Edgar Filing: ASSURED GUARANTY LTD

AGO-9.30.2012-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended September 30, 2012



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, 2012 was 194,076,724 (includes 88,549 unvested restricted shares).

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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, 2012 and December 31, 2011	1
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	2
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	3
	Consolidated Statement of Shareholders’ Equity (unaudited) for Nine Months Ended September 30, 2012	4
	Consolidated Statements of Cash Flows (unaudited) for Nine Months Ended September 30, 2012 and 2011	5
	Notes to Consolidated Financial Statements (unaudited)	6
	1. Business and Basis of Presentation	6
	2. Business Changes, Risks, Uncertainties and Accounting Developments	7
	3. Outstanding Exposure	10
	4. Financial Guaranty Insurance Contracts	15
	5. Fair Value Measurement	42
	6. Financial Guaranty Contracts Accounted for as Credit Derivatives	56
	7. Consolidation of Variable Interest Entities	64
	8. Investments	67
	9. Insurance Company Regulatory Requirements	73
	10. Income Taxes	74
	11. Reinsurance and Other Monoline Exposures	76
	12. Commitments and Contingencies	79
	13. Long Term Debt and Credit Facilities	84
	14. Earnings Per Share	87
	15. Shareholders' Equity	87
	16. Other Comprehensive Income	88
	17. Subsidiary Information	89
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	96
	Forward Looking Statements	96
	Convention	98
	Introduction	98
	Available Information	99
	Executive Summary	99
	Key Business Strategies	102
	Results of Operations	106
	Non-GAAP Financial Measures	127
	Insured Portfolio	131
	Significant Risk Management Activities	138
	Exposure to Residential Mortgage Backed Securities	139
	Exposures by Reinsurer	142
	Liquidity and Capital Resources	145
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	162
Item 4.	Controls and Procedures	162
	PART II. OTHER INFORMATION	162
Item 1.	Legal Proceedings	162
Item 1A.	Risk Factors	166
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	169
Item 6.	Exhibits	169

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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, 2012		As of December 31, 2011
Assets
Investment portfolio:
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,589 and $9,638)	$	10,318	$	10,142
Short term investments, at fair value	564		734
Other invested assets	205		223
Total investment portfolio	11,087		11,099
Cash	133		215
Premiums receivable, net of ceding commissions payable	944		1,003
Ceded unearned premium reserve	550		709
Deferred acquisition costs	127		132
Reinsurance recoverable on unpaid losses	56		69
Salvage and subrogation recoverable	430		368
Credit derivative assets	450		469
Deferred tax asset, net	729		804
Current income tax receivable	78		76
Financial guaranty variable interest entities’ assets, at fair value	2,693		2,819
Other assets	286		262
Total assets	$	17,563	$	18,025
Liabilities and shareholders’ equity
Unearned premium reserve	$	5,332	$	5,963
Loss and loss adjustment expense reserve	594		679
Reinsurance balances payable, net	185		171
Long-term debt	840		1,038
Credit derivative liabilities	2,151		1,773
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	2,169		2,397
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	1,018		1,061
Other liabilities	322		291
Total liabilities	12,611		13,373
Commitments and contingencies (See Note 12)
Common stock ($0.01 par value, 500,000,000 shares authorized; 193,988,878 and 182,235,798 shares issued and outstanding in 2012 and 2011)	2		2
Additional paid-in capital	2,722		2,570
Retained earnings	1,693		1,708
Accumulated other comprehensive income, net of tax of $200 and $135	531		368
Deferred equity compensation (320,193 shares in 2012 and 2011)	4		4
Total shareholders’ equity	4,952		4,652
Total liabilities and shareholders’ equity	$	17,563	$	18,025

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

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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,
	2012			2011			2012			2011
Revenues
Net earned premiums	$	222		$	211		$	635		$	695
Net investment income	102			95			301			295
Net realized investment gains (losses):
Other-than-temporary impairment losses	(4		)	(33		)	(41		)	(67		)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income	0			(17		)	(30		)	(35		)
Other net realized investment gains (losses)	6			5			11			19
Net realized investment gains (losses)	2			(11		)	0			(13		)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	2			0			(78		)	25
Net unrealized gains (losses)	(38		)	1,156			(388		)	830
Net change in fair value of credit derivatives	(36		)	1,156			(466		)	855
Fair value gain (loss) on committed capital securities	(2		)	2			(12		)	3
Fair value gains (losses) on financial guaranty variable interest entities	38			(99		)	174			(154		)
Other income	16			(9		)	112			59
Total revenues	342			1,345			744			1,740
Expenses
Loss and loss adjustment expenses	90			215			459			313
Amortization of deferred acquisition costs	4			4			14			13
Interest expense	21			25			71			74
Other operating expenses	48			46			163			163
Total expenses	163			290			707			563
Income (loss) before income taxes	179			1,055			37			1,177
Provision (benefit) for income taxes
Current	(9		)	(13		)	(9		)	(200		)
Deferred	46			307			10			520
Total provision (benefit) for income taxes	37			294			1			320
Net income (loss)	$	142		$	761		$	36		$	857

Earnings per share:
Basic	$	0.73		$	4.15		$	0.19		$	4.66
Diluted	$	0.73		$	4.13		$	0.19		$	4.60
Dividends per share	$	0.09		$	0.045		$	0.27		$	0.135

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

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Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (unaudited)

(in millions)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Net income (loss)	$	142	$	761		$	36		$	857
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $34, $52, $61 and $94	95		129			169			210
Investments with other-than-temporary impairment, net of tax provision (benefit) of $4, $(7), $(4) and $(3)	5		(14		)	(13		)	(6		)
Unrealized holding gains (losses) arising during the period, net of tax	100		115			156			204
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(1), $(4), $(6), and $(5)	—		(9		)	(5		)	(12		)
Change in net unrealized gains on investments	100		124			161			216
Other, net of tax provision	1		(3		)	2			(1		)
Other comprehensive income (loss)	$	101	$	121		$	163		$	215
Comprehensive income (loss)	$	243	$	882		$	199		$	1,072

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

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Assured Guaranty Ltd.

Consolidated Statement of Shareholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2012

(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, 2011	182,235,798		$	2	$	2,570		$	1,708		$	368	$	4	$	4,652
Net income	—		—		—			36			—		—		36
Dividends ($0.27 per share)	—		—		—			(51		)	—		—		(51		)
Dividends on restricted stock units	—		—		0			0			—		—		—
Common stock issuance, net	13,428,770		0		173			—			—		—		173
Common stock repurchases	(2,066,759	)	0		(24		)	—			—		—		(24		)
Share-based compensation and other	391,069		0		3			—			—		—		3
Other comprehensive income	—		—		—			—			163		—		163
Balance at September 30, 2012	193,988,878		$	2	$	2,722		$	1,693		$	531	$	4	$	4,952

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

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Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)

(in millions)



	Nine Months Ended September 30,
	2012			2011
Net cash flows provided by (used in) operating activities	$	(223	)	$	601
Investing activities
Fixed maturity securities:
Purchases	(1,322		)	(1,788		)
Sales	683			849
Maturities	758			503
Net sales (purchases) of short-term investments	282			182
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	407			598
Acquisition of MIAC, net of cash acquired	(91		)	—
Other	85			14
Net cash flows provided by (used in) investing activities	802			358
Financing activities
Proceeds from issuances of common stock	173			—
Dividends paid	(51		)	(25		)
Repurchases of common stock	(24		)	(23		)
Share activity under option and incentive plans	(3		)	(3		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(553		)	(830		)
Repayment of long-term debt	(204		)	(17		)
Net cash flows provided by (used in) financing activities	(662		)	(898		)
Effect of exchange rate changes	1			4
Increase (decrease) in cash	(82		)	65
Cash at beginning of period	215			108
Cash at end of period	$	133		$	173
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	(11	)	$	89
Interest	$	56		$	58

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2012


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 has applied its credit underwriting judgment, risk management skills and capital markets experience to offer insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The 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 in many countries, although its principal focus is on the U.S., Europe and Australia.

Financial guaranty insurance policies provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest ("Debt Service") when due. Upon an obligor’s default on scheduled principal or interest payments due on the obligation, the Company is required under the financial guaranty policy to pay the principal or interest shortfall. The Company has issued financial guaranty insurance policies on 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 and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents, with respect to one or more third party referenced securities or loans. Financial guaranty contracts accounted for as credit derivatives are primarily comprised of credit default swaps (“CDS”). The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation.

The Company has not entered into any 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 and, in certain cases, has converted existing CDS exposure into a financial guaranty insurance contract. These actions have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

The Company has historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks. In January 2012, two of AGL's operating subsidiaries, Assured Guaranty Municipal Corp. (“AGM”) and Assured Guaranty Corp. (“AGC”), entered into a $435 million excess of loss reinsurance facility with third-party reinsurers, which reduced rating agency capital charges. The Company also has been reassuming previously ceded business from reinsurers. In the three-month period ended March 31, 2012 (“First Quarter 2012”), the Company reassumed a total of $19.1 billion in par from two reinsurers and in the three-month period ended September 30, 2012, the Company reassumed $9 million in par from one reinsurer. See Note 11, Reinsurance and Other Monoline Exposures.

When a rating agency assigns a public rating to a financial obligation guaranteed by one of AGL’s insurance company

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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. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.

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

Basis of Presentation

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

The unaudited interim consolidated financial statements include the accounts of 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, 2011, filed with the U.S. Securities and Exchange Commission (the “SEC”).

AGL’s principal insurance company subsidiaries are AGC, domiciled in Maryland; AGM, domiciled in New York; and Assured Guaranty Re Ltd. (“AG Re”), domiciled in Bermuda. In addition, the Company has another U.S. and another Bermuda insurance company subsidiary that participate in a pooling agreement with AGM, two insurance subsidiaries organized in the United Kingdom, and a mortgage insurance company domiciled in New York. On May 31, 2012, the Company also completed the purchase of Municipal and Infrastructure Assurance Corporation ("MIAC"), which is domiciled in New York. See Note 2, Business Changes, Risks, Uncertainties and Accounting Developments. 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 13, Long Term Debt and Credit Facilities.


2.	Business Changes, Risks, Uncertainties and Accounting Developments

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

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Rating Actions

In the last several years, Standard and Poor’s Ratings Services (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) have downgraded the financial strength ratings of all the Company’s insurance subsidiaries that they rate. On March 20, 2012, Moody’s placed the ratings of AGL and its Subsidiaries, including the insurance financial strength rating of the Company’s insurance subsidiaries, on review for possible downgrade. On October 30, 2012, Moody's indicated that it anticipates resolving its review during the first half of November 2012. There can be no assurance as to the actions that Moody's may take on the Company's ratings or that S&P will not take further action on the Company’s ratings. For a discussion of the effect of rating actions by S&P or Moody's on the Company as of September 30, 2012, see the following:


•	Note 4, Financial Guaranty Insurance Contracts


•	Note 6, Financial Guaranty Contracts Accounted for as Credit Derivatives


•	Note 11, Reinsurance and Other Monoline Exposures


•	Note 13, Long Term Debt and Credit Facilities (regarding the impact on the Company's insured leveraged lease transactions)

Another situation in which the Company is exposed to downgrade risk is 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. At September 30, 2012, a downgrade of AGM to below AA- by S&P and Aa3 by Moody’s would result in withdrawal of $358 million of GIC funds and the need to post collateral on GICs with a balance of $2.9 billion. In the event of such a downgrade, assuming an average margin of 105%, the market value as of September 30, 2012 that the GIC issuers would be required to post in order to avoid withdrawal of any GIC funds would be $3.1 billion.

The insurance subsidiaries’ financial strength ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of 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 downgrade could harm the Company’s new business production and results of operations in a material respect.

Accounting Changes

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


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


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


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

In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). ASU 2012-02 amends prior indefinite-lived intangible asset impairment testing guidance. Under ASU 2012-02, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired. If, after considering the totality of events and circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is not impaired, then calculating the fair value of such asset is unnecessary. ASU 2012-02 is effective for interim and annual periods beginning after September 15, 2012 and the Company will adopt ASU 2012-02 at December 31, 2012. There will be no cumulative effect upon the adoption of ASU 2012-02 on the Company's consolidated financial position, results of operations or cash flows.

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Deutsche Bank Agreement

On May 8, 2012, Assured Guaranty reached a settlement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), resolving claims related to certain residential mortgage-backed securities (“RMBS”) transactions issued, underwritten or sponsored by Deutsche Bank that were insured by Assured Guaranty under financial guaranty insurance policies and to certain RMBS exposures in re-securitization transactions as to which Assured Guaranty provides credit protection through CDS. As part of the settlement agreement (the “Deutsche Bank Agreement”), Assured Guaranty settled its litigation against Deutsche Bank on three RMBS transactions.

Assured Guaranty received a cash payment of $166 million from Deutsche Bank upon signing of the Deutsche Bank Agreement, a portion of which partially reimbursed Assured Guaranty for past losses on certain transactions. Assured Guaranty and Deutsche Bank also entered into loss sharing arrangements covering future RMBS related losses, which are described below. Under the Deutsche Bank Agreement, Deutsche Bank AG placed eligible assets in trust in order to collateralize the obligations of a reinsurance affiliate under the loss-sharing arrangements. The Deutsche Bank reinsurance affiliate may be required to post additional collateral in the future to satisfy rating agency requirements. As of September 30, 2012 the balance of the assets held in trust of $282 million was sufficient to fully collateralize Deutsche Bank's obligations, based on the Company's estimate of expected loss for the transactions covered under the agreement.

The settlement includes eight RMBS transactions (“Covered Transactions”) that Assured Guaranty has insured through financial guaranty insurance policies. The Covered Transactions are backed by first lien and second lien mortgage loans. Under the Deutsche Bank Agreement, the Deutsche Bank reinsurance affiliate will reimburse 80% of Assured Guaranty’s future losses on the Covered Transactions until Assured Guaranty’s aggregate losses (including those to date that are partially reimbursed by the $166 million cash payment) reach $319 million. Assured Guaranty currently projects that in the base case the Covered Transactions will not generate aggregate losses in excess of $319 million. In the event aggregate losses exceed $389 million, the Deutsche Bank reinsurance affiliate is required to resume reimbursement at the rate of 85% of Assured Guaranty’s losses in excess of $389 million until such losses reach $600 million. The Covered Transactions represented $548 million of gross par outstanding ($472 million on a net basis) as of September 30, 2012.

Certain uninsured tranches (“Uninsured Tranches”) of three of the Covered Transactions are included as collateral in RMBS re-securitization transactions as to which Assured Guaranty provides credit protection through CDS. Under the Deutsche Bank Agreement, the Deutsche Bank reinsurance affiliate will reimburse losses on the CDS in an amount equal to 60% of losses in these Uninsured Tranches until the aggregate losses in the Uninsured Tranches reach $141 million. In the event aggregate losses exceed $161 million, reimbursement resumes at the rate of 60% until the aggregate losses reach $185 million. The Deutsche Bank reinsurance affiliate is required to reimburse any losses in excess of $185 million at the rate of 100% until the aggregate losses reach $248 million. The Uninsured Tranches represent $317 million of par outstanding as of September 30, 2012. As of September 30, 2012, lifetime losses in the base case are expected to exceed $141 million (on a discounted basis).

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

Reinsurance Agreements

As discussed in Note 11, Reinsurance and Other Monoline Exposures, the Company has entered into several agreements with reinsurers, including assumption and re-assumption agreements with Radian Asset Assurance Inc. ("Radian"), a re-assumption agreement with Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio”) and a $435 million excess of loss reinsurance facility.

MIAC Acquisition

On May 31, 2012, the Company purchased 100% of the outstanding common stock of MIAC from Radian for $91 million in cash, resulting in $16 million in indefinite-lived intangible assets which represents the value of MIAC's licenses. The other assets acquired consisted primarily of short-term investments. MIAC is licensed to provide financial guaranty insurance and reinsurance in 38 U.S. jurisdictions including the District of Columbia. The acquisition of MIAC enhances the Company's flexibility to respond to changes in the financial guaranty industry.

Remarketing of Senior Notes and Redemption of Equity Units

On June 1, 2012, the Company completed the remarketing of the $173 million aggregate principal amount of 8.50%

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Senior Notes issued by AGUS in 2009 that were components of the Company's Equity Units. AGUS purchased all of the Senior Notes in the remarketing at a price of 100% of the aggregate 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 contracts that were also components of the Equity Units. Accordingly, on June 1, 2012, AGL issued 3.8924 common shares to holders of each $50 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. The Equity Units ceased to exist when the forward purchase contracts were settled on June 1, 2012.


3.	Outstanding Exposure

The Company’s financial guaranty contracts are written in different forms, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its 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 7, Consolidation of Variable Interest Entities. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs whether or not they are consolidated.

Debt Service Outstanding



	Gross Debt Service Outstanding				Net Debt Service Outstanding
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
	(in millions)
Public finance	$	746,703	$	798,471	$	699,938	$	716,890
Structured finance	117,105		137,661		109,790		128,775
Total financial guaranty	$	863,808	$	936,132	$	809,728	$	845,665

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, 2012. The net mortgage guaranty insurance in force is assumed excess of loss business and comprises $135 million covering loans originated in Ireland and $15 million covering loans originated in the UK.

Financial Guaranty Portfolio by Internal Rating



	As of September 30, 2012
	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
Super senior	$	—	—	%	$	1,119	2.9	%	$	13,714	17.5	%	$	4,818	24.1	%	$	19,651	3.7	%
AAA	4,575		1.2		1,392		3.6		30,745		39.2		8,504		42.5		45,216		8.4
AA	131,488		32.9		950		2.4		9,996		12.7		725		3.6		143,159		26.7
A	215,989		54.1		10,281		26.5		4,500		5.7		1,476		7.4		232,246		43.3
BBB	42,353		10.6		22,712		58.7		4,093		5.2		2,594		13.0		71,752		13.4
Below-investment-grade (“BIG”)	4,771		1.2		2,266		5.9		15,456		19.7		1,876		9.4		24,369		4.5
Total net par outstanding	$	399,176	100.0	%	$	38,720	100.0	%	$	78,504	100.0	%	$	19,993	100.0	%	$	536,393	100.0	%

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

Beginning in First Quarter 2012, the Company decided to classify those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating. As of Third Quarter 2012, the Company applied this policy to the Bank of America Agreement and the Deutsche Bank Agreement (see Note 4, Financial Guaranty Insurance Contracts). The Bank of America Agreement was entered into in April 2011 and the reclassification in First Quarter 2012 resulted in a decrease in BIG net par outstanding as of December 31, 2011 of $1,452 million from that previously reported.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $1.7 billion for structured finance and $0.9 billion for public finance obligations at September 30, 2012. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between October 1, 2012 and February 25, 2017, with $0.5 billion expiring prior to December 31, 2012. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

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Economic Exposure to the Selected European Countries

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

Net Economic Exposure to Selected European Countries(1)

September 30, 2012



	Greece		Hungary		Ireland		Italy		Portugal		Spain (2)		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Public finance	$	—	$	—	$	—	$	992	$	108	$	260	$	1,360
Infrastructure finance	—		423		23		326		99		167		1,038
Sub-total	—		423		23		1,318		207		427		2,398
Non-sovereign exposure:
Regulated utilities	—		—		—		228		—		9		237
RMBS	—		219		135		491		—		—		845
Commercial receivables	—		1		18		26		14		17		76
Pooled corporate	25		—		187		227		14		527		980
Sub-total	25		220		340		972		28		553		2,138
Total	$	25	$	643	$	363	$	2,290	$	235	$	980	$	4,536
Total BIG	$	—	$	511	$	8	$	242	$	125	$	410	$	1,296

____________________

(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 $135 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 4, Financial Guaranty Insurance Contracts.

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. The Company understands that Moody's recently had undertaken a review of redenomination risk in selected countries in the Eurozone, including some of the Selected European Countries. No redenomination from the Euro to another currency has yet occurred and it may never occur. Therefore, it is not possible to be certain at this point how a redenomination of an issuer’s obligations might be implemented in the future and, in particular, whether any redenomination would extend to the Company's obligations under a related financial guarantee. As of June 30, 2012, the Company had €218 million of net exposure to the sovereign debt of Greece. The Company accelerated claims under its guarantees during the second quarter 2012, paying off in full its liabilities with respect to the Greek sovereign bonds it guaranteed. As of September 30, 2012, the Company no longer had any direct exposure to Greece.

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

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periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies.

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

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 4, Financial Guaranty Insurance Contracts). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects “lifetime losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it ultimately will have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for recording of reserves for financial statement purposes.)

Intense monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The three BIG categories are:


•	BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.


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


•	BIG Category 3: Below-investment-grade transactions for which lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

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Financial Guaranty Exposures

(Insurance and Credit Derivative Form)



	As of September 30, 2012
	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	27	$	461	$	3	$	491	$	663	0.1	%
Alt-A first lien	120		2,146		1,442		3,708		4,760		0.7
Option ARM	60		425		734		1,219		1,753		0.2
Subprime	116		1,350		854		2,320		7,541		0.4
Second lien U.S. RMBS:
Closed end second lien	—		451		412		863		985		0.2
Home equity lines of credit (“HELOCs”)	96		—		2,755		2,851		3,358		0.5
Total U.S. RMBS	419		4,833		6,200		11,452		19,060		2.1
Trust preferred securities (“TruPS”)	2,026		—		951		2,977		5,863		0.6
Other structured finance	1,156		377		1,370		2,903		73,574		0.5
U.S. public finance	3,288		665		818		4,771		399,176		0.9
Non-U.S. public finance	2,266		—		—		2,266		38,720		0.4
Total	$	9,155	$	5,875	$	9,339	$	24,369	$	536,393	4.5	%



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

_____________________

(1) Includes $282 million in net par as of December 31, 2011, for bonds of the Hellenic Republic of Greece. See Note 4, Financial Guaranty Insurance Contracts.

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Below-Investment-Grade Credits

By Category



	As of September 30, 2012
	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	6,943	$	2,212	$	9,155	148	31	179
Category 2	3,233		2,642		5,875		90	30	120
Category 3	7,299		2,040		9,339		136	31	167
Total BIG	$	17,475	$	6,894	$	24,369	374	92	466



	As of December 31, 2011
	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	8,297	$	3,953	$	12,250	171	40	211
Category 2	3,458		1,523		4,981		71	33	104
Category 3	7,204		2,327		9,531		126	26	152
Total BIG	$	18,959	$	7,803	$	26,762	368	99	467

_____________________

(1) Includes net par outstanding for FG VIEs.

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

Hurricane Sandy

On October 29, 2012, Hurricane Sandy made landfall in New Jersey and caused significant loss of life and property damage in New Jersey, New York and Connecticut. While the Company is continuing to evaluate the effects of Hurricane Sandy on its insured portfolio, it does not expect any significant losses as a result of the hurricane at this time.


4.	Financial Guaranty Insurance Contracts

Change in accounting for deferred acquisition costs

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

Expected losses, which include loss adjustment expenses (“LAE”), investment income, and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of deferred acquisition costs. When an insured issue is retired early, the remaining related deferred acquisition cost is expensed at that time. Ceding commission expense and income associated with future installment premiums on assumed and ceded business, respectively,

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are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to net premium receivable or reinsurance balances payable.

As of January 1, 2011, the effect of retrospective application of the new guidance was a reduction to deferred acquisition costs of $94 million and a reduction to retained earnings of $64 million.

Effect of Retrospective Application of New Deferred Acquisition Cost Guidance

On Consolidated Statements of Operations



	As Reported Third Quarter 2011		Retroactive Application Adjustment			As Revised Third Quarter 2011
	(in millions except per share amounts)
Amortization of deferred acquisition costs	$	7	$	(3	)	$	4
Other operating expenses	42		4			46
Net income (loss)	761		0			761
Earnings per share:
Basic	$	4.15	$	—		$	4.15
Diluted	4.13		—			4.13



	As Reported Nine Months 2011		Retroactive Application Adjustment			As Revised Nine Months 2011
	(in millions except per share amounts)
Amortization of deferred acquisition costs	$	24	$	(11	)	$	13
Other operating expenses	147		16			163
Net income (loss)	859		(2		)	857
Earnings per share:
Basic	4.67		(0.01		)	4.66
Diluted	4.61		(0.01		)	4.60

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of derivative contracts. Amounts presented in this note relate only to financial guaranty insurance contracts. See Note 6, Financial Guaranty Contracts Accounted for as Credit Derivatives. Tables presented herein also present reconciliations to financial statement line items for other less significant types of insurance.

Net Earned Premiums



	Third Quarter				Nine Months
	2012		2011		2012		2011
	(in millions)
Scheduled net earned premiums	$	144	$	178	$	441	$	596
Acceleration of premium earnings	73		27		178		77
Accretion of discount on net premiums receivable	4		6		15		21
Total financial guaranty	221		211		634		694
Other	1		0		1		1
Total net earned premiums(1)	$	222	$	211	$	635	$	695

___________________

(1) Excludes $17 million and $20 million in Third Quarter 2012 and 2011, respectively, and $50 million and $57 million for Nine Months 2012 and 2011, respectively, related to consolidated FG VIEs.

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Gross Premium Receivable, Net of Ceding Commissions Roll Forward



	Nine Months
	2012			2011
	(in millions)
Balance beginning of period	$	1,003		$	1,168
Premium written, net	134			153
Premium payments received, net	(225		)	(228		)
Adjustments to the premium receivable:
Changes in the expected term of financial guaranty insurance contracts	12			(117		)
Accretion of discount	19			23
Foreign exchange translation	10			(3		)
Consolidation of FG VIEs	(5		)	(10		)
Other adjustments	(4		)	1
Balance, end of period (1)	$	944		$	987

____________________

(1) Excludes $30 million and $29 million as of September 30, 2012 and 2011, respectively, related to consolidated FG VIEs.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 50%, 47% and 49% of installment premiums at September 30, 2012, December 31, 2011 and September 30, 2011, respectively, are denominated in currencies other than the U.S. dollar, primarily in Euro and British Pound Sterling.

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

Expected Collections of Gross Premiums Receivable,

Net of Ceding Commissions (Undiscounted)



	September 30, 2012
	(in millions)
2012 (October 1 – December 31)	$	65
2013	112
2014	93
2015	83
2016	77
2017-2021	305
2022-2026	206
2027-2031	152
After 2031	190
Total(1)	$	1,283

____________________

(1) Excludes expected cash collections on FG VIEs of $35 million.

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Components of Unearned Premium Reserve



	As of September 30, 2012									As of December 31, 2011
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue	$	5,476		$	576		$	4,900		$	6,046		$	728		$	5,318
Contra-paid	(152		)	(26		)	(126		)	(92		)	(19		)	(73		)
Total financial guaranty	5,324			550			4,774			5,954			709			5,245
Other	8			0			8			9			0			9
Total	$	5,332		$	550		$	4,782		$	5,963		$	709		$	5,254

____________________

(1) Total net unearned premium reserve excludes $226 million and $274 million related to FG VIEs as of September 30, 2012 and December 31, 2011, respectively.

The following table provides a schedule of the expected timing of the income statement recognition of pre-tax financial guaranty insurance net deferred premium revenue and the present value of net expected losses to be expensed. The amount and timing of actual premium earnings and loss and LAE may differ from the estimates shown below due to factors such as refundings, accelerations, commutations, changes in expected lives and updates to loss estimates. A loss and LAE reserve is only recorded for the amount by which net 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.

Expected Timing of Premium and Loss Recognition



	As of September 30, 2012
	Scheduled Net Earned Premium		Net Expected Loss to be Expensed		Net
	(in millions)
2012 (October 1–December 31)	$	141	$	25	$	116
Subtotal 2012	141		25		116
2013	490		75		415
2014	433		49		384
2015	379		38		341
2016	343		35		308
2017 - 2021	1,294		124		1,170
2022 - 2026	814		66		748
2027 - 2031	498		34		464
After 2031	508		30		478
Total present value basis(1)(2)	4,900		476		4,424
Discount	270		235		35
Total future value	$	5,170	$	711	$	4,459

____________________

(1) Balances represent discounted amounts.

(2) Consolidation of FG VIEs resulted in reductions of $364 million in future scheduled net earned premium and $195 million in net expected loss to be expensed.

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Selected Information for Policies Paid in Installments



	As of September 30, 2012			As of December 31, 2011
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	944		$	1,003
Gross deferred premium revenue	1,920			2,193
Weighted-average risk-free rate used to discount premiums	3.6		%	3.4		%
Weighted-average period of premiums receivable (in years)	9.9			9.8

Loss Estimation Process

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

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The following table presents a roll forward of the present value of net expected loss to be paid for financial guaranty insurance contracts by sector. Net expected loss to be paid is the estimate of the present value of future claim payments, net of reinsurance and net of salvage and subrogation, which includes the present value benefit of estimated recoveries for breaches of representations and warranties (“R&W”). The Company used weighted average risk-free rates for U.S. dollar denominated obligations, which ranged from 0.0% to 3.19% as of September 30, 2012 and 0.0% to 3.27% as of December 31, 2011.

Present Value of Net Expected Loss to be Paid

Roll Forward by Sector(1)



	Net Expected Loss to be Paid as of June 30, 2012			Economic Loss Development(2)			(Paid) Recovered Losses(3)			Net Expected Loss to be Paid as of September 30, 2012(4)
	(in millions)
U.S. RMBS:
First lien:
Prime first lien	$	3		$	1		$	—		$	4
Alt-A first lien	192			4			(8		)	188
Option ARM	(36		)	7			(88		)	(117		)
Subprime	159			11			(5		)	165
Total first lien	318			23			(101		)	240
Second lien:
Closed-end second lien	(17		)	(1		)	(3		)	(21		)
HELOCs	(63		)	(14		)	(30		)	(107		)
Total second lien	(80		)	(15		)	(33		)	(128		)
Total U.S. RMBS	238			8			(134		)	112
TruPS	7			3			(1		)	9
Other structured finance	221			1			(1		)	221
U.S. public finance	58			8			(56		)	10
Non-U.S. public finance	302			33			(289		)	46
Total financial guaranty	826			53			(481		)	398
Other	(4		)	—