiss the litigation if the recovery plan is effected.

On November 8, 2013, AGM filed a complaint in the U.S. Bankruptcy Court for the Eastern District of Michigan against the City seeking a declaratory judgment with respect to the City’s unlawful treatment of its Unlimited Tax General Obligation Bonds (the “Unlimited Tax Bonds”). The complaint seeks a declaratory judgment and court order establishing that, under Michigan law, the proceeds of ad valorem taxes levied and collected by the City for the sole purpose of repaying the Unlimited Tax Bonds are “restricted funds”, must be segregated and not co-mingled with other funds of the City, and the City is prohibited from using the restricted funds for any purposes other than repaying holders of the Unlimited Tax Bonds.

Table of Contents

6. Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and loss adjustment expense ("LAE") reserves, net of reinsurance and salvage and subrogation recoverable.

Loss and LAE Reserve (Recovery)

and Salvage and Subrogation Recoverable

Net of Reinsurance

Insurance Contracts



	As of September 30, 2013									As of December 31, 2012
	Loss and LAE Reserve, net			Salvage and Subrogation Recoverable, net			Net			Loss and LAE Reserve, net			Salvage and Subrogation Recoverable, net			Net
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	3		$	—		$	3		$	3		$	—		$	3
Alt-A first lien	105			52			53			93			—			93
Option ARM	33			38			(5		)	52			216			(164		)
Subprime	131			1			130			82			0			82
Total first lien	272			91			181			230			216			14
Second lien:
Closed-end second lien	5			47			(42		)	5			72			(67		)
HELOC	6			141			(135		)	37			196			(159		)
Total second lien	11			188			(177		)	42			268			(226		)
Total U.S. RMBS	283			279			4			272			484			(212		)
TruPS	2			—			2			1			—			1
Other structured finance	143			5			138			197			4			193
U.S. public finance	177			48			129			104			134			(30		)
Non-U.S. public finance	31			—			31			31			—			31
Total financial guaranty	636			332			304			605			622			(17		)
Other	2			5			(3		)	2			5			(3		)
Subtotal	638			337			301			607			627			(20		)
Effect of consolidating FG VIEs	(96		)	(88		)	(8		)	(64		)	(217		)	153
Total (1)	$	542		$	249		$	293		$	543		$	410		$	133

____________________


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

Table of Contents

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.

Components of Net Reserves (Salvage)

Insurance Contracts



	As of September 30, 2013			As of December 31, 2012
	(in millions)
Loss and LAE reserve	$	601		$	601
Reinsurance recoverable on unpaid losses	(59		)	(58		)
Loss and LAE reserve, net	542			543
Salvage and subrogation recoverable	(275		)	(456		)
Salvage and subrogation payable(1)	26			46
Salvage and subrogation recoverable, net	(249		)	(410		)
Other recoveries(2)	(23		)	(30		)
Subtotal	(272		)	(440		)
Total	270			103
Less: other (non-financial guaranty business)	(3		)	(3		)
Financial guaranty net reserves (salvage)	$	273		$	106

____________________


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


(2)	R&W recoveries recorded in other assets on the consolidated balance sheet.

Balance Sheet Classification of

Net Expected Recoveries for Breaches of R&W

Insurance Contracts



	As of September 30, 2013							As of December 31, 2012
	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	$	203	$	(57	)	$	146	$	449	$	(169	)	$	280
Loss and LAE reserve	412		(29		)	383		571		(33		)	538

____________________


(1)	The remaining benefit for R&W is either recorded at fair value in FG VIE assets, or not recorded on the balance sheet until the expected loss, net of R&W, exceeds unearned premium reserve.

The table below provides a reconciliation of net expected loss to be paid to net expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid which represent the payments that have been made but have not yet been expensed, (2) for transactions with a net expected recovery, 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 reduced expected loss to be paid), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).

Table of Contents

Reconciliation of Net Expected Loss to be Paid and

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts



	As of September 30, 2013
	(in millions)
Net expected loss to be paid	$	604
Less: net expected loss to be paid for FG VIEs	52
Total	552
Contra-paid, net	94
Salvage and subrogation recoverable, net of reinsurance	244
Loss and LAE reserve, net of reinsurance	(540		)
Other recoveries (1)	23
Net expected loss to be expensed (2)	$	373

____________________


(1)	R&W recoveries recorded in other assets on the consolidated balance sheet.


(2)	Excludes $109 million as of September 30, 2013, related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual 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. A loss and LAE reserve is only recorded for the amount by which expected loss to be expensed exceeds deferred premium revenue determined on a contract-by-contract basis. This table excludes amounts related to consolidated FG VIEs, which are eliminated in consolidation.

Net Expected Loss to be Expensed

Insurance Contracts



	As of September 30, 2013
	(in millions)
2013 (October 1–December 31)	$	12
2014	43
2015	40
2016	34
2017	29
2018 - 2022	103
2023 - 2027	54
2028 - 2032	30
After 2032	28
Total present value basis(1)	373
Discount	421
Total future value	$	794

____________________


(1)	Consolidation of FG VIEs resulted in reductions of $109 million in net expected loss to be expensed.

Table of Contents

The following table presents the loss and LAE recorded in the consolidated statements of operations by sector for non-derivative contracts. Amounts presented are net of reinsurance.

Loss and LAE

Reported on the

Consolidated Statements of Operations



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	1		$	1		$	1		$	2
Alt-A first lien	(7		)	9			(7		)	37
Option ARM	22			25			(39		)	94
Subprime	31			9			65			33
Total first lien	47			44			20			166
Second lien:
Closed end second lien	—			(1		)	19			1
HELOC	(28		)	2			(44		)	21
Total second lien	(28		)	1			(25		)	22
Total U.S. RMBS	19			45			(5		)	188
TruPS	—			2			(1		)	(4		)
Other structured finance	(12		)	1			(33		)	2
U.S. public finance	47			2			121			47
Non-U.S. public finance	12			38			13			233
Subtotal	66			88			95			466
Other	—			—			—			(6		)
Total insurance contracts before FG VIE consolidation	66			88			95			460
Effect of consolidating FG VIEs	(11		)	(2		)	(26		)	(14		)
Total loss and LAE	$	55		$	86		$	69		$	446

Table of Contents

The following table provides information on non-derivative financial guaranty insurance contracts categorized as BIG. Previously, the Company had included securities purchased for loss mitigation purposes in its descriptions of its invested assets and its financial guaranty insured portfolio. Beginning with Third Quarter 2013, the Company will be excluding such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated); it has taken this approach as of both September 30, 2013 and December 31, 2012.

Financial Guaranty Insurance BIG Transaction Loss Summary

September 30, 2013



	BIG Categories (1)
	BIG 1						BIG 2						BIG 3						Total BIG, Net			Effect of Consolidating FG VIEs			Total
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net			Effect of Consolidating FG VIEs			Total
	(dollars in millions)
Number of risks(2)	154			(52		)	76			(24		)	136			(40		)	366			—			366
Remaining weighted-average contract period (in years)	9.8			7.2			8.5			9.5			10.7			7.8			10.1			—			10.1
Outstanding exposure:
Principal	$	8,795		$	(1,342	)	$	2,772		$	(235	)	$	3,884		$	(296	)	$	13,578		$	—		$	13,578
Interest	4,432			(499		)	1,350			(142		)	1,531			(93		)	6,579			—			6,579
Total(3)	$	13,227		$	(1,841	)	$	4,122		$	(377	)	$	5,415		$	(389	)	$	20,157		$	—		$	20,157
Expected cash outflows (inflows)	$	1,593		$	(508	)	$	806		$	(93	)	$	2,686		$	(123	)	$	4,361		$	(703	)	$	3,658
Potential recoveries(4)	(1,759		)	512			(395		)	25			(1,766		)	97			(3,286		)	601			(2,685		)
Subtotal	(166		)	4			411			(68		)	920			(26		)	1,075			(102		)	973
Discount	23			(1		)	(135		)	26			(391		)	7			(471		)	50			(421		)
Present value of expected cash flows	$	(143	)	$	3		$	276		$	(42	)	$	529		$	(19	)	$	604		$	(52	)	$	552
Deferred premium revenue	$	359		$	(60	)	$	163		$	(23	)	$	447		$	(52	)	$	834		$	(190	)	$	644
Reserves (salvage)(5)	$	(180	)	$	8		$	142		$	(32	)	$	351		$	(8	)	$	281		$	(8	)	$	273

Table of Contents

Financial Guaranty Insurance BIG Transaction Loss Summary

December 31, 2012



	BIG Categories(1)
	BIG 1						BIG 2						BIG 3						Total BIG, Net			Effect of Consolidating FG VIEs			Total
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net			Effect of Consolidating FG VIEs			Total
	(dollars in millions)
Number of risks(2)	163			(66		)	76			(22		)	131			(41		)	370			—			370
Remaining weighted-average contract period (in years)	10.2			9.2			10.6			15.1			9.0			6.0			10.0			—			10.0
Outstanding exposure:
Principal	$	9,462		$	(1,533	)	$	2,248		$	(132	)	$	6,024		$	(481	)	$	15,588		$	—		$	15,588
Interest	4,475			(591		)	1,357			(127		)	1,881			(117		)	6,878			—			6,878
Total(3)	$	13,937		$	(2,124	)	$	3,605		$	(259	)	$	7,905		$	(598	)	$	22,466		$	—		$	22,466
Expected cash outflows (inflows)	$	1,914		$	(687	)	$	863		$	(58	)	$	2,720		$	(146	)	$	4,606		$	(738	)	$	3,868
Potential recoveries(4)	(2,356		)	677			(509		)	18			(1,911		)	117			(3,964		)	798			(3,166		)
Subtotal	(442		)	(10		)	354			(40		)	809			(29		)	642			60			702
Discount	12			8			(107		)	14			(216		)	2			(287		)	36			(251		)
Present value of expected cash flows	$	(430	)	$	(2	)	$	247		$	(26	)	$	593		$	(27	)	$	355		$	96		$	451
Deferred premium revenue	$	265		$	(32	)	$	227		$	(15	)	$	604		$	(83	)	$	966		$	(251	)	$	715
Reserves (salvage)(5)	$	(485	)	$	10		$	102		$	(18	)	$	347		$	(3	)	$	(47	)	$	153		$	106

____________________


(1)	In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure. This approach is reflected in the "Financial Guaranty Insurance BIG Transaction Loss Summary" tables as of both September 30, 2013 and December 31, 2012.


(2)	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.


(3)	Includes BIG amounts related to FG VIEs.


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


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

Ratings Impact on Financial Guaranty Business

A downgrade of one of the Company’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company, if the insured obligors were unable to pay.

For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. Under the swaps, AGM insures periodic payments owed by the municipal obligors to the bank counterparties. Under certain of the swaps, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. At AGM's current financial strength ratings, if the conditions giving rise to the

Table of Contents

obligation of AGM to make a termination payment under the swap termination policies were all satisfied, then AGM could pay claims in an amount not exceeding approximately $101 million in respect of such termination payments. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding approximately $296 million in respect of such termination payments.

As another example, with respect to variable rate demand obligations ("VRDOs") for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will 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 AGM or AGC under its financial guaranty policy. As of September 30, 2013, AGM and AGC had insured approximately $7.4 billion net par of VRDOs, of which approximately $0.4 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. 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 the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates do not comply with their obligations following a downgrade of the financial strength rating of AGM. Most of the guaranteed investment contracts ("GICs") insured by AGM allow for the withdrawal of GIC funds in the event of a downgrade of AGM, unless the relevant GIC issuer posts collateral or otherwise enhances its credit. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody’s, with no right of the GIC issuer to avoid such withdrawal by posting collateral or otherwise enhancing its credit. Each GIC contract stipulates the thresholds below which the GIC issuer must post eligible collateral, along with the types of securities eligible for posting and the collateralization percentage applicable to each security type. These collateralization percentages range from 100% of the GIC balance for cash posted as collateral to, typically, 108% for asset-backed securities.


7.	Fair Value Measurement

The Company carries a significant portion 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 and constraints on liquidity. 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 Nine Months 2013, 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.

Table of Contents

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.

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 estimation.

Transfers between Levels 1, 2 and 3 are recognized at the end of the period when the transfer occurs. The Company reviews the classification between Levels 1, 2 and 3 quarterly to determine whether a transfer is necessary. During the periods presented, there were no transfers between Level 1, 2 and 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. Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently. 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.

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 September 30, 2013, the Company used model processes to price 38 fixed maturity securities, which was 7.5% or $800 million 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); home 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.

Table of Contents

Other Invested Assets

Other invested assets includes certain investments that are carried and measured at fair value on a recurring basis and non-recurring basis, as well as assets not carried at fair value. Within other invested assets, $73 million are carried at fair value on a recurring basis as of September 30, 2013. These assets comprise certain short-term investments and fixed maturity securities classified as trading and are Level 2 in the fair value hierarchy. Also carried at fair value on a recurring basis are $0.3 million in notes classified as Level 3 in the fair value hierarchy. The fair value of these notes is determined by calculating the present value of the expected cash flows. The unobservable inputs used in the fair value measurement of the notes are discount rate, prepayment speed and default rate.

Within other invested assets, $6 million are carried at fair value on a non-recurring basis as of September 30, 2013. These assets are comprised of mortgage loans which are classified as Level 3 in the fair value hierarchy as there are significant unobservable inputs used in the valuation of such loans. The non-performing portion of these mortgage loans is valued using an average recovery rate. The performing loans are valued using management’s determination of future cash flows arising from these loans, discounted at the rate of return that would be required by a market participant. The unobservable inputs used in the fair value measurement of the mortgage loans are discount rate, recovery on delinquent loans, loss severity, prepayment speed and default rate.

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 AGM’s Committed Preferred Trust Securities (the “AGM CPS Securities”) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (see Note 15, Long Term Debt and Credit Facilities). The estimated current cost of the Company’s CCS is based 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.

Supplemental Executive Retirement Plans

The Company classifies the fair value measurement of the assets of the Company's various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is valued based on the observable published daily values of the underlying mutual fund included in the aforementioned plans (Level 1) or based upon the net asset value of the funds if a published daily value is not available (Level 2).

Financial Guaranty Contracts Accounted for as Credit Derivatives

The Company’s credit derivatives consist primarily of insured CDS contracts, and also include interest rate swaps 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 absent an event of default or termination event that entitles the Company to terminate; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. Such terminations generally are completed for an amount that approximates the present value of future premiums, not at fair value.

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.

Table of Contents

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 importantly 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 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. Consistent with the previous several years, market conditions at September 30, 2013 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.

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.


•	The allocation of gross spread among:


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


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


◦	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.


•	The rates used to discount future expected premium cash flows.

Table of Contents

The expected future premium cash flows for the Company’s credit derivatives were discounted at rates ranging from 0.18% to 3.66% at September 30, 2013 and 0.21% to 2.81% at December 31, 2012.

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 spread 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, CDS spreads are either interpolated or extrapolated 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.


•	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 (1)



	As of September 30, 2013		As of December 31, 2012
Based on actual collateral specific spreads	6	%	6	%
Based on market indices	87	%	88	%
Provided by the CDS counterparty	7	%	6	%
Total	100	%	100	%

____________________

(1) Based on par.

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.

Table of Contents

The Company interpolates a curve based on the historical relationship between the premium the Company receives when a credit derivative is close 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 or AGM. For credit spreads on the Company’s name the Company obtains the quoted price of CDS contracts traded on AGC and AGM from market data sources published by third parties. The cost to acquire CDS protection referencing AGC or AGM 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 or AGM increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGC or AGM 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 48% and 71%, based on number of deals, of the Company's CDS contracts are fair valued using this minimum premium as of September 30, 2013 and December 31, 2012, respectively. The change period over period is driven by AGM's and AGC's credit spreads narrowing to levels supported by today's economy. As a result of this, the cost to hedge AGC's and AGM's names has declined significantly causing more transactions to price above previously established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC and AGM hedged by its counterparties, with independent third parties each reporting period. The current level of AGC’s and AGM’s own credit spread has resulted in the bank or deal originator hedging a significant portion of its exposure to AGC and AGM. This reduces the amount of contractual cash flows AGC and AGM 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 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 fair value resulting in a credit derivative asset on protection sold is the result of contractual cash inflows 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 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.

Table of Contents



	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.

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 September 30, 2013 and December 31, 2012, 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.

These contracts were classified as Level 3 in the fair value hierarchy because there is a reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company's estimate of the value of non-standard terms and conditions of its credit derivative contracts and of amount of protection purchased on AGC or AGM's name.

Table of Contents

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 9, Consolidation of Variable Interest Entities.

The FG VIEs that are consolidated by the Company issued securities collateralized by HELOCs, first lien and second lien RMBS, subprime automobile loans, 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 generally 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); yields 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. 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 (i.e. net expected loss to be paid as described in Note 5), the unrealized fair value gains (losses) 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 related 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 asset 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 FG VIE liabilities.

The fair value of the Company’s FG VIE liabilities is also sensitive to changes relating to estimated prepayment speeds; market values of the underlying assets; 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 FG VIE liabilities with recourse 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 insurance policy guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE that is insured by the Company. In general, extending the timing of expected loss payments by the Company into the future typically leads to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIE liabilities with recourse, 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 FG VIE liabilities with recourse.

Not Carried at Fair Value

Financial Guaranty Insurance Contracts

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

Table of Contents

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.

Long-Term Debt

The Company’s long-term debt, excluding notes payable, is valued by broker-dealers using third party independent pricing sources and standard market conventions. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. The fair value measurement was classified as Level 2 in the fair value hierarchy.

The fair value of the notes payable that are recorded within long-term debt was determined by calculating the present value of the expected cash flows. The Company determines discounted future cash flows using market driven discount rates and a variety of assumptions, including LIBOR curve projections, prepayment and default assumptions, and AGM CDS spreads. The fair value measurement was classified as Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including the discount rates, prepayment and default assumptions, loss severity and recovery on delinquent loans.

Other Invested Assets

The fair value of the other invested assets, which primarily consist of assets acquired in refinancing transactions, was determined by calculating the present value of the expected cash flows. The Company uses a market approach to determine discounted future cash flows using market driven discount rates and a variety of assumptions, including prepayment and default assumptions. The fair value measurement was classified as Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including the discount rates, prepayment and default assumptions, loss severity and recovery on delinquent loans.

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, the carrying values of which approximate fair value.

Table of Contents

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 September 30, 2013



			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	$	717	$	—	$	717	$	—
Obligations of state and political subdivisions	5,249		—		5,208		41
Corporate securities	1,345		—		1,213		132
Mortgage-backed securities:
RMBS	1,120		—		833		287
Commercial mortgage-backed securities ("CMBS")	523		—		523		—
Asset-backed securities	614		—		274		340
Foreign government securities	305		—		305		—
Total fixed maturity securities	9,873		—		9,073		800
Short-term investments	761		516		245		—
Other invested assets (1)	79		—		73		6
Credit derivative assets	106		—		—		106
FG VIEs’ assets, at fair value	2,515		—		—		2,515
Other assets(2)	67		24		11		32
Total assets carried at fair value	$	13,401	$	540	$	9,402	$	3,459
Liabilities:
Credit derivative liabilities	$	2,027	$	—	$	—	$	2,027
FG VIEs’ liabilities with recourse, at fair value	1,828		—		—		1,828
FG VIEs’ liabilities without recourse, at fair value	1,047		—		—		1,047
Total liabilities carried at fair value	$	4,902	$	—	$	—	$	4,902

Table of Contents

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of December 31, 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	$	794	$	—	$	794	$	—
Obligations of state and political subdivisions	5,631		—		5,596		35
Corporate securities	1,010		—		1,010		—
Mortgage-backed securities:
RMBS	1,266		—		1,047		219
CMBS	520		—		520		—
Asset-backed securities	531		—		225		306
Foreign government securities	304		—		304		—
Total fixed maturity securities	10,056		—		9,496		560
Short-term investments	817		446		371		—
Other invested assets (1)	120		—		112		8
Credit derivative assets	141		—		—		141
FG VIEs’ assets, at fair value	2,688		—		—		2,688
Other assets(2)	65		24		5		36
Total assets carried at fair value	$	13,887	$	470	$	9,984	$	3,433
Liabilities:
Credit derivative liabilities	$	1,934	$	—	$	—	$	1,934
FG VIEs’ liabilities with recourse, at fair value	2,090		—		—		2,090
FG VIEs’ liabilities without recourse, at fair value	1,051		—		—		1,051
Total liabilities carried at fair value	$	5,075	$	—	$	—	$	5,075

____________________


(1)	Includes mortgage loans that are recorded at fair value on a non-recurring basis. At September 30, 2013 and December 31, 2012, such investments were carried at their fair value of $6 million and $7 million, respectively.

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

Table of Contents

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 Third Quarter 2013 and 2012 and Nine Months 2013 and 2012.

Fair Value Level 3 Rollforward

Recurring Basis

Third Quarter 2013



	Fixed Maturity Securities
	Obligations of State and Political Subdivisions					RMBS					Asset- Backed Securities					Corporate Securities					Other Invested Assets					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 as of June 30, 2013	$	36				$	276				$	300				$	—				$	2				$	2,674				$	23			$	(2,248	)			$	(1,940	)			$	(1,134	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	—			(2	)	4			(2	)	6			(2	)	1			(2	)	0			(7	)	(30		)	(3	)	9		(4	)	354			(6	)	28			(3	)	35			(3	)
Other comprehensive income (loss)	6					12					(2		)			4					0					—					—				—					—					—
Purchases	—					9					38					130			(8	)	—					—					—				—					—					—
Settlements	(1		)			(14		)			(2		)			(3		)			(2		)			(113		)			—				(27		)			84					36
FG VIE consolidations	—					—					—					—					—					—					—				—					—					—
FG VIE deconsolidations	—					—					—					—					—					(16		)			—				—					—					16
Fair value as of September 30, 2013	$	41				$	287				$	340				$	132				$	0				$	2,515				$	32			$	(1,921	)			$	(1,828	)			$	(1,047	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2013	$	5				$	12				$	(2	)			$	4				$	0				$	20				$	9			$	331				$	24				$	(20	)

Table of Contents

Fair Value Level 3 Rollforward

Recurring Basis

Third Quarter 2012



	Fixed Maturity Securities
	Obligations of state and political subdivisions		RMBS					Asset Backed Securities					Other Invested Assets		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 as of June 30, 2012	$	10	$	167				$	274				$	1	$	2,726				$	44				$	(1,666	)			$	(2,239	)			(1,042	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0		4			(2	)	6			(2	)	—		91			(3	)	(2		)	(4	)	(36		)	(6	)	(51		)	(3	)	(19	)	(3	)
Other comprehensive income (loss)	0		13					20					—		—					—					—					—					—
Purchases	1		42					1					—		—					—					—					—					—
Settlements	—		(17		)			(2		)			—		(124		)			—					1					121					43
FG VIE consolidations	—		—					—					—		—					—					—					—					—
Fair value as of September 30, 2012	$	11	$	209				$	299				$	1	$	2,693				$	42				$	(1,701	)			$	(2,169	)			(1,018	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2012	$	0	$	10				$	20				$	—	$	165				$	(2	)			$	(39	)			$	(55	)			(58	)

Table of Contents

Fair Value Level 3 Rollforward

Recurring Basis

Nine Months 2013



	Fixed Maturity Securities
	Obligations of State and Political Subdivisions					RMBS					Asset- Backed Securities					Corporate Securities					Other Invested Assets					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 as of December 31, 2012	$	35				$	219				$	306				$	—				$	1				$	2,688				$	36				$	(1,793	)			$	(2,090	)			$	(1,051	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	1			(2	)	15			(2	)	15			(2	)	1			(2	)	(1		)	(7	)	526			(3	)	(4		)	(4	)	(164		)	(6	)	(135		)	(3	)	(157		)	(3	)
Other comprehensive income (loss)	7					16					(24		)			4					2					—					—					—					—					—
Purchases	—					79					49					130			(8	)	—					—					—					—					—					—
Settlements	(2		)			(42		)			(6		)			(3		)			(2		)			(553		)			—					36					274					135
FG VIE consolidations	—					—					—					—					—					48					—					—					(12		)			(37		)
FG VIE deconsolidations	—					—					—					—					—					(194		)			—					—					135					63
Fair value as of September 30, 2013	$	41				$	287				$	340				$	132				$	0				$	2,515				$	32				$	(1,921	)			$	(1,828	)			$	(1,047	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2013	$	7				$	16				$	(23	)			$	4				$	2				$	450				$	(4	)			$	14				$	(141	)			$	(246	)

Table of Contents

Fair Value Level 3 Rollforward

Recurring Basis

Nine Months 2012



	Fixed Maturity Securities
	Obligations of State and Political Subdivisions					RMBS					Asset- Backed Securities					Other Invested Assets			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 as of December 31, 2011	$	10				$	134				$	235				$	2		$	2,819				$	54				$	(1,304	)			$	(2,397	)			$	(1,061	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0			(2	)	9			(2	)	20			(2	)	—			266			(3	)	(12		)	(4	)	(466		)	(6	)	(150		)	(3	)	(112		)	(3	)
Other comprehensive income (loss)	1					6					8					(1		)	—					—					—					—					—
Purchases	1					97					41					—			—					—					—					—					—
Settlements	(1		)			(37		)			(5		)			—			(407		)			—					69					398					155
FG VIE consolidations	—					—					—					—			15					—					—					(20		)			—
Fair value as of September 30, 2012	$	11				$	209				$	299				$	1		$	2,693				$	42				$	(1,701	)			$	(2,169	)			$	(1,018	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2012	$	1				$	2				$	8				$	(1	)	$	468				$	(12	)			$	(391	)			$	(180	)			$	(213	)

______________


(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 gains (losses) on CCS.


(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)	Reported in other income.


(8)	Non-cash transaction.

Table of Contents

Level 3 Fair Value Disclosures

Quantitative Information About Level 3 Fair Value Inputs

At September 30, 2013



Financial Instrument Description	Fair Value at September 30, 2013 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Assets:
Fixed maturity securities:
Obligations of state and political subdivisions	$	41	Discounted	Rate of inflation	1.0		%	-	3.0%
			cash flow	Cash flow receipts	0.5		%	-	94.4%
				Yield	4.6		%		9.0%
				Collateral recovery period	1 month			-	41 years

Corporate	132		Discounted	Yield	8.0%
Corporate	132		cash flow

RMBS	287		Discounted	CPR	1.0		%	-	7.5%
			cash flow	CDR	4.4		%	-	27.8%
				Severity	48.0		%	-	102.7%
				Yield	3.0		%	-	10.8%
Asset-backed securities:
Whole business securitization	63		Discounted cash flow	Annual gross revenue projections (in millions)		$54		-	$96
				Value of primary financial guaranty policy	54.5%
				Liquidity discount	5.0		%	-	20.0%

Investor owned utility	165		Discounted cash flow	Liquidation value (in millions)		$215		-	$287
				Years to liquidation	0 years			-	1.25 years
				Collateral recovery period	3 months			-	6 years
				Discount factor	15.3%

XXX life insurance transactions	112		Discounted	Yield	12.5%
XXX life insurance transactions	112		cash flow

Other invested assets	6		Discounted cash flow	Discount for lack of liquidity	10.0		%	-	20.0%
				Recovery on delinquent loans	20.0		%	-	60.0%
				Default rates	1.0		%	-	12.0%
				Loss severity	40.0		%	-	90.0%
				Prepayment speeds	6.0		%	-	15.0%

FG VIEs’ assets, at fair value	2,515		Discounted	CPR	0.6		%	-	11.8%
			cash flow	CDR	2.8		%	-	27.8%
				Loss severity	38.1		%	-	106.4%
				Yield	4.4		%	-	9.0%

Table of Contents



Financial Instrument Description	Fair Value at September 30, 2013 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Other assets	32		Discounted cash flow	Quotes from third party pricing	$45		-	$51
Other assets			Discounted cash flow	Term (years)	3 years

Liabilities:
Credit derivative liabilities, net	(1,921	)	Discounted	Year 1 loss estimates	0.0	%	-	58.0%
			cash flow	Hedge cost (in bps)	46.3		-	502.0
				Bank profit (in bps)	1.0		-	1,389.9
				Internal floor (in bps)	7.0		-	100.0
				Internal credit rating	AAA		-	BIG

FG VIEs’ liabilities, at fair value	(2,875	)	Discounted	CPR	0.6	%	-	11.8%
			cash flow	CDR	2.8	%	-	27.8%
				Loss severity	38.1	%	-	106.4%
				Yield	4.4	%	-	9.0%

Table of Contents

Quantitative Information About Level 3 Fair Value Inputs

At December 31, 2012



Financial Instrument Description	Fair Value at December 31, 2012 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Assets:
Fixed maturity securities:
Obligations of state and political subdivisions	$	35	Discounted	Rate of inflation	1.0		%	-	3.0%
			cash flow	Cash flow receipts	4.9		%	-	85.8%
				Discount rates	4.3		%		9.0%
				Collateral recovery period	1 month			-	43 years

RMBS	219		Discounted	CPR	0.8		%	-	7.5%
			cash flow	CDR	4.4		%	-	28.6%
				Severity	48.1		%	-	102.8%
				Yield	3.5		%	-	12.8%
Asset-backed securities:
Whole business securitization	63		Discounted cash flow	Annual gross revenue projections (in millions)		$54		-	$96
				Value of primary financial guaranty policy	43.8%
				Liquidity discount	5.0		%	-	20.0%

Investor owned utility	186		Discounted cash flow	Liquidation value (in millions)		$212		-	$242
				Years to liquidation	0 years			-	3 years
				Discount factor	15.3%

XXX life insurance transactions	57		Discounted	Yield	12.5%
XXX life insurance transactions	57		cash flow

Other invested assets	8		Discounted cash flow	Discount for lack of liquidity	10.0		%	-	20.0%
				Recovery on delinquent loans	20.0		%	-	60.0%
				Default rates	1.0		%	-	12.0%
				Loss severity	40.0		%	-	90.0%
				Prepayment speeds	6.0		%	-	15.0%

FG VIEs’ assets, at fair value	2,688		Discounted	CPR	0.5		%	-	10.9%
			cash flow	CDR	3.0		%	-	28.6%
				Loss severity	37.5		%	-	103.8%
				Yield	4.5		%	-	20.0%

Table of Contents



Financial Instrument Description	Fair Value at December 31, 2012 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Other assets	36		Discounted cash flow	Quotes from third party pricing	$38		-	$51
Other assets			Discounted cash flow	Term (years)	3 years

Liabilities:
Credit derivative liabilities, net	(1,793	)	Discounted	Year 1 loss estimates	0.0	%	-	58.7%
			cash flow	Hedge cost (in bps)	64.2		-	678.4
				Bank profit (in bps)	1.0		-	1,312.9
				Internal floor (in bps)	7.0		-	60.0
				Internal credit rating	AAA		-	BIG

FG VIEs’ liabilities, at fair value	(3,141	)	Discounted	CPR	0.5	%	-	10.9%
			cash flow	CDR	3.0	%	-	28.6%
				Loss severity	37.5	%	-	103.8%
				Yield	4.5	%	-	20.0%

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 September 30, 2013				As of December 31, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in millions)
Assets:
Fixed maturity securities	$	9,873	$	9,873	$	10,056	$	10,056
Short-term investments	761		761		817		817
Other invested assets	102		110		177		182
Credit derivative assets	106		106		141		141
FG VIEs’ assets, at fair value	2,515		2,515		2,688		2,688
Other assets	164		164		166		166
Liabilities:
Financial guaranty insurance contracts(1)	3,694		5,786		3,918		6,537
Long-term debt	819		992		836		1,091
Credit derivative liabilities	2,027		2,027		1,934		1,934
FG VIEs’ liabilities with recourse, at fair value	1,828		1,828		2,090		2,090
FG VIEs’ liabilities without recourse, at fair value	1,047		1,047		1,051		1,051
Other liabilities	42		42		47		47

____________________


(1)	Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.


8.	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

Table of Contents

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 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.

Credit Derivative Net Par Outstanding by Sector

The estimated remaining weighted average life of credit derivatives was 4.1 years at September 30, 2013 and 3.7 years at December 31, 2012. The components of the Company’s credit derivative net par outstanding are presented below.

Credit Derivatives Net Par Outstanding



	As of September 30, 2013							As of December 31, 2012
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:
Collateralized loan obligation/collateral bond obligations	$	20,858	32.4	%	34.2	%	AAA	$	29,142	32.8	%	33.3	%	AAA
Synthetic investment grade pooled corporate	9,716		21.6		19.7		AAA	9,658		21.6		19.7		AAA
Synthetic high yield pooled corporate	2,690		47.2		41.1		AAA	3,626		35.0		30.3		AAA
TruPS CDOs	3,673		45.9		33.6		BB+	4,099		46.5		32.7		BB
Market value CDOs of corporate obligations	3,113		31.2		31.9		AAA	3,595		30.1		32.0		AAA
Total pooled corporate obligations	40,050		31.9		30.9		AAA	50,120		31.7		30.4		AAA
U.S. RMBS:
Option ARM and Alt-A first lien	2,995		19.8		8.0		BB	3,381		20.2		10.4		B+
Subprime first lien	3,067		30.2		50.8		AA-	3,494		29.8		52.6		A+
Prime first lien	278		10.9		3.2		B	333		10.9		5.2		B
Closed end second lien and HELOCs	25		—		—		CCC	49		—		—		B-
Total U.S. RMBS	6,365		24.3		28.3		BBB	7,257		24.2		30.4		BBB
CMBS	3,781		33.3		42.0		AAA	4,094		33.3		41.8		AAA
Other	8,913		—		—		A	9,310		—		—		A-
Total	$	59,109					AA+	$	70,781					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.

Table of Contents

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 $3.2 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 AAA levels at origination. The remaining $5.7 billion of exposure in “Other” CDS contracts comprises numerous deals across various asset classes, such as commercial receivables, international RMBS, infrastructure, regulated utilities and consumer receivables. Of the total net par outstanding in the "Other" sector, $0.5 million is rated BIG.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating



	As of September 30, 2013				As of December 31, 2012
Ratings	Net Par Outstanding		% of Total		Net Par Outstanding		% of Total
	(dollars in millions)
AAA	$	41,753	70.6	%	$	50,918	71.9	%
AA	3,660		6.2		3,083		4.4
A	3,592		6.1		5,487		7.8
BBB	5,125		8.7		4,584		6.4
BIG	4,979		8.4		6,709		9.5
Total credit derivative net par outstanding	$	59,109	100.0	%	$	70,781	100.0	%

Net Change in Fair Value of Credit Derivatives

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



	Third Quarter					Nine Months
	2013		2012			2013			2012
	(in millions)
Net credit derivative premiums received and receivable	$	24	$	33		$	92		$	96
Net ceding commissions (paid and payable) received and receivable	0		0			1			0
Realized gains on credit derivatives	24		33			93			96
Terminations	—		—			—			(1		)
Net credit derivative losses (paid and payable) recovered and recoverable	0		(31		)	(137		)	(173		)
Total realized gains (losses) and other settlements on credit derivatives	24		2			(44		)	(78		)
Net unrealized gains (losses) on credit derivatives	330		(38		)	(120		)	(388		)
Net change in fair value of credit derivatives	$	354	$	(36	)	$	(164	)	$	(466	)

Table of Contents

In Third Quarter 2013 and 2012, CDS contracts totaling $0.3 billion and $0.3 billion in net par were terminated, resulting in accelerations of credit derivative revenues of $0.1 million in Third Quarter 2013 and $0.4 million in Third Quarter 2012. In Nine Months 2013 and 2012, CDS contracts totaling $3.3 billion and $1.1 billion in net par were terminated, resulting in accelerations of credit derivative revenues of $15 million in Nine Months 2013 and $1 million in Nine Months 2012. In Nine Months 2013, in addition to the CDS terminations mentioned above, the Company terminated a film securitization CDS for a payment of $120 million which was recorded in realized gains (losses) and other settlements on credit derivatives, with a corresponding release of the unrealized loss recorded in unrealized gains (losses) on credit derivatives of $127 million for a net change in fair value of credit derivatives of $7 million.

Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, 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 loss to be paid as discussed in Note 5), 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



	Third Quarter					Nine Months
Asset Type	2013		2012			2013			2012
	(in millions)
Pooled corporate obligations	$	96	$	32		$	(43	)	$	62
U.S. RMBS	195		(78		)	(248		)	(457		)
CMBS	3		—			(1		)	—
Other	36		8			172			7
Total	$	330	$	(38	)	$	(120	)	$	(388	)

During Third Quarter 2013, unrealized fair value gains were generated primarily in the U.S. RMBS prime first lien, Alt-A, Option ARM and subprime sectors, as well as pooled corporate obligations, 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 significantly during the period. These transactions were pricing at or 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. The cost of AGM’s credit protection also increased during Third Quarter 2013, but did not lead to significant fair value gains, as a significant portion of AGM policies continue to price at floor levels.

During Nine Months 2013, U.S. RMBS unrealized fair value losses were generated primarily in the prime first lien, Alt-A, Option ARM and subprime RMBS sectors primarily as 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; therefore when the cost of purchasing CDS protection on AGC decreased, the implied spreads that the Company would expect to receive on these transactions increased. The cost of AGM's credit protection also decreased during Nine Months 2013, but did not lead to significant fair value losses, as the majority of AGM policies continue to price at floor levels. These unrealized fair value losses were partially offset by unrealized fair value gains in the Other sector driven primarily by the termination of a film securitization transaction and price improvement on a XXX life securitization transaction.

In Third Quarter 2012, U.S. RMBS unrealized fair value losses were generated primarily in the 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 decreased, the implied spreads that the Company would expect to receive on these transactions increased. The cost of AGM's credit protection also decreased during the quarter, but did not lead to significant fair value losses, as the majority of AGM policies continue to price at floor levels.

During Nine 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 and Option ARM 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

Table of Contents

market cost of AGC's credit protection decreased. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGC decreased, the implied spreads that the Company would expect to receive on these transactions increased. The cost of AGM's credit protection also decreased during Nine Months 2012, but did not lead to significant fair value losses, as the majority of AGM policies continue to price at floor levels. In addition, Nine Months 2012 included an $85 million unrealized gain relating to R&W benefits from the agreement with Deutsche Bank.

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 and AGM. 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 and AGM 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 and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.

Five-Year CDS Spread on AGC and AGM



	As of September 30, 2013	As of June 30, 2013	As of December 31, 2012	As of September 30, 2012	As of June 30, 2012	As of December 31, 2011
Quoted price of CDS contract (in basis points):
AGC	465	343	678	780	904	1,140
AGM	502	365	536	638	652	778

One-Year CDS Spread on AGC and AGM



	As of September 30, 2013	As of June 30, 2013	As of December 31, 2012	As of September 30, 2012	As of June 30, 2012	As of December 31, 2011
Quoted price of CDS contract (in basis points):
AGC	185	57	270	458	629	965
AGM	215	72	257	333	416	538



	As of September 30, 2013			As of December 31, 2012
	(in millions)
Fair value of credit derivatives before effect of AGC and AGM credit spreads	$	(3,955	)	$	(4,809	)
Plus: Effect of AGC and AGM credit spreads	2,034			3,016
Net fair value of credit derivatives	$	(1,921	)	$	(1,793	)

The fair value of CDS contracts at September 30, 2013, before considering the implications of AGC’s and AGM’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 2005-2007 vintages of prime first lien, Alt-A, Option ARM, subprime RMBS deals as well as trust-preferred and pooled corporate securities. Comparing September 30, 2013 with December 31, 2012, there was a narrowing of spreads primarily related to Alt-A first lien, Option ARM, and subprime RMBS transactions, as well as the Company's pooled corporate obligations. This narrowing of spreads combined with the run-off of par outstanding and termination of securities, resulted in a gain of approximately $854 million, before taking into account AGC’s or AGM’s credit spreads.

Management believes that the trading level of AGC’s and AGM’s credit spreads over the past several years has been due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against AGC and AGM 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 and AGM’s credit spread were higher

Table of Contents

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, TruPS CDO, and CLO markets as well as continuing market concerns over the most recent vintages of RMBS.

The following table presents the fair value and the present value of expected claim payments or recoveries (i.e. net expected loss to be paid as described in Note 5) 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						Present Value of Expected Claim (Payments) Recoveries(1)
Asset Type	As of September 30, 2013			As of December 31, 2012			As of September 30, 2013			As of December 31, 2012
	(in millions)
Pooled corporate obligations	$	(40	)	$	6		$	(33	)	$	(16	)
U.S. RMBS	(1,487		)	(1,237		)	(175		)	(181		)
CMBS	(3		)	(2		)	—			—
Other	(391		)	(560		)	44			(85		)
Total	$	(1,921	)	$	(1,793	)	$	(164	)	$	(282	)

____________________


(1)	Represents amount in excess of the present value of future installment fees to be received of $41 million as of September 30, 2013 and $43 million as of December 31, 2012. Includes R&W benefit of $174 million as of September 30, 2013 and $237 million as of December 31, 2012.

Ratings Sensitivities of Credit Derivative Contracts

Within the Company’s insured CDS portfolio, the transaction documentation for approximately $1.7 billion in CDS gross par insured as of September 30, 2013 provides that a downgrade of AGC's financial strength rating below BBB- or Baa3 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, AGC could be required to make a termination payment (or may be entitled to receive a termination payment from the CDS counterparty). The Company does not believe that it can accurately estimate the termination payments AGC could be required to make if, as a result of any such downgrade, the CDS counterparty terminated the affected transactions. These payments could have an adverse effect on the Company’s liquidity and financial condition.

The transaction documentation for approximately $11.2 billion in CDS gross par insured as of September 30, 2013 requires certain of the Company's insurance subsidiaries 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 approximately $10.8 billion of such contracts, AGC has negotiated caps such that the posting requirement cannot exceed a certain fixed amount, regardless of the mark-to-market valuation of the exposure or the financial strength ratings of AGC. For such contracts, AGC need not post on a cash basis more than $675 million, which amount is already being posted by AGC and is part of the approximately $681 million posted by the Company's insurance subsidiaries. For the remaining approximately $373 million of such contracts, the Company could be required from time to time to post additional collateral based on movements in the mark-to-market valuation of the underlying exposure. Of the $681 million being posted by the Company's insurance subsidiaries, approximately $64 million relate to such $373 million of notional.

Table of Contents

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 AGM and on the risks that they both assume.

Effect of Changes in Credit Spread

As of September 30, 2013



Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss) (Pre-Tax)
	(in millions)
100% widening in spreads	$	(3,885	)	$	(1,964	)
50% widening in spreads	(2,901		)	(980		)
25% widening in spreads	(2,410		)	(489		)
10% widening in spreads	(2,115		)	(194		)
Base Scenario	(1,921		)	—
10% narrowing in spreads	(1,770		)	151
25% narrowing in spreads	(1,544		)	377
50% narrowing in spreads	(1,168		)	753

____________________


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


9.	Consolidation of Variable Interest Entities

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. AGC and AGM do 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 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.

AGC and AGM are 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. AGL’s and its Subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral 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 receivable, and net claims paid and expected to be paid by AGC or AGM under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 5, Expected Loss to be Paid.

As part of the terms of its financial guaranty contracts, 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 deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, 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 and, accordingly, where the Company is obligated to

Table of Contents

absorb VIE losses or receive benefits that could potentially be significant to the VIE. The Company obtains protective rights under its insurance contracts that give the Company additional controls over a VIE if there is either deterioration of deal performance or in the financial health of the deal servicer. The Company is deemed to be the control party under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. 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 September 30, 2013, the Company had issued financial guaranty contracts for approximately 1,000 VIEs that it did not consolidate.

Consolidated FG VIEs

Number of FG VIE's Consolidated



	As of September 30, 2013		As of December 31, 2012

Beginning of the period	33		33
Consolidated(1)	11		2
Deconsolidated(1)	(3	)	—
Matured	(1	)	(2	)
End of the period	40		33

____________________


(1)	Net loss on consolidation and deconsolidation was $7 million in Nine Months 2013 and $6 million in 2012, respectively, and recorded in “fair value gains (losses) on FG VIEs” in the consolidated statement of operations.

The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately $791 million at September 30, 2013. The aggregate unpaid principal of the FG VIEs’ assets was approximately $2,117 million greater than the aggregate fair value at September 30, 2013, excluding the effect of R&W settlements. The change in the instrument-specific credit risk of the FG VIEs’ assets for Third Quarter 2013 and Nine Months 2013 were gains of $83 million and $252 million, respectively. The change in the instrument-specific credit risk of the FG VIEs’ assets for Third Quarter 2012 and Nine Months 2012 were gains of $65 million and $235 million, respectively.

The aggregate unpaid principal balance was approximately $1,725 million greater than the aggregate fair value of the FG VIEs’ liabilities as of September 30, 2013.

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 September 30, 2013					As of December 31, 2012
	Number of FG VIEs	Assets		Liabilities		Number of FG VIEs	Assets		Liabilities
	(dollars in millions)
With recourse:
First lien	25	$	620	$	799	14	$	618	$	825
Second lien	14	456		671		16	633		915
Other	1	358		358		3	350		350
Total with recourse	40	1,434		1,828		33	1,601		2,090
Without recourse	—	1,081		1,047		—	1,087		1,051
Total	40	$	2,515	$	2,875	33	$	2,688	$	3,141

Table of Contents

Unpaid Principal for FG VIEs’ Liabilities

with Recourse



	As of September 30, 2013		As of December 31, 2012
	(in millions)
Unpaid principal for FG VIEs’ liabilities with recourse (1)	$	2,385	$	2,808

____________________


(1)	FG VIE liabilities with recourse will mature at various dates ranging from 2025 to 2047.

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 elimination of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse and (3) the elimination of investment balances related to the Company’s purchase of AGC and AGM 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 Shareholders’ Equity



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Net earned premiums	$	(14	)	$	(17	)	$	(47	)	$	(50	)
Net investment income	(3		)	(3		)	(10		)	(9		)
Net realized investment gains (losses)	0			0			2			4
Fair value gains (losses) on FG VIEs	40			34			253			161
Loss and LAE	11			2			26			14
Total pretax effect on net income	34			16			224			120
Less: tax provision (benefit)	12			5			78			42
Total effect on net income (loss)	$	22		$	11		$	146		$	78



	As of September 30, 2013			As of December 31, 2012
	(in millions)
Total (decrease) increase on shareholders’ equity	$	(209	)	$	(348	)

Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. During Third Quarter 2013, the Company recorded a pre-tax net fair value gain of consolidated FG VIEs of $40 million. The gain was primarily driven by price depreciation on the Company’s FG VIE liabilities. During the quarter, market participants gave less value to the guarantee provided by monoline insurers as a result of exposure to specific countries. The primary driver of the $253 million pre-tax fair value gain of consolidated FG VIEs during Nine Months 2013 was a result of R&W benefits received on several VIEs as a result of settlements with various counterparties during the first and second quarters. These settlements resulted in a gain of $213 million. During Third Quarter 2013, one of the Company's financial guaranty insurance policies was canceled, resulting in deconsolidation of one FG VIE. During the first half of the year the Company signed an agreement that resulted in the deconsolidation of two FG VIEs.

During Third Quarter 2012, the Company recorded a pre-tax net fair value gain of consolidated FG VIEs of $34 million. While prices appreciated slightly during the period on the Company's FG VIE assets and liabilities, the gain for Third Quarter 2012 was primarily driven by large principal paydowns made on the Company's FG VIE assets. This was also the primary driver of the $161 million pre-tax fair value gain of consolidated FG VIEs during Nine Months 2012. The majority of this gain, $163 million, is a result of a R&W settlement with Deutsche Bank that closed during second quarter 2012.

Table of Contents

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.


10.	Investments and Cash

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. Income earned on the general investment portfolio, excluding loss mitigation bonds, declined due to lower reinvestment rates. Accrued investment income on fixed maturity securities, short-term investments and assets acquired in refinancing transactions was $96 million and $97 million as of September 30, 2013 and December 31, 2012, respectively.

Net Investment Income



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Income from fixed maturity securities in general investment portfolio	$	81		$	87		$	241		$	262
Income from fixed maturity securities purchased or obtained for loss mitigation purposes	19			15			47			42
Other (1)	1			2			4			4
Gross investment income	101			104			292			308
Investment expenses	(2		)	(2		)	(6		)	(7		)
Net investment income	$	99		$	102		$	286		$	301

____________________

(1) Includes income from short-term investments and assets acquired in refinancing transactions.

Net Realized Investment Gains (Losses)



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Gross realized gains on investment portfolio	$	6		$	8		$	61		$	34
Gross realized losses on investment portfolio	(5		)	(2		)	(18		)	(23		)
Other-than-temporary impairment ("OTTI")	(8		)	(4		)	(20		)	(11		)
Net realized investment gains (losses)	$	(7	)	$	2		$	23		$	0

Table of Contents

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 other comprehensive income ("OCI").

Roll Forward of Credit Losses in the Investment Portfolio



	Third Quarter					Nine Months
	2013		2012			2013		2012
	(in millions)
Balance, beginning of period	$	72	$	53		$	64	$	47
Additions for credit losses on securities for which an OTTI was not previously recognized	1		1			2		8
Reductions for securities sold during the period	—		(3		)	—		(4		)
Additions for credit losses on securities for which an OTTI was previously recognized	6		3			13		3
Balance, end of period	$	79	$	54		$	79	$	54

Fixed Maturity Securities and Short Term Investments

by Security Type

As of September 30, 2013



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI(2) Gain (Loss) on Securities with OTTI			Weighted Average Credit Quality (3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	6	%	$	684	$	37	$	(4	)	$	717	$	—		AA+
Obligations of state and political subdivisions	49		5,047		241		(39		)	5,249		1			AA
Corporate securities	13		1,308		50		(13		)	1,345		0			A
Mortgage-backed securities(4):	0
RMBS	11		1,157		33		(70		)	1,120		(53		)	A
CMBS	5		507		19		(3		)	523		—			AAA
Asset-backed securities	6		592		31		(9		)	614		16			BBB-
Foreign government securities	3		292		13		0			305		—			AA+
Total fixed maturity securities	93		9,587		424		(138		)	9,873		(36		)	AA-
Short-term investments	7		761		0		0			761		—			AAA
Total investment portfolio	100	%	$	10,348	$	424	$	(138	)	$	10,634	$	(36	)	AA-

Table of Contents

Fixed Maturity Securities and Short Term Investments

by Security Type

As of December 31, 2012



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI			Weighted Average Credit Quality (3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	7	%	$	732	$	62	$	0		$	794	$	—		AA+
Obligations of state and political subdivisions	51		5,153		489		(11		)	5,631		9			AA
Corporate securities	9		930		80		0			1,010		0			AA-
Mortgage-backed securities(4):
RMBS	13		1,281		62		(77		)	1,266		(59		)	A+
CMBS	5		482		38		0			520		—			AAA
Asset-backed securities	5		482		59		(10		)	531		43			BIG
Foreign government securities	2		286		18		0			304		0			AAA
Total fixed maturity securities	92		9,346		808		(98		)	10,056		(7		)	AA-
Short-term investments	8		817		0		0			817		—			AAA
Total investment portfolio	100	%	$	10,163	$	808	$	(98	)	$	10,873	$	(7	)	AA-

____________________


(1)	Based on amortized cost.


(2)	Accumulated OCI ("AOCI"). See also Note 17, Other Comprehensive Income.


(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 51% of mortgage backed securities as of September 30, 2013 and 61% as of December 31, 2012 based on fair value.

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. 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 Company’s investment portfolio is substantially 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.

Table of Contents

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.

Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

As of September 30, 2013



	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	$	175	$	(4	)	$	—	$	—		$	175	$	(4	)
Obligations of state and political subdivisions	731		(39		)	—		—			731		(39		)
Corporate securities	341		(13		)	—		—			341		(13		)
Mortgage-backed securities:
RMBS	373		(13		)	170		(57		)	543		(70		)
CMBS	59		(3		)	—		—			59		(3		)
Asset-backed securities	117		(2		)	40		(7		)	157		(9		)
Foreign government securities	58		0			—		—			58		0
Total	$	1,854	$	(74	)	$	210	$	(64	)	$	2,064	$	(138	)
Number of securities			385					18					403
Number of securities with OTTI			11					10					21

Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

As of December 31, 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	$	62	$	0		$	—	$	—		$	62	$	0
Obligations of state and political subdivisions	79		(11		)	—		—			79		(11		)
Corporate securities	25		0			—		—			25		0
Mortgage-backed securities:
RMBS	108		(19		)	121		(58		)	229		(77		)
CMBS	5		0			—		—			5		0
Asset-backed securities	16		0			35		(10		)	51		(10		)
Foreign government securities	8		0			—		—			8		0
Total	$	303	$	(30	)	$	156	$	(68	)	$	459	$	(98	)
Number of securities			58					16					74
Number of securities with OTTI			5					6					11

Of the securities in an unrealized loss position for 12 months or more as of September 30, 2013, 11 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2013 was $63 million. The Company has determined that the unrealized losses recorded as of September 30, 2013 are yield related and not the result of OTTI.

Table of Contents

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of September 30, 2013 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.

Distribution of Fixed-Maturity Securities

by Contractual Maturity

As of September 30, 2013



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	269	$	273
Due after one year through five years	1,602		1,674
Due after five years through 10 years	2,451		2,554
Due after 10 years	3,601		3,729
Mortgage-backed securities:
RMBS	1,157		1,120
CMBS	507		523
Total	$	9,587	$	9,873

Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts for the benefit of reinsured companies, which amounted to $360 million and $368 million as of September 30, 2013 and December 31, 2012, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $22 million and $27 million as of September 30, 2013 and December 31, 2012, respectively. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account equal to 120% of the letter of credit, which amounted to $3.5 million and $3.5 million as of September 30, 2013 and December 31, 2012, respectively.

Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on fair value assessments in excess of contractual thresholds. The fair value of the Company’s pledged securities totaled $681 million and $660 million as of September 30, 2013 and December 31, 2012, respectively. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives, for the effect of the downgrade on collateral posted.

No material investments of the Company were non-income producing for Nine Months 2013 and 2012, respectively.

Loss Mitigation Assets

One of the Company's strategies for mitigating losses has been to purchase insured securities that have expected losses at discounted prices. In addition, the Company may also obtain the obligations referenced in CDS transactions that have triggered the insured's obligation to put these bonds to AGM or AGC, or assets may be obtained as part of a negotiated agreement.

Table of Contents

Loss Mitigation Assets

Carrying Value



	As of September 30, 2013		As of December 31, 2012
	(in millions)
Fixed maturity securities:
Obligations of state and political subdivisions	$	41	$	35
Corporate Securities	132		—
RMBS	268		215
Asset-backed securities	340		306
Other invested assets:
Assets acquired in refinancing transactions	51		72
Other	21		42
Total	$	853	$	670


11.	Insurance Company Regulatory Requirements

On July 16, 2013, subsidiaries of Assured Guaranty Ltd. completed a series of transactions that increased the capitalization of its subsidiary, MAC, to $800 million on a statutory basis. The Company does not currently anticipate MAC distributing dividends.

AGM and its subsidiaries Assured Guaranty Municipal Insurance Company ("AGMIC") and Assured Guaranty (Bermuda) Ltd. ("AGBM") terminated the reinsurance pooling agreement pursuant to which AGMIC and AGBM had assumed a quota share percentage of the financial guaranty insurance policies issued by AGM, and AGM reassumed such ceded business. Subsequently, AGMIC was merged into AGM, with AGM as the surviving company.

AGBM, which had made a loan of $82.5 million to AGUS, an indirect parent holding company of AGM, received all of the outstanding shares of MAC held by AGUS and cash, in full satisfaction of the principal of and interest on such loan. After AGBM distributed substantially all of its assets, including the MAC shares, to AGM as a dividend, AGM sold AGBM to its affiliate AG Re. Subsequently, AGBM and AG Re merged, with AG Re as the surviving company. The sale of AGBM to, and subsequent merger with, AG Re were each effective as of July 17, 2013.

A new company, MAC Holdings, was formed to own 100% of the outstanding stock of MAC. AGM and its affiliate AGC subscribed for approximately 61% and 39% of the outstanding MAC Holdings common stock, respectively, for which AGM paid $425 million and AGC paid $275 million, as consideration. The consideration consisted of all of MAC's outstanding common stock (in the case of AGM), cash and marketable securities.

MAC Holdings then contributed cash and marketable securities having a fair market value sufficient to increase MAC's policyholders' surplus to approximately $400 million, and purchased a surplus note issued by MAC in the principal amount of $300 million. In addition, AGM purchased a surplus note issued by MAC in the principal amount of $100 million.

Following the increase in MAC's capitalization, AGM ceded par exposure of approximately $87 billion and unearned premiums of approximately $468 million to MAC, and AGC ceded par exposure of approximately $24 billion and unearned premiums of approximately $249 million to MAC.

In addition, on July 15, 2013, AGM and its wholly-owned subsidiary, Assured Guaranty (Europe) Ltd. (together, the "AGM Group") were notified that the New York State Department of Financial Services ("NYSDFS") does not object to the AGM Group reassuming contingency reserves that they had ceded to AG Re and electing to cease ceding future contingency reserves to AG Re under the following circumstances:


•	The AGM Group may reassume 33% of a contingency reserve base of approximately $250 million (the “NY Contingency Reserve Base”) in 2013, after July 16, 2013, the date on which the transactions for the capitalization of MAC were completed (the “Closing Date”).

Table of Contents


•	The AGM Group may reassume 50% of the NY Contingency Reserve Base in 2014, no earlier than the one year anniversary of the Closing Date, with the prior approval of the NYSDFS.


•	The AGM Group may reassume the remaining 17% of the NY Contingency Reserve Base in 2015, no earlier than the two year anniversary of the Closing Date, with the prior approval of the NYSDFS.

At the same time, AGC was notified that the Maryland Insurance Administration does not object to AGC reassuming contingency reserves that it had ceded to AG Re and electing to cease ceding future contingency reserves to AG Re under the following circumstances:


•	AGC may reassume 33% of a contingency reserve base of approximately $267 million (the “MD Contingency Reserve Base”) in 2013, after the Closing Date.


•	AGC may reassume 50% of the MD Contingency Reserve Base in 2014, no earlier than the one year anniversary of the Closing Date, with the prior approval of the MIA and the NY DFS.


•	AGC may reassume the remaining 17% of the MD Contingency Reserve Base in 2015, no earlier than the two year anniversary of the Closing Date, with the prior approval of the MIA and the NY DFS.

The reassumption of the contingency reserves by the AGM Group and AGC have the effect of increasing contingency reserves by the amount reassumed and decreasing their policyholders' surpluses by the same amount; there would be no impact on the statutory or rating agency capital of the AGM Group or AGC. The reassumption of contingency reserves by the AGM Group or AGC permit the release of amounts from the AG Re trust accounts securing AG Re's reinsurance of the AGM Group and AGC. In Third Quarter 2013, AGM and AGC reassumed 33% of their respective contingency reserve bases as discussed above.

Dividend Restrictions and Capital Requirements

AGC is a Maryland domiciled insurance company. Under Maryland's insurance law, AGC may, with prior notice to the Maryland Insurance Commissioner, pay an ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed 10% of its policyholders' surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. As of September 30, 2013, approximately $49 million was available for distribution of dividends, after giving effect to dividends paid in the prior 12 months of approximately $42 million.

AGM is a New York domiciled insurance company. Under New York insurance law, AGM may pay dividends out of "earned surplus", which is the portion of a company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay an ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of the last annual or quarterly statement filed) or 100% of its adjusted net investment income during that period. As of September 30, 2013, approximately $78 million was available for distribution of dividends, after giving effect to dividends paid in the prior 12 months of $98 million.

As of September 30, 2013, AG Re had unencumbered assets of approximately $255 million. AG Re maintains unencumbered assets for general corporate purposes, including placing additional assets in trust for the benefit of cedants to reflect declines in the market value of previously posted assets or additional ceded reserves. Unencumbered assets may decline in fourth quarter 2013 due to collateral posting requirements related to Detroit exposures. AG Re is an insurance company registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations. Based on regulatory capital requirements, AG Re currently has $600 million of excess capital and surplus. As a Class 3B insurer, AG Re is restricted from distributing capital or paying dividends by the following regulatory requirements:


•	Dividends shall not exceed outstanding statutory surplus or $440 million.


•	Dividends on annual basis shall not exceed 25% of its total statutory capital and surplus (as set out in its previous year's financial statements) or $321 million unless it files (at least seven days before payment of such dividends) with the Bermuda Monetary Authority an affidavit stating that it will continue to meet the required margins.


•	Capital distributions on an annual basis shall not exceed 15% of its total statutory capital (as set out in its previous year's financial statements) or $126 million, unless approval is granted by the Bermuda Monetary Authority.

Table of Contents


•	Dividends are limited by requirements that the subject company must at all times (i) maintain the minimum solvency margin and the Company's applicable enhanced capital requirements required under the Insurance Act of 1978 and (ii) have relevant assets in an amount at least equal to 75% of relevant liabilities, both as defined under the Insurance Act of 1978.

Dividends and Surplus Notes

By Insurance Company Subsidiaries



	Third Quarter					Nine Months
	2013			2012		2013			2012
	(in millions)
Dividends paid by AGC to AGUS	$	25		$	—	$	42		$	55
Dividends paid by AGM to AGMH	60			—		98			30
Dividends paid by AG Re to AGL	22			41		122			111
Repayment of surplus note by AGM to AGMH	25			—		50			50
Issuance of surplus notes by MAC to AGM and MAC Holdings	(400		)	—		(400		)	—


12.	Income Taxes

Overview

AGL and its Bermuda Subsidiaries, which include AG Re, AGBM, Assured Guaranty Re Overseas Ltd. (“AGRO”) and Cedar Personnel Ltd., are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. The Company’s U.S. and U.K. subsidiaries are subject to income taxes imposed by U.S. and U.K. authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company and Assured Guaranty (Europe) Ltd., a U.K. domiciled company, have elected under Section 953(d) of the U.S. Internal Revenue Code to be taxed as a U.S. domestic corporation.

In November 2013, AGL became tax resident in the U.K. and will remain a Bermuda-based company and its administrative and head office functions will continue to be carried on in Bermuda. As a company that is not incorporated in the U.K., AGL currently intends to manage the affairs of AGL in such a way as to establish and maintain its status as a company that is tax resident in the U.K. As a U.K. tax resident company, AGL will be required to file a corporation tax return with Her Majesty’s Revenue & Custom (“HMRC”). AGL will be subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The main rate of corporation tax is 23% currently; such rate is scheduled to fall to 21% as of April 1, 2014 and to 20% as of April 1, 2015. AGL will also register in the U.K. to report its Value Added Tax (“VAT”) liability. The current rate of VAT is 20%. Assured Guaranty does not expect that becoming U.K. tax resident will result in any material change in the group’s overall tax charge. Assured Guaranty expects that the dividends AGL receives from its direct subsidiaries will be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The U.K. government implemented a new tax regime for “controlled foreign companies” (“CFC regime”) effective January 1, 2013. Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be taxed under the CFC regime and has obtained a clearance from HMRC confirming this on the basis of current facts.

In conjunction with the acquisition of AGMH on July 1, 2009 ("AGMH Acquisition"), AGMH has joined the consolidated federal tax group of AGUS, AGC, and AG Financial Products Inc. (“AGFP”). In conjunction with the acquisition of MAC (formerly Municipal and Infrastructure Assurance Corporation) on May 31, 2012 (the "MAC Acquisition"), MAC has joined the consolidated federal tax group. For the periods beginning on July 1, 2009 and forward, AGMH files a consolidated federal income tax return with AGUS, AGC, AGFP and AG Analytics Inc. (“AGUS consolidated tax group”). Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO, Assured Guaranty Mortgage Insurance Company and AG Intermediary Inc., have historically filed their own consolidated federal income tax return.

Table of Contents

Provision for Income Taxes

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 estimated annual effective tax rate and pretax income for the full year 2013. A discrete calculation of the provision is calculated for each interim period.

The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the U.K. blended marginal corporate tax rate of 23.25% unless subject to U.S. tax by election or as a U.S. controlled foreign corporation, and no taxes for the Company’s Bermuda holding company and Bermuda subsidiaries unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. For periods subsequent to April 1, 2013, the U.K. corporation tax rate has been reduced to 23%, for the period April 1, 2012 to April 1, 2013 the U.K. corporation tax rate was 24% resulting in a blended tax rate of 23.25% in 2013 and prior to April 1, 2012, the U.K. corporation rate was 26% resulting in a blended tax rate of 24.5% in 2012. The Company’s overall corporate effective tax rate fluctuates based on the distribution of income across jurisdictions.

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



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Expected tax provision (benefit) at statutory rates in taxable jurisdictions	$	165		$	51		$	241		$	43
Tax-exempt interest	(14		)	(15		)	(43		)	(46		)
Change in liability for uncertain tax positions	4			0			(3		)	1
Other	(3		)	1			(1		)	3
Total provision (benefit) for income taxes	$	152		$	37		$	194		$	1
Effective tax rate	28.2		%	20.6		%	29.7		%	3.7		%

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 by election or as controlled foreign corporations are included at the U.S. statutory tax rate. Where there is a pretax loss in one jurisdiction and pretax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.

The following table presents pretax income and revenue by jurisdiction.

Pretax Income (Loss) by Tax Jurisdiction



	Third Quarter				Nine Months
	2013		2012		2013			2012
	(in millions)
United States	$	469	$	145	$	688		$	123
Bermuda	67		34		(35		)	(86		)
UK	0		0		0			0
Total	$	536	$	179	$	653		$	37

Table of Contents

Revenue by Tax Jurisdiction



	Third Quarter				Nine Months
	2013		2012		2013		2012
	(in millions)
United States	$	548	$	284	$	846	$	675
Bermuda	122		54		113		56
UK	0		0		0		0
Total	$	670	$	338	$	959	$	731

Pretax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.

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 Company 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

The following table provides a reconciliation of the beginning and ending balances of the total liability for unrecognized tax benefits. The balance of unrecognized tax benefits has been reduced due to the closing of an IRS audit.



	Unrecognized Tax Benefits Rollforward
	Nine Months 2013			Year Ended 2012
	(in millions)
Balance at the beginning of the period	$	22		$	20
Decrease due to closing of IRS audit	(9		)	—
Increase in unrecognized tax benefits as a result of position taken during the current period	6			2
Balance, end of period	$	19		$	22

The Company's policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2013, the Company has accrued $4 million of interest.

AGUS has open tax years with the U.S. Internal Revenue Service (“IRS”) for 2009 forward and is currently under audit for the 2009 tax year. The IRS concluded its field work with respect to tax years 2006 through 2008 without adjustment. On February 20, 2013 the IRS notified AGUS that the Joint Committee on Taxation completed its review and has accepted the results of the IRS examination without exception.


13.	Reinsurance and Other Monoline Exposures

The Company 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. 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.

Assumed and Ceded Business

The Company is party to reinsurance agreements as a reinsurer to other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The

Table of Contents

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 at the option of the ceding company:


•	if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum financial strength rating, or


•	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 ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, 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 the first bullet 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, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the ceding company may have the right to recapture Assumed Business ceded to AG Re or AGC, respectively, and in most cases, assets representing the statutory unearned premium (net of ceding commissions) and loss reserves (if any), plus in certain cases to receive an additional ceding commission, associated with that business. As of September 30, 2013, AG Re had posted $314 million of collateral in trust accounts for the benefit of third party ceding companies to secure its obligations under its reinsurance agreements, excluding contingency reserves. The equivalent amount for AGC is $130 million; AGC is not required to post collateral. On February 14, 2013, AG Re posted an additional $27 million of collateral due to the January 2013 downgrade by Moody's of its financial strength rating to Baa1. As of September 30, 2013, the amount of additional ceding commission for AG Re was $7 million.

The Company has Ceded Business to 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.

Commutations of Ceded Business resulted in net increase to unearned premium reserves of $108 million, net par outstanding of 19.1 billion and gains of $84 million which were recorded in other income, for Nine Months 2012. There have been no commutations to date in 2013. While certain Ceded Business has been reassumed, the Company still has significant Ceded Business with third parties.

The following table presents the components of premiums and losses reported in the consolidated statement of operations and the contribution of the Company's Assumed and Ceded Businesses.

Table of Contents

Effect of Reinsurance on Statement of Operations



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Premiums Written:
Direct	$	28		$	24		$	48		$	131
Assumed(1)	(2		)	0			17			13
Ceded(2)	4			1			3			88
Net	$	30		$	25		$	68		$	232
Premiums Earned:
Direct	$	173		$	242		$	627		$	694
Assumed	12			13			26			39
Ceded	(26		)	(33		)	(83		)	(98		)
Net	$	159		$	222		$	570		$	635
Loss and LAE:
Direct	$	25		$	108		$	18		$	545
Assumed	35			(4		)	70			13
Ceded	(5		)	(18		)	(19		)	(112		)
Net	$	55		$	86		$	69		$	446

____________________


(1)	Negative assumed premiums written were due to changes in expected Debt Service schedules.


(2)	Positive ceded premiums written were due to commutations and changes in expected Debt Service schedules.

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 September 30, 2013, based on fair value, the Company had $524 million of fixed maturity securities in its investment portfolio wrapped by National Public Finance Guarantee Corporation, $474 million by Ambac Assurance Corporation ("Ambac") and $28 million by other guarantors.

Table of Contents

Exposure by Reinsurer



	Ratings at		Par Outstanding
	November 7, 2013		As of September 30, 2013
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(1)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	WR (2)	WR	$	8,695	$	—	$	30
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa3 (3)	AA- (3)	7,420		—		—
Radian Asset Assurance Inc.	Ba1	B+	4,781		38		1,194
Syncora Guarantee Inc.	WR	WR	4,119		1,790		162
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+ (3)	2,160		—		—
ACA Financial Guaranty Corp.	NR	WR	810		5		10
Swiss Reinsurance Co.	A1	AA-	401		—		—
Ambac	WR	WR	85		6,451		18,307
CIFG Assurance North America Inc.	WR	WR	61		237		5,201
MBIA Inc.	(4)	(4)	—		10,549		7,497
Financial Guaranty Insurance Co.	WR	WR	—		2,535		1,721
Other	Various	Various	946		2,056		46
Total			$	29,478	$	23,661	$	34,168

____________________


(1)	Includes $3,364 million in ceded par outstanding related to insured credit derivatives.

(2) Represents “Withdrawn Rating.”

(3) The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody’s.


(4)	MBIA Inc. includes various subsidiaries which are rated A and B by S&P and Baa1, B1 and B3 by Moody’s.

Amounts Due (To) From Reinsurers

As of September 30, 2013



	Assumed Premium, net of Commissions		Ceded Premium, net of Commissions			Assumed Expected Loss and LAE			Ceded Expected Loss and LAE
	(in millions)
American Overseas Reinsurance Company Limited	$	—	$	(9	)	$	—		$	5
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		(22		)	—			33
Radian Asset Assurance Inc.	—		(17		)	—			12
Syncora Guarantee Inc.	—		(39		)	22			—
Mitsui Sumitomo Insurance Co. Ltd.	—		(4		)	—			7
Swiss Reinsurance Co.	—		(3		)	—			—
Ambac	69		—			(80		)	—
CIFG Assurance North America Inc.	—		—			—			4
MBIA Inc.	14		—			(11		)	—
Financial Guaranty Insurance Co.	7		—			(118		)	—
Other	—		(39		)	—			—
Total	$	90	$	(133	)	$	(187	)	$	61

Table of Contents


14.	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.

The Company establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is disclosed, including matters discussed below. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly, and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

In addition, in the ordinary course of their respective businesses, certain of the Company’s subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. For example, as described in the "Recovery Litigation" section of Note 5, Expected Loss to be Paid, as of the date of this filing, AGC and AGM have filed complaints against certain sponsors and underwriters of RMBS securities that AGC or AGM 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 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.

Proceedings Relating to the Company’s Financial Guaranty Business

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

In August 2008, a number of financial institutions and other parties, including AGM and other bond insurers, were named as defendants in a civil action brought in the circuit court of Jefferson County, Alabama relating to the County’s problems meeting its sewer debt obligations: Charles E. Wilson vs. JPMorgan Chase & Co et al (filed the Circuit Court of Jefferson County, Alabama), Case No. 01-CV-2008-901907.00, a putative class action. The action was brought on behalf of rate payers, tax payers and citizens residing in Jefferson County, and alleges conspiracy and fraud in connection with the issuance of the County’s debt. The complaint in this lawsuit seeks equitable relief, unspecified monetary damages, interest, attorneys’ fees and other costs. On January, 13, 2011, the circuit court issued an order denying a motion by the bond insurers and other defendants to dismiss the action. Defendants, including the bond insurers, have petitioned the Alabama Supreme Court for a writ of mandamus to the circuit court vacating such order and directing the dismissal with prejudice of plaintiffs’ claims for lack of standing. Currently, the litigation is stayed pending confirmation of Jefferson County's plan of adjustment or further court orders. In July 2013, Jefferson County filed its Chapter 9 plan of adjustment, disclosure statement, and motions to approve the disclosure statement and solicitation procedures with the bankruptcy court and in August 2103, the bankruptcy court approved Jefferson County's disclosure statement and related solicitation procedures. In October 2013, Jefferson County completed the plan approval solicitation process and, of the creditors entitled to vote on the plan and inclusive of all voting classes, over $3.9 billion in claims voted to accept the plan and the holders of less than $18 million in claims voted to reject the plan. On November 6, 2013, Jefferson County entered into supplements to the various plan support agreements and filed a revised plan of adjustment with the Bankruptcy Court in order to address changes in the municipal finance market, consumption patterns, and actual and projected revenues. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from this lawsuit.

Beginning in July 2008, AGM and various other financial guarantors were named in complaints filed in the Superior Court for the State of California, City and County of San Francisco by a number of plaintiffs. Subsequently, plaintiffs' counsel filed amended complaints against AGM and AGC and added additional plaintiffs. These complaints alleged 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 asserted claims for breach of the

Table of Contents

covenant of good faith and fair dealing, fraud, unjust enrichment, negligence, and negligent misrepresentation. At hearings held in July and October 2011 relating to AGM, AGC and the other defendants' demurrer, the court overruled the demurrer 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, AGM, 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 July 9, 2013, the court entered its order denying in part and granting in part the bond insurers' motion to strike. As a result of the order, the causes of action that remain against AGM and AGC are: claims of breach of contract and fraud, brought by the City of San Jose, the City of Stockton, East Bay Municipal Utility District and Sacramento Suburban Water District, relating to the failure to disclose the impact of risky financial transactions on their financial condition; and a claim of breach of the unfair business practices law brought by The Jewish Community Center of San Francisco. On September 9, 2013, plaintiffs filed an appeal of the anti-SLAPP ruling on the California antitrust statute. On September 30, 2013, AGC, AGM and the other bond insurer defendants filed a notice of cross-appeal. The complaints generally seek unspecified monetary damages, interest, attorneys' fees, costs and other expenses. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from these lawsuits.

On April 8, 2011, AG Re and AGC 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 AG Re and AGC concerning their obligations under reinsurance agreements with Ambac. In March 2010, Ambac had placed a number of insurance policies that it had issued, including policies reinsured by AG Re and AGC pursuant to the reinsurance agreements, into a segregated account. The Wisconsin state court had 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 advised AG Re and AGC that it had and intended to continue to enter into commutation agreements with holders of policies issued by Ambac, and reinsured by AG Re and AGC, pursuant to which Ambac would pay a combination of cash and surplus notes to the policyholder. AG Re and AGC informed Ambac that they believed their only current payment obligation with respect to the commutations arose from the cash payment, and that there was no obligation to pay any amounts in respect of the surplus notes until payments of principal or interest are made on such notes. Ambac disputed this position on one commutation. On April 15, 2011, attorneys for the Wisconsin Insurance Commissioner, as Rehabilitator of Ambac’s segregated account, and for Ambac filed a motion with the Circuit Court of Dane County, Wisconsin, asking the Circuit Court to find AG Re and AGC 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, the Circuit Court issued an order granting the Rehabilitator’s and Ambac’s motion to enforce the injunction against AG Re and AGC and the parties filed a stipulation dismissing the Petition to Compel Arbitration without prejudice. AG Re and AGC appealed the Circuit Court order to the Wisconsin Court of Appeals, which affirmed the Circuit Court's ruling on October 24, 2013. As a result of the ruling by the Court of Appeals, AG Re and AGC will not recover approximately $200,000 it had paid to Ambac in respect of the surplus notes.

On November 28, 2011, Lehman Brothers International (Europe) (in administration) (“LBIE”) sued AGFP, 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 AGFP under these credit default swaps. LBIE’s complaint, which was filed in the Supreme Court of the State of New York, alleged that AGFP improperly terminated nine credit derivative transactions between LBIE and AGFP and improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions between LBIE and AGFP. With respect to the 28 credit derivative transactions, AGFP calculated that LBIE owes AGFP approximately $25 million, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. LBIE is seeking unspecified damages. On February 3, 2012, AGFP filed a motion to dismiss certain of the counts in the complaint, and on March 15, 2013, the court granted AGFP's motion to dismiss the count relating to improper termination of the nine credit derivative transactions and denied AGFP's motion to dismiss the count relating to the remaining transactions. The Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.

On November 19, 2012, Lehman Brothers Holdings Inc. (“LBHI”) and Lehman Brothers Special Financing Inc. (“LBSF") commenced an adversary complaint and claim objection in the United States Bankruptcy Court for the Southern District of New York against Credit Protection Trust 283 (“CPT 283”), FSA Administrative Services, LLC, as trustee for CPT 283, and AGM, in connection with CPT 283's termination of a CDS between LBSF and CPT 283. CPT 283 terminated the CDS as a consequence of LBSF failing to make a scheduled payment owed to CPT 283, which termination occurred after LBHI filed for bankruptcy but before LBSF filed for bankruptcy. The CDS provided that CPT 283 was entitled to receive from LBSF a termination payment in that circumstance of approximately $43.8 million (representing the economic equivalent of the future fixed payments CPT 283 would have been entitled to receive from LBSF had the CDS not been terminated), and CPT 283 filed proofs of claim against LBSF and LBHI (as LBSF's credit support provider) for such amount. LBHI and LBSF seek to disallow and expunge (as impermissible and unenforceable penalties) CPT 283's proofs of claim against LBHI and LBSF and recover approximately $67.3 million, which LBHI and LBSF allege was the mark-to-market value of the CDS to LBSF

Table of Contents

(less unpaid amounts) on the day CPT 283 terminated the CDS, plus interest, attorney's fees, costs and other expenses. On the same day, LBHI and LBSF also commenced an adversary complaint and claim objection against Credit Protection Trust 207 (“CPT 207”), FSA Administrative Services, LLC, as trustee for CPT 207, and AGM, in connection with CPT 207's termination of a CDS between LBSF and CPT 207. Similarly, the CDS provided that CPT 207 was entitled to receive from LBSF a termination payment in that circumstance of $492,555. LBHI and LBSF seek to disallow and expunge CPT 207's proofs of claim against LBHI and LBSF and recover approximately $1.5 million. AGM believes the terminations of the CDS and the calculation of the termination payment amounts were consistent with the terms of the ISDA master agreements between the parties. The Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.

On September 25, 2013, Wells Fargo Bank, N.A., as trust administrator, filed an interpleader complaint in the U.S. District Court for the Southern District of New York against AGM, among others, relating to the right of AGM to be reimbursed from certain cashflows for principal claims paid on insured certificates issued in the MASTR Adjustable Rate Mortgages Trust 2007-3 securitization. The Company estimates that an adverse outcome to the interpleader proceeding could increase losses on the transaction by approximately $10 million, net of settlement payments and reinsurance in force.

Proceedings Related to AGMH’s Former Financial Products Business

The following is a description of legal proceedings involving AGMH’s former Financial Products Business. Although the Company did not acquire AGMH’s former Financial Products Business, which included AGMH’s former GIC business, medium term notes business and portions of the leveraged lease businesses, certain legal proceedings relating to those businesses are against entities that the Company did acquire. While Dexia SA and Dexia Crédit Local S.A. (“DCL”), jointly and severally, have agreed to indemnify the Company against liability arising out of the proceedings described below in the “—Proceedings Related to AGMH’s Former Financial Products Business” section, such indemnification might not be sufficient to fully hold the Company harmless against any injunctive relief or civil or criminal sanction that is imposed against AGMH or its subsidiaries.

Governmental Investigations into Former Financial Products Business

AGMH and/or AGM have received subpoenas duces tecum and interrogatories or civil investigative demands from the Attorneys General of the States of Connecticut, Florida, Illinois, Massachusetts, Missouri, New York, Texas and West Virginia relating to their investigations of alleged bid rigging of municipal GICs. AGMH is responding to such requests. AGMH may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future. In addition,


•	AGMH received a subpoena from the Antitrust Division of the Department of Justice in November 2006 issued in connection with an ongoing criminal investigation of bid rigging of awards of municipal GICs and other municipal derivatives;


•	AGM received a subpoena from the SEC in November 2006 related to an ongoing industry-wide investigation concerning the bidding of municipal GICs and other municipal derivatives; and

•

AGMH received a “Wells Notice” from the staff of the Philadelphia Regional Office of the SEC in February 2008 relating to the investigation concerning the bidding of municipal GICs and other municipal derivatives. The Wells Notice indicates that the SEC staff is considering recommending that the SEC authorize the staff to bring a civil injunctive action and/or institute administrative proceedings against AGMH, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act.

Pursuant to the subpoenas, AGMH has furnished to the Department of Justice and SEC records and other information with respect to AGMH’s municipal GIC business. The ultimate loss that may arise from these investigations remains uncertain.

In July 2010, a former employee of AGM who had been involved in AGMH's former Financial Products Business was indicted along with two other persons with whom he had worked at Financial Guaranty Insurance Company. Such former employee and the other two persons were convicted on fraud conspiracy counts. They have appealed the convictions.

Lawsuits Relating to Former Financial Products Business

During 2008, nine putative class action lawsuits were filed in federal court alleging federal antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. These cases have been coordinated and consolidated for pretrial

Table of Contents

proceedings in the U.S. District Court for the Southern District of New York as MDL 1950, In re Municipal Derivatives Antitrust Litigation, Case No. 1:08-cv-2516 (“MDL 1950”).

Five of these cases named both AGMH and AGM: (a) Hinds County, Mississippi v. Wachovia Bank, N.A.; (b) Fairfax County, Virginia v. Wachovia Bank, N.A.; (c) Central Bucks School District, Pennsylvania v. Wachovia Bank, N.A.; (d) Mayor and City Council of Baltimore, Maryland v. Wachovia Bank, N.A.; and (e) Washington County, Tennessee v. Wachovia Bank, N.A. In April 2009, the MDL 1950 court granted the defendants’ motion to dismiss on the federal claims, but granted leave for the plaintiffs to file a second amended complaint. In June 2009, interim lead plaintiffs’ counsel filed a Second Consolidated Amended Class Action Complaint; although the Second Consolidated Amended Class Action Complaint currently describes some of AGMH’s and AGM’s activities, it does not name those entities as defendants. In March 2010, the MDL 1950 court denied the named defendants’ motions to dismiss the Second Consolidated Amended Class Action Complaint. In March 2013, the putative class plaintiffs served a Third Consolidated Amended Class Action Complaint that does not list AGMH or AGM. On October 9, 2013, the putative class plaintiffs served a corrected Third Consolidated Amended Class Action Complaint that also does not list AGMH or AGM. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.

Four of the cases named AGMH (but not AGM) and also alleged that the defendants violated California state antitrust law and common law by engaging in illegal bid-rigging and market allocation, thereby depriving the cities or municipalities of competition in the awarding of GICs and ultimately resulting in the cities paying higher fees for these products: (f) City of Oakland, California v. AIG Financial Products Corp.; (g) County of Alameda, California v. AIG Financial Products Corp.; (h) City of Fresno, California v. AIG Financial Products Corp.; and (i) Fresno County Financing Authority v. AIG Financial Products Corp. When the four plaintiffs filed a consolidated complaint in September 2009, the plaintiffs did not name AGMH as a defendant. However, the complaint does describe some of AGMH’s and AGM’s activities. The consolidated complaint generally seeks unspecified monetary damages, interest, attorneys’ fees and other costs. In April 2010, the MDL 1950 court granted in part and denied in part the named defendants’ motions to dismiss this consolidated complaint.

In 2008, AGMH and AGM also were named in five non-class action lawsuits originally filed in the California Superior Courts alleging violations of California law related to the municipal derivatives industry: (a) City of Los Angeles, California v. Bank of America, N.A.; (b) City of Stockton, California v. Bank of America, N.A.; (c) County of San Diego, California v. Bank of America, N.A.; (d) County of San Mateo, California v. Bank of America, N.A.; and (e) County of Contra Costa, California v. Bank of America, N.A. Amended complaints in these actions were filed in September 2009, adding a federal antitrust claim and naming AGM (but not AGMH) and AGUS, among other defendants. These cases have been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings.

In late 2009, AGM and AGUS, among other defendants, were named in six additional non-class action cases filed in federal court, which also have been coordinated and consolidated for pretrial proceedings with MDL 1950: (f) City of Riverside, California v. Bank of America, N.A.; (g) Sacramento Municipal Utility District v. Bank of America, N.A.; (h) Los Angeles World Airports v. Bank of America, N.A.; (i) Redevelopment Agency of the City of Stockton v. Bank of America, N.A.; (j) Sacramento Suburban Water District v. Bank of America, N.A.; and (k) County of Tulare, California v. Bank of America, N.A.

The MDL 1950 court denied AGM and AGUS’s motions to dismiss these eleven complaints in April 2010. Amended complaints were filed in May 2010. On October 29, 2010, AGM and AGUS were voluntarily dismissed with prejudice from the Sacramento Municipal Utility District case only. The complaints in these lawsuits generally seek or sought unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from the remaining lawsuits.

In May 2010, AGM and AGUS, among other defendants, were named in five additional non-class action cases filed in federal court in California: (a) City of Richmond, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); (b) City of Redwood City, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); (c) Redevelopment Agency of the City and County of San Francisco, California v. Bank of America, N.A. (filed on May 21, 2010, N.D. California); (d) East Bay Municipal Utility District, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); and (e) City of San Jose and the San Jose Redevelopment Agency, California v. Bank of America, N.A (filed on May 18, 2010, N.D. California). These cases have also been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings. In September 2010, AGM and AGUS, among other defendants, were named in a sixth additional non-class action filed in federal court in New York, but which alleges violation of New York’s Donnelly Act in addition to federal antitrust law: Active Retirement Community, Inc. d/b/a Jefferson’s Ferry v. Bank of America, N.A. (filed on September 21, 2010, E.D. New York), which has also been transferred to the Southern District of New York and consolidated with MDL 1950 for

Table of Contents

pretrial proceedings. In December 2010, AGM and AGUS, among other defendants, were named in a seventh additional non-class action filed in federal court in the Central District of California, Los Angeles Unified School District v. Bank of America, N.A., and in an eighth additional non-class action filed in federal court in the Southern District of New York, Kendal on Hudson, Inc. v. Bank of America, N.A. These cases also have been consolidated with MDL 1950 for pretrial proceedings. 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, if any, or range of loss that may arise from these lawsuits.

In January 2011, AGM and AGUS, among other defendants, were named in an additional non-class action case filed in federal court in New York, which alleges violation of New York’s Donnelly Act in addition to federal antitrust law: Peconic Landing at Southold, Inc. v. Bank of America, N.A. This case has been consolidated with MDL 1950 for pretrial proceedings. The complaint in this lawsuit generally seeks unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from this lawsuit.

In September 2009, the Attorney General of the State of West Virginia filed a lawsuit (Circuit Ct. Mason County, W. Va.) against Bank of America, N.A. alleging West Virginia state antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. An amended complaint in this action was filed in June 2010, adding a federal antitrust claim and naming AGM (but not AGMH) and AGUS, among other defendants. This case has been removed to federal court as well as transferred to the S.D.N.Y. and consolidated with MDL 1950 for pretrial proceedings. The complaint in this lawsuit generally seeks civil penalties, unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from this lawsuit.


15.	Long-Term Debt and Credit Facilities

The principal and carrying values of the Company’s long-term debt are presented in the table below.

Principal and Carrying Amounts of Debt



	As of September 30, 2013				As of December 31, 2012
	Principal		Carrying Value		Principal		Carrying Value
	(in millions)
AGUS:
7.0% Senior Notes	$	200	$	198	$	200	$	197
Series A Enhanced Junior Subordinated Debentures	150		150		150		150
Total AGUS	350		348		350		347
AGMH:
67/8% QUIBS	100		68		100		68
6.25% Notes	230		138		230		137
5.60% Notes	100		54		100		54
Junior Subordinated Debentures	300		168		300		164
Total AGMH	730		428		730		423
AGM:
Notes Payable	38		43		61		66
Total AGM	38		43		61		66
Total	$	1,118	$	819	$	1,141	$	836

Recourse Credit Facilities

Strip Coverage Facility

In connection with the AGMH Acquisition, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. The liquidity risk to AGM related to the strip policy portion of the leveraged lease business is mitigated by the strip coverage facility described below.

Table of Contents

In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.

If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the “strip coverage”) from its own sources. AGM issued financial guaranty insurance policies (known as “strip policies”) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.

Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities do not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $1.6 billion as of September 30, 2013. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. It is difficult to determine the probability that AGM will have to pay strip provider claims or the likely aggregate amount of such claims. At September 30, 2013, approximately $1.1 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM.

On July 1, 2009, AGM and DCL, acting through its New York Branch (“Dexia Crédit Local (NY)”), entered into a credit facility (the “Strip Coverage Facility”). Under the Strip Coverage Facility, Dexia Crédit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on AGM strip policies that were outstanding as of November 13, 2008, up to the commitment amount. The commitment amount of the Strip Coverage Facility was $1 billion at closing of the AGMH Acquisition but is scheduled to amortize over time. As of September 30, 2013, the maximum commitment amount of the Strip Coverage Facility has amortized to $975 million. It may also be reduced in 2014 to $750 million, if AGM does not have a specified consolidated net worth at that time.

Fundings under this facility are subject to certain conditions precedent, and their repayment is collateralized by a security interest that AGM granted to Dexia Crédit Local (NY) in amounts that AGM recovers—from the tax-exempt entity, or from asset sale proceeds—following its payment of strip policy claims. The Strip Coverage Facility will terminate upon the earliest to occur of an AGM change of control, the reduction of the commitment amount to $0, and January 31, 2042.

The Strip Coverage Facility’s financial covenants require that AGM and its subsidiaries maintain a maximum debt-to-capital ratio of 30% and maintain a minimum net worth of 75% of consolidated net worth as of July 1, 2009, plus, starting July 1, 2014, (i) 25% of the aggregate consolidated net income (or loss) for the period beginning July 1, 2009 and ending on June 30, 2014 or, (2) zero, if the commitment amount has been reduced to $750 million as described above. The Company is in compliance with all financial covenants as of September 30, 2013.

The Strip Coverage Facility contains restrictions on AGM, including, among other things, in respect of its ability to incur debt, permit liens, pay dividends or make distributions, dissolve or become party to a merger or consolidation. Most of these restrictions are subject to exceptions. The Strip Coverage Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, bankruptcy or insolvency proceedings and cross-default to other debt agreements.

As of September 30, 2013, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.

Intercompany Credit Facility

On October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend an aggregate principal amount not exceeding $225 million in the aggregate. Such commitment terminates on the fifth anniversary date of the date of the credit agreement (the “loan termination date”). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable Federal short-term or mid-term interest rate, as the case may be, as determined under Internal Revenue Code Sec. 1274(d), and interest on all loans will be computed for the actual

Table of Contents

number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan termination date. No amounts are currently outstanding under the credit facility.

Limited Recourse Credit Facilities

AG Re had a $200 million limited recourse credit facility for the payment of losses in respect of cumulative municipal losses (net of any recoveries) in excess of the greater of $260 million or the average annual Debt Service of the covered portfolio multiplied by 4.5%. The obligation to repay loans under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral. AG Re terminated this credit facility effective March 5, 2013.

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 expired in October 2013. As of September 30, 2013, $2.9 million was outstanding under this letter of credit. This letter of credit expires in November 2013.

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 million of perpetual preferred stock of AGC (the “AGC Preferred Stock”). The custodial trusts were created as vehicles 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 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.

In June 2003, $200 million of “AGM CPS Securities”, money market preferred trust securities, were issued by trusts created for the primary purpose of issuing the AGM CPS Securities, investing the proceeds in high-quality commercial paper and selling put options to AGM, allowing AGM to issue the trusts non-cumulative redeemable perpetual preferred stock (the “AGM Preferred Stock”) of AGM in exchange for cash. There are four trusts, each with an initial aggregate face amount of $50 million. These trusts hold auctions every 28 days, at which time investors submit bid orders to purchase AGM CPS Securities. If AGM were to exercise a put option, the applicable trust would transfer the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, to AGM in exchange for AGM Preferred Stock. AGM pays a floating put premium to the trusts, which represents the difference between the commercial paper yield and the winning auction rate (plus all fees and expenses of the trust). If an auction does not attract sufficient clearing bids, however, the auction rate is subject to a maximum rate of one-month LIBOR plus 200 basis points for the next succeeding distribution period. Beginning in August 2007, the AGM CPS Securities required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock. The trusts provide AGM access to new capital at its sole discretion through the exercise of the put options. As of September 30, 2013 the put option had not been exercised. The Company does not consider itself to be the primary beneficiary of the trusts. See Note 7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement discussion.

Table of Contents


16.	Earnings Per Share

Computation of Earnings Per Share



	Third Quarter				Nine Months
	2013		2012		2013		2012
	(in millions, except per share amounts)
Basic earnings per share ("EPS"):
Net income (loss) attributable to AGL	$	384	$	142	$	459	$	36
Less: Distributed and undistributed income (loss) available to nonvested shareholders	0		—		0		1
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic	$	384	$	142	$	459	$	35
Basic shares	182.9		194.0		188.2		187.6
Basic EPS	$	2.10	$	0.73	$	2.44	$	0.19

Diluted EPS:
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic	$	384	$	142	$	459	$	35
Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries	0		—		0		—
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted	$	384	$	142	$	459	$	35

Basic shares	182.9		194.0		188.2		187.6
Effect of dilutive securities:
Options and restricted stock awards	1.0		0.7		0.9		0.7
Equity units	—		—		—		1.0
Diluted shares	183.9		194.7		189.1		189.3
Diluted EPS	$	2.09	$	0.73	$	2.43	$	0.19
Potentially dilutive securities excluded from computation of EPS because of antidilutive effect	1.9		3.9		3.0		11.9

Table of Contents


17.	Other Comprehensive Income

The following tables present the changes in the balances of each component of accumulated other comprehensive income and the effect of significant reclassifications out of AOCI on the respective line items in net income.

Changes in Accumulated Other Comprehensive Income by Component

Third Quarter 2013



	Net Unrealized Gains (Losses) on Investments with no OTTI			Net Unrealized Gains (Losses) on Investments with OTTI			Cumulative Translation Adjustment			Cash Flow Hedge		Total Accumulated Other Comprehensive Income
	(in millions)
Balance, June 30, 2013	$	237		$	(25	)	$	(12	)	$	9	$	209
Other comprehensive income (loss) before reclassifications	(11		)	(2		)	7			—		(6		)
Amounts reclassified from AOCI to:
Other net realized investment gains (losses)	(2		)	7			—			—		5
Interest expense	—			—			—			0		0
Total before tax	(2		)	7			—			0		5
Tax (provision) benefit	1			(3		)	—			0		(2		)
Total amounts reclassified from AOCI, net of tax	(1		)	4			—			0		3
Net current period other comprehensive income	(12		)	2			7			0		(3		)
Balance, September 30, 2013	$	225		$	(23	)	$	(5	)	$	9	$	206

Third Quarter 2012



	Net Unrealized Gains (Losses) on Investments with no OTTI		Net Unrealized Gains (Losses) on Investments with OTTI			Cumulative Translation Adjustment			Cash Flow Hedge		Total Accumulated Other Comprehensive Income
	(in millions)
Balance, June 30, 2012	$	445	$	(16	)	$	(8	)	$	9	$	430
Other comprehensive income (loss)	94		5			2			0		101
Balance, September 30, 2012	$	539	$	(11	)	$	(6	)	$	9	$	531

100

Table of Contents

Nine Months 2013



	Net Unrealized Gains (Losses) on Investments with no OTTI			Net Unrealized Gains (Losses) on Investments with OTTI			Cumulative Translation Adjustment			Cash Flow Hedge			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2012	$	517		$	(5	)	$	(6	)	$	9		$	515
Other comprehensive income (loss) before reclassifications	(280		)	(34		)	1			—			(313		)
Amounts reclassified from AOCI to:
Other net realized investment gains (losses)	(16		)	24			—			—			8
Interest expense	—			—			—			(1		)	(1		)
Total before tax	(16		)	24			—			(1		)	7
Tax (provision) benefit	4			(8		)	—			1			(3		)
Total amounts reclassified from AOCI, net of tax	(12		)	16			—			0			4
Net current period other comprehensive income	(292		)	(18		)	1			0			(309		)
Balance, September 30, 2013	$	225		$	(23	)	$	(5	)	$	9		$	206

Nine Months 2012



	Net Unrealized Gains (Losses) on Investments with no OTTI		Net Unrealized Gains (Losses) on Investments with OTTI			Cumulative Translation Adjustment			Cash Flow Hedge		Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2011	$	365	$	2		$	(8	)	$	9	$	368
Other comprehensive income (loss)	174		(13		)	2			0		163
Balance, September 30, 2012	$	539	$	(11	)	$	(6	)	$	9	$	531

101

Table of Contents


18.	Subsidiary Information

The following tables present the condensed consolidating financial information for AGUS and AGMH, wholly-owned subsidiaries of AGL, which have issued publicly traded debt securities (see Note 15, Long-Term Debt and Credit Facilities) as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012. The information for AGUS and AGMH presents its subsidiaries on the equity method of accounting.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2013

(in millions)



	Assured Guaranty Ltd. (Parent)		AGUS (Issuer)		AGMH (Issuer)		Other Entities		Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
ASSETS
Total investment portfolio and cash	$	36	$	133	$	49	$	10,948	$	(300	)	$	10,866
Investment in subsidiaries	4,779		4,030		3,497		280		(12,586		)	—
Premiums receivable, net of ceding commissions payable	—		—		—		1,047		(141		)	906
Ceded unearned premium reserve	—		—		—		1,646		(1,166		)	480
Deferred acquisition costs	—		—		—		204		(79		)	125
Reinsurance recoverable on unpaid losses	—		—		—		196		(137		)	59
Credit derivative assets	—		—		—		530		(424		)	106
Deferred tax asset, net	—		76		—		805		(114		)	767
Intercompany receivable	—		—		—		90		(90		)	—
Financial guaranty variable interest entities’ assets, at fair value	—		—		—		2,515		—			2,515
Other	26		2		39		716		(253		)	530
TOTAL ASSETS	$	4,841	$	4,241	$	3,585	$	18,977	$	(15,290	)	$	16,354
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unearned premium reserves	$	—	$	—	$	—	$	5,820	$	(1,144	)	$	4,676
Loss and LAE reserve	—		—		—		751		(150		)	601
Long-term debt	—		348		428		43		—			819
Intercompany payable	—		90		—		300		(390		)	—
Credit derivative liabilities	—		—		—		2,451		(424		)	2,027
Deferred tax liabilities, net	—		—		91		—		(91		)	—
Financial guaranty variable interest entities’ liabilities, at fair value	—		—		—		2,875		—			2,875
Other	7		7		21		877		(390		)	522
TOTAL LIABILITIES	7		445		540		13,117		(2,589		)	11,520
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD.	4,834		3,796		3,045		5,580		(12,421		)	4,834
Noncontrolling interest	—		—		—		280		(280		)	—
TOTAL SHAREHOLDERS' EQUITY	4,834		3,796		3,045		5,860		(12,701		)	4,834
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,841	$	4,241	$	3,585	$	18,977	$	(15,290	)	$	16,354

102

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2012

(in millions)



	Assured Guaranty Ltd. (Parent)		AGUS (Issuer)		AGMH (Issuer)			Other Entities		Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
ASSETS
Total investment portfolio and cash	$	245	$	15	$	30		$	11,233	$	(300	)	$	11,223
Investment in subsidiaries	4,734		3,958		3,225			3,524		(15,441		)	—
Premiums receivable, net of ceding commissions payable	—		—		—			1,147		(142		)	1,005
Ceded unearned premium reserve	—		—		—			1,550		(989		)	561
Deferred acquisition costs	—		—		—			190		(74		)	116
Reinsurance recoverable on unpaid losses	—		—		—			223		(165		)	58
Credit derivative assets	—		—		—			553		(412		)	141
Deferred tax asset, net	—		48		(94		)	789		(22		)	721
Intercompany receivable	—		—		—			173		(173		)	—
Financial guaranty variable interest entities’ assets, at fair value	—		—		—			2,688		—			2,688
Other	23		29		26			816		(165		)	729
TOTAL ASSETS	$	5,002	$	4,050	$	3,187		$	22,886	$	(17,883	)	$	17,242
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unearned premium reserves	$	—	$	—	$	—		$	6,168	$	(961	)	$	5,207
Loss and LAE reserve	—		—		—			778		(177		)	601
Long-term debt	—		347		423			66		—			836
Intercompany payable	—		173		—			300		(473		)	—
Credit derivative liabilities	—		—		—			2,346		(412		)	1,934
Financial guaranty variable interest entities’ liabilities, at fair value	—		—		—			3,141		—			3,141
Other	8		6		15			803		(303		)	529
TOTAL LIABILITIES	8		526		438			13,602		(2,326		)	12,248
TOTAL SHAREHOLDERS’ EQUITY	4,994		3,524		2,749			9,284		(15,557		)	4,994
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,002	$	4,050	$	3,187		$	22,886	$	(17,883	)	$	17,242

103

Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013

(in millions)



	Assured Guaranty Ltd. (Parent)			AGUS (Issuer)			AGMH (Issuer)			Other Entities			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
REVENUES
Net earned premiums	$	—		$	—		$	—		$	156		$	3		$	159
Net investment income	—			—			1			101			(3		)	99
Net realized investment gains (losses)	—			—			(1		)	33			(39		)	(7		)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	—			—			—			24			—			24
Net unrealized gains (losses)	—			—			—			330			—			330
Net change in fair value of credit derivatives	—			—			—			354			—			354
Other	—			—			—			65			—			65
TOTAL REVENUES	—			—			—			709			(39		)	670
EXPENSES
Loss and LAE	—			—			—			52			3			55
Amortization of deferred acquisition costs	—			—			—			6			(2		)	4
Interest expense	—			6			13			6			(4		)	21
Other operating expenses	5			—			1			49			(1		)	54
TOTAL EXPENSES	5			6			14			113			(4		)	134
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES	(5		)	(6		)	(14		)	596			(35		)	536
Total (provision) benefit for income taxes	—			3			5			(172		)	12			(152		)
Equity in net earnings of subsidiaries	389			316			151			10			(866		)	—
NET INCOME (LOSS)	384			313			142			434			(889		)	384
Less: noncontrolling interest	—			—			—			10			(10		)	—
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD.	$	384		$	313		$	142		$	424		$	(879	)	$	384

COMPREHENSIVE INCOME (LOSS)	$	381		$	317		$	145		$	411		$	(873	)	$	381

104

Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)



	Assured Guaranty Ltd. (Parent)			AGUS (Issuer)			AGMH (Issuer)			Other Entities			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
REVENUES
Net earned premiums	$	—		$	—		$	—		$	219		$	3		$	222
Net investment income	—			—			0			107			(5		)	102
Net realized investment gains (losses)	—			—			—			2			—			2
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	—			—			—			1			1			2
Net unrealized gains (losses)	—			—			—			(38		)	—			(38		)
Net change in fair value of credit derivatives	—			—			—			(37		)	1			(36		)
Other	—			—			—			49			(1		)	48
TOTAL REVENUES	—			—			—			340			(2		)	338
EXPENSES
Loss and LAE	—			—			—			86			—			86
Amortization of deferred acquisition costs	—			—			—			6			(2		)	4
Interest expense	—			7			13			6			(5		)	21
Other operating expenses	4			0			1			44			(1		)	48
TOTAL EXPENSES	4			7			14			142			(8		)	159
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES	(4		)	(7		)	(14		)	198			6			179
Total (provision) benefit for income taxes	—			3			5			(42		)	(3		)	(37		)
Equity in net earnings of subsidiaries	146			105			157			100			(508		)	—
NET INCOME (LOSS)	$	142		$	101		$	148		$	256		$	(505	)	$	142

COMPREHENSIVE INCOME (LOSS)	$	243		$	175		$	190		$	431		$	(796	)	$	243

105

Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

(in millions)



	Assured Guaranty Ltd. (Parent)			AGUS (Issuer)			AGMH (Issuer)			Other Entities			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
REVENUES
Net earned premiums	$	—		$	—		$	—		$	563		$	7		$	570
Net investment income	0			0			1			298			(13		)	286
Net realized investment gains (losses)	0			—			0			58			(35		)	23
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	—			—			—			(44		)	—			(44		)
Net unrealized gains (losses)	—			—			—			(120		)	—			(120		)
Net change in fair value of credit derivatives	—			—			—			(164		)	—			(164		)
Other	—			—			—			244			—			244
TOTAL REVENUES	—			—			1			999			(41		)	959
EXPENSES
Loss and LAE	—			—			—			69			—			69
Amortization of deferred acquisition costs	—			—			—			3			5			8
Interest expense	—			21			40			17			(15		)	63
Other operating expenses	17			—			1			151			(3		)	166
TOTAL EXPENSES	17			21			41			240			(13		)	306
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES	(17		)	(21		)	(40		)	759			(28		)	653
Total (provision) benefit for income taxes	—			8			14			(226		)	10			(194		)
Equity in net earnings of subsidiaries	476			486			533			10			(1,505		)	—
NET INCOME (LOSS)	$	459		$	473		$	507		$	543		$	(1,523	)	$	459
Less: noncontrolling interest	—			—			—			10			(10		)	—
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD.	$	459		$	473		$	507		$	533		$	(1,513	)	$	459

COMPREHENSIVE INCOME (LOSS)	$	150		$	272		$	384		$	16		$	(672	)	$	150

106

Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)



	Assured Guaranty Ltd. (Parent)			AGUS (Issuer)			AGMH (Issuer)			Other Entities			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
REVENUES
Net earned premiums	$	—		$	—		$	—		$	625		$	10		$	635
Net investment income	0			0			1			313			(13		)	301
Net realized investment gains (losses)	0			—			0			0			—			0
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	—			—			—			(78		)	—			(78		)
Net unrealized gains (losses)	—			—			—			(388		)	—			(388		)
Net change in fair value of credit derivatives	—			—			—			(466		)	—			(466		)
Other	—			—			—			263			(2		)	261
TOTAL REVENUES	—			—			1			735			(5		)	731
EXPENSES
Loss and LAE	—			—			—			448			(2		)	446
Amortization of deferred acquisition costs	—			—			—			24			(10		)	14
Interest expense	—			27			40			17			(13		)	71
Other operating expenses	16			1			1			149			(4		)	163
TOTAL EXPENSES	16			28			41			638			(29		)	694
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES	(16		)	(28		)	(40		)	97			24			37
Total (provision) benefit for income taxes	—			10			14			(17		)	(8		)	(1		)
Equity in net earnings of subsidiaries	52			112			319			94			(577		)	—
NET INCOME (LOSS)	$	36		$	94		$	293		$	174		$	(561	)	$	36

COMPREHENSIVE INCOME (LOSS)	$	199		$	212		$	364		$	455		$	(1,031	)	$	199

107

Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

(in millions)



	Assured Guaranty Ltd. (Parent)			AGUS (Issuer)			AGMH (Issuer)			Other Entities			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
Net cash flows provided by (used in) operating activities	$	108		$	123		$	68		$	207		$	(360	)	$	146
Cash flows from investing activities
Fixed maturity securities:
Purchases	—			(35		)	(23		)	(1,570		)	65			(1,563		)
Sales	171			1			25			680			(65		)	812
Maturities	21			—			2			620			—			643
Sales (purchases) of short-term investments, net	16			(94		)	(24		)	146			—			44
Net proceeds from financial guaranty variable entities’ assets	—			—			—			553			—			553
Intercompany debt	—			—			—			7			(7		)	—
Investment in subsidiary	—			—			50			—			(50		)	—
Other	—			—			—			81			—			81
Net cash flows provided by (used in) investing activities	208			(128		)	30			517			(57		)	570
Cash flows from financing activities
Return of capital	—			—			—			(50		)	50			—
Dividends paid	(57		)	—			(98		)	(262		)	360			(57		)
Repurchases of common stock	(259		)	—			—			—			—			(259		)
Share activity under option and incentive plans	—			—			—			—			—			—
Net paydowns of financial guaranty variable entities’ liabilities	—			—			—			(409		)	—			(409		)
Payment of long-term debt	—			—			—			(22		)	—			(22		)
Intercompany debt	—			(7		)	—			—			7			—
Net cash flows provided by (used in) financing activities	(316		)	(7		)	(98		)	(743		)	417			(747		)
Effect of exchange rate changes	—			—			—			(1		)	—			(1		)
Increase (decrease) in cash	—			(12		)	—			(20		)	—			(32		)
Cash at beginning of period	—			13			0			125			—			138
Cash at end of period	$	—		$	1		$	0		$	105		$	—		$	106

108

Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)



	Assured Guaranty Ltd. (Parent)			AGUS (Issuer)			AGMH (Issuer)			Other Entities			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
Net cash flows provided by (used in) operating activities	$	98		$	23		$	14		$	(82	)	$	(276	)	$	(223	)
Cash flows from investing activities
Fixed maturity securities:
Purchases	(160		)	(1		)	(11		)	(1,150		)	—			(1,322		)
Sales	—			—			1			682			—			683
Maturities	1			—			3			754			—			758
Sales (purchases) of short-term investments, net	(34		)	27			23			266			—			282
Net proceeds from financial guaranty variable entities’ assets	—			—			—			407			—			407
Acquisition of MAC, net of cash acquired	—			(91		)	—			—			—			(91		)
Intercompany debt	—			—			—			(173		)	173			—
Investment in subsidiary	—			—			50			—			(50		)	—
Other	—			—			—			85			—			85
Net cash flows provided by (used in) investing activities	(193		)	(65		)	66			871			123			802
Cash flows from financing activities
Issuance of common stock	173			—			—			—			—			173
Return of capital	—			—			—			(50		)	50			—
Dividends paid	(51		)	—			(80		)	(196		)	276			(51		)
Repurchases of common stock	(24		)	—			—			—			—			(24		)
Share activity under option and incentive plans	(3		)	—			—			—			—			(3		)
Net paydowns of financial guaranty variable entities’ liabilities	—			—			—			(553		)	—			(553		)
Payment of long-term debt	—			(173		)	—			(31		)	—			(204		)
Intercompany debt	—			173			—			—			(173		)	—
Net cash flows provided by (used in) financing activities	95			—			(80		)	(830		)	153			(662		)
Effect of exchange rate changes	—			—			—			1			—			1
Increase (decrease) in cash	—			(42		)	—			(40		)	—			(82		)
Cash at beginning of period	—			72			0			143			—			215
Cash at end of period	$	—		$	30		$	0		$	103		$	—		$	133


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”). These

109

Table of Contents

statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.

Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ materially are:

· rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of Assured Guaranty or any of its subsidiaries and/or of transactions that Assured Guaranty’s subsidiaries have insured;

· developments in the world’s financial and capital markets, including changes in interest and foreign exchange rates, that adversely affect the demand for the Company's insurance, issuers’ payment rates, Assured Guaranty’s loss experience, its exposure to refinancing risk in transactions (which could result in substantial liquidity claims on its guarantees), its access to capital, its unrealized (losses) gains on derivative financial instruments or its investment returns;

· changes in the world’s credit markets, segments thereof or general economic conditions;

· the impact of rating agency action with respect to sovereign debt and the resulting effect on the value of securities in the Company’s investment portfolio and collateral posted by and to the Company;

· more severe or frequent losses impacting the adequacy of Assured Guaranty’s expected loss estimates;

· the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default swap form;

· reduction in the amount of insurance opportunities available to Assured Guaranty;

· deterioration in the financial condition of Assured Guaranty’s reinsurers, the amount and timing of reinsurance recoverables actually received and the risk that reinsurers may dispute amounts owed to Assured Guaranty under its reinsurance agreements;

· the failure of Assured Guaranty to realize insurance loss recoveries or damages expected from originators, sellers, sponsors, underwriters or servicers of residential mortgage-backed securities transactions through loan putbacks, settlement negotiations or litigation;

· the possibility that budget shortfalls or other factors will result in credit losses or impairments on obligations of state and local governments that the Company insures or reinsures;

· increased competition, including from new entrants into the financial guaranty industry;

· changes in applicable accounting policies or practices;

· changes in applicable laws or regulations, including insurance and tax laws;

· other governmental actions;

· difficulties with the execution of Assured Guaranty’s business strategy;

· contract cancellations;

· loss of key personnel;

· adverse technological developments;

· the effects of mergers, acquisitions and divestitures;

· natural or man-made catastrophes;

110

Table of Contents

· other risks and uncertainties that have not been identified at this time;

· management’s response to these factors; and

· other risk factors identified in Assured Guaranty’s filings with the U.S. Securities and Exchange Commission (the “SEC”).

The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC.

If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.

For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Introduction

The Company provides credit protection products in the United States (“U.S.”) and international public finance (including infrastructure) and structured finance markets. The Company applies 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 taxable and tax-exempt 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 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 obligations. The Company guarantees obligations issued principally in the United States and the United Kingdom ("U.K."). The Company also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

Available Information

The Company maintains an Internet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (at www.assuredguaranty.com/investor-information/by-company/assured-guaranty-ltd/sec-filings) the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (at www.assuredguaranty.com/governance) links to the Company’s Corporate Governance Guidelines, its Code of Conduct and the charters for its Board Committees.

The Company routinely posts important information for investors on its web site (at www.assuredguaranty.com/about-us/company-statements). The Company uses this web site as a means of disclosing material, non-public information and for complying with its disclosure obligations under SEC Regulation FD. Accordingly, investors should monitor the Investor Information portion of the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company’s web site is not incorporated by reference into, and is not a part of, this report.

111

Table of Contents

Executive Summary

This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to Assured Guaranty's 2012 Annual Report on Form 10-K and Assured Guaranty's Quarterly Report on 10-Q for the quarter ended September 30, 2013.

Economic Environment

The Company continued to be the most active provider of financial guaranty insurance in the three months ended September 30, 2013 ("Third Quarter 2013") and nine months ended September 30, 2013 ("Nine Months 2013") as a result of its financial strength and its ability to attract investors through its default protection, credit selection, underwriting and surveillance. All of the Company's pre-2008 financial guaranty competitors have had their financial strength ratings downgraded by rating agencies to below investment grade levels or are no longer rated, severely impairing their ability to underwrite new business. Only two other industry participants have investment grade financial strength ratings today: National Public Finance Guarantee Corporation, which recently resolved litigation challenging its separation from MBIA Insurance Corporation and appears not to have financial strength ratings adequate to issue new financial guaranty policies on public finance obligations at this time, and Build America Mutual Assurance Company, which is a new entrant to the industry that commenced operations during 2012 and significantly increased its business during Nine Months 2013. Business conditions have been difficult for the entire financial guaranty insurance industry since mid-2007, and the industry continues to face challenges in maintaining its market penetration today. The industry's ability to generate new business has been constrained in the environment of low interest rates and tight credit spreads that has prevailed in recent years. These conditions suppress demand for bond insurance, as the potential savings for issuers are diminished and some investors prefer to forgo insurance in favor of greater yield. However, the Company believes there is potential for growth in insured penetration once interest rates rise and credit spreads widen. For example, in Third Quarter 2013, interest rates were significantly higher than in the same period of 2012 and the insured penetration of the municipal new-issue market was also higher, despite lower overall new issuance. The Company cannot assure whether or for how long this pattern will be sustained.

The overall economic environment in the U.S. has improved over the last few years and indicators such as lower mortgage delinquency rates, more stable housing prices and record stock market valuations point toward further improvement. However, unemployment rates remain elevated, and the economy is continuing to experience the economic impact of the Federal budget sequestration mandated by congressional legislation.

Although few municipalities have fully rebuilt reserves to pre-recession levels, the vast majority have been taking steps to address the ongoing fiscal challenges they have experienced since the recent credit crisis and the ensuing recession, including, in many cases, significant unfunded pension and retiree health care liabilities. Revenues at the state level have been rebounding in general, and while the strength of the housing recovery varies from region to region, property tax and other revenues have stabilized for most local governments. Although municipal defaults remain rare, a small number of municipal credits have sought, though not always obtained, bankruptcy protection. Municipal bankruptcy is an area of law that is relatively undeveloped due to the low frequency of such cases.

The Company, along with other creditors, has negotiated conditional agreements with certain distressed municipalities, including Jefferson County, Alabama, the City of Stockton, California, and the City of Harrisburg, Pennsylvania. The Company is also active with respect to the municipal bankruptcy case of the City of Detroit, Michigan and is closely monitoring legal proceedings in other municipal bankruptcy cases. The publicity surrounding high-profile defaults and bankruptcy filings, such as Detroit's, especially those few where bond insurers are paying claims, provides evidence of the value of bond insurance, which the Company believes may stimulate demand, especially at the retail level.

The Company is also closely following developments in the Commonwealth of Puerto Rico, which has significant economic challenges. The Company believes that recent announcements and actions by the current Governor and his administration demonstrate that officials of the Commonwealth are focused on making the necessary choices to help Puerto Rico operate within its financial resources and maintain its access to the capital markets, which is a critical source of funding for the Commonwealth. The Commonwealth has not defaulted on any of its debt, and neither Puerto Rico nor its instrumentalities are eligible debtors under Chapter 9 of the U.S. Bankruptcy Code. For additional information on the Company's exposure to Puerto Rico, please refer to "Puerto Rico" in Note 3, Outstanding Exposure, of the Financial Statements.

112

Table of Contents

In the international arena, troubled Eurozone countries continue to be a source of stress in global equity and debt markets. Following the 2011 restructuring of the sovereign debt of Greece, debt costs in Portugal, Spain and Italy remain elevated, although they have declined substantially since the announcement on August 2, 2012 by the European Central Bank that it would undertake outright monetary transactions in support of Eurozone sovereign bonds. Successful execution of structural reforms is necessary to avert further fiscal stress in those and other European Union ("EU") countries. Fiscal austerity programs initiated to address the problems have constrained economic growth, and a number of countries are in or near recession. The rating agencies have downgraded many European sovereign credits. The Company's exposure to troubled Eurozone countries is described in “–Results of Operations–Consolidated Results of Operations–Losses in the Insured Portfolio” and “–Insured Portfolio-Selected European Exposures.”

The economic environment since 2008 has had a significant negative impact on the demand by investors for financial guaranty policies, and it is uncertain when or if demand for financial guaranties will return to their pre-credit crisis level. In particular, there has been limited new issue activity and also limited demand for financial guaranties in both the global structured finance and international infrastructure finance markets for several years. The Company expects that global structured finance and international infrastructure opportunities will increase in the future as the global economy recovers, issuers return to the capital markets for financings and institutional investors again utilize financial guaranties. During Third Quarter 2013, the Company guaranteed two bond issues for U.K. public-private partnership infrastructure financings, the first new-issue transactions since 2008, and it anticipates guaranteeing additional similar transactions. The Company cannot assure that this recent increase in U.K. infrastructure opportunities will continue or that the Company will be given the opportunity to participate in such financings if it does.

In Third Quarter 2013, the Company continued to be affected by a negative perception of financial guaranty insurers arising from the financial distress suffered by other companies in the industry during the financial crisis. On January 17, 2013, after a ten month review, Moody's Investors Service, Inc. ("Moody's") assigned the following lower financial strength ratings: A2 (Stable) for Assured Guaranty Municipal Corp. ("AGM"), A3 (Stable) for Assured Guaranty Corp. ("AGC"), and Baa1 (Stable) for Assured Guaranty Re Ltd. ("AG Re"). The Company believes the Moody's rating action during first quarter 2013 caused an interruption in demand for its municipal bond insurance as the market evaluated the action's implications. Historically, production has decreased in the periods immediately before and after an unfavorable rating agency action but subsequently increased from those lower levels.

In a sign that the impact of the Moody's downgrade has been limited, AGC's and AGM's credit spreads were tighter at June 30, 2013 than at January 1, 2013 by 49% and 32%, respectively. In Third Quarter 2013, other factors, such as generally wider credit spreads, affected AGC’s and AGM’s credit spreads, which were 31% and 6% tighter at September 30, 2013 than at January 1, 2013. Credit spreads reflect the risk that investors perceive in the Company, among other factors. The higher the Company's credit spread, the lower the benefit of the Company's guaranty is to certain investors. If investors view the Company as being only marginally less risky, or perhaps even as risky, as the uninsured security, the coupon on a security insured by the Company may not be much lower, or may be the same as, an uninsured security offered by the same issuer. Accordingly, issuers may be unwilling to pay a premium for the Company to insure their securities if the insurance does not lower the costs of borrowing. Although high compared with their pre-2007 levels, both AGC's and AGM's credit spreads were less than 16% of their March 2009 peaks as of September 30, 2013.

113

Table of Contents

Financial Performance of Assured Guaranty

Financial Results



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions, except per share amounts)
Selected income statement data
Net earned premiums	$	159		$	222		$	570		$	635
Net investment income	99			102			286			301
Realized gains (losses) and other settlements on credit derivatives	24			2			(44		)	(78		)
Net unrealized gains (losses) on credit derivatives	330			(38		)	(120		)	(388		)
Fair value gains (losses) on financial guaranty variable interest entities	40			34			253			161
Loss and loss adjustment (expenses) benefit	(55		)	(86		)	(69		)	(446		)
Other operating expenses	(54		)	(48		)	(166		)	(163		)
Net income (loss)	384			142			459			36
Diluted income (loss) per share	$	2.09		$	0.73		$	2.43		$	0.19
Selected non-GAAP measures(1)
Operating income	$	117		$	166		$	475		$	351
Operating income per share	$	0.64		$	0.85		$	2.51		$	1.85
Present value of new business production (“PVP”)	$	40		$	35		$	74		$	141

____________________


(1)	Please refer to “—Non-GAAP Financial Measures.”

Net Income (Loss)

There are several primary drivers of volatility in reported net income or loss that are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses: changes in credit spreads of insured credit derivative obligations and financial guaranty variable interest entities' ("FG VIEs") assets and liabilities, changes in the Company's own credit spreads, and changes in risk-free rates used to discount expected losses. Changes in credit spreads have the most significant effect on changes in fair value of credit derivatives and FG VIE assets and liabilities. In addition to these factors, changes in expected losses, the timing of refundings and terminations, realized gains and losses on the investment portfolio (including other-than-temporary impairments), the effects of large settlements or transactions, and the effects of the Company's various loss mitigation strategies, among other factors, may also have a significant effect on reported net income or loss in a given reporting period.

Net income for Third Quarter 2013 was $384 million compared with net income of $142 million in the three-month period ended September 30, 2012 ("Third Quarter 2012"). The increase was primarily due to unrealized gains on credit derivatives that resulted from the increase in AGC's and AGM's credit spreads in the Third Quarter 2013 and lower loss and loss adjustment expenses due primarily to an increase in projected representations and warranties ("R&W") recoveries from U.S. residential mortgage-backed security ("RMBS") transactions. This was partially offset by the decline in net earned premiums due to lower scheduled earned premiums, and lower refundings and terminations.

Net income for Nine Months 2013 was $459 million compared with net income of $36 million in the nine-month period ended September 30, 2012 ("Nine Months 2012"). On a year to date basis, the increase in net income was primarily attributable to lower loss expense due to several factors including the resolution of Greek exposures in 2012 and the impact of various R&W settlements in 2013, lower unrealized losses on credit derivatives, and certain R&W settlements that benefited the fair value of FG VIEs in 2013. This was partially offset by lower net premium earned and lower other income due to the inclusion of commutation gains recognized on previously ceded reinsurance contracts from Radian Asset Assurance Inc. ("Radian") and Tokio Marine & Nichido Fire Insurance Co., Ltd. ("Tokio") in Nine Months 2012.

114

Table of Contents

Non-GAAP Financial Measures

Non-GAAP operating income in Third Quarter 2013 was $117 million, compared with $166 million in Third Quarter 2012. The decrease in operating income was primarily driven by the scheduled amortization of the insurance portfolio and lower refundings and negotiated terminations, partially offset by lower loss expense. Non-GAAP operating income in Nine Months 2013 was $475 million, compared with $351 million in Nine Months 2012. The increase in operating income was driven primarily by lower losses, partially offset by the decrease in net earned premiums and other income, as indicated above. The increase in pretax operating income in U.S. taxable jurisdictions resulted in a higher effective tax rate in Nine Months 2013.

Adjusted book value per share was $49.55 as of September 30, 2013, as compared with $47.17 per share as of December 31, 2012. Adjusted book value value per share increased primarily due to share repurchases during Nine Months 2013.

See "–Non-GAAP Financial Measures" for a description of these non-GAAP financial measures.

Key Business Strategies

While continuing its focus on loss mitigation, commutations and strategies to manage capital more efficiently, the Company has also devoted significant resources to launching its subsidiary, Municipal Assurance Corp. ("MAC"), formerly known as Municipal and Infrastructure Assurance Corporation.

Municipal Assurance Corp.

MAC was acquired by the Company in May 2012 and is licensed to provide financial guaranty insurance and reinsurance in 42 U.S. jurisdictions, including the District of Columbia. MAC is a new financial guaranty insurer that provides insurance only on investment grade debt obligations in select sectors of the U.S. public finance markets. In July 2013, it was capitalized with $700 million in equity and a $100 million surplus note issued to AGM. MAC was established in order to increase the Company's insurance penetration in the U.S. public finance sector and, unlike other new financial guarantors, began operations with a seasoned book of business totaling $111 billion in par, which was ceded from its affiliates AGC and AGM, a future stream of investment income and premiums earnings. MAC received a AA+ (stable outlook) financial strength rating from Kroll Bond Rating Agency and a AA- (stable outlook) financial strength rating from Standard and Poor’s Ratings Services ("S&P"). Please refer to Note 11, Insurance Company Regulatory Requirements, of the Financial Statements for additional information.

Loss Mitigation

The Company continued its risk remediation strategies in 2013, which lowered losses and improved its rating agency capital position. The Company believes that, with its knowledge and resources and, in some instances, the remedies available to it as insurer, it is often in a better position than a single bond holder to avoid or mitigate losses from troubled credits.

In an effort to recover U.S. RMBS losses the Company experienced in its insured U.S. RMBS portfolio resulting from breaches of R&W, the Company has pursued R&W providers by enforcing R&W provisions in contracts, negotiating agreements with R&W providers relating to those provisions and, where indicated, initiating litigation against R&W providers. See Note 5, Expected Loss to be Paid, of the Financial Statements, for a discussion of R&W settlements. Most recently:


•	On May 6, 2013, the Company entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") to settle R&W claims with UBS for a cash payment of $358 million plus 85% of future losses on certain transactions under a loss-sharing agreement.

•

In the proceeding AGM brought against Flagstar Bank in the United States District Court for the Southern District of New York, the court granted judgment in favor of AGM, awarding AGM damages of $90.7 million and pre-judgment interest of $15.9 million, for a total of $106.5 million. In second quarter 2013, Flagstar and AGM entered into a settlement agreement pursuant to which Flagstar paid AGM $105 million and withdrew its appeal of the judgment in favor of AGM.


•	In August 2013, AGC entered into a settlement agreement with an R&W provider that resolved AGC’s claims relating to specified RMBS transactions that AGC had insured. Separately, AGM entered into a settlement agreement with a servicer of certain RMBS transactions that AGM had insured.

115

Table of Contents


•	On October 10 2013, the Company entered into an agreement with Deutsche Bank to terminate a below investment grade transaction under which the Company had provided protection to Deutsche Bank through a credit default swap ("CDS").

All together these efforts have resulted in the Company causing R&W providers to pay or agree to pay $3.5 billion (gross of reinsurance) in respect of R&W. The Company believes these results, including settlement agreements and trial decisions, are significant and will help it as it continues to pursue R&W providers for U.S. RMBS transactions it has insured. The Company continues to enforce contractual provisions and pursue litigation and is in discussions with other R&W providers regarding potential agreements. See “Recovery Litigation” in Note 5, Expected Loss to be Paid, of the Financial Statements, for a discussion of the litigation proceedings the Company has initiated against R&W providers and other parties.

The quality of servicing of the mortgage loans underlying an RMBS transaction influences collateral performance and ultimately the amount (if any) of the Company's insured losses. The Company has established a group to mitigate RMBS losses by influencing mortgage servicing, including, if possible, causing the transfer of servicing or establishing special servicing arrangements. “Special servicing” is an industry term referencing more intense servicing applied to delinquent loans aimed at mitigating losses. Special servicing arrangements provide incentives to a servicer to achieve better performance on the mortgage loans it services. As a result of the Company’s efforts, as of September 30, 2013, the servicing of approximately $2.8 billion of underlying mortgage loans had been transferred to a new servicer and another $1.6 billion of underlying mortgage loans became subject to special servicing arrangements. As of September 30, 2013, the Company's net insured par of the transactions subject to a servicing transfer was $2.4 billion and the net insured par of the transactions subject to a special servicing arrangement was $858 million.

The Company is also continuing to purchase attractively priced below-investment-grade ("BIG") obligations that it insured. These purchases resulted in a reduction of net expected loss to be paid of $546 million as of September 30, 2013. As of September 30, 2013, the fair value of assets purchased for loss mitigation purposes (excluding the value of the Company's insurance) was $564 million, with a par of $1,742 million (including bonds related to FG VIEs of $93 million in fair value and $696 million in par). In addition, under the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and recorded in invested assets in the consolidated balance sheets. The fair value of such assets totaled $309 million, with a par of $407 million as of September 30, 2013.

In the public finance and infrastructure finance arena, the Company’s position, knowledge and resources sometimes enable it to negotiate a consensual restructuring with the issuer that may be more favorable than the result an individual bondholder in similar circumstances may have obtained. During the third quarter, the Company paid in full the remaining amounts owed on insured bonds secured by the excess free cash flow of the Foxwoods Casino run by the Mashantucket Pequot Tribe, but received new notes with a principal amount of $145 million from which the Company currently projects receiving full recovery of the claims it paid. During Third Quarter 2013, the Company also reached tentative arrangements with respect to its exposures to Jefferson County, Alabama, Stockton, California and Harrisburg, Pennsylvania, in each case subject to various contingencies. See “Selected U.S. Public Finance Transactions” in Note 5, Expected Loss to be Paid, of the Financial Statements, for a discussion of the respective arrangements reached.

New Business Production and Commutations

The Company believes it is able to provide value not only by insuring the timely payment of scheduled interest and principal amounts when due, but also through its underwriting, surveillance and loss mitigation capabilities. Few individual or even institutional investors have the analytic resources to cover the tens of thousands of municipal credits in the market. For those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes this allows retail investors to participate more widely, institutional investors to operate more efficiently, and smaller, less well-known issuers to gain market access on a more cost-effective basis. The following tables present summarized information about the U.S. municipal market's new debt issuance volume and the Company's share of that market.

116

Table of Contents

U.S. Municipal Market Data

Based on Sale Date



	Nine Months 2013			Year Ended December 31, 2012
	Par		Number of issues	Par		Number of issues
	(dollars in billions, except number of issues)
New municipal bonds issued	$	238.0	8,279	$	366.7	12,544
Total insured	8.2		775	13.2		1,159
Insured by AGC and AGM	4.9		371	13.2		1,157

Penetration Rates for the

U.S. Municipal Market



	Nine Months		Year Ended December 31,
	2013	2012	2012
Market penetration par	3.4%	3.6%	3.6%
Market penetration based on number of issues	9.4	9.5	9.2
% of single A par sold	10.6	11.9	11.9
% of single A transactions sold	30.1	30.7	29.5
% of under $25 million par sold	10.4	12.2	11.7
% of under $25 million transactions sold	10.4	10.6	10.3

New Business Production



	Third Quarter				Nine Months
	2013		2012		2013		2012
	(in millions)
PVP (1):
Public Finance—U.S.
Assumed from Radian (2)	$	—	$	—	$	—	$	22
Direct	24		30		55		107
Public Finance—non-U.S.	13		—		13		1
Structured Finance—U.S.	3		5		6		11
Total PVP	$	40	$	35	$	74	$	141
Gross Par Written:
Public Finance—U.S.
Assumed from Radian	$	—	$	—	$	—	$	1,797
Direct	2,072		3,007		5,928		10,723
Public Finance—non-U.S.	270		—		270		35
Structured Finance—U.S.	273		182		287		220
Total gross par written	$	2,615	$	3,189	$	6,485	$	12,775

____________________


(1)	PVP represents the present value of estimated future earnings primarily on new financial guaranty contracts written in the period, before consideration of cessions to reinsurers. See “—Non-GAAP Measures—PVP or Present Value of New Business Production.”


(2)	Represents assumed public finance business from Radian, the Company's first third party assumed reinsurance treaty written since 2009.

117

Table of Contents

The increase in PVP was attributable primarily to the issuance of guarantees on two new UK infrastructure transactions in Third Quarter 2013, the first new-issue transactions since 2008. U.S. public finance PVP decreased in Third Quarter 2013 from its Third Quarter 2012 level primarily due to lower market issuance and a challenging market environment. The Company's new business written in the quarter remained in the single-A category.

The Company continues to evaluate opportunities for commutations of previously ceded books of business similar to the agreements reached in 2012 with Radian and Tokio.

Capital Management

The Company has reviewed strategies for improving the efficiency of its management of capital within the Assured Guaranty group and decided that AGL would become tax resident in the United Kingdom, while remaining a Bermuda-based company and continuing to carry on its administrative and head office functions in Bermuda. As a U.K. tax resident company, AGL will be subject to the tax rules applicable to companies resident in the U.K. For more information about AGL becoming a U.K. tax resident, see the "Tax Matters" section of this Management's Discussion and Analysis.

Capital Improvement Strategies

In order to reduce leverage, and possibly, rating agency capital charges, the Company has mutually agreed with beneficiaries to terminate selected financial guaranty insurance and credit derivative contracts. In particular, the Company has targeted investment grade securities for which claims are not expected but which carry a disproportionate rating agency capital charge. The Company terminated $1.0 billion and $5.2 billion in net par in Third Quarter 2013 and Nine Months 2013, respectively, and $0.6 billion and $2.2 billion in net par in Third Quarter 2012 and Nine Months 2012, respectively.

Share Repurchase Program

On November 11, 2013, the Company's share repurchase authorization of $400 million replaced the prior authorization. The Company expects the repurchases to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date. Through November 11, 2013, under the Company’s previous $315 million share repurchase authorization, the Company had repurchased a total of 12.5 million common shares for approximately $264 million at an average price of $21.12 per share. This included 5.0 million common shares purchased on June 5, 2013 from funds associated with WL Ross & Co. LLC and its affiliates (collectively, the “WLR Funds”) and Wilbur L. Ross, Jr., a director of the Company, for $109.7 million. Such share purchase reduced the WLR Funds’ and Mr. Ross’s ownership of AGL's common shares to approximately 14.9 million common shares, or to approximately 8% of AGL's total common shares outstanding, from approximately 10.5% of such outstanding common shares.

Results of Operations

Estimates and Assumptions

The Company’s consolidated financial statements include amounts that are determined using estimates and assumptions. The actual amounts realized could ultimately be materially different from the amounts currently provided for in the Company’s consolidated financial statements. Management believes the most significant items requiring inherently subjective and complex estimates are expected losses, including assumptions for breaches of R&W, fair value estimates, other-than-temporary impairment (“OTTI”), deferred income taxes, and premium revenue recognition. The following discussion of the results of operations includes information regarding the estimates and assumptions used for these items and should be read in conjunction with the notes to the Company’s consolidated financial statements.

An understanding of the Company’s accounting policies for these items is of critical importance to understanding its consolidated financial statements. See Part II, Item 8. “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for a discussion of significant accounting policies and fair value methodologies. The following discussion of the results of operations includes information regarding the estimates and assumptions used for these items and should be read in conjunction with the notes to the Company’s consolidated financial statements.

118

Table of Contents

Consolidated Results of Operations



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Revenues:
Net earned premiums	$	159		$	222		$	570		$	635
Net investment income	99			102			286			301
Net realized investment gains (losses)	(7		)	2			23			0
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	24			2			(44		)	(78		)
Net unrealized gains	330			(38		)	(120		)	(388		)
Net change in fair value of credit derivatives	354			(36		)	(164		)	(466		)
Fair value gains (losses) on committed capital securities ("CCS")	9			(2		)	(4		)	(12		)
Fair value gains (losses) on FG VIEs	40			34			253			161
Other income	16			16			(5		)	112
Total revenues	670			338			959			731
Expenses:
Loss and loss adjustment expenses ("LAE")	55			86			69			446
Amortization of deferred acquisition costs	4			4			8			14
Interest expense	21			21			63			71
Other operating expenses	54			48			166			163
Total expenses	134			159			306			694
Income (loss) before provision for income taxes	536			179			653			37
Provision (benefit) for income taxes	152			37			194			1
Net income (loss)	$	384		$	142		$	459		$	36

119

Table of Contents

Net Earned Premiums

Net earned premiums are recognized over the remaining contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts.

Net Earned Premiums



	Third Quarter				Nine Months
	2013		2012		2013		2012
	(in millions)
Financial guaranty:
Public finance
Scheduled net earned premiums and accretion	$	71	$	83	$	218	$	252
Accelerations(1)	31		73		143		178
Total public finance	102		156		361		430
Structured finance(2)
Scheduled net earned premiums and accretion	48		65		152		204
Accelerations(1)	9		—		56		—
Total structured finance	57		65		208		204
Other	—		1		1		1
Total net earned premiums	$	159	$	222	$	570	$	635

____________________


(1)	Reflects the unscheduled refunding or early termination of underlying insured obligations.


(2)	Excludes $14 million and $17 million for Third Quarter 2013 and 2012, respectively, and $47 million and $50 million for Nine Months 2013 and 2012, respectively, related to consolidated FG VIEs.

Net earned premiums decreased in 2013 compared with 2012 due in part to the scheduled decline in the par outstanding, particularly in the structured finance insured portfolio. Accelerations of net earned premiums due to refundings and terminations declined in Third Quarter 2013 compared with Third Quarter 2012, but increased for the Nine Months 2013 compared with Nine Months 2012 due to the termination of a large structured finance transactions in the first half of 2013. Included in accelerations in the table above are accelerations related to the negotiated terminations of financial guaranty insurance contracts of $12 million for the Third Quarter 2013, $22 million for the Third Quarter 2012, $44 million for the Nine Months 2013, and $44 million of the Nine Months 2012.

At September 30, 2013, $4.3 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts. Due to the scheduled amortization of deferred premium revenue, which includes acquisition accounting adjustments, scheduled net earned premiums are expected to decrease each year unless replaced by new business or the Company reassumes previously ceded business.

Net Investment Income

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. Income earned on the general investment portfolio, excluding loss mitigation bonds, declined due to lower reinvestment rates. The overall pre-tax book yield was 3.92% at September 30, 2013 and 4.03% at September 30, 2012, respectively. Excluding bonds purchased or obtained for loss mitigation purposes, pre-tax yield was 3.43% as of September 30, 2013 compared with 3.60% as of September 30, 2012.

120

Table of Contents

Net Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses).

Net Realized Investment Gains (Losses)(1)



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Realized investment gains (losses) on sales of investments	$	1		$	6		$	43		$	11
OTTl	(8		)	(4		)	(20		)	(11		)
Net realized investment gains (losses)	$	(7	)	$	2		$	23		$	0

____________________


(1)	Net realized investment gains (losses) exclude $2 million OTTI for Nine Months 2013 and $4 million OTTI for Nine Months 2012 related to consolidated FG VIEs.

Other Income

Other income is comprised of recurring items such as foreign exchange remeasurement gains and losses, ancillary fees on financial guaranty policies such as commitment, consent and processing fees, and other revenue items on financial guaranty insurance and reinsurance contracts such as commutation gains on re-assumptions of previously ceded business.

Other Income



	Third Quarter				Nine Months
	2013		2012		2013			2012
	(in millions)
Foreign exchange gain (loss) on remeasurement of premium receivable and loss reserves	$	14	$	6	$	(5	)	$	21
Commutation gains (losses)	—		1		—			84
Other	2		9		0			7
Total other income	$	16	$	16	$	(5	)	$	112

In Nine Months 2012, the Company reassumed two large previously ceded reinsurance contracts from Radian and Tokio resulting in commutation gains of $83 million.

Losses in the Insured Portfolio

The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. Please refer to Note 5, Expected Loss to be Paid, of the Financial Statements, for a discussion of the assumptions and methodologies used in calculating the expected loss to be paid for all contracts. See Notes 4 and 6 through 9 of the Financial Statements for discussions of each accounting model and fair value methodologies.

The discussion of losses that follows encompasses losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. In order to effectively evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. That is, management monitors and assigns ratings and calculates expected losses in the same manner for all its exposures. Management also considers contract specific characteristics that affect the estimates of expected loss.

The surveillance process for identifying transactions with expected losses is described in the notes to the consolidated financial statements. In Third Quarter 2013, the Company refined the definitions of its BIG surveillance categories to be consistent with its new approach to assigning internal credit ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure, of the Financial Statements. More extensive monitoring and

121

Table of Contents

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 future losses possible, but for which none are currently expected.


•	BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims which is a claim that the Company expects to be reimbursed within one year) have yet been paid.


•	BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Net Par Outstanding and Number of Risks

By BIG Category



	Net Par Outstanding as of				Number of Risks (1) as of
Description	September 30, 2013		December 31, 2012		September 30, 2013	December 31, 2012
	(dollars in millions)
BIG:
Category 1	$	8,986	$	10,820	175	196
Category 2	4,805		4,617		101	103
Category 3	4,766		6,860		165	160
Total BIG	$	18,557	$	22,297	441	459

____________________


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

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 or 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.

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these R&W provisions. Soon after the Company observed the deterioration in the performance of its insured RMBS following the deterioration of the residential mortgage and property markets, the Company began using internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W on a loan-by-loan basis. Where a provider of R&W refused to honor its repurchase obligations, the Company sometimes chose to initiate litigation. See “Recovery Litigation—RMBS Transactions," section of Note 5, Expected Loss to be Paid, of the Financial Statements. The Company's success in pursuing these strategies permitted the Company to enter into agreements with R&W providers under which those providers made payments to the Company, agreed to make payments to the Company in the future, and / or repurchased loans from the transactions, all in return for releases of related liability by the Company. Such agreements provide the Company with many of the benefits of pursuing the R&W claims on a loan by loan basis or through litigation, but without the related expense and uncertainty. The Company continues to pursue these strategies against R&W providers with which it does not yet have agreements.

122

Table of Contents



	(in millions)
Agreement amounts already received	$	2,421
Agreement amounts projected to be received in the future	492
Repurchase amounts paid into the relevant RMBS prior to settlement (1)	574
Total R&W payments, gross of reinsurance	$	3,487

____________________


(1)	These amounts were paid into the relevant RMBS transactions prior to settlement and distributed in accordance with the priority of payments set out in the relevant transaction documents. Because the Company may insure only a portion of the capital structure of a transaction, such payments will not necessarily directly benefit the Company dollar-for-dollar, especially in first lien transactions.

Based on this success, the Company has included in its net expected loss estimates as of September 30, 2013 an estimated net benefit related to breaches of R&W of $895 million, which includes $476 million from agreements (entered into both before and after September 30, 2013) with R&W providers and $419 million in transactions where the Company does not yet have such an agreement, all net of reinsurance.

Net expected loss to be paid consists primarily of the present value of future: expected claim payments, expected recoveries of excess spread in the transaction structures, cessions to reinsurers, and expected recoveries for breaches of R&W and the effects of other loss mitigation strategies. Current risk free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported. The effect of changes in discount rates are included in net economic loss development, however, economic loss development attributable to changes in discount rates is not indicative of credit impairment or improvement. Assumptions used in the determination of the net expected loss to be paid such as delinquency, severity, and discount rates and expected timeframes to recovery in the mortgage market were consistent by sector regardless of the accounting model used. The primary drivers of changes in expected loss to be paid are discussed below.

The primary difference between net economic loss development and loss expense included in operating income relates to the consideration of deferred premium revenue in the calculation of loss reserves and loss expense. For financial guaranty insurance contracts, a loss is generally recorded only when expected losses exceed deferred premium revenue. Therefore, the timing of loss recognition does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. AGM's U.S. RMBS transactions generally have the largest deferred premium revenue balances because of the purchase accounting adjustments that were made in 2009 in connection with Assured Guaranty's purchase of AGM, and therefore the largest differences between net economic loss development and loss expense relates to AGM policies. See "–Losses Incurred."

123

Table of Contents

Economic Loss Development



	Economic Loss Development(1)
	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
U.S. RMBS before benefit for recoveries for breaches of R&W	$	25		$	34		$	152		$	199
Net benefit for recoveries for breaches of R&W	(86		)	(12		)	(294		)	(109		)
U.S. RMBS after benefit for recoveries for breaches of R&W	(61		)	22			(142		)	90
Other structured finance	(4		)	2			(32		)	1
Public finance	43			40			151			280
Other	—			—			(10		)	(6		)
Total	$	(22	)	$	64		$	(33	)	$	365

____________________


(1)	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.

Claims (Paid) Recovered



	Claims (Paid) Recovered (1)
	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
U.S. RMBS before benefit for recoveries for breaches of R&W	$	(148	)	$	(255	)	$	(514	)	$	(776	)
Net benefit for recoveries for breaches of R&W	155			95			769			388
U.S. RMBS after benefit for recoveries for breaches of R&W	7			(160		)	255			(388		)
Other structured finance	(9		)	(4		)	(129		)	(39		)
Public finance	56			(345		)	26			(291		)
Other	—			—			10			—
Total	$	54		$	(509	)	$	162		$	(718	)

____________________


(1)	Includes cash paid and recovered, as well as non-cash settlement of claims such as those negotiated in restructurings where the Company receives securities instead of cash.

Net Expected Loss to be Paid



	As of September 30, 2013			As of December 31, 2012
	(in millions)
U.S. RMBS before benefit for recoveries for breaches of R&W	$	1,290		$	1,652
Net benefit for recoveries for breaches of R&W	(895		)	(1,370		)
U.S. RMBS after benefit for recoveries for breaches of R&W	395			282
Other structured finance	178			339
Public finance	236			59
Other	(3		)	(3		)
Total	$	806		$	677

124

Table of Contents

Third Quarter 2013 Net Economic Loss Development

Total economic loss development was a favorable $22 million ($7 million after tax) in Third Quarter 2013, primarily due to an increase in projected R&W recoveries from U.S. RMBS transactions, and improved delinquency experience from special servicing arrangements on certain second lien U.S. RMBS transactions. This was offset in part by loss development on certain first lien U.S. RMBS transactions, and U.S. public finance losses due to developments in municipal bankruptcy proceedings. The risk-free rates used to discount expected losses ranged from 0.0% to 4.36% as of September 30, 2013 compared with 0.0% to 3.28% as of December 31, 2012.

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will eventually improve. Each quarter the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the quarter of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend. Based on such observations the Company chose to use essentially the same assumptions and scenarios to project RMBS losses as of September 30, 2013 as it used as of June 30, 2013 and, with respect to its first lien RMBS, as it used as of December 31, 2012. The Company's use of essentially the same assumptions and scenarios to project RMBS losses as of September 30, 2013, as of June 30, 2013 and, with respect to its first lien RMBS, December 31, 2012, was consistent with its view at September 30, 2013 that the housing and mortgage market recovery is not being reflected as quickly in the performance of those transactions as it had anticipated at June 30, 2013 or December 31, 2012. During second quarter 2013, the Company had observed improvements in the performance of its second lien RMBS transactions that, when viewed in the context of their performance in previous quarters, suggested those transactions were beginning to respond to the improvements in the residential property market and economy being widely reported. Based on such observations, in projecting losses for its second lien RMBS the Company chose to decrease by two months in its base scenario and by three months in its optimistic scenario the period it assumed it would take the mortgage market to recover as compared to March 31, 2013 and December 31, 2012. The Company retained this change to its scenarios in its projections as of September 30, 2013. The Company observed some improvement in delinquency trends in most of its RMBS transactions during the third quarter, with some of that improvement in second liens driven by a servicing transfer it effectuated. Such improvement is naturally transmitted to its projections for each individual RMBS transaction, since the projections are based on the delinquency performance of the loans in that individual RMBS transaction. The Company also made adjustments during the quarter to its assumptions for specific transactions to reflect loss mitigation developments. The methodology and assumptions the Company uses to project RMBS losses and the scenarios it employs are described in more detail in Note 5, Expected Loss to be Paid, of the Financial Statements.

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.



	Third Quarter 2013
	(in millions)
Inclusion (removal) of deals with breaches of R&W during period	$	—
Change in recovery assumptions as the result of additional file review and recovery success	69
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	13
Results of settlements	—
Accretion of discount on balance	4
Total	$	86

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. Given some of these developments, and the circumstances surrounding each instance, the ultimate outcome cannot be certain and may lead to an increase in defaults on some of the Company's insured public finance obligations. The Company will continue to analyze developments in each of these matters closely. The municipalities whose obligations the Company has insured that have filed for protection under Chapter 9 of the U.S Bankruptcy Code are: Detroit, Michigan; Jefferson County, Alabama; and Stockton, California. The City Council of Harrisburg, Pennsylvania had also filed a purported bankruptcy petition, which was later dismissed by the bankruptcy court; a receiver for the City of Harrisburg was appointed by the Commonwealth Court of Pennsylvania on December 2, 2011. During the third quarter the Company reached tentative arrangements with respect to its

125

Table of Contents

exposures to Jefferson County, Alabama, Stockton, California and Harrisburg, Pennsylvania, in each case subject to various contingencies. See “Selected U.S. Public Finance Transactions” in Note 5, Expected Loss to be Paid, of the Financial Statements, for a discussion of respective arrangements reached. The net par outstanding for these and all other BIG rated U.S. public finance obligations was $4.6 billion as of September 30, 2013 and December 31, 2012. The Company projects that its total future expected net loss across its troubled U.S. public finance credits as of September 30, 2013 will be $183 million. As of June 30, 2013 the Company was projecting a net expected loss of $71 million across it troubled U.S. public finance credits. While the deterioration was due to a number of factors, it was attributable primarily to the elimination of the recoverable for claims paid on the bonds secured by cash flow from the Foxwoods Casino upon the receipt of the New Pequot Notes (with a with a principal amount of $145 million) now held in the investment account, along with loss developments in Detroit and Stockton.

Third Quarter 2012 Net Economic Loss Development

Economic loss development was $64 million ($41 million after tax) in Third Quarter 2012, which was primarily driven by the establishment of losses on Spanish exposures, higher expected LAE as the Company continues to pursue loss mitigation strategies, and modest development in RMBS exposures. The Company reflected a slightly higher probability of loss on certain Spanish sub-sovereign exposures as a result of including scenarios reflecting recent downgrades in Spain's sovereign and sub-sovereign ratings. As of September 30, 2012, no claims had been paid on any Spanish exposures. Changes in discount rates had a significant effect on the economic loss development in Third Quarter 2012 as the rates ranged from 0.0% to 3.19% as of September 30, 2012 compared with 0.0% to 3.27% as of December 31, 2011.

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.



	Third Quarter 2012
	(in millions)
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	$	10
Accretion of discount on balance	2
Total	$	12

Nine Months 2013 and 2012 Net Economic Loss Development

Economic loss development was a favorable $33 million ($8 million unfavorable after tax) for Nine Months 2013 compared with loss development of $365 million ($265 million after tax) for Nine Months 2012, primarily due to loss expense on Greek sovereign debt exposure in Nine Months 2012. The favorable economic loss development in Nine Months 2013 is primarily due to lower U.S. RMBS losses due to the settlement of several R&W claims during 2013, which was partially by higher U.S. public finance sector losses primarily due to Detroit.

Losses Incurred

For transactions accounted for as financial guaranty insurance under generally accepted accounting principles in the United States of America ("GAAP"), each transaction’s expected loss to be expensed, net of estimated R&W recoveries, is compared with the deferred premium revenue of that transaction. Generally, when the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in the income statement for the amount of such excess.

When the Company measures operating income, a non-GAAP financial measure, it calculates the credit derivative and FG VIE losses incurred in a similar manner. Changes in fair value in excess of expected loss that are not indicative of economic deterioration or improvement are not included in operating income.

Expected loss to be paid, as discussed above under "Losses in the Insured Portfolio", is an important liquidity measure in that it provides the present value of amounts that the Company expects to pay or recover in future periods. Expected loss to be expensed is important because it presents the Company’s projection of incurred losses that will be recognized in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be paid for FG VIEs pursuant to AGC’s and AGM’s financial guaranty policies is calculated in a manner consistent with financial guaranty insurance contracts, but eliminated in consolidation under GAAP.

126

Table of Contents

The following tables present the loss and LAE recorded in the consolidated statements of operations by sector for non-derivative contracts and the loss expense recorded under non-GAAP operating income respectively. Amounts presented are net of reinsurance.

Loss and LAE Reported

on the Consolidated Statements of Operations



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
U.S. RMBS	$	19		$	45		$	(5	)	$	188
Other structured finance	(12		)	3			(34		)	(2		)
Public finance	59			40			134			280
Other	—			—			—			(6		)
Total insurance contracts before FG VIE consolidation	66			88			95			460
Effect of consolidating FG VIEs	(11		)	(2		)	(26		)	(14		)
Total loss and LAE	$	55		$	86		$	69		$	446

Loss Expense Non-GAAP Operating



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
U.S. RMBS	$	2		$	62		$	23		$	210
Other structured finance	(2		)	(2		)	(38		)	(14		)
Public finance	56			40			132			279
Other	—			—			(10		)	(6		)
Total	$	56		$	100		$	107		$	469

Reconciliation of Loss and LAE to Non-GAAP Loss Expense



	Third Quarter					Nine Months
	2013			2012		2013		2012
	(in millions)
Loss and LAE	$	55		$	86	$	69	$	446
Credit derivative loss expense	(10		)	12		12		9
FG VIE loss expense	11			2		26		14
Loss expense included in operating income	$	56		$	100	$	107	$	469

In 2013, U.S. RMBS losses were lower due primarily to the settlement of several R&W claims, however U.S. public finance sector experienced economic loss development due in part to the Company's exposure to Detroit. Changes in risk-free rates used to discount losses also affect loss expense for long-dated transactions, however this component of loss expense does not reflect actual credit impairment or improvement in the period.

For financial guaranty contracts accounted for as insurance, the amounts reported in the GAAP financial statements may only reflect a portion of the current period’s economic development and may also include a portion of prior-period economic development. The difference between economic loss development on financial guaranty insurance contracts and loss and LAE recognized in GAAP income is essentially loss development and accretion for financial guaranty insurance contracts that is, or was previously, absorbed in unearned premium reserve. Such amounts have not yet been recognized in income.

127

Table of Contents

The table below presents the expected timing of loss recognition for insurance contracts on both a reported GAAP and non-GAAP operating income basis.

Financial Guaranty Insurance

Net Expected Loss to be Expensed

As of September 30, 2013



	Net Expected Loss to be Expensed(1)
	In GAAP Reported Income		In Non-GAAP Operating Income
	(in millions)
2013 (October 1 - December 31)	$	12	$	13
2014	43		58
2015	40		54
2016	34		45
2017	29		39
2018-2022	103		128
2023-2027	54		68
2028-2032	30		39
After 2032	28		38
Total expected PV of net expected loss to be expensed	373		482
Discount	421		471
Total future value	$	794	$	953

____________________


(1)	Net expected loss to be expensed for GAAP reported income is different than non-GAAP operating income by the amount related to consolidated FG VIEs.

Net Change in Fair Value of Credit Derivatives

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. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims paying resources, rating agency capital or regulatory capital positions. Expected losses to be paid in respect of contracts accounted for as credit derivatives are included in the discussion above: “—Losses in the Insured Portfolio.”

There are typically no quoted prices for the Company's instruments or similar instruments as financial guaranty contracts do not typically trade in active markets. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to those in the credit derivatives issued by the Company. Therefore, the valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. See Note 7, Fair Value Measurement, of the Financial Statements.

128

Table of Contents

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, interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows.

The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past three years and as of September 30, 2013, and market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments.

Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. These terms differ from more standardized credit derivatives sold by companies outside of the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points. Because of these terms and conditions, the fair value of the Company’s credit derivatives may not reflect the same prices observed in an actively traded market of CDS that do not contain terms and conditions similar to those observed in the financial guaranty market. The Company considers R&W claim recoveries in determining the fair value of its CDS contracts.

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.

Net Change in Fair Value of Credit Derivatives

Gain (Loss)



	Third Quarter					Nine Months
	2013		2012			2013			2012
	(in millions)
Net credit derivative premiums received and receivable	$	24	$	33		$	92		$	96
Net ceding commissions (paid and payable) received and receivable	0		0			1			0
Realized gains on credit derivatives	24		33			93			96
Terminations	—		—			—			(1		)
Net credit derivative losses (paid and payable) recovered and recoverable	—		(31		)	(137		)	(173		)
Total realized gains (losses) and other settlements on credit derivatives	24		2			(44		)	(78		)
Net unrealized gains (losses) on credit derivatives	330		(38		)	(120		)	(388		)
Net change in fair value of credit derivatives	$	354	$	(36	)	$	(164	)	$	(466	)

Net credit derivative premiums have decreased in Third Quarter 2013 and Nine Months 2013 due primarily to the decline in net par outstanding to $59.1 billion at September 30, 2013 from $74.7 billion at September 30, 2012. In Third Quarter 2013 and 2012, CDS contracts totaling $0.3 billion and $0.3 billion in net par were terminated, resulting in accelerations of credit derivative revenues of $0.1 million in Third Quarter 2013 and $0.4 million in Third Quarter 2012. In Nine Months 2013 and 2012, CDS contracts totaling $3.3 billion and $1.1 billion in net par were terminated, resulting in accelerations of credit derivative revenues of $15 million in Nine Months 2013 and $1 million in Nine Months 2012. In Nine Months 2013, in addition to the CDS terminations mentioned above, the Company terminated a film securitization CDS for a payment of $120 million which was recorded in realized gains (losses) and other settlements on credit derivatives, with a

129

Table of Contents

corresponding release of the unrealized loss recorded in unrealized gains (losses) on credit derivatives of $127 million for a net change in fair value of credit derivatives of $7 million.

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



	Third Quarter					Nine Months
Asset Type	2013		2012			2013			2012
	(in millions)
Pooled corporate obligations	$	96	$	32		$	(43	)	$	62
U.S. RMBS	195		(78		)	(248		)	(457		)
CMBS	3		—			(1		)	—
Other (1)	36		8			172			7
Total	$	330	$	(38	)	$	(120	)	$	(388	)

____________________


(1)	“Other” includes all other U.S. and international asset classes, such as commercial receivables, international infrastructure, international RMBS securities, and pooled infrastructure securities.

For all periods presented, a majority of AGM policies were pricing at their floor levels (or the minimum rate at which the Company would consider assuring these risks based on historical experience) and therefore changes in AGM credit spreads, or the cost to buy credit protection in AGM's name did not have a significant effect on the changes in unrealized gains or losses. Instead, AGC's U.S. RMBS exposures experienced the most significant volatility attributable primarily to changes in AGC's credit spreads. Increases in AGC's credit spreads generally resulted in unrealized gains due to tighter implied net spreads, and decreases in AGC's credit spreads generally resulted in unrealized losses due to wider implied net spreads. See the tables below for the 5 Year and 1 Year CDS spreads on AGC and AGM.

In addition, unrealized gains and losses in Nine Months 2013 also included a $127 million gain attributable to the termination of a film securitization CDS. In Nine Months 2012, the U.S. RMBS sector included an $85 million unrealized gain relating to R&W benefits from the agreement with Deutsche Bank.

Five-Year CDS Spread on AGC and AGM



	As of September 30, 2013	As of June 30, 2013	As of December 31, 2012	As of September 30, 2012	As of June 30, 2012	As of December 31, 2011
Quoted price of CDS contract (in basis points):
AGC	465	343	678	780	904	1,140
AGM	502	365	536	638	652	778

One-Year CDS Spread on AGC and AGM



	As of September 30, 2013	As of June 30, 2013	As of December 31, 2012	As of September 30, 2012	As of June 30, 2012	As of December 31, 2011
Quoted price of CDS contract (in basis points):
AGC	185	57	270	458	629	965
AGM	215	72	257	333	416	538

130

Table of Contents

Effect of Changes in the Company’s Credit Spread on

Unrealized Gains (Losses) on Credit Derivatives



	Third Quarter					Nine Months
	2013		2012			2013			2012
	(in millions)
Change in unrealized gains (losses) of credit derivatives:
Before considering implication of the Company’s credit spreads	$	9	$	791		$	863		$	649
Resulting from change in the Company’s credit spreads	321		(829		)	(983		)	(1,037		)
After considering implication of the Company’s credit spreads	$	330	$	(38	)	$	(120	)	$	(388	)

Management believes that the trading level of AGC’s and AGM’s credit spreads is due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against AGC and AGM 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 and AGM’s credit spread were higher credit spreads in the fixed income security markets relative to pre-financial crisis levels. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high-yield collateralized debt obligations ("CDO"), trust preferred securities CDO ("TruPS CDOs"), and collateralized loan obligation ("CLO") markets as well as continuing market concerns over the most recent vintages of RMBS.

Provision for Income Tax

Deferred income tax assets and liabilities are established for the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Such temporary differences relate principally to unrealized gains and losses on investments and credit derivatives, FG VIE fair value adjustments, loss and LAE reserve, unearned premium reserve and tax attributes for net operating losses, alternative minimum tax (“AMT”) credits and foreign tax credits. As of September 30, 2013 and December 31, 2012, the Company had a net deferred income tax asset of $767 million and $721 million, respectively. The increase in the deferred tax asset related primarily to fair value losses on credit derivatives. As of September 30, 2013, the Company has foreign tax credits carried forward of $36 million which expire in 2018 through 2021 and AMT credits of $88 million which do not expire. Foreign tax credits of $22 million are from its acquisition of Assured Guaranty Municipal Holdings Inc. (“AGMH”) on July 1, 2009 (“AGMH Acquisition”). The Internal Revenue Code limits the amount of credits the Company may utilize each year.

Provision for Income Taxes and Effective Tax Rates



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Total provision (benefit) for income taxes	$	152		$	37		$	194		$	1
Effective tax rate	28.2		%	20.6		%	29.7		%	3.7		%

The Company’s effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, United Kingdom (“U.K.”) subsidiaries taxed at the U.K. blended marginal corporate tax rate of 23.25% unless subject to U.S. tax by election or as a U.S. controlled foreign corporation, and no taxes for the Company’s Bermuda holding company and subsidiaries unless subject to U.S tax by election or as a U.S. controlled foreign corporation. For periods subsequent to April 1, 2013, the U.K. corporation tax rate has been reduced to 23%, for the period April 1, 2012 to April 1, 2013 the U.K. corporation tax rate was 24% resulting in a blended tax rate of 23.25% in 2013 and prior to April 1, 2012, the U.K. corporation rate was 26% resulting in a blended tax rate of 24.5% in 2012. Accordingly, the Company’s overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. Third Quarter 2013, Third Quarter 2012, Nine Months 2013 and Nine Months 2012 had disproportionate losses and income across jurisdictions, offset by tax-exempt interest, and are the primary reasons for the effective tax rates.

131

Table of Contents

Financial Guaranty Variable Interest Entities

Pursuant to GAAP, the Company evaluated its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. As of September 30, 2013, 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 VIEs’ most significant activities, 40 VIEs required consolidation.

The table below presents the effects on reported GAAP income resulting from consolidating these FG VIEs and eliminating their related insurance and investment accounting entries and, in total, represents a difference between GAAP reported net income and non-GAAP operating income attributable to FG VIEs. The consolidation of FG VIEs has a significant effect on net income and shareholders' 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 and AGM FG VIE liabilities with recourse and (3) the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE debt. Upon consolidation of an FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. See “—Non-GAAP Financial Measures—Operating Income” below.

Effect of Consolidating FG VIEs on Net Income (Loss)



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Net earned premiums	$	(14	)	$	(17	)	$	(47	)	$	(50	)
Net investment income	(3		)	(3		)	(10		)	(9		)
Net realized investment gains (losses)	0			0			2			4
Fair value gains (losses) on FG VIEs	40			34			253			161
Loss and LAE	11			2			26			14
Total pretax effect on net income	34			16			224			120
Less: tax provision (benefit)	12			5			78			42
Total effect on net income (loss)	$	22		$	11		$	146		$	78

During Third Quarter 2012, the Company recorded a pre-tax net fair value gain of consolidated FG VIEs of $34 million. While prices appreciated slightly during the period on the Company's FG VIE assets and liabilities, the gain for Third Quarter 2012 was primarily driven by large principal paydowns made on the Company's FG VIE assets. This was also the primary driver of the $161 million pre-tax fair value gain of consolidated FG VIEs during Nine Months 2012. The majority of this gain, $163 million, is a result of an R&W settlement with Deutsche Bank that closed during second quarter 2012.

Expected losses to be paid (recovered) in respect of consolidated FG VIEs, were $52 million of expected loss to be paid as of September 30, 2013 and $96 million of expected losses to be recovered as of December 31, 2012, and are included in the discussion of “—Losses in the Insured Portfolio.”

132

Table of Contents

Non-GAAP Financial Measures

To reflect the key financial measures management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discusses both measures promulgated in accordance with GAAP and measures not promulgated in accordance with GAAP (“non-GAAP financial measures”). Although the financial measures identified as non-GAAP should not be considered substitutes for GAAP measures, management considers them key performance indicators and employs them as well as other factors in determining compensation. Non-GAAP financial measures, therefore, provide investors with important information about the key financial measures management utilizes in measuring its business. The primary limitation of non-GAAP financial measures is the potential lack of comparability to those of other companies, which may define non-GAAP measures differently because there is limited literature with respect to such measures. Three of the primary non-GAAP financial measures analyzed by the Company’s senior management are: operating income, adjusted book value and PVP.

Management and the board of directors utilize non-GAAP financial measures in evaluating the Company’s financial performance and as a basis for determining senior management incentive compensation. By providing these non-GAAP financial measures, investors, analysts and financial news reporters have access to the same information that management reviews internally. In addition, Assured Guaranty’s presentation of non-GAAP financial measures is consistent with how analysts calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and with how investors, analysts and the financial news media evaluate Assured Guaranty’s financial results.

The following paragraphs define each non-GAAP financial measure and describe why it is useful. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure, if available, is also presented below.

Operating Income

Reconciliation of Net Income (Loss) to Operating Income



	Third Quarter						Nine Months
	2013			2012			2013			2012

Net income	$	384		$	142		$	459		$	36
Less after-tax adjustments:
Realized gains (losses) on investments	(3		)	0			18			(5		)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives	233			(37		)	(173		)	(394		)
Fair value gains (losses) on CCS	5			(2		)	(3		)	(8		)
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves	10			4			(4		)	14
Effect of consolidating FG VIEs	22			11			146			78
Operating income	$	117		$	166		$	475		$	351

Effective tax rate on operating income	28.1		%	22.5		%	27.2		%	24.2		%

Management believes that operating income is a useful measure because it clarifies the understanding of the underwriting results of the Company’s financial guaranty business, and also includes financing costs and net investment income, and enables investors and analysts to evaluate the Company’s financial results as compared with the consensus analyst estimates distributed publicly by financial databases. Operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of the after-tax realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. Trends in the underlying profitability of the Company’s business can be more clearly identified without the fluctuating effects of these transactions.

133

Table of Contents

2) Elimination of the after-tax non-credit impairment unrealized fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. Additionally, such adjustments present all financial guaranty contracts on a more consistent basis of accounting, whether or not they are subject to derivative accounting rules.

3) Elimination of the after-tax fair value gains (losses) on the Company’s CCS. Such amounts are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

4) Elimination of the after-tax foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves. Long-dated receivables constitute a significant portion of the net premium receivable balance and represent the present value of future contractual or expected collections. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.

5) Elimination of the effects of consolidating FG VIEs in order to present all financial guaranty contracts on a more consistent basis of accounting, whether or not GAAP requires consolidation. GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company even though the Company does not own such VIEs.

Adjusted Book Value and Operating Shareholders’ Equity

Management also uses adjusted book value in order to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value is one of the key financial measures used in determining the amount of certain long term compensation to management and employees and used by rating agencies and investors.

Reconciliation of Shareholders’ Equity

to Adjusted Book Value



	As of September 30, 2013						As of December 31, 2012
	Total			Per Share			Total			Per Share
	(dollars in millions, except per share amounts)
Shareholders’ equity	$	4,834		$	26.53		$	4,994		$	25.74
Less after-tax adjustments:
Effect of consolidating FG VIEs	(209		)	(1.14		)	(348		)	(1.79		)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives	(1,192		)	(6.55		)	(988		)	(5.09		)
Fair value gains (losses) on CCS	20			0.11			23			0.12
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect	175			0.96			477			2.45
Operating shareholders’ equity	6,040			33.15			5,830			30.05
After-tax adjustments:
Less: Deferred acquisition costs	162			0.89			165			0.85
Plus: Net present value of estimated net future credit derivative revenue	173			0.95			220			1.14
Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed	2,978			16.34			3,266			16.83
Adjusted book value	$	9,029		$	49.55		$	9,151		$	47.17

134

Table of Contents

As of September 30, 2013, shareholders’ equity decreased to $4.8 billion from $5.0 billion at December 31, 2012 due to share repurchases, a decline in unrealized gains on the available for sale portfolio and dividends, which were partially offset by net income in Nine Months 2013. Operating shareholders' equity increased due primarily to positive operating income in Nine Months 2013, which was partially offset by the share repurchases. Adjusted book value decreased mainly due to share repurchases, dividends and economic loss development. Adjusted book value per share increased due to the repurchase of 12.2 million common shares as of September 30, 2013.

Management believes that operating shareholders’ equity is a useful measure because it presents the equity of the Company with all financial guaranty contracts accounted for on a more consistent basis and excludes fair value adjustments that are not expected to result in economic loss. Many investors, analysts and financial news reporters use operating shareholders’ equity as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Many of the Company’s fixed income investors also use operating shareholders’ equity to evaluate the Company’s capital adequacy. Operating shareholders’ equity is the basis of the calculation of adjusted book value (see below). Operating shareholders’ equity is defined as shareholders’ equity attributable to Assured Guaranty Ltd., as reported under GAAP, adjusted for the following:

1) Elimination of the effects of consolidating FG VIEs in order to present all financial guaranty contracts on a more consistent basis of accounting, whether or not GAAP requires consolidation. GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company even though the Company does not own such VIEs.

4) Elimination of the after-tax unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss.

Management believes that adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company’s in-force premiums and revenues in addition to operating shareholders’ equity. The premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. Many investors, analysts and financial news reporters use adjusted book value to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Adjusted book value is operating shareholders’ equity, as defined above, further adjusted for the following:

1) Elimination of after-tax deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.

2) Addition of the after-tax net present value of estimated net future credit derivative revenue. See below.

3) Addition of the after-tax value of the unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the expected future net earned premiums, net of expected losses to be expensed, which are not reflected in GAAP equity.

Net Present Value of Estimated Net Future Credit Derivative Revenue

Management believes that this amount is a useful measure because it enables an evaluation of the value of future estimated credit derivative revenue. There is no corresponding GAAP financial measure. This amount represents the present value of estimated future revenue from the Company’s credit derivative in-force book of business, net of reinsurance, ceding

135

Table of Contents

commissions and premium taxes, for contracts without expected economic losses, and is discounted at 6%. Estimated net future credit derivative revenue may change from period to period due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.

PVP or Present Value of New Business Production

Reconciliation of PVP to Gross Written Premiums



	Third Quarter					Nine Months
	2013		2012			2013		2012
	(in millions)
Total PVP	$	40	$	35		$	74	$	141
Less: Financial guaranty installment premium PVP	18		5			19		12
Total: Financial guaranty upfront gross written premiums	22		30			55		129
Plus: Financial guaranty installment gross written premiums	4		(5		)	10		15
Total gross written premiums	$	26	$	25		$	65	$	144

Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as premium supplements and additional installment premium on existing contracts as to which the issuer has the right to call the insured obligation but has not exercised such right, whether in insurance or credit derivative contract form, which GAAP gross premiums written and the net credit derivative premiums received and receivable portion of net realized gains and other settlements on credit derivatives (“Credit Derivative Revenues”) do not adequately measure. PVP in respect of financial guaranty contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums, in each case, discounted at 6%. For purposes of the PVP calculation, management discounts estimated future installment premiums on insurance contracts at 6%, while under GAAP, these amounts are discounted at a risk free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual future net earned or written premiums and Credit Derivative Revenues may differ from PVP due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation.

Insured Portfolio

The following tables present the insured portfolio by asset class net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e. credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e. insurance, derivative or VIE consolidation).

136

Table of Contents

Net Par Outstanding and Average Internal Rating by Asset Class



	As of September 30, 2013							As of December 31, 2012
Sector	Net Par Outstanding (including loss mitigation bonds)		Loss Mitigation Bonds		Net Par Outstanding (excluding loss mitigation bonds)		Avg. Rating	Net Par Outstanding (including loss mitigation bonds)		Loss Mitigation Bonds		Net Par Outstanding (excluding loss mitigation bonds)		Avg. Rating
	(dollars in millions)
Public finance:
U.S.:
General obligation	$	158,972	$	—	$	158,972	A+	$	169,985	$	—	$	169,985	A+
Tax backed	68,608		34		68,574		A+	73,787		38		73,749		A+
Municipal utilities	58,363		—		58,363		A	62,116		—		62,116		A
Transportation	31,189		—		31,189		A	33,799		—		33,799		A
Healthcare	16,635		—		16,635		A	17,838		—		17,838		A
Higher education	14,336		—		14,336		A	15,770		—		15,770		A+
Infrastructure finance	4,105		—		4,105		BBB	4,210		—		4,210		BBB
Housing	3,608		—		3,608		A+	4,633		—		4,633		AA-
Investor-owned utilities	1,024		—		1,024		A-	1,069		—		1,069		A-
Other public finance—U.S.	4,397		—		4,397		A	4,760		—		4,760		A
Total public finance—U.S.	361,237		34		361,203		A	387,967		38		387,929		A
Non-U.S.:
Infrastructure finance	14,857		—		14,857		BBB	15,812		—		15,812		BBB
Regulated utilities	11,216		—		11,216		BBB+	12,494		—		12,494		BBB+
Pooled infrastructure	3,177		—		3,177		AA-	3,200		—		3,200		AA-
Other public finance—non-U.S.	5,662		—		5,662		A	6,034		—		6,034		A
Total public finance—non-U.S.	34,912		—		34,912		BBB+	37,540		—		37,540		BBB+
Total public finance	396,149		34		396,115		A	425,507		38		425,469		A
Structured finance:
U.S.:
Pooled corporate obligations	33,974		—		33,974		AAA	41,886		—		41,886		AAA
RMBS	15,362		842		14,520		BB+	17,827		792		17,035		BB+
CMBS and other commercial real estate related exposures	3,994		—		3,994		AAA	4,247		—		4,247		AAA
Insurance securitizations	3,363		300		3,063		A-	3,113		170		2,943		BBB+
Financial products	2,732		—		2,732		AA-	3,653		—		3,653		AA-
Consumer receivables	2,223		—		2,223		BBB	2,369		—		2,369		BBB+
Commercial receivables	969		—		969		A	1,025		—		1,025		BBB+
Structured credit	184		121		63		BB	319		121		198		B
Other structured finance—U.S.	1,046		—		1,046		A-	1,179		—		1,179		BBB+
Total structured finance—U.S.	63,847		1,263		62,584		AA-	75,618		1,083		74,535		AA-
Non-U.S.:
Pooled corporate obligations	11,535		—		11,535		AAA	14,813		—		14,813		AAA
Commercial receivables	1,308		—		1,308		BBB+	1,463		—		1,463		A-
RMBS	1,162		—		1,162		AA-	1,424		—		1,424		AA-
Structured credit	288		—		288		BBB	591		—		591		BBB
CMBS and other commercial real estate related exposures	—		—		—		—	100		—		100		AAA
Other structured finance—non-U.S.	378		—		378		AAA	377		—		377		AAA
Total structured finance—non-U.S.	14,671		—		14,671		AA	18,768		—		18,768		AA
Total structured finance	78,518		1,263		77,255		AA-	94,386		1,083		93,303		AA-
Total net par outstanding	$	474,667	$	1,297	$	473,370	A	$	519,893	$	1,121	$	518,772	A+

137

Table of Contents

The September 30, 2013 and December 31, 2012 amounts above include $39.0 billion and $47.4 billion, respectively, of AGM structured finance net par outstanding, excluding loss mitigation bonds. AGM has not insured a mortgage-backed transaction since January 2008 and announced its complete withdrawal from the structured finance market in August 2008. The structured finance transactions that remain in AGM’s insured portfolio are of double-A average underlying credit quality, according to the Company’s internal rating system. Management expects AGM’s structured finance portfolio to run-off rapidly: 3% by year-end 2013, 53% by year end 2015, and 83% by year-end 2017.

The following tables set forth the Company’s net financial guaranty portfolio by internal rating.

Financial Guaranty Portfolio by Internal Rating

As of September 30, 2013



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

Financial Guaranty Portfolio by Internal Rating

As of December 31, 2012



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category (1)	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,502	1.2	%	$	1,706	4.5	%	$	42,187	56.6	%	$	13,169	70.2	%	$	61,564	11.9	%
AA	124,525		32.1		875		2.3		9,543		12.8		722		3.9		135,665		26.1
A	210,124		54.1		9,781		26.1		4,670		6.3		1,409		7.5		225,984		43.6
BBB	44,213		11.4		22,885		61.0		3,737		5.0		2,427		12.9		73,262		14.1
BIG	4,565		1.2		2,293		6.1		14,398		19.3		1,041		5.5		22,297		4.3
Total net par outstanding (excluding loss mitigation bonds)	$	387,929	100.0	%	$	37,540	100.0	%	$	74,535	100.0	%	$	18,768	100.0	%	$	518,772	100.0	%
Loss Mitigation Bonds	38				—				1,083				—				1,121
Net Par Outstanding (including loss mitigation bonds)	$	387,967			$	37,540			$	75,618			$	18,768			$	519,893

____________________


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

138

Table of Contents

Previously, the Company had included securities purchased for loss mitigation purposes in its descriptions of its invested assets and its financial guaranty insured portfolio. Beginning in Third Quarter 2013, the Company will be excluding such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated); it has taken this approach as of both September 30, 2013 and December 31, 2012. In addition, under the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and are also recorded in invested assets in the consolidated balance sheets. Such amounts are still included in the financial guaranty insured portfolio and totaled $218 million and $220 million in gross par outstanding as of September 30, 2013 and December 31, 2012, respectively.

Selected European Exposure

Several European countries continue to experience significant economic, fiscal and / or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The Company has identified those European countries where it has exposure and where it believes heightened uncertainties exist to be: Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). The Company selected these European countries based on its view that their credit fundamentals are deteriorating, as well as on published reports identifying countries that may be experiencing reduced demand for their sovereign debt in the current environment. See “—Selected European Countries” below for an explanation of the circumstances in each country leading the Company to select that country for further discussion.

Economic Exposure to the Selected European Countries

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 tables, both gross and net of ceded reinsurance:

Gross Economic Exposure to Selected European Countries(1)

September 30, 2013



	Greece		Hungary		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	—	$	—	$	—	$	1,368	$	120	$	435	$	1,923
Infrastructure finance	—		442		24		86		96		174		822
Sub-total	—		442		24		1,454		216		609		2,745
Non-sovereign exposure:
Regulated utilities	—		—		—		248		—		—		248
RMBS	—		231		142		377		—		—		750
Commercial receivables	—		0		9		64		14		2		89
Pooled corporate	18		—		121		185		15		554		893
Sub-total	18		231		272		874		29		556		1,980
Total	$	18	$	673	$	296	$	2,328	$	245	$	1,165	$	4,725
Total BIG	$	—	$	635	$	8	$	1	$	131	$	592	$	1,367

139

Table of Contents

Net Economic Exposure to Selected European Countries(1)

September 30, 2013



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

____________________

(1) While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, including U.S. dollars, Euros and British pounds sterling. Included in both tables above is $142 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining legacy mortgage reinsurance business. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the tables.

As of September 30, 2013, the Company does not guarantee any sovereign bonds of the Selected European Countries, although the payments for many of the public finance and infrastructure finance credits originate with sovereigns or sub-sovereigns. The exposure shown in the “Public Finance” Category is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal.

The tables above include the par amount of financial guaranty contracts accounted for as derivatives. The Company’s credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. ("ISDA") documentation, and the Company is required to make a loss payment on them only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. For those financial guaranty contracts included in the tables above and accounted for as derivatives, the tables below show their fair value, net of reinsurance:

Fair Value Gain (Loss) of Financial Guaranty Contracts Accounted for as Derivatives,

With Exposure to Selected European Countries, Net of Reinsurance

September 30, 2013



	Greece		Hungary			Ireland			Italy			Portugal			Spain
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	—	$	—		$	—		$	—		$	—		$	—
Infrastructure finance	—		(1		)	(1		)	(1		)	(2		)	0
Total sovereign exposure	—		(1		)	(1		)	(1		)	(2		)	0
Non-sovereign exposure:
Regulated utilities	—		—			—			—			—			—
RMBS	—		(7		)	—			—			—			—
Total non-sovereign exposure	—		(7		)	—			—			—			—
Total	$	—	$	(8	)	$	(1	)	$	(1	)	$	(2	)	$	0

140

Table of Contents

The Company purchases reinsurance in the ordinary course to cover both its financial guaranty insurance and credit derivative exposures. Aside from this type of coverage the Company does not purchase credit default protection to manage the risk in its financial guaranty business. Rather, the Company has reduced its risks by ceding a portion of its business (including its financial guaranty contracts accounted for as derivatives) to third-party reinsurers that are generally required to pay their proportionate share of claims paid by the Company, and the net amounts shown above are net of such third-party reinsurance (reinsurance of financial guaranty contracts accounted for as derivatives is accounted for as a purchased derivative). See Note 13, Reinsurance and Other Monoline Exposures, of the Financial Statements.

Indirect Exposure to Selected European Countries

The Company has included in the exposure tables above its indirect economic exposure to the Selected European Countries through insurance 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 that exposure relates to only a small portion of an insured transaction that otherwise is not related to that Selected European Country.

The Company’s pooled corporate obligations are highly diversified in terms of obligors and, except in the case of TruPS CDOs or transactions backed by perpetual preferred securities (“Perps”), highly diversified in terms of industry. Most pooled corporate obligations are structured to limit exposure to any given obligor and any given non-U.S. country or region. The insured pooled corporate transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim. Some pooled corporate obligations include investments in companies with a nexus to the Selected European Countries.

The Company’s commercial receivable transactions included in the exposure tables above are rail car lease transactions and aircraft lease transactions where some of the lessees have a nexus with the Selected European Countries. Like the pooled corporate transactions, the commercial receivable transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim.

The following table shows the Company’s indirect economic exposure (net of reinsurance) to the Selected European Countries in pooled corporate obligations and commercial receivable transactions. The amount shown in the table is calculated by multiplying the amount insured by the Company (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) times the percent of the relevant collateral pool reported as having a nexus to the Selected European Countries:

Net Indirect Exposure to Selected European Countries

September 30, 2013



	Greece			Hungary			Ireland			Italy			Portugal			Spain			Total
	(dollars in millions)
Pooled corporate
$ millions	$	17		$	—		$	103		$	168		$	15		$	502		$	805
Average proportion	2.1		%	—			1.7		%	2.7		%	1.0		%	4.8		%	3.2		%
Commercial receivables
$ millions	$	—		$	0		$	9		$	62		$	14		$	2		$	87
Average proportion	—			0.0		%	6.7		%	10.3		%	2.4		%	1.8		%	5.2		%
Total $ millions	$	17		$	0		$	112		$	230		$	29		$	504		$	892

The table above includes, in the pooled corporate category, exposure from primarily non-U.S. pooled corporate transactions insured by the Company. Many primarily U.S. pooled corporate obligations permit investments of up to 10% or 15% (or occasionally 20%) of the pool in non-U.S. (or non-U.S. or -Canadian) collateral. Given the relatively low level of permitted international investments in these transactions and their generally high current credit quality, they are excluded from the table above.

Selected European Countries

The Company follows and analyzes public information regarding developments in countries to which the Company has exposure, including the Selected European Countries, and utilizes this information to evaluate risks in its financial guaranty portfolio. Because the Company guarantees payments under its financial guaranty contracts, its analysis is focused

141

Table of Contents

primarily on the risk of payment defaults by these countries or obligors in these countries. However, dramatic developments with respect to the Selected European Countries would also impact the fair value of insurance contracts accounted for as derivatives and with a nexus to those countries.

The Republic of Hungary is rated “BB” and “Ba1” by S&P and Moody’s, respectively. The country continues to face significant economic and political challenges. The Company’s sovereign and sub-sovereign exposure to Hungarian credits includes an infrastructure financing dependent on payments by government agencies. The Company rates this exposure ($379 million net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations. The Company’s non-sovereign exposure to Hungary comprises primarily covered mortgage bonds issued by Hungarian banks. The Company rates the covered bonds ($220 million net par) below investment grade.

The Kingdom of Spain is rated “BBB-” and “Baa3” by S&P and Moody’s, respectively. While its recession was longer and deeper than most other European countries, there are recent signs that the economic environment in Spain is stabilizing. The Company’s sovereign and sub-sovereign exposure to Spanish credits includes infrastructure financings dependent on payments by sub-sovereigns and government agencies, financings dependent on lease and other payments by sub-sovereigns and government agencies, and an issuance by a regulated utility. The Company rates most ($425 million aggregate net par) of its exposure to sovereign and sub-sovereign credits in Spain below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations.

The Republic of Portugal is rated “BB” and “Ba3” by S&P and Moody's, respectively. The country continues to face difficulties regarding its fiscal imbalances, high indebtedness and the difficult macroeconomic situation but has made progress in terms of fiscal consolidation and structural reforms. The Company’s exposure to sovereign and sub-sovereign Portuguese credits includes financings dependent on lease payments by sub-sovereigns and government agencies and infrastructure financings dependent on payments by sub-sovereigns and government agencies. The Company rates four of these transactions ($113 million aggregate net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations.

The Republic of Ireland is currently rated “BBB+” and “Ba1” by S&P and Moody’s, respectively. The country has implemented strict fiscal consolidation and structural reforms, which have improved the sustainability of future economic growth. The Company’s exposure to Irish credits includes exposure in a pool of infrastructure financings dependent on payments by a sub-sovereign and mortgage reinsurance on a pool of Irish residential mortgages originated in 2004-2006 left from its legacy mortgage reinsurance business. Only $7 million of the Company’s exposure to Ireland is below investment grade, and it is indirect in non-sovereign pooled corporate transactions.

The Republic of Italy is rated “BBB” and “Baa2” by S&P and Moody’s, respectively. Even though its recession has eased somewhat in recent months, the country continues to face significant economic and political challenges. The Company’s sovereign and sub-sovereign exposure to Italy depends on payments by Italian governmental entities in connection with infrastructure financings or for services already rendered. The Company internally rates one of the infrastructure transactions ($1 million net par) below investment grade. The Company’s non-sovereign Italian exposure is comprised primarily of securities backed by Italian residential mortgages or in one case a government-sponsored water utility. The Company is closely monitoring the ability and willingness of these obligors to make timely payments on their obligations.

The Hellenic Republic of Greece is rated “B-” and “C” by S&P and Moody’s, respectively. As evidenced by its low ratings, the country still faces significant economic, social and political challenges. As of September 30, 2013 the Company no longer had any direct economic exposure to Greece, although it does still have small, indirect exposures as described above under "Indirect Exposure to Selected European Countries".

Identifying Exposure to Selected European Countries

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 most exposures 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 as it has, for example, in a residential mortgage backed security backed by residential mortgage loans in both Germany and Italy. The Company may also have exposures to the Selected European Countries in business assumed from other monoline insurance companies. See Note 13, Reinsurance and Other Monoline Exposure, of the Financial Statements. In the case of assumed business, the Company depends upon geographic information provided by the primary insurer.

142

Table of Contents

The Company also has indirect exposure to the Selected European Countries through structured finance transactions backed by pools of corporate obligations or receivables, such as lease payments, with a nexus to such countries. 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 other monoline insurance companies. However, in the case of assumed business, the primary insurer generally does not provide information to the Company permitting it to geographically allocate the exposure proportionally to the domicile of the underlying obligors.

Exposure to Puerto Rico

Exposures by Reinsurer

Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. 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 as a result been downgraded by the rating agencies. In addition, state insurance regulators have intervened with respect to some of these insurers.

Assumed par outstanding represents the amount of par assumed by the Company from other monolines. 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.

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.

143

Table of Contents

Exposure by Reinsurer



	Ratings at		Par Outstanding
	November 7, 2013		As of September 30, 2013
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(1)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	WR (2)	WR	$	8,695	$	—	$	30
Tokio	Aa3 (3)	AA- (3)	7,420		—		—
Radian	Ba1	B+	4,781		38		1,194
Syncora Guarantee Inc.	WR	WR	4,119		1,790		162
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+ (3)	2,160		—		—
ACA Financial Guaranty Corp.	NR	WR	810		5		10
Swiss Reinsurance Co.	A1	AA-	401		—		—
Ambac Assurance Corporation ("Ambac")	WR	WR	85		6,451		18,307
CIFG Assurance North America Inc. ("CIFG")	WR	WR	61		237		5,201
MBIA Inc.	(4)	(4)	—		10,549		7,497
Financial Guaranty Insurance Co.	WR	WR	—		2,535		1,721
Other	Various	Various	946		2,056		46
Total			$	29,478	$	23,661	$	34,168

____________________


(1)	Includes $3,364 million in ceded par outstanding related to insured credit derivatives.

(2) Represents “Withdrawn Rating.”

(3) The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody’s.

(4) MBIA Inc. includes various subsidiaries which are rated A and B by S&P and Baa1, B1 and B3 by Moody’s.

144

Table of Contents

Ceded Par Outstanding by Reinsurer and Credit Rating

As of September 30, 2013



	Internal Credit Rating (1)
Reinsurer	AAA		AA		A		BBB		BIG		Total
	(in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	$	1,118	$	2,977	$	2,701	$	1,519	$	380	$	8,695
Tokio	1,153		1,130		2,306		2,229		602		7,420
Radian	241		291		2,407		1,530		312		4,781
Syncora Guarantee Inc.	—		223		759		2,496		641		4,119
Mitsui Sumitomo Insurance Co. Ltd.	145		694		869		408		44		2,160
ACA Financial Guaranty Corp	—		465		324		21		—		810
Swiss Reinsurance Co.	8		5		253		104		31		401
Ambac	—		—		85		—		—		85
CIFG	—		—		—				61		61
Other	—		73		816		57		—		946
Total	$	2,665	$	5,858	$	10,520	$	8,364	$	2,071	$	29,478

____________________


(1)	In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure, of the Financial Statements.

In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table above post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. CIFG and Radian are authorized reinsurers. Radian's collateral equals or exceeds its ceded statutory loss reserves and CIFG's collateral covers a substantial portion of its ceded statutory loss reserves. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of September 30, 2013 is approximately $1.2 billion.

145

Table of Contents

Second-to-Pay

Insured Par Outstanding by Internal Rating

As of September 30, 2013(1)



	Public Finance										Structured Finance
	AAA		AA		A		BBB		BIG		AAA		AA		A		BBB		BIG		Total
	(in millions)
Radian	$	—	$	—	$	13	$	17	$	8	$	—	$	—	$	—	$	—	$	—	$	38
Syncora Guarantee Inc.	—		25		379		767		299		82		58		—		—		180		1,790
ACA Financial Guaranty Corp.	—		3		—		2		—		—		—		—		—		—		5
Ambac	0		1,401		3,230		1,138		80		10		46		73		216		257		6,451
CIFG	—		11		69		112		45		—		—		—		—		—		237
MBIA Inc.	162		2,435		4,209		1,739		—		—		1,547		25		202		230		10,549
Financial Guaranty Insurance Co.	—		121		1,106		296		324		561		—		79		—		48		2,535
Other	—		—		2,056		—		—		—		—		—		—		—		2,056
Total	$	162	$	3,996	$	11,062	$	4,071	$	756	$	653	$	1,651	$	177	$	418	$	715	$	23,661

____________________


(1)	Assured Guaranty’s internal rating. In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure, of the Financial Statements.

Exposure to Residential Mortgage-Backed Securities

The tables below provide information on the risk ratings and certain other risk characteristics of the Company’s financial guaranty insurance and credit derivative RMBS exposures as of September 30, 2013. U.S. RMBS exposures represent 3% of the total net par outstanding, and BIG U.S. RMBS represent 43% of total BIG net par outstanding. The tables presented provide information with respect to the underlying performance indicators of this book of business. See Note 5, Expected Loss to be Paid, of the Financial Statements, for a discussion of expected losses to be paid on U.S. RMBS exposures.

Net par outstanding in the following tables are based on values as of September 30, 2013. Previously, the Company had included securities purchased for loss mitigation purposes in its invested assets and its financial guaranty insured portfolio. Beginning with Third Quarter 2013, the Company will be excluding such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated); it has taken this approach as of both September 30, 2013 and December 31, 2012. In addition, under the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and are also recorded in invested assets in the consolidated balance sheets. Such amounts are still included in the financial guaranty insured portfolio and totaled $218 million and $220 million in gross par outstanding as of September 30, 2013 and December 31, 2012, respectively. All performance information such as pool factor, subordination, cumulative losses and delinquency is based on September 30, 2013 information obtained from third parties and/or provided by the trustee.

Pool factor in the following tables is the percentage of the current collateral balance divided by the original collateral balance of the transactions at inception.

Subordination in the following tables represents the sum of subordinate tranches and overcollateralization, expressed as a percentage of total transaction size and does not include any benefit from excess spread collections that may be used to absorb losses. Many of the closed-end-second lien RMBS transactions insured by the Company have unique structures whereby the collateral may be written down for losses without a corresponding write-down of the obligations insured by the Company. Many of these transactions are currently undercollateralized, with the principal amount of collateral being less than the principal amount of the obligation insured by the Company. The Company is not required to pay principal shortfalls until legal maturity (rather than making timely principal payments), and takes the undercollateralization into account when estimating expected losses for these transactions.

146

Table of Contents

Cumulative losses in the following tables are defined as net charge-offs on the underlying loan collateral divided by the original collateral balance.

60+ day delinquencies in the following tables are defined as loans that are greater than 60 days delinquent and all loans that are in foreclosure, bankruptcy or real estate owned divided by current collateral balance.

U.S. Prime First Lien in the tables below includes primarily prime first lien plus an insignificant amount of other miscellaneous RMBS transactions.

Distribution of U.S. RMBS by Internal Rating and Type of Exposure as of September 30, 2013



Ratings (1):	Prime First Lien		Closed End Second Lien		Home Equity Lines of Credit ("HELOC")		Alt-A First Lien		Option ARM		Subprime First Lien		Total Net Par Outstanding
	(in millions)
AAA	$	1	$	0	$	23	$	229	$	4	$	2,260	$	2,517
AA	102		102		108		418		326		1,712		2,768
A	1		0		9		18		26		99		154
BBB	39		—		269		528		25		282		1,143
BIG	417		150		1,955		2,801		633		1,983		7,938
Total exposures	$	561	$	252	$	2,365	$	3,993	$	1,014	$	6,335	$	14,520

____________________


(1)	In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure, of the Financial Statements.

Distribution of U.S. RMBS by Year Insured and Type of Exposure as of September 30, 2013



Year insured:	Prime First Lien		Closed End Second Lien		HELOC		Alt-A First Lien		Option ARM		Subprime First Lien		Total Net Par Outstanding
	(in millions)
2004 and prior	$	24	$	1	$	196	$	88	$	31	$	1,275	$	1,615
2005	163		—		576		538		46		205		1,527
2006	95		52		717		324		86		2,588		3,862
2007	278		199		875		1,990		794		2,194		6,330
2008	—		—		—		1,054		58		74		1,186
Total exposures	$	561	$	252	$	2,365	$	3,993	$	1,014	$	6,335	$	14,520

Distribution of U.S. RMBS by Internal Rating⁽¹⁾ and Year Insured as of September 30, 2013



Year insured:	AAA Rated			AA Rated			A Rated			BBB Rated			BIG Rated			Total
	(dollars in millions)
2004 and prior	$	1,008		$	131		$	52		$	93		$	332		$	1,615
2005	106			180			2			96			1,144			1,527
2006	1,317			1,241			59			195			1,049			3,862
2007	9			1,158			41			760			4,362			6,330
2008	77			58			—			—			1,051			1,186
Total exposures	$	2,517		$	2,768		$	154		$	1,143		$	7,938		$	14,520
% of total	17.3		%	19.1		%	1.1		%	7.8		%	54.7		%	100.0		%

____________________


(1)	In Third Quarter 2013, the Company adjusted its approach to assigning internal ratings. See "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in Note 3, Outstanding Exposure, of the Financial Statements.

147

Table of Contents

Distribution of Financial Guaranty Direct U.S. RMBS

Insured January 1, 2005 or Later by Exposure Type, Average Pool Factor, Subordination,

Cumulative Losses and 60+ Day Delinquencies as of September 30, 2013

U.S. Prime First Lien



Year insured:	Net Par Outstanding		Pool Factor		Subordination		Cumulative Losses		60+ Day Delinquencies		Number of Transactions
	(dollars in millions)
2005	$	161	23.9	%	5.2	%	2.5	%	12.4	%	6
2006	95		47.3	%	8.4	%	0.8	%	17.8	%	1
2007	278		34.7	%	3.2	%	6.5	%	19.1	%	1
2008	—		—	%	—	%	—	%	—	%	—
Total	$	534	33.7	%	4.7	%	4.3	%	16.8	%	8

U.S. Closed End Second Lien



Year insured:	Net Par Outstanding		Pool Factor		Subordination		Cumulative Losses		60+ Day Delinquencies		Number of Transactions
	(dollars in millions)
2005	$	—	—	%	—	%	—	%	—	%	—
2006	43		10.9	%	—	%	60.6	%	5.0	%	1
2007	199		12.7	%	—	%	69.8	%	5.9	%	8
2008	—		—	%	—	%	—	%	—	%	—
Total	$	242	12.4	%	—	%	68.2	%	5.7	%	9

U.S. HELOC



Year insured:	Net Par Outstanding		Pool Factor		Subordination		Cumulative Losses		60+ Day Delinquencies		Number of Transactions
	(dollars in millions)
2005	$	536	11.5	%	3.3	%	18.7	%	5.3	%	5
2006	701		20.4	%	4.2	%	38.5	%	3.7	%	7
2007	875		25.5	%	2.0	%	40.0	%	3.7	%	8
2008	—		—	%	—	%	—	%	—	%	—
Total	$	2,112	20.2	%	3.0	%	34.1	%	4.1	%	20

U.S. Alt-A First Lien



Year insured:	Net Par Outstanding		Pool Factor		Subordination		Cumulative Losses		60+ Day Delinquencies		Number of Transactions

2005	$	536	24.8	%	8.7	%	7.5	%	17.9	%	20
2006	324		30.9	%	0.0	%	21.8	%	37.4	%	7
2007	1,990		38.3	%	1.2	%	17.2	%	28.1	%	12
2008	1,054		36.5	%	14.2	%	16.7	%	25.9	%	5
Total	$	3,903	35.4	%	5.6	%	16.1	%	26.9	%	44

148

Table of Contents

U.S. Option ARMs



Year insured:	Net Par Outstanding		Pool Factor		Subordination		Cumulative Losses		60+ Day Delinquencies		Number of Transactions

2005	$	40	15.5	%	11.6	%	10.4	%	16.4	%	2
2006	80		28.3	%	—	%	19.6	%	32.4	%	5
2007	794		37.3	%	1.0	%	22.5	%	30.8	%	11
2008	58		39.0	%	49.6	%	17.3	%	23.7	%	1
Total	$	973	35.7	%	4.2	%	21.4	%	30.0	%	19

U.S. Subprime First Lien



Year insured:	Net Par Outstanding		Pool Factor		Subordination		Cumulative Losses		60+ Day Delinquencies		Number of Transactions
	(dollars in millions)
2005	$	196	33.6	%	17.3	%	9.2	%	27.6	%	4
2006	2,583		17.9	%	61.8	%	20.1	%	31.7	%	4
2007	2,194		40.7	%	9.8	%	27.5	%	40.7	%	13
2008	74		52.5	%	16.1	%	22.7	%	31.1	%	1
Total	$	5,047	28.9	%	36.8	%	22.9	%	35.4	%	22

Liquidity and Capital Resources

Liquidity Requirements and Sources

AGL and its Holding Company Subsidiaries

The liquidity of AGL and its subsidiaries that are intermediate holding companies is largely dependent on dividends from their operating subsidiaries and their access to external financing. Liquidity requirements include the payment of operating expenses, interest on debt of Assured Guaranty US Holdings Inc. ("AGUS") and AGMH, and dividends on common shares. AGL and its holding company subsidiaries may also require liquidity to make periodic capital investments in their operating subsidiaries. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months, including the ability to pay dividends on AGL common shares. See “—Insurance Company Regulatory Restrictions” below for a discussion of the dividend restrictions of its insurance company subsidiaries.

The Company anticipates that for the next twelve months, amounts paid by AGL’s operating subsidiaries as dividends will be a major source of its liquidity. It is possible that, in the future, AGL or its subsidiaries may need to seek additional external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company. As of September 30, 2013, AGL had $24 million in short term investments and $12 million in fixed maturity securities with weighted average duration of 0.1 years. AGUS and AGMH had a total of $122 million in cash, short term investments and common stock and $60 million in fixed maturity securities with weighted average duration of 1.2 years. See also "—Insurance Company Regulatory Restrictions" below. On October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend an aggregate principal amount not exceeding $225 million in the aggregate. See Note 15 in the Financial Statements, "Long Term Debt and Credit Facilities" for additional information.

149

Table of Contents

AGL and Holding Company Subsidiaries

Significant Cash Flow Items



	Nine Months
	2013			2012
	(in millions)
Dividends and return of capital from subsidiaries	$	312		$	246
Proceeds from issuance of common shares	—			173
Dividends paid to AGL shareholders	(57		)	(51		)
Repurchases of common shares	(259		)	(24		)
Interest paid	(42		)	(49		)
Loans from subsidiaries	—			173
Payment of long-term debt	(7		)	(173		)

Insurance Company Subsidiaries

Liquidity of the insurance company subsidiaries is primarily used to pay for:


•	claims on the insured portfolio,


•	operating expenses,


•	purchase of loss mitigation bonds


•	collateral postings in connection with credit derivatives and reinsurance transactions,


•	reinsurance premiums,


•	dividends to AGUS, AGMH and AGL, as applicable, for debt service and dividends,


•	principal paydown on surplus notes issued, and


•	capital investments in their own subsidiaries, where appropriate.

Management believes that its subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios. The Company targets a balance of its most liquid assets including cash and short term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold temporarily impaired debt securities until the date of anticipated recovery.

Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, insurance regulations and rating agency capital requirements and general economic conditions.

Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option. CDS may provide for acceleration of amounts due upon the occurrence of certain credit events, subject to single-risk limits specified in the insurance laws of the State of New York (the “New York Insurance Law”). These constraints prohibit or limit acceleration of certain claims according to Article 69 of the New York Insurance Law and serve to reduce the Company’s liquidity requirements.

Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year-to-year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses.

150

Table of Contents

Claims Paid (Recovered)



	Third Quarter						Nine Months
	2013			2012			2013			2012
	(in millions)
Claims paid before R&W recoveries, net of reinsurance	$	101		$	604		$	607		$	1,106
R&W recoveries	(155		)	(95		)	(769		)	(388		)
Claims paid (recovered), net of reinsurance(1)	$	(54	)	$	509		$	(162	)	$	718

____________________


(1)	Includes $8 million recovered and $18 million paid for consolidated FG VIEs for Third Quarter 2013 and 2012, respectively, and $167 million and $62 million recovered for consolidated FG VIEs for Nine Months 2013 and 2012, respectively. Claims recovered include invested assets received as part of a restructuring. See Note 5, Expected Loss to be Paid.

The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by ISDA in order to provide for payments on a scheduled basis and to replicate the terms of a traditional financial guaranty insurance policy. Some contracts the Company entered into as the credit protection seller, however, utilize standard ISDA settlement mechanics of cash settlement (i.e., a process to value the loss of market value of a reference obligation) or physical settlement (i.e., delivery of the reference obligation against payment of principal by the protection seller) in the event of a “credit event,” as defined in the relevant contract. Cash settlement or physical settlement generally requires the payment of a larger amount, prior to the maturity of the reference obligation, than would settlement on a “pay-as-you-go” basis, under which the Company would be required to pay scheduled interest shortfalls during the term of the reference obligation and scheduled principal shortfall only at the final maturity of the reference obligation. The Company’s CDS contracts also generally provide that if events of default or termination events specified in the CDS 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 the CDS contract prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination. In addition, under certain of the Company's CDS, the Company may be obligated to collateralize its obligations under the CDS if it does not maintain financial strength ratings above the negotiated rating level specified in the CDS documentation.

Insurance Company Regulatory Restrictions

The insurance company subsidiaries’ ability to pay dividends depends, among other things, upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. See Note 11, Insurance Company Regulatory Requirements, of the Financial Statements. Previously, dividends paid by a U.S. company to a Bermuda holding company were subject to a 30% withholding tax. After AGL became tax resident in the United Kingdom, as described in "Tax Matters" below, it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax

151

Table of Contents

on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.


•	Dividends shall not exceed outstanding statutory surplus or $440 million.


•	Dividends on annual basis shall not exceed 25% of its total statutory capital and surplus (as set out in its previous year's financial statements) or $321 million unless it files (at least seven days before payment of such dividends) with the Bermuda Monetary Authority an affidavit stating that it will continue to meet the required margins.


•	Capital distributions on an annual basis shall not exceed 15% of its total statutory capital (as set out in its previous year's financial statements) or $126 million, unless approval is granted by the Bermuda Monetary Authority.


•	Dividends are limited by requirements that the subject company must at all times (i) maintain the minimum solvency margin and the Company's applicable enhanced capital requirements required under the Insurance Act of 1978 and (ii) have relevant assets in an amount at least equal to 75% of relevant liabilities, both as defined under the Insurance Act of 1978.

Dividends and Surplus Notes

By Insurance Company Subsidiaries



	Third Quarter					Nine Months
	2013			2012		2013			2012
	(in millions)
Dividends paid by AGC to AGUS	$	25		$	—	$	42		$	55
Dividends paid by AGM to AGMH	60			—		98			30
Dividends paid by AG Re to AGL	22			41		122			111
Repayment of surplus note by AGM to AGMH	25			—		50			50
Issuance of surplus notes by MAC to AGM and MAC Holdings	(400		)	—		(400		)	—

152

Table of Contents

Consolidated Cash Flows

Consolidated Cash Flow Summary



	Three Months						Nine Months
	2013			2012			2013			2012
	(in millions)
Net cash flows provided by (used in) operating activities	$	24		$	(385	)	$	146		$	(223	)
Net cash flows provided by (used in) investing activities	98			529			570			802
Net cash flows provided by (used in) financing activities	(162		)	(191		)	(747		)	(662		)
Effect of exchange rate changes	3			5			(1		)	1
Cash at beginning of period	143			175			138			215
Total cash at the end of the period	$	106		$	133		$	106		$	133

Operating cash flows in 2013 include cash flows from FG VIEs. Claims paid on consolidated FG VIEs are presented in the consolidated cash flow statements as a component of paydowns on FG VIE liabilities in financing activities as opposed to operating activities. Excluding consolidated FG VIEs, the cash flows from operating activities increased for Nine Months 2013 compared to Nine Months 2012 and were mainly related to proceeds from R&W settlements in 2013, which were partially offset by claim payments and higher tax payments in Nine Months 2013 and $210 million in cash received on two commutations in Nine Months 2012.

Investing activities were primarily net sales (purchases) of fixed maturity and short-term investment securities. Investing cash flows in Nine Months 2013 and 2012 include inflows of $553 million and $407 million for FG VIEs, respectively. Nine Months 2013 included proceeds from sales of third party surplus notes and other invested assets. Nine Months 2012 included a $91 million payment to acquire MAC and proceeds from a paydown of notes receivable from an equity investment, which were used to offset the Company’s payments under its CDS contract.

Financing activities consisted primarily of paydowns of FG VIE liabilities and share repurchases. Financing cash flows in Nine Months 2013 and 2012 include outflows of $409 million and $553 million for FG VIEs, respectively. Through September 30, 2013, the Company repurchased a total of 12.2 million common shares for approximately $259 million at an average price of $21.15 per share. On November 11, 2013, the Company's share repurchase authorization of $400 million replaced the prior authorization. For more information about the new share repurchase authorization and the Company's repurchase activities through November 11, 2013, the day on which the new share repurchase plan was authorized, see the "Share Repurchase Program" section of the "Key Business Strategy" section of the Executive Summary above.

Commitments and Contingencies

Leases

AGL and its subsidiaries are party to various lease agreements. Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed since December 31, 2012.

153

Table of Contents

Long-Term Debt Obligations

The principal of and interest paid on long-term debt issued by AGUS and AGMH were as follows:

Principal Outstanding

and Interest Paid on Long-Term Debt



	Principal Amount				Interest Paid
	As of September 30,		As of December 31,		Third Quarter				Nine Months
	2013		2012		2013		2012		2013		2012
	(in millions)
AGUS:
7.0% Senior Notes	$	200	$	200	$	—	$	—	$	7	$	7
8.5% Senior Notes	—		—		—		—		—		7
Series A Enhanced Junior Subordinated Debentures	150		150		—		—		5		5
Total AGUS	350		350		—		—		12		19
AGMH:
67/8% QUIBS	100		100		2		2		5		5
6.25% Notes	230		230		4		4		11		11
5.60% Notes	100		100		1		1		4		4
Junior Subordinated Debentures	300		300		—		—		10		10
Total AGMH	730		730		7		7		30		30
AGM:
Notes Payable	38		61		2		2		5		7
Total AGM	38		61		2		2		5		7
Total	$	1,118	$	1,141	$	9	$	9	$	47	$	56

AGL fully and unconditionally guarantees the following obligations:


•	7.0% Senior Notes issued by AGUS


•	6 7/8% Quarterly Income Bonds Securities (“QUIBS”) issued by AGMH


•	6.25% Notes issued by AGMH


•	5.60% Notes issued by AGMH

In addition, AGL guarantees, on a junior subordinated basis, AGUS’s Series A, Enhanced Junior Subordinated Debentures and the $300 million of AGMH’s outstanding Junior Subordinated Debentures.

Debt Issued by AGUS

7.0% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7.0% senior notes due 2034 (“7.0% Senior Notes”) for net proceeds of $197 million. Although the coupon on the Senior Notes is 7.0%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge.

8.5% Senior Notes. On June 24, 2009, AGL issued 3,450,000 equity units for net proceeds of approximately $167 million in a registered public offering. The net proceeds of the offering were used to pay a portion of the consideration for the AGMH Acquisition. Each equity unit consisted of (i) a 5% undivided beneficial ownership interest in $1,000 principal amount of 8.5% senior notes due 2014 issued by AGUS and (ii) a forward purchase contract obligating the holders to purchase $50 of AGL common shares in June 2012. On June 1, 2012, the Company completed the remarketing of the $173 million aggregate principal amount of 8.5% Senior Notes; AGUS purchased all of the Senior Notes in the remarketing at a price of 100% of the principal amount thereof, and retired all of such notes on June 1, 2012. The proceeds from the remarketing were used to satisfy the obligations of the holders of the Equity Units to purchase AGL common shares pursuant to the forward purchase contract.

154

Table of Contents

Accordingly, on June 1, 2012, AGL issued 3.8924 common shares to holders of each Equity Unit, which represented a settlement rate of 3.8685 common shares plus certain anti-dilution adjustments, or an aggregate of 13,428,770 common shares at approximately $12.85 per share. The Equity Units ceased to exist when the forward purchase contracts were settled on June 1, 2012.

Series A Enhanced Junior Subordinated Debentures. On December 20, 2006, AGUS issued $150 million of the Debentures due 2066. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month London Interbank Offered Rate ("LIBOR") plus a margin equal to 2.38%. AGUS may select at 1.0 or more times to defer payment of interest for 1.0 or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date.

Debt Issued by AGMH

6 7/8% QUIBS. On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due December 15, 2101, which are callable without premium or penalty.

6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are callable without premium or penalty in whole or in part.

5.60% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.60% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part.

Junior Subordinated Debentures. On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.40%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is twenty years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH.

Debt Issued by AGM

Notes Payable represent debt, issued by special purpose entities consolidated by AGM, to the former AGMH subsidiaries that conducted AGMH’s Financial Products Business (the “Financial Products Companies”) transferred to Dexia Holdings Inc. ("Dexia Holdings") prior to the AGMH Acquisition. The funds borrowed were used to finance the purchase of the underlying obligations of AGM-insured obligations which had breached triggers allowing AGM to exercise its right to accelerate payment of a claim in order to mitigate loss. The assets purchased are classified as assets acquired in refinancing transactions and recorded in “other invested assets.” The terms of the notes payable match the terms of the assets.

Recourse Credit Facilities

Strip Coverage Facility. In connection with the AGMH Acquisition, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. The liquidity risk to AGM related to the strip policy portion of the leveraged lease business is mitigated by the strip coverage facility described below.

155

Table of Contents

transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the “strip coverage”) from its own sources. AGM issued financial guaranty insurance policies (known as “strip policies”) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.

On July 1, 2009, AGM and Dexia Crédit Local S.A. (“DCL”), acting through its New York Branch (“Dexia Crédit Local (NY)”), entered into a credit facility (the “Strip Coverage Facility”). Under the Strip Coverage Facility, Dexia Crédit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on AGM strip policies that were outstanding as of November 13, 2008, up to the commitment amount. The commitment amount of the Strip Coverage Facility was $1 billion at closing of the AGMH Acquisition but is scheduled to amortize over time. As of September 30, 2013, the maximum commitment amount of the Strip Coverage Facility has amortized to $975 million. It may also be reduced in 2014 to $750 million, if AGM does not have a specified consolidated net worth at that time.

exempt entity, or from asset sale proceeds – following its payment of strip policy claims. The Strip Coverage Facility will terminate upon the earliest to occur of an AGM change of control, the reduction of the commitment amount to $0, and January 31, 2042.

As of September 30, 2013, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.

Intercompany Credit Facility. On October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend an aggregate principal amount not exceeding $225 million in the aggregate. Such commitment terminates on the fifth anniversary date of the date of the credit agreement (the “loan termination date”). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable Federal short-term or mid-term interest rate, as the case may be, as determined under Internal Revenue Code Sec. 1274(d), and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan termination date. No amounts are currently outstanding under the credit facility.

156

Table of Contents

Limited-Recourse Credit Facilities

AG Re had a $200 million limited recourse credit facility for the payment of losses in respect of cumulative municipal losses (net of any recoveries) in excess of the greater of $260 million or the average annual debt service of the covered portfolio multiplied by 4.5%. The obligation to repay loans under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral. AG Re terminated such credit facility effective March 5, 2013.

Letters of Credit

Committed Capital Securities

Each of AGC and AGM have issued $200 million of committed capital securities pursuant to transactions in which AGC CCS Securities or AGM CPS Securities, as applicable, were issued by custodial trusts created for the primary purpose of issuing such securities, investing the proceeds in high-quality assets and providing put options to AGC or AGM, as applicable. The put options allow AGC and AGM to issue non-cumulative redeemable perpetual preferred to the trusts in exchange for cash. For both AGC and AGM, four initial trusts were created, each with an initial aggregate face amount of $50 million. The Company does not consider itself to be the primary beneficiary of the trusts for either the AGC or AGM committed capital securities and the trusts are not consolidated in Assured Guaranty's financial statements.

The trusts provide AGC and AGM access to new capital at their respective sole discretion through the exercise of the put options. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase the AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from such sale of its preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) in the event specified events occur.

AGC Committed Capital Securities. AGC entered into separate put agreements with four custodial trusts with respect to its committed capital securities in April 2005. The AGC put options have not been exercised through the date of this filing. Initially, all of AGC committed capital securities 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 committed capital securities 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 committed capital securities 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 committed capital securities are determined pursuant to an auction process. On April 7, 2008 this auction process failed, thereby increasing the annualized rate on the AGC committed capital securities to one-month LIBOR plus 250 basis points. Distributions on the AGC preferred stock will be determined pursuant to the same process. AGC continues to have the ability to exercise its put option and cause the related trusts to purchase AGC Preferred Stock.

AGM Committed Capital Securities. AGM entered into separate put agreements with four custodial trusts trusts with respect to its committed capital securities in June 2003. The AGM put options have not been exercised through the date of this filing. AGM pays a floating put premium to the trusts, which represents the difference between the commercial paper yield and the winning auction rate (plus all fees and expenses of the trust). If an auction does not attract sufficient clearing bids, however, the auction rate is subject to a maximum rate of one-month LIBOR plus 200 basis points for the next succeeding distribution period. Beginning in August 2007, the AGM committed capital securities required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock.

Investment Portfolio

The Company’s principal objectives in managing its investment portfolio are to preserve the highest possible ratings for each operating company; to manage investment risk within the context of the underlying portfolio of insurance risk; to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio; and to maximize after-tax net investment income.

157

Table of Contents

Fixed Maturity Securities and Short-Term Investments

The Company’s fixed maturity securities and short-term investments had a duration of 5.0 years as of September 30, 2013 and 4.3 years as of December 31, 2012. Generally, the Company’s fixed maturity securities are designated as available-for-sale. Fixed maturity securities designated as available for sale are reported at their fair value, and the change in fair value is reported as part of AOCI except for the credit component of the unrealized loss for securities deemed to be OTTI. If management believes the decline in fair value is “other-than-temporary,” the Company writes down the carrying value of the investment and records a realized loss in the consolidated statements of operations for an amount equal to the credit component of the unrealized loss.

Fair value of fixed maturity securities is based upon market prices provided by either independent pricing services or, when such prices are not available, by reference to broker or underwriter bid indications. The Company’s fixed maturity and short term portfolio is primarily invested in publicly traded securities. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Note 10, Investments and Cash, of the Financial Statements.

Fixed Maturity Securities and Short Term Investments

by Security Type



	As of September 30, 2013				As of December 31, 2012
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in millions)
Fixed maturity securities:
U.S. government and agencies	$	684	$	717	$	732	$	794
Obligations of state and political subdivisions	5,047		5,249		5,153		5,631
Corporate securities	1,308		1,345		930		1,010
Mortgage-backed securities(1):
RMBS	1,157		1,120		1,281		1,266
CMBS	507		523		482		520
Asset-backed securities	592		614		482		531
Foreign government securities	292		305		286		304
Total fixed maturity securities	9,587		9,873		9,346		10,056
Short-term investments	761		761		817		817
Total fixed maturity and short-term investments	$	10,348	$	10,634	$	10,163	$	10,873

____________________


(1)	Government-agency obligations were approximately 51% of mortgage backed securities as of September 30, 2013 and 61% as of December 31, 2012, based on fair value.

158

Table of Contents

The following tables summarize, for all fixed maturity securities in an unrealized loss position as of September 30, 2013 and December 31, 2012, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

As of September 30, 2013



	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	$	175	$	(4	)	$	—	$	—		$	175	$	(4	)
Obligations of state and political subdivisions	731		(39		)	—		—			731		(39		)
Corporate securities	341		(13		)	—		—			341		(13		)
Mortgage-backed securities:
RMBS	373		(13		)	170		(57		)	543		(70		)
CMBS	59		(3		)	—		—			59		(3		)
Asset-backed securities	117		(2		)	40		(7		)	157		(9		)
Foreign government securities	58		0			—		—			58		0
Total	$	1,854	$	(74	)	$	210	$	(64	)	$	2,064	$	(138	)
Number of securities			385					18					403
Number of securities with OTTI			11					10					21

Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

As of December 31, 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	$	62	$	0		$	—	$	—		$	62	$	0
Obligations of state and political subdivisions	79		(11		)	—		—			79		(11		)
Corporate securities	25		0			—		—			25		$	0
Mortgage-backed securities:											—		—
RMBS	108		(19		)	121		(58		)	229		(77		)
CMBS	5		0			—		—			5		0
Asset-backed securities	16		0			35		(10		)	51		(10		)
Foreign government securities	8		0			—		—			8		0
Total	$	303	$	(30	)	$	156	$	(68	)	$	459	$	(98	)
Number of securities			58					16					74
Number of securities with OTTI			5					6					11

Of the securities in an unrealized loss position for 12 months or more as of September 30, 2013, 11 securities had an unrealized loss greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2013 was $63 million. The Company has determined that the unrealized losses recorded as of September 30, 2013 are yield related and not the result of other-than-temporary impairments.

159

Table of Contents

Changes in interest rates affect the value of the Company’s fixed maturity portfolio. As interest rates fall, the fair value of fixed maturity securities increases and as interest rates rise, the fair value of fixed maturity securities decreases. The Company’s portfolio of fixed maturity securities consists primarily of high-quality, liquid instruments. The Company continues to receive sufficient information to value its investments and has not had to modify its approach due to the current market conditions.

The amortized cost and estimated fair value of the Company’s available-for-sale fixed maturity securities, by contractual maturity, 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.

Distribution of Fixed Maturity Securities by Contractual Maturity

As of September 30, 2013



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	269	$	273
Due after one year through five years	1,602		1,674
Due after five years through 10 years	2,451		2,554
Due after 10 years	3,601		3,729
Mortgage-backed securities:
RMBS	1,157		1,120
CMBS	507		523
Total	$	9,587	$	9,873

The following table summarizes the ratings distributions of the Company’s investment portfolio as of September 30, 2013 and December 31, 2012. Ratings reflect the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or risk management strategies, which use Assured Guaranty’s internal ratings classifications.

Distribution of Fixed Maturity Securities by Rating



Rating	As of September 30, 2013		As of December 31, 2012
AAA	15.0	%	18.5	%
AA	58.1		61.3
A	18.0		14.3
BBB	1.0		0.4
BIG(1)	7.9		5.5
Total	100.0	%	100.0	%

____________________


(1)	Comprised of primarily loss mitigation assets. See Note 10, Investments and Cash, of the Financial Statements.

160

Table of Contents

The following table presents the fair value of securities with third-party guaranties.

Summary of Investments with Third-Party Guarantors (1)

at Fair Value



Guarantor	As of September 30, 2013
	(in millions)
National Public Finance Guarantee Corporation	$	524
Ambac	474
CIFG	20
Berkshire Hathaway Assurance Corporation	5
Syncora Guarantee Inc.	3
Total	$	1,026

___________________


(1)	99.2% of these securities had investment grade ratings based on the lower of Moody’s and S&P.

Short-term investments include securities with maturity dates equal to or less than one year at the time of purchase. The Company’s short-term investments consist of money market funds, discount notes and certain time deposits for foreign cash portfolios. Short-term investments are reported at fair value.

In connection with its assumed business, under agreements with its ceding companies and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts for the benefit of the ceding companies, which amounted to $360 million and $368 million as of September 30, 2013 and December 31, 2012, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $22 million and $27 million as of September 30, 2013 and December 31, 2012, respectively, for the protection of the policyholders. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account equal to 120% of the letter of credit, which amounted to $3.5 million as of September 30, 2013 and December 31, 2012.

Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on mark-to-market valuations in excess of contractual thresholds. The fair market value of the Company’s pledged securities totaled $681 million and $660 million as of September 30, 2013 and December 31, 2012, respectively. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives, of the Financial Statements, for the effect of the downgrade on collateral posted.

Other Invested Assets

Assets Acquired in Refinancing Transactions

The Company has rights under certain of its financial guaranty insurance policies and indentures that allow it to accelerate the insured notes and pay claims under its insurance policies upon the occurrence of predefined events of default. To mitigate financial guaranty insurance losses, the Company elected to purchase certain outstanding insured obligations or its underlying collateral, primarily franchise loans. The refinancing vehicles obtained their funds from the proceeds of AGM-insured guaranteed investment contracts ("GICs"), issued in the ordinary course of business by the Financial Products Companies (See “—Liquidity Arrangements with respect to AGMH’s former Financial Products Business—The GIC Business” below). The refinancing vehicles are consolidated with the Company.

Investment in Portfolio Funding Company LLC I

In the third quarter of 2010, as part of loss mitigation efforts under a CDS contract, the Company acquired a 50% interest in Portfolio Funding Company LLC I (“PFC”). PFC owns the distribution rights of a motion picture film library. The Company accounts for its interest in PFC as an equity investment. The Company’s equity earnings in PFC are included in net change in fair value of credit derivatives, as any proceeds from the investment are used to offset the Company’s payments under its CDS contract. During Nine Months 2013 and Nine Months 2012, the Company received $11 million and $51 million, respectively, in payments of notes receivable from PFC. The Company and the CDS counterparty mutually agreed to terminate the CDS on April 25, 2013.

161

Table of Contents

Liquidity Arrangements with respect to AGMH’s former Financial Products Business

AGMH’s former financial products segment had been in the business of borrowing funds through the issuance of GICs and medium term notes and reinvesting the proceeds in investments that met AGMH’s investment criteria. The financial products business also included the equity payment undertaking agreement portion of the leveraged lease business, as described further below in “—Strip Coverage Facility for the Leveraged Lease Business.”

The GIC Business

AGM continues to have exposure to the GIC business formerly conducted by AGMH through its non-insurance subsidiaries (the “GIC Issuers”) FSA Capital Management Services LLC, FSA Capital Markets Services LLC and FSA Capital Markets Services (Caymans) Ltd. Prior to the completion of the AGMH Acquisition, AGMH sold its ownership interest in the GIC Issuers and FSA Asset Management LLC (“FSAM”) to Dexia Holdings. Even though AGMH no longer owns the GIC Issuers or FSAM, AGM's guarantees of the GICs remain in place, and must remain in place until each GIC is terminated.

Through a series of transactions and intercompany financing arrangements put in place substantially contemporaneously with the AGMH Acquisition, AGM has sought to mitigate its exposure to the GICs. The key forms of protection consist of guarantees, committed financing arrangements, and collateralized put contracts entered into by Dexia Holdings and certain related and formerly-related entities. The nature and scope of those arrangements is more fully described in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's Form 10‑K for the year ended December 31, 2012 and its Form 10-Q for the quarter ended March 31, 2013.

In the most recent quarter, no substantive modifications were made to those arrangements, and accordingly AGM's risks in its exposure to the GICs remains the same. The overall exposure has declined as a result of terminations and amortization of GICs. As of September 30, 2013, the aggregate accreted GIC balance was approximately $2.7 billion. As of the same date and with respect to the FSAM assets that are covered by the primary put contract, the aggregate accreted principal was approximately $4.2 billion, the aggregate market value was approximately $4.0 billion and the aggregate market value after agreed reductions was approximately $2.9 billion. Cash and net derivative value constituted another $0.3 billion of assets. Accordingly, as of September 30, 2013, the aggregate fair value (after agreed reductions) of the assets supporting the GIC business exceeded the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Therefore, no posting of collateral was required under the credit support annex applicable to the primary put contract. Under the terms of that credit support annex, the collateral posting is recalculated on a weekly basis according to the formula set forth in the credit support annex, and a collateral posting is required whenever the collateralization levels tested by the formula are not satisfied, subject to a threshold of $5 million.

Despite the execution of the transaction referred to above, and the significant portion of FSAM assets comprised of highly liquid securities backed by the full faith and credit of the United States, AGM remains subject to the risk that Dexia may not make payments or securities available (i) on a timely basis, which is referred to as “liquidity risk,” or (ii) at all, which is referred to as “credit risk,” because of the risk of default. Even if Dexia has sufficient assets to pay all amounts when due, concerns regarding Dexia's financial condition or willingness to comply with their obligations could cause one or more rating agencies to view negatively the ability or willingness of Dexia and its affiliates to perform under their various agreements and could negatively affect AGM's ratings.

If Dexia or its affiliates do not fulfill the contractual obligations, the GIC issuers may not have the financial ability to pay upon the withdrawal of GIC funds or post collateral or make other payments in respect of the GICs, thereby resulting in claims upon the AGM financial guaranty insurance policies. If AGM is required to pay a claim due to a failure of the GIC issuers to pay amounts in respect of the GICs, AGM is subject to the risk that the GICs will not be paid from funds received from Dexia before it is required to make payment under its financial guaranty policies or that it will not receive the guaranty payment at all.

The Medium Term Notes Business

In connection with the AGMH Acquisition, DCL agreed to fund, on behalf of AGM and Assured Guaranty (Bermuda) Ltd., 100% of all policy claims made under financial guaranty insurance policies issued by AGM and Assured Guaranty (Bermuda) in relation to the medium term notes issuance program of FSA Global Funding Limited. Such agreement is set out in a Separation Agreement, dated as of July 1, 2009, between DCL, AGM, Assured Guaranty (Bermuda), FSA Global Funding and Premier International Funding Co., and in a funding guaranty and a reimbursement guaranty that DCL issued for the benefit of AGM and Assured Guaranty (Bermuda). Under the funding guaranty, DCL guarantees to pay to or on behalf of

162

Table of Contents

AGM or Assured Guaranty (Bermuda) amounts equal to the payments required to be made under policies issued by AGM or Assured Guaranty (Bermuda) relating to the medium term notes business. Under the reimbursement guaranty, DCL guarantees to pay reimbursement amounts to AGM or Assured Guaranty (Bermuda) for payments they make following a claim for payment under an obligation insured by a policy they have issued. Notwithstanding DCL’s obligation to fund 100% of all policy claims under those policies, AGM and Assured Guaranty (Bermuda) have a separate obligation to remit to DCL a certain percentage (ranging from 0% to 25%) of those policy claims. AGM, the Company and related parties are also protected against losses arising out of or as a result of the medium term note business through an indemnification agreement with DCL. Assured Guaranty (Bermuda) was sold to, and subsequently merged with, AG Re in July 2013 in connection with the capitalization of MAC.

The Leveraged Lease Business

Under the Strip Coverage Facility entered into in connection with the AGMH Acquisition, Dexia Credit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on certain AGM strip policies issued in connection with the leveraged lease business. AGM may request advances under the Strip Coverage Facility without any explicit limit on the number of loan requests, provided that the aggregate principal amount of loans outstanding as of any date may not initially exceed the commitment amount. The leveraged lease business, the AGM strip policies and the Strip Coverage Facility are described further under “Commitments and Contingencies—Recourse Credit Facilities—2009 Strip Coverage Facility” under this Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Tax Matters

Taxation of AGL and Subsidiaries

United Kingdom

In November 2013, AGL became tax resident in the U.K. AGL will remain a Bermuda-based company and its administrative and head office functions will continue to be carried on in Bermuda. The AGL common shares will not change and will continue to be listed on the New York Stock Exchange.

As a company that is not incorporated in the U.K., AGL will be considered tax resident in the U.K. only if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. Effective November 6, 2013, the AGL board of directors currently intends to manage the affairs of AGL in such a way as to establish and maintain its status as a company that is tax resident in the U.K.

As a U.K. tax resident company, AGL will be subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. AGL expects that, as a result of it becoming a U.K. tax resident, it will be able to manage capital within the Assured Guaranty group more efficiently.

As a U.K. tax resident, AGL will be required to file a corporation tax return with Her Majesty’s Revenue & Custom (“HMRC”). AGL will be subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The main rate of corporation tax is 23% currently; such rate is scheduled to fall to 21% as of April 1, 2014 and to 20% as of April 1, 2015. AGL will also register in the U.K. to report its Value Added Tax (“VAT”) liability. The current rate of VAT is 20%. Assured Guaranty does not expect that becoming U.K. tax resident will result in any material change in the group’s overall tax charge. Assured Guaranty expects that the dividends AGL receives from its direct subsidiaries will be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The U.K. government implemented a new tax regime for “controlled foreign companies” effective January 1, 2013, stating an intention to target more accurately profits that should be subject to U.K. taxation and to improve the attractiveness of the U.K. as a location for a holding company of a multinational group. Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be taxed under the CFC regime and has obtained clearance from HMRC confirming this on the basis of current facts.

United States

None of AGL or its principal subsidiaries will be subject to any additional U.S. taxes, including withholding tax, as a result of AGL becoming a U.K. tax resident. AGL subsidiaries with operations in the U.S. will continue to be subject to tax in the U.S. on the income from those operations.

163

Table of Contents

The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.

Taxation of Shareholders

United Kingdom

AGL is not incorporated in the U.K., but as of November 6, 2013, AGL became tax resident in the U.K., on the basis that its affairs are centrally managed and controlled in the U.K.

Dividends. Under current U.K. tax law, AGL is not required to withhold tax at source from dividends paid to the holders of the AGL common shares.

Capital gains. U.K. tax is not normally charged on any capital gains realized by non-U.K. shareholders in AGL unless, in the case of a corporate shareholder, at or before the time the gain accrues, the shareholding is used in or for the purposes of a trade carried on by the non-resident shareholder through a permanent establishment in the U.K. or for the purposes of that permanent establishment. Similarly, an individual shareholder who carries on a trade, profession or vocation in the U.K. through a branch or agency may be liable for U.K. tax on the gain if such shareholder disposes of shares that are, or have been, used, held or acquired for the purposes of such trade, profession or vocation or for the purposes of such branch or agency. This treatment applies regardless of the U.K. tax residence status of AGL.

Stamp Taxes. On the basis that AGL does not currently intend to maintain a share register in the U.K., there should be no U.K. stamp duty reserve tax on a purchase of common shares in AGL. A conveyance or transfer on sale of common shares in AGL will not be subject to U.K. stamp duty provided that the instrument of transfer is not executed in the U.K. and does not relate to any property situated, or any matter or thing done, or to be done, in the U.K.

United States

AGL shareholders will not be subject to any additional U.S. taxes, including withholding tax, as a result of AGL becoming U.K. tax resident.

Dividends. AGL believes dividends paid by AGL on its common shares to non-corporate holders will continue to be eligible for reduced rates of tax at the rates applicable to long-term capital gains as "qualified dividend income."

Regulation

In connection with establishing its U.K. tax residence, AGL has been discussing the regulation of the group with the Prudential Regulatory Authority (“PRA”) in the U.K. and with the New York State Department of Financial Services (“NYDFS”). The NYDFS has indicated that it will assume responsibility for regulation of the Assured Guaranty group. Assured Guaranty intends to continue its ongoing discussions with the PRA and the NYDFS.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an updated sensitivity analysis for credit derivatives and expected losses on contracts accounted for as insurance. There were no material changes in market risk since December 31, 2012.


ITEM 4.	CONTROLS AND PROCEDURES

Assured Guaranty’s management, with the participation of AGL’s President and Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are effective in recording, processing, summarizing and reporting, within the time periods specified in the Commission’s rules and forms, information required to be disclosed by AGL in the reports that it files or submits under the Exchange Act and ensuring that such information is accumulated and communicated to management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

164

Table of Contents

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2013. Based on their evaluation as of September 30, 2013 covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.

There have been no changes in the Company’s internal controls over financial reporting during the Company’s quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.


PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 and in the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013. Material developments to such proceedings during the three months ended September 30, 2013 are described below and in the "Recovery Litigation" section of Note 5, Expected Loss to be Paid, of the Financial Statements.


ITEM 1A.	RISK FACTORS

The following information, which could materially affect the Company’s business, financial condition or future results, contains material updates and/or additions to the risk factors set forth in Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and should be considered carefully and read in conjunction with the information set forth in such Annual Report on Form 10-K and in the Company’s other filings with the SEC. The risks and uncertainties described below are not the only ones the Company faces. Additional risks not presently known to the Company or that it currently deems immaterial may also impair its business or results of operations. Any of the risks described below could result in a significant or material adverse effect on the Company’s results of operations or financial condition.

165

Table of Contents

A change in AGL’s U.K. tax residency status or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.

AGL is not incorporated in the U.K. and, accordingly, can only be resident in the U.K. for U.K. tax purposes if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. The concept is a question of fact and AGL intends to have become tax resident in the U.K. for U.K. tax purposes effective November 6, 2013, on the basis that it began to be centrally managed and controlled in the U.K. from that date. AGL believes that it will be entitled to take advantage of the benefits of income tax treaties to which the U.K. is a party once it has established central management and control in the U.K. However, such tax treaties may be revised in a way that causes AGL to fail to qualify for benefits thereunder. The board of directors currently intends to manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K. for U.K. tax purposes and to qualify for the benefits of income tax treaties to which the U.K. is a party. However, a change in relevant U.K. tax law or tax treaties to which the U.K. is a party, or in AGL’s central management and control as a factual matter, or other events, could adversely affect the ability of Assured Guaranty to manage its capital in the efficient manner that it contemplated in establishing U.K. tax residence. Assured Guaranty has obtained confirmation that there is a low risk of challenge of its residency status from HMRC under the facts as they stand today.

Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.

As a U.K. tax resident, AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to applicable exemptions. The main rate of corporation tax is 23% currently.


•	With respect to income, the dividends that AGL receives from its subsidiaries should be exempt from U.K. corporation tax under the exemption contained in section 931D of the Corporation Tax Act 2009.

•

With respect to capital gains, if AGL were to dispose of shares in its direct subsidiaries or if it were deemed to have done so, it may realize a chargeable gain for U.K. tax purposes. Any tax charge would be based on AGL’s original acquisition cost. It is anticipated that any such future gain should qualify for exemption under the substantial shareholding exemption in Schedule 7AC to the Taxation of Chargeable Gains Act 1992. However, the availability of such exemption would depend on facts at the time of disposal, in particular the “trading” nature of the activities of the Assured Guaranty group and of the relevant subsidiary. There is no statutory definition of what constitutes “trading” activities for this purpose and in practice reliance is placed on the published guidance of HMRC.

A change in U.K. tax law or its interpretation by HMRC, or any failure to meet all the qualifying conditions for relevant exemptions from U.K. corporation tax, could affect Assured Guaranty’s financial results of operations or its ability to provide returns to shareholders.

An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their foreign subsidiaries could adversely impact Assured Guaranty’s tax liability.

Under the U.K. “controlled foreign company” (“CFC”) regime, the income profits of non-U.K. resident companies may, in certain circumstances, be attributed to controlling U.K. resident shareholders for U.K. corporation tax purposes. A new CFC regime was introduced with effect for CFC accounting periods beginning on or after January 1, 2013. The non-U.K. resident members of the Assured Guaranty group intend to operate and manage their levels of capital in such a manner that their profits would not be taxed on AGL under the U.K. CFC regime. Assured Guaranty has obtained clearance from HMRC that none of the profits of the non-U.K. resident members of the Assured Guaranty group should be subject to U.K. tax as a result of attribution under the CFC regime on the facts as they currently stand. However, a change in the way in which Assured Guaranty operates or any further change in the CFC regime, resulting in an attribution to AGL of any of the income profits of any of AGL’s non-U.K. resident subsidiaries for U.K. corporation tax purposes, could adversely affect Assured Guaranty’s financial results of operations.

Becoming resident in the U.K. for tax purposes may subject Assured Guaranty to additional regulatory requirements with which it may have difficulty complying or which may constrain or limit its ability to take certain actions.

In connection with AGL’s establishment of tax residence in the U.K., AGL has been discussing the regulation of the group with the Prudential Regulatory Authority (“PRA”) in the U.K. and with the New York State Department of Financial Services (“NYDFS”). The NYDFS has indicated that it will assume responsibility for regulation of the Assured Guaranty group. Group supervision by the NYDFS would result in additional regulatory oversight over Assured Guaranty, and may

166

Table of Contents

subject Assured Guaranty to new regulatory requirements and constraints. If the PRA determines that, notwithstanding the NYDFS becoming Assured Guaranty’s group regulator, AGL’s head office is in the U.K. based upon it having a tax residence there, then AGL may be subject to additional capital and compliance requirements that it must satisfy. If Assured Guaranty is unable to satisfy these additional regulatory requirements, it may not be able to effectuate the efficient management of capital that it contemplated in establishing U.K. tax residence.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer’s Purchases of Equity Securities

The following table reflects purchases of AGL common shares made by the Company during Third Quarter 2013. In addition, at the end of September 2013, the Company repurchased 0.3 million common shares for $5.7 million; the transaction did not close until October 1, 2013. After giving effect to repurchases through October 1, 2013, the Company had repurchased a total of 12.5 million common shares for approximately $264.2 million, excluding commissions, at an average price of $21.12 per share. On November 11, 2013, the Company's share repurchase authorization of $400 million replaced the prior authorization.



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (1)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program(2)
July 1 - July 31	—	$	—	—	$	70,767,734
August 1 - August 31	—	$	—	—	$	70,767,734
September 1 - September 30	732,092	$	19.47	732,092	$	56,515,411
Total	732,092	$	19.47	732,092

____________________


(1)	On January 18, 2013, the Company's Board of Directors authorized a $200 million share repurchase program. On May 8, 2013, the Company's Board of Directors authorized an additional $115 million of repurchases of the Company’s common shares, bringing the total authorization in 2013 to $315 million.


(2)	Excludes commissions.


ITEM 6.	EXHIBITS.

See Exhibit Index for a list of exhibits filed with this report.

167

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.



	ASSURED GUARANTY LTD. (Registrant)

Dated November 12, 2013	By:	/s/ ROBERT A. BAILENSON

		Robert A. Bailenson Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

168

Table of Contents

EXHIBIT INDEX



Exhibit Number			Description of Document
10.1			Director Compensation Summary*
31.1			Certification of CEO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of CFO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
32.2			Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
101.1			The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2013 and 2012 (iv) Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 30, 2013; (v) Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements.

* Management contract or compensatory plan

169