Edgar Filing: ASSURED GUARANTY LTD

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 March 31, 2016



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 May 2, 2016 was 134,357,143 (includes 62,145 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 March 31, 2016 and December 31, 2015	1
	Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2016 and 2015	2
	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2016 and 2015	3
	Consolidated Statement of Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2016	4
	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015	5
	Notes to Consolidated Financial Statements (unaudited)	6
	1. Business and Basis of Presentation	6
	2. Acquisitions	7
	3. Rating Actions	8
	4. Outstanding Exposure	8
	5. Expected Loss to be Paid	19
	6. Financial Guaranty Insurance	35
	7. Fair Value Measurement	45
	8. Financial Guaranty Contracts Accounted for as Credit Derivatives	62
	9. Consolidated Variable Interest Entities	67
	10. Investments and Cash	70
	11. Insurance Company Regulatory Requirements	76
	12. Income Taxes	77
	13. Reinsurance and Other Monoline Exposures	80
	14. Commitments and Contingencies	84
	15. Long Term Debt and Credit Facilities	87
	16. Earnings Per Share	89
	17. Shareholders' Equity	90
	18. Subsidiary Information	92
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	98
	Forward Looking Statements	98
	Available Information	99
	Executive Summary	99
	Results of Operations	105
	Non-GAAP Financial Measures	116
	Insured Portfolio	120
	Liquidity and Capital Resources	133
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	146
Item 4.	Controls and Procedures	146
PART II	Other Information	147
Item 1.	Legal Proceedings	147
Item 1A.	Risk Factors	147
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	148
Item 6.	Exhibits	148

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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 March 31, 2016		As of December 31, 2015
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,123 and $10,275)	$	10,588	$	10,627
Short-term investments, at fair value	459		396
Other invested assets	167		169
Total investment portfolio	11,214		11,192
Cash	112		166
Premiums receivable, net of commissions payable	662		693
Ceded unearned premium reserve	236		232
Deferred acquisition costs	113		114
Reinsurance recoverable on unpaid losses	72		69
Salvage and subrogation recoverable	206		126
Credit derivative assets	55		81
Deferred tax asset, net	278		276
Current income tax receivable	11		40
Financial guaranty variable interest entities’ assets, at fair value	1,191		1,261
Other assets	302		294
Total assets	$	14,452	$	14,544
Liabilities and shareholders’ equity
Unearned premium reserve	$	3,810	$	3,996
Loss and loss adjustment expense reserve	1,112		1,067
Reinsurance balances payable, net	58		51
Long-term debt	1,302		1,300
Credit derivative liabilities	489		446
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	1,165		1,225
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	119		124
Other liabilities	284		272
Total liabilities	8,339		8,481
Commitments and contingencies (See Note 14)
Common stock ($0.01 par value, 500,000,000 shares authorized; 135,083,637 and 137,928,552 shares issued and outstanding)	1		1
Additional paid-in capital	1,269		1,342
Retained earnings	4,519		4,478
Accumulated other comprehensive income, net of tax of $127 and $104	319		237
Deferred equity compensation (320,193 and 320,193 shares)	5		5
Total shareholders’ equity	6,113		6,063
Total liabilities and shareholders’ equity	$	14,452	$	14,544

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 March 31,
	2016			2015
Revenues
Net earned premiums	$	183		$	142
Net investment income	99			101
Net realized investment gains (losses):
Other-than-temporary impairment losses	(20		)	(5		)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income	(4		)	2
Net impairment loss	(16		)	(7		)
Other net realized investment gains (losses)	3			23
Net realized investment gains (losses)	(13		)	16
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	8			21
Net unrealized gains (losses)	(68		)	103
Net change in fair value of credit derivatives	(60		)	124
Fair value gains (losses) on committed capital securities	(16		)	2
Fair value gains (losses) on financial guaranty variable interest entities	18			(7		)
Other income (loss)	34			(9		)
Total revenues	245			369
Expenses
Loss and loss adjustment expenses	90			18
Amortization of deferred acquisition costs	4			4
Interest expense	26			25
Other operating expenses	60			56
Total expenses	180			103
Income (loss) before income taxes	65			266
Provision (benefit) for income taxes
Current	30			13
Deferred	(24		)	52
Total provision (benefit) for income taxes	6			65
Net income (loss)	$	59		$	201

Earnings per share:
Basic	$	0.43		$	1.29
Diluted	$	0.43		$	1.28
Dividends per share	$	0.13		$	0.12

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 March 31,
	2016			2015
Net income (loss)	$	59		$	201
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $31, and $1	95			18
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(10) and $(2)	(17		)	(2		)
Unrealized holding gains (losses) arising during the period, net of tax	78			16
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(4) and $6	(6		)	10
Change in net unrealized gains on investments	84			6
Other, net of tax provision	(2		)	(6		)
Other comprehensive income (loss)	$	82		$	0
Comprehensive income (loss)	$	141		$	201

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 Three Months Ended March 31, 2016

(dollars in millions, except share data)



	Common Shares Outstanding		Common Stock Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Deferred Equity Compensation		Total Shareholders’ Equity
Balance at December 31, 2015	137,928,552		$	1	$	1,342		$	4,478		$	237	$	5	$	6,063
Net income	—		—		—			59			—		—		59
Dividends ($0.13 per share)	—		—		—			(18		)	—		—		(18		)
Common stock repurchases	(3,038,928	)	0		(75		)	—			—		—		(75		)
Share-based compensation and other	194,013		0		2			—			—		—		2
Other comprehensive income	—		—		—			—			82		—		82
Balance at March 31, 2016	135,083,637		$	1	$	1,269		$	4,519		$	319	$	5	$	6,113

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)



	Three Months Ended March 31,
	2016			2015
Net cash flows provided by (used in) operating activities	$	(90	)	$	23
Investing activities
Fixed-maturity securities:
Purchases	(296		)	(448		)
Sales	162			841
Maturities	301			155
Net sales (purchases) of short-term investments	(63		)	420
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	66			30
Other	2			3
Net cash flows provided by (used in) investing activities	172			1,001
Financing activities
Dividends paid	(18		)	(19		)
Repurchases of common stock	(75		)	(152		)
Share activity under option and incentive plans	0			(5		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(42		)	(39		)
Repayment of long-term debt	0			(1		)
Other	(1		)	4
Net cash flows provided by (used in) financing activities	(136		)	(212		)
Effect of foreign exchange rate changes	0			(2		)
Increase (decrease) in cash	(54		)	810
Cash at beginning of period	166			75
Cash at end of period	$	112		$	885
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	1		$	17
Interest	$	7		$	7

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)

March 31, 2016


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 financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (“Debt Service”), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance 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 U.S. and the United Kingdom ("U.K."), and also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

In the past, the Company sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps ("CDS"). 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 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 also contributed to the Company not entering into such new CDS since 2009. 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 variable interest entities (“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 March 31, 2016 and cover the three-month period ended March 31, 2016 ("First Quarter 2016") and the three-month period ended March 31, 2015 ("First Quarter 2015"). 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, its direct and indirect subsidiaries (collectively, the “Subsidiaries”), and its consolidated 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, 2015, filed with the U.S. Securities and Exchange Commission (the “SEC”).

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The Company's principal insurance company subsidiaries are:


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


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


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


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


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

The Company’s organizational structure includes various holding 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 and Note 18, Subsidiary Information.

Future Application of Accounting Standards

Share-Based Payments

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU on its Consolidated Financial Statements.


2.	Acquisitions

Consistent with one of its key business strategies of supplementing its book of business through acquisitions, the Company has acquired or agreed to acquire two financial guaranty companies within the last 12 months.

CIFG Holding Inc.

On April 12, 2016, AGC entered into an agreement and plan of merger to acquire CIFG Holding Inc. ("CIFG"), the parent of financial guaranty insurer CIFG Assurance North America, Inc. ("CIFG NA"). AGC expects to pay $450 million in cash to acquire CIFG, subject to adjustments as contemplated in the agreement, and the acquisition is expected to be completed mid-2016, subject to receipt of anti-trust and insurance regulatory approvals as well as satisfaction of customary closing conditions. CIFG’s stockholders have already approved the acquisition. As part of the transaction, CIFG NA will merge into AGC, which will be the surviving entity. As of December 31, 2015, CIFG had a consolidated insured portfolio of $5.6 billion of net par and approximately $637 million of consolidated qualified statutory capital.

Radian Asset Assurance Inc.

On April 1, 2015 (“Acquisition Date”), AGC completed the acquisition (“Radian Asset Acquisition”) of all of the issued and outstanding capital stock of financial guaranty insurer Radian Asset Assurance Inc. (“Radian Asset”) for $804.5 million. Radian Asset was merged with and into AGC, with AGC as the surviving company of the merger. The Radian Asset Acquisition added $13.6 billion to the Company's net par outstanding on April 1, 2015.

Please refer to Note 2, Acquisition of Radian Asset Assurance Inc., in Part II, Item 8. “Financial Statements and Supplementary Data” of AGL’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information on the acquisition of Radian Asset including the purchase price and the allocation of the purchase price to net assets acquired and the resulting bargain purchase gain and the gains on settlement of pre-existing relationships.

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3. 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 the rating agencies 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 strong financial strength ratings. However, the methodologies and models used by rating agencies differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The methodologies and models are not fully transparent, contain subjective elements and data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings are subject to continuous review and revision or withdrawal at any time. If the financial strength ratings of one (or more) of the Company’s insurance subsidiaries were reduced below current levels, the Company expects it could have adverse effects on the impacted subsidiary's future business opportunities as well as the premiums the impacted subsidiary could charge for its insurance policies.

The Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. For example, the Kroll Bond Rating Agency ("KBRA") ratings were first assigned to MAC in 2013 and to AGM in 2014 and the A.M. Best Company, Inc. ("Best") rating was first assigned to Assured Guaranty Re Overseas Ltd. ("AGRO") in 2015, while a Moody's Investors Service, Inc. ("Moody's") rating was never requested for MAC and was dropped from AG Re and AGRO in 2015.

In the last several years, Standard & Poor's Ratings Services ("S&P") and Moody's have changed, multiple times, their financial strength ratings of AGL's insurance subsidiaries, or changed the outlook on such ratings. More recently, KBRA and Best have assigned financial strength ratings to some of AGL's insurance subsidiaries. The rating agencies' most recent actions related to AGL's insurance subsidiaries are:


•	On December 8, 2015 Moody's published credit opinions maintaining its existing insurance financial strength ratings of A2 (stable outlook) on AGM and AGE and A3 (negative outlook) on AGC and AGC's subsidiary Assured Guaranty (UK) Ltd. ("AGUK"). Effective April 8, 2015, at the Company's request, Moody’s withdrew the financial strength ratings it had assigned to AG Re and AGRO.


•	On August 3, 2015 and December 10, 2015, KBRA affirmed the AA+ (stable outlook) financial strength ratings of MAC and AGM, respectively.


•	On June 29, 2015, S&P affirmed the AA (stable) financial strength ratings of all of AGL's insurance subsidiaries.


•	On May 5, 2015, Best assigned to AGRO a financial strength rating of A+ (Stable), which is their second highest rating.

There can be no assurance that any of the rating agencies will not take negative action on their financial strength ratings of AGL's insurance subsidiaries in the future.

For a discussion of the effects of rating actions on the Company, see the following:


•	Note 6, Financial Guaranty Insurance


•	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


4.	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 it views as investment grade at inception, although, as part of its loss mitigation strategy for existing troubled credits, it may underwrite new issuances that it views as below-investment-grade ("BIG"). The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, requires rigorous subordination or collateralization requirements. Reinsurance may be used in order to reduce net exposure to certain insured transactions.

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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. The Company also includes within public finance similar obligations issued by territorial and non-U.S. sovereign and sub-sovereign issuers and governmental authorities.

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

Surveillance Categories

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

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

Credits identified as BIG are subjected to further review to determine the probability of a loss. See Note 5, Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. For surveillance purposes, the Company calculates present value using a constant discount rate of 4% or 5% depending on the insurance subsidiary. (Risk-free rates are used for calculating the expected loss for financial statement measurement purposes.)

More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims in the future of that transaction than it will have reimbursed. The three BIG categories are:


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


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


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

Components of Outstanding Exposure

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

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The Company purchases securities that it has insured, and for which it has expected losses to be paid, in order to

mitigate the economic effect of insured losses ("loss mitigation securities"). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated) from par and Debt Service outstanding, because it manages such securities as investments and not insurance exposure. The following table presents the gross and net debt service for all financial guaranty contracts.

Financial Guaranty

Debt Service Outstanding



	Gross Debt Service Outstanding				Net Debt Service Outstanding
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
	(in millions)
Public finance	$	496,630	$	515,494	$	476,362	$	494,426
Structured finance	42,012		43,976		40,037		41,915
Total financial guaranty	$	538,642	$	559,470	$	516,399	$	536,341

In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $107 million as of March 31, 2016 and $102 million as of December 31, 2015, related to loans originated in Ireland. The increase in the net mortgage guaranty insurance debt service is due to exchange rate fluctuations.

Financial Guaranty Portfolio by Internal Rating

As of March 31, 2016



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	2,541	0.9	%	$	688	2.3	%	$	13,953	45.8	%	$	2,529	49.4	%	$	19,711	5.7	%
AA	65,310		23.2		1,969		6.7		7,505		24.7		154		3.0		74,938		21.6
A	145,515		51.6		6,695		22.8		2,584		8.5		551		10.8		155,345		44.7
BBB	60,736		21.5		18,622		63.4		1,279		4.2		1,267		24.7		81,904		23.6
BIG	7,953		2.8		1,411		4.8		5,131		16.8		622		12.1		15,117		4.4
Total net par outstanding (1)	$	282,055	100.0	%	$	29,385	100.0	%	$	30,452	100.0	%	$	5,123	100.0	%	$	347,015	100.0	%

_____________________


(1)	Excludes $1.5 billion of loss mitigation securities insured and held by the Company as of March 31, 2016, which are primarily BIG.

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Financial Guaranty Portfolio by Internal Rating

As of December 31, 2015



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	3,053	1.1	%	$	709	2.4	%	$	14,366	45.2	%	$	2,709	50.6	%	$	20,837	5.8	%
AA	69,274		23.7		2,017		6.8		7,934		25.0		177		3.3		79,402		22.1
A	157,440		53.9		6,765		22.9		2,486		7.8		555		10.3		167,246		46.7
BBB	54,315		18.6		18,708		63.2		1,515		4.8		1,365		25.5		75,903		21.2
BIG	7,784		2.7		1,378		4.7		5,469		17.2		552		10.3		15,183		4.2
Total net par outstanding (1)	$	291,866	100.0	%	$	29,577	100.0	%	$	31,770	100.0	%	$	5,358	100.0	%	$	358,571	100.0	%

_____________________


(1)	Excludes $1.5 billion of loss mitigation securities insured and held by the Company as of December 31, 2015, which are primarily BIG.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $240 million for public finance obligations as of March 31, 2016. The expiration dates for the public finance commitments range between April 1, 2016 and February 25, 2017, with $66 million expiring prior to the date of this filing and an additional $110 million expiring prior to December 31, 2016. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Components of BIG Portfolio

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of March 31, 2016



	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in millions)
U.S. public finance	$	4,608	$	3,191	$	154	$	7,953	$	282,055
Non-U.S. public finance	882		529		—		1,411		29,385
Structured finance:
First lien U.S. residential mortgage-backed securities ("RMBS"):
Prime first lien	192		32		24		248		425
Alt-A first lien	125		66		507		698		1,238
Option ARM	50		7		78		135		235
Subprime	82		281		866		1,229		3,305
Second lien U.S. RMBS	225		47		1,100		1,372		1,474
Total U.S. RMBS	674		433		2,575		3,682		6,677
Triple-X life insurance transactions	—		—		216		216		2,650
Trust preferred securities (“TruPS”)	650		127		—		777		4,296
Student loans	—		68		81		149		1,815
Other structured finance	743		147		39		929		20,137
Total	$	7,557	$	4,495	$	3,065	$	15,117	$	347,015

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Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of December 31, 2015



	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in millions)
U.S. public finance	$	4,765	$	2,883	$	136	$	7,784	$	291,866
Non-U.S. public finance	875		503		—		1,378		29,577
Structured finance:
First lien U.S. RMBS:
Prime first lien	225		34		25		284		445
Alt-A first lien	119		73		601		793		1,353
Option ARM	39		12		90		141		252
Subprime	146		228		930		1,304		3,457
Second lien U.S. RMBS	491		50		910		1,451		1,560
Total U.S. RMBS	1,020		397		2,556		3,973		7,067
Triple-X life insurance transactions	—		—		216		216		2,750
TruPS	679		127		—		806		4,379
Student loans	12		68		83		163		1,818
Other structured finance	672		151		40		863		21,114
Total	$	8,023	$	4,129	$	3,031	$	15,183	$	358,571

BIG Net Par Outstanding

and Number of Risks

As of March 31, 2016



	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	$	6,585	$	972	$	7,557	202	12	214
Category 2	4,015		480		4,495		86	7	93
Category 3	2,938		127		3,065		129	12	141
Total BIG	$	13,538	$	1,579	$	15,117	417	31	448

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BIG Net Par Outstanding

and Number of Risks

As of December 31, 2015



	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	$	7,019	$	1,004	$	8,023	202	12	214
Category 2	3,655		474		4,129		85	8	93
Category 3	2,900		131		3,031		132	12	144
Total BIG	$	13,574	$	1,609	$	15,183	419	32	451

_____________________

(1) Includes net par outstanding for VIEs.


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

Exposure to Puerto Rico

The Company has insured exposure to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.1 billion net par as of March 31, 2016, all of which are rated BIG.

Puerto Rico has experienced significant general fund budget deficits in recent years. In addition to high debt levels, Puerto Rico faces a challenging economic environment.

In June 2014, the Puerto Rico legislature passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the "Recovery Act") in order to provide a legislative framework for certain public corporations experiencing severe financial stress to restructure their debt, including Puerto Rico Highway and Transportation Authority ("PRHTA") and Puerto Rico Electric Power Authority ("PREPA"). Subsequently, the Commonwealth stated PREPA might need to seek relief under the Recovery Act due to liquidity constraints. Investors in bonds issued by PREPA filed suit in the United States District Court for the District of Puerto Rico challenging the Recovery Act. On February 6, 2015, the U.S. District Court for the District of Puerto Rico ruled the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore void. On July 6, 2015, the U.S. Court of Appeals for the First Circuit upheld that ruling, and on December 4, 2015, the U.S. Supreme Court granted petitions for writs of certiorari relating to that ruling. Oral arguments were held on March 22, 2016. Typical Supreme Court practice suggests a decision could be announced in June 2016, but there is no assurance that an opinion will be announced at such time, especially in light of the Supreme Court vacancy.

On June 28, 2015, Governor García Padilla of Puerto Rico (the "Governor") publicly stated that the Commonwealth’s public debt, considering the current level of economic activity, is unpayable and that a comprehensive debt restructuring may be necessary, and he has made similar statements since then.

On September 9, 2015, the Working Group for the Fiscal and Economic Recovery of Puerto Rico (“Working Group”) established by the Governor published its “Puerto Rico Fiscal and Economic Growth Plan” (the “FEGP”). The FEGP included a recommendation that the Commonwealth’s advisors begin to work on a voluntary exchange offer to its creditors as part of the FEGP.

On November 30, 2015, and December 8, 2015, the Governor issued executive orders (“Clawback Orders”) directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company to retain or transfer certain taxes pledged to secure the payment of bonds issued by PRHTA, PRIFA and Puerto Rico Convention Center District Authority ("PRCCDA"). On January 7, 2016 the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico asserting that this attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief. The Puerto Rico credits insured by the Company impacted by the Clawback Orders are shown in the table “Puerto Rico Net Par Outstanding” below.

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On January 1, 2016 Puerto Rico Infrastructure Finance Authority ("PRIFA") defaulted on payment of a portion of the interest due on its bonds on that date. For those PRIFA bonds the Company had insured, the Company paid approximately $451 thousand of claims for the interest payments on which PRIFA had defaulted.

On April 6, 2016 the Governor signed into law the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act (the “Moratorium Act”). The Moratorium Act purportedly empowers the Governor to declare a moratorium, entity by entity, on debt service payments on debt of the commonwealth and its related authorities and public corporations, as well as instituting a stay against related litigation, among other things. It is possible that a court may find any attempt to exercise the power to declare a moratorium on debt service payments purportedly granted by the Moratorium Act to be unconstitutional, and the impact of any attempt to exercise such power on the Puerto Rico credits insured by the Company is uncertain. Shortly after signing it into law, the Governor used the authority of the Moratorium Act to declare an emergency period with respect to the Government Development Bank (the “GDB”), placing restrictions on its disbursements and certain of its other activities and moving the clearing of payroll of Commonwealth and GDB employees from the GDB.

On April 30, 2016, the Governor signed an order under the Moratorium Act ordering a moratorium on the debt service payment of approximately $422 million due to be made by the GDB on May 2, 2016. On May 1, 2016, the GDB announced a tentative agreement with a group of creditors of the GDB (the “Ad Hoc Group”) for a restructuring of GDB’s notes and that the GDB would pay the interest due on May 2, 2016. According to the announcement, the Ad Hoc Group agreed to forbear from initiating litigation for 30 days during the pendency of negotiations. The GDB noted in its May 1 announcement that the tentative agreement requires 100% participation of the GDB’s creditors and that it would be unlikely to reach that level of participation without a restructuring law enabling it to bind non-consenting creditors. The Company does not insure any debt issued by the GDB.

There have been a number of other proposals, plans and legislative initiatives offered in Puerto Rico and in the United States aimed at addressing Puerto Rico’s fiscal issues. Among the responses proposed is a federal financial control board and access to bankruptcy courts or another restructuring mechanism. In addition, the Working Group has made several proposals for voluntary exchanges that include terms such as discounts, extensions and subordination. The final shape and timing of responses to Puerto Rico’s distress eventually enacted or implemented by Puerto Rico or the United States, if any, and the impact of any such actions on obligations insured by the Company, is uncertain and may differ substantially from the recommendations of the Working Group or any other proposals or plans described in the press or offered to date or in the future.

S&P, Moody’s and Fitch Ratings have lowered the credit rating of the Commonwealth’s bonds and on its public corporations several times over the past approximately two years, and the Commonwealth has disclosed its liquidity has been adversely affected by rating agency downgrades and by the limited market access for its debt, and also noted it has relied on short-term financings and interim loans from the GDB and other private lenders, which reliance has constrained its liquidity and increased its near-term refinancing risk.

PREPA

As of March 31, 2016, the Company had $744 million insured net par outstanding of PREPA obligations. On July 1, 2015, PREPA made full payment of the $416 million of principal and interest due on its bonds, including bonds insured by AGM and AGC. However, that payment was conditioned on and facilitated by AGM and AGC agreeing, also on July 1, to purchase a portion of $131 million of interest-bearing bonds to help replenish certain of the operating funds PREPA used to make the $416 million of principal and interest payments. On July 31, 2015, AGM and AGC purchased $74 million aggregate principal amount of those bonds; the bonds were repaid in full in 2016.

On December 24, 2015, AGM and AGC entered into a Restructuring Support Agreement (“RSA”) with PREPA, an ad hoc group of uninsured bondholders and a group of fuel-line lenders that would, subject to certain conditions, result in, among other things, modernization of the utility and a restructuring of current debt. Upon finalization of the contemplated restructuring transaction, insured PREPA revenue bonds (with no reduction to par or stated interest rate or extension of maturity) will be supported by securitization bonds issued by a special purpose corporation and secured by a transition charge assessed on ratepayers. To facilitate the securitization transaction, which enables PREPA to achieve debt relief and more efficient capital markets financing, Assured Guaranty will issue surety insurance policies in an aggregate amount not expected to exceed $113 million in exchange for a market premium and to support a portion of the reserve fund for the securitization bonds. Certain of the creditors also agreed, subject to certain conditions, to participate in a bridge financing. The Company’s share of the bridge financing is approximately $15 million. Legislation meeting the requirements of the RSA was enacted on February 16, 2016. The closing of the restructuring transaction, the issuance of the surety bonds and the closing of the bridge financing are subject

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to certain conditions, including confirmation that the enacted legislation meets all requirements of the RSA and execution of acceptable documentation and legal opinions.

There can be no assurance that the conditions in the RSA will be met or that, if the conditions are met, the RSA's other provisions, including those related to the restructuring of the insured PREPA revenue bonds, will be implemented. In addition, the impact of the Moratorium Act or any attempt to exercise the power purportedly granted by the Moratorium Act on the implementation of the RSA is uncertain. PREPA, during the pendency of the agreements, has suspended deposits into its debt service fund.

PRHTA

As of March 31, 2016, the Company had $910 million insured net par outstanding of PRHTA (Transportation revenue) bonds and $369 million net par of PRHTA (Highway revenue) bonds. The Clawback Orders cover Commonwealth-derived taxes that are allocated to PRHTA. The Company believes that such sources represented a substantial majority of PRHTA’s revenues in 2015.

Puerto Rico Sales Tax Financing Corporation (“COFINA”)

As of March 31, 2016, the Company had $270 million insured net par outstanding of junior COFINA bonds, which are secured by a lien on certain sales and use taxes. There have been proposals from both the Commonwealth and from holders of certain senior COFINA bonds to restructure COFINA debt.

Puerto Rico Convention Center District Authority

As of March 31, 2016, the Company had $164 million insured net par outstanding of PRCCDA bonds, which are secured by certain hotel tax revenues. These revenues are sensitive to the level of economic activity in the area and are subject to the Clawback Orders.

Puerto Rico Aqueduct and Sewer Authority (“PRASA”)

As of March 31, 2016, the Company had $388 million insured par outstanding to PRASA bonds, which are secured by the gross revenues of the system. On September 15, 2015, PRASA entered into a settlement with the U.S. Justice Department and the U.S. Environmental Protection Agency that requires it to spend $1.6 billion to upgrade and improve its sewer system island-wide. According to a material event notice PRASA filed on March 4, 2016, it owed its contractors $140 million.

Municipal Finance Agency ("MFA")

As of March 31, 2016, the Company had $387 million net par outstanding of bonds issued by MFA secured by a pledge of local property tax revenues. On October 13, 2015, the Company filed a motion to intervene in litigation between Centro de Recaudación de Ingresos Municipales (“CRIM”) and the GDB in which CRIM was seeking to ensure that the pledged tax revenues are, and will continue to be, available to support the MFA bonds. While the Company’s motion to intervene was denied, the GDB and CRIM have reported that they executed a new deed of trust that requires the GDB, as fiduciary, to keep the pledged tax revenues separate from any other GDB monies or accounts and that governs the manner in which the pledged revenues may be invested and dispersed.

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

Puerto Rico

Gross Par and Gross Debt Service Outstanding



	Gross Par Outstanding				Gross Debt Service Outstanding
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
	(in millions)
Previously Subject to the Voided Recovery Act (1)	$	2,965	$	2,965	$	5,090	$	5,162
Not Previously Subject to the Voided Recovery Act	2,791		2,790		4,398		4,470
Total	$	5,756	$	5,755	$	9,488	$	9,632

____________________


(1)	On February 6, 2015, the U.S. District Court for the District of Puerto Rico ruled that the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore void. On July 6, 2015, the U.S. Court of Appeals for the First Circuit upheld that ruling, and on December 4, 2015, the U.S. Supreme Court granted petitions for writs of certiorari relating to that ruling.

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Puerto Rico

Net Par Outstanding



	As of March 31, 2016			As of December 31, 2015
	Total		Internal Rating	Total		Internal Rating
	(in millions)
Exposures Previously Subject to the Voided Recovery Act:
PRHTA (Transportation revenue) (1)	$	910	CCC-	$	909	CCC-
PREPA	744		CC	744		CC
PRASA	388		CCC	388		CCC
PRHTA (Highway revenue)(1)	369		CCC	370		CCC
PRCCDA (1)	164		CCC-	164		CCC-
Total	2,575			2,575

Exposures Not Previously Subject to the Voided Recovery Act:
Commonwealth of Puerto Rico - General Obligation Bonds	1,615		CCC	1,615		CCC
MFA	387		CCC-	387		CCC-
COFINA	270		CCC+	269		CCC+
Puerto Rico Public Buildings Authority	188		CCC	188		CCC
PRIFA (1) (2)	18		C	18		CCC-
University of Puerto Rico	1		CCC-	1		CCC-
Total	2,479			2,478
Total net exposure to Puerto Rico	$	5,054		$	5,053

____________________

(1)

The Governor issued executive orders on November 30, 2015, and December 8, 2015, directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company to retain or transfer certain taxes and revenues pledged to secure the payment of bonds issued by PRHTA, PRIFA and PRCCDA. On January 7, 2016 the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico asserting that this attempt to “claw back” pledged taxes and revenues is unconstitutional, and demanding declaratory and injunctive relief.


(2)	On January 1, 2016 PRIFA defaulted on full payment of a portion of the interest due on its bonds on that date. For those PRIFA bonds the Company had insured, the Company paid approximately $451 thousand of claims for the interest payments on which PRIFA had defaulted.

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

Amortization Schedule of Puerto Rico Net Par Outstanding

and Net Debt Service Outstanding

As of March 31, 2016



	Scheduled Net Par Amortization						Scheduled Net Debt Service Amortization
	Previously Subject to the Voided Recovery Act		Not Previously Subject to the Voided Recovery Act		Total		Previously Subject to the Voided Recovery Act		Not Previously Subject to the Voided Recovery Act		Total
	(in millions)
2016 (April 1 – June 30)	$	0	$	0	$	0	$	2	$	0	$	2
2016 (July 1 – September 30)	98		204		302		161		267		428
2016 (October 1 – December 31)	0		0		0		2		0		2
2017	51		171		222		175		288		463
2018	56		123		179		178		232		410
2019	74		130		204		192		232		424
2020	87		183		270		202		280		482
2021	66		59		125		177		146		323
2022	47		68		115		153		152		305
2023	110		40		150		214		123		337
2024	89		85		174		188		164		352
2025	111		85		196		206		159		365
2026-2030	590		353		943		974		660		1,634
2031-2035	583		548		1,131		838		761		1,599
2036-2040	308		271		579		427		355		782
2041-2045	137		159		296		206		174		380
2046-2047	168		—		168		181		—		181
Total	$	2,575	$	2,479	$	5,054	$	4,476	$	3,993	$	8,469

Exposure to the Selected European Countries

The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal and Spain (collectively, the “Selected European Countries”). The Company’s direct 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.

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Net Direct Economic Exposure to Selected European Countries(1)

As of March 31, 2016



	Hungary		Italy		Portugal		Spain		Total
	(in millions)
Sub-sovereign exposure(2)	$	271	$	827	$	84	$	375	$	1,557
Non-sovereign exposure(3)	179		458		—		—		637
Total	$	450	$	1,285	$	84	$	375	$	2,194
Total BIG (See Note 5)	$	379	$	—	$	84	$	375	$	838

____________________


(1)	While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros.


(2)	Sub-sovereign exposure in Selected European Countries includes transactions backed by receivables from or supported by sub-sovereigns, which are governmental or government-backed entities other than the ultimate governing body of the country.


(3)	Non-sovereign exposure in Selected European Countries includes debt of regulated utilities and RMBS.

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $206 million to Selected European Countries (plus Greece) in transactions with $4.1 billion of net par outstanding. The indirect exposure to credits with a nexus to Greece is $6 million across several highly rated pooled corporate obligations with net par outstanding of $231 million.


5.	Expected Loss to be Paid

Loss Estimation Process

This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio, regardless of the accounting model. The Company’s loss reserve committees estimate expected loss to be paid for all contracts by reviewing analyses that consider various scenarios with corresponding 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.

The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances, the Company has no right to cancel such financial guaranties. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a quarter, and as a result the Company’s loss estimates may change materially over that same period.

The Company does not use traditional actuarial approaches to determine its estimates of expected losses. Actual losses will ultimately depend on future events or transaction performance and may be influenced by many interrelated factors that are difficult to predict. As a result, the Company's current projections of probable and estimable losses may be subject to considerable volatility and may not reflect the Company's ultimate claims paid. For information on the Company's loss estimation process, please refer to Note 5, Expected Losses to be Paid, of Part II, Item 8, Financial Statements and Supplementary Data in AGL's Annual Report on Form 10-K for the year ended December 31, 2015.

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The following tables present 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 financial guaranty ("FG") VIEs, by sector, after the benefit for expected recoveries for breaches of representations and warranties ("R&W") and other expected recoveries. The Company used weighted average risk-free rates for U.S. dollar denominated obligations that ranged from 0.0% to 2.88% as of March 31, 2016 and 0.0% to 3.25% as of December 31, 2015.

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward



	First Quarter
	2016			2015
	(in millions)
Net expected loss to be paid, beginning of period	$	1,391		$	1,169
Economic loss development due to:
Accretion of discount	9			7
Changes in discount rates	63			7
Changes in timing and assumptions	(13		)	(17		)
Total economic loss development	59			(3		)
Paid losses	(113		)	(12		)
Net expected loss to be paid, end of period	$	1,337		$	1,154

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Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

First Quarter 2016



	Net Expected Loss to be Paid (Recovered) as of December 31, 2015 (2)			Economic Loss Development			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of March 31, 2016 (2)
	(in millions)
Public Finance:
U.S. public finance	$	771		$	98		$	(5	)	$	864
Non-U.S. public finance	38			1			—			39
Public Finance	809			99			(5		)	903
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	(2		)	0			1			(1		)
Alt-A first lien	127			(16		)	(75		)	36
Option ARM	(28		)	(21		)	2			(47		)
Subprime	251			1			(12		)	240
Total first lien	348			(36		)	(84		)	228
Second lien	61			5			(1		)	65
Total U.S. RMBS	409			(31		)	(85		)	293
Triple-X life insurance transactions	99			4			(1		)	102
Student loans	54			(14		)	(8		)	32
Other structured finance	20			1			(14		)	7
Structured Finance	582			(40		)	(108		)	434
Total	$	1,391		$	59		$	(113	)	$	1,337

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Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

First Quarter 2015



	Net Expected Loss to be Paid (Recovered) as of December 31, 2014			Economic Loss Development			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of March 31, 2015
	(in millions)
Public Finance:
U.S. public finance	$	303		$	9		$	(2	)	$	310
Non-U.S. public finance	45			(3		)	—			42
Public Finance	348			6			(2		)	352
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	4			0			(1		)	3
Alt-A first lien	304			(5		)	(10		)	289
Option ARM	(16		)	4			(4		)	(16		)
Subprime	303			(1		)	(9		)	293
Total first lien	595			(2		)	(24		)	569
Second lien	(11		)	6			6			1
Total U.S. RMBS	584			4			(18		)	570
Triple-X life insurance transactions	161			5			(1		)	165
Student loans	68			(6		)	—			62
Other structured finance	8			(12		)	9			5
Structured Finance	821			(9		)	(10		)	802
Total	$	1,169		$	(3	)	$	(12	)	$	1,154

____________________


(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. The Company paid $2 million and $4 million in loss adjustment expenses ("LAE") for First Quarter 2016 and 2015, respectively.


(2)	Includes expected LAE to be paid of $9 million as of March 31, 2016 and $12 million as of December 31, 2015.

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Future Net R&W Benefit Receivable (Payable)(1)



	As of March 31, 2016			As of December 31, 2015
	(in millions)
U.S. RMBS:
First lien	$	(30	)	$	0
Second lien	77			79
Total	$	47		$	79

____________________

(1)

The Company’s agreements with providers of breaches of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers. See the section “Breaches of Representations and Warranties” for information about the R&W agreements and eligible assets held in trust with respect to such agreements. When the Company projects receiving more reimbursements in the future than it projects to pay in claims, the Company will have a net R&W payable.

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 expected recoveries for breaches of R&W.

Net Expected Loss to be Paid (Recovered)

By Accounting Model

As of March 31, 2016



	Financial Guaranty Insurance			FG VIEs(1) and Other		Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	864		$	—	$	0		$	864
Non-U.S. public finance	39			—		—			39
Public Finance	903			—		0			903
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	2			—		(3		)	(1		)
Alt-A first lien	19			18		(1		)	36
Option ARM	(44		)	—		(3		)	(47		)
Subprime	148			55		37			240
Total first lien	125			73		30			228
Second lien	19			43		3			65
Total U.S. RMBS	144			116		33			293
Triple-X life insurance transactions	91			—		11			102
Student loans	32			—		—			32
Other structured finance	40			2		(35		)	7
Structured Finance	307			118		9			434
Total	$	1,210		$	118	$	9		$	1,337

Table of Contents

Net Expected Loss to be Paid (Recovered)

By Accounting Model

As of December 31, 2015



	Financial Guaranty Insurance		FG VIEs(1) and Other		Credit Derivatives(2)		Total
	(in millions)
Public Finance:
U.S. public finance	$	771	$	—	$	0	$	771
Non-U.S. public finance	38		—		—		38
Public Finance