Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ý ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20122015
Or
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 Number 001-32141
ASSURED GUARANTY LTD.
(Exact name of Registrant as specified in its charter)
Bermuda
(State or other jurisdiction of
incorporation or organization)
 
98-0429991
(I.R.S. Employer Identification No.)
30 Woodbourne Avenue
Hamilton HM 08 Bermuda
(441) 279-5700
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive office)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered 
Common Shares, $0.01 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 ý    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o


Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of Common Shares held by non-affiliates of the Registrant as of the close of business on June 30, 20122015 was $2,425,375,248$3,501,022,807 (based upon the closing price of the Registrant's shares on the New York Stock Exchange on that date, which was $14.10)$23.99). For purposes of this information, the outstanding Common Shares which were owned by all directors and executive officers of the Registrant were deemed to be the only shares of Common Stock held by affiliates.
As of February 22, 2013, 194,257,20023, 2016, 135,925,921 Common Shares, par value $0.01 per share, were outstanding (includes 88,549(including 62,145 unvested restricted shares).
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement relating to its 20132016 Annual General Meeting of Shareholders are incorporated by reference to Part III of this report.
 
 


Table of Contents

Forward Looking Statements

This Form 10-K contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (“AGL”) and togetherits subsidiaries (collectively with its subsidiaries,AGL, “Assured Guaranty” or the “Company”). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.
 
Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ materiallyadversely are:
 
·rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of Assured GuarantyAGL or any of its subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that Assured Guaranty’sAGL’s subsidiaries have insured;
reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty's insurance;
·developments in the world’s financial and capital markets that adversely affect the demand for the Company's insurance, issuers’obligors’ payment rates, Assured Guaranty’s loss experience, or its exposure to refinancing risk in transactions (which could result in substantial liquidity claims on its guarantees), its access to capital, its unrealized (losses) gains;
the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on derivative financial instrumentsobligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or its investment returns;reinsures;

·changes in the world’s credit markets, segments thereof or general economic conditions;
·the impact of rating agency action with respect to sovereign debt and the resulting effect on the value of securities in the Company’s investment portfolio and collateral posted by and to the Company;
·more severe or frequent losses impacting the adequacyfailure of Assured Guaranty’sGuaranty to realize loss recoveries that are assumed in its expected loss estimates;
·the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default swap form;
·reduction in the amount of insurance opportunities available to Assured Guaranty;
·deterioration in the financial condition of Assured Guaranty’s reinsurers, the amount and timing of reinsurance recoverables actually received and the risk that reinsurers may dispute amounts owed to Assured Guaranty under its reinsurance agreements;
·the failure of Assured Guaranty to realize insurance loss recoveries or damages expected from originators, sellers, sponsors, underwriters or servicers of residential mortgage-backed securities transactions through loan putbacks, settlement negotiations or litigation;
·the possibility that budget shortfalls or other factors will result in credit losses or impairments on obligations of state and local governments that the Company insures or reinsures;
·increased competition, including from new entrants into the financial guaranty industry;
rating agency action on obligors, including sovereign debtors, resulting in a reduction in the value of securities in Assured Guaranty's investment portfolio and in collateral posted by and to Assured Guaranty;
·the inability of Assured Guaranty to access external sources of capital on acceptable terms;
changes in the world’s credit markets, segments thereof, interest rates or general economic conditions;
the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default swap form;
changes in applicable accounting policies or practices;
·changes in applicable laws or regulations, including insurance, bankruptcy and tax laws;
·laws, or other governmental actions;
·difficulties with the execution of Assured Guaranty’s business strategy;
·contract cancellations;
·loss of key personnel;

·adverse technological developments;


Table of Contents

·the effects of mergers, acquisitions and divestitures;
·natural or man-made catastrophes;
·other risks and uncertainties that have not been identified at this time;
·management’s response to these factors; and


Table of Contents

·other risk factors identified in Assured Guaranty’sAGL’s filings with the U.S. Securities and Exchange Commission (the “SEC”).
 
The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC.
 
If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-K reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.
 
For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).


Convention
 
Unless otherwise noted, ratings disclosed herein on Assured Guaranty’sGuaranty's insured portfolio reflect its internal rating. Althoughand on bonds or notes purchased pursuant to loss mitigation strategies ("loss mitigation securities") or risk management strategies are Assured Guaranty’s internal ratings. Internal credit ratings are expressed on a rating scale is similar to that used by the nationally recognized statistical rating organizations, the ratings may not be the same as ratings assigned by any such rating agency. For example the super senior category, which is not generally used by rating agencies is usedand generally reflect an approach similar to that employed by the rating agencies, except that Assured Guaranty in instances where its AAA-rated exposure has additionalGuaranty's internal credit enhancement dueratings focus on future performance, rather than lifetime performance.

In addition, unless otherwise noted, the Company excludes amounts attributable to either (1) the existence of another security rated AAA that is subordinated to Assured Guaranty’s exposure or (2) Assured Guaranty’s exposure benefitingloss mitigation securities from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss,par and debt service outstanding, because it manages such credit enhancement, in management’s opinion, causes Assured Guaranty’s attachment point to be materially above the AAA attachment point.securities as investments and not insurance exposure.





Table of Contents


ASSURED GUARANTY LTD.

INDEX TO FORM 10-K
TABLE OF CONTENTS 
  Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I

ITEM 1.BUSINESS

Overview

Assured Guaranty Ltd. ("AGL"(“AGL” and, together with its subsidiaries, "Assured Guaranty"“Assured Guaranty” or the "Company"“Company”) is a Bermuda-based holding company incorporated in 2003 that provides, through its operating subsidiaries, credit protection products to the United States ("(“U.S.") and international public finance infrastructure(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,payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest and principal payments. The securities insured bypayment (“Debt Service”), the Company include taxableis required under its unconditional and tax-exempt obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issuedirrevocable financial guaranty to finance international infrastructure projects; and asset-backed securities issued by special purpose entities.pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection productsfinancial guaranty insurance directly to issuers and underwriters of public finance infrastructure and structured finance securities as well as to investors in such debt obligations. The Company guarantees debtobligations issued principally in the U.S. and the United Kingdom ("U.K"), and also guarantees obligations issued in manyother countries although its principal focus is on the U.S., as well as Europe and Australia.

On July 1, 2009, the Company acquired Financial Security Assurance Holdings Ltd. (renamed Assured Guaranty Municipal Holdings Inc., "AGMH"),regions, including Australia and AGMH's subsidiaries, from Dexia Holdings, Inc. ("Dexia Holdings"). AGMH's principal insurance subsidiary is Financial Security Assurance Inc. (renamed Assured Guaranty Municipal Corp., "AGM"). The acquisition, which the Company refers to as the AGMH Acquisition, did not include the acquisition of AGMH's former financial products business, which was comprised of its guaranteed investment contracts business, its medium term notes business and the equity payment agreements associated with AGMH's leveraged lease business (collectively, the "Financial Products Business"). The AGMH subsidiaries that conducted AGMH's former Financial Products Business were sold to Dexia Holdings prior to completion of the AGMH Acquisition and the Company entered into various agreements with Dexia SA (the parent of Dexia Holdings) and certain of its present and former subsidiaries (collectively, "Dexia"), in order to transfer to such Dexia entities the credit and liquidity risks associated with AGMH's former Financial Products Business. The agreements are described in additional detail in "Item 1A, Risk Factors—Risks Related to the AGMH Acquisition—The Company has exposure to credit and liquidity risks from Dexia."Western Europe.

The Company conducts its financial guaranty business on a direct basis from twothe following companies: AGM andAssured Guaranty Municipal Corp. ("AGM"), Municipal Assurance Corp. ("MAC"), Assured Guaranty Corp. ("AGC"), and Assured Guaranty (Europe) Ltd. ("AGE"). AGM writes insurance exclusively on U.S. public finance and global infrastructure risks. AGC underwrites global structured finance obligations as well as U.S. public finance and global infrastructure obligations. Neither company currently underwrites new U.S. residential mortgage backed securities transactions.It also conducts business through Assured Guaranty Re Ltd. ("AG Re"), a Bermuda-based reinsurer. The following is a description of AGL's three principal operating subsidiaries.subsidiaries:

Assured Guaranty Municipal Corp.

AGM an insurance companyis located and domiciled in New York, was organized in 1984 and commenced operations in 1985. Since mid-2008, it only providesAGM has provided financial guaranty insurance that protects against principal and interest payment defaults on debt obligations issued in the U.S. public finance and global infrastructure market.markets, including bonds issued by U.S. state or governmental authorities or notes issued to finance infrastructure projects. Previously, AGM also offered insurance and reinsurance in the global structured finance market.

market, including asset-backed securities issued by special purpose entities. AGM owns 100% offormerly was named Financial Security Assurance Inc. Assured Guaranty acquired AGM, together with its holding company Financial Security Assurance Holdings Ltd. (renamed Assured Guaranty Municipal Insurance Company (formerly FSA Insurance Company)Holdings Inc., which primarily provides reinsurance to AGM. It was"AGMH") and the subsidiaries owned by that holding company, on July 1, 2009.

Municipal Assurance Corp.MAC is located and domiciled in OklahomaNew York and has re-domesticated to New York.was organized in 2008. Assured Guaranty acquired MAC on May 31, 2012. On July 16, 2013, Assured Guaranty completed a series of transactions that increased the capitalization of MAC and resulted in MAC assuming a portfolio of geographically diversified U.S. public finance exposure from AGM and Assured Guaranty Municipal Insurance Company together own Assured Guaranty (Bermuda) Ltd. (formerly Financial Security Assurance International Ltd.), a BermudaAGC. MAC offers insurance company that also providesand reinsurance to AGM and previously provided insurance for transactions outsideon bonds issued by U.S. state or municipal governmental authorities, focusing on investment grade obligations in select sectors of the U.S. and European markets.municipal market.

Assured Guaranty Municipal Insurance CompanyCorp.AGC is located in turn owns 100%New York and domiciled in Maryland, was organized in 1985 and commenced operations in 1988. It provides insurance and reinsurance on debt obligations in the global structured finance market and also offers guarantees on obligations in the U.S. public finance and international infrastructure markets.

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; the cash consideration was paid from AGC's available funds and from the proceeds of a $200 million loan from AGC’s direct parent, Assured Guaranty US Holdings Inc. ("AGUS"). AGC repaid the loan in full to AGUS on April 14, 2015. 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, and is consistent with one of the Company's key business strategies of supplementing its book of business through acquisitions.

Assured Guaranty (Europe) Ltd. (formerly Financial Security Assurance (U.K.) Limited, "AGE"),AGE is a United Kingdom ("U.K.") incorporated company licensed as a U.K. insurance company and authorized to operate in various countries throughout the European Economic Area ("EEA"). It was organized in 1990 and issued its first financial guarantee in 1994. AGE providesoffers financial guaranty insuranceguarantees in both the international public finance and structured finance markets and is the primary entity from which the Company writes business in the EEA. As discussed further under "Business" below, AGE has agreed with its regulator that new business it writes would be guaranteed using a co-insurance structure pursuant to which AGE would co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGE must obtain the approval of the Prudential Regulation Authority ("PRA") before it can guarantee any new structured finance transaction.


6

Table of Contents

Assured Guaranty Corp.

AGC, an insurance company located in New York and domiciled in Maryland, was organized in 1985 and commenced operations in January 1988. It provides insurance that protects against principal and interest payment defaults on debt obligations in the U.S. public finance and the global infrastructure and structured finance markets. AGC owns 100% of Assured Guaranty (U.K.) Ltd. ("AGUK"), a company incorporated in the U.K. as a U.K. insurance company. The Company elected to place AGUK into run-off and the U.K. Financial Services Authority has approved its run-off plan.

Assured Guaranty Re Ltd.

Assured GuarantyAG Re Ltd. ("AG Re") is incorporated under the laws of Bermuda and is licensed as a Class 3B insurer under the Insurance Act 1978 and related regulations of Bermuda. AG Re owns, Assured Guaranty Overseas U.S. Holdings Inc., a Delaware corporation, which owns the entire share capital ofindirectly, Assured Guaranty Re Overseas Ltd. ("AGRO"), which is a Bermuda Class 3A and Class C insurer. AG Re and AGRO underwrite financial guaranty reinsurance and AGRO previously also underwrote residential mortgage reinsurance. AG Re and AGROThey write business as reinsurers of third-party primary insurers and as reinsurers/retrocessionaires of certain affiliated companies. AGRO, in turn, owns Assured Guaranty Mortgage Insurance Company, a New York corporation that is authorized to provide mortgage guaranty insurance.

On May 31, 2012,Assured Guaranty is the Company acquired Municipal and Infrastructure Assurance Corporation, which it has renamed Municipal Assurance Corporation ("MAC"), from Radian Asset Assurance Inc. ("Radian"). In January 2013,market leader in the Company announced its intention to launch MAC as a new financial guaranty insurer that provides insurance only on debt obligations in the U.S. public finance markets, in order to increase the Company's insurance penetration in such market.

The Company's insurance subsidiaries are chosen by obligors or investors to provide financial guaranty insurance on debt obligations for the Company's unconditional and irrevocable guaranty that protects against non-payment of scheduled principal and interest payments when due, and also because the debt or short-term credit ratings that such debt obligations would carry in the absence of the Company's credit enhancement would be lower than the financial strength ratings of the Company's insurance subsidiary that insures those obligations. When the debt obligations have the benefit of the Company's financial guaranty insurance, the rating agencies generally raise the debt or short-term credit ratings of such obligations to the same rating as the financial strength rating of the Assured Guaranty subsidiary that has guaranteed that obligation. Accordingly, investors in products insured by AGM, AGC or AGE frequently rely on rating agency ratings and a failure of AGM, AGC or AGE to maintain strong financial strength ratings or uncertainty over such ratings would have a negative impact on the demand for their insurance product.

Since 2008, the Company has been the most active provider of financial guaranty credit protection products.industry. The Company's position in the market has been strengthened bybenefited from its acquisition of AGMH in 2009, its ability to achieve and maintain investment-gradestrong financial strength ratings, its strong claims-paying resources, as comparedits proven willingness to that of many of its former competitors, whichmake claim payments to policyholders after obligors have faced significant financial distress since 2007 and have been unable to underwrite new business,defaulted, and its ability to achieve recoveries in respect of the claims that it has paid on insured residential mortgage-backed securities. However, since 2008, thesecurities and to resolve troubled municipal credits to which it had exposure.

The Company has continued to facefaces challenges in maintaining its market penetration. The challenges in 20122015 were primarily due to:

The sustainedSustained low interest rate environment in the U.S. InterestOver the last several years, interest rates generally have been historically low inlower than historical norms. In 2015, average daily 30-year municipal interest rates, as reflected by the U.S. and are expected to remain so for the near future. In 2012, the average yield on the Thomson Reutersbenchmark AAA 30-year Municipal Market Data (MMD) scale for AAA-rated bonds maturing in 30 years was 3.04%index published by Thomson Reuters ("MMD Index"), versus 4.23% in 2011. At the same time, the difference in yield between the MMD scale for A-rated General Obligation bonds maturing in 30 years versus the AAA benchmark narrowed to 74.5were approximately 35 basis points lower than their levels in 2012, versus 87.1 basis points2014, a year in 2011.which rates were already low by historical standards. As a result, the difference in yield (or the credit spread) between a bond insured by Assured Guaranty and an uninsured bond has not been substantial,provided comparatively little room for issuer savings and the Companyinsurance premium, and Assured Guaranty has seen a lower demand for its financial guaranty insurance from issuers over the past several years than it has in the past.saw historically.

Continued uncertainty overIncreased competition. The Company estimates, based on third party industry compilations, that of the insured U.S. public finance bonds issued in the primary market in 2015, the Company insured approximately 60% of the par, while Build America Mutual Assurance Company ("BAM"), insured 38% of the par. National Public Finance Guarantee Corporation ("National"), an affiliate of MBIA Insurance Corporation ("MBIA"), insured the remaining 2% of the balance. The continued presence in the market of BAM affects the Company's financial strength ratings. The Company's financial strength ratings have been subjectinsured volume as well as the amount of premium the Company is able to substantial uncertainty in recent years due to periodic rating agency reviews for possible downgrade and actual downgrades. In January 2011, Standard & Poor's Ratings Services ("S&P") requested comments on proposed changes to its bond insurance ratings criteria, noting that it could lower its financial strength ratings on existing investment-grade bond insurers by one or more rating categories if the proposed criteria were adopted. The resulting uncertainty over the Company's financial strength ratings was not resolvedcharge.

7

Table of Contents

until November 30, 2011, when S&P downgraded the counterparty credit and financial strength ratings of AGM and AGC from AA+ to AA- (Stable Outlook). In March 2012, Moody's Investors Service, Inc. ("Moody's") placed the ratings of AGL and its subsidiaries, including the insurance financial strength ratings of AGL's insurance subsidiaries, on review for possible downgrade. Among the considerations cited by Moody's in its decision to review the ratings of AGM and AGC were (i) the constrained business opportunities reflecting lower origination volume and reduced demand for financial guaranty insurance across sectors, (ii) the continued economic stress in the U.S. and in Europe, resulting in an elevated portion of Assured Guaranty's portfolio in risks assessed as below investment grade, and (iii) the pressure on new business margins due to low interest rates and tight credit spreads. Moody's did not complete its review until January 17, 2013, when it downgraded the financial strength ratings of AGM and AGC from Aa3 to A2 and A3, respectively, and that of AG Re from A1 to Baa1. The uncertainty over the Company's financial strength ratings during the long review period had a negative effect on the demand for the Company's financial guaranties.

In addition, the Company's business continues to be affected by the rating agencies' past upgrades of their ratings of municipal bonds and/or recalibration of their rating scales applied to U.S. public finance issuances and issuers. These actions, combined with the downgradesnegative perceptions of the Company's financial strength ratings, have decreased the percentagevalue of the market that had underlying investment grade ratings lower than the Company's financial strength ratings and resulted in fewer opportunities for the Company to provide its financial guaranty insurance. Furthermore, the Company's business continues to be affected by continuing uncertainty over the value of financial guaranty insurance sold by other companies.companies that had been active in the industry. The losses suffered by such other insurers that had previously been active in the financial guaranty industry resulted in those companies being downgraded to below investment gradebelow-investment-grade ("BIG") levels by the rating agencies and/or subject to intervention by their state insurance regulators. In a number of cases, the state insurance regulators prevented the distressed financial guaranty insurers from paying claims or paying such claims in full; in addition, such financial guaranty insurers were perceived by market participants not to be actively conducting surveillance on transactions or fully exercising rights and remedies to mitigate losses.

The Company believes that issuers and investors in securities will continue to purchase financial guaranty insurance, especially if interest rates rise and credit spreads widen. U.S. municipalities have budgetary requirements that are best met through financings in the fixed income capital markets. In particular, smaller municipal issuers may needfrequently use financial guaranties in order to access the capital markets with new debt offerings at a lower all-in interest rate than on an unguaranteed basis. In addition, the Company expects long-term debt financings for infrastructure projects will grow throughout the world, as will the financing needs associated with privatization initiatives or refinancing of infrastructuresinfrastructure projects in developed countries.

The Company's Financial Guaranty Portfolio

The Company primarily conducts its business through subsidiaries located in the U.S., Europe and Bermuda. The Company generally insures obligations issued in the U.S., although it has also guaranteed securities issued in Europe, Australia, South America and other international markets.

Financial guaranty insurance generally provides an unconditional and irrevocable guaranty that protects the holder of a debt instrument or other monetary obligation against non-payment of scheduled principal and interest payments when due. Upon an obligor's default on scheduled principal or interest payments due on the debt obligation, the Company is generally required under the financial guaranty contract to pay the investor the principal or interest shortfall due.

Financial guaranty insurance may be issued to all of the investors of the guaranteed series or tranche of a municipal bond or structured finance security at the time of issuance of those obligations or it may be issued in the secondary market to only specific individual holders of such obligations who purchase the Company's credit protection.

Both issuers of and investors in financial instruments may benefit from financial guaranty insurance. Issuers benefit when they purchase financial guaranty insurance for their new issue debt transaction because the insurance may have the effect of lowering an issuer's interest cost over the life of the debt transaction to the extent that the insurance premium charged by the Company is less than the net present value of the difference between the yield on the obligation insured by Assured Guaranty (which carries the credit rating of the specific subsidiary that guarantees the debt obligation) and the yield on the debt obligation if sold on the basis of its uninsured credit rating. The principal benefit to investors is that the Company's guaranty provides certainty that scheduled payments will be received when due. The guaranty may also improve the marketability of obligations issued by infrequent or unknown issuers, as well as obligations with complex structures or backed by asset classes new to the market. This benefit, which we call a "liquidity benefit," results from the increase in secondary market trading values for Assured Guaranty-insured obligations as compared to uninsured obligations by the same issuer. In general, the liquidity benefit of financial guaranties is that investors are able to sell insured bonds more quickly and, depending on the financial strength rating of the insurer, at a higher secondary market price than for uninsured debt obligations.

8

Table of Contents


As an alternative to traditional financial guaranty insurance, prior to April 2009, the Company also has provided credit protection relating to a particular security or obligor through a credit derivative contract, such as a credit default swap ("CDS"). Under the terms of a CDS, the seller of credit protection agrees to make a specified payment to the buyer of credit protection if one or more specified credit events occurs with respect to a reference obligation or entity. In general, the credit events specified in the Company's CDSs are for interest and principal defaults on the reference obligation. One difference between CDSs and traditional primary financial guaranty insurance is that credit default protection is typically provided to a particular buyer rather than to all holders of the reference obligation. As a result, the Company's rights and remedies under a CDS may be different and more limited than on a financial guaranty of an entire issuance. Credit derivatives may be preferred by some investors, however, because they generally offer the investor ease of execution and standardized terms as well as more favorable accounting or capital treatment. The Company has not provided credit protection through a CDS since March 2009, other than in connection with loss mitigation and other remediation efforts relating to its existing book of business, and does not expect to write new credit default swaps.

The Company also offers credit protection through reinsurance, and in the past has provided reinsurance to other financial guaranty insurers with respect to their guaranty of public finance, infrastructure and structured finance obligations. The Company believes that the opportunities currently available to it in the reinsurance market consist primarily of offering credit protection through a reinsurance execution and also potentially assuming portfolios of transactions from inactive primary insurers and recapturing portfolios that it has previously ceded to third party reinsurers.

Financial Guaranty Portfolio

The Company primarily conducts its business through subsidiaries located in the U.S., Europe and Bermuda. The Company generally insures obligations issued in the U.S., although it has also guaranteed securities issued in Europe, Australia and other international markets.

Financial guaranty insurance generally provides an unconditional and irrevocable guaranty that protects the holder of a debt instrument or other monetary obligation against non-payment of scheduled principal and interest payments when due. Upon an obligor's default on scheduled principal or interest payments due on the debt obligation, whether due to its insolvency or otherwise, the Company is generally required under the financial guaranty contract to pay the investor the principal or interest shortfall then due.

Financial guaranty insurance may be issued to all of the investors of the guaranteed series or tranche of a municipal bond or structured finance security at the time of issuance of those obligations or it may be issued in the secondary market to only specific individual holders of such obligations who purchase the Company's credit protection.

7

Table of Contents


Both issuers of and investors in financial instruments may benefit from financial guaranty insurance. Issuers benefit when they purchase financial guaranty insurance for their new issue debt transaction because the insurance may have the effect of lowering an issuer's interest cost over the life of the debt transaction to the extent that the insurance premium charged by the Company is less than the net present value of the difference between the yield on the obligation insured by Assured Guaranty (which carries the credit rating of the specific subsidiary that guarantees the debt obligation) and the yield on the debt obligation if sold on the basis of its uninsured credit rating. The principal benefit to investors is that the Company's guaranty provides certainty that scheduled payments will be received when due. The guaranty may also improve the marketability of obligations issued by infrequent or unknown issuers, as well as obligations with complex structures or backed by asset classes new to the market. This benefit to market liquidity, which we call a "liquidity benefit," results from the increase in secondary market trading values for Assured Guaranty-insured obligations as compared with uninsured obligations by the same issuer. In general, the liquidity benefit of financial guaranties is that investors are able to sell insured bonds more quickly and, depending on the financial strength rating of the insurer, at a higher secondary market price than for uninsured debt obligations.

As an alternative to traditional financial guaranty insurance, in the past the Company also provided credit protection relating to a particular security or obligor through a credit derivative contract, such as a credit default swap ("CDS"). Under the terms of a CDS, the seller of credit protection agreed to make a specified payment to the buyer of credit protection if one or more specified credit events occurs with respect to a reference obligation or entity. In general, the credit events specified in the Company's CDS are for interest and principal defaults on the reference obligation. One difference between CDS and traditional primary financial guaranty insurance is that credit default protection was typically provided to a particular buyer of credit protection, who is not always required to own the reference obligation, rather than to all investors in the reference obligation. As a result, the Company's rights and remedies under a CDS may be different and more limited than on a financial guaranty of an entire issuance. Credit derivatives were preferred by some investors, however, because they generally offered the investor ease of execution and standardized terms as well as more favorable accounting or capital treatment. Due to changes in the regulatory environment, the Company has not provided credit protection through a CDS since March 2009, other than in connection with loss mitigation and other remediation efforts relating to its existing book of business. See the Risk Factor captioned "Changes in or inability to comply with applicable law could adversely affect the Company's ability to do business" under Risks Related to GAAP and Applicable Law in "Item 1A. Risk Factors" for additional detail about the regulatory environment.

The Company also offers credit protection through reinsurance, and in the past has provided reinsurance to other financial guaranty insurers with respect to their guaranty of public finance, infrastructure and structured finance obligations. The Company believes that the opportunities currently available to it in the reinsurance market consist primarily of potentially assuming portfolios of transactions from inactive primary insurers and recapturing portfolios that it has previously ceded to third party reinsurers.

The Company's financial guaranty direct and assumed businesses provide credit enhancement,protection on public finance/finance, infrastructure and structured finance obligations.

Public Finance and Infrastructure  Public finance obligations in For information on the U.S. consist primarily of debt obligations issued by or on behalf of states or their political subdivisions (counties, cities, towns and villages, utility districts, public universities and hospitals, public housing and transportation authorities), other public and quasi public entities, private universities and hospitals, and investor owned utilities. These obligations generally are supported by the taxing authoritygeographic breakdown of the issuer, the issuer's or underlying obligor's ability to collect fees or assessmentsCompany's financial guaranty portfolio and on its income and revenue by jurisdiction, see "Geographic Distribution of Net Par Outstanding" in Note 4, Outstanding Exposure, and "Provision for certain projects or public services or revenues from operations. This market also includes project finance obligations, as well as other structured obligations supporting infrastructure and other public works projects. Non-U.S. public finance obligations includes regulated utility obligations and obligations of local, municipal, regional or national governmental authorities located outsideIncome Taxes" in Note 12, Income Taxes, of the United States; they are described in greater detail under "Non-U.S. Public Finance Obligations" below. Infrastructure obligations in the U.S.Financial Statements and internationally consist primarily of debt obligations issued by a project or entity where the debt service is supported by the cash flows from the underlying project. Infrastructure transactions may also benefit from payments from a governmental or municipal tax authority or revenue source, although the principal payment source for an infrastructure transaction is generally from the cash flows of the underlying project itself.

Structured Finance  Structured finance obligations in both the U.S. and international markets are generally backed by pools of assets, such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value, that are generally held by a non-recourse special purpose issuing entity. Structured finance obligations can be "funded" or "synthetic." Funded structured finance obligations generally have the benefit of one or more forms of credit enhancement, such as over-collateralization and/or excess cash flow, to cover payment default risks associated with the related assets. Synthetic structured finance obligations generally take the form of credit derivatives or credit linked notes that reference a pool of securities or loans, with a defined deductible or over-collateralization to cover credit risks associated with the referenced securities or loans.
Supplementary Data.

U.S. Public Finance Obligations   The Company insures and reinsures a number of different types of U.S. public finance obligations, including the following:

General Obligation Bonds are full faith and credit bonds that are issued by states, their political subdivisions and other municipal issuers, and are supported by the general obligation of the issuer to pay from available funds and by a pledge of the issuer to levy ad valorem taxes in an amount sufficient to provide for the full payment of the bonds.
     

9

Table of Contents

Tax-Backed Bonds are obligations that are supported by the issuer from specific and discrete sources of taxation. They include tax-backed revenue bonds, general fund obligations and lease revenue bonds. Tax-backed obligations may be secured by a lien on specific pledged tax revenues, such as a gasoline or excise tax, or incrementally from growth in property tax revenue associated with growth in property values. These obligations also include obligations secured by special assessments levied against property owners and often benefit from issuer covenants to enforce collections of such assessments and to foreclose on delinquent properties. Lease revenue bonds typically are general fund obligations of a municipality or other governmental authority that are subject to annual appropriation or abatement; projects financed and subject to such lease payments ordinarily include real estate or equipment serving an essential public purpose. Bonds in this category also include moral obligations of municipalities or governmental authorities.

8

Table of Contents

  
Municipal Utility Bonds are obligations of all forms of municipal utilities, including electric, water and sewer utilities and resource recovery revenue bonds. These utilities may be organized in various forms, including municipal enterprise systems, authorities or joint action agencies.

Transportation Bonds include a wide variety of revenue-supported bonds, such as bonds for airports, ports, tunnels, municipal parking facilities, toll roads and toll bridges.

Healthcare Bonds are obligations of healthcare facilities, including community based hospitals and systems, as well as of health maintenance organizations and long-term care facilities.

Higher Education Bonds are obligations secured by revenue collected by either public or private secondary schools, colleges and universities. Such revenue can encompass all of an institution's revenue, including tuition and fees, or in other cases, can be specifically restricted to certain auxiliary sources of revenue.

Housing Revenue Bonds are obligations relating to both single and multi-family housing, issued by states and localities, supported by cash flow and, in some cases, insurance from entities such as the Federal Housing Administration.

Infrastructure Bonds include obligations issued by a variety of entities engaged in the financing of infrastructure projects, such as roads, airports, ports, social infrastructure and other physical assets delivering essential services supported by long-term concession arrangements with a public sector entity.

Investor-Owned Utility Bonds are obligations primarily backed by investor-owned utilities, first mortgage bond obligations of for-profit electric or water utilities providing retail, industrial and commercial service, and also include sale-leaseback obligation bonds supported by such entities.

Other Public Finance Bonds include other debt issued, guaranteed or otherwise supported by U.S. national or local governmental authorities, as well as student loans, revenue bonds, and obligations of some not-for-profit organizations.

A portion of the Company's exposure to tax-backed bonds, municipal utility bonds and transportation bonds constituteconstitutes "special revenue" bonds under the U.S. Bankruptcy Code. Even if an obligor under a special revenue bond were to seek protection from creditors under Chapter 9 of the U.S. Bankruptcy Code, holders of the special revenue bond should continue to receive timely payments of principal and interest during the bankruptcy proceeding, subject to the special revenues being sufficient to pay debt service and the lien on the special revenues being subordinate to the necessary operating expenses of the project or system from which the revenues are derived. While "special revenues" acquired by the obligor after bankruptcy remain subject to the pre-petition pledge, special revenue bonds may be adjusted if their claim is determined to be "undersecured."

Non-U.S. Public Finance Obligations    The Company insures and reinsures a number of different types of non-U.S. public finance obligations, which consist of both infrastructure projects and other projects essential for municipal function such as regulated utilities. Credit support for the exposures written by the Company may come from a variety of sources, including some combination of subordinated tranches, excess spread, over-collateralization or cash reserves. Additional support also may be provided by transaction provisions intended to benefit noteholders or credit enhancers. The types of non-U.S. public finance securities the Company insures and reinsures include the following:


10

Table of Contents

Infrastructure Finance Obligations are obligations issued by a variety of entities engaged in the financing of international infrastructure projects, such as roads, airports, ports, social infrastructure, and other physical assets delivering essential services supported either by long-term concession arrangements with a public sector entity or a regulatory regime. The majority of the Company's international infrastructure business is conducted in the U.K.

Regulated Utilities Obligations are issued by government-regulated providers of essential services and commodities, including electric, water and gas utilities. The majority of the Company's international regulated utility business is conducted in the U.K.

Pooled Infrastructure Obligations are synthetic asset-backed obligations that take the form of CDS obligations or credit-linked notes that reference either infrastructure finance obligations or a pool of such obligations, with a defined deductible to cover credit risks associated with the referenced obligations.

9

Table of Contents


Other Public Finance Obligations include obligations of local, municipal, regional or national governmental authorities or agencies.

U.S. and Non-U.S. Structured Finance Obligations    The Company insures and reinsures a number of different types of U.S. and non-U.S. structured finance obligations. Credit support for the exposures written by the Company may come from a variety of sources, including some combination of subordinated tranches, excess spread, over-collateralization or cash reserves. Additional support also may be provided by transaction provisions intended to benefit noteholders or credit enhancers. The types of U.S. and Non-U.S. Structured Finance obligations the Company insures and reinsures include the following:

Pooled Corporate Obligations are securities primarily backed by various types of corporate debt obligations, such as secured or unsecured bonds, bank loans or loan participations and trust preferred securities ("TruPS"). These securities are often issued in "tranches," with subordinated tranches providing credit support to the more senior tranches. The Company's financial guaranty exposures generally are to the more senior tranches of these issues.

Residential Mortgage-Backed Securities ("RMBS") and Home Equity Securities are obligations backed by closed-end first mortgage loans and closed- and open-end first and second lien mortgage loans or home equity loans on one-to-four family residential properties, including condominiums and cooperative apartments. First lien mortgage loan products in these transactions include fixed rate, adjustable rate and option adjustable-rate mortgages. The credit quality of borrowers covers a broad range, including "prime", "subprime" and "Alt-A". A prime borrower is generally defined as one with strong risk characteristics as measured by factors such as payment history, credit score, and debt-to-income ratio. A subprime borrower is a borrower with higher risk characteristics, usually as determined by credit score and/or credit history. An Alt-A borrower is generally defined as a prime quality borrower that lacks certain ancillary characteristics, such as fully documented income. The Company has not insured a RMBS transaction since January 2008 and does not anticipate doing so again.2008.

"Financial Products Business" is how the Company refers to the guaranteed investment contracts ("GICs") portion of a line of business previously conducted by AGMH that the former Financial Products BusinessCompany did not acquire when it purchased AGMH in 2009 from Dexia SA and that is being run off. That line of AGMH. AGM has issued financial guaranty insurance policies onbusiness was comprised of AGMH's guaranteed investment contracts business, its medium term notes business and the GICs and in respect of the GIC business that cannot be revoked or cancelled.equity payment agreements associated with AGMH's leveraged lease business. Assured Guaranty is indemnified by Dexia SA and certain of its affiliates ("Dexia") against loss from the former Financial Products Business by Dexia. The Financial Products Business is currently being run off and, as of December 31, 2012, the accreted value of the liabilities of the GIC issuers was $3.6 billion, compared to $4.7 billion as of December 31, 2011. As of December 31, 2012, with respect to the FSAM assets, the aggregate accreted principal balance was approximately $5.4 billion, the aggregate market value was approximately $5.3 billion and the aggregate market value after agreed reductions was approximately $4.1 billion. Cash and net derivative value constituted another $0.2 billion of assets. Accordingly, as of December 31, 2012, the aggregate fair value (after agreed reductions) of the assets supporting the GIC business exceeded the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business.
Structured Credit Securities include program-wide credit enhancement for commercial paper conduits in the U.S., and securities issued in whole business securitizations and intellectual property securitizations. Program-wide credit enhancement generally involves insuring against the default of asset-backed securities in a bank-sponsored commercial paper conduit. Securities issued in whole business and intellectual property securitizations are backed by revenue-producing assets sold to a limited-purpose company by an operating company, including franchise agreements, lease agreements, intellectual property and real property.Business.

Consumer Receivables Securities are obligations backed by non-mortgage consumer receivables, such as student loans, automobile loans and leases, credit card receivablesmanufactured home loans and other consumer receivables.

11

Table of Contents


Commercial Mortgage-Backed Securities ("CMBS") are obligations backed by pools of commercial mortgages on office, multi-family, retail, hotel, industrial and other specialized or mixed-use properties.

Commercial Receivables Securities are obligations backed by equipment loans or leases, fleet autoaircraft and aircraft engine financings, business loans and trade receivables. Credit support is derived from the cash flows generated by the underlying obligations, as well as property or equipment values as applicable.

Insurance Securitization Obligations are obligations secured by the future earnings from pools of various types of insurance/reinsurance policies and income produced by invested assets.

Other Structured Finance Obligations are obligations backed by assets not generally described in any of the other described categories. One such type of asset is a tax benefit to be realized by an investor in one of the Federal or state programs that permit such investor to receive a credit against taxes (such as Federal corporate income tax or state insurance premium tax) for making qualified investments in specified enterprises, typically located in designated low-income areas.


10

Table of Contents

Credit Policy and Underwriting Procedure

Credit Policy

The Company establishes exposure limits and underwriting criteria for obligors, sectors and countries, single risks and in the case of structured finance obligations, servicers. Single riskand infrastructure exposures, for individual transactions. Risk exposure limits are established in relation to the Company's capital base andfor single obligors are based on the Company's assessment of potential frequency and severity of loss as well as other factors, such as historical and stressed collateral performance. Sector limits are based on the Company'sCompany’s view of stress losses for the sector and on its assessment of intra-sector correlation, as well as other factors.correlation. Country limits are based on long term foreign currency ratings, history of political stability,the size and stability of the relevant economy, and other factors.the Company’s view of the political environment and legal system. All of the foregoing limits are established in relation to the Company's capital base.

Critical risk factors thatFor U.S. public finance transactions, the Company would analyze for proposed public finance exposures include, for example,focuses principally on the credit quality of the issuer,obligor based on population size and trends, wealth factors, and strength of the economy. The Company evaluates the obligor’s liquidity position; its fiscal management policies and track record; its ability to raise revenues and control expenses; and its exposure to derivative contracts and to debt subject to acceleration. The Company assesses the obligor’s pension and other post-employment benefits obligations and funding policies and evaluates the obligor’s ability to adequately fund such obligations in the future. The Company analyzes other critical risk factors including the type of issue,issue; the repayment source, thesource; pledged security, pledged,if any; the presence of restrictive covenants and the issue's maturity date.tenor of the risk. The Company has also been focusing onconsiders the ability of obligors to file for bankruptcy or receivership under applicable statutes (and on related statutes that provide for state oversight or fiscal control over financially troubled obligors);. In addition, the amountCompany weighs the risk of liquidity available to the obligors for debt payment, including the obligors' exposure to derivative contracts and to debt subject to acceleration; and to the abilitya rating agency downgrade of the obligors to increase revenue. Underwritingan obligation's underlying uninsured rating.
For certain transactions, underwriting considerations include (1) the classification of the transaction, reflecting economic and social factors affecting that bond type, includingmay also include: the importance of the proposed project to the community, (2)community; the financial management of the project and of the issuer, (3)a specific project; the potential refinancing risk,risk; and (4) various legal andor administrative factors. In cases where the primary source of repayment is the taxing or rate setting authority of a public entity, such as general obligation bonds, transportation bonds and municipal utility bonds, emphasis is placed on the overall financial strength of the issuer, the economic and demographic characteristics of the taxpayer or ratepayer and the strength of the legal obligation to repay the debt. risks.
In cases of not-for-profit institutions, such as healthcare issuers and private higher education issuers, emphasis is placed onthe Company emphasizes the financial stability of the institution, its competitive position and its management experience.

For U.S. infrastructure transactions, the Company's due diligence is generally the same as it is for international infrastructure transactions, as described below.
StructuredU.S. structured finance obligations generally present three distinct forms of risk: (1) asset risk, pertaining to the amount and quality of assets underlying an issue; (2) structural risk, pertaining to the extent to which an issue's legal structure provides protection from loss; and (3) execution risk, which is the risk that poor performance by a servicer or collateral manager contributes to a decline in the cash flow available to the transaction. Each riskof these risks is addressed in turn through the Company's underwriting process.
Generally, the amount and quality of asset coverage required with respect to a structured finance exposure is dependent upon both the historic performance of the subject asset class, or those assets actually underlyingas well as the risk proposed to be insured or assumed through reinsurance.Company’s view of the future performance of the subject assets. Future performance expectations are developed from this history,historical loss experience, taking into account economic, social and political factors affecting that asset class as well as, to the extent feasible, the subject assets themselves. Conclusions are then drawn about the amount of over-collateralization or other credit enhancement necessary in a particular transaction in order to protect investors (and therefore the insurer or reinsurer) against poor asset performance. In addition, structured securities usually are designed to protect investors (and therefore the guarantor)insurer or reinsurer) from the bankruptcy or insolvency of the entity whichthat originated the underlying assets, as well as the bankruptcy or insolvency of the servicer or manager of those assets.


12

TableThe Company conducts extensive due diligence on the collateral that supports its insured transactions. The principal focus of Contentsthe due diligence is to confirm the underlying collateral was originated in accordance with the stated underwriting criteria of the asset originator. To this end, such collateral is reviewed, either internally by the Company or by outside consultants that the Company engages. The Company also conducts audits of servicing or other management procedures, reviewing critical aspects of these procedures such as including cash management and collections. The Company may, for certain transactions, obtain background checks on key managers of the originator, servicer or manager of the obligations underlying that transaction.

In general, non-U.S. transactions are comprised of structured finance transactions, transactions with regulated utilities, or infrastructure transactions. For internationalthese transactions, the Company undertakes an analysis of the country or countries in which the risk resides, is performed. Such analysiswhich includes an assessment of the political risk as well as the economic and demographic characteristics of the country or countries.characteristics. For each transaction, the

11

Table of Contents

Company also performs an assessment of the legal jurisdictionframework governing the transaction and the laws affecting the underlying assets supporting the obligations.obligations to be insured.

The underwriting of structured finance and regulated utilities is generally the same as for U.S. transactions, but for considerations related to the specific country as described in the previous paragraph. For infrastructure transactions, the Company reviews the type of project (e.g., hospital, road, social housing, transportation or student accommodation) and the source of repayment of the debt. For certain transactions, debt service and operational expenses are covered by availability payments made by either a governmental entity or a not-for-profit entity. The availability payments are due if the project is available for use, regardless of whether the project actually is in use. The principal risks for such transactions are construction risk and operational risk. The project must be completed on time and must be available for use during the life of the concession. For other transactions, notably transactions secured by toll-roads, revenues derived from the project must be sufficient to make debt service payments as well as cover operating expenses during the concession period. The Company undertakes due diligence to assess demand risks in such projects and often uses consultants to help assess future demand and revenue and expense projections.
The Company’s due diligence for infrastructure projects also includes: a financial review of the entity seeking the development of the project (usually a governmental entity or university); a financial and operational review of the developer, the construction companies, and the project operator; and a financial review of the various providers of operational financial protection for the bondholders (and therefore the insurer), including construction surety providers, letter-of-credit providers, liquidity banks or account banks. The Company uses outside consultants to review the construction program and to assess whether the project can be completed on time and on budget. The Company projects the cost of replacing the construction company, including delays in construction, in the event that a construction company is unable to complete the construction for any reason. Construction security packages are sized appropriately to cover these risks and the Company requires such coverage from credit-worthy institutions.
Underwriting Procedure

Each transaction underwritten by the Company involves persons with different expertise across various departments within the Company. The Company's transaction underwriting teams include both underwriting and legal personnel, who analyze the structure of a potential transaction and the credit and legal issues pertinent to the particular line of business or asset class, and accounting and finance personnel, who review the more complex transactions for compliance with applicable accounting standards and investment guidelines.

In the public finance portion of the Company's financial guaranty direct business, underwriters generally analyze the issuer's historical financial statements and, where warranted, develop stress case projections to test the issuers' ability to make timely debt service payments under stressful economic conditions. In the structured and infrastructure finance portionportions of the Company's financial guaranty direct business, underwriters generally use computer-based financial models in order to evaluate the ability of the transaction to generate adequate cash flow to service the debt under a variety of scenarios. The models include economically-stressedeconomically stressed scenarios that the underwriters use for their assessment of the potential credit risk inherent in a particular transaction. For financial guaranty reinsurance transactions, stress model results may be provided by the primary insurer. Stress models may also be developed internally by the Company's underwriters and reflect both empirical research as well asand information gathered from third parties, such as rating agencies or investment banks or servicers.banks. The Company may also performengage advisors such as consultants and external counsel to assist in analyzing a transaction's financial or legal risks. The Company may also conduct a due diligence review when the underwriters believe that such a review is necessary to assess properly a particular transaction. A due diligence review may include,includes, among other things, a site visit to the project or facility, meetings with issuer management, review of underwriting and operational procedures, file reviews, and review of financial procedures and computer systems. The Company may also engage advisors such as consultants and external counsel to assist in analyzing a transaction's financial or legal risks.

Upon completion of the underwriting analysis, the underwriter prepares a formal credit report that is submitted to a credit committee for review. An oral presentation is usually made to the committee, followed by questions from committee members and discussion among the committee members and the underwriters. In some cases, additional information may be presented at the meeting or required to be submitted prior to approval. Signatures ofEach credit committee members are receiveddecision is documented and any further requirements, such as specific terms or evidence of due diligence, are noted. The Company currently has fourCompany's credit committees are composed of senior officers of the Company. The committees are organized by asset class, such as for public finance or structured finance, or along regulatory lines, to assess the various potential exposures.


12

Table of Contents

Risk Management Procedures

Organizational Structure

The Company's policies and procedures relating to risk assessment and risk management are overseen by its Board of Directors. The Board takes an enterprise-wide approach to risk management that is designed to support the Company's business plans at a reasonable level of risk. A fundamental part of risk assessment and risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The Board of Directors annually approves the Company's business plan, factoring risk management into account. It also approves the Company's risk appetite statement, which articulates the Company's tolerance for risk and describes the general types of risk that the Company accepts or attempts to avoid. The involvement of the Board in setting the Company's business strategy is a key part of its assessment of management's risk tolerance and also a determination of what constitutes an appropriate level of risk for the Company.

While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk assessment and risk management. The Risk Oversight Committee of the Board of Directors oversees the standards, controls, limits, underwriting guidelines and policies that the Company establishes and implements in respect of credit underwriting and risk management. It focuses on management's assessment and management of both (i) credit risks and (ii) other risks, including, but not limited to, financial, legal and operational risks, and risks relating to the Company's reputation and ethical standards. In addition, the Audit Committee of the Board of Directors is responsible for, among other matters, reviewing policies and processes related to the evaluation of risk assessment and risk management, including the Company's major financial risk exposures and the steps management has taken to monitor and control such exposures. It also reviews compliance with legal and regulatory requirements. Furthermore, theThe Compensation Committee of the Board of Directors reviews compensation-related risks to the Company. The Finance Committee of the Board of Directors oversees the investment of the Company's investment portfolio and the Company's capital structure, liquidity, financing arrangements, rating agency matters, and any corporate development activities in support of the Company's financial plan. The Nominating and Governance Committee of the Board of Directors oversees risk at the Company by developing appropriate corporate governance guidelines and identifying qualified individuals to become board members.


13

Table of Contents

The Company has established a number of management committees to develop underwriting and risk management guidelines, policies and procedures for the Company's insurance and reinsurance subsidiaries that are tailored to their respective businesses, providing multiple levels of credit review and analysis.

Portfolio Risk Management Committee—CommitteeThis committee establishes company-wide credit policy for the Company's direct and assumed business. It implements specific underwriting procedures and limits for the Company and allocates underwriting capacity among the Company's subsidiaries. The Portfolio Risk Management Committee focuses on measuring and managing credit, market and liquidity risk for the overall company. All transactions in new asset classes or new jurisdictions must be approved by this committee.

U.S. Management Committee—CommitteeThis committee establishes strategic policy and reviews the implementation of strategic initiatives and general business progress in the U.S. The U.S. Management Committee approves risk policy at the U.S. operating company level.

Risk Management Committees—CommitteesThe U.S., AGE, AG UKU.K. and AG Re risk management committees conduct an in-depth review of the insured portfolios of the relevant subsidiaries, focusing on varying portions of the portfolio at each meeting. They assign internal ratings of the insured transactions and review sector reports, monthly product line surveillance reports and compliance reports.

Workout Committee—CommitteeThis committee receives reports from Surveillance and Workout personnel on transactions that might benefit from active loss mitigation and developsor risk reduction, and approves loss mitigation or risk reduction strategies for such transactions.

Reserve Committees—CommitteesOversight of reserving risk is vested in the U.S. Reserve Committee, the AG Re Reserve Committee and the U.K. Reserve Committee. The committees review the reserve methodology and assumptions for each major asset class or significant below-investment grade ("BIG")BIG transaction, as well as the loss projection scenarios used and the probability weights assigned to those scenarios. The U.S. Reserve Committee establishesreserve committees establish reserves for AGC and AGM,the relevant subsidiaries, taking into consideration the supporting information provided by Surveillance personnel.


13

Table of Contents

The Company's surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio, including exposures in both the financial guaranty direct and assumed businesses. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate.to management. All transactions in the insured portfolio are assigned internal credit ratings, and surveillance personnel are responsible for recommendingrecommend adjustments to those ratings to reflect changes in transaction credit quality.

The Company's workout personnel are responsible for managing workout, and loss mitigation and risk reduction situations. They work together with the Company's surveillance personnel to develop and implement strategies on transactions that are experiencing loss or may be likely tocould possibly experience loss. They develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies (including its rights to require that sellers or originators repurchase loans from residential mortgage-backed securities transactions if the seller or originator has breached its representations and warranties regarding the loans) and mitigate itspotential losses. The Company's workout personnel also engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the Company's litigation proceedings. They may also make open market or negotiated purchases of securities that the Company has insured, andor negotiate or otherwise implement consensual terminations of insurance coverage prior to contractual maturity. The Company's workout personnel work with servicers of residential mortgage-backed securities transactions to enhance their performance. At the onset of the financial crisis, the Company shifted personnel to loss mitigation and workout activities and hired new personnel to augment its efforts in this area.

Direct Business

The Company monitors the performance of each risk in its portfolio as well asand tracks risk aggregations.aggregation of risk. The review cycle and scope vary based upon transaction type and credit quality. In general, the review process includes the collection and analysis of information from various sources, including trustee and servicer reports, financial statements, and reports, general industry or sector news and analyses, and rating agency reports. For public finance risks, the surveillance process includes monitoring general economic trends, developments with respect to state and municipal finances, and the financial situation of the issuers. For structured finance transactions, the surveillance process can include monitoring transaction performance data and cash flows, compliance with transaction terms and conditions, and evaluation of servicer or collateral manager performance and financial condition. Additionally, the Company uses various quantitative tools and models to assess

14

Table of Contents

transaction performance and identify situations where there may have been a change in credit quality. For all transactions, surveillance activities may include discussions with or site visits to issuers, servicers or other parties to a transaction.

Assumed Business

For transactions that the Company hadhas assumed, in the past as to which it still has exposure, the ceding insurers are responsible for conducting ongoing surveillance of the exposures that have been ceded to the Company. The Company's surveillance personnel monitor the ceding insurer's surveillance activities on exposures ceded to the Company through a variety of means, including but not limited to, reviews of surveillance reports provided by the ceding insurers, and meetings and discussions with their analysts. The Company's surveillance personnel also monitor general news and information, industry trends and rating agency reports to help focus surveillance activities on sectors or credits of particular concern. For certain exposures, the Company also will undertake an independent analysis and remodeling of the transaction.exposure. In the event of credit deterioration of a particular exposure, more frequent reviews of the ceding company's risk mitigation activities are conducted. The Company's surveillance personnel also take steps to ensure that the ceding insurer is managing the risk pursuant to the terms of the applicable reinsurance agreement. To this end, the Company conducts periodic reviews of ceding companies' surveillance activities and capabilities. That process may include the review of the insurer's underwriting, surveillance and claim files for certain transactions.

Ceded Business

As part of its risk management strategy, the Company has sought in the pastseeks to obtain third party reinsurance or retrocessions and may also periodically enter into other arrangements to reduce its exposure to risk concentrations, such as for single risk limits, portfolio credit rating or exposure limits, geographic limits or other factors. At December 31, 2012,2015, the Company had ceded approximately 6%4% of its principal amount outstanding to third party reinsurers.

The Company has obtained reinsurance to increase its underwriting capacity, both on an aggregate-risk and a single-risk basis, to meet internal, rating agency and regulatory risk limits, diversify risks, reduce the need for additional capital, and strengthen financial ratios. The Company receives capital credit for ceded reinsurance based on the reinsurer's ratings in the capital models used by the rating agencies to evaluate the Company's capital position for its financial strength ratings. In addition, a number of the Company's reinsurers are required to pledge collateral to secure their reinsurance obligations to the Company. In some cases, the pledged collateral augments the rating agency credit for the reinsurance provided. In recent years, most of the Company's reinsurersreinsurers have been downgraded by one or more rating agency, and consequently, the financial strength ratings of many of the reinsurers are below those of the Company's insurance subsidiaries. While ceding commissions or premium allocation adjustments may compensate in part for such downgrades, the effect of such downgrades, in general, is to

14


decrease the financial benefits of using reinsurance under rating agency capital adequacy models. However, to the extent a reinsurer still has the financial wherewithal to pay, the Company could still benefit from the reinsurance provided.

The Company's ceded reinsurance may be on a quota share, first-loss or excess-of-loss basis. Quota share reinsurance generally provides protection against a fixed specified percentage of all losses incurred by the Company. First-loss reinsurance generally provides protection against a fixed specified percentage of losses incurred up to a specified limit. Excess-of-loss reinsurance generally provides protection against a fixed percentage of losses incurred to the extent that losses incurred exceed a specified limit. Reinsurance arrangements typically require the Company to retain a minimum portion of the risks reinsured.

In past, the Company had both facultative (transaction-by-transaction) and treaty ceded reinsurance contracts with third party reinsurers, generally arranged on an annual basis for new business. The Company also employed "automatic facultative" reinsurance that permitted the Company to apply reinsurance with third party reinsurance to transactions it selected subject to certain limitations. The remainder of the Company's treaty reinsurance provided coverage for a portion, subject in certain cases to adjustment at the Company's election, of the exposure from all qualifying policies issued during the term of the treaty. The reinsurer's participation in a treaty was either cancellable annually upon 90 days' prior notice by either the Company or the reinsurer or had a one-year term. Treaties generally provide coverage for the full term of the policies reinsured during the annual treaty period, except that, upon a financial deterioration of the reinsurer or the occurrence of certain other events, the Company generally has the right to reassume all or a portion of the business reinsured. Reinsurance agreements may be subject to other termination conditions as required by applicable state law.

The Company's treaty and automatic facultative program covering new business with third party reinsurers ended in 2008, but such reinsurance continues to cover ceded business until the expiration of exposure, except that the Company has entered into commutation agreements reassuming portions of the ceded business from certain reinsurers. The Company continues to reinsure occasionally new business on a facultative basis.

15

Table of Contents


On January 22, 2012, AGC, AGM and AGMMAC entered into ana $360 million aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2012.2016. This facility replaces a similar $450 million aggregate excess of loss reinsurance facility that AGC, AGM and MAC had entered into effective January 1, 2014 and which terminated on December 31, 2015. The new facility covers losses occurring either from January 1, 20132016 through December 31, 2020. The contract2023, or January 1, 2017 through December 31, 2024, at the option of AGC, AGM and MAC. It terminates on January 1, 20142018, unless AGC, AGM and AGMMAC choose to extend it. The new facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and AGMMAC as of September 30, 2011,2015, excluding credits that were rated non-investment grade as of December 31, 20112015 by Moody'sMoody’s Investors Service, Inc. ("Moody’s") or Standard & Poor's Ratings Services ("S&P&P") or internally by AGC, AGM or AGMMAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The new facility attaches when AGC's or AGM'sAGC’s, AGM’s and MAC’s net losses (net of AGC'sAGC’s and AGM otherAGM's reinsurance other than pooling reinsurance provided to AGM by AGM's subsidiaries(including from affiliates) and net of recoveries) exceed $1.25 billion in the aggregate $2 billion.aggregate. The new facility covers a portion of the next $600$400 million of losses, with the reinsurers assuming pro rata in the aggregate $435$360 million of the $600$400 million of losses and AGC, AGM and AGMMAC jointly retaining the remaining $165 million of losses.$40 million. The reinsurers are required to be rated at least AA- (Stable Outlook) through December 31, 2014 or to post collateral sufficient to provide AGM, AGC and AGCMAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and AGCMAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. This obligation is secured by a pledgeAGC, AGM and MAC paid approximately $9 million of premiums in 2016 for the recoveries, which will beterm January 1, 2016 through December 31, 2016 and deposited approximately $9 million of securities into a trust accounts for the benefit of the reinsurers.

reinsurers to be used to pay the premium for January 1, 2017 through December 31, 2017. The main differences between the new facility and the prior facility that terminated on December 31, 2015 are the reinsurance attachment point ($1.25 billion versus $1.5 billion), the total reinsurance coverage ($360 million part of $400 million versus $450 million part of $500 million) and the annual premium ($9 million versus $19 million).

Importance of Financial Strength Ratings

Low financial strength ratings or uncertainty over the Company's ability to maintain its financial strength ratings would have a negative impact on issuers' and investors' perceptions of the value of the Company's insurance product. Therefore, the Company manages its business with the goal of achieving high financial strength ratings, preferably the highest that an agency will assign.assign to a financial guarantor. However, the models used by rating agencies differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. TheIn addition, the models are not fully transparent, contain subjective factors and change frequently.

Historically, insurance financial strength ratings reflect an insurer's ability to pay under its insurance policies and contracts in accordance with their terms. The rating is not specific to any particular policy or contract. InsuranceHistorically, insurance financial strength ratings do not refer to an insurer's ability to meet non-insurance obligations and are not a recommendation to purchase any policy or contract issued by an insurer or to buy, hold, or sell any security insured by an insurer. The insurance financial strength ratings assigned by the rating agencies are based upon factors that the rating agencies believe are relevant to policyholders and are not directed toward the protection of investors in AGL's common shares. Ratings reflect only the views of the respective rating agencies and are subject to continuous review and revision or withdrawal at any time.

Following the financial crisis, the rating process has become increasinglybeen challenging for the Company due to a number of factors, including:

Instability of Rating Criteria and Methodologies. Rating agencies purport to issue ratings pursuant to published rating criteria and methodologies. In recent years, the rating agencies have made material changes to their rating criteria and methodologies applicable to financial guaranty insurers, sometimes through formal changes and other times through ad hoc adjustments to the conclusions reached by existing criteria. Furthermore, these criteria and methodology changes are typically implemented without any transition period, making it difficult for an insurer to comply quickly with new standards.


15

Table of Contents

IncreasinglyInstability of Severe Stress Case Loss Assumptions. A major component in arriving at a financial guaranty insurer's rating has been the rating agency’s assessment of the insurer’s capital adequacy, with each rating agency employing its own proprietary model. These capital adequacy modelsapproaches include “stress case” loss assumptions for various risks or risk categories. In reaction toSince the financial crises,crisis, the rating agencies have at various times materially increased stress case loss assumptions across numerousfor various risks or risk categories. However, thecategories, in some cases later reducing such stress case loss assumptions appliedlosses. This approach has made predicting the amount of capital required to financial guaranty insurers do not always appear consistent with, and can appear to be materiallymaintain or attain a certain rating more severe than, the assumptions the rating agencies use when rating securities in those risk categories.difficult.

More Reliance on Qualitative Rating Criteria. In prior years, the financial strength ratings of the Company’s insurance company subsidiaries were largely consistent with the rating agency’s assessment of the insurers’ capital adequacy, such that a rating downgrade could generally be avoided by raising additional capital or otherwise improving capital adequacy under the rating agency’s model. In recent years, however, both S&P and Moody’s have applied other factors, some of which are subjective, such as the insurer's business strategy and franchise value or the anticipated future demand for its product, to justify ratings for the Company’s insurance company subsidiaries significantly below the ratings implied by their own capital adequacy models. Currently, for example, S&P has concluded that AGM has “AAA” capital adequacy under the S&P model (but subject to a downward adjustment due to

16

Table of Contents

a new “large obligor test” and being at a perceived competitive disadvantage to a newly formed bond insurer)) and Moody’s has concluded that AGM has “Aa” capital adequacy under the Moody’s model (offset by other factors including the rating agency’s assessment of competitive profile, future profitability and market share).

AlthoughDespite the difficult rating agency process following the financial crisis, the Company has been able to maintain strong financial strength ratings following the financial crisis, despite the difficult rating agency process,ratings. However, if a substantial downgrade of the financial strength ratings of the Company's insurance and reinsurance subsidiaries were to occur in the future, such downgrade would adversely affect its business and prospects and, consequently, its results of operations and financial condition. The Company believes that if the financial strength ratings of AGM, AGC and/or AGCMAC were downgraded from their current levels, such downgrade could result in downward pressure on the premium it isthat such insurance subsidiary would be able to charge for its insurance. Currently, AGM, AGC and MAC all have AA (Stable Outlook) financial strength ratings from S&P. Each of AGM and MAC also has a AA+ (Stable Outlook) financial strength rating from Kroll Bond Rating Agency ("KBRA"), while AGM and AGC have financial strength ratings in the double-A category from S&P (AA- (Stable Outlook)) and in the single-A category from Moody's (A2 (Stable Outlook) and A3 (Stable(Negative Outlook), respectively. respectively). In addition, AGRO has been assigned a rating of A+ (Stable) from A.M. Best Company, Inc. ("Best"), which is Best's second highest rating. The Company periodically assesses the value of each rating assigned to each of its companies, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its companies. For example, the KBRA ratings were first assigned to MAC in 2013 and to AGM in 2014 and the Best rating was first assigned to AGRO in 2015, while a Moody's rating was never requested for MAC and was dropped from AG Re and AGRO in 2015.

The Company believes that so long as AGM, AGC and/or AGC continuesMAC continue to have financial strength ratings in the double-A category from at least one of the legacy rating agency,agencies (S&P or Moody’s), they are likely to be able to continue writing financial guaranty business with a credit quality similar to that historically written. However, if both theneither legacy rating agency maintained financial strength ratings of AGM, AGC and/or MAC in the double-A category, or if either legacy rating agency were to downgrade AGM, AGC were downgraded toand/or MAC below the single-A level, or below, it could be difficult for the Company to originate the current volume of new business with comparable credit characteristics. See "Item 1A.the Risk Factors—RisksFactor captioned "Risks Related to the Company's Financial Strength and Financial Enhancement Ratings" in "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information about the Company's ratings.

Investments

Investment income from the Company's investment portfolio is one of the primary sources of cash flowsflow supporting its operations and claim payments. For the years endedThe Company's total investment portfolio was $11.2 billion and $11.4 billion as of December 31, 2012, 20112015 and 2010, the Company's2014, respectively, and generated net investment income was $404of $423 million, $396$403 million and $361$393 million in 2015, 2014 and 2013, respectively.

The Company's principal objectives in managing its investment portfolio are to preservesupport the highest possible ratings for each operating company; maintain sufficient liquidity to cover unexpected stress in the insurance portfolio; and maximize total after-tax net investment income. If the Company's calculations with respect to its policy liabilities are incorrect or other unanticipated payment obligations arise, or if the Company improperly structures its investments to meet these liabilities, it could have unexpected losses, including losses resulting from forced liquidation of investments before their maturity. The investment policies of the Company's insurance subsidiaries are subject to insurance law requirements, and may change depending upon regulatory, economic and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the Company's businesses.

The Company has a formal review process for all securities in the Company's investment portfolio, including a review for impairment losses. Factors considered when assessing impairment include:

a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;

a decline in the market value of a security for a continuous period of 12 months;

recent credit downgrades of the applicable security or the issuer by rating agencies;

the financial condition of the applicable issuer;

whether loss of investment principal is anticipated;

the impact of foreign exchange rates;

whether scheduled interest payments are past due; and

whether the Company intends to sell the security prior to its recovery in fair value.

In addition, the Company holds in its investment portfolio obligations that either AGM or AGC has insured or that constitute a part of the same issuance as obligations that either AGM or AGC has insured. Some of the obligations were purchased primarily for investment purposes and others were purchased primarily as part of the Company's risk management strategy, to enable the Company to exercise rights available to holders of the obligations or to mitigate its losses. As of

1716

Table of Contents

December 31, 2012, the Company held securities purchased for loss mitigation purposes with a par of $1,855 million in its investment accounts, as compared to $1,560 million as of December 31, 2011.

Furthermore, from time to time, the Company may purchase securities in their initial distribution or in the secondary market, either on an uninsured basis or where AGM or AGC is the insurer of such securities or of securities issued as partApproximately 85% of the same issuance. The Company may hold the bonds for investment or it may sell them from time to time. During 2012, the Company had purchased $782 million principal amount outstanding of such securities and sold an amount of par equal to $728 million.

If the Company believes a decline in the value of a particular investment is temporary, the Company records the decline as an unrealized loss on the Company's consolidated balance sheets in "accumulated other comprehensive income" in shareholders' equity. If, however, the Company believes a decline in the value of a particular investment is other than temporary, the other-than-temporary-impairment ("OTTI") amount is recorded in earnings. See Note 11, Investments and Cash, of the Financial Statements and Supplementary Data for a discussion on OTTI.

The Company's assessment of a decline in value includes management's current assessment of the factors noted above. If that assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

The Company's investment portfolio is externally managed by its investment managers: BlackRock Financial Management, Inc., Deutsche InvestmentGoldman Sachs Asset Management, Americas Inc.L.P., General Re-New England Asset Management, Inc. and Wellington Management Company, LLP. The performance of the Company's invested assets is subject to the performanceability of the investment managers in selectingto select and managingmanage appropriate investments. The Company's portfolio is allocated approximately equally among the four investment managers. The Company's investment managers have discretionary authority over the Company's investment portfolio within the limits of the Company's investment guidelines approved by the Company's Board of Directors. The Company compensatesCompany's portfolio is allocated approximately equally among the four investment managers and each of these managersmanager is compensated based upon a fixed percentage of the market value of the Company's portfolio.portion of the portfolio being managed by such manager. During the years ended December 31, 2012, 20112015, 2014 and 2010,2013, the Company recorded investment management fee expenses of $9$10 million, $8$9 million, and $8 million, respectively, related to these managers.respectively.


The Company internally managed 15% of the investment portfolio, either in connection with its loss mitigation or risk management strategy, or because the Company believes a particular security or asset presents an attractive investment opportunity.
The largest component of the Company’s internally managed portfolio consists of obligations that the Company purchases in connection with its loss mitigation or risk management strategy for its insured exposure. Purchasing such obligations enables the Company to exercise rights available to holders of the obligations. The Company also holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of its financial guaranties. The Company held approximately $1,440 million and $881 million of securities based on their fair value, after elimination of the benefit of any insurance provided by the Company, that were obtained for loss mitigation or risk management purposes in its internally managed investment accounts as of December 31, 2015 and December 31, 2014, respectively.
Competition

Assured Guaranty is the market leader in the financial guaranty industry. It facesAssured Guaranty believes its financial strength, protection against defaults, credit selection policies, underwriting standards and surveillance procedures make it an attractive provider of financial guaranties.
Assured Guaranty's principal competition is in the form of obligations that issuers decide to issue on an uninsured executions of transactions that would be candidates for insurance. Particularlybasis. In the U.S. public finance market, when interest rates are low, as in 2012 and 2011, investors may be more willing to forgo the benefits of bondprefer greater yield over insurance in favor of incrementally greater yield,protection, and issuers may considerfind the cost savings offrom insurance less worth pursuing.compelling. Over the last several years, interest rates generally have been lower than historical norms. In 2015, average daily benchmark AAA 30-year municipal interest rates as reflected by the MMD Index were approximately 35 basis points lower that their levels in 2014, a year in which rates were already low by historical standards.

OtherNevertheless, in the U.S. public finance market in 2015, usage of municipal bond insurance increased to approximately 6.7% of the par amount of new issues sold, compared with approximately 5.9% in 2014. The Company believes the increase in market penetration despite falling interest rates indicates greater demand for bond insurance based on investors’ heightened awareness of municipal issuers’ potential to come under financial stress (due to such high-profile cases as Detroit’s bankruptcy) and evidence that Assured Guaranty insured bonds held their market value better than comparable uninsured bonds in distressed situations.

In the international infrastructure finance market, the uninsured execution serving as the Company’s principal competition occurs primarily in privately funded transactions where no bonds are sold in the public markets. In the structured finance market, the uninsured execution occurs in both public and primary transactions primarily where bonds are sold with sufficient credit or structural enhancement embedded in transactions, such as through overcollateralization, first loss insurance, excess spread or other terms, to make the bonds attractive to investors without bond insurance.     
Assured Guaranty is the only financial guaranty companies that had beencompany active prior to 2008 experienced significant financial distress duringbefore the global financial crisis and currently no longer haveof 2008 that has maintained sufficient financial strength to write new business continuously since the crisis began. As a result of rating agency downgrades of the financial strength ratings adequateof financial guaranty competitors active before the crisis, Assured Guaranty’s only significant financial guaranty competitor in 2015 was BAM, a mutual insurance company that commenced business in 2012.

Based on industry statistics, the Company estimates that, of the new U.S. public finance bonds sold with insurance in 2015, the Company insured approximately 60% of the par, while BAM insured approximately 38%. BAM is effective in competing with the Company for small to remain activemedium sized U.S. public finance transactions in new business origination. Specifically, amongcertain sectors, and its pricing and underwriting strategies may have a negative impact on the amount of premium the Company is able to charge for its insurance for such transactions. However, the Company believes it has competitive advantages over BAM due to: AGM's and MAC's

17

Table of Contents

larger capital base; AGM's ability to insure larger transactions and issuances in more diverse U.S. bond sectors; and AGM's and MAC's strong financial strength ratings from multiple rating agencies (in the case of AGM, AA+ from KBRA, AA from S&P and A2 from Moody's, and in the case of MAC, AA+ from KBRA and AA from S&P, compared with BAM's AA solely from S&P). Additionally, as a public company with access to both the equity and debt capital markets, Assured Guaranty may have greater flexibility to raise capital, if needed.
Another potentially significant competitor to the Company on U.S. public finance transactions is National, which the Company estimates insured approximately 2% of the par of public finance bonds sold with insurance in 2015. In 2009, MBIA, one of the legacy competitors, neither Ambac Assurance Corporation ("Ambac") nor Financial Guaranty Insurance Company, the parent companies of which filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in 2010, areinsurers that is not writing new business. MBIA Insurance Corporation, whichbusiness, transferred its U.S. public finance exposures to its affiliate National Public Finance Guarantee Corporation,National. The transfer was challenged in litigation that was not settled until May 2013. Subsequently, S&P has raised National’s financial strength rating from BBB to AA-, noting that S&P no longer viewed MBIA’s rating as a limitation on National’s rating, and Moody’s has upgraded National's financial strength rating from Baa2 to A3.
In the global structured finance and infrastructure markets, Assured Guaranty is the only financial guaranty insurance company currently writing new guarantees. Management considers the Company’s greater diversification to be a competitive advantage in the long run because it means the Company is not writing new business. National Public Finance Guarantee Corporation, a company that insures only U.S. public finance obligations, currently appears not to have financial strength ratings adequate to issue new financial guaranty policieswholly dependent on public finance obligations. Neither Syncora Guarantee Inc. nor Radian is writing new business. CIFG Assurance North America, Inc. ("CIFG") has been restructured but is not writing new business; it ceded a significant portion of its U.S. public finance portfolio to AGCconditions in January 2009.any one market.

With respect to new entrants into the financial guaranty industry, Berkshire Hathaway Assurance Corporation commenced business in 2008 and did not write new business in 2010, 2011 or 2012. It did issue policies in early 2013 in support of a financing for an affiliate. Municipal and Infrastructure Assurance Corporation ("MIAC"), another potential entrant into the financial guaranty industry, was unable to raise sufficient capital in 2010 in order to write business; Radian purchased MIAC in 2011 and sold MIAC to Assured Guaranty in 2012, which renamed the company MAC and announced its intention to launch MAC in 2013 as an insurer of U.S. municipal bonds. Build America Mutual Assurance Company (“BAM”) commenced operations in 2012 as a U.S. municipal bond insurer and currently serves as the Company's only active competitor in the financial guaranty industry.

In the future, additional new entrants into the financial guaranty industry could reduce the Company's future new business prospects, including by furthering price competition or offering financial guaranty insurance on transactions with structural and

18

Table of Contents

security features that are more favorable to the issuers than those required by Assured Guaranty. However, the Company believes that the presence of multiple guarantors might also increase the overall visibility and acceptance of the product by a broadening group of investors, and the fact that investors are willing to commit fresh capital to the industry may promote market confidence in the product.
In addition the Federal Home Loan Bank has been authorized to participate to a limited extent in the municipal financial guaranty market.

Additionally,monoline insurance companies, Assured Guaranty competes with other forms of credit enhancement, such as letters of credit or credit derivatives provided by foreign and domestic banks and other financial institutions, some of which are governmental enterprises, or direct guaranties of municipal, structured finance or other debt by federal or state governments or government-sponsoredgovernment sponsored or affiliated agencies.

Alternative credit enhancement structures, and in particular federal government credit enhancement or other programs, can also affectinterfere with the Company's new business prospects, particularly if they provide direct governmental-level guaranties, restrict the use of third-party financial guaranties or reduce the amount of transactions that might qualify for financial guaranties. There have been periodic proposals during the past several years for state-level support of financial guaranties through investment in non-profit bond insurers. In addition, state guaranty funds for municipal debt, such as the Texas Permanent School Fund, can also impact the demand for the Company's financial guaranty insurance.


In the asset-backed market, credit or structural enhancement embedded in transactions, such as through overcollateralization, first loss insurance, excess spread or other terms and conditions that provide investors with additional collateral or cash flow, also compete with the Company's financial guaranties.
18



Regulation

General

The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. Reinsurers are generally subject to less direct regulation than primary insurers. The Company is subject to regulation under applicable statutes in the U.S., the U.K. and Bermuda, as well as applicable statutes in Australia.

United States

AGL has three operating insurance subsidiaries domiciled in the U.S., which the Company refers to collectively as the "Assured Guaranty U.S. Subsidiaries."

AGC is a Maryland domiciled insurance company licensed to write financial guaranty insurance and reinsurance (which is classified in some states as surety or another line of insurance) in 50 U.S. states, the District of Columbia and Puerto Rico. It is registered as a foreign company in Australia and currently operates through a representative office in Sydney. AGC currently intends for the representative office to conduct activities so that it does not have a permanent establishment in Australia.

AGM is a New York domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. It operates through a service company in Sydney. In 2011, AGM submitted an application to the Insurance Business Division of the Supervision Bureau of the Financial Services Agency to invalidate its insurance license in Japan and subsequently closed its branch in Tokyo.

Assured Guaranty Municipal Insurance Company (formerly FSA Insurance Company) was redomesticated to New York from Oklahoma in 2010. It
MAC is licensed to write financial guaranty insurance and reinsurance in New York and Oklahoma, and in 19 other states in the U.S.

In addition, on May 31, 2012, the Company acquired Municipal Assurance Corporation, a New York domiciled insurance company licensed to write financial guaranty insurance and reinsurance in 3750 U.S. states and the District of Columbia. The Company intends to launch MAC as a new financial guaranty insurer that provides insurancewill only on debt obligations in theinsure U.S. public finance markets,debt obligations, focusing on investment grade bonds in order to increase its insurance penetration in suchselect sectors of that market.

Furthermore, the Company owns Assured Guaranty Mortgage Insurance Company,AGC is a New YorkMaryland domiciled insurance company authorized solelylicensed to transact mortgagewrite financial guaranty insurance and reinsurance that is licensed as a mortgage guaranty insurer in the State of New York and in50 U.S. states, the District of Columbia and is an approved or accredited reinsurer in the States of California, Illinois and Wisconsin. In 2012, the last policy to which Assured Guaranty Mortgage Insurance Company had exposure expired. The Company does not intend to offer mortgage guaranty insurance or reinsurance in the future.Puerto Rico.

19



Insurance Holding Company Regulation

AGL and the Assured Guaranty U.S. Subsidiaries are subject to the insurance holding company laws of their jurisdiction of domicile, as well as other jurisdictions where these insurers are licensed to do insurance business. These laws generally require each of the Assured Guaranty U.S. Subsidiaries to register with its respective domestic state insurance department and annually to furnish financial and other information about the operations of companies within their holding company system. Generally, all transactions among companies in the holding company system to which any of the Assured Guaranty U.S. Subsidiaries is a party (including sales, loans, reinsurance agreements and service agreements) must be fair and, if material or of a specified category, such as reinsurance or service agreements, require prior notice and approval or non-disapproval by the insurance department where the applicable subsidiary is domiciled.

Change of Control

Before a person can acquire control of a U.S. domestic insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity and management of the applicant's board of directors and executive officers, the acquirer's plans for the management of the applicant's board of directors and executive officers, the acquirer's plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control involving AGL that some or all of AGL's stockholders might consider to be desirable, including in particular unsolicited transactions.


19


State Insurance Regulation

State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including licensing these companies to transact business, accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends and, in certain instances, approving policy forms and related materials and approving premium rates. State insurance laws and regulations require the Assured Guaranty U.S. Subsidiaries to file financial statements with insurance departments everywhere they are licensed, authorized or accredited to conduct insurance business, and their operations are subject to examination by those departments at any time. The Assured Guaranty U.S. Subsidiaries prepare statutory financial statements in accordance with Statutory Accounting Practices, or SAP, and procedures prescribed or permitted by these departments. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years. Market conduct examinations by regulators other than the domestic regulator are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance Commissioners.

The New York State Department of Financial Services (the "NYDFS"), the regulatory authority of the domiciliary jurisdiction of AGM and MAC, conducts a periodic examination of insurance companies domiciled in New York, usually at five-year intervals. In 2012, the NYDFS commenced examinations of AGM, MAC, Assured Guaranty Municipal Insurance Company and AG Mortgage in order for its examinations of these companies to coincide with the Maryland Insurance Administration (the "MIA's") examination of AGC. In 2013, the NYDFS completed its examinations and issued Reports on Examination of AGM for the four-year period ending December 31, 2011 and MAC for the period September 26, 2008 through June 30, 2012. The reports did not note any significant regulatory issues concerning those companies.

The MIA, the regulatory authority of the domiciliary jurisdiction of AGC, conducts a periodic examination of insurance companies domiciled in Maryland every five years. The Maryland Insurance Administration lastIn 2013, the MIA issued aan Examination Report on Financial Examination with respect to AGC in 2008 for the five year period ending December 31, 2006. The Maryland Insurance Administration commenced in March 2012 an examination of AGC for the five year period ending December 31, 2011, which is scheduled to be completed2011; no significant regulatory issues were noted in 2013.such report.

The New York Department of Financial Services (the "NY DFS"), the regulatory authority of the domiciliary jurisdiction of AGM, Assured Guaranty Mortgage Insurance Company, Assured Guaranty Municipal Insurance Company and MAC, conducts a periodic examination of insurance companies domiciled in New York, also at five-year intervals. During 2008, the NY DFS completed its review of each of AGM and Assured Guaranty Mortgage Insurance Company for the five-year period ended December 31, 2007. In 2012, the NY DFS commenced examinations of AGM, Assured Guaranty Municipal Insurance Company, Assured Guaranty Mortgage Insurance Company and MAC in order for its examinations of these companies to coincide with the Maryland Insurance Administration's examination of AGC. The examinations of AGM and Assured Guaranty Mortgage Insurance Company will be for the four-year period ending December 31, 2011. This will be the first examination of Assured Guaranty Municipal Insurance Company by the NY DFS since its re-domestication from Oklahoma to New York. The Oklahoma Insurance Department completed its last examination of Assured Guaranty Municipal Insurance Company in 2008 for the three years ending December 31, 2006. The examination of Assured Guaranty Municipal

20


Insurance Company will be for the five-year period ending December 31, 2011. The examination of MAC will be for the period September 26, 2008 through June 30, 2012. These examinations are scheduled to be completed in 2013.

Adverse developments surrounding the Company's industry peers have led state insurance regulators and federal regulators to question the adequacy of the current regulatory scheme governing financial guaranty insurers. See "Item 1A. Risk Factors—Risks Related to GAAP and Applicable Law—Changes in or inability to comply with applicable law could adversely affect the Company's ability to do business."

State Dividend Limitations

Maryland.New York.   One of the primary sources of cash for the payment of debt service and dividends by the Company is the receipt of dividends from AGC. If a dividend or distribution is an "extraordinary dividend," it must be reported to, and approved by, the Insurance Commissioner prior to payment. An "extraordinary dividend" is defined to be any dividend or distribution to stockholders, such as Assured Guaranty US Holdings Inc. ("AGUS"), the parent holding company of AGC, which, together with dividends paid during the preceding twelve months, exceeds the lesser of 10% of AGC's policyholders' surplus at the preceding December 31 or 100% of AGC's adjusted net investment income during that period. Further, an insurer may not pay any dividend or make any distribution to its shareholders unless the insurer notifies the Insurance Commissioner of the proposed payment within five business days following declaration and at least ten days before payment. The Insurance Commissioner may declare that such dividend not be paid if the Commissioner finds that the insurer's policyholders' surplus would be inadequate after payment of the dividend or could lead the insurer to a hazardous financial condition. AGC declared and paid dividends of $55 million, $30 million and $50 million during 2012, 2011 and 2010, respectively, to AGUS. The maximum amount available during 2013 for the payment of dividends by AGC which would not be characterized as "extraordinary dividends" is approximately $91 million.

New York.AGM. Under the New York Insurance Law, AGM may declare oronly pay any dividend onlydividends out of "earned surplus," which is defined as thatthe portion of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. Additionally, no dividendAGM may be declared or distributed by either company in an amount which,pay dividends without the prior approval of the New York Superintendent of Financial Services ("New York Superintendent") that, together with all dividends declared or distributed by it during the preceding twelve12 months, exceedsdoes not exceed the lesser of:

of 10% of its policyholders' surplus as(as of its last annual or quarterly statement filed with the New York Superintendent;Superintendent) or

100% of its adjusted net investment income during thisthat period.

Based on AGM's statutory statements for 2012, the The maximum amount available during 2016 for payment ofAGM to pay dividends by AGMto its parent AGMH without regulatory approval overis estimated to be approximately $244 million, of which approximately $95 million is available for distribution in the first quarter of 2016. AGM paid dividends of $215 million, $160 million and $163 million during 2015, 2014 and 2013, respectively, to AGMH.

Maryland.    Another primary source of cash for the payment of debt service and dividends by the Company is the receipt of dividends from AGC. Under Maryland's insurance law, AGC may, with prior notice to the MIA, pay an ordinary dividend that, together with all dividends paid in the prior 12 months, followingdoes not exceed the lesser of 10% of its policyholders' surplus (as of the prior December 31, 2012 is approximately $178 million.

In addition to statutory constraints, AGM had been subject to contractual constraints on31) or 100% of its abilityadjusted net investment income during that period. The maximum amount available during 2016 for AGC to pay dividends that expired on July 1, 2012. AGM paid $30 million inordinary dividends to AGMHits parent AGUS will be approximately $79 million, of which approximately $9 million is available for distribution in 2012the first quarter of 2016. A dividend or distribution to a stockholder in excess of this limitation would constitute an "extraordinary dividend," which must be paid out of "earned surplus" and didreported to, and approved by, the MIA prior to payment. "Earned surplus" is that portion of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not declarebeen distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized capital gains and appreciation of assets. Currently, AGC does not have any earned surplus and therefore the Company expects AGC only to pay ordinary dividends in 2016. AGC may not pay any dividend or make any distribution, including ordinary dividends, in 2011unless it notifies the MIA of the proposed payment within five business days following declaration and at least ten days before payment. The MIA may declare that such dividend not be paid if it finds that AGC's policyholders' surplus would be inadequate after payment of the dividend or 2010.the dividend could lead AGC to a hazardous financial condition. AGC paid dividends of $90 million, $69 million and $67 million during 2015, 2014 and 2013, respectively, to AGUS.

20



Contingency Reserves

Maryland.    In accordance with Maryland insurance law and regulations, AGC maintains a statutory contingency reserve for the protection of policyholders. The contingency reserve is maintained for each obligation and is equal to the greater of 50% of the premiums written or a percentage of principal guaranteed (which percentage varies from 0.55% to 2.5% depending on the nature of the asset). The contingency reserve is put up over a period of either 15 or 20 years, depending on the nature of the obligation, and then taken down over the same period of time. When considering the principal amount guaranteed, the Company is permitted to take into account amounts that it has ceded to reinsurers.

New York.   Under the New York Insurance Law, each of AGM Assured Guaranty Mortgage Insurance Company and Assured Guaranty Municipal Insurance CompanyMAC must establish a contingency reserve to protect policyholders. TheAs financial guaranty insurerinsurers, each is required to providemaintain a contingency reserve:

with respect to policies written prior to July 1, 1989, in an amount equal to 50% of earned premiums less permitted reductions; and


21


with respect to policies written on and after July 1, 1989, quarterly on a pro rata basis over a period of 20 years for municipal bonds and 15 years for all other obligations, in an amount equal to the greater of 50% of premiums written for the relevant category of insurance or a percentage of the principal guaranteed, varying from 0.55% to 2.50%, depending on the type of obligation guaranteed, until the contingency reserve amount for the category equals the applicable percentage of net unpaid principal. The contingency reserve is then taken down over the same period of time that it was established.

ThisMaryland.    In accordance with Maryland insurance law and regulations, AGC also maintains a statutory contingency reserve must be maintained for the periods specified above, exceptprotection of policyholders. The contingency reserve is maintained quarterly on a pro rata basis over a period of 20 years for municipal bonds and 15 years for all other obligations, in an amount equal to the greater of 50% of premiums written for the relevant category of insurance or a percentage of the principal guaranteed, varying from 0.55% to 2.50%, depending on the type of obligation guaranteed, until the contingency reserve amount for the category equals the applicable percentage of net unpaid principal. The contingency reserve is then taken down over the same period of time that reductions byit was established.
In both New York and Maryland, when considering the principal amount guaranteed, the insurer is permitted to take into account amounts that it has ceded to reinsurers. In addition, releases from the insurer's contingency reserve may be permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.

From time to time, AGM and Assured Guaranty Municipal Insurance CompanyAGC have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer's outstanding insured obligations. In 2015, on the latter basis, AGM obtained the NYDFS's approval for a contingency reserve release of approximately $253 million and AGC obtained the MIA's approval for a contingency reserve release of approximately $134 million. In addition, MAC also released approximately $56 million of contingency reserves, which consisted of the assumed contingency reserves maintained by MAC, as reinsurer of AGM, in respect of the same obligations that were the subject of AGM's $253 million release.

With respect to the regular, quarterly contributions to contingency reserves required by the applicable Maryland and New York laws and regulations, such laws and regulations permit the discontinuation of such quarterly contributions to a company’s contingency reserves when such company’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the company’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category.  In accordance with such laws and regulations, and with the approval of the MIA and the NYDFS, respectively, AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business and AGM ceased making quarterly contributions to its contingency reserves for non-municipal business, in each case beginning in the past soughtfourth quarter of 2014. Such cessations are expected to continue for as long as AGC and obtained approvals and releasesAGM satisfy the foregoing condition for their applicable line(s) of excessive contingency reserves from the NY DFS. Inbusiness.

On July 15, 2013, AGM and Assured Guaranty Municipal Insurance Company obtained NY DFS approvalsits wholly-owned subsidiary AGE (together, the "AGM Group") and AGC, were notified that the NYDFS and MIA do not object to the AGM Group and AGC, respectively, reassuming all of the outstanding contingency reserve releasesreserves that the AGM Group and AGC had ceded to AG Re and electing to cease ceding future contingency reserves to AG Re. The insurance regulators permitted the AGM Group and AGC to reassume the contingency reserves in increments over three years. In the third quarter of 2015, the AGM Group and AGC each reassumed their respective final installments and as of December 31, 2015, the AGM Group and AGC had collectively reassumed an aggregate of approximately $510 million and $192 million, respectively, based on the expiration$522 million.





21


Financial guaranty insurers are also required to maintain a loss and loss adjustment expense ("LAE") reserve (on a case-by-case basis) and unearned premium reserve on a case-by-case basis.reserve.

Single and Aggregate Risk Limits

The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty insurers applicable to all obligations issued by a single entity and backed by a single revenue source. For example, under the limit applicable to qualifying asset-backed securities, the lesser of:

the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or

the insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders' surplus and contingency reserves, subject to certain conditions.

Under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders' surplus and contingency reserves. In addition, insured principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and collateral, is limited to 75% of the insurer's policyholders' surplus and contingency reserves. Single-risk limits are also specified for other categories of insured obligations, and generally are more restrictive than those listed for asset-backed or municipal obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to the "corporate" limit (applicable to insurance of unsecured corporate obligations) equal to 10% of the sum of the insurer's policyholders' surplus and contingency reserves. For example, "triple-X" and "future flow" securitizations, as well as unsecured investor-owned utility obligations, are generally subject to these "corporate" single-risk limits.

The New York Insurance Law and the Code of Maryland Regulations also establish aggregate risk limits on the basis of aggregate net liability insured as compared with statutory capital. "Aggregate net liability" is defined as outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under these limits, policyholders' surplus and contingency reserves must not be less than a percentage of aggregate net liability equal to the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment-grade obligations. As of December 31, 2012,2015, the aggregate net liability of each of AGM, AGCMAC and Assured Guaranty Municipal Insurance CompanyAGC utilized approximately 42.2%27.0%, 41.5%30.3% and 41.5%16.1% of their respective policyholders' surplus and contingency reserves.

The New York Superintendent has broad discretion to order a financial guaranty insurer to cease new business originations if the insurer fails to comply with single or aggregate risk limits. In practice, the New York Superintendent has shown a willingness to work with insurers to address these concerns.

Group Regulation

In connection with AGL’s establishment of tax residence in the United Kingdom, as discussed in greater detail under "Tax Matters" below, AGL has been discussing the regulation of AGL and its subsidiaries as a group with the Prudential Regulation Authority in the U.K. and with the NYDFS. The NYDFS has assumed responsibility for regulation of the Assured Guaranty group. Group supervision by the NYDFS results in additional regulatory oversight over Assured Guaranty, and may subject Assured Guaranty to new regulatory requirements and constraints.

Investments

The Assured Guaranty U.S. Subsidiaries are subject to laws and regulations that require diversification of their investment portfolio and limit the amount of investments in certain asset categories, such as BIG fixed maturityfixed-maturity securities, equity real estate, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. The Company believes that the investments made by the Assured Guaranty U.S. Subsidiaries complied with such regulations as of December 31, 2012.2015. In addition, any

22


investment must be approved by the insurance company's board of directors or a committee thereof that is responsible for supervising or making such investment.


22


Operations of the Company's Non-U.S. Insurance Subsidiaries

The insurance laws of each state of the U.S. and of many other countries regulate or prohibit the sale of insurance and reinsurance within their jurisdictions by unlicensed or non-accredited insurers and reinsurers. None of AGUK, AGE, AG Re, AGRO or Assured Guaranty (Bermuda) are admitted to do business in the United States. The Company does not intend that these companies will maintain offices or solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction in the U.S. where the conduct of such activities would require it to be admitted or authorized.

In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers'the business operations of the Company's reinsurance subsidiaries are affected by regulatory requirements in various states of the United States governing "credit for reinsurance", which are imposed on the ceding companies of the reinsurers. The Nonadmitted and Reinsurance Reform Act (“NRRA”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) streamlined the regulation of reinsurance by applying single state regulation for credit for reinsurance. Under the NRRA, credit for reinsurance determinations are controlled by the ceding company’s state of domicile and non-domiciliary states are prohibited from applying their ceding companies.reinsurance laws extraterritorially. In general, a ceding company which obtains reinsurance from a reinsurer that is licensed, accredited or approved by the ceding company's state of domicile is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit on the statutory financial statementstatements of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer secures its reinsurance obligations to the ceding insurer by providing a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited. The Company's reinsurance subsidiaries AG Re and AGRO are not licensed, accredited or approved in any state and have established trusts to secure their reinsurance obligations.

U.S. Federal Regulation

The Company’s businesses are also subject to direct and indirect regulation under U.S. federal law. In particular, the Company’s derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd-Frank Wall Street ReformAct. Rules that have been adopted by the SEC could require certain of AGL's subsidiaries to register and Consumer Protection Act (the “Dodd-Frank Act”) could result inbe regulated as "major security-based swap participants" when those registration rules take effect. If such registration is required, these entities would likely be subject to regulatory capital requirements, for the Company to maintain capital and/or post margin requirements with respect to future derivativetheir transactions in “security-based swaps" and possibly maintain capital on its existing insured derivatives portfolio. In 2012,additional requirements relating to business conduct and risk management in connection with such transactions. While the SEC adopted final rules for registration of major security-based swap participants in August 2015, most of the substantive rules for these entities have not yet been adopted and it is therefore unclear what impact registration would have or when such requirements would become effective. The mandatory compliance date is not likely to occur before late 2016.

In addition, while AGL does not believe its subsidiaries are required to register with the Commodity Futures Trading Commission (“CFTC”("CFTC") released final rules for determining whether the Company or any of its affiliates will be deemed to be a “swap dealer” oras “major swap participant” (“MSP”). The Company believes AGCparticipants,” certain of AGL's subsidiaries may be indirectly subject to CFTC and AGMother regulations with respect to “swaps” including interest rate swaps.  When rules relating to margin take effect in March 2017, AGL's subsidiary may be required to registerpost margin on future transactions with the SEC as MSPs when those registration rules take effect; it is continuinga swap dealer counterparty, if any, or on certain amendments to analyze its insured portfoliolegacy swap transactions with a swap dealer counterparty. These entities’ swaps must also be reported to determine whether registration with the CFTC as an MSP will be required. MSP designationcentral data repositories, and registration would likely expose the Company to increased compliance costs.

In addition, pursuant to the Dodd-Frank Act, the Financial Stability Oversight Council ("FSOC") is charged with identifying certain non-bank financial companies to be subject to supervision by the Board of Governors of the Federal Reserve System.  Although the Company is unlikely to be so designated based on its size, the FSOCvarious documentation requirements also considers other factors, such as an entity's interconnectedness with other financial institutions, which could raise the Company's profile in this context. In a parallel international process, the International Association of Insurance Supervisors published a proposed assessment methodology for identifying global systematically important insurers which explicitly identified financial guaranty insurance as an activity that poses increased systemic risk relative to more traditional insurance activities.indirectly apply through their counterparties.

Bermuda

AG Re AGRO and Assured Guaranty (Bermuda), the Company's "Bermuda Subsidiaries,"AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of Bermuda, amendments thereto and related regulations (collectively, the "Insurance Act"). AG Re is registered and licensed as a Class 3B insurer and each of AGRO and Assured Guaranty (Bermuda) is registered and licensed as a Class 3A insurer. AGRO is also currently registeredinsurer and licensed as a classClass C long-term insurer.

Bermuda Insurance Regulation

The Insurance Act imposes on insurance companies certain solvency and liquidity standards; certain restrictions on the declaration and payment of dividends and distributions; certain restrictions on the reduction of statutory capital; certain restrictions on the winding up of long-term insurers; and certain auditing and reporting requirementsrequirements; and also the need to have a principal representative and a principal office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Bermuda Monetary Authority (the "Authority") the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance companies and in certain circumstances share information with foreign regulators. Class 3A

23


and Class 3B insurers are authorized to carry on general insurance business (as understood under the Insurance Act), subject to conditions attached to the license and to compliance with minimum capital and surplus requirements, solvency margin, liquidity ratio and other requirements imposed by the Insurance Act. Class C long-term insurers are permitted to carry on long-term business (as understood under the Insurance Act) subject to conditions attached to the license and to similar compliance requirements and the requirement to maintain its long-term business fund (a segregated fund).

23



Each of AG Re AGRO and Assured Guaranty (Bermuda)AGRO is required annually to file statutorily mandated financial statements and returns, audited by an auditor approved by the Authority (no approved auditor of an insurer may have an interest in that insurer, other than as an insured, and no officer, servant or agent of an insurer shall be eligible for appointment as an insurer's approved auditor), together with an annual loss reserve opinion of the Authority, approved loss reserve specialist, and in respect of AGRO, the required actuary's certificate with respect to the long-term business. AG Re is also required to file annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which must be available to the public. As a Class 3A insurers,insurer, AGRO and Assured Guaranty (Bermuda) have each received exemptionshas filed for an exemption from the Authority from making such filing. filing for its December 31, 2015 year-end, but it will be subject to this requirement going forward.

In addition, AG Re is required to file a capital and solvency return that includes the company'sits Bermuda Solvency Capital Requirement ("BSCR") model (or an approved internal capital model in lieu thereof), a schedule of fixed income investments by rating categories, a schedule of net reserves for losses and loss expense provisions by line of business, a schedule of premiums written by line of business, a schedule of risk management, a schedule of fixed income securities, a schedule of commercial insurer's solvency self assessmentself-assessment ("CISSA"), a schedule of catastrophe risk return, a schedule of loss triangles or reconciliation of net loss reserves and a schedule of eligible capital. AG Re is also required to file quarterly financial returns which consist of quarterly unaudited financial statements and details of material intra-group transactions and risk concentrations.

Each of AGRO and Assured Guaranty (Bermuda) is also required to file a capital and solvency return that includes, among other details, the company's Bermuda Solvency Capital Requirement—Requirement - Small and Medium Entities ("BSCR-SME") model (or an approved internal capital model in lieu thereof), the CISSA and a schedule of eligible capital.
Further, each of AG Re and AGRO is subject to filing (within four months along with the capital and solvency return) a mandatory trial run of an economic balance sheet ("EBS") with their respective capital and solvency returns. The underlying premise of the EBS is that both assets and liabilities are valued using market or fair values. Included within the EBS is a requirement to produce a financial condition report, disclosing information relating to the view of each of AG Re’s and AGRO’s management regarding each respective entity’s business performance, governance, risk profile, solvency valuation, capital management and potential subsequent events of significance. For the 2016 year-end and onwards, the financial condition report must be published on the Company's website within 14 days of filing with the Authority.

Finally, AG Re is required to file with the Authority, on a quarterly basis, financial returns consisting of (i) quarterly unaudited financial statements for each financial quarter (which must minimally include a balance sheet and income statement and must also be recent and not reflect a financial position that exceeds two months), and (ii) a list and details of material intra‑group transactions and risk concentrations, which would also include, among other things, details surrounding reinsurance and retrocession arrangements and the ten largest exposures to counterparties and any other counterparty exposures exceeding 10% of the insurer’s statutory capital and surplus.
Shareholder Controllers

Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or more or 50% or more of the Company's common shares must notify the Authority in writing within 45 days of becoming such a holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may direct, among other things, that the voting rights attaching to their common shares shall not be exercisable. A person that does not comply with such a notice or direction from the Authority will be guilty of an offence.offense.

Notification of Material Changes

All registered insurers are required to give notice to the Authority of their intention to effect a material change within the meaning of the Insurance Act. For the purposes of the Insurance Act, the following changes are material: (i) the transfer or acquisition of insurance business being part of a scheme falling within, or any transaction relating to a scheme of arrangement under section 25 of the Insurance Act or section 99 of the Companies Act 1981 of Bermuda (the "Companies Act"), (ii) the amalgamation or merger with or acquisition of another firm, (iii)  engaging in unrelated business that is retail business, (iv) the acquisition of a controlling interest in an undertaking that is engaged in non-insurance business which offers services or products to non-affiliated persons, (v) outsourcing all or substantially all of the functions of actuarial, risk management, compliance and internal audit functions, (vi) outsourcing of all or a material part of an insurer's underwriting activity, (vii) transferring other than by way of reinsurance of all or substantially all of a line of business and (viii) expanding into a material new line of business.business, (ix) the sale of an insurer, and (x) outsourcing an officer role (in this context meaning a chief executive or senior executive performing the roles of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters).


24


No registered insurer shall take any steps to give effect to athe material changechanges listed in items (ii) to (viii) above unless it has first served notice on the Authority that it intends to effect such material change and, before the end of 1430 days, either the Authority has notified such company in writing that it has no objection to such change or that period has lapsed without the Authority having issued a notice of objection. A person who fails to give the required notice or who effects a material change, or allows such material change to be effected, before the prescribed period has elapsed or after having received a notice of objection shall be guilty of an offence.

Minimum Solvency Margin and Enhanced Capital Requirements

Under the Insurance Act, AG Re AGRO and Assured Guaranty (Bermuda)AGRO must each ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin and each company's applicable enhanced capital requirement.


24


The minimum solvency margin for Class 3A and Class 3B insurers is the greater of (i) $1 million, or (ii) 20% of the first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 15% of net premiums written in excess of $6 million, or (iii) 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves.reserves, or (iv) 25% of that insurers applicable enhanced capital requirement reported at the end of its relevant year.

In addition, as a Class C long-term insurer, AGRO is required, with respect to its long-term business, to maintain a minimum solvency margin equal to 75% of the greater of $500,000 or 1.5% of its assets for the 2012 financial year.assets. For the purpose of this calculation, assets are defined as the total assets pertaining to its long-term business reported on the balance sheet in the relevant year less the amounts held in a segregated account. AGRO is also required to keep its accounts in respect of its long-term business separate from any accounts kept in respect of any other business and all receipts of its long-term business form part of its long-term business fund.

Each of the Bermuda SubsidiariesAG Re and AGRO is required to maintain available statutory capital and surplus at a level equal to or in excess of its applicable enhanced capital requirement, which is established by reference to either its BSCR model or an approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an insurer's capital requirements (statutory capital and surplus) by taking into account the risk characteristics of different aspects of the insurer's business. The BSCR formulaeformula establish capital requirements for eight categories of risk: fixed income investment risk, equity investment risk, interest rate/liquidity risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk. For each category, the capital requirement is determined by applying factors to asset, premium, reserve, creditor, probable maximum loss and operation items, with higher factors applied to items with greater underlying risk and lower factors for less risky items.

While not specifically referred to in the Insurance Act, the Authority has also established a target capital level ("TCL") for each insurer subject to an enhanced capital requirement equal to 120% of its enhanced capital requirement. While such an insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the Authority and failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight.

For each insurer subject to an enhanced capital requirement, the Authority has introducedthere is a three-tiered capital system designed to assess the quality of capital resources that a company has available to meet its capital requirements. Under this system, all of an insurer's capital instruments will be classified as either basic or ancillary capital which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics. Highest quality capital is classified as Tier 1 Capital; lesser quality capital is classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital (determined by registration classification) may be used to support the company's minimum solvency margin, enhanced capital requirement and TCL.

Restrictions on Dividends and Distributions

The Insurance Act limits the declaration and payment of dividends and other distributions by AG Re AGRO and Assured Guaranty (Bermuda).

AGRO.
Under the Insurance Act:

The minimum share capital must be always issued and outstanding and cannot be reduced (forreduced. For AG Re, which is registered as a companyClass 3B insurer, the minimum share capital is $120,000. For AGRO, which is registered both as a Class 3A and a Class C long-term insurer, such as AGRO, the minimum share capital is $370,000 and for a company registered as a Class 3A or Class 3B insurer only, such as AG Re and Assured Guaranty (Bermuda), the minimum share capital is $120,000).$370,000.


25


With respect to the distribution (including repurchase of shares) of any share capital, contributed surplus or other statutory capital, certain restrictions under the Insurance Act may apply if the proposal is to reduce its total statutory capital. Before reducing its total statutory capital by 15% or more of the insurer's total statutory capital as set out in its previous year's financial statements, a Class 3A, Class 3B or Class C insurer must obtain the prior approval of the Authority. Any application for such approval must include an affidavit stating that it will continue to meet the required margins.capital:

(a)any such distribution that would reduce AG Re's or AGRO's total statutory capital by 15% or more of their respective total statutory capital as set out in their previous year's financial statements requires the prior approval of the Authority. Any application for such approval must include an affidavit stating that the company will continue to meet the required margins; and

(b)as a Class C long-term insurer, AGRO may not use the funds allocated to its long-term business fund, directly or indirectly, for any purpose other than a purpose of its long-term business except in so far as such payment can be made out of any surplus certified by AGRO's approved actuary to be available for distribution otherwise than to policyholders;

With respect to the declaration and payment of dividends:

(a)each of the Bermuda SubsidiariesAG Re and AGRO is prohibited from declaring or paying any dividends during any financial year if it is in breach of its solvency margin, minimum liquidity ratio or enhanced capital requirement, or if the declaration or payment of such dividends would cause such a breach (if it has failed to meet its minimum

25


solvency margin or minimum liquidity ratio on the last day of any financial year, the insurer will be prohibited, without the approval of the Authority, from declaring or paying any dividends during the next financial year);

(b)as a Class 3B insurer, AG Re is prohibited from declaring or paying in any dividends during the next financial yearyear). Dividends, are paid out of each insurer's statutory surplus and, therefore, dividends of more than 25% of its total statutory capitalcannot exceed such surplus. See "—Minimum Solvency Margin and surplus (as shown on its previous financial year's statutory balance sheet) unless it files (at least 7 days before payment of such dividends) with the Authority an affidavit stating that it will continue to meet the required margins;Enhanced Capital Requirements" above and "—Minimum Liquidity Ratio" below;

(c)(b)an insurer which at any time fails to meet its minimum solvency margin or comply with the enhanced capital requirement may not declare or pay any dividend until the failure is rectified, and also in such circumstances the insurer must report, within 14 days after becoming aware of its failure or having reason to believe that such failure has occurred, to the Authority in writing giving particulars of the circumstances leading to the failure and giving a plan detailing the manner, specific actions to be taken and time frame in which the insurer intends to rectify the failure. A failure to comply with the enhanced capital requirement will also result in the insurer furnishing certain other information to the Authority within 45 days after becoming aware of its failure or having reason to believe that such failure has occurred.occurred;

A Class C long-term insurer may not:

(a)(c)use the funds allocated to its long-term business fund, directlyeach of AG Re and AGRO is prohibited from declaring or indirectly, forpaying in any purpose otherfinancial year dividends of more than a purpose25% of its long-term business except in so far astotal statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files (at least seven days before payments of such payment candividends) with the Authority an affidavit signed by at least 2 directors (one of whom must be made outa Bermuda resident director if any of any surplus certified by the insurer's approved actuarydirectors are resident in Bermuda) and the principal representative stating that it will continue to meet its solvency margin and minimum liquidity ratio. Where such an affidavit is filed, it shall be available for distribution otherwise than to policyholders;public inspection at the offices of the Authority; and

(b)(d)as a Class C long-term insurer, AGRO may not declare or pay a dividend to any person other than a policyholder unless the value of the assets of its long-term business fund, as certified by the insurer'sAGRO's approved actuary, exceeds the extent (as so certified) of the liabilities of the insurer'sAGRO's long-term business, and the amount of any such dividend shall not exceed the aggregate of (1) that excess; and (2) any other funds properly available for the payment of dividends being funds arising out of theAGRO's business of the insurer other than its long-term business.

Under theThe Companies Act aalso limits the declaration and payment of dividends and other distributions by Bermuda company (suchcompanies such as AGL and its Bermuda Subsidiaries)subsidiaries (including AG Re and AGRO). Such companies may only declare and pay a dividend or make a distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing that the company is and after the payment will be able to meet and pay its liabilities as they become due and the realizable value of the company's assets will not be less than its liabilities. The Companies Act also regulates and restricts the reduction and return of capital and paid in share premium, including the repurchase of shares and imposes minimum issued and outstanding share capital requirements.

Based on the limitations above, in 2016 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $127 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to the limit of its outstanding statutory surplus, which is $174 million. Such dividend capacity may be further

26


limited by the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements. As of December 31, 2015, AG Re had unencumbered assets of approximately $640 million. AG Re declared and paid dividends of $150 million, $82 million and $144 million during 2015, 2014 and 2013, respectively, to AGL. For more information concerning AG Re’s capacity to pay dividends and or other distributions, see Note 11, Insurance Company Regulatory Requirements, of the Financial Statements and Supplementary Data. The Company does not expect AGRO to declare or pay any dividends or other distributions at this time.
Minimum Liquidity Ratio

The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are certain categories of assets which, unless specifically permitted by the Authority, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans.

The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit and corporate guarantees.

Insurance Code of Conduct

Each of the Bermuda SubsidiariesAG Re and AGRO is subject to the Insurance Code of Conduct, which establishes duties, standards, procedures and sound business principles which must be complied with to ensure sound corporate governance, risk management and internal controls are implemented by all insurers registered under the Insurance Act. The Authority will assess an insurer's compliance with the Code in a proportionate manner relative to the nature, scale and complexity of its business. Failure to comply with the requirements under the Insurance Code of Conduct will be a factor taken into account by the Authority in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the Insurance Act. Such failure to comply with the requirements of the Insurance Code of Conduct could result in the Authority exercising its powers of intervention and investigation and will be a factor in calculating the operational risk charge applicable in accordance with the insurer's BSCR model or approved internal model.

26



Certain Other Bermuda Law Considerations

Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of its common shares.

Under Bermuda law, "exempted" companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an "exempted" company, AGL (as well as each of the Bermuda Subsidiaries)AG Re and AGRO) may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance (the "Minister"), participate in certain business and other transactions, including: (1) the acquisition or holding of land in Bermuda (except that held by way of lease or tenancy agreement which is required for its business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for its officers and employees and held with the consent of the Bermuda Minister, of Finance, for a term not exceeding 21 years), (2) the taking of mortgages on land in Bermuda to secure a principal amount in excess of $50,000 unless the Minister of Finance consents to a higher amount, and (3) the carrying on of business of any kind or type for which it is not duly licensed in Bermuda, except in certain limited circumstances, such as doing business with another exempted undertaking in furtherance of AGL's business carried on outside Bermuda.

The Bermuda government actively encourages foreign investment in "exempted" entities like AGL that are based in Bermuda, but which do not operate in competition with local businesses. AGL is not currently subject to taxes computed on profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual government fees, business fees, payroll tax and other taxes and duties. See "—Tax Matters—Taxation of AGL and Subsidiaries—Bermuda."


27


Special considerations apply to the Company's Bermuda operations. Under Bermuda law, non-Bermudians, other than spouses of Bermudians and individuals holding permanent resident certificates or working resident certificates, are not permitted to engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda government. A work permit is only granted or extended if the employer can show that, after a proper public advertisement, no Bermudian, spouse of a Bermudian or individual holding a permanent resident certificate or working resident certificate is available who meets the minimum standards for the position. A waiver from advertising is automatically granted in respect of any chief executive officer position and other chief officer positions. The employer can also make a request for a waiver from the requirement to advertise in certain other cases, as expressed in the Bermuda government's work permit policies. Currently, all of the Company's Bermuda based professional employees who require work permits have been granted work permits by the Bermuda government.

United Kingdom

This section concerns AGE and its affiliates, Assured Guaranty (UK) Ltd. ("AGUK") and Assured Guaranty Finance Overseas Ltd (“AGFOL”), each of which is regulated in the U.K., as well as Assured Guaranty Credit Protection Ltd. ("AGCPL"), which is an authorized representative of AGE. Both AGE and AGUK are regulated by the PRA as insurers, although the Company has elected to place AGUK into runoff.

General

Each of AGE, AGUK and AGFOL are subject to the U.K.'s Financial Services and Markets Act 2000 ("FSMA"), which covers financial services relating to deposits, insurance, investments and certain other financial products fall under.
Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K.'s Financial Services and Markets Act 2000 (“FSMA”), and each constitutes a “regulated activity” requiring authorization by the entities that provide themappropriate regulator. An authorized insurance company must have permission for each class of insurance business it intends to write.
Insurance companies in the U.K. are authorized and regulated by the PRA and the Financial ServicesConduct Authority (“FSA U.K.”("FCA"). In addition,The PRA and the FCA were established on April 1, 2013 and are the main regulatory authorities responsible for financial regulation in the U.K. These two regulatory bodies cover the following areas:
the PRA, a part of the Bank of England, is responsible for prudential regulation of key systemically important firms (which includes insurance companies, among others), and
the FCA is responsible for the conduct of business regulation of all firms and the regulation of market conduct and the prudential regulation of all non-PRA firms.
While the two regulators coordinate and cooperate in some areas, they have separate and independent mandates and separate rule-making and enforcement powers. AGE and AGUK are regulated by both the PRA and the FCA.
The PRA carries out the prudential supervision of insurance companies through a variety of methods, including the collection of information from statistical returns, the review of accountants' reports and insurers' annual reports and disclosures, visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of insurance companies.
The PRA's rules are intended to align capital requirements with the risk profile of each insurance company and to ensure adequate diversification of an insurer's or reinsurer's exposures to any credit risks of its reinsurers. Each of AGE and AGUK has calculated its minimum required capital according to the PRA's individual capital adequacy criteria and is in compliance.
The PRA applies threshold conditions, which insurers must meet, and against which the PRA assesses them on a continuous basis. At a high level, these conditions are that:
an insurer's head office, and in particular its mind and management, must be in the United Kingdom if it is incorporated in the United Kingdom;
an insurer's business must be conducted in a prudent manner — in particular, the insurer must maintain appropriate financial and non-financial resources;

28


the insurer must be fit and proper, and be appropriately staffed; and
the insurer and its group must be capable of being effectively supervised.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and so whether they meet, and are likely to continue to meet, the threshold conditions. It weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its objectives. It is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise further ahead and will rely significantly on judgments based on evidence and analysis. Its risk assessment framework looks at the potential impact of failure of the insurer, its risk context and mitigating factors. The Solvency II Directive (Directive 2009/138/EC) as amended by the Omnibus II Directive (2014/51/EU) (together, "Solvency II") (discussed below) has brought further changes to the supervisory framework for insurers. The Company has been in consultation with the PRA for several months on the implementation of Solvency II and believes that its current plans are consistent with Solvency II requirements. Future, ongoing consultation with the PRA is anticipated.
The regulatory regime in the U.K. must be consistent with relevant European Union (“EU”) legislation, which is either directly applicable in, or must be implemented into national law by, all EU member states. KeyThe key EU legislation includesthat is relevant to AGE and AGUK is Solvency II, which provides the framework for a new solvency and supervisory regime for insurers in the EEA. The key EU legislation that is relevant to AGFOL is Markets in Financial Instruments Directive (“MiFID”), which harmonizes the regulatory regime for investment services and activities across the EEA,EEA.
Position of U.K. Regulated Entities within the Insurance Directives, which harmonize the regulatory regime for, respectively, life (long term) and non-life (general) insurance and the Banking Consolidation Directive, which harmonizes the regulatory regime for credit institutions. The Capital Adequacy Directive (“CAD”) contains capital requirements for MiFID firms.AGL Group
The FSA U.K. is, until April 1, 2013, the single statutory regulator responsible for regulating the financial services industry in the U.K., having the authority to oversee the carrying on of one or more “regulated activities” (including deposit taking, the underwriting, claims payment and intermediation of insurance and reinsurance, securities and investments broking, dealing and advising, investment management and most other financial services), with the purpose of maintaining confidence in the U.K. financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime (the “regulatory objectives”). It is a criminal offense for any person to carry on a regulated activity in the U.K. unless that personAGE is authorized by the FSA U.K. and has been granted permission to carry on that regulated activity, or otherwise falls under an exclusion or exemption. Each authorized person must have FSA U.K. permission to carry on each relevant regulated activity. Being authorized but acting outside the scope of permission is a disciplinary matter under the FSA U.K.'s rules, which can at worst lead to the firm in question losing its authorization and being unable to continue its business in the U.K.

27


Under FSMA, effecting or carrying out contracts of insurance, within a class of general or long-term insurance, by way of business in the U.K., each constitute a “regulated activity” requiring authorization. An authorized insurance company must have permission for each class of insurance business it intends to write. Insurance business in the EU and U.K. falls into two main categories: long-term insurance (which is primarily investment related) and general insurance. Subject to limited exceptions, it is not possible for a new insurance company to be authorized in both long-term and general insurance business unless the long-term insurance business is restricted to reinsurance business. These two categories are both divided into “classes” (for example: permanent health and pension fund management are two classes of long-term insurance; damage to property and motor vehicle liability are two classes of general insurance).
The present single‑regulator framework in the U.K. will be replaced on April 1, 2013 with a new framework established by the U.K. Financial Services Act 2012. There will be two new regulatory bodies:
the Prudential Regulatory Authority (“PRA”), a subsidiary of the Bank of England, which will be responsible for prudential regulation of key systemically important firms (which includes credit institutions, insurance companies and investment firms that trade on their own accounts (those that have a €730,000 minimum capital resources requirement under the EU Capital Requirements Directive and FSA U.K. rules)), and
the Financial Conduct Authority (“FCA”), which will be responsible for the prudential regulation of all non-PRA firms, the conduct of business regulation of all firms and the regulation of market conduct.
These two new regulators will inherit the majority of the FSA U.K.'s existing functions. While they will co-ordinate and co-operate in some areas, they will have separate and independent mandates and separate rule-making and enforcement powers. AGE and AGUK will be regulated by both the PRA and the FCA under the new regime. The PRA will have new regulatory objectives specific to insurance, which are:
to promote insurers' safety and soundness, thereby supporting the stability of the U.K. financial system; and
to contribute to securing an appropriate degree of protection for those who are or may become policyholders.
The FSA U.K. carries out the prudential supervision of insurance companies through a variety of methods, including the collection of information from statistical returns, review of accountants' reports, visits to insurance companies and regular formal interviews. The FSA U.K. has adopted a risk-based and a principles‑based approach to the supervision of insurance companies.
Under its risk-based approach, the FSA U.K. periodically performs a formal risk assessment of insurance companies or groups carrying on business in the U.K., which varies in scope according to the risk profile of the insurer. The FSA U.K. performs its risk assessment broadly, by analyzing information which it receives during the normal course of its supervision, such as regular prudential returns on the financial position of the insurance company, or which it acquires through a series of meetings with senior management of the insurance company and by making use of its thematic work. After each risk assessment, the FSA U.K. will inform the insurer of its views on the insurer's risk profile. This will include details of any remedial action that the FSA U.K. requires and the likely consequences if this action is not taken. The FSA U.K. also maintains requirements for senior management arrangements and for systems and controls for insurance and reinsurance companies under its jurisdiction.
In addition, the FSA U.K. regards itself as a principles‑based regulator and is placing an increased emphasis on risk identification and management in relation to the prudential regulation of insurance and reinsurance business in the U.K. The FSA U.K.'s rules include those on the sale (known as insurance mediation) of general insurance and investment insurance. Prudential rules are contained in the General Prudential Sourcebook (GENPRU), the Interim Prudential Sourcebook for Insurers (IPRU-INS) and the Prudential Sourcebook for Insurers (INSPRU) (collectively, the “Prudential Sourcebooks”). The Prudential Sourcebooks cover measures such as risk-based capital adequacy rules, including individual capital assessments. These are intended to align capital requirements with the risk profile of each insurance company and ensure adequate diversification of an insurer's or reinsurer's exposures to any credit risks of its reinsurers. AGE has calculated its minimum required capital according to the FSA U.K.'s individual capital adequacy criteria and is in compliance. After April 1, 2013, the PRA will adopt certain of FSA U.K.'s prudential rules as they apply to certain regulated firms, and will restate others. The FCA will adopt other rules relating to conduct of business and market conduct requirements, so insurers will have to comply with the appropriate rules of each regulator.

28


When the PRA takes over prudential regulation of insurers, it will apply new threshold conditions, which insurers must meet, and against which the PRA will assess them on a continuous basis. These conditions are likely to be that:
an insurer's head office, and in particular its mind and management, has to be in the United Kingdom if it is incorporated in the United Kingdom;
an insurer's business must be conducted in a prudent manner - in particular that the insurer maintains appropriate financial and non-financial resources;
the insurer must be fit and proper, and be appropriately staffed; and
the insurer and its group must be capable of being effectively supervised.
The PRA will take a different approach to supervision than the FSA U.K. The PRA will supervise insurers to judge whether they are acting in a manner consistent with safety and soundness and appropriate policyholder protection, and so whether they meet, and are likely to continue to meet, the threshold conditions. It has indicated it will weight its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its objectives. It will be forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise further ahead and will rely significantly on the judgment of its supervisors. Its risk assessment framework will look at the potential impact of failure of the insurer, its risk context and mitigating factors. Solvency II (discussed below) will bring further changes to the supervisory framework for insurers. The PRA believes its plans are consistent with Solvency II requirements.
AGE is authorized to effect and carry out certain classes of general insurance, specifically: classes 14 (credit), 15 (suretyship) and 16 (miscellaneous financial loss) for commercial customers.eligible counterparties and professional clients only (i.e., not retail clients). This scope of permission is sufficient to enable AGE to effect and carry out financial guaranty insurance and reinsurance. The insurance and reinsurance businesses of AGE are subject to close supervision by the FSA U.K.PRA. AGE also has permission to arrange and advise on deals in financialtransactions it guarantees, which it underwrites, and to take deposits in the context of its insurance business.
Following the Company's decision in 2010 to place AGUK into run-off, the Company has been utilizing AGE as the entity from which to write business in the EEA. It was agreed between management and AGE's then regulator, the FSA U.K.Financial Services Authority (now the PRA), that any new business written by AGE willwould be guaranteed using a co-insurance structure pursuant to which AGE willwould co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGE must obtain the approval of the FSA U.K. (or, after April 1, 2013, the PRA or FCA, as relevant) before it can guarantee any new structured finance transaction. AGE's financial guarantee will coverguaranty for each transaction covers a proportionate share (expected to be approximately 3 to 10%) of the total exposure, and AGM or AGC, as the case may be, will guaranteeguarantees the remaining exposure under the transaction (subject to compliance with EEA licensing requirements). AGM or AGC, as the case may be, will also issueprovide a second-to-pay guaranty to cover AGE's financial guarantee. guaranty.
AGE also is also the principal of Assured Guaranty Credit Protection Ltd ("AGCPL").AGCPL. AGCPL is not FSA U.K.PRA or FCA authorized, but is an appointed representative of AGE. This means AGCPL can carry on advising and arranging activities without a license, because AGE has regulatory responsibility for it.
Assured Guaranty Finance Overseas Ltd. (“AGFOL”AGCPL is subject to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council of July 4, 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR"), which, as a European regulation, is directly applicable in all the member states of the European Union. AGCPL is the only European entity within the AGL group which has entered into derivative contracts and as such it is the only entity in the group which is directly subject to EMIR. AGCPL has notified the European Securities and Markets Authority ("ESMA") and the FCA of its status under EMIR as a non-financial counterparty which has exceeded the clearing threshold (an “NFC+”) as described in Article 10 of EMIR. AGCPL is subject to certain requirements under EMIR with respect to its portfolio of derivative contracts including: (i) the requirement to centrally clear standardized OTC derivatives (although AGCPL does not currently enter into such derivatives, and so this requirement is not currently relevant) (ii) an obligation to employ certain risk mitigation techniques relating to derivatives that cannot be centrally cleared; and (iii) a requirement to report derivative transactions to a trade depository.  The Company is aware that circumstances exist in which EMIR may apply directly to non-European entities when transacting derivatives, but has determined that these circumstances do not apply to the non-European entities in AGL’s group.
AGFOL, a subsidiary of AGL, is authorized by the FSA U.K.FCA to carry out designated investment business activities in that it may “advise on investments (except on pension transfers and pension opt outs)” relating to most investment instruments. In addition, it may arrange or bring about transactions in investments and make “arrangements with a view to transactions in

29


investments.” In all cases, it may deal only with clients who are eligible counterparties or professional customers (so no(i.e., not retail clients), or, when arranging or advising onin relation to insurance contracts, commercial customers. It should be noted that AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or places, and may not hold funds on behalf of its customers. AGFOL's permissions also allow it to introduce business to AGC and AGM, so that AGFOL can arrange financial guaranties underwritten by AGC and AGM, even though AGFOL's role will be limited to acting as a pure introducer of business to AGC and AGM. AGFOL is an “Exempt CAD” firm: although it is a
AGFOL’s MiFID investment firm, it does not have to comply with the CAD. Its activities are limited to receiving and transmitting orders and giving investment advice and it cannot hold client money. Accordingly, although it is subject to MiFID, AGFOL is exempt from the Capital Requirements Directive and Capital Requirements Regulations (CRD III and CRD IV), which are the EU regulations on capital for certain MiFID firms.

29


Solvency II and Solvency Requirements
The Prudential Sourcebooks require that non-life insurance companies such as AGUK and AGE maintain a margin of solvency at all times in respect ofSolvency II came into force for insurers within its remit on January 1, 2016. In the liabilities of the insurance company, the calculation of which depends on the type and amount of insurance business a company writes. The method of calculation of the solvency margin (known as the minimum capital requirement) is set outU.K., Solvency II has been transposed into national law through changes to existing provisions in the Prudential Sourcebooks, and for these purposes, the insurer's assets and liabilities are subject to specified valuation rules. If and to the extent that the premiums it collects for specified categories of insurance, such as credit and property, exceed certain specified minimum thresholds, a non-life insurance company must have extra technical provisions, called an equalization reserve, in addition to its minimum capital requirements. The purpose of the equalization reserve, calculated in accordance with the Prudential Sourcebooks, is to ensure that insurers retain additional assets to provide some extra protection against uncertainty as to the amount of claims.
The Prudential Sourcebooks also require that AGUK and AGE calculate and share with the FSA U.K. their “enhanced capital requirement” based on risk-weightings applied to assets held and lines of business written. In 2007, the FSA U.K. replaced the individual capital assessment for financial guaranty insurers with a “benchmarker” capital adequacy model devised by the FSA U.K. Should the level of capital of AGUK or AGE fall below the capital requirement as indicated by the benchmarker, the FSA U.K. may require the Company to undertake further work, following which Individual Capital Guidance may result. Failure to maintain capital at least equal to the minimum capital requirement in the benchmarker model is one of the grounds on which the wide powers of intervention conferred upon the FSA U.K. may be exercised. AGE and AGUK each are discussing with the FSA U.K. the assumptions for the benchmarker modelFCA and the appropriate level of capital for AGEPRA’s respective handbooks and AGUK, respectively, including whether any additional capital would be required following the January 2013 Moody's downgrade of AGCrulebook and AGM.
The European Union's Solvency II Directive (Directive 2009/138/EC), which itself isthrough amendments to be amended by the proposed Omnibus II Directive (collectively, “Solvency II”), is currently not expected to be implemented before 2015 at the earliest. The solvency requirements described above will be replaced by such time.primary legislation. Among other things, Solvency II introduces a revised risk-based prudential regime which includes the following features:"Pillar 1" regulatory capital rules:
assets and liabilities are generally to be valued at their market value;
the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated firms are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and
reinsurance recoveries will be treated as a separate asset (rather than being netted offagainst the underlying insurance liabilities).
In many instances, Solvency II is expected to require insurers to maintain a somewhat increased amount of capital to satisfy the new solvency capital requirements. AGE has been acceptedand AGUK have agreed with the PRA that they will use the "Standard Formula" prescribed by the FSA U.K. into the pre-application process and has begun the process to apply for approval from the FSA U.K. for use of the “Partial Internal Model” methodologySolvency II for calculation of its solvencytheir capital requirement, which combines standard formulas developed by the European Insurance and Occupational Pensions Authority under the direction of the European Commission, for calculation of certain capital requirements with an internally developed model for calculation of other capital requirements. The formal application process has been delayed until mid-2014 at the earliest because of the delay in the implementation of Solvency II.
In addition to new regulatory capital rules, Solvency II also contains a number of “Pillar 2” qualitative requirements, obliging firms to develop and embed systems to identify, measure and proactively manage the risks they are, or may be, exposed to. Among other things, firms must:
have in place an insurer (which includeseffective system of governance that provides for the sound and prudent management of its business;
establish effective risk-management systems; and
take a company conducting only reinsurance business)comprehensive approach to considering their risks through an Own Risk and Solvency Assessment (“ORSA”) as proportionate to the nature, scale and complexity of the risks inherent in their business.

“Pillar 3” reporting and disclosure requirements also exist, including a requirement to publish a public Solvency and Financial Condition Report (“SFCR”) and a private Regular Supervisory Report (“RSR”). For more information on reporting requirements and the ORSA, see “Reporting Requirements” below.
Solvency II contains a new regime for the supervision of groups, including groups in which the parent undertaking has its head office in a country which is outside the EEA. The treatment of such groups in part depends on whether the jurisdiction in which the non-EEA parent has its head office is determined to have a supervisory regime which is equivalent to the Solvency II regime. In the absence of such a determination, the Solvency II rules on supervision apply to the group on a worldwide basis, unless the PRA elects to apply “other methods” which ensure appropriate supervision. Both AGE and AGUK are subsidiaries of U.S. parent companies. As the U.S. has not been determined to be equivalent for the purposes of group supervision, if the PRA were not to elect to apply “other methods”, AGE and AGUK would therefore be required to perform and submit to the FSA U.K.PRA a group capital adequacy return in respect of itstheir ultimate insurance parent. Theparent and that calculation at the level of the ultimate EEA insurance parent is requiredwould have to show a positive result. There
However, the PRA has issued a Direction to AGE and AGUK which confirms the “other methods” that the PRA will apply to ensure appropriate supervision. These include, among other things, requirements for AGE and AGUK to notify the PRA in advance of any material changes in their intra-group arrangements and any payments of dividends or capital extractions to a group undertaking outside the EEA. AGE and AGUK must also provide the PRA with certain other information, such as internal and external solvency, capital adequacy and risk assessment reports. The Direction applies from January 1, 2016 until January 1, 2019, unless it is revoked earlier or no such requirement in relation to the report at the levellonger applicable.

30

Further, an insurer is required to report in its annual returns to the FSA U.K. all material related party transactions (such as intra-group reinsurance whose value is more than 5% of the insurer's general insurance business amount).

Restrictions on Dividend Payments
U.K. company law prohibits each of AGUKAGE and AGEAGUK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory

30


restrictions on a general insurer's ability to declare a dividend, the FSA U.K.'sPRA's capital requirements may in practice act as a restriction on dividends. The Company does not expect AGE or AGUK to distribute any dividends at this time.
Reporting Requirements
U.K. insurance companies must prepare their financial statements under the Companies Act 2006, which requires the filing with Companies House of audited financial statements and related reports. In addition, U.K.as from January 1, 2016, the reporting requirements for UK insurance companies were modified by Solvency II. AGE and AGUK are required to fileproduce certain key reports including an annual SFCR, RSR and an ORSA, the latter as part of the so-called “Pillar 2” individual capital assessment requirements. Although the SFCR will take the place of a number of existing regulatory returns, Solvency II is likely to result in an overall increase in the quantity and quality of disclosures that firms make.
The PRA will review each firm’s ORSA and then consider whether in its view the firm needs to hold capital in excess of its Pillar 1 capital (see “Solvency II and Solvency Requirements” above) and, if so, will impose a “capital add-on”. The prescribed information to be contained in the ORSA, as well as the frequency with which the FSA U.K., which include a revenue account, a profitassessment must be carried out, is subject to guidance issued by the European Insurance and loss accountOccupational Pensions Authority (“EIOPA”) in September 2015 and a balance sheetsupervisory statement issued by the PRA in prescribed forms. UnderOctober 2015. The PRA has advised AGE and AGUK that it is not imposing a capital add-on for those companies at this time. The PRA may determine to impose a capital add-on in relation to AGE and AGUK in the Prudential Sourcebooks, audited regulatory returns must be filed with the FSA U.K. within two months and 15 days of the financial year end (or three months where the delivery of the return is made electronically).future.
Supervision of Management
Individuals thatwho perform one or more “controlled functions” such as significant influence functions or the customer function within authorized firms must be approved by FSA U.K.PRA or FCA (as appropriate) to carry out that function. The management of insurance companies falls within the scope of significant influence functions.functions, which require approval from the PRA. Individuals performing these functions are “Approved Persons” for the purpose of Part V of FSMA and staff performing these specified “controlled functions” within an authorized firm must be approved by the FSA U.K.PRA. The PRA is in the process of implementing a new "Senior Insurance Managers Regime", part of which was driven by high level requirements on governance and fitness and propriety of certain individuals contained in Solvency II. The new regime may result in further or different individuals requiring authorization from the regulators.
Change of Control
Under FSMA, regulates the acquisitionwhen a person decides to acquire or increase of “control” of anya U.K. authorized firm (including an insurance company) they must give the PRA notice in writing before making the acquisition. The PRA has up to 60 working days (without including insurance companies.any period of interruption) in which to assess a change of control case. Any person (a company or individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”) or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting power, in a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and MiFID investment firms, and the 20% threshold to insurance brokers and certain other firms that are non-directive firms.
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an insurance company) they must give the FSA U.K. notice in writing before making the acquisition. The FSA U.K. has up to 60 working days (without including any period of interruption) in which to assess a change of control case. The 60 working day period will begin on the day it confirms receipt of a complete section 178 notice (that includes all supporting documents). A person cannot acquire an authorized firm until the FSA U.K. have assessed and approved the transaction. The FSA U.K. may interrupt the assessment period once during the 60 working day period - for up to 20 days in the case of EEA controllers, and 30 days for others.
In considering whether to approve an application, the FSA U.K. must consider among other things, the reputation of the person acquiring control, the reputation and experience of any person who will direct the business, the financial soundness of the acquirer and whether the authorized firm will be able to comply with its prudential requirements. Failure to make prior notification of a change in control is an offence under FSMA and could result in action being taken by the FSA U.K..
Intervention and Enforcement
The FSA U.K.PRA has extensive powers to intervene in the affairs of an authorized firm, culminating in the sanction of the suspension of authorization to carry on a regulated activity. FSA U.K.The PRA can also vary or cancel a firm's permissions under its own initiative if it considers that the firm is failing, or is likely to fail, to satisfy the Threshold Conditions. FSMA gives the FSA U.K.PRA significant investigation and enforcement powers. It also gives FSA U.K.the PRA a rule-making power, under which it makes the various rules that constitute its Handbook of Rules and Guidance.Rules.
The FSA U.K.PRA also has the power to prosecute criminal offenses arising under FSMA. The FCA has the power to prosecute offenses under FSMA and to prosecute insider dealing under Part V of the Criminal Justice Act of 1993, and breaches by authorized firms of money laundering and terrorist financing regulations. The FSA U.K.'s stated policy is to pursue criminal prosecutions through the criminal justice system in all appropriate cases.

31


“Passporting”
EU directives allow AGFOL, AGUK and AGE to conduct business in EU states other than the U.K. where they are authorized by the FSA U.K.PRA or FCA under a single market directive. This right extends to the EEA. A firm taking advantage of a right under a single market directive to conduct business in another EEA state can rely on its "home state" authorization. This ability

31


to operate in other jurisdictions of the EEA on the basis of home state authorization and supervision is sometimes referred to as “passporting.”
Insurers may operate outside their home Each of AGFOL, AGUK and AGE is passported to conduct business in EEA states other than the U.K. Passporting is not applicable to firms not authorized in the EEA, such as AGM and AGC. Accordingly, the co-insurance model described above cannot be “passported” throughout the EEA. Instead, it is a question of local law in each EEA member state either onas to whether AGM's or AGC’s participation in a “services” basisco-insurance structure, protecting insureds or on an “establishment” basis. Operating on a services basis meansrisks located in that jurisdiction, would amount to the firm conducts permitted businesses in the host state without having a physical presence there. Operating on an establishment basis means the firm has a branch or physical presence in the host state. In both cases, a firm remains subject to regulation by its home state regulator although the firm may have to comply with certain local rules such as local conduct rules and regulations. This requirement to comply with local rules and regulations applies to any passporting firm, but a wider range apply where the firm is operating on an establishment basis. Even when operating on an establishment basis, home state rules apply in respect of organizational and prudential obligations. Each of AGUK, AGE and AGFOL is permitted to operate on a passport basis in various countries throughout the EEA where they are authorized by the FSA U.K. under a single market directive. However, as previously discussed, the Company has elected to place AGUK into run-off and it can only carry oninsurance business in another EEA state in respect of the activities for which it holds the appropriate authorization from the FSA U.K.that jurisdiction.
Fees and Levies
Each of AGUK, AGE and AGEAGFOL is subject to FSA U.K.regulatory fees and levies based on its gross premium income and gross technical liabilities. These fees are collected by the FCA (though they relate to regulation by both the PRA and the FCA). The FSA U.K.PRA also requires authorized firms, including authorized insurers, to participate in an investors' protection fund, known as the Financial Services Compensation Scheme. The Financial Services Compensation Scheme was established to compensate consumers of financial services firms, including the buyers of insurance, against failures in the financial services industry. Eligible claimants (identified in the Compensation Sourcebook of the FSA U.K.PRA Handbook) may be compensated by the Financial Services Compensation Scheme when an authorized insurer is unable, or likely to be unable, to satisfy policyholder claims. Neither AGUK nor AGE expects to write anyGeneral insurance business thatin class 14 (credit) is not protected by the Financial Services Compensation Scheme.Scheme, nor is reinsurance in any class; however, other direct insurance classes written by AGUK and AGE are covered (namely, classes 15 (suretyship) and 16 (miscellaneous financial loss)).
Material Contracts

AGE’s New York affiliate, AGM, currently provides support to AGE, through a quota share and excess of loss reinsurance agreement (the “Reinsurance Agreement”) and a net worth maintenance agreement (the "Net Worth Agreement"). Such agreements replace and supersede the second amended and restated quota share and stop loss reinsurance agreement and the second amended and restated net worth maintenance agreement, respectively, previously in place between the parties. For transactions closed prior to 2011, AGE typically guaranteed all of the guaranteed obligations directly and AGM reinsured under the quota share cover of the Reinsurance Agreement approximately 92% of AGE's retention after cessions to other reinsurers. In 2011, AGE and AGM implemented a co-guarantee structure pursuant to which (i) AGE directly guarantees a portion of the guaranteed obligations in an amount equal to what would have been AGE's pro rata retention percentage under the quota share cover, (ii) AGM directly guarantees the balance of the guaranteed obligations, and (iii) AGM also provides a second-to-pay guarantee for AGE's portion of the guaranteed obligations. AGM's ability to provide such direct guaranties outside of the U.K. is uncertain. See "Passporting" above.

Under the excess of loss cover of the Reinsurance Agreement, AGM pays AGE quarterly the amount by which (i) the sum of (a) AGE’s incurred losses calculated in accordance with UK GAAP as reported by AGE in its financial returns filed with the PRA and (b) AGE’s paid losses and loss adjustment expenses, in both cases net of all other performing reinsurance, including the reinsurance provided by the Company under the quota share cover of the Reinsurance Agreement, exceeds (ii) an amount equal to (a) AGE’s capital resources under U.K. law minus (b) the greatest of the amounts as may be required by the PRA as a condition for AGE to maintain its authorization to carry on a financial guarantee business in the U.K. The Reinsurance Agreement permits AGE to terminate the Reinsurance Agreement upon the following events: a downgrade of AGM’s ratings by Moody’s below Aa3 or by S&P below AA- if AGM fails to restore its rating(s) to the required level within a prescribed period of time; AGM's insolvency; failure by AGM to maintain the minimum capital required by its domiciliary jurisdiction; or AGM filing a petition in bankruptcy, going into liquidation or rehabilitation or having a receiver appointed.

The quota share and excess loss covers each exclude transactions guaranteed by AGE on or after July 1, 2009 that are not municipal, utility, project finance or infrastructure risks or similar types of risks.

The Reinsurance Agreement also contemplates the establishment of collateral by AGM to support AGM’s reinsurance obligations to AGE.  In December 2014, to satisfy the PRA’s collateral requirements, AGM and AGE entered into a trust agreement pursuant to which AGM established and deposited assets into a reinsurance trust account for the benefit of AGE. AGM’s collateral requirement was measured during 2015, as of the end of each calendar quarter, by (i) using the PRA’s FG Benchmark Model to calculate at the 99.5% confidence interval the losses expected to be borne collectively by AGE’s three affiliated reinsurers, AGM, AG Re and AGRO; (ii) deducting from such calculation AGE’s capital resources under such model;

32


and (iii) requiring AGM, AG Re and AGRO collectively to maintain collateral equal to fifty percent (50%) of such difference, i.e., the excess of AGM’s, AG Re’s and AGRO’s assumed modeled losses over AGE’s capital resources.  As of January 1, 2016, the FG Benchmark Model is no longer applicable and the PRA has agreed to allow AGM’s collateral requirement to be determined using AGE’s internal capital requirement model under the same formula described above. This change in the calculation of AGM's required collateral must be reflected in an amendment to the Reinsurance Agreement; such an amendment to a transaction between affiliates requires the approval of the NYDFS under the New York Insurance Law.

Pursuant to the current Net Worth Agreement, AGM is obligated to cause AGE to maintain capital resources equal to 110% of the greatest of the amounts as may be required by the PRA as a condition for AGE to maintain its authorization to carry on a financial guarantee business in the U.K., provided that AGM's contributions (a) do not exceed 35% of AGM's policyholders' surplus on an accumulated basis as determined by the laws of the State of New York, and (b) are in compliance with Section 1505 of the New York Insurance Law. AGM has never been required to make any contributions to AGE's capital under the current Net Worth Agreement or the prior net worth maintenance agreement. Subject to the approval of the NYDFS, AGE and AGM will amend the Net Worth Agreement to provide for use of the internal capital requirement model.

AGUK’s parent company, AGC, currently provides support to AGUK through an amended and restated quota share reinsurance agreement (the “Quota Share Agreement”), an amended and restated excess of loss reinsurance agreement (the “XOL Agreement”), and an amended and restated net worth maintenance agreement (the "AGUK Net Worth Agreement"). Pursuant to the Quota Share Agreement, AGUK cedes 90% of its financial guaranty insurance and reinsurance exposure to AGC. Pursuant to the XOL Agreement, AGC indemnifies AGUK for 100% of losses (net of the quota share reinsurance agreement discussed above) incurred by AGUK in excess of an amount equal to (a) AGUK’s capital resources less (b) 110% of the greatest of the amounts as may be required by the PRA as a condition for AGUK maintaining its authorization to carry on a financial guarantee business in the U.K. Pursuant to the AGUK Net Worth Agreement, if AGUK's net worth falls below 110% of the minimum level of capital required by the PRA, AGC must invest additional funds in order to bring the capital of AGUK back into compliance with the required amount.

AGC and AGUK recently reached an agreement with the PRA that, in order for AGC to secure its outstanding reinsurance of AGUK under the Quota Share Agreement and XOL Agreement, AGC shall post as collateral its share of AGUK-guaranteed triple-X insurance bonds that have been purchased by AGC for loss mitigation and an additional amount to be determined by (i) using AGUK’s internal capital requirement model to calculate at the 99.5% confidence interval the losses expected to be borne by AGC for the exposures it has assumed from AGUK that do not have loss reserves (“non-reserve exposures”); (ii) adding the amount of loss reserves ceded by AGUK to AGC under UK GAAP; (iii) subtracting from such sum AGUK’s capital resources under its internal capital requirement model (the result of clauses (i) through (iii) being referred to as the “resulting amount”); and then (iv) reducing the resulting amount by 50% of the portion of the resulting amount that was contributed by the non-reserve exposures. AGC and AGUK intend to enter into a trust agreement pursuant to which AGC will establish a reinsurance trust account for the benefit of AGUK and will deposit therein on a quarterly basis sufficient assets to satisfy the above-described collateral requirement recently agreed with the PRA. The new collateral requirement must be reflected in amendments to the Quota Share Agreement and XOL Agreement; such amendments to transactions between affiliates require the approval of the MIA under the Maryland insurance law.
Tax Matters

Taxation of AGL and Subsidiaries

Bermuda

Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by AGL or its Bermuda Subsidiaries.subsidiaries. AGL, AG Re and the Bermuda SubsidiariesAGRO have each obtained from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to AGL, AG Re or the Bermuda SubsidiariesAGRO or to any of their operations or their shares, debentures or other obligations, until March 31, 2035. This assurance is subject to the proviso that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda, or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any land leased to AGL, AG Re or the Bermuda Subsidiaries.AGRO. AGL, AG Re and the Bermuda SubsidiariesAGRO each paypays annual Bermuda government fees, and the Bermuda SubsidiariesAG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.


33


United States

AGL has conducted and intends to continue to conduct substantially all of its foreign operations outside the U.S. and to limit the U.S. contacts of AGL and its foreign subsidiaries (except AGRO and AGE, which have elected to be taxed as U.S. corporations) so that they should not be engaged in a trade or business in the U.S. A foreign corporation, such as AG Re, that is deemed to be engaged in a trade or business in the United States would be subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business, unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a foreign corporation would generally be entitled to deductions and credits only if it timely files a U.S. federal income tax return. AGL, AG Re and certain of the other foreign subsidiaries have and will continue to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that they are subject to U.S. federal

32


income tax. The highest marginal federal income tax rates currently are 35% for a corporation's effectively connected income and 30% for the "branch profits" tax.

Under the income tax treaty between Bermuda and the U.S. (the "Bermuda Treaty"), a Bermuda insurance company would not be subject to U.S. income tax on income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the U.S. AG Re and the other Bermuda Subsidiaries currently intendintends to conduct theirits activities so that they doit does not have a permanent establishment in the U.S.

An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the U.S. or Bermuda or U.S. citizens and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities of, persons who are neither residents of either the U.S. or Bermuda nor U.S. citizens.

Foreign insurance companies carrying on an insurance business within the U.S. have a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If AG Re or another of the Company's Bermuda Subsidiarysubsidiaries is considered to be engaged in the conduct of an insurance business in the U.S. and is not entitled to the benefits of the Bermuda Treaty in general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Internal Revenue Code of 1986, as amended (the "Code"), could subject a significant portion of AG Re's or another of the Company's Bermuda Subsidiary'ssubsidiary's investment income to U.S. income tax.

AGL, as a U.K. tax resident, would not be subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business under the income tax treaty between the U.S. and the U.K. (the “U.K. Treaty”), unless that trade or business is conducted through a permanent establishment in the United States. AGL intends to conduct its activities so that it does not have a permanent establishment in the United States. 

Foreign corporations not engaged in a trade or business in the U.S., and those that are engaged in a U.S. trade or business with respect to their non-effectively connected income are nonetheless subject to U.S. withholding tax on certain "fixed or determinable annual or periodic gains, profits and income" derived from sources within the U.S. (such as dividends and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The standard non-treaty rate of U.S. withholding tax is currently 30%. The Bermuda Treaty does not reduce the U.S. withholding rate on U.S.-sourced investment income. The standard non-treaty rate ofU.K. Treaty reduces or eliminates U.S. withholding tax is currently 30%.on certain U.S. sourced investment income, including dividends from U.S. companies to U.K. resident persons entitled to the benefit of the U.K. Treaty.

The U.S. also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers with respect to risk of a U.S. person located wholly or partly within the U.S. or risks of a foreign person engaged in a trade or business in the U.S. which are located within the U.S. The rates of tax applicable to premiums paid are 4% for direct casualty insurance premiums and 1% for reinsurance premiums.

AGUS, AGC, AG Financial Products Inc., Assured Guaranty Overseas U.S. Holdings Inc. and Assured Guaranty Mortgage Insurance Company are each a U.S. domiciled corporation and AGRO and AGE have elected to be treated as U.S. corporations for all U.S. federal tax purposes. Aspurposes and, as such, each corporationof AGRO and AGE, together with AGL's U.S. subsidiaries, is subject to taxation in the U.S. at regular corporate rates.

If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.


34


United Kingdom

In November 2013, AGL became tax resident in the U.K. AGL remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. The AGL common shares have not changed and continue to be listed on the New York Stock Exchange ("NYSE").

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

As a U.K. tax resident company, AGL is subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties.

As a U.K. tax resident, AGL is required to file a corporation tax return with Her Majesty’s Revenue & Customs (“HMRC”). AGL will be subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The main rate of corporation tax is currently 20%. It will be further reduced to 19% with effect from April 1, 2017 and 18% with effect from April 1, 2020. AGL has also registered in the U.K. to report its value added tax (“VAT”) liability. The current rate of VAT is 20%.

The dividends AGL receives from its direct subsidiaries should be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The non-U.K. resident subsidiaries intend to operate in such a manner that their profits are outside the scope of the charge under the "controlled foreign companies" ("CFC regime"). Accordingly, Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be attributed to AGL and taxed in the U.K. under the CFC regime and has obtained clearance from HMRC confirming this on the basis of current facts and intentions.

Taxation of Shareholders

Bermuda Taxation

Currently, there is no Bermuda capital gains tax, or withholding or other tax payable on principal, interestsinterest or dividends paid to the holders of the AGL common shares.

United States Taxation

This discussion is based upon the Code, the regulations promulgated thereunder and any relevant administrative rulings or pronouncements or judicial decisions, all as in effect on the date hereof and as currently interpreted, and does not take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively. This discussion does not include any description of the tax laws of any state or local governments within the U.S. or any foreign government.

The following summary sets forth the material U.S. federal income tax considerations related to the purchase, ownership and disposition of AGL's shares. Unless otherwise stated, this summary deals only with holders that are U.S. Persons (as defined below) who purchase their shares and who hold their shares as capital assets within the meaning of section 1221 of the Code. The following discussion is only a discussion of the material U.S. federal income tax matters as described herein and does not purport to address all of the U.S. federal income tax consequences that may be relevant to a particular shareholder in light of such shareholder's specific circumstances. For example, special rules apply to certain shareholders, such as partnerships, insurance companies, regulated investment companies, real estate investment trusts, financial asset securitization investment trusts, dealers or traders in securities, tax exempt organizations, expatriates, persons that do not hold their securities

33


in the U.S. dollar, persons who are considered with respect to AGL or any of its foreign subsidiaries as "United States shareholders" for purposes of the controlled foreign corporation ("CFC") rules of the Code (generally, a U.S. Person, as defined below, who owns or is deemed to own 10% or more of the total combined voting power of all classes of AGL or the stock of any of AGL's foreign subsidiaries entitled to vote (i.e., 10% U.S. Shareholders)), or persons who hold the common shares as part of a hedging or conversion transaction or as part of a short-sale or straddle. Any such shareholder should consult their tax advisor.

If a partnership holds AGL's shares, the tax treatment of the partners will generally depend on the status of the partner and the activities of the partnership. Partners of a partnership owning AGL's shares should consult their tax advisers.


35


For purposes of this discussion, the term "U.S. Person" means: (i) a citizen or resident of the U.S., (ii) a partnership or corporation, created or organized in or under the laws of the U.S., or organized under any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, (iv) a trust if either (x) a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes or (v) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.

Taxation of Distributions.    Subject to the discussions below relating to the potential application of the CFC, related person insurance income ("RPII") and passive foreign investment company ("PFIC") rules, cash distributions, if any, made with respect to AGL's shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of AGL (as computed using U.S. tax principles). Dividends paid by AGL to corporate shareholders will not be eligible for the dividends received deduction. To the extent such distributions exceed AGL's earnings and profits, they will be treated first as a return of the shareholder's basis in the common shares to the extent thereof, and then as gain from the sale of a capital asset.

AGL believes dividends paid by AGL on its common shares to non-corporate holders will be eligible for reduced rates of tax at the rates applicable to long-term capital gains as "qualified dividend income," provided that AGL is not a PFIC and certain other requirements, including stock holding period requirements, are satisfied. Note, however, that legislation has periodically been introduced in the U.S. Congress intending to limit the availability of this preferential dividend tax rate where dividends are paid by corporations resident in foreign jurisdictions deemed to be "tax haven" jurisdictions for this purpose.

Classification of AGL or its Foreign Subsidiaries as a Controlled Foreign Corporation.    Each 10% U.S. Shareholder (as defined below) of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the foreign corporation, directly or indirectly through foreign entities, on the last day of the foreign corporation's taxable year on which it is CFC, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart F income," even if the subpart F income is not distributed. "Subpart F income" of a foreign insurance corporation typically includes foreign personal holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income). A foreign corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through foreign entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e., "constructively")) more than 50% of the total combined voting power of all classes of voting stock of such foreign corporation, or more than 50% of the total value of all stock of such corporation on any day during the taxable year of such corporation. For purposes of taking into account insurance income, a CFC also includes a foreign insurance company in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation. A "10% U.S. Shareholder" is a U.S. Person who owns (directly, indirectly through foreign entities or constructively) at least 10% of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. AGL believes that because of the dispersion of AGL's share ownership, provisions in AGL's organizational documents that limit voting power (these provisions are described in "Description of Share Capital") and other factors, no U.S. Person who owns shares of AGL directly or indirectly through one or more foreign entities should be treated as owning (directly, indirectly through foreign entities, or constructively), 10% or more of the total voting power of all classes of shares of AGL or any of its foreign subsidiaries. It is possible, however, that the Internal Revenue Service ("IRS") could challenge the effectiveness of these provisions and that a court could sustain such a challenge. In addition, the direct and indirect subsidiaries of AGUS are characterized as CFCs and any subpart F income generated will be included in the gross income of the applicable domestic subsidiaries in the AGL group.

The RPII CFC Provisions.    The following discussion generally is applicable only if the RPII of AG Re or any other foreign insurance subsidiary that has not made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. federal tax purposes or are CFCs owned directly or indirectly by AGUS (each a "Foreign Insurance Subsidiary" or

34


collectively, with AG Re, the "Foreign Insurance Subsidiaries") determined on a gross basis, is 20% or more of the Foreign Insurance Subsidiary's gross insurance income for the taxable year and the 20% Ownership Exception (as defined below) is not met. The following discussion generally would not apply for any taxable year in which the Foreign Insurance Subsidiary's gross RPII falls below the 20% threshold or the 20% Ownership Exception is met. Although the Company cannot be certain, it believes that each Foreign Insurance Subsidiary has been, in prior years of operations, and will be, for the foreseeable future, either below the 20% threshold or in compliance with the requirements of 20% Ownership Exception for each tax year.

RPII is any "insurance income" (as defined below) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a "RPII shareholder" (as defined below) or a "related person" (as defined below) to such RPII shareholder. In general, and subject to certain limitations, "insurance income" is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance

36


company. For purposes of inclusion of the RPII of a Foreign Insurance Subsidiary in the income of RPII shareholders, unless an exception applies, the term "RPII shareholder" means any U.S. Person who owns (directly or indirectly through foreign entities) any amount of AGL's common shares. Generally, the term "related person" for this purpose means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying certain constructive ownership principles. A Foreign Insurance Subsidiary will be treated as a CFC under the RPII provisions if RPII shareholders are treated as owning (directly, indirectly through foreign entities or constructively) 25% or more of the shares of AGL by vote or value.

RPII Exceptions.    The special RPII rules do not apply if (i) at all times during the taxable year less than 20% of the voting power and less than 20% of the value of the stock of AGL (the "20% Ownership Exception") is owned (directly or indirectly through entities) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by a Foreign Insurance Subsidiary or related persons to any such person, (ii) RPII, determined on a gross basis, is less than 20% of a Foreign Insurance Subsidiary's gross insurance income for the taxable year (the "20% Gross Income Exception), (iii) a Foreign Insurance Subsidiary elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business, and to waive all treaty benefits with respect to RPII and meet certain other requirements or (iv) a Foreign Insurance Subsidiary elects to be treated as a U.S. corporation and waive all treaty benefits and meet certain other requirements. The Foreign Insurance Subsidiaries do not intend to make either of these elections. Where none of these exceptions applies, each U.S. Person owning or treated as owning any shares in AGL (and therefore, indirectly, in a Foreign Insurance Subsidiary) on the last day of AGL's taxable year will be required to include in its gross income for U.S. federal income tax purposes its share of the RPII for the portion of the taxable year during which a Foreign Insurance Subsidiary was a CFC under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at that date, but limited by each such U.S. Person's share of a Foreign Insurance Subsidiary's current-year earnings and profits as reduced by the U.S. Person's share, if any, of certain prior-year deficits in earnings and profits. The Foreign Insurance Subsidiaries intend to operate in a manner that is intended to ensure that each qualifies for either the 20% Gross Income Exception or 20% Ownership Exception.

Computation of RPII.    For any year in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception, AGL may also seek information from its shareholders as to whether beneficial owners of shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons; to the extent AGL is unable to determine whether a beneficial owner of shares is a U.S. Person, AGL may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses. If a Foreign Insurance Subsidiary meets the 20% Ownership Exception or the 20% Gross Income Exception, RPII shareholders will not be required to include RPII in their taxable income.

Apportionment of RPII to U.S. Holders.    Every RPII shareholder who owns shares on the last day of any taxable year of AGL in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income Exception should expect that for such year it will be required to include in gross income its share of a Foreign Insurance Subsidiary's RPII for the portion of the taxable year during which the Foreign Insurance Subsidiary was a CFC under the RPII provisions, whether or not distributed, even though it may not have owned the shares throughout such period. A RPII shareholder who owns shares during such taxable year but not on the last day of the taxable year is not required to include in gross income any part of the Foreign Insurance Subsidiary's RPII.

Basis Adjustments.    An RPII shareholder's tax basis in its common shares will be increased by the amount of any RPII the shareholder includes in income. The RPII shareholder may exclude from income the amount of any distributions by

35


AGL out of previously taxed RPII income. The RPII shareholder's tax basis in its common shares will be reduced by the amount of such distributions that are excluded from income.

Uncertainty as to Application of RPII.    The RPII provisions are complex and have never been interpreted by the courts or the Treasury Department in final regulations; regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. These provisions include the grant of authority to the Treasury Department to prescribe "such regulations as may be necessary to carry out the purpose of this subsection including regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise." Accordingly, the meaning of the RPII provisions and the application thereof to the Foreign Insurance Subsidiaries is uncertain. In addition, the Company cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent IRS examination. Any prospective investor which does business

37


with a Foreign Insurance Subsidiary and is considering an investment in common shares should consult his tax advisor as to the effects of these uncertainties.

Information Reporting.    Under certain circumstances, U.S. Persons owning shares (directly, indirectly or constructively) in a foreign corporation are required to file IRS Form 5471 with their U.S. federal income tax returns. Generally, information reporting on IRS Form 5471 is required by (i) a person who is treated as a RPII shareholder, (ii) a 10% U.S. Shareholder of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation and who owned the stock on the last day of that year; and (iii) under certain circumstances, a U.S. Person who acquires stock in a foreign corporation and as a result thereof owns 10% or more of the voting power or value of such foreign corporation, whether or not such foreign corporation is a CFC. For any taxable year in which AGL determines that the 20% Gross Income Exception and the 20% Ownership Exception does not apply, AGL will provide to all U.S. Persons registered as shareholders of its shares a completed IRS Form 5471 or the relevant information necessary to complete the form. Failure to file IRS Form 5471 may result in penalties. In addition, U.S. shareholders should consult their tax advisors with respect to other information reporting requirements that may be applicable to them.

For taxable years beginning after March 18, 2010, the Code requires thatU.S. Persons holding our shares should consider their possible obligation to file FINCEN Form 114, Foreign Bank and Financial Accounts Report, with respect to their shares. Additionally, such U.S. and non-U.S. persons should consider their possible obligations to annually report certain information with respect to us with their U.S. federal income tax returns. Shareholders should consult their tax advisors with respect to these or any individual owning an interest in “specified foreign financial assets,” including an interest in a foreign entity (such as AGL) that is not held in an account maintained by a financial institution, the value of which in the aggregate exceeds certain thresholds, attach IRS Form 8938 to his or her tax return for the year that provides detailed disclosure of such assets. Penalties may be assessed for failure to comply. Future guidance is expected to provide that certain domestic entities would also be subject to thisother reporting requirement in the future.which may apply with respect to their ownership of our shares.

Tax-Exempt Shareholders.    Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includible in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are tax exempt entities are urged to consult their tax advisors as to the potential impact of the unrelated business taxable income provisions of the Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in certain circumstances.

Dispositions of AGL's Shares.    Subject to the discussions below relating to the potential application of the Code section 1248 and PFIC rules, holders of shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other disposition of shares in the same manner as on the sale, exchange or other disposition of any other shares held as capital assets. If the holding period for these shares exceeds one year, any gain will be subject to tax at a current maximum marginal tax rate of 15%20% for individuals (subject to increase in 2013 without Congressional action) and 35% for corporations. Moreover, gain, if any, generally will be a U.S. source gain and generally will constitute "passive income" for foreign tax credit limitation purposes.

Code section 1248 provides that if a U.S. Person sells or exchanges stock in a foreign corporation and such person owned, directly, indirectly through foreign entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of the CFC's earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). The Company believes that because of the dispersion of AGL's share ownership, provisions in AGL's organizational documents that limit voting power and other factors that no U.S. shareholder of AGL should be treated as owning (directly, indirectly through foreign entities or constructively) 10% of more of the total voting power of AGL; to the extent this is the case this application of Code Section 1248 under the regular CFC rules should not apply to dispositions of AGL's shares. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could

36


sustain such a challenge. A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, AGL will provide a completed IRS Form 5471 or the relevant information necessary to complete the Form. Code section 1248 in conjunction with the RPII rules also applies to the sale or exchange of shares in a foreign corporation if the foreign corporation would be treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Ownership Exception or 20% Gross Income Exception applies. Existing proposed regulations do not address whether Code section 1248 would apply if a foreign corporation is not a CFC but the foreign corporation has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a domestic corporation. The Company believes, however, that this application of Code section 1248 under the RPII rules should not apply to dispositions of AGL's shares because AGL will not be directly engaged in the insurance business. The Company cannot be certain, however, that the IRS will not interpret the proposed regulations in a contrary manner or that the Treasury Department will not amend the proposed regulations to provide that these rules will apply to dispositions of common shares. Prospective investors should consult their tax advisors regarding the effects of these rules on a disposition of common shares.


38


Passive Foreign Investment Companies.    In general, a foreign corporation will be a PFIC during a given year if (i) 75% or more of its gross income constitutes "passive income" (the "75% test") or (ii) 50% or more of its assets produce passive income (the "50% test").

If AGL were characterized as a PFIC during a given year, each U.S. Person holding AGL's shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an "excess distribution" with respect to, their shares, unless such person (i) is a 10% U.S. Shareholder and AGL is a CFC or (ii) made a "qualified electing fund election" or "mark-to-market" election. It is uncertain that AGL would be able to provide its shareholders with the information necessary for a U.S. Person to make a qualified electing fund election. In addition, if AGL were considered a PFIC, upon the death of any U.S. individual owning common shares, such individual's heirs or estate would not be entitled to a "step-up" in the basis of the common shares that might otherwise be available under U.S. federal income tax laws. In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the common shares during the three preceding taxable years (or shorter period during which the taxpayer held common shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the common shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the common shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder's period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period. In addition, a distribution paid by AGL to U.S. shareholders that is characterized as a dividend and is not characterized as an excess distribution would not be eligible for reduced rates of tax as qualified dividend income.

For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC rules provide that income "derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business... is not treated as passive income." The PFIC provisions also contain a look-through rule under which a foreign corporation shall be treated as if it "received directly its proportionate share of the income..." and as if it "held its proportionate share of the assets..." of any other corporation in which it owns at least 25% of the value of the stock.

The insurance income exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. The Company expects, for purposes of the PFIC rules, that each of AGL's insurance subsidiaries will be predominantly engaged in an insurance business and is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of operations. Accordingly, none of the income or assets of AGL's insurance subsidiaries should be treated as passive. Additionally, the Company expects that in each year of operations the passive income and assets of AGL's non-insurance subsidiaries will not exceed the 75% test or 50% test amounts in each year of operations with respect to the overall income and assets of AGL and its subsidiaries. Under the look-through rule AGL should be deemed to own its proportionate share of the assets and to have received its proportionate share of the income of its direct and indirect subsidiaries for purposes of the 75% test and the 50% test. As a result, the Company believes that AGL was not and should not be treated as a PFIC. The Company cannot be certain that the IRS will not successfully challenge this position, however, as there are currently no final or temporary regulations regarding the application of the PFIC provisions to an insurance company. The IRS recently issued proposed regulations intended to clarify the application of the PFIC provisions to an insurance company. These proposed regulations provide that a non-U.S. insurance company may only qualify for an exception to the PFIC rules if, among other things, the non-U.S. insurance company’s officers and newemployees perform its substantial managerial and operational activities.  This proposed regulation will not be effective until adopted in final form.  In addition, Senator Wyden recently introduced the “Offshore Reinsurance Tax Fairness Act” that, if enacted, would characterize a non-U.S. insurance company with insurance liabilities of 25% or less of such company’s assets as a PFIC unless it can qualify for a temporary exception which would require its insurance liabilities to equal or exceed 10% of its assets and the satisfaction of a facts and circumstances test. Because of the legal uncertainties relating to how the proposed regulations will be interpreted and the form in which such regulations or pronouncements interpreting or clarifying these rulesany legislative proposal may be forthcoming,finalized, the Company cannot predict what impact, if any, such guidance or legislation would have on an investor that the IRS will not successfully challenge this position.is subject to US federal income tax. Prospective investors should consult their tax advisor as to the effects of the PFIC rules.

Foreign tax credit.    If U.S. Persons own a majority of AGL's common shares, only a portion of the current income inclusions, if any, under the CFC, RPII and PFIC rules and of dividends paid by AGL (including any gain from the sale of

37


common shares that is treated as a dividend under section 1248 of the Code) will be treated as foreign source income for purposes of computing a shareholder's U.S. foreign tax credit limitations. The Company will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the "subpart F income," RPII and dividends that are foreign source income will constitute either "passive" or "general" income. Thus, it may not be possible for most shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income.

39



Information Reporting and Backup Withholding on Distributions and Disposition Proceeds.    Information returns may be filed with the IRS in connection with distributions on AGL's common shares and the proceeds from a sale or other disposition of AGL's common shares unless the holder of AGL's common shares establishes an exemption from the information reporting rules. A holder of common shares that does not establish such an exemption may be subject to U.S. backup withholding tax on these payments if the holder is not a corporation or non-U.S. Person or fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person's U.S. federal income tax liability and may entitle the U.S. Person to a refund, provided that the required information is furnished to the IRS.

Changes in U.S. Federal Income Tax Law Could Materially Adversely Affect AGL or AGL's Shareholders.Legislation has been introduced from time to time in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections. For example, legislation has been introduced in Congress to limit the deductibility of reinsurance premiums paid by U.S. companies to foreign affiliates. It is possible that this or similar legislation could be introduced in and enacted by the current Congress or future Congresses that could have an adverse impact on AGL or AGL's shareholders.

Additionally, tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or a PFIC or has RPII are subject to change, possibly on a retroactive basis. There are currently noonly recently proposed regulations regarding the application of the PFIC rules to an insurance company. Additionally, the regulations regarding RPII are stillhave been in proposed form.form since 1991. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may be provided and whether such guidance will have a retroactive effect.

United Kingdom

The following discussion is intended to be only a general guide to certain U.K. tax consequences of holding AGL common shares, under current law and the current practice of HMRC, either of which is subject to change at any time, possibly with retrospective effect. Except where otherwise stated, this discussion applies only to shareholders who are not (and have not recently been) resident or (in the case of individuals) domiciled for tax purposes in the U.K., who hold their AGL common shares as an investment and who are the absolute beneficial owners of their common shares. This discussion may not apply to certain shareholders, such as dealers in securities, life insurance companies, collective investment schemes, shareholders who are exempt from tax and shareholders who have (or are deemed to have) acquired their shares by virtue of an office or employment. Such shareholders may be subject to special rules.

The following statements do not purport to be a comprehensive description of all the U.K. considerations that may be relevant to any particular shareholder. Any person who is in any doubt as to their tax position should consult an appropriate professional tax adviser.

AGL's Tax Residency. AGL is not incorporated in the U.K., but effective November 6, 2013, the AGL Board of Directors intends to manage the affairs of AGL in such a way as to maintain its status as a company that is tax resident in the U.K.

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

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

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


40


Description of Share Capital

The following summary of AGL's share capital is qualified in its entirety by the provisions of Bermuda law, AGL's memorandum of association and its Bye-Laws, copies of which are incorporated by reference as exhibits to this Annual Report on Form 10-K.

AGL's authorized share capital of $5,000,000 is divided into 500,000,000 shares, par value U.S. $0.01 per share, of which 194,168,651135,863,776 common shares were issued and outstanding as of February 22, 2013.23, 2016. Except as described below, AGL's common shares have no pre-emptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL's common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL's assets, if any remain after the payment of all AGL's debts and liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a shareholder. See "—Acquisition of Common Shares by AGL" below.

Voting Rights and Adjustments

In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL's shares) of a shareholder are treated as "controlled shares" (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL's issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL's Bye-laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a controlled foreign corporation as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL's Bye-Laws as a "9.5% U.S. Shareholder"). In addition,

38


AGL's Board of Directors may determine that shares held carry different voting rights when it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. "Controlled shares" includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.

Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL's Bye-laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.

AGL's Board of Directors is authorized to require any shareholder to provide information for purposes of determining whether any holder's voting rights are to be adjusted, which may be information on beneficial share ownership, the names of persons having beneficial ownership of the shareholder's shares, relationships with other shareholders or any other facts AGL's Board of Directors may deem relevant. If any holder fails to respond to this request or submits incomplete or inaccurate information, AGL's Board of Directors may eliminate the shareholder's voting rights. All information provided by the shareholder will be treated by AGL as confidential information and shall be used by AGL solely for the purpose of establishing whether any 9.5% U.S. Shareholder exists and applying the adjustments to voting power (except as otherwise required by applicable law or regulation).

Restrictions on Transfer of Common Shares

AGL's Board of Directors may decline to register a transfer of any common shares under certain circumstances, including if they have reason to believe that any adverse tax, regulatory or legal consequences to the Company, any of its subsidiaries or any of its shareholders or indirect holders of shares or its Affiliates may occur as a result of such transfer (other than such as AGL's Board of Directors considers de minimis)minimis). Transfers must be by instrument unless otherwise permitted by the Companies Act.

The restrictions on transfer and voting restrictions described above may have the effect of delaying, deferring or preventing a change in control of Assured Guaranty.

41



Acquisition of Common Shares by AGL

Under AGL's Bye-Laws and subject to Bermuda law, if AGL's Board of Directors determines that any ownership of AGL's shares may result in adverse tax, legal or regulatory consequences to AGL, any of AGL's subsidiaries or any of AGL's shareholders or indirect holders of shares or its Affiliates (other than such as AGL's Board of Directors considers de minimis)minimis), AGL has the option, but not the obligation, to require such shareholder to sell to AGL or to a third party to whom AGL assigns the repurchase right the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board of Directors to represent the shares' fair market value (as defined in AGL's Bye-Laws).

Other Provisions of AGL's Bye-Laws

AGL's Board of Directors and Corporate Action

AGL's Bye-Laws provide that AGL's Board of Directors shall consist of not less than three and not more than 21 directors, the exact number as determined by the Board of Directors. AGL's Board of Directors consists of eleven persons. In 2011, AGL's Bye-laws were amended to eliminate the classified board structure and provide for the annual election of all directors without affecting the current term of any director then in office. Accordingly, at the 2012 Annual General Meeting, eight directors wereten persons who are elected for annual terms and three directors continue to serve terms expiring at the 2013 Annual General Meeting, at which time all directors will be elected annually.terms.

Shareholders may only remove a director for cause (as defined in AGL's Bye-Laws) at a general meeting, provided that the notice of any such meeting convened for the purpose of removing a director shall contain a statement of the intention to do so and shall be provided to that director at least two weeks before the meeting. Vacancies on the Board of Directors can be filled by the Board of Directors if the vacancy occurs in those events set out in AGL's Bye-Laws as a result of death, disability, disqualification or resignation of a director, or from an increase in the size of the Board of Directors.

39



Generally under AGL's Bye-Laws, the affirmative votes of a majority of the votes cast at any meeting at which a quorum is present is required to authorize a resolution put to vote at a meeting of the Board of Directors.Directors, including one relating to a merger, acquisition or business combination. Corporate action may also be taken by a unanimous written resolution of the Board of Directors without a meeting. A quorum shall be at least one-half of directors then in office present in person or represented by a duly authorized representative, provided that at least two directors are present in person.

Shareholder Action

At the commencement of any general meeting, two or more persons present in person and representing, in person or by proxy, more than 50% of the issued and outstanding shares entitled to vote at the meeting shall constitute a quorum for the transaction of business. In general, any questions proposed for the consideration of the shareholders at any general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the Bye-Laws.

The Bye-Laws contain advance notice requirements for shareholder proposals and nominations for directors, including when proposals and nominations must be received and the information to be included.

Amendment

The Bye-Laws may be amended only by a resolution adopted by the Board of Directors and by resolution of the shareholders.

Voting of Non-U.S. Subsidiary Shares

If AGL is required or entitled to vote at a general meeting of any of AG Re, AGFOL or any other of its directly held non-U.S. subsidiaries, AGL's Board of Directors shall refer the subject matter of the vote to AGL's shareholders and seek direction from such shareholders as to how they should vote on the resolution proposed by the non-U.S. subsidiary. AGL's Board of Directors in its discretion shall require substantially similar provisions are or will be contained in the bye-laws (or equivalent governing documents) of any direct or indirect non-U.S. subsidiaries other than U.K. and AGRO.


Employees

As of December 31, 2012,2015, the Company had 319approximately 300 employees. None of the Company's employees are subject to collective bargaining agreements. The Company believes that employee relations are satisfactory.



42


Available Information

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

The Company routinely posts important information for investors on its web site (under About Us/Company Statementsassuredguaranty.com/company-statements and, more generally, under the Investor Information)Information and Businesses pages). The Company uses this web site as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, and Investor Information and Businesses portions of the Company's web site, in addition to following the Company's press releases, SEC filings, public conference calls, presentations and webcasts.

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



4043


ITEM 1A.RISK FACTORS

You should carefully consider the following information, together with the information contained in AGL's other filings with the SEC. The risks and uncertainties discussed below are not the only ones the Company faces. However, these are the risks that the Company's management believes are material. The Company may face additional risks or uncertainties that are not presently known to the Company or that management currently deems immaterial, and such risks or uncertainties also may impair its business or results of operations. The risks discussed below could result in a significant or material adverse effect on the Company's financial condition, results of operations, liquidity or business prospects.

Risks Related to the Company's Expected Losses

Recorded estimatesEstimates of expected losses are subject to uncertainties and such estimates may not be adequate to cover potential paid claims.

The financial guaranties issued by the Company's insurance subsidiaries 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. As a result, the Company's estimate of ultimate losses on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credittransaction. Credit performance as a result of changingcan be adversely affected by economic, fiscal and financial market variability over the long duration of most contracts. If the Company's actual losses exceed its current estimate, this may result in adverse effects on the Company's financial condition, results of operations, liquidity, business prospects, financial strength ratings and ability to raise additional capital.

In addition, if the Company is required to make claim payments, even if it is reimbursed in full over time and does not experience ultimate loss on a particular policy, such claim payments would reduce the Company's invested assets and therefore result in reduced liquidity and net investment income. If the amount of claim payments is significant, the Company's ability to make other claim payments and its financial condition, financial strength ratings and business prospects could be adversely affected.

In addition, as a resultThe Company had exposure of market changes, although the Company may not experience ultimate loss on a particular policy, the Company has exposureapproximately $2.9 billion to infrastructure transactions with refinancing risk as of December 31, 2015. These transactions generally involve long-term infrastructure projects that were financed at least in part by bonds that mature well before the expiration of the project concession and which were originally expected to whichbe refinanced. The Company generally expects the cash flows from these projects to be sufficient to repay all of the bonds over the life of the project concession, but if, due to market conditions, the issuer is unable to refinance insured bonds maturing well before the expiration of the project concession, the Company may needhave to makepay a claim paymentsat that it did not anticipate paying whentime and then recover from cash flows produced by the policies were issued;project in the aggregate amountfuture. However, the recovery of the claim paymentssuch amounts is uncertain and may be substantial and reimbursement may not occur for an extended time, if at all. For the three largest transactions with significant refinancing risk, the Company may be exposedtake from 10 to and subsequently recover, payments aggregating $1.4 billion. The claim payments are anticipated to occur substantially between 2014 and 2017, while the recoveries could take 20-4535 years, depending on the transaction and the performance of the underlying collateral. For more information about thisAs of December 31, 2015, the Company estimated total claims for the two largest transactions with significant refinancing risk, see "Theassuming no refinancing, and based on certain performance assumptions, could be $1.9 billion on a gross basis; such claims would occur from 2017 through 2022. Of such $1.9 billion in estimated gross claims, an estimated $1.3 billion related to obligations of Skyway Concession Company may require additional capital from timeLLC (“SCC”), which owned the concession for the Chicago Skyway toll road. In November 2015, a consortium of three Canadian pension plans announced that they had reached agreement, subject to time, including from soft capitalregulatory approvals and liquidity credit facilities, which may not be available or may be available onlycustomary closing conditions, to purchase SCC for $2.8 billion. The sale was completed on unfavorable terms" under "Risks Related toFebruary 25, 2016 and the Company's Capital and Liquidity Requirements" below.various SCC obligations insured by the Company were retired without a claim on the Company.

The determination of expected loss 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. 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. As a result, the Company's current estimates of probable and estimable losses may not reflect the Company's future ultimate claims paid. If the Company's actual losses exceed its current estimate, this may result in adverse effects on the Company's financial condition, results of operations, liquidity, business prospects, financial strength ratings and ability to raise additional capital.

During the recent financial crisis, certainCertain sectors and large risks within the Company's insured portfolio have experienced losses farcredit deterioration in excess of the Company’s initial expectations, which has led or may lead to losses in excess of the Company’s initial expectations.  The Company's expected loss experience, particularly in respect of its insured RMBS transactions, demonstrated the limited value of historical loss data in predicting future losses. The Company's loss reserve models take into account current and expected future trends, in loss severities, which for RMBS transactions, contemplate the impact of current and probable foreclosure liquidation expectations, default rates, prepayment speeds,developments in the impactperformance of governmental economic and consumer stimulation programs and other factors impacting the transactional cash flows and ultimately losses.credit.  These factors, which are integral elements of the Company's reserve estimation methodology, are updated on a quarterly basis based on current information.  Because such information changes, sometimes materially, from quarter to quarter, the Company’s projection of losses may also change materially.  Since the financial crisis, much of the development in the Company’s loss projections has been with respect to insured U.S. RMBS performance data. Thesecurities.  While the Company's net par outstanding of U.S. RMBS rated BIG under the Company's rating methodology as of December 31, 20122015 and December 31, 2011 for U.S. RMBS2014 was $17.8still $4.0 billion and $21.6$5.6 billion, respectively, and may still be a source of loss development, the Company believes the performance of this portfolio has stabilized.  More recently, there has been credit

44


deterioration with respect to certain insured Puerto Rico credits.  The Company had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating of $5.1 billion and $4.9 billion, respectively, as of December 31, 2015 and December 31, 2014, all of which $7.2 billion and $8.4 billion, respectively, was rated investment gradeBIG under the Company'sCompany’s rating methodology.methodology as of December 31, 2015. For a discussion of the Company's review of its Puerto Rico risks and RMBS transactions, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Operations-Results of Operations-Consolidated Results of Operations—Consolidated Results of Operations—Losses in the Insured Portfolio."

The Company's estimate of expected RMBS losses takes into account expected recoveries from sellers and originators of the underlying residential mortgages. RMBS transaction documentation generally specifies that the seller or originator must repurchase a loan from the RMBS transaction if the seller or originator has breached its representations and warranties

41


regarding that loan and if that breach materially and adversely affects (a) the interests of the trust, the trustee, the noteholders or the financial guaranty insurer in the mortgage loan or (b) the value of the mortgage loan. In order to enforce the repurchase remedy, the Company has been reviewing mortgage loan files for RMBS transactions that it has insured in order to identify the loans that the Company believes violate the seller's or originator's representations and warranties regarding the characteristics of such loans. The Company then submits or "puts back" such loans to the sellers or originators for repurchase from the RMBS transaction.

The Company's efforts to put back loans for breaches of representations and warranties have been subject to a number of difficulties. First, the review itself is time-consuming and costly and may not necessarily result in a greater amount of recoveries than the costs incurred in this process. In addition, the sellers or originators may challenge the Company's ability to complete this process, including without limitation, by refusing to make the loan files available to the Company; asserting that there has been no breach or that any such breach is not material; or delaying or otherwise prolonging the repayment process. The Company may also need to rely on the trustee of the insured transaction to enforce this remedy on its behalf and the trustee may be unable or unwilling to pursue the remedy in a manner that is satisfactory to the Company.

The amount of recoveries that the Company receives from the sellers or originators is also subject to considerable uncertainty, which may affect the amount of ultimate losses the Company pays on the transaction. For instance, the Company may determine to accept a negotiated settlement with a seller or originator in lieu of a repurchase of mortgage loans, in which case, current estimates of expected recoveries may differ from actual recoveries. In many cases, when a seller or originator has not complied with its obligation to repurchase mortgage loans or when attempts to arrive at a negotiated settlement have not been successful, the Company has commenced litigation in order to enforce its rights and remedies. Litigation is expensive, necessitates substantial senior management resources, may not be resolved for a number of years and may result in unfavorable outcomes. Additionally, the Company may be unable to enforce the repurchase remedy because of a deterioration in the financial position of the seller or originator to a point where it does not have the financial wherewithal to pay. Furthermore, a portion of the expected recoveries are derived from the Company's estimates of the number of loans that will both default in the future and be found to have material breaches of representations and warranties. The Company has estimated future recoveries based on its experience to date, has discounted the success rate it has been experiencing in recognition of the uncertainties described herein and has also excluded any credit for repurchases by sellers or originators the Company believes do not have the financial wherewithal to pay. Although the Company believes that its methodology for extrapolating estimated recoveries is appropriate for evaluating the amount of potential recoveries, actual recoveries may differ materially from those estimated.

The methodologies that the Company uses to estimate expected losses in general and for any specific obligation in particular may not be similar to methodologies used by the Company's competitors, counterparties or other market participants. For additional discussion of the Company's reserve methodologies, see Note 6, ExpectedOperations-Economic Loss to be Paid, of the Financial Statements and Supplementary Data.Development."

Risks Related to the Company's Financial Strength and Financial Enhancement Ratings

A downgrade of the financial strength or financial enhancement ratings of any of the Company's insurance and reinsurance subsidiaries would adversely affect its business and prospects and, consequently, its results of operations and financial condition.

The financial strength and financial enhancement ratings assigned by S&P, Moody's, KBRA and Moody'sBest to the Company'sAGL's insurance and reinsurance subsidiaries providerepresent the rating agencies' opinions of the insurer's financial strength and ability to meet ongoing obligations to policyholders and cedants in accordance with the terms of the financial guaranties it has issued or the reinsurance agreements it has executed. The ratings also reflect qualitative factors, such as the rating agencies' opinion of an insurer's business strategy and franchise value, the anticipated future demand for its product, the composition of its insured portfolio, and its capital adequacy, profitability and financial flexibility. Issuers, investors, underwriters, credit derivative counterparties, ceding companies and others consider the Company's financial strength or financial enhancement ratings an important factor when deciding whether or not to utilize a financial guaranty or purchase reinsurance from one of the Company's insurance or reinsurance subsidiaries. A downgrade by a rating agency of the financial strength or financial enhancement ratings of the Company'sone or more of AGL's subsidiaries could impair the Company's financial condition, results of operation, liquidity, business prospects or other aspects of the Company's business.

The ratings assigned by the rating agencies that publish financial strength or financial enhancement ratings on the Company'sAGL's insurance subsidiaries are subject to frequent review and may be lowered by a rating agency as a result of a number of factors, including, but not limited to, the rating agency's revised stress loss estimates for the Company's insurance portfolio, adverse developments in the Company's or the subsidiaries'subsidiary's financial conditions or results of operations due to underwriting or investment losses or other factors, changes in the rating agency's outlook for the financial guaranty industry or in the markets in

42


which the Company operates, or a revision in the rating agency's capital model or ratings methodology. Their reviews can occur at any time and without notice to the Company and could result in a decision to downgrade, revise or withdraw the financial strength or financial enhancement ratings of AGL's insurance and reinsurance subsidiaries. For example, while all of the rating agencies that rate AGL subsidiaries with exposure to Puerto Rico have indicated that their evaluations of such AGL subsidiaries already take into account stress scenarios related to developments in Puerto Rico, actual developments in Puerto Rico beyond what a rating agency considered could cause that rating agency to review its ratings of such AGL subsidiaries.

Since 2008, each of S&P and Moody's has reviewed and downgraded the financial strength ratings of AGL's insurance and reinsurance subsidiaries, including AGC, AGM and AG Re. In addition, the rating agenciesS&P and Moody's have from time to time changed the ratings outlook for certain of the Company's subsidiaries to "negative" from "stable" or have placed such ratings on watch for possible downgrade. For example, in March 2012, Moody's placed the ratings of AGLCurrently, AGM, AGC, MAC and its subsidiaries, including the insuranceAG Re all have AA (Stable Outlook) financial strength ratings from S&P, with the most recent change by S&P being an upgrade of the AGL's insurance subsidiaries, on review for possible downgrade. TheAGC, AGM and AG Re from AA- (Stable Outlook) in November 2011.  Each of AGM and MAC also has a AA+ (Stable Outlook) financial strength rating review was not concluded until January 17, 2013, when Moody's announced new credit ratings for AGLfrom KBRA, while AGM and its subsidiaries, including lower insuranceAGC have financial strength ratings of A2in the single-A category from Moody's (A2 (Stable Outlook) for AGM,and A3 (Stable(Negative Outlook) for AGC and Baa1 (Stable Outlook) for AG Re. In January 2011, S&P requested comments on proposed changes to its bond insurance, respectively), with the most recent ratings criteria, noting that it could lower its financial strength ratings on existing investment-grade bond insurerschange by one or more rating categories ifMoody's being a change in the proposed criteria were adopted. The resulting uncertainty over the Company's financial strength ratings was not resolved until November 30, 2011, when S&P downgraded the counterparty credit and financial strength ratingsoutlook of AGM and AGC to AA- (Stable Outlook).Negative in February 2015. In addition, AGRO has been assigned a rating of A+ (Stable) from Best, which is Best's second highest rating. The Company periodically assesses the value of each rating assigned to each of its companies, and may as a result of such assessment request that a rating agency add or drop a rating from certain of its companies. For example, the KBRA ratings were first assigned to MAC in 2013 and to AGM in 2014 and the Best rating was first assigned to AGRO in 2015, while a Moody's rating was never requested for MAC and was dropped from AG Re and AGRO in 2015.

The Company believes that these rating agencythe uncertainty introduced by S&P and Moody's various actions and proposals have reduced the Company's new business opportunities and have also affected the value of the Company's product to issuers and investors. 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 anyone or more of the Company's insurance subsidiaries were reduced below current levels, the Company expects itthat would have further adverse effect on its future business opportunities as well asreduce the premiums it could charge for its insurance policies andnumber of transactions that would benefit from the Company's insurance; consequently, a downgrade by rating agencies could harm the Company's new business production, results of operations and financial condition.

45



In addition, a downgrade may have a negative impact on the Company in respect of transactions that it has insured or reinsurance that it has assumed.

For example, a downgrade of one of the Company's insurance subsidiaries may result in increased claims under financial guaranties such subsidiary has issued. Under variable rate demand obligations insured by AGM, the January 2013 Moody's downgrade of AGM and any further downgrades past rating levels specified in the transaction documents could result in the municipal obligor paying a higher rate of interest and in such obligations amortizing on a more accelerated basis than expected when the obligations originally were issued; if the municipal obligor is unable to make such interest or principal payments, AGM may receive a claim under its financial guaranty.
Under interest rate swaps insured by AGM, the January 2013 Moody's downgrade of AGM and any further downgrades past specified rating levels could entitle the municipal obligor's swap counterparty to terminate the swap; if the municipal obligor owed a termination payment as a result and were unable to make such payment, AGM may receive a claim if its financial guaranty guaranteed such termination payment. For more information about increased claim payments the Company may potentially make, see Note 7,"Ratings Impact on Financial Guaranty Business" in Note 6, Financial Guaranty Insurance, Losses, of the Financial Statements and Supplementary Data, –Ratings Impact on Financial Guaranty Business.

Data. In addition, as discussed in greater detail under "Liquidity and Capital Resources—Commitments and Contingencies—Recourse Credit Facilities—2009 Strip Coverage Facility" within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," the January 2013 Moody's downgrade of AGM may result in early termination of all leases under leveraged lease transactions insured by AGM. Upon early termination of a lease, to the extent the early termination payment owing to the lessor within such a transaction is not paid by the municipal lessee, a claim could be made to AGM under its financial guaranty. To mitigate this risk, AGM has entered into a liquidity facility with Dexia Crédit Local S.A. to finance the potential payment of claims under these policies. See "Risks Related to the AGMH Acquisition—The Company has substantial exposure to credit and liquidity risks from Dexia" within these Risk Factors.

Furthermore, a downgrade of AGC and AG Re could result in ceding companies recapturing business that they had ceded to these reinsurers. See "The downgrade of the financial strength ratings of AG Re or of AGC gives reinsurance counterparties the right to recapture ceded business, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve" below.


43


Separately, in certain other transactions, beneficiaries of financial guaranties issued by the Company's insurance subsidiaries may have the right to cancel the credit protection offered by the Company, which would result in the loss of future premium earnings and the reversal of any fair value gains or losses recorded by the Company. In addition, a downgrade of AG Re or AGC could result in certain ceding companies recapturing business that they had ceded to these reinsurers. See "The downgrade of the financial strength ratings of AG Re or of AGC gives certain reinsurance counterparties the right to recapture ceded business, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve" below.

If AGC's financial strength or financial enhancement ratings were downgraded, the Company could be required to post additional collateral under certain of its credit derivative contracts or certain of the Company's counterparties could have a right to terminate such credit derivative contract.contracts. See "If AGC's financial strength or financial enhancement ratings were downgraded, the Company could be required to make termination payments or post collateral under certain of its credit derivative contracts, which could impair its liquidity and results of operations and financial condition"operations" below.

If AGM's financial strength or financial enhancement ratings were downgraded, AGM-insured GICs issued by the former AGMH subsidiaries that conducted AGMH's Financial Products Business (the "Financial Products Companies") may come due or may come due absent the provision of collateral by the GIC issuers. The Company relies on agreements pursuant to which Dexia has agreed to guarantee or lend certain amounts, or to post liquid collateral, in regards to AGMH's former financial products business. See "Risks Related to the AGMH Acquisition—TheCompany's Business—Acquisitions may subject the Company has substantial exposure to credit and liquidity risks from Dexia.non-monetary consequences."

Furthermore, if the financial strength ratings of AGE or AGUK were downgraded, AGM or AGC may be required to contribute additional capital to their respective subsidiary pursuant to the terms of the support arrangements for such subsidiaries, including those described under "Material Contracts" in the "Regulation—United Kingdom" section of "Item 1. Business."

If AGC's financial strength or financial enhancement ratings were downgraded, the Company could be required to make termination payments or post collateral under certain of its credit derivative contracts, which could impair its liquidity and results of operations and financial condition.operations.

Within the Company’s insured CDS portfolio, the transaction documentation for approximately $2.0$3.8 billion in CDS gross par insured as of December 31, 2012 provides that a downgrade of AGC's financial strength rating below BBB- or Baa3 would constitute a termination event that would allow the relevant CDS counterparty to terminate the affected transactions. If the CDS counterparty elected to terminate the affected transactions,2015 requires AGC could be required to make a termination payment (or may be entitled to receive a termination payment from the CDS counterparty). Of the transactions described above, for one of the CDS counterparties, a downgrade of AGC's financial strength rating below A- or A3 (but not below BBB- or Baa3) would constitute a termination event for which the Company has the right to cure by posting collateral, assigning its rights and obligations in respect of the transactions to a third party, or seeking a third party guaranty of its obligations. No counterparty had a right to terminate any transactions as a result of the January 2013 Moody's downgrade of AGC. The Company does not believe that it can accurately estimate the termination payments AGC could be required to make if, as a result of any such downgrade, a CDS counterparty terminated the affected transactions. These payments could have a material adverse effect on the Company’s liquidity and financial condition.
The transaction documentation for approximately $13.2 billion in CDS gross par insured as of December 31, 2012 requires certain of the Company's insurance subsidiaries to post eligible collateral to secure its obligations to make payments under such contracts based on (i) the mark-to-market valuation of the underlying exposure and (ii) in some cases, the financial strength ratings of such subsidiaries.contracts. Eligible collateral is generally cash or U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. As a result of the January 2013 Moody's downgrade of AGC's financial strength rating, AGC was required under such transaction documentation to post approximately $70 million of additional collateral, for a total amount posted by the Company's insurance subsidiaries of approximately $728 million (which amount reflects some of the eligible collateral being valued at a discount to the face amount).

For approximately $12.8$3.6 billion of such contracts, AGC has negotiated caps such that after giving effect to the January 2013 Moody's downgrade of AGC, the posting requirement cannot exceed on a cash basis more than $675 million,certain fixed amount, regardless of the mark-to-market valuation of the exposure or the financial strength ratings of AGC. Such capped amount is partFor such contracts, AGC need not post on a cash basis more than $575 million, although the value of the approximately $728 million beingcollateral posted bymay exceed such fixed amount depending on the Company's insurance subsidiaries.
advance rate agreed with the counterparty for the particular type of collateral posted.

For the remaining approximately $400$221 million of such contracts, AGC could be required from time to time to post additional collateral without such cap based on movements in the mark-to-market valuation of the underlying exposure. Of

As of December 31, 2015, the $728Company was posting approximately $305 million being posted by to secure its obligations under CDS, of which approximately $23 million related to the $221 million of notional described above, as to which the obligation to collateralize is not capped. In contrast, as of December 31, 2014, the Company was posting approximately $376 million to secure its obligations under CDS, of which approximately $25 million related to $242 million of notional as to which the

46


obligation to collateralize was not capped. The obligation to post collateral could impair the Company's insurance subsidiaries, approximately $68 million relate to such $400 millionliquidity and results of notional.
operations.

The downgrade of the financial strength ratings of AG Re or of AGC gives certain reinsurance counterparties the right to recapture ceded business, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve.


44


the financial strength ratings of AG Re or of AGC gives certain reinsurance counterparties the right to recapture ceded business, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve. With respect to a significant portion of the Company's in-force financial guaranty assumed business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the third party ceding company may have the right to recapture assumed business ceded to AG Re andand/or AGC, and assets representing substantially allin connection therewith, to receive payment from the assuming reinsurer of an amount equal to the reinsurer’s statutory unearned premium (net of ceding commissions) and statutory loss reserves (if any) associated with that business.business, plus, in certain cases, an additional ceding commission. As of December 31, 2012,2015, if each third party company ceding business to AG Re and/or AGC had posted $328 million of collateral in trust accounts fora right to recapture such business, and chose to exercise such right, the benefit of third party ceding companies to secure its obligations under its reinsurance agreements, excluding contingency reserves. The equivalent amount foraggregate amounts that AG Re and AGC is $147 million; AGC is notcould be required to post collateral. In February 2013, AG Re posted an additional $27pay to all such companies would be approximately $55 million of collateral due to the January 2013 downgrade by Moody's of its financial strength rating to Baa1. At December 31, 2012, the amount of additional ceding commission for AG Re was $8 and $34 million,. respectively.

Actions taken by the rating agencies with respect to capital models and rating methodology of the Company's business or changes in capital charges or downgrades of transactions within its insured portfolio may adversely affect its ratings, business prospects, results of operations and financial condition.

The rating agencies from time to time have evaluated the Company's capital adequacy under a variety of scenarios and assumptions. The rating agencies do not always supply clear guidance on their approach to assessing the Company's capital adequacy and the Company may disagree with the rating agencies' approach and assumptions. Changes in the rating agencies' capital models and rating methodology, including loss assumptions and capital requirements for the Company's investment and insured portfolios, could require the Company to raise additional capital to maintain its current ratings levels, even if there are no adverse developments with respect to any specific investment or insured risk. The amount of such capital required may be substantial, and may not be available to the Company on favorable terms and conditions or at all. Accordingly, the Company cannot ensure that it will seek to, or be able to, complete the capital raising. The failure to raise additional required capital could result in a downgrade of the Company's ratings, which could be one or more ratings categories, and thus have an adverse impact on its business, results of operations and financial condition. See "Risks Related to the Company's Capital and Liquidity Requirements—The Company may require additional capital from time to time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on unfavorable terms."

The rating agencies assessFor example, S&P assesses each individual credit (including potential new credits) insured by the Company based on a variety of factors, including the nature of the credit, the nature of the support or credit enhancement for the credit, its tenor, and its expected and actual performance. This assessment determines the amount of capital the Company is required to maintain against that credit to maintain its financial strength ratings under the relevant rating agency'sS&P's capital adequacy model. Sometimes the rating agencies consider the amount of additional capital that could be required for certain risks or sectors under certain stress scenarios based on their views of developments in the market, as each have done recently with respect to the Company's exposures to Puerto Rico. Factors influencing the rating agencies' actions, including their assessments of individual credits,agencies are beyond management's control and not always known to the Company. In the event of an actual or perceived deterioration in creditworthiness, a reduction in the underlying rating or a change in a rating agency's capital model or rating methodology, that rating agency may require the Company to increase the amount of capital allocated to support the affected credits, regardless of whether losses actually occur, or against potential new business. Significant reductions in the rating agencies' assessments of credits in the Company's insured portfolio can produce significant increases in the amount of capital required for the Company to maintain its financial strength ratings under the rating agencies' capital adequacy models, which may require the Company to seek additional capital. We cannot assure you that the Company'sThe amount of such capital position willrequired may be adequatesubstantial, and may not be available to meet such increased capital requirements or that the Company on favorable terms and conditions or at all. Accordingly, the Company cannot ensure that it will seek to, or be able to, secureraise additional capital, especially at a time of actual or perceived deterioration in the creditworthiness of new or existing credits. Unless the Company is ablecapital. The failure to increase the amount of its availableraise additional required capital an increase in the amount of capital the Company is required to maintain its credit ratings under the rating agencies' capital adequacy models could result in a downgrade of the Company's financial strength ratings and couldthus have an adverse effectimpact on its abilitybusiness, results of operations and financial condition. See "Risks Related to write new business.the Company's Capital and Liquidity Requirements—The Company may require additional capital from time to time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on unfavorable terms."

Since 2008,2009, Moody's and S&P have announced the downgrade of, or other negative ratings actions with respect to,downgraded a large number of structured finance transactions,securities and public finance bonds, including certain transactionsobligations that the Company insures. Additional securitiesobligations in the Company's insured portfolio may be reviewed and downgraded in the future. Moreover, the Company does not know which securities in its insured portfolio already have been reviewed by the rating agencies and if, or when, the rating agencies might review additional securities in its insured portfolio or review again securities that were previously reviewed and/or downgraded. Downgrades of the Company's insured credits will result in higher capital requirements for the Company under the relevant rating agency capital adequacy model. If the additional amount of capital required to support such exposures is significant, the Company may need to undertake certain actions in order to maintain its ratings, including, but not limited to, raising additional capital (which, if available, may not be available on terms and conditions that are favorable to the Company); curtailing new business; or paying to transfer a portion of its in-force business to generate rating agency capital. If the Company is unable to complete any of these capital initiatives, it could suffer ratings downgrades. These capital actions or ratings downgrades could adversely affect the Company's results of operations, financial condition, ability to write new business or competitive positioning.


4547


Risks Related to the Financial, Credit and Financial Guaranty Markets

Improvement in the recent difficult conditions in the U.S. and world-wide financial markets has been gradual, and the Company's business, liquidity, financial condition and stock price may continue to be adversely affected.

The Company's loss reserves, profitability, financial position, insured portfolio, investment portfolio, cash flow, statutory capital and stock price could be materially affected by the U.S. and global financial markets. Upheavals in the financial markets affect economic activity and employment and therefore can affect the Company's business through their effects on general levels of economic activity and employment.business. The global recession and disruptioneconomic outlook remains uncertain, including the overall growth rate of the financial markets has led to concerns over capital markets accessU.S. economy, the fragile economic recovery in Europe and the solvency of certain European Union member states, including Greece, Portugal, Ireland, Italy and Spain, and of financial institutions that have significant direct or indirect exposure to debt issued by these countries. Certainimpact of the major rating agencies have downgraded the sovereign debtgradual tightening of Greece, Portugalglobal monetary conditions on emerging markets. These and Ireland to below investment grade. The sovereign debt of Italy and Spain has also recently downgraded. The September 6, 2012 announcement of a European Central Bank program to purchase unlimited amounts of secondary market debt of euro area sovereigns that apply for a full macroeconomic adjustment or precautionary program from the European Financial Stability Facility / European Stability Mechanism has helped in the reduction of European sovereign yields. However, concerns remain over potential further economic and financial distress at these or other European Union member states. In the U.S., the unemployment rate remains high and housing prices have only recently shown signs of stabilization. The Company and its financial position will continue to be subject to risk of the global financial and economic conditions thatrisks could materially and negatively affect itsthe Company’s ability to access the capital markets, the cost of the Company's debt, the demand for its products, the amount of losses incurred on transactions it guarantees, the value of its investment portfolio, its financial ratings and the price of its stock price.

Issuers or borrowers whose securities or loans the Company insures or holds as well as the Company's counterparties under swaps and other derivative contracts may default on their obligations to the Company due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Additionally, the underlying assets supporting structured finance securities that the Company's insurance subsidiaries have guaranteed may deteriorate, causing these securities to incur losses. These losses could be significantly more than the Company expects and could materially adversely impact its financial strength, ratings and prospects for future business.

The Company's access to funds under its credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Those banks may not be able to meet their funding commitments to the Company if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from the Company and other borrowers within a short period of time. In addition, consolidation of financial institutions could lead to increased credit risk.

In addition, the Company's ability to raise equity, debt or other forms of capital is subject to market demand and other factors that could be affected by global financial market conditions. If the Company needed to raise capital to maintain its ratings and was unable to do so because of lack of demand for its securities, it could be downgraded by the rating agencies, which would impair the Company's ability to write new business.common shares.

Some of the state and local governments and entities that issue obligations the Company insures are experiencing unprecedentedsignificant budget deficits and pension funding and revenue shortfalls that could result in increased credit losses or impairments and capital charges on those obligations.

The economic crisis caused manySome of the state and local governments that issue some of the obligations the Company insures to experiencehave experienced significant budget deficits and pension funding and revenue collection shortfalls that requirerequired them to significantly raise taxes and/or cut spending in order to satisfy their obligations. While the U.S. government has provided some financial support to state and local governments and although in 2012, overall state revenues have increased in recent years, significant budgetary pressures remain, especially at the local government level.level and in relation to retirement obligations. Certain local governments, including ones that have issued obligations insured by the Company, have sought protection from creditors under Chapterchapter 9 of the U.S. Bankruptcy Code as a means of restructuring their outstanding debt. In some recent instances where local governments were seeking to restructure their outstanding debt, and partially in response to concerns that materially reducing pension payments would lead to employee flight and, therefore, an inadequate level of local government services, pension and other obligations owed to workers were treated more favorably than senior bond debt owed to the capital markets. If the issuers of the obligations in the Company's public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its public finance obligations, which could materially and adversely affect its business, financial condition and results of operations. If such issuers succeed in restructuring pension and other obligations owed to workers so that they are treated more favorably than obligations insured by the Company, such losses or impairments could be greater than the Company otherwise anticipated when the insurance was written.

The Company's risk of loss on and capital charges for municipal credits could also be exacerbated by rating agency downgrades of municipal credit ratings. A downgraded municipal issuer may be unable to refinance maturing obligations or issue new debt, which could exacerbatereduce the municipality's inabilityability to service its debt. Downgrades could also affect the interest rate that the municipality must pay on its variable rate debt or for new debt issuance. Municipal credit downgrades, as with other downgrades, result in an increase in the capital charges the rating agencies assess when evaluating the Company's capital

46


adequacy in their rating models. Significant municipal downgrades could result in higher capital requirements for the Company in order to maintain its financial strength ratings.

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Commonwealth faces a challenging economic environment and, in recent years, has experienced significant general fund budget deficits, which it had attempted to address by issuing debt. 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. Investors 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. 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 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 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 and revenues pledged to

48


secure the payment of bonds issued by certain authorities. On January 7, 2016, the Company sued various Puerto Rico governmental officials in the United State 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. 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. 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 Government Development Bank for Puerto Rico (“GDB”) and other private lenders, which reliance has constrained its liquidity and increased its near-term refinancing risk. The Company has an aggregate $5.1 billion net par exposure to the Commonwealth and various obligations of its related authorities and public corporations, and if the Company were required to make claim payments on such insured exposures, such payments could have a negative effect on the Company's liquidity and results of operations.
In addition, obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, may be adversely affected by revenue declines resulting from reduced demand, changing demographics or other factors associated with an economy in which unemployment remains high, housing prices have not yet stabilized and growth is slow. These obligations, which may not necessarily benefit from financial support from other tax revenues or governmental authorities, may also experience increased losses if the revenue streams are insufficient to pay scheduled interest and principal payments.

Adverse developments in the credit and financial guaranty markets have substantially increased uncertainty in the Company's business and may materially and adversely affect its financial condition, results of operations and future business.

Since mid-2007 there have been several adverse developments in the credit and financial guaranty markets that have affected the Company's business, financial condition, results of operation and future business prospects. In particular, U.S. residential mortgages and RMBS transactions that were issued in the 2005-2007 period have generated losses far higher than originally expected and higher than experienced in the last several decades. This poor performance led to price declines for RMBS securities and the rating agencies downgrading thousands of such transactions. In addition, the material amount of the losses that have been incurred by insurers of these mortgages, such as Fannie Mae or private mortgage insurers, by guarantors of RMBS securities or of securities that contain significant amounts of RMBS, and by purchasers of RMBS securities have resulted in the insolvency or significant financial impairment of many of these companies.

As a result of these adverse developments, investors have significant concerns about the financial strength of credit enhancement providers, which has substantially reduced the demand for financial guaranties in many fixed income markets. These concerns as well as the uncertain economic environment may adversely affect the Company in a number of ways, including requiring it to raise and hold more capital, reducing the demand for its direct guaranties or reinsurance, limiting the types of guaranties the Company offers, encouraging new competitors, making losses harder to estimate, making its results more volatile and making it harder to raise new capital. Furthermore, rating agencies and regulators could enhance the financial guaranty insurance company capital requirements, regulations or restrictions on the types or amounts of business conducted by monoline financial guaranty insurers.

Changes inPersistently low interest rate levels and credit spreads could adversely affect demand for financial guaranty insurance as well as the Company's financial condition.

Demand for financial guaranty insurance generally fluctuates with changes in market credit spreads. Credit spreads, which are based on the difference between interest rates on high-quality or "risk free" securities versus those on lower-rated or uninsured securities, fluctuate due to a number of factors and are sensitive to the absolute level of interest rates, current credit experience and investors' willingness to purchase lower-rated or higher-rated securities.risk appetite. Over the last several years, interest rates generally have been lower than historical norms. In 2015, average daily AAA benchmark 30-year municipal interest rates as reflected by the MMD Index were approximately 35 basis points lower that their levels in 2014, a year in which rates were already low by historical standards. When interest rates are low, as they have been in 2012 and for the foreseeable future, or when the market is relatively less risk averse, the credit spread between high-quality or insured obligations versus lower- rated or uninsured obligations typically narrows or is "tight" and, asnarrows. As a result, financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively wider credit spreads. As a result,When issuers are less likely to use financial guaranties on their new issues when credit spreads are tight, resultingnarrow, this results in decreased demand or premiums obtainable for financial guaranty insurance, and thus a resulting reduction in the Company's results of operations. The continued persistence of low interest rate levels and credit spreads could continue to dampen demand for financial guaranty insurance.

Conversely, in a deteriorating credit environment, credit spreads increase and become "wide", which increases the interest cost savings that financial guaranty insurance may provide and can result in increased demand for financial guaranties by issuers. However, if the weakening credit environment is associated with economic deterioration, the Company's insured portfolio could generate claims and loss payments in excess of normal or historical expectations. In addition, increases in market interest rate levels could reduce new capital markets issuances and, correspondingly, a decreased volume of insured transactions.

Competition in the Company's industry may adversely affect its revenues.

As described in greater detail under "Competition" in "Item 1. Business," the Company can face competition, either in the form of current or new providers of credit enhancement or in terms of alternative structures, including uninsured offerings, or pricing competition. Increased competition could have an adverse effect on the Company's insurance business.


4749


The Company's financial position, results of operations and cash flows may be adversely affected by fluctuations in foreign exchange rates.

The Company's reporting currency is the U.S. dollar. The principal functional currencies of AGL's insurance and reinsurance subsidiaries includeare the U.S. dollar and U.K. sterling. Exchange rate fluctuations which have been exacerbated by the recent turmoil in the European financial markets, relative to the functional currencies may materially impact the Company's financial position, results of operations and cash flows. Many of theThe Company's non-U.S. subsidiaries maintain both assets and liabilities in currencies different than their functional currency, which exposes the Company to changes in currency exchange rates. In addition, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.

The principal currencies creating foreign exchange risk are the British pound sterling and the European Union euro. The Company cannot accurately predict the nature or extent of future exchange rate variability between these currencies or relative to the U.S. dollar. ExchangeForeign exchange rates are sensitive to factors beyond the Company's control. The Company does not engage in active management, or hedging, of its foreign exchange rate risk. Therefore, fluctuation in exchange rates between these currencies and the U.S. dollar have fluctuated significantly in recent periods and may continue to do so in the future, which could adversely impact the Company's financial position, results of operations and cash flows.

The Company's international operations expose it to less predictable credit and legal risks.

The Company pursues new business opportunities in international markets and currently operates in various countries in Europe and the Asia Pacific region.markets. The underwriting of obligations of an issuer in a foreign country involves the same process as that for a domestic issuer, but additional risks must be addressed, such as the evaluation of foreign currency exchange rates, foreign business and legal issues, and the economic and political environment of the foreign country or countries in which an issuer does business. Changes in such factors could impede the Company's ability to insure, or increase the risk of loss from insuring, obligations in the countries in which it currently does business and limit its ability to pursue business opportunities in other countries.

The Company's investment portfolio may be adversely affected by credit, interest rate and other market changes.

The Company's operating results are affected, in part, by the performance of its investment portfolio which consists primarily of fixed-income securities and short-term investments. As of December 31, 2012,2015, the fixed maturityfixed-maturity securities and short-term investments had a fair value of approximately $10.9$11.0 billion. Credit losses and changes in interest rates could have an adverse effect on its shareholders' equity and net income. Credit losses result in realized losses on the Company's investment portfolio, which reduce net income and shareholders' equity. Changes in interest rates can affect both shareholders' equity and investment income. For example, if interest rates decline, funds reinvested will earn less than expected, reducing the Company's future investment income compared to the amount it would earn if interest rates had not declined. However, the value of the Company's fixed-rate investments would generally increase if interest rates decreased, resulting in an unrealized gain on investments included in shareholders' equity. Conversely, if interest rates increase, the value of the investment portfolio will be reduced, resulting in unrealized losses that the Company is required to include in shareholders' equity as a change in accumulated other comprehensive income. Accordingly, interest rate increases could reduce the Company's shareholders' equity.

As of December 31, 2012, mortgage-backed securities constituted approximately 16% of the Company's fixed-income securities and short-term investments. Changes in interest rates can expose the Company to significant prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid more quickly, requiring the Company to reinvest the proceeds at then-current market rates. During periods of rising interest rates, the frequency of prepayments generally decreases.

Interest rates are highly sensitive to many factors, including monetary policies, domestic and international economic and political conditions and other factors beyond the Company's control. The Company does not engage in active management, or hedging, of interest rate risk, and may not be able to mitigate interest rate sensitivity effectively.

The market value of the investment portfolio also may be adversely affected by general developments in the capital markets, including decreased market liquidity for investment assets, market perception of increased credit risk with respect to the types of securities held in the portfolio, downgrades of credit ratings of issuers of investment assets and/or foreign exchange movements which impact investment assets. In addition, the Company invests in securities insured by other financial guarantors, the market value of which may be affected by the rating instability of the relevant financial guarantor.


48


Risks Related to the Company's Capital and Liquidity Requirements

The Company may require additional capital from time to time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on unfavorable terms.

The Company's capital requirements depend on many factors, primarily related to its in-force book of business and rating agency capital requirements.

The Company needs liquid assets to pay lossesmake claim payments on its insured portfolio and to write new business. For example, as discussed in the Risk Factor captioned "Estimates of expected losses are subject to

50


uncertainties and may not be adequate to cover potential paid claims" under Risks Related to the Company's Expected Losses, the Company has outstanding exposuressubstantial exposure to certain infrastructure transactions in its insured portfolio that may expose itwith refinancing risk as to refinancing risk. These transactions generally involve long-term infrastructure projects that are financed by bonds that mature prior to the expiration of the project concession. While the cash flows from these projects were expected to be sufficient to repay all of the debt over the life of the project concession, in order to pay the principal on the early maturing debt, the Company expected it to be refinanced in the market at or prior to its maturity. Due to market dislocation and increased credit spreads, some or all of the securities may not be refinanced and, as a result,which the Company may haveneed to pay a claim at the maturity of the securities. The Company generally projects that in most scenarios it will be fully reimbursed for such payments, but repayment is uncertain and depends on many factors, including future project cashflows. In addition, the aggregate amount of themake large claim payments may be substantial and reimbursement maythat it did not occur for an extended time, if at all. The Company may be exposed to, and subsequently recover, payments aggregating $1.4 billion related toanticipate paying when the three largest transactions with significant refinancing risk. The claim payments are anticipated to occur substantially between 2014 and 2017, while the recoveries could take 20-45 years, depending on the transaction and the performance of the underlying collateral.

policies were issued. Failure to raise additional capital as needed may result in the Company being unable to write new business and may result in the ratings of the Company and its subsidiaries being downgraded by one or more ratings agency. The Company's access to external sources of financing, as well as the cost of such financing, is dependent on various factors, including the market supply of such financing, the Company's long-term debt ratings and insurance financial strength ratings and the perceptions of its financial strength and the financial strength of its insurance subsidiaries. The Company's debt ratings are in turn influenced by numerous factors, such as financial leverage, balance sheet strength, capital structure and earnings trends. If the Company's need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for the Company to raise the necessary capital.

Future capital raises for equity or equity-linked securities could also result in dilution to the Company's shareholders. In addition, some securities that the Company could issue, such as preferred stock or securities issued by the Company's operating subsidiaries, may have rights, preferences and privileges that are senior to those of its common shares.

Financial guaranty insurers and reinsurers typically rely on providers of lines of credit, credit swap facilities and similar capital support mechanisms (often referred to as "soft capital") to supplement their existing capital base, or "hard capital." The ratings of soft capital providers directly affect the level of capital credit which the rating agencies give the Company when evaluating its financial strength. The Company intends to maintaincurrently maintains soft capital facilities with providers having ratings adequate to provide the Company's desired capital credit, althoughcredit. For example, effective January 1, 2016, AGC, AGM and MAC entered into a $360 million aggregate excess of loss reinsurance facility with a number of reinsurers, that covers certain U.S. public finance credits insured or reinsured by those companies (For additional information, see Note 13, Reinsurance and Other Monoline Exposures, of the Financial Statements and Supplementary Data). However, no assurance can be given that itthe Company will be able to renew any existing soft capital facilities or that one or more of the rating agencies will not downgrade or withdraw the applicable ratings of such providers in the future. In addition, the Company may not be able to replace a downgraded soft capital provider with an acceptable replacement provider for a variety of reasons, including if an acceptable replacement provider is willing to provide the Company with soft capital commitments or if any adequately-rated institutions are actively providing soft capital facilities. Furthermore, the rating agencies may in the future change their methodology and no longer give credit for soft capital, which may necessitate the Company having to raise additional capital in order to maintain its ratings.

An increase in the Company'sAGL's subsidiaries' leverage ratio may prevent them from writing new insurance.

Rating agencies and insuranceInsurance regulatory authorities impose capital requirements on the Company'sAGL's insurance subsidiaries. These capital requirements, which include leverage ratios and surplus requirements, may limit the amount of insurance that the Company's subsidiaries may write. The Company's insurance subsidiaries have several alternatives available to control their leverage ratios, including obtaining capital contributions from the Company, purchasing reinsurance or entering into other loss mitigation agreements, or reducing the amount of new business written. However, a material reduction in the statutory capital and surplus of a subsidiary, whether resulting from underwriting or investment losses, a change in regulatory capital requirements or otherwise, or a disproportionate increase in the amount of risk in force, could increase a subsidiary's leverage ratio. This in turn could require that subsidiary to obtain reinsurance for existing business (which may not be available, or may

49


be available on terms that the Company considers unfavorable), or add to its capital base to maintain its financial strength ratings. Failure to maintain regulatory capital levels could limit that subsidiary's ability to write new business.

The Company's holding companies' ability to meet its obligations may be constrained.

Each of AGL, AGUS and AGMH is a holding company and, as such, has no direct operations of its own. None of AGL, AGUS or AGMHthe holding companies expects to have any significant operations or assets other than its ownership of the shares of its subsidiaries. However, their

The insurance subsidiaries are subject to regulatory and rating agency restrictions limiting theircompany subsidiaries’ ability to declare and to pay dividends and make other payments.payments depends, among other things, upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. Restrictions applicable to AGC and AGM, and to AG Re and AGRO, are described under the "Regulation—United States—State Dividend Limitations" and "Regulation—Bermuda—Restrictions on Dividends and Distributions" sections of “Item 1. Business.” Such dividends and permitted payments are expected to be the primary source of funds for AGL, AGUS and AGMHthe holding companies to meet ongoing cash requirements, including operating expenses, any future debt service payments and other expenses, and to pay dividends to itstheir respective shareholders. Accordingly, if the insurance subsidiaries cannot pay sufficient dividends or make other permitted payments at the times or in the amounts that are required, that would have an adverse effect on the ability of AGL, AGUS and AGMH to satisfy their ongoing cash requirements and on their ability to pay dividends to shareholders.

51



If AGL does notAGRO were to pay dividends the only return on an investment in AGL's shares, if at all, would come from any appreciation in the price of the common shares.

To the extentto its U.S. holding company parent and that U.S. holding company were to pay dividends are paid from AGL's U.S. subsidiaries, they presentlyto its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.

AG Re's and AGRO's dividend distribution are governed by Bermuda law. Under Bermuda law, dividends may only be paid if there are reasonable grounds for believing that the company is, or would after the payment be, able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than its liabilities. Distributions to shareholders may also be paid out of statutory capital, but are subject to a 15% limitation without prior approval of the Authority. Dividends are limited by requirements that the subject company must at all times (i) maintain the minimum solvency margin required under the Insurance Act and the enhanced capital requirement applicable to it and (ii) have relevant assets in an amount at least equal to 75% of relevant liabilities, both as defined under the Insurance Act. AG Re, as a Class 3B insurer, is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files (at least seven days before payment of such dividends) with the Authority an affidavit stating that it will continue to meet the required margins. Any distribution which results in a reduction of 15% of more of the company's total statutory capital, as set out in its previous year's financial statements, would require the prior approval of the Authority.

The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.

Each of AGL, AGUS and AGMH requires liquidity, either in the form of cash or in the ability to easily sell investment assets for cash, in order to meet its payment obligations, including, without limitation, its operating expenses, interest on debt and dividends on common shares, and to make capital investments in operating subsidiaries. The Company's operating subsidiaries require substantial liquidity in order to meet their respective payment and/or collateral posting obligations, including under financial guaranty insurance policies, CDS contracts or reinsurance agreements. They also require liquidity to pay operating expenses, reinsurance premiums, dividends to AGUS or AGMH for debt service and dividends to the Company, as well as, where appropriate, to make capital investments in their own subsidiaries. The Company cannot give any assurance that the liquidity of AGL and its subsidiaries will not be adversely affected by adverse market conditions, changes in insurance regulatory law or changes in general economic conditions.

AGL anticipates that its liquidity needs will be met by:

by the ability of its operating subsidiaries to pay dividends or to make other payments,
payments; external financings,
financings; investment income from its invested assets,assets; and
current cash and short-term investments.

The Company expects that its subsidiaries' need for liquidity will be met by:

by the operating cash flows of such subsidiaries,
subsidiaries; external financings,
financings; investment income from their invested assets,assets; and
proceeds derived from the sale of its investment portfolio, a significant portion of which is in the form of cash or short-term investments.

All of these sources of liquidity are subject to market, regulatory or other factors that may impact the Company's liquidity position at any time. As discussed above, AGL's insurance subsidiaries are subject to regulatory and rating agency restrictions

50


limiting their ability to declare and to pay dividends and make other payments to AGL. As further noted above, external financing may or may not be available to AGL or its subsidiaries in the future on satisfactory terms.

In addition, investment income at AGL and its subsidiaries may fluctuate based on interest rates, defaults by the issuers of the securities AGL or its subsidiaries hold in their respective investment portfolios, or other factors that the Company does not control. Finally, the value of the Company's investments may be adversely affected by changes in interest rates, credit risk and capital market conditions and therefore may adversely affect the Company's potential ability to sell investments quickly and the price which the Company might receive for those investments.

The Company cannot give any assurance that the liquidity of AGL and its subsidiaries will not be adversely affected by adverse market conditions, changes in insurance regulatory law or changes in general economic conditions. In 2011, Assured Guaranty permitted a liquidity facility to expire without replacement and terminated and replaced a soft capital facility with an excess of loss reinsurance facility. There can be no assurance that existing liquidity facilities will prove adequate to the needs of AGL and its subsidiaries or that adequate liquidity will be available on favorable terms in the future.

Risks Related to the AGMH Acquisition

The Company has substantial exposure to credit and liquidity risks from Dexia.

Dexia and the Company have entered into a number of agreements intended to protect the Company from having to pay claims on AGMH's former Financial Products Business, which the Company did not acquire. Dexia has agreed to guarantee certain amounts, lend certain amounts or post liquid collateral for or in respect of AGMH's former Financial Products Business. Dexia SA and Dexia Crédit Local S.A. ("DCL"), jointly and severally, have also agreed to indemnify the Company for losses associated with AGMH's former Financial Products Business, including the ongoing Department of Justice and SEC investigations of such business. Furthermore, DCL, acting through its New York Branch, is providing a liquidity facility in order to make loans to AGM to finance the payment of claims under certain financial guaranty insurance policies issued by AGM or its affiliate that relate to the equity portion of leveraged lease transactions insured by AGM. The equity portion of the leveraged lease transactions is part of AGMH's financial guaranty business, which the Company did acquire. However, in connection with the AGMH Acquisition, DCL agreed to provide AGM with financing so that AGM could fund its payment of claims made under financial guaranty policies issued in respect of this portion of the business, because the amount of such claims could be large and are generally payable within a short time after AGM receives them. For a description of the agreements entered into with Dexia and a further discussion of the risks that these agreements are intended to protect against, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Arrangements with respect to AGMH's former Financial Products Business."

Despite the execution of such documentation, the Company remains subject to the risk that Dexia may not make payments or securities available (a) on a timely basis, which is referred to as "liquidity risk," or (b) at all, which is referred to as "credit risk," because of the risk of default. Even if Dexia has sufficient assets to pay, lend or post as collateral all amounts when due, concerns regarding Dexia's financial condition or willingness to comply with its obligations could cause one or more rating agencies to view negatively the ability or willingness of Dexia to perform under its various agreements and couldnegatively affect the Company's ratings. Under its orderly resolution plan, Dexia has continued to receive capital and liquidity support from the Belgian, French and Luxembourg governments. Such state aid has been authorized by the European Commission.

AGMH and its subsidiaries could be subject to non-monetary consequences arising out of litigation associated with AGMH's former financial products business, which the Company did not acquire.

As noted under "Item 3. Legal Proceedings—Proceedings Related to AGMH's Former Financial Products Business," in February 2008, AGMH received a "Wells Notice" from the staff of the Philadelphia Regional Office of the SEC relating to an ongoing industry-wide investigation concerning the bidding of municipal GICs and other municipal derivatives. The Wells Notice indicates that the SEC staff is considering recommending that the SEC authorize the staff to bring a civil injunctive action and/or institute administrative proceedings against AGMH, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. In addition, in November 2006, AGMH received a subpoena from the Antitrust Division of the Department of Justice issued in connection with an ongoing criminal investigation of bid rigging of awards of municipal GICs and other municipal derivatives. While these proceedings relate to AGMH's former Financial Products Business, which the Company did not acquire, they are against entities which the Company did acquire. Furthermore, while Dexia SA and DCL, jointly and severally, have agreed to indemnify the Company against liability arising out of these proceedings, such indemnification might not be sufficient to fully hold the Company harmless against any injunctive relief or civil or criminal sanction that is imposed against AGMH or its subsidiaries.

51



Risks Related to the Company's Business

The Company's financial guaranty products may subject it to significant risks from individual or correlated credits.

The Company is exposed to the risk that issuers of debt that it insures or other counterparties may default in their financial obligations, whether as a result of insolvency, lack of liquidity, operational failure or other reasons. Similarly, the Company could be exposed to corporate credit risk if a corporation's securities are contained in a portfolio of collateralized debt obligations ("CDOs") it insures, or if the corporation or financial institution is the originator or servicer of loans, mortgages or other assets backing structured securities that the Company has insured.

In addition, because the Company insures or reinsures municipal bonds, it can have significant exposures to single municipal risks.risks (e.g., the Commonwealth of Puerto Rico). While the Company's risk of a complete loss, where it would have to pay the entire principal amount of an issue of bonds and interest thereon with no recovery, is generally lower for municipal bonds than for corporate creditsbonds as most municipal bonds are backed by tax or other revenues, there can be no assurance that a single default by a municipality would not have a material adverse effect on its results of operations or financial condition.

The Company's ultimate exposure to a single name may exceed its underwriting guidelines, and an event with respect to a single name may cause a significant loss. The Company seeks to reduce this risk by managing exposure to large single risks, as well as concentrations of correlated risks, through tracking its aggregate exposure to single names in its various lines of business, establishing underwriting criteria to manage risk aggregations, and utilizingaggregations. It has also in the past obtained third party reinsurance and other risk mitigation measures.for such exposure. The Company may insure and has insured individual public finance and asset-backed risks well in excess of $1 billion. Should the Company's risk assessments prove inaccurate and should the applicable limits prove inadequate, the Company could be exposed to larger than anticipated losses, and could be required by the rating agencies to hold additional capital against insured exposures whether or not downgraded by the rating agencies.

The Company is exposed to correlation risk across the various assets the Company insures. During periods of strong macroeconomic performance, stress in an individual transaction generally occurs in a single asset class or for idiosyncratic

52


reasons. During a broad economic downturn, a wider range of the Company's insured portfolio could be exposed to stress at the same time. This stress may manifest itself in ratings downgrades, which may require more capital, or in actual losses. In addition, while the Company has experienced catastrophic events in the past without material loss, such as the terrorist attacks of September 11, 2001, the 2005 hurricane season and Superstorm Sandy in 2012, unexpected catastrophic events may have a material adverse effect upon the Company's insured portfolio and/or its investment portfolios.

Some of the Company's direct financial guaranty products may be riskier than traditional financial guaranty insurance.

As of December 31, 20122015 and 2011, 15%2014, 7% and 17%9%, respectively, of the Company's financial guaranty direct exposures were executed as credit derivatives. Traditional financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a municipal finance or structured finance obligation against non-payment of principal and interest, while credit derivatives provide protection from the occurrence of specified credit events, including non-payment of principal and interest. In general, the Company structures credit derivative transactions such that circumstances giving rise to its obligation to make payments are similar to that for financial guaranty policies and generally occur as losses are realizedwhen issuers fail to make payments on the underlying reference obligation.obligations. The tenor of credit derivatives exposures, like exposure under financial guaranty insurance policies, is also generally for as long as the reference obligation remains outstanding.

Nonetheless, credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. ("ISDA") documentation and operate differently from financial guaranty insurance policies. For example, the Company's control rights with respect to a reference obligation under a credit derivative may be more limited than when it issues a financial guaranty insurance policy on a direct primary basis. In addition, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events, unlike financial guaranty insurance policies. In some of the Company's older credit derivative transactions, one such specified event is the failure of AGC to maintain specified financial strength ratings. If a credit derivative is terminated, the Company could be required to make a termination payment as determined under the ISDA documentation. In addition, under a limited number of credit derivative contracts, the Company may be required to post eligible securities as collateral, generally cash or U.S. government or agency securities, under specified circumstances. The need to post collateral under many of these transactions is subject to caps that the Company has negotiated with its counterparties, but there are some transactions as to which the Company could be required to post collateral without such a cap based on movements in the mark-to-market valuation of the underlying exposure in excess of contractual thresholds. See "Risks Related to the Company's Financial Strength and Financial Enhancement Ratings—If AGC's financial strength or financial enhancement ratings were downgraded,

52


the Company could be required to make termination payments or post collateral under certain of its credit derivative contracts, which could impair its liquidity and results of operations and financial condition.operations."

Further downgrades of one or more of the Company's reinsurers could reduce the Company's capital adequacy and return on equity. The impairment of other financial institutions also could adversely affect the Company.

At December 31, 2012,2015, the Company had ceded approximately 6%4% of its principal amount of insurance outstanding to third party reinsurers. In evaluating the credits insured by the Company, securities rating agencies allow capital charge "credit" for reinsurance based on the reinsurers' ratings. In recent years, a number of the Company's reinsurers were downgraded by one or more rating agencies, resulting in decreases in the credit allowed for reinsurance and in the financial benefits of using reinsurance under existing rating agency capital adequacy models. Many of the Company's reinsurers have already been downgraded to single-A or below by one or more rating agencies. The Company could be required to raise additional capital to replace the lost reinsurance credit in order to satisfy rating agency and regulatory capital adequacy and single risk requirements. The rating agencies' reduction in credit for reinsurance could also ultimately reduce the Company's return on equity to the extent that ceding commissions paid to the Company by the reinsurers were not adequately increased to compensate for the effect of any additional capital required. In addition, downgraded reinsurers may default on amounts due to the Company and such reinsurer obligations may not be adequately collateralized, resulting in additional losses to the Company and a reduction in its shareholders' equity and net income.

The Company also has exposure to counterparties in various industries, including banks, hedge funds and other investment vehicles in its insured transactions. Many of these transactions expose the Company to credit risk in the event its counterparty fails to perform its obligations.

Acquisitions may not result in the benefits anticipated.

                From time to time and in order to deploy excess capital the Company evaluates financial guaranty portfolio and company acquisition opportunities and conducts diligence activities with respect to transactions with other financial guarantors and financial services companies. For example, during 2015 the Company acquired Radian Asset and merged it with and into AGC, with AGC as the surviving company of the merger. Acquiring other financial guaranty portfolios or companies or other financial services companies may involve some or all of the various risks commonly associated with acquisitions, including, among other things: (a) failure to adequately identify and value potential exposures and liabilities of the target portfolio or entity; (b) difficulty in estimating the value of the target portfolio or entity; (c) potential diversion of management’s time and

53


attention; (d) exposure to asset quality issues of the target entity; and (e) difficulty and expense of integrating the operations, systems and personnel of the target entity. Such acquisitions may also have unintended consequences on ratings assigned by the rating agencies to the Company or its subsidiaries (see “- Risks Related to the Company’s Ratings”) or on the applicability of laws and regulations to the Company’s existing businesses. These or other factors may cause any future acquisitions of financial guaranty portfolios or companies or other financial services companies not to result in the benefits to the Company anticipated when the acquisition was agreed.

Acquisitions may subject the Company to non-monetary consequences.

Past or future acquisitions may also subject the Company to non-monetary consequences that may or may not have been anticipated or fully mitigated at the time of the acquisition. For example, as noted under "Item 3. Legal Proceedings—Proceedings Related to AGMH's Former Financial Products Business," in November 2006, AGMH received a subpoena from the Antitrust Division of the Department of Justice issued in connection with an ongoing criminal investigation of bid rigging of awards of municipal GICs and other municipal derivatives. Although the subpoena relates to AGMH's former Financial Products Business, which the Company did not acquire, it was issued to AGMH, which the Company did acquire. Furthermore, while Dexia SA and Dexia Crédit Local S.A., jointly and severally, have agreed to indemnify the Company against liability arising out of these proceedings, such indemnification might not be sufficient to fully hold the Company harmless against any injunctive relief or civil or criminal sanction that is imposed against AGMH or its subsidiaries.

The Company is dependent on key executives and the loss of any of these executives, or its inability to retain other key personnel, could adversely affect its business.

The Company's success substantially depends upon its ability to attract and retain qualified employees and upon the ability of its senior management and other key employees to implement its business strategy. The Company believes there are only a limited number of available qualified executives in the business lines in which the Company competes. Although the Company is not aware of any planned departures, theThe Company relies substantially upon the services of Dominic J. Frederico, President and Chief Executive Officer, and other executives. Although the Company has designed its executive compensation with the goal of retaining and incentivizingcreating incentives for its executive officers, the Company may not be successful in retaining their services. The loss of the services of any of these individuals or other key members of the Company's management team could adversely affect the implementation of its business strategy.

The Company'sCompany is dependent on its information technology and that of certain third parties, and a cyber-attack, security breach or failure in such systems could adversely affect the Company’s business.

                The Company relies upon information technology and systems, including technology and systems provided by or interfacing with those of third parties, to support a variety of its business processes and activities.  In addition, the Company has collected and stored confidential information including, in connection with certain loss mitigation and due diligence activities related to its structured finance business, personally identifiable information.  While the Company does not believe that the financial guaranty industry is as inherently prone to cyber-attacks as industries relating to, for example, payment card processing, banking, critical infrastructure or defense contracting, the Company’s data systems and those of third parties on which it relies are still vulnerable to security breaches due to cyber-attacks, viruses, malware, hackers and other external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct.  Problems in or security breaches of these systems could, for example, result in lost business, reputational harm, the disclosure or misuse of confidential or proprietary information, incorrect reporting, inaccurate loss projections, legal costs and regulatory penalties. 

                The Company’s business operations rely on the continuous availability of its computer systems as well as those of certain third parties.  In addition to disruptions caused by cyber-attacks or other data breaches, such systems may be adversely affected by Bermuda employment restrictions.

natural and man-made catastrophes.  The Company's senior management plays an active role in its underwriting andCompany’s failure to maintain business decisions, as well as in performing its financial reporting and compliance obligations. The Company's location in Bermuda may serve as an impediment to attracting and retaining experienced personnel. Under Bermuda law, non-Bermudians, other than spouses of Bermudians and individuals holding permanent resident certificates or working resident certificates, are not permitted to engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda government. A work permit is only granted or extended if the employer can show that, after a proper public advertisement, no Bermudian, spouse of a Bermudian or individual holding a permanent resident certificate or working resident certificate is available who meets the minimum standards for the position.

All of the Company's Bermuda-based employees who require work permits have been granted permits by the Bermuda government. It is possible that the Company could lose the services of one or more of its key employees if the Company is unable to obtain or renew their work permits.

The regulatory systems under which the Company operates, and recent changes and potential changes thereto, could have a significant and negative effect on its business.

The Bermuda Monetary Authority has stated that achieving equivalence with European Union regulators under the Solvency II Directive (expected to become effective in 2015 at the earliest) is one of its key strategic objectives. To that end, the Authority has introduced (and iscontinuity in the processwake of introducing) regulations that, among other things, implement a group supervision regimesuch events, particularly if there were an interruption for an extended period, could prevent the timely completion of critical processes across its operations, including, for example, claims processing, treasury and enhance the capitalinvestment operations and solvency framework applicable to Bermuda insurers. The regulationspayroll.  These failures could result in additional costs, loss of business, fines and the proposed regulations, when implemented, may have an impact on the Company's operations.litigation.


5354


Risks Related to GAAP and Applicable Law

Marking-to-marketChanges in the fair value of the Company's insured credit derivatives portfolio may subject net income to volatility.

The Company is required to mark-to-market certain derivatives that it insures, including CDS that are considered derivatives under GAAP. Although there is no cash flow effect from this "marking-to-market," net changes in the fair value of the derivative are reported in the Company's consolidated statements of operations and therefore affect its reported earnings. As a result of such treatment, and given the large principal balance of the Company's CDS portfolio, small changes in the market pricing for insurance of CDS will generally result in the Company recognizing material gains or losses, with material market price increases generally resulting in large reported losses under GAAP. Accordingly, the Company's GAAP earnings will be more volatile than would be suggested by the actual performance of its business operations and insured portfolio.

The fair value of a credit derivative will be affected by any event causing changes in the credit spread (i.e.(i.e., the difference in interest rates between comparable securities having different credit risk) on an underlying security referenced in the credit derivative. Common events that may cause credit spreads on an underlying municipal or corporate security referenced in a credit derivative to fluctuate include changes in the state of national or regional economic conditions, industry cyclicality, changes to a company's competitive position within an industry, management changes, changes in the ratings of the underlying security, movements in interest rates, default or failure to pay interest, or any other factor leading investors to revise expectations about the issuer's ability to pay principal and interest on its debt obligations. Similarly, common events that may cause credit spreads on an underlying structured security referenced in a credit derivative to fluctuate may include the occurrence and severity of collateral defaults, changes in demographic trends and their impact on the levels of credit enhancement, rating changes, changes in interest rates or prepayment speeds, or any other factor leading investors to revise expectations about the risk of the collateral or the ability of the servicer to collect payments on the underlying assets sufficient to pay principal and interest. The fair value of credit derivative contracts also reflects the change in the Company's own credit cost, based on the price to purchase credit protection on AGC.AGC and AGM. For discussion of the Company's fair value methodology for credit derivatives, see Note 8,7, Fair Value Measurement, of the Financial Statements and Supplementary Data.

If thea credit derivative is held to maturity and no credit loss is incurred, any unrealized gains or losses previously reported would be offset by corresponding gains or losses byas the transactions reach maturity. Due to the complexity of fair value accounting and the application of GAAP requirements, future amendments or interpretations of relevant accounting standards may cause the Company to modify its accounting methodology in a manner which may have an adverse impact on its financial results.

Change in industry and other accounting practices could impair the Company's reported financial results and impede its ability to do business.

Changes in or the issuance of new accounting standards, as well as any changes in the interpretation of current accounting guidance, may have an adverse effect on the Company's reported financial results, including future revenues, and may influence the types and/or volume of business that management may choose to pursue.

Changes in or inability to comply with applicable law could adversely affect the Company's ability to do business.

The Company’s businesses are subject to direct and indirect regulation under state insurance laws, federal securities, commodities and tax laws affecting public finance and asset backed obligations, and federal regulation of derivatives, as well as applicable laws in the other countries in which the Company operates. Future legislative, regulatory, judicial or other legal changes in the jurisdictions in which the Company does business may adversely affect its ability to pursue its current mix of business, thereby materially impacting its financial results by, among other things, limiting the types of risks it may insure, lowering applicable single or aggregate risk limits, increasing required reserves or capital, increasing the level of supervision or regulation to which the Company’s operations may be subject, imposing restrictions that make the Company’s products less attractive to potential buyers, lowering the profitability of the Company’s business activities, requiring the Company to change certain of its business practices and exposing it to additional costs (including increased compliance costs).

In particular, regulations under the Dodd-Frank Act impose requirements on activities that AGL's subsidiaries may engage in that involve “swaps” or “security-based swaps” as defined under that Act. Although final product rules published by the CFTC and SEC in August 2012 established an insurance safe-harbor that provides that AGM’s and AGC's financial guaranty insurance policies are not generally deemed swaps or security-based swaps under the Dodd-Frank Act and are therefore not subject to derivatives regulation under the Act, regulations under the Act could result in requirements forrequire certain of AGL's subsidiaries to register with the Company to maintain capital and/CFTC or post margin with respect to future derivative transactions and possibly maintain capital on its existing insured derivatives portfolio. In 2012, the SEC and the CFTC released final rules for determining if the Company or its affiliates will be deemed to beas a “swap dealer” or “major swap participant” (“MSP”) underor “major security-based swap participant” (“MSBSP”), respectively, as a result of either the Dodd-Frank Act. The Company believes AGClegacy financial guaranty insurance policies and AGM may be required to register with the SEC as MSPs when those registration rules take effect; it is continuing to analyze its insured portfolio to determine whether registration with the CFTC as an MSP will be required. MSP designation and registration would likely expose the Company to increased compliance costs. The magnitude of related capital requirements resulting from designation and registration, and the extent to which such requirements would apply to the Company's legacy insured derivatives portfolio,

5455


portfolios or new activities. Subsidiaries required to register as MSPs or MSBSPs would need to satisfy the regulatory margin and capital requirements of the applicable agency and would be subject to additional compliance requirements.
The Company has analyzed the exposures created by its legacy financial guaranty insurance policies and derivatives portfolio and determined that the sizes of these exposures are not sufficiently high at the current time to require its subsidiaries to register as MSPs under the CFTC rules. However, in the event such swap exposures exceed the triggers, then one or more of AGL's subsidiaries may be required to register as an MSP with the CFTC. With respect to registration as an MSBSP, the SEC adopted final rules in August 2015, but is not yet clear when the mandatory compliance date under such rules will dependoccur whether one or more of AGL's subsidiaries will be above the applicable triggers at that time, or, if so, what substantive regulations may be applicable.
In addition, certain of AGL's subsidiaries may be required by their counterparties to post margin with respect to either future or legacy derivative transactions when U.S. and European rules relating to margin take effect. U.S. bank regulators and the CFTC have adopted margin requirements for new derivative transactions under their jurisdiction, but declined to provide any guidance on the releaseapplicability of final rules by thethose requirements on non-material amendments of legacy derivative transactions. The SEC and CFTC, which hasEuropean regulators have not yet occurred. Asadopted margin requirements for new derivative transactions under their jurisdiction. It is possible that some or all of the relevant regulators will take the position that amendments to existing transactions under their jurisdiction will cause the amended transactions to be treated as new derivatives for purposes of these margin rules and certain other new regulatory requirements. Such an expansion of the margin and other regulatory requirements to amendments of existing derivatives may impede the Company's ability to amend insured derivative transactions in connection with loss mitigation efforts or municipal refunding transactions.
The magnitude of capital and/or margin requirements could be substantial and, as discussed in “Risks Related to the Company's Capital and Liquidity Requirements —The— The Company may require additional capital from time to time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on unfavorable terms,” there can be no assurance that the Company will be able to obtain, or obtain on favorable terms, such additional capital thatas may be required by the Dodd-Frank Act.

Pursuant to the Dodd-Frank Act, the FSOC is charged with identifying certain non-bank financial companies to be subject to supervision by the Board of Governors of the Federal Reserve System.  Although the Company is unlikely to be so designated based on its size, the FSOC also considers other factors, such as an entity's interconnectedness with other financial institutions, which could raise the Company's profile in this context. In a parallel international process, the International Association of Insurance Supervisors published a proposed assessment methodology for identifying global systematically important insurers which explicitly identified financial guaranty insurance as an activity that poses increased systemic risk relative to more traditional insurance activities.

In addition, a Federal Insurance Office (“FIO”) has been established to develop federal policy relating to insurance matters. The FIO is conducting a study for submission to the U.S. Congress on how to modernize and improve insurance regulation in the U.S.  Moreover, various federal regulatory agencies have proposed and adopted additional regulations in furtherance of the Dodd-Frank Act provisions and will continue in the coming months. To the extentmeet these capital and/or other requirements ultimately apply to the Company, they could require the Company to change how it conducts and manages its business, including subjecting it to higher capital requirements, and could adversely affect it.
margin requirements. 
The foregoing requirements, as well as others that could be applied to the Company as a result of the legislation, could limit the Company’s ability to conduct certain lines of business and/or subject the Company to enhanced business conduct standards and/or otherwise adversely affect its future results of operations. Because many provisions of the Dodd-Frank Act are being implemented through agency rulemaking processes, a number of which have not been completed, the Company's assessment of the legislation’s impact on its business remains uncertain and is subject to change.

In addition, the decline in the financial strength of many financial guaranty insurers has caused government officials to examine the suitability of some of the complex securities guaranteed by financial guaranty insurers. For example, the New York Department of Financial Services ("NY DFS")NYDFS had announced that it would develop new rules and regulations for the financial guaranty industry. On September 22, 2008, the NY DFSNYDFS issued Circular Letter No. 19 (2008) (the “Circular Letter”), which established best practices guidelines for financial guaranty insurers effective January 1, 2009. The NY DFS had announced that it plansAlthough the Company is not aware of any current efforts by the NYDFS to propose legislation and regulations to formalize these guidelines. Such guidelines, and the relatedany such legislation and regulations may limit the amount of new structured finance business that AGC may write.

Furthermore, if the Company fails to comply with applicable insurance laws and regulations it could be exposed to fines, the loss of insurance licenses, limitations on the right to originate new business and restrictions on its ability to pay dividends, all of which could have an adverse impact on its business results and prospects. As a result of a number of factors, including incurred losses and risks reassumed from troubled reinsurers, AGM and AGC have from time to time exceeded regulatory risk limits. Failure to comply with these limits allows the NY DFS the discretion to cause the Company to cease writing new business. Although the Company has notified the NY DFS of such noncompliance, the NY DFS has not exercised such discretion in the past. If an insurance company’s surplus declines below minimum required levels, the insurance regulator could impose additional restrictions on the insurer or initiate insolvency proceedings. AGC and AGM may increase surplus by various means, including obtaining capital contributions from the Company, purchasing reinsurance or entering into other loss mitigation arrangements, reducing the amount of new business written or obtaining regulatory approval to release contingency reserves. From time to time, AGM and AGC have obtained approval from their regulators to release contingency reserves based on losses and, in the case of AGM, also based on the expiration of theirits insured exposure.

From time to time, legislators have called for changes to the Internal Revenue Code in order to limit or eliminate the Federal income tax exclusion for municipal bond interest. Such a change is expected towould increase the cost of borrowing for state and local governments, and as a result, tocould cause a decrease in infrastructure spending by states and municipalities. Municipalities may issue a lower volume of bonds, and in particular may be less likely to refund existing debt, in which case, the amount of bonds that can benefit from insurance might also be reduced.


56


AGL's ability to pay dividends may be constrained by certain insurance regulatory requirements and restrictions.

AGL is subject to Bermuda regulatory requirements that affect its ability to pay dividends on common shares and to make other payments. Under the Bermuda Companies Act 1981, as amended, AGL may declare or pay a dividend only (1) if it has reasonable grounds for believing that it is, and after the payment would be, able to pay its liabilities as they become due, and

55


(2) if the realizable value of its assets would not be less than its liabilities. While AGL currently intends to pay dividends on its common shares, investors who require dividend income should carefully consider these risks before investing in AGL.

In addition, if, pursuant to the insurance laws and related regulations of Bermuda, Maryland and New York, AGL's insurance subsidiaries cannot pay sufficient dividends to AGL at the times or in the amounts that it requires, it would have an adverse effect on AGL's ability to pay dividends to shareholders. See "Risks Related to the Company's Capital and Liquidity Requirements—The ability of AGL and its subsidiaries to meet their liquidity needs may be limited."

Applicable insurance laws may make it difficult to effect a change of control of AGL.

Before a person can acquire control of a U.S. or U.K. insurance company, prior written approval must be obtained from the insurance commissioner of the state or country where the insurer is domiciled. Because a person acquiring 10% or more of AGL's common shares would indirectly control the same percentage of the stock of its U.S. insurance company subsidiaries, the insurance change of control laws of Maryland, New York and the U.K. would likely apply to such a transaction.

These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions, and in particular unsolicited transactions, that some or all of its shareholders might consider to be desirable.

While AGL's Bye-Laws limit the voting power of any shareholder to less than 10%, we cannot assure you that the applicable regulatory body would agree that a shareholder who owned 10% or more of its common shares did not control the applicable insurance company subsidiary, notwithstanding the limitation on the voting power of such shares.

Risks Related to Taxation

Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the Company's investment portfolio.

Any material change in the U.S. tax treatment of municipal securities, the imposition of a national sales tax or a flat tax in lieu of the current federal income tax structure in the U.S., or changes in the treatment of dividends, could adversely affect the market for municipal obligations and, consequently, reduce the demand for financial guaranty insurance and reinsurance of such obligations.

Changes in U.S. federal, state or local laws that materially adversely affect the tax treatment of municipal securities or the market for those securities, or other changes negatively affecting the municipal securities market, also may adversely impact the Company's investment portfolio, a significant portion of which is invested in tax-exempt instruments. These adverse changes may adversely affect the value of the Company's tax-exempt portfolio, or its liquidity.

Certain of the Company's foreign subsidiaries may be subject to U.S. tax.

The Company manages its business so that AGL and its foreign subsidiaries (other than AGRO and AGE) operate in such a manner that none of them should be subject to U.S. federal tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks, and U.S. withholding tax on certain U.S. source investment income). However, because there is considerable uncertainty as to the activities which constitute being engaged in a trade or business within the U.S., the Company cannot be certain that the IRS will not contend successfully that AGL or any of its foreign subsidiaries (other than AGRO and AGE) is/are engaged in a trade or business in the U.S. If AGL and its foreign subsidiaries (other than AGRO and AGE) were considered to be engaged in a trade or business in the U.S., each such company could be subject to U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such U.S. business.


57


AGL, AG Re and its Bermuda subsidiariesAGRO may become subject to taxes in Bermuda after March 2035, which may have a material adverse effect on the Company's results of operations and on an investment in the Company.

The Bermuda Minister of Finance, under Bermuda's Exempted Undertakings Tax Protection Act 1966, as amended, has given AGL, AG Re and its Bermuda SubsidiariesAGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or its Bermuda Subsidiaries,AGRO, or any of AGL's or its subsidiaries' operations, shares, debentures or other obligations until March 31, 2035.

56


Given the limited duration of the Minister of Finance's assurance, the Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035.

U.S. Persons who hold 10% or more of AGL's shares directly or through foreign entities may be subject to taxation under the U.S. controlled foreign corporation rules.

Each 10% U.S. shareholder of a foreign corporation that is a controlled foreign corporation ("CFC")CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the foreign corporation directly or indirectly through foreign entities on the last day of the foreign corporation's taxable year on which it is a CFC, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart F income," even if the subpart F income is not distributed. In addition, upon a sale of shares of a CFC, 10% U.S. shareholders may be subject to U.S. federal income tax on a portion of their gain at ordinary income rates.

The Company believes that because of the dispersion of the share ownership in AGL, provisions in AGL's Bye-Laws that limit voting power, contractual limits on voting power and other factors, no U.S. Person who owns AGL's shares directly or indirectly through foreign entities should be treated as a 10% U.S. shareholder of AGL or of any of its foreign subsidiaries. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge, in which case such U.S. Person may be subject to taxation under U.S. tax rules.

U.S. Persons who hold shares may be subject to U.S. income taxation at ordinary income rates on their proportionate share of the Company's related person insurance income.

If:If the following conditions are true, then a U.S. Person who owns AGL's shares (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person's pro rata share of the RPII of such Foreign Insurance Subsidiary (as defined below) for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. Persons at that date, regardless of whether such income is distributed:

the Company is 25% or more owned directly, indirectly through foreign entities or by attribution by U.S. Persons;

the gross RPII of AG Re or any other AGL foreign subsidiary engaged in the insurance business that has not made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. tax purposes or are CFCs owned directly or indirectly by AGUS (each, with AG Re, a "Foreign Insurance Subsidiary") were to equal or exceed 20% of such Foreign Insurance Subsidiary's gross insurance income in any taxable year; and

direct or indirect insureds (and persons related to such insureds) own (or are treated as owning directly or indirectly through entities) 20% or more of the voting power or value of the Company's shares,shares.

then a U.S. Person who owns AGL's shares (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person's pro rata share of such Foreign Insurance Subsidiary's RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. Persons at that date, regardless of whether such income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income.

The amount of RPII earned by a Foreign Insurance Subsidiary (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of shares or any person related to such holder) will depend on a number of factors, including the geographic distribution of a Foreign Insurance Subsidiary's business and the identity of persons directly or indirectly insured or reinsured by a Foreign Insurance Subsidiary. The Company believes that each of its Foreign Insurance Subsidiaries either should not in the foreseeable future have RPII income which equals or exceeds 20% of its gross insurance income or have direct or indirect insureds, as provided for by RPII rules, that directly or indirectly own 20% or more of either the voting power or value of AGL's shares. However, the Company cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond its control.


58


U.S. Persons who dispose of AGL's shares may be subject to U.S. income taxation at dividend tax rates on a portion of their gain, if any.

The meaning of the RPII provisions and the application thereof to AGL and its Foreign Insurance Subsidiaries is uncertain. The RPII rules in conjunction with section 1248 of the Code provide that if a U.S. Person disposes of shares in a foreign insurance corporation in which U.S. Persons own (directly, indirectly, through foreign entities or by attribution) 25% or more of the shares (even if the amount of gross RPII is less than 20% of the corporation's gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as dividend income to the extent of the holder's share of the corporation's undistributed earnings and profits that were accumulated during the period that the holder owned the shares. This provision applies whether

57


or not such earnings and profits are attributable to RPII. In addition, such a holder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the holder.

In the case of AGL's shares, these RPII rules should not apply to dispositions of shares because AGL is not itself directly engaged in the insurance business. However, the RPII provisions have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form, what changes or clarifications might ultimately be made thereto, or whether any such changes, as well as any interpretation or application of the RPII rules by the IRS, the courts, or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII.

U.S. Persons who hold common shares will be subject to adverse tax consequences if AGL is considered to be a "passive foreign investment company" for U.S. federal income tax purposes.

If AGL is considered a passive foreign investment company ("PFIC")PFIC for U.S. federal income tax purposes, a U.S. Person who owns any shares of AGL will be subject to adverse tax consequences that could materially adversely affect its investment, including subjecting the investor to both a greater tax liability than might otherwise apply and an interest charge. The Company believes that AGL is not, and currently does not expect AGL to become, a PFIC for U.S. federal income tax purposes; however, there can be no assurance that AGL will not be deemed a PFIC by the IRS.

There are currently no final or temporary regulations regarding the application of the PFIC provisions to an insurance company. NewThe IRS recently issued proposed regulations intended to clarify the application of the PFIC provisions to an insurance company. These proposed regulations provide that a non-U.S. insurance company may only qualify for an exception to the PFIC rules if, among other things, the non-U.S. insurance company’s officers and employees perform its substantial managerial and operational activities.  This proposed regulation will not be effective until adopted in final form.  In addition, Senator Wyden recently introduced the “Offshore Reinsurance Tax Fairness Act” that, if enacted, would characterize a non-U.S. insurance company with insurance liabilities of 25% or less of such company’s assets as a PFIC unless it can qualify for a temporary exception which would require its insurance liabilities to equal or exceed 10% of its assets and the satisfaction of a facts and circumstances test. Because of the legal uncertainties relating to how the proposed regulations will be interpreted and the form in which such regulations or pronouncements interpreting or clarifying these rulesany legislative proposal may be forthcoming. Thefinalized, the Company cannot predict what impact, if any, such guidance or legislation would have on an investor that is subject to U.S.US federal income taxation.tax.

Changes in U.S. federal income tax law could materially adversely affect an investment in AGL's common shares.

Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. connections. For example, legislation has previously been introduced in Congress to limit the deductibility of reinsurance premiums paid by U.S. insurance companies to foreign affiliates and impose additional limits on deductibility of interest of foreign owned U.S. corporations. Another prior legislative proposal would treat a foreign corporation that is primarily managed and controlled in the U.S. as a U.S. corporation for U.S federal income tax purposes. Further, legislation has previously been introduced to override the reduction or elimination of the U.S. withholding tax on certain U.S. source investment income under a tax treaty in the case of a deductible related party payment made by a U.S. member of a foreign controlled group to a foreign member of the group organized in a tax treaty country to the extent that the ultimate foreign parent corporation would not enjoy the treaty benefits with respect to such payments. It is possible that this or similar legislation could be introduced in and enacted by the current Congress or future Congresses that could have an adverse impact on the Company or the Company's shareholders.

U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the U.S. is a PFIC, or whether U.S. Persons would be required to include in their gross income the "subpart F income" of a CFC or RPII are subject to change, possibly on a retroactive basis. There currently are noonly recently proposed regulations

59


regarding the application of the PFIC rules to insurance companies, and the regulations regarding RPII are stillhave been in proposed form.form since 1991. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when, or in what form such regulations or pronouncements may be implemented or made, or whether such guidance will have a retroactive effect.

Recharacterization by the Internal Revenue Service of the Company's U.S. federal tax treatment of losses on the Company's CDS portfolio can adversely affect the Company's financial position.

As part of the Company's financial guaranty business, the Company has sold credit protection by insuring CDS entered into with various financial institutions. Assured Guaranty's CDS portfolio has experienced significant cumulative fair value losses which are only deductible for U.S. federal income tax purposes upon realization and, consequently, generate a significant deferred tax asset based on the Company's intended treatment of such losses as ordinary insurance losses upon realization. The U.S. federal income tax treatment of CDS is an unsettled area of the tax law. As such, it is possible that the Internal Revenue Service may decide that the losses generated by the Company's CDS business should be characterized as capital rather than ordinary insurance losses, which could materially adversely affect the Company's financial condition.


58


An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.

If AGL were to issue equity securities in the future, including in connection with any strategic transaction, or if previously issued securities of AGL were to be sold by the current holders, AGL may experience an "ownership change" within the meaning of Section 382 of the Code. In general terms, an ownership change would result from transactions increasing the aggregate ownership of certain stockholders in AGL's stock by more than 50 percentage points over a testing period (generally three years). If an ownership change occurred, the Company's ability to use certain tax attributes, including certain built-in losses, credits, deductions or tax basis and/or the Company's ability to continue to reflect the associated tax benefits as assets on AGL's balance sheet, may be limited. The Company cannot give any assurance that AGL will not undergo an ownership change at a time when these limitations could materially adversely affect the Company's financial condition.

AGMH likely experienced an ownership change under Section 382 of the Code.

In connection with the acquisition of AGMH, Acquisition, AGMH likely experienced an "ownership change" within the meaning of Section 382 of the Code. The Company has concluded that the Section 382 limitations as discussed in "An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences" are unlikely to have any material tax or accounting consequences. However, this conclusion is based on a variety of assumptions, including the Company's estimates regarding the amount and timing of certain deductions and future earnings, any of which could be incorrect. Accordingly, there can be no assurance that these limitations would not have an adverse effect on the Company's financial condition or that such adverse effects would not be material.

A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the U.K. is a party could adversely affect an investment in AGL’s common shares.
AGL is not incorporated in the U.K. and, accordingly, is only resident in the U.K. for U.K. tax purposes if it is “centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a company’s affairs. AGL believes it is entitled to take advantage of the benefits of income tax treaties to which the U.K. is a party on the basis that it is has established central management and control in the U.K. AGL has obtained confirmation that there is a low risk of challenge to its residency status from HMRC under the facts as they stand today. The board of directors intends to manage the affairs of AGL in such a way as to maintain its status as a company that is tax-resident in the U.K. for U.K. tax purposes and to qualify for the benefits of income tax treaties to which the U.K. is a party. However, the concept of central management and control is a case-law concept that is not comprehensively defined in U.K. statute. In addition, it is a question of fact. Moreover, tax treaties may be revised in a way that causes AGL to fail to qualify for benefits thereunder. Accordingly, a change in relevant U.K. tax law or in tax treaties to which the U.K. is a party, or in AGL’s central management and control as a factual matter, or other events, could adversely affect the ability of Assured Guaranty to manage its capital in the efficient manner that it contemplated in establishing U.K. tax residence.
Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
As a U.K. tax resident, AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to applicable exemptions. The main rate of corporation tax is currently 20%.

60


With respect to income, the dividends that AGL receives from its subsidiaries should be exempt from U.K. corporation tax under the exemption contained in section 931D of the Corporation Tax Act 2009.
With respect to capital gains, if AGL were to dispose of shares in its direct subsidiaries or if it were deemed to have done so, it may realize a chargeable gain for U.K. tax purposes. Any tax charge would be based on AGL’s original acquisition cost. It is anticipated that any such future gain should qualify for exemption under the substantial shareholding exemption in Schedule 7AC to the Taxation of Chargeable Gains Act 1992. However, the availability of such exemption would depend on facts at the time of disposal, in particular the “trading” nature of the activities of the Assured Guaranty group and of the relevant subsidiary. There is no statutory definition of what constitutes “trading” activities for this purpose and in practice reliance is placed on the published guidance of HMRC.
A change in U.K. tax law or its interpretation by HMRC, or any failure to meet all the qualifying conditions for relevant exemptions from U.K. corporation tax, could affect Assured Guaranty’s financial results of operations or its ability to provide returns to shareholders.
Assured Guaranty's financial results may be affected by measures taken in response to the OECD BEPS project.
The Organization for Economic Co-operation and Development published its final reports on Base Erosion and Profit Shifting (the “BEPS Reports”) in October 2015. The recommended actions include an examination of the definition of a “permanent establishment” and the rules for attributing profit to a permanent establishment. There are also recommended actions relating to the goal of ensuring that transfer pricing outcomes are in line with value creation, noting that the current rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place. In response to this, the U.K. Government has already made changes to transfer pricing. Other recommendations have been published with respect to hybrid financial instruments and the deductibility of intra-group interest and the U.K. Government has launched consultations with respect to both these matters. Any further changes in U.K. tax law or changes in U.S. tax law in response to the BEPS Reports could adversely affect Assured Guaranty’s tax liability.
A new U.K. tax, the diverted profits tax ("DPT"), which is levied at 25%, came into effect from April 1, 2015, and, in substance, effectively anticipated some of the recommendations emerging from the BEPS Reports. This is an anti-avoidance measure, aimed at protecting the U.K. tax base against the diversion of profits away from the U.K. tax charge. In particular, DPT may apply to profits generated by economic activities carried out in the U.K., that are not taxed in the U.K. by reason of arrangements between companies in the same multinational group and involving a low-tax jurisdiction. It is currently unclear whether DPT would constitute a creditable tax for U.S. foreign tax credit purposes. If any member of the Assured Guaranty group is liable to DPT, this could adversely affect the Company's results of operations.
An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits of their foreign subsidiaries could adversely impact Assured Guaranty’s tax liability.
Under the U.K. “controlled foreign company” regime, the income profits of non-U.K. resident companies may, in certain circumstances, be attributed to controlling U.K. resident shareholders for U.K. corporation tax purposes. The non-U.K. resident members of the Assured Guaranty group intend to operate and manage their levels of capital in such a manner that their profits would not be taxed on AGL under the U.K. CFC regime. Assured Guaranty has obtained clearance from HMRC that none of the profits of the non-U.K. resident members of the Assured Guaranty group should be subject to U.K. tax as a result of attribution under the CFC regime on the facts as they currently stand. However, a change in the way in which Assured Guaranty operates or any further change in the CFC regime, resulting in an attribution to AGL of any of the income profits of any of AGL’s non-U.K. resident subsidiaries for U.K. corporation tax purposes, could adversely affect Assured Guaranty’s financial results of operations.

61


Risks Related to AGL's Common Shares

The market price of AGL's common shares may be volatile, which could cause the value of an investment in the Company to decline.

The market price of AGL's common shares has experienced, and may continue to experience, significant volatility. Numerous factors, including many over which the Company has no control, may have a significant impact on the market price of its common shares. These risks include those described or referred to in this "Risk Factors" section as well as, among other things:

investor perceptions of the Company, its prospects and that of the financial guaranty industry and the markets in which the Company operates;

the Company's operating and financial performance;

the Company's access to financial and capital markets to raise additional capital, refinance its debt or replace existing senior secured credit and receivables-backed facilities;

the Company's ability to repay debt;

the Company's dividend policy;

future sales of equity or equity-related securities;

changes in earnings estimates or buy/sell recommendations by analysts; and

general financial, economic and other market conditions.

In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of AGL's common shares, regardless of its operating performance.

Furthermore, future sales or other issuances of AGL equity may adversely affect the market price of its common shares.

AGL's common shares are equity securities and are junior to existing and future indebtedness.

As equity interests, AGL's common shares rank junior to indebtedness and to other non-equity claims on AGL and its assets available to satisfy claims on AGL, including claims in a bankruptcy or similar proceeding. For example, upon liquidation, holders of AGL debt securities and shares of preferred stock and creditors would receive distributions of AGL's available assets prior to the holders of AGL common shares. Similarly, creditors, including holders of debt securities, of AGL's

59


subsidiaries, have priority on the assets of those subsidiaries. Future indebtedness may restrict payment of dividends on the common shares.

Additionally, unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the case of common shares, dividends are payable only when and if declared by AGL's board of directors or a duly authorized committee of the board. Further, the common shares place no restrictions on its business or operations or on its ability to incur indebtedness or engage in any transactions, subject only to the voting rights available to stockholders generally.

There may be future sales or other dilution of AGL's equity, which may adversely affect the market price of its common shares.

Future sales or other issuances of AGL's equity may adversely affect the market price of its common shares. In addition, based on a Schedule 13D/A filed by WL Ross Group, L.P. on December 5, 2011, the Company calculates that WL Ross Group, L.P. and its affiliates owned 10.2% of AGL's common shares as of December 31, 2012. WL Ross Group, L.P. and its affiliates have registration rights with respect to AGL common shares. A sale of a significant portion of such holdings could adversely affect the market price of AGL's common shares.

Provisions in the Code and AGL's Bye-Laws may reduce or increase the voting rights of its common shares.

Under the Code, AGL's Bye-Laws and contractual arrangements, certain shareholders have their voting rights limited to less than one vote per share, resulting in other shareholders having voting rights in excess of one vote per share. Moreover, the relevant provisions of the Code may have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership.

More specifically, pursuant to the relevant provisions of the Code, if, and so long as, the common shares of a shareholder are treated as "controlled shares" (as determined under section 958 of the Code) of any U.S. Person (as defined below) and such controlled shares constitute 9.5% or more of the votes conferred by AGL's issued shares, the voting rights with

62


respect to the controlled shares of such U.S. Person (a "9.5% U.S. Shareholder") are limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in AGL's Bye-Laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. For these purposes, "controlled shares" include, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code).

In addition, the Board of Directors may limit a shareholder's voting rights where it deems appropriate to do so to (1) avoid the existence of any 9.5% U.S. Shareholders, and (2) avoid certain material adverse tax, legal or regulatory consequences to the Company or any of the Company's subsidiaries or any shareholder or its affiliates. AGL's Bye-Laws provide that shareholders will be notified of their voting interests prior to any vote taken by them.

As a result of any such reallocation of votes, the voting rights of a holder of AGL common shares might increase above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting in such holder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934. In addition, the reallocation of votes could result in such holder becoming subject to the short swing profit recovery and filing requirements under Section 16 of the Exchange Act.

AGL also has the authority under its Bye-Laws to request information from any shareholder for the purpose of determining whether a shareholder's voting rights are to be reallocated under the Bye-Laws. If a shareholder fails to respond to a request for information or submits incomplete or inaccurate information in response to a request, the Company may, in its sole discretion, eliminate such shareholder's voting rights.

Provisions in AGL's Bye-Laws may restrict the ability to transfer common shares, and may require shareholders to sell their common shares.

AGL's Board of Directors may decline to approve or register a transfer of any common shares (1) if it appears to the Board of Directors, after taking into account the limitations on voting rights contained in AGL's Bye-Laws, that any adverse tax, regulatory or legal consequences to AGL, any of its subsidiaries or any of its shareholders may occur as a result of such transfer (other than such as the Board of Directors considers to be de minimis), or (2) subject to any applicable requirements of or commitments to the New York Stock Exchange ("NYSE"),NYSE, if a written opinion from counsel supporting the legality of the transaction under U.S. securities laws has not been provided or if any required governmental approvals have not been obtained.


60


AGL's Bye-Laws also provide that if the Board of Directors determines that share ownership by a person may result in adverse tax, legal or regulatory consequences to the Company, any of the subsidiaries or any of the shareholders (other than such as the Board of Directors considers to be de minimis), then AGL has the option, but not the obligation, to require that shareholder to sell to AGL or to third parties to whom AGL assigns the repurchase right for fair market value the minimum number of common shares held by such person which is necessary to eliminate such adverse tax, legal or regulatory consequences.

Existing reinsurance agreement terms may make it difficult to effect a change of control of AGL.

Some of the Company's reinsurance agreements have change of control provisions that are triggered if a third party acquires a designated percentage of AGL's shares. If a change of control provision is triggered, the ceding company may recapture some or all of the reinsurance business ceded to the Company in the past. Any such recapture could adversely affect the Company's shareholders' equity, future income or financial strength or debt ratings. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of AGL, including through transactions that some or all of the shareholders might consider to be desirable.


ITEM 1B.UNRESOLVED STAFF COMMENTS
None.

ITEM 2.PROPERTIES

The principal executive offices of AGL and AG Re consist of approximately 8,250 square feet of office space located in Hamilton, Bermuda. TheBermuda; the lease for this space expires in April 2015.

In addition, the Company occupies approximately 110,000 square feet of office space in New York City. This office space is leased by AGM. The lease expires in April 2026.

The Company and its subsidiaries also occupy currently another approximately 21,000 square feet of office space in San Francisco, Irvine, London and Sydney. The Irvine office lease expires in July 31, 20132021 and is renewable at the option of the Company.


63


In addition, the Company has been occupying offices at 31 West 52nd Street in New York City. In September 2015, the Company entered into a lease for 88,000 square feet of office space at 1633 Broadway in New York City; the new lease expires in February 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent. The Company expectsagreed to renewterminate its existing lease in August 2016 and plans to relocate its U.S. affiliates into the new office space in the summer of 2016.

Furthermore, the Company has offices in San Francisco and London. Previously, the Company had an office in Sydney, which it closed in March 2015, and in Irvine, lease.California, which it closed in July 2015.

Management believes that theits office space is adequate for its current and anticipated needs.

ITEM 3.    LEGAL PROCEEDINGS
ITEM 3.LEGAL PROCEEDINGS

Lawsuits arise in the ordinary course of the Company's business. It is the opinion of the Company's management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company's results of operations in a particular quarter or year.

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

In addition, in the ordinary course of their respective businesses, certain of the Company's subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods.periods or prevent losses in the future. For example, as described in the "Recovery Litigation—RMBS Transactions,Litigation," section of Note 6,5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, asin January 2016 the Company commenced an action for declaratory judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico to invalidate executive orders issued by the Governor of Puerto Rico directing the retention or transfer of certain taxes and revenues pledged to secure the payment of certain bonds insured by the Company. Also, in December 2008, the Company filed a claim in the Supreme Court of the dateState of this filing, AGC and AGM have filed complaintsNew York against certain sponsors and underwriters of RMBS securities that AGC or AGM hadan investment manager in a transaction it insured alleging among other claims, that such persons had breached representationsbreach of fiduciary duty, gross negligence and warranties ("R&W") in the transaction documents, failed to cure or repurchase defective loans and/or violated state securities laws.breach of contract. The amounts, if any, the Company will recover in proceedings to recover losses are uncertain, and recoveries, or failure to obtain recoveries, in any one or more of these proceedings during any quarter or year could be material to the Company's results of operations in that particular quarter or year.


64


Proceedings Relating to the Company's Financial Guaranty Business

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

In August 2008, a number of financial institutions and other parties, including AGM and other bond insurers, were named as defendants in a civil action brought in the circuit court of Jefferson County, Alabama relating to the County's

61


problems meeting its sewer debt obligations: Charles E. Wilson vs. JPMorgan Chase & Co et al (filed the Circuit Court of Jefferson County, Alabama), Case No. 01-CV-2008-901907.00, a putative class action. The action was brought on behalf of rate payers, tax payers and citizens residing in Jefferson County, and alleges conspiracy and fraud in connection with the issuance of the County's debt. The complaint in this lawsuit seeks equitable relief, unspecified monetary damages, interest, attorneys' fees and other costs. On January, 13, 2011, the circuit court issued an order denying a motion by the bond insurers and other defendants to dismiss the action. Defendants, including the bond insurers, have petitioned the Alabama Supreme Court for a writ of mandamus to the circuit court vacating such order and directing the dismissal with prejudice of plaintiffs' claims for lack of standing. On January 23, 2012, the Alabama Supreme Court entered a stay pending the resolution of the Jefferson County bankruptcy. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from this lawsuit.

Beginning in July 2008, AGM and various other financial guarantors were named in complaints filed in the Superior Court for the State of California, City and County of San Francisco. Since that time, plaintiffs' counsel has filed amended complaints against AGM and AGC and added additional plaintiffs. As of the date of this filing, the plaintiffs with complaints against AGM and AGC, among other financial guaranty insurers, are: (a) City of Los Angeles, acting by and through the Los Angeles Department of Water and Power; (b) City of Sacramento; (c) City of Los Angeles; (d) City of Oakland; (e) City of Riverside; (f) City of Stockton; (g) County of Alameda; (h) Contra Costa County; (i) County of San Mateo; (j) Los Angeles World Airports; (k) City of Richmond; (l) Redwood City; (m) East Bay Municipal Utility District; (n) Sacramento Suburban Water District; (o) City of San Jose; (p) County of Tulare; (q) The Regents of the University of California; (r) The Redevelopment Agency of the City of Riverside; (s) The Public Financing Authority of the City of Riverside; (t) The Jewish Community Center of San Francisco; (u) The San Jose Redevelopment Agency; (v) The Redevelopment Agency of the City of Stockton; (w) The Public Financing Authority of the City of Stockton; and (x) The Olympic Club. Complaints filed by the City and County of San Francisco and the Sacramento Municipal Utility District were subsequently dismissed as to AGM and AGC. These complaints allege that the financial guaranty insurer defendants (i) participated in a conspiracy in violation of California's antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance, (ii) participated in risky financial transactions in other lines of business that damaged each insurer's financial condition (thereby undermining the value of each of their guaranties), and (iii) failed to adequately disclose the impact of those transactions on their financial condition. In addition to their antitrust claims, various plaintiffs in these actions assert claims for breach of the covenant of good faith and fair dealing, fraud, unjust enrichment, negligence, and negligent misrepresentation. At hearings held in July and October 2011 relating to AGM, AGC and the other defendants' demurrer, the court overruled the demurrer on the following claims: breach of contract, violation of California's antitrust statute and of its unfair business practices law, and fraud. The remaining claims were dismissed. On December 2, 2011, AGM, AGC and the other bond insurer defendants filed an anti-SLAPP ("Strategic Lawsuit Against Public Participation") motion to strike the complaints under California's Code of Civil Procedure. On May 1, 2012, the court ruled in favor of the bond insurer defendants on the first stage of the anti-SLAPP motion as to the causes of action arising from the alleged conspiracy, but denied the motion as to those causes of action based on transaction specific representations and omissions about the bond insurer defendants' credit ratings and financial health. The court has scheduled a hearing on the second stage of the anti-SLAPP motion for March 12, 2013. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys' fees, costs and other expenses. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from these lawsuits.

On April 8, 2011, AG Re and AGC filed a Petition to Compel Arbitration with the Supreme Court of the State of New York, requesting an order compelling Ambac to arbitrate Ambac's disputes with AG Re and AGC concerning their obligations under reinsurance agreements with Ambac. In March 2010, Ambac placed a number of insurance policies that it had issued, including policies reinsured by AG Re and AGC pursuant to the reinsurance agreements, into a segregated account. The Wisconsin state court has approved a rehabilitation plan whereby permitted claims under the policies in the segregated account will be paid 25% in cash and 75% in surplus notes issued by the segregated account. Ambac has advised AG Re and AGC that it has and intends to continue to enter into commutation agreements with holders of policies issued by Ambac, and reinsured by AG Re and AGC, pursuant to which Ambac will pay a combination of cash and surplus notes to the policyholder. AG Re and AGC have informed Ambac that they believe their only current payment obligation with respect to the commutations arises from the cash payment, and that there is no obligation to pay any amounts in respect of the surplus notes until payments of principal or interest are made on such notes. Ambac has disputed this position on one commutation and may take a similar position on subsequent commutations. On April 15, 2011, attorneys for the Wisconsin Insurance Commissioner, as Rehabilitator of Ambac's segregated account, and for Ambac filed a motion with Lafayette County, Wisconsin, Circuit Court Judge William Johnston, asking him to find AG Re and AGC to be in violation of an injunction protecting the interests of the segregated account by their seeking to compel arbitration on this matter and failing to pay in full all amounts with respect to Ambac's payments in the form of surplus notes. On June 14, 2011, Judge Johnston issued an order granting the Rehabilitator's and Ambac's motion to enforce the injunction against AGC and AG Re and the parties filed a stipulation dismissing the Petition

62


to Compel Arbitration without prejudice. AGC and AG Re have appealed Judge Johnston's order to the Wisconsin Court of Appeals.

On November 28, 2011, Lehman Brothers International (Europe) (in administration) ("LBIE") sued AG Financial Products Inc. ("AGFP"), an affiliate of AGC which in the past had provided credit protection to counterparties under credit default swaps. AGC acts as the credit support provider of AGFP under these credit default swaps. LBIE's complaint, which was filed in the Supreme Court of the State of New York, alleged that AGFP improperly terminated nine credit derivative transactions between LBIE and AGFP and improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions between LBIE and AGFPs. With respect toAGFP. Following defaults by LBIE, AGFP properly terminated the 28 credit derivative transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP calculated that LBIE owes AGFP approximately $25$29 million in connection with the termination of the credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. On February 3, 2012, AGFP filed a motion to dismiss certain of the counts in the complaint. Oral argumentscomplaint, and on suchMarch 15, 2013, the court granted AGFP's motion to dismiss took placethe count relating to improper termination of the nine credit derivative transactions and denied AGFP's motion to dismiss the counts relating to the remaining transactions. On February 22, 2016, AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP's counterclaims. LBIE’s administrators disclosed in September 2012. LBIEan April 10, 2015 report to LBIE’s unsecured creditors that LBIE's valuation expert has calculated LBIE's damages in aggregate for the 28 transactions to range between a minimum of approximately $200 million and a maximum of approximately $500 million, depending on what adjustment, if any, is seeking unspecified damages. Themade for AGFP's credit risk and excluding any applicable interest. Notwithstanding the range calculated by LBIE's valuation expert, the Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.

On November 19, 2012, Lehman Brothers Holdings Inc. (“LBHI”) and Lehman Brothers Special Financing Inc. (“LBSF") commencedSeptember 25, 2013, Wells Fargo Bank, N.A., as trust administrator of the MASTR Adjustable Rate Mortgages Trust 2007-3, filed an adversaryinterpleader complaint and claim objection in the United States BankruptcyU.S. District Court for the Southern District of New York against Credit Protection Trust 283AGM, among others, relating to the right of AGM to be reimbursed from certain cashflows for principal claims paid in respect of insured certificates. The Company estimates that an adverse outcome to the interpleader proceeding could increase losses on the transaction by approximately $10 - $20 million, net of expected settlement payments and reinsurance in force.

Proceedings Resolved Since September 30, 2015

On May 28, 2014, Houston Casualty Company Europe, Seguros y Reseguros, S.A. (“CPT 283”HCCE”), FSA Administrative Services, LLC, as trustee for CPT 283, and AGM, notified Radian Asset that it was demanding arbitration against Radian Asset in connection with CPT 283's terminationhousing cooperative losses presented to Radian Asset by HCCE under several years of a CDS between LBSFquota-share surety reinsurance contracts. Through November 30, 2015, HCCE had presented AGC, as successor to Radian Asset, with approximately €15 million in claims.  In January 2016, Assured Guaranty and CPT 283. CPT 283 terminatedHCCE settled all the CDS as a consequence of LBSF failingclaims related to make a scheduled payment owed to CPT 283, which termination occurred after LBHI filed for bankruptcy but before LBSF filed for bankruptcy. The CDS provided that CPT 283 was entitled to receive from LBSF a termination payment in that circumstance of approximately $43.8 million (representing the economic equivalent of the future fixed payments CPT 283 would have been entitled to receive from LBSF had the CDS not been terminated), and CPT 283 filed proofs of claim against LBSF and LBHI (as LBSF's credit support provider) for such amount. LBHI and LBSF seek to disallow and expunge (as impermissible and unenforceable penalties) CPT 283's proofs of claim against LBHI and LBSF and recover approximately $67.3 million, which LBHI and LBSF allege was the mark-to-market value of the CDS to LBSF (less unpaid amounts) on the day CPT 283 terminated the CDS, plus interest, attorney's fees, costs and other expenses. On the same day, LBHI and LBSF also commenced an adversary complaint and claim objection against Credit Protection Trust 207 (“CPT 207”), FSA Administrative Services, LLC, as trustee for CPT 207, and AGM, in connection with CPT 207's termination of a CDS between LBSF and CPT 207. Similarly, the CDS provided that CPT 207 was entitled to receive from LBSF a termination payment in that circumstance of $492,555. LBHI and LBSF seek to disallow and expunge CPT 207's proofs of claim against LBHI and LBSF and recover approximately $1.5 million. AGM believes the terminations of the CDS and the calculation of the termination payment amounts were consistent with the terms of the ISDA master agreements between the parties. The Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.Spanish housing cooperative losses.

Proceedings Related to AGMH's Former Financial Products Business

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

Governmental Investigations into Former Financial Products Business

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

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

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


63


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

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

65



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

Lawsuits Relating to Former Financial Products Business

During 2008, nine putative class action lawsuits were filed in federal court alleging federal antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. These cases have been coordinated and consolidated for pretrial proceedings in the U.S. District Court for the Southern District of New York as MDL 1950, In re Municipal Derivatives Antitrust Litigation, Case No. 1:08-cv-2516 ("(“MDL 1950"1950”).

Five of these cases named both AGMH and AGM: (a) Hinds County, Mississippi v. Wachovia Bank, N.A.; (b) Fairfax County, Virginia v. Wachovia Bank, N.A.; (c) Central Bucks School District, Pennsylvania v. Wachovia Bank, N.A.; (d) Mayor and City Council of Baltimore, Maryland v. Wachovia Bank, N.A.; and (e) Washington County, Tennessee v. Wachovia Bank, N.A. In April 2009, the MDL 1950 court granted the defendants'defendants’ motion to dismiss on the federal claims for these five cases, but granted leave for the plaintiffs to file a secondan amended complaint. In June 2009, interim lead plaintiffs' counsel filed a Second Consolidated Amended Class Action Complaint; although the SecondThe Corrected Third Consolidated Amended Class Action Complaint, currently describes some of AGMH's and AGM's activities, it does not name those entitiesfiled on October 9, 2013, lists neither AGM nor AGMH as defendants. In March 2010, the MDL 1950 court denied thea named defendants' motions to dismiss the Second Consolidated Amended Class Action Complaint.defendant or a co-conspirator. The complaints in these lawsuitscomplaint generally seekseeks unspecified monetary damages, interest, attorneys'attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.

Four of theother four cases named AGMH (but not AGM) and also alleged that the defendants violated California state antitrust law and common law by engaging in illegal bid-rigging and market allocation, thereby depriving the cities or municipalities of competition in the awarding of GICs and ultimately resulting in the cities paying higher fees for these products: (f) City of Oakland, California v. AIG Financial Products Corp.; (g) County of Alameda, California v. AIG Financial Products Corp.; (h) City of Fresno, California v. AIG Financial Products Corp.; and (i) Fresno County Financing Authority v. AIG Financial Products Corp. When the four plaintiffs filed a consolidated complaint in September 2009, the plaintiffs did not name AGMH as a defendant. However, the complaint does describe some of AGMH'sAGMH’s and AGM'sAGM’s activities. The consolidated complaint generally seeks unspecified monetary damages, interest, attorneys'attorneys’ fees and other costs. In April 2010, the MDL 1950 court granted in part and denied in part the named defendants'defendants’ motions to dismiss this consolidated complaint. On September 22, 2015, the remaining parties to the putative class action reported to the MDL 1950 Court that settlements in principle had been reached, and a motion for preliminary approval of those putative class claims was filed on February 24, 2016. The parties have reported that final settlement with those remaining defendants would resolve the putative class case. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.

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

In late 2009, AGM and AGUS, among other defendants, were named in six additional non-class action cases filed in federal court, which also have been coordinated and consolidated for pretrial proceedings with MDL 1950:1950; one was voluntarily dismissed with prejudice in October 2010, leaving five that are currently pending: (f) City of Riverside, California v. Bank of America, N.A.; (g) Sacramento Municipal Utility District v. Bank of America, N.A.; (h) Los Angeles World Airports v. Bank of America, N.A.; (i)(h) Redevelopment Agency of the City of Stockton v. Bank of America, N.A.; (j)(i) Sacramento Suburban Water District v. Bank of America, N.A.; and (k)(j) County of Tulare, California v. Bank of America, N.A.

The MDL 1950 court denied AGM and AGUS's motions to dismiss thesethe eleven complaints inthat were pending as of April 2010. Amended complaints were filed in May 2010. On October 29, 2010, AGM and AGUS were voluntarily dismissed with prejudice from the

64


Sacramento Municipal Utility District case only. The complaints in these lawsuits generally seek or sought unspecified monetary damages, interest, attorneys'attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from the remaining lawsuits.

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

66


Hudson, Inc. v. Bank of America, N.A. These cases also have been consolidated with MDL 1950 for pretrial proceedings. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys'attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.

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

In September 2009, the Attorney General of the State of West Virginia filed a lawsuit (Circuit Ct. Mason County, W. Va.) against Bank of America, N.A. alleging West Virginia state antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. An amended complaint in this action was filed in June 2010, adding a federal antitrust claim and naming AGM (but not AGMH) and AGUS, among other defendants. This case has been removed to federal court as well as transferred to the S.D.N.Y. and consolidated with MDL 1950 for pretrial proceedings. AGM and AGUS answered West Virginia's Second Amended Complaint on November 11, 2013. The complaint in this lawsuit generally seeks civil penalties, unspecified monetary damages, interest, attorneys'attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from this lawsuit.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

Executive Officers of the Company

The table below sets forth the names, ages, positions and business experience of the executive officers of Assured Guaranty Ltd.

NameAge Position(s)
Dominic J. Frederico6063 President and Chief Executive Officer; Deputy Chairman
Robert B. Mills63Chief Operating Officer
Robert A. Bailenson46Chief Financial Officer
Howard W. Albert53Chief Risk Officer
Russell B. Brewer II55Chief Surveillance Officer
James M. Michener6063 General Counsel and Secretary
Bruce E. SternRussell B. Brewer II58 Chief Surveillance Officer
Robert A. Bailenson49Chief Financial Officer
Bruce E. Stern61Executive Officer
Howard W. Albert56Chief Risk Officer

Dominic J. Frederico has been a director of AGL since the Company's 2004 initial public offering and the President and Chief Executive Officer of AGL since December 2003. Mr. Frederico served as Vice Chairman of ACE Limited from June 2003 until April 2004 and served as President and Chief Operating Officer

65


of ACE Limited and Chairman of ACE INA Holdings, Inc. from November 1999 to June 2003. Mr. Frederico was a director of ACE Limited from 2001 until his retirement from that board in Maythrough 2005. From 1995 to 1999 Mr. Frederico has also served as Chairman, President and Chief Executive Officerin a number of executive positions with ACE INA Holdings, Inc. from May 1999 through November 1999. Mr. Frederico previously served as President of ACE Bermuda Insurance Ltd. from July 1997 to May 1999, Executive Vice President, Underwriting from December 1996 to July 1997, and as Executive Vice President, Financial Lines from January 1995 to December 1996.Limited. Prior to joining ACE Limited, Mr. Frederico spent 13 years working for various subsidiaries of American International Group ("AIG"). Mr. Frederico completed his employment at AIG after serving as Senior Vice President and Chief Financial Officer of AIG Risk Management. Before that, Mr. Frederico was Executive Vice President and Chief Financial Officer of UNAT, a wholly owned subsidiary of AIG headquartered in Paris, France.Group.

Robert B. MillsJames M. Michener has been Chief Operating OfficerGeneral Counsel and Secretary of AGL since June 2011. Mr. Mills was Chief Financial Officer of AGL from January 2004 until June 2011.February 2004. Prior to joining Assured Guaranty, Mr. MillsMichener was Managing DirectorGeneral Counsel and Secretary of Travelers Property Casualty Corp. from January 2002 to February 2004. From April 2001 to January 2002, Mr. Michener served as general counsel of Citigroup's Emerging Markets business. Prior to joining Citigroup's Emerging Markets business, Mr. Michener was General Counsel of Travelers Insurance from April 2000 to April 2001 and General Counsel of Travelers Property Casualty Corp. from May 1996 to April 2000.

Russell B. Brewer II has been Chief Surveillance Officer of AGL since November 2009 and Chief Financial Officer—AmericasSurveillance Officer of UBS AGAGC and UBS Investment BankAGM since July 2009 and has also been responsible for information technology at Assured Guaranty since April 2015. Mr. Brewer has been with AGM since 1986. Mr. Brewer was Chief Risk Management Officer of AGM from April 1994 to January 2004, where heSeptember 2003 until July 2009 and Chief Underwriting Officer of AGM from September 1990 until September 2003. Mr. Brewer was also a member of the Investment Bank BoardExecutive Management Committee of Directors. Previously,AGM. He was a Managing Director of AGMH

67


from May 1999 until July 2009. From March 1989 to August 1990, Mr. MillsBrewer was with KPMG from 1971Managing Director, Asset Finance Group, of AGM. Prior to 1994, where his responsibilities included being partner-in-chargejoining AGM, Mr. Brewer was an Associate Director of the Investment Banking and Capital Markets practice.Moody's Investors Service, Inc.

Robert A. Bailenson has been Chief Financial Officer of AGL since June 2011. Mr. Bailenson has been with Assured Guaranty and its predecessor companies since 1990. Mr. Bailenson became Chief Accounting Officer of AGM in July 2009 and has been Chief Accounting Officer of AGL since May 2005 and Chief Accounting Officer of AGC since 2003. He was Chief Financial Officer and Treasurer of AG Re from 1999 until 2003 and was previously the Assistant Controller of Capital Re Corp., the Company's predecessor.

Bruce E. Stern has been Executive Officer of AGC and AGM since July 2009. Mr. Stern was General Counsel, Managing Director, Secretary and Executive Management Committee member of AGM from 1987 until July 2009. Prior to joining AGM, Mr. Stern was an associate at the New York office of Cravath, Swaine & Moore. Mr. Stern has served as Chairman of the Association of Financial Guaranty Insurers since April 2010.

Howard W. AlbertAlbert has been Chief Risk Officer of AGL since May 2011. Prior to that, he was Chief Credit Officer of AGL from 2004 to April 2011. Mr. Albert joined Assured Guaranty in September 1999 as Chief Underwriting Officer of Capital Re Company, the predecessor to AGC. Before joining Assured Guaranty, he was a Senior Vice President with Rothschild Inc. from February 1997 to August 1999. Prior to that, he spent eight years at Financial Guaranty Insurance Company from May 1989 to February 1997, where he was responsible for underwriting guaranties of asset-backed securities and international infrastructure transactions. Prior to that, he was employed by Prudential Capital, an investment arm of The Prudential Insurance Company of America, from September 1984 to April 1989, where he underwrote investments in asset-backed securities, corporate loans and project financings.

Russell B. Brewer II has been Chief Surveillance Officer of AGL since November 2009 and Chief Surveillance Officer of AGC and AGM since July 2009. Mr. Brewer has been with AGM since 1986. Mr. Brewer was Chief Risk Management Officer of AGM from September 2003 until July 2009 and Chief Underwriting Officer of AGM from September 1990 until September 2003. Mr. Brewer was also a member of the Executive Management Committee of AGM. He was a Managing Director of AGMH from May 1999 until July 2009. From March 1989 to August 1990, Mr. Brewer was Managing Director, Asset Finance Group, of AGM. Prior to joining AGM, Mr. Brewer was an Associate Director of Moody's Investors Service, Inc.

James M. Michener has been General Counsel and Secretary of AGL since February 2004. Prior to joining Assured Guaranty, Mr. Michener was General Counsel and Secretary of Travelers Property Casualty Corp. from January 2002 to February 2004. From April 2001 to January 2002, Mr. Michener served as general counsel of Citigroup's Emerging Markets business. Prior to joining Citigroup's Emerging Markets business, Mr. Michener was General Counsel of Travelers Insurance from April 2000 to April 2001 and General Counsel of Travelers Property Casualty Corp. from May 1996 to April 2000.

Bruce E. Stern has been Executive Officer of AGC and AGM since July 2009. Mr. Stern was General Counsel, Managing Director, Secretary and Executive Management Committee member of AGM from 1987 until July 2009. Prior to joining AGM, Mr. Stern was an associate at the New York office of Cravath, Swaine & Moore. Mr. Stern has served as Chairman of the Association of Financial Guaranty Insurers since April 2010.


6668


PART II
 
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

AGL's common shares are listed on the New York Stock ExchangeNYSE under symbol "AGO." The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices and amount of any cash dividends declared.

Common Stock Prices and Dividends

2012 20112015 2014
Sales Price Cash Sales Price CashSales Price Cash Sales Price Cash
High Low Dividends High Low DividendsHigh Low Dividends High Low Dividends
First Quarter$19.04
 $13.20
 $0.09
 $20.16
 $13.49
 $0.045
$26.96
 $24.21
 $0.12
 $26.76
 $20.44
 $0.11
Second Quarter16.58
 11.17
 0.09
 18.54
 14.03
 0.045
29.75
 22.55
 0.12
 26.78
 23.10
 0.11
Third Quarter15.83
 11.29
 0.09
 16.99
 9.67
 0.045
26.87
 22.86
 0.12
 24.91
 21.61
 0.11
Fourth Quarter14.80
 12.48
 0.09
 14.19
 9.16
 0.045
29.62
 24.39
 0.12
 26.79
 20.02
 0.11

On February 22, 2013,23, 2016, the closing price for AGL's common shares on the NYSE was $18.80,$23.81, and the approximate number of shareholders of record at the close of business on that date was 121.81.

AGL is a holding company whose principal source of income is dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to AGL and AGL's ability to pay dividends to its shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of AGL's Board of Directors and will be dependent upon the Company's profits and financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. For more information concerning AGL's dividends, please refer to Item 77. Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Liquidity and Capital Resources" and Note 12,11, Insurance Company Regulatory Requirements, of the Financial Statements and Supplementary Data.
Recent
2015 Share Purchases

In 2015, the Company repurchased a total of 21.0 million common shares for approximately $555 million, at an average price of $26.43 per share. After additional repurchases in 2016, the Company exhausted its previous $400 million authorization to repurchase common shares on February 9, 2016. On January 18, 2013,February 24, 2016, the Company's Board of Directors authorizedapproved a $200 $250 million share repurchase program. This latestauthorization. The Company expects future common share repurchases under the current authorization to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases are at the discretion of management and will depend on a variety of factors, including availability of funds at the holding companies, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program replacesauthorization may be modified, extended or terminated by the authorization on November 14, 2011 forBoard of Directors at any time. It does not have an expiration date.

69


Issuer’s Purchases of Equity Securities
The following table reflects purchases of AGL common shares made by the Company to repurchase up to 5.0 million common shares. Under the prior authorization, the Company had repurchased 2.1 million common shares in 2012.during Fourth Quarter 2015.
No shares were repurchased for the payment
Period 
Total
Number of
Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program (1)
 
Maximum Number (or Approximate Dollar Value)
of Shares that
May Yet Be
Purchased
Under the Program(2)
October 1 - October 31 1,660,310
 $27.10
 1,660,310
 $145,035,556
November 1 - November 30 1,628,406
 $27.63
 1,628,406
 $100,036,984
December 1 - December 31 1,746,921
 $25.76
 1,746,921
 $55,035,579
Total 5,035,637
 $26.81
 5,035,637
  
____________________
(1)After giving effect to repurchases since the beginning of 2013 through February 9, 2016, the Company has repurchased a total of 60.2 million common shares for approximately $1,464 million, excluding commissions, at an average price of $24.33 per share. On February 24, 2016, the Company's Board of Directors approved a $250 million share repurchase authorization; as of the filing date, the Company has not repurchased any common shares under this authorization.

(2)Excludes commissions.

70

Table of employee withholding taxes due in connection with the vesting of restricted stock awards or under the Company's share repurchase program during the three months ended December 31, 2012.Contents

Performance Graph

Set forth below are a line graph and a table comparing the dollar change in the cumulative total shareholder return on AGL's common shares from December 31, 20072010 through December 31, 20122015 as compared to the cumulative total return of the Standard & Poor's 500 Stock Index and the cumulative total return of the Standard & Poor's 500 Financials Index. The chart and table depict the value on December 31, 2007, December 31, 2008, December 31, 2009, December 31, 2010, December 31, 2011, December 31, 2012, December 31, 2013, December 31, 2014 and December 31, 20122015 of a $100 investment made on December 31, 2007,2010, with all dividends reinvested:


67

Table of Contents


Assured Guaranty S&P 500 Index 
S&P 500
Financial Index
Assured Guaranty S&P 500 Index 
S&P 500
Financial Index
12/31/2007$100.00
 $100.00
 $100.00
12/31/200843.54
 63.00
 44.73
12/31/200984.32
 79.68
 52.44
12/31/201069.29
 91.68
 58.83
$100.00
 $100.00
 $100.00
12/31/201152.12
 93.62
 48.82
75.22
 102.11
 82.94
12/31/201257.94
 108.59
 62.93
83.62
 118.44
 106.78
12/31/2013141.19
 156.79
 144.78
12/31/2014158.40
 178.24
 166.76
12/31/2015163.95
 180.66
 164.15
___________________
Source: Bloomberg


6871

Table of Contents

ITEM 6.SELECTED FINANCIAL DATA

The following selected financial data should be read together with the other information contained in this Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Form 10-K. Results of operations of Assured Guaranty Municipal Holdings Inc. ("AGMH") are included for periods beginning July 1, 2009, which we refer to as the Acquisition Date. Certain prior year balances have been reclassified to conform to the current year's presentation.

Year Ended December 31,Year Ended December 31,
2012 2011 2010 2009 20082015 2014 2013 2012 2011
  (dollars in millions, except per share amounts)(dollars in millions, except per share amounts)
Statement of operations data:                  
Revenues:                  
Net earned premiums(1)
$853
 $920
 $1,187
 $930
 $261
$766
 $570
 $752
 $853
 $920
Net investment income(1)
404
 396
 361
 262
 163
423
 403
 393
 404
 396
Net realized investment gains (losses)(1)
1
 (18) (2) (33) (70)(26) (60) 52
 1
 (18)
Realized gains and other settlements on credit derivatives(108) 6
 153
 164
 118
(18) 23
 (42) (108) 6
Net unrealized gains (losses) on credit derivatives(477) 554
 (155) (338) 38
746
 800
 107
 (477) 554
Fair value gains (losses) on committed capital securities(18) 35
 9
 (123) 42
27
 (11) 10
 (18) 35
Fair value gains (losses) on financial guaranty variable interest entities(1)
210
 (132) (274) (1) 
38
 255
 346
 191
 (146)
Other income108
 58
 34
 56
 1
Bargain purchase gain and settlement of pre-existing relationships214
 
 
 
 
Other income (loss)37
 14
 (10) 108
 58
Total revenues973
 1,819
 1,313
 917
 553
2,207
 1,994
 1,608
 954
 1,805
Expenses:                  
Loss and loss adjustment expenses(1)
523
 462
 412
 394
 266
Amortization of deferred acquisition costs(1)(2)
14
 17
 22
 44
 54
Assured Guaranty Municipal Holdings Inc. acquisition-related expenses
 
 7
 92
 
Loss and loss adjustment expenses424
 126
 154
 504
 448
Amortization of deferred acquisition costs(1)
20
 25
 12
 14
 17
Interest expense92
 99
 100
 63
 23
101
 92
 82
 92
 99
Goodwill and settlement of pre-existing relationship
 
 
 23
 
Other operating expenses(2)
212
 212
 238
 192
 112
Other operating expenses(1)
231
 220
 218
 212
 212
Total expenses841
 790
 779
 808
 455
776
 463
 466
 822
 776
Income (loss) before (benefit) provision for income taxes132

1,029

534

109

98
1,431

1,531

1,142

132

1,029
Provision (benefit) for income taxes22
 256
 50
 29
 38
375
 443
 334
 22
 256
Net income (loss)110
 773
 484
 80
 60
1,056
 1,088
 808
 110
 773
Less: Noncontrolling interest of variable interest entities
 
 
 (2) 
Net income (loss) attributable to Assured Guaranty Ltd. $110
 $773
 $484
 $82
 $60
Earnings (loss) per share:                  
Basic$0.58
 $4.21
 $2.63
 $0.64
 $0.67
$7.12
 $6.30
 $4.32
 $0.58
 $4.21
Diluted$0.57
 $4.16
 $2.56
 $0.63
 $0.67
$7.08
 $6.26
 $4.30
 $0.57
 $4.16
Dividends per share$0.36
 $0.18
 $0.18
 $0.18
 $0.18
$0.48
 $0.44
 $0.40
 $0.36
 $0.18

6972

Table of Contents

As of December 31,As of December 31,
2012 2011 2010 2009 20082015 2014 2013 2012 2011
  (dollars in millions, except per share amounts)(dollars in millions, except per share amounts)
Balance sheet data (end of period):                  
Assets:                  
Investments and cash$11,223
 $11,314
 $10,849
 $11,013
 $3,644
$11,358
 $11,459
 $10,969
 $11,223
 $11,314
Premiums receivable, net of ceding commission(1)
1,005
 1,003
 1,168
 1,418
 16
Premiums receivable, net of commissions payable693
 729
 876
 1,005
 1,003
Ceded unearned premium reserve(1)
561
 709
 822
 1,078
 19
232
 381
 452
 561
 709
Salvage and subrogation recoverable456
 368
 1,032
 395
 80
126
 151
 174
 456
 368
Credit derivative assets141
 153
 185
 217
 147
81
 68
 94
 141
 153
Total assets(2)17,242
 17,709
 19,370
 16,449
 4,505
14,544
 14,919
 16,285
 17,240
 17,705
Liabilities and shareholders' equity:                  
Unearned premium reserve(1)
5,207
 5,963
 6,973
 8,381
 1,234
3,996
 4,261
 4,595
 5,207
 5,963
Loss and loss adjustment expense reserve(1)
601
 679
 574
 300
 197
1,067
 799
 592
 601
 679
Reinsurance balances payable, net219
 171
 274
 212
 18
51
 107
 148
 219
 171
Long-term debt(2)836
 1,038
 1,053
 1,066
 347
1,300
 1,297
 814
 834
 1,034
Credit derivative liabilities1,934
 1,457
 2,055
 1,759
 734
446
 963
 1,787
 1,934
 1,457
Total liabilities(2)12,248
 13,057
 15,700
 12,995
 2,629
8,481
 9,161
 11,170
 12,246
 13,053
Accumulated other comprehensive income515
 368
 112
 142
 3
237
 370
 160
 515
 368
Shareholders' equity attributable to Assured Guaranty Ltd. 4,994
 4,652
 3,670
 3,455
 1,876
Shareholders' equity4,994
 4,652
 3,670
 3,454
 1,876
6,063
 5,758
 5,115
 4,994
 4,652
Book value per share25.74
 25.52
 19.97
 18.76
 20.62
43.96
 36.37
 28.07
 25.74
 25.52
Consolidated statutory financial information(3):
         
Consolidated statutory financial information:         
Contingency reserve$2,364
 $2,571
 $2,288
 $1,879
 $712
$2,263
 $2,330
 $2,934
 $2,364
 $2,571
Policyholders' surplus3,579
 3,116
 2,627
 2,962
 1,598
4,550
 4,142
 3,202
 3,579
 3,116
Claims paying resources(4)
12,328
 12,839
 12,630
 13,051
 4,962
Claims-paying resources(3)
12,306
 12,189
 12,147
 12,328
 12,839
Outstanding Exposure:                  
Net debt service outstanding$782,180
 $845,665
 $927,143
 $958,265
 $348,816
$536,341
 $609,622
 $690,535
 $780,356
 $844,447
Net par outstanding519,893
 558,048
 617,131
 640,422
 222,722
358,571
 403,729
 459,107
 518,772
 556,830
___________________
(1)Accounting guidance for financial guaranty insurance contracts changed effective January 1, 2009 and for VIEs effective January 1, 2010. As a result, amounts are not comparable.
(2)Accounting guidance restricting the types and amounts of financial guaranty insurance contract acquisition costs that may be deferred was adopted and retrospectively applied effective January 1, 2012.
(2)Accounting guidance (a) requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and (b) resulting in reclassification of its debt issuance costs from other assets to long-term debt, was adopted and retrospectively applied effective December 31, 2015.
(3)
Prepared in accordance with accounting practices prescribed or permitted by U.S. insurance regulatory authorities, for all insurance subsidiaries.
(4)Claims paying Claims-paying resources is calculated as the sum of statutory policyholders' surplus, statutory contingency reserve, statutory unearned premium reserves, statutory loss and LAE reserves, present value of installment premium on financial guaranty and credit derivatives, discounted at 6%, and standby lines of credit/stop loss. Total claims payingclaims-paying resources is used by the Company to evaluate the adequacy of capital resources. OnThe December 23, 2011, AGM terminated its $29831, 2015 amount includes an aggregate $360 million non-recourse credit facility and replaced such credit facility, effective as of January 1, 2012, with a $435 million excess of lossexcess-of-loss reinsurance facility for the benefit of AGC, AGM and MAC, which became effective January 1, 2016. The facility terminates on January 1, 2018 unless AGC, which is included in claims paying resources as ofAGM and MAC choose to extend it. The December 31, 2014 amount includes an aggregate $450 million excess-of-loss reinsurance facility for the benefit of AGC, AGM and MAC. The December 31, 2013, 2012 and 2011.2011 amounts include an aggregate $435 million excess-of-loss reinsurance facility for the benefit of AGC and AGM.


7073

Table of Contents

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. It contains forward looking statements that involve risks and uncertainties. Please see “Forward Looking Statements” for more information. The Company's actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the headings “Risk Factors” and “Forward Looking Statements.”

Introduction
 
The Company provides credit protection products into 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,payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest and principal payments. The securities insured bypayment, the Company include taxableis required under its unconditional and tax-exempt obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issuedirrevocable financial guaranty to finance international infrastructure projects; and asset-backed securities issued by special purpose entities.pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection productsfinancial guaranty insurance directly to issuers and underwriters of public finance infrastructure and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in many countries, although its principal focus is on the U.S. and the U.K., as well as Europe and Australia.
also guarantees obligations issued in other countries and regions, including Australia and Western Europe.
 
Executive Summary
  
This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Annual Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Annual Report should be read in its entirety.

Economic Environment
 
The Companyoverall U.S. economic environment continued improving during 2015 by a number of measures. The U.S. Department of Commerce Bureau of Economic Analysis reported that gross domestic product increased 2.4% during 2015. According to be the most active providerU.S. Bureau of financial guaranty insuranceLabor Statistics ("BLS"), the estimated unemployment rate fell to 5.0% in 2012 as a result of its financial strength and its ability to maintain strong investment-grade financial strength ratings. Alleach of the Company’s former financial guaranty competitors have had their financial strength ratings downgraded by rating agencies to below investment grade levels or are no longer rated, severely impacting their ability to underwrite new business. Only two other industry participants have investment grade financial strength ratings today: National Public Finance Guarantee Corporation, which has been involved in litigation challenging its separation from MBIA Insurance Corporation and appears not to have financial strength ratings adequate to issue new financial guaranty policies on public finance obligations, and Build America Mutual Assurance Company, which islast three months of 2015, down six-tenths of a new entrant to the industry that commenced operations during 2012 and is gradually increasing its business. Business conditions have been difficult for the entire financial guaranty insurance industrypercentage point since mid-2007,December 2014 and the Company continues to face challengeslowest monthly level since April 2008. The BLS also reported that the U.S. economy added more than 2.6 million jobs during 2015, with the greatest quarterly growth occurring in maintaining its market penetration today. The presence of a new financial guaranty insurer may lead to higher overall insurance penetrationthe fourth quarter. U.S. home prices, as measured by the Case-Shiller index, rose in the first several months of the U.S. municipal bond market or such new insurer may displaceyear, subsequently stabilized, and then resumed growth, continuing the Company in certain insured transactions.

The overall economic environment ingenerally positive trend that emerged at the U.S. has improved over the last few years and indicators such as lower delinquency rates and more stable housing prices point toward improvement in the housing market. However, unemployment rates remain too high for a robust general economic recovery to have taken hold and concerns over the fiscal cliff may have hampered the recovery towards the endbeginning of 2012.

Municipal credits have experienced budgetary stress sinceThe Federal Open Market Committee ("FOMC") maintained the recent credit crisistarget range for the federal funds rate near zero for most of the year, as inflation remained below the committee’s 2% target, but raised the target range by one-quarter point in December 2015. Also during 2015, the benchmark interest rates reflected by the MMD Index fluctuated in a narrow range bordering historic lows. Overall, the Company believes that the MMD Index will gradually rise further as the economy continues to improve, but the prospects for such additional economic recovery and higher interest rates are clouded by weak global economic performance and geopolitical risk, accompanied by strengthening of the ensuing recession, compoundeddollar, deflationary pressure arising from a drop in many casesglobal oil prices, and volatility in the U.S. and international stock markets. Therefore, the Company believes that the FOMC is likely to exercise caution in 2016, and that the pace of further rate increases is uncertain.
The City Fiscal Condition survey of city finance officers conducted in the fall of 2015 and published by significant unfunded pension and retiree health care liabilities. While revenuesthe National League of Cities showed continued improvement in cities’ fiscal health. The same survey concluded that, at the state level, have been rebounding in general, many local governments haverevenues continued to grow in 2015. In general, however, the Company believes that states and cities face structural deficitslong-term spending pressures in areas such as health care, education, infrastructure, and pensions.

Outside the U.S., the number of new infrastructure financings coming to market, including those appropriate for financial guarantees, remained limited. In an effort to stimulate growth as well as inflation, the European Central Bank continued its program of quantitative easing and held its interest rates for bank deposits below zero. The United Kingdom's Office for National Statistics reports that, in the United Kingdom, the pace of economic growth was slightly slower in 2015 than in 2014, and while the employment rate reached a result of the decline in property taxes. Although the vast majority of municipalities have been taking steps to address their fiscal challenges, a small number have sought bankruptcy protection. This is an area of law that has not been tested due to the relatively low frequency of such cases. The Company has been active with respect to the municipal bankruptcy cases involving Jefferson County, Alabama and the City of Stockton, California. It has also been closely monitoring legal proceedings in other municipal bankruptcy casesrecord high, inflation was generally flat.

7174

Table of Contents

in various states. In addition, the Company has been involved with efforts of the city receiver for the City of Harrisburg, Pennsylvania to develop and implement a fiscal recovery plan for the city.

The publicity surrounding high-profile defaults, especially those few where bond insurers are paying claims, provides evidence of the value of bond insurance and may stimulate demand, especially at the retail level. New issuance volume in the U.S. public finance market increased in 2012 as interest rates fell to historic lows. Tight credit spreads and low interest rates tend to suppress demand for bond insurance as the potential savings for issuers are diminished and some investors prefer to forgo insurance in favor of greater yield.
In the international arena, troubled Eurozone countries continue to be a source of stress in global equity and debt markets. Following the 2011 restructuring of the sovereign debt of Greece, debt costs in Portugal, Spain and Italy remain elevated, although they have declined substantially since the announcement on August 2, 2012 by the European Central Bank that it would undertake outright monetary transactions ("OMT") in support of Eurozone sovereign bonds. Successful execution of structural reforms is necessary to avert further fiscal stress in those and other European Union ("EU") countries. Fiscal austerity programs initiated to address the problems have constrained economic growth and may cause recession. The rating agencies have downgraded many European sovereign credits within the past year. The Company’s exposure to troubled Eurozone countries is described in “—Results of Operations—Consolidated Results of Operations—Losses in the Insured Portfolio” and “—Insured Portfolio—Selected European Exposures.”
The current economic environment has had a significant negative impact on the demand by investors for financial guaranty policies, and it is uncertain when or if demand for financial guaranties will return to their pre-economic crisis level. In particular, there has been limited new issue activity and also limited demand for financial guaranties in 2012 and 2011 in both the global structured finance and international infrastructure finance markets. The Company expects that global structured finance and international infrastructure opportunities will increase in the future as the global economy recovers, issuers return to the capital markets for financings and institutional investors again utilize financial guaranties, although the Company cannot assure that this will occur.
In 2012, the Company continued to be affected by a negative perception of financial guaranty insurers arising from the financial distress suffered by other companies in the industry during the financial crisis. In November 2011, S&P downgraded the financial strength ratings of AGM and AGC to AA- (Stable Outlook) under its revised criteria. In January 2013, after a ten month review, Moody's assigned the following lower financial strength ratings: A2 (Stable) for AGM, A3 (Stable) for AGC, and Baa1 (Stable) for AGRe. Because the financial strength ratings of Assured Guaranty were under review for possible downgrade by Moody's throughout most of 2012, the Company believes the demand for the Company's insurance product was negatively impacted.
The demand for the Company’s insurance has also been negatively affected by the credit spread on AGC, which is a reflection of the risk that investors perceive in the Company, among other factors. The higher the Company's credit spread, the lower the benefit of the Company’s guaranty is to certain investors. If investors view the Company as being only marginally less risky, or perhaps even as risky, as the uninsured security, the coupon on a security insured by the Company may not be much lower, or may be the same as, an uninsured security offered by the same issuer. Accordingly, issuers may be unwilling to pay a premium for the Company to insure their securities if the insurance does not lower the costs of issuance. While AGC's and AGM's credit spreads were lower at December 31, 2012 compared with December 31, 2011, they remained high compared with their pre-2007 credit spreads.

72

Table of Contents

Financial Performance of Assured Guaranty
 
Financial Results

 Year Ended December 31,
 2012 2011 Change
 (in millions, except per share amounts)
Selected income statement data 
    
Net earned premiums$853
 $920
 $(67)
Net investment income404
 396
 8
Realized gains (losses) and other settlements on credit derivatives(108) 6
 (114)
Net unrealized gains (losses) on credit derivatives(477) 554
 (1,031)
Fair value gains (losses) on financial guaranty variable interest entities210
 (132) 342
Loss and loss adjustment expenses(523) (462) (61)
Other operating expenses(212) (212) 
Net income (loss)110
 773
 (663)
Diluted earnings per share$0.57
 $4.16
 $(3.59)
Selected non-GAAP measures(1)     
Operating income$535
 $601
 $(66)
Operating income per share$2.81
 $3.24
 $(0.43)
Present value of new business production (“PVP”)$210
 $243
 $(33)
 Year Ended December 31,
 2015 2014 2013
 (in millions, except per share amounts)
Net income (loss)$1,056
 $1,088
 $808
Operating income(1)699
 491
 609
      
Net income (loss) per diluted share7.08
 6.26
 4.30
Operating income per share(1)4.69
 2.83
 3.25
Diluted shares149.0
 173.6
 187.6
      
Present value of new business production (“PVP”)(1)179
 168
 141
Gross par written17,336
 13,171
 9,350
  As of December 31, 2015 As of December 31, 2014
  Amount Per Share Amount Per Share
  (in millions, except per share amounts)
Shareholders' equity $6,063
 $43.96
 $5,758
 $36.37
Operating shareholders' equity(1) 5,946
 43.11
 5,933
 37.48
Adjusted book value(1) 8,439
 61.18
 8,495
 53.66
Common shares outstanding (2) 137.9
   158.3
  
____________________
(1)Please refer to “—Non-GAAP Financial Measures.”Measures” for a definition of the financial measures that were not determined in accordance with GAAP and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available.

(2)Please refer to "Key Business Strategies – Capital Management" below for information on common share repurchases.

Net Income (Loss)Year Ended December 31, 2015

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

Net income for 2012 declined2015 was $1.06 billion compared with $1.09 billion in 2014. Higher loss expense attributable mainly to $110 million from $773 million in 2011 due primarily to unrealized losses on credit derivatives, higher loss and loss adjustment expensesPuerto Rico and lower fair value gains in FG VIEs in 2015 were mostly offset by the bargain purchase gain and settlement of pre-existing relationships from the acquisition of Radian Asset and higher net earned premiums. Over the course of 2012, credit spreads on AGC and AGM declined, which resulted in unrealized losses in the credit derivative portfolio, while in 2011, those credit spreads increased, resulting in unrealized gains. In 2012, loss and loss adjustment expenses were higher than 2011 due primarily to losses incurred on Greek sovereign exposures. Net earned premiums declined due to the scheduled amortization of the insured portfolio, offset in part by higher terminationsrefundings and refundings of insured obligations. Offsetting the decline in net income were changes in fair value of FG VIE assets and liabilities and commutation gains related to the reassumption of previously ceded books of business.
Non-GAAP Financial Measures terminations.

Non-GAAP operating income in 20122015 was $535$699 million, compared with $601$491 million in 2011.2014. The declineincrease in operating income was primarily driven by losses incurred on Greek exposuresdue to the acquisition of Radian Asset, including the bargain purchase gain and lowersettlement of pre-existing relationships, and higher net earned premiums and credit derivative revenues due to refundings and terminations, offset in part by higher commutation gains. The declinelosses attributable primarily to Puerto Rico. Operating income in credit derivative revenues is consistent with expectations as2015 was the highest that the Company no longer writes financial guaranties in derivative form and this book of business amortizes.has reported.

Adjusted book value was $9.2 billion and adjusted book value per share was $47.17 as of December 31, 2012 as compared to $9.0 billion and $49.32 per share as of December 31, 2011. Adjusted book value increased slightly, mainly due to the issuance of common shares, new business and commutations of reassumed business, partially offset by economic loss development. Adjusted book value per share decreased due to 11.8 million additional shares outstanding in 2012. In June 2012,

7375

Table of Contents

the Company issued 13.4 million common shares which were partially offset by the repurchase of 2.1 million common shares in 2012. See Note 19, Shareholders' Equity, of the Financial Statements and Supplementary Data.

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


Key Business Strategies

The Company has been focused on variouscontinually evaluates its primary business strategies. Currently. the Company is pursuing the following primary business strategies, each described in more detail below:

New business production
Capital management
Alternative strategies to create value:

loss mitigation,value, including the pursuit of recoveries for breaches of R&W, servicing improvementsthrough acquisitions and the purchase of insured obligations;
new business development and reinsurance commutations; and
other rating agency capital improvement strategies.
On May 31, 2012, the Company acquired Municipal and Infrastructure Assurance Corporation, which it has renamed MAC, from Radian. MAC is licensed to provide financial guaranty insurance and reinsurance in 38 U.S. jurisdictions including the District of Columbia. In January 2013, the Company announced its intention to launch MAC as a new financial guaranty insurer that provides insurance only on debt obligations in the U.S. public finance markets, in order to increase the Company's insurance penetration in such market.

commutations
Loss Mitigation
The Company continued its risk remediation strategies in 2012, which lowered losses and improved rating agency capital. The following are examples of the strategies employed by the Company.

Pursuit of R&W Breaches

In an effort to recover U.S. RMBS losses the Company experienced in its insured U.S. RMBS portfolio resulting from breaches of R&W, the Company has pursued R&W providers by enforcing R&W provisions in contracts, negotiating agreements with R&W providers relating to those provisions and, where indicated, initiating litigation against R&W providers. The two largest settlement agreements resulting from these efforts were with Bank of America in 2011 and Deutsche Bank in 2012. See "Losses in the Insured Portfolio" and Note 6, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, for a discussion of each of these agreements. In the proceeding AGM brought against Flagstar Bank in New York Federal court, the court granted judgment in favor of AGM in February 2013 on its claims for breach of contract in the amount of approximately $90 million plus contractual interest and attorneys' fees and costs to be determined. Flagstar Bank has indicated it intends to appeal the decision.

All together these efforts have resulted in the Company causing R&W providers to pay or agree to pay $2.9 billion in respect of R&W. The Company believes these results, including settlement agreements and trial decisions, are significant and will help it as it continues to pursue R&W providers for U.S. RMBS transactions it has insured. The Company continues to enforce contractual provisions and pursue litigation and is in discussions with other R&W providers regarding potential agreements. See “Recovery Litigation” in Note 6, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, for a discussion of the litigation proceedings the Company has initiated against other R&W providers.
Purchase of Below Investment Grade Insured Obligations

In order to mitigate losses, the Company is continuing to purchase attractively priced BIG obligations that it insured. These purchases resulted in a reduction to net expected loss to be paid of $586 million as of December 31, 2012. As of December 31, 2012, the fair value of assets purchased or obtained for loss mitigation purposes (excluding the value of the Company's insurance) was $650 million, with a par of $1,855 million (including bonds related to FG VIEs of $94 million in fair value and $695 million in par).
RMBS Servicing Intervention

The quality of servicing of the mortgage loans underlying an RMBS transaction influences collateral performance and ultimately the amount (if any) of the Company's insured losses. The Company has established a group to mitigate RMBS losses by influencing mortgage servicing, including, if possible, causing the transfer of servicing or establishing special servicing arrangements. “Special servicing” is an industry term referencing more intense servicing applied to delinquent loans aimed at

74

Table of Contents

mitigating losses. Special servicing arrangements provide incentives to a servicer to achieve better performance on the mortgage loans it services. As a result of the Company’s efforts, at February  28, 2013 the servicing of approximately $3.0 billion of mortgage loans had been transferred to a new servicer and another $1.7 billion of mortgage loans were subject to special servicing arrangements. The December 31, 2012 net insured par of the transactions subject to a servicing transfer was $2.7 billion and the net insured par of the transactions subject to a special servicing arrangement was $0.9 billion.

New Business DevelopmentProduction

The Company believes high-profile defaults by municipal obligors, such as Detroit, Michigan and Commutations
ManagementStockton, California, both of which filed for protection under chapter 9 of the U.S. Bankruptcy Code, and the deteriorating financial condition of Puerto Rico, have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes that the Company is able to provide value not only by insuring the timely payment of scheduled interest and principal amounts when due, but also throughthere will be continued demand for its underwriting, surveillance and loss mitigation capabilities. Few individual or even institutional investors have the analytic resources to cover the tens of thousands of municipal creditsinsurance in the market. Forthis market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. ManagementThe Company believes this allowsthat its insurance: encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to participate more widely,purchase such bonds; enables institutional investors to operate more efficiently,efficiently; and allows smaller, less well-known issuers to gain market access on a more cost-effective basis. The following tables present summarized information about
On the U.S. municipal market's new debt issuance volumeother hand, the persistently low interest rate environment continues to dampen demand for bond insurance and, after a number of years in which the Company's shareCompany was essentially the only financial guarantor, there are now two other financial guarantors active in one of that market.its markets.

U.S. Municipal Market Data(1)Data
Based on Sale Date

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
Par 
Number of
issues
 Par 
Number of
issues
 Par 
Number of
issues
Par 
Number of
issues
 Par 
Number of
issues
 Par 
Number of
issues
(dollars in billions, except number of issues)(dollars in billions, except number of issues)
New municipal bonds issued$366.7
 12,544
 $285.2
 10,176
 $430.8
 13,594
$377.6
 12,076
 $314.9
 10,162
 $311.9
 10,558
Insured by AGC and AGM(2)13.2
 1,157
 15.2
 1,228
 26.8
 1,697
Total insured25.2
 1,880
 18.5
 1,403
 12.1
 1,025
Insured by Assured Guaranty15.1
 1,009
 10.7
 697
 7.5
 488
____________________
(1)Based on the date the transactions are sold.
(2)Represents 99.8% for 2012, 100% for 2011 and 100% for 2010 of market share of bonds issued with insurance for all periods presented.

Amounts in the table below represent Assured Guaranty's percentage of the market categories listed.
Assured Guaranty'sIndustry Penetration Rates for the
U.S. Municipal Market

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
Market penetration par3.6% 5.3% 6.2%
Market penetration based on par6.7% 5.9% 3.9%
Market penetration based on number of issues9.2 12.1 12.515.6 13.8 9.7
% of single A par sold11.9 15.8 14.922.1 19.7 11.0
% of single A transactions sold29.5 37.8 35.254.1 49.3 30.6
% of under $25 million par sold11.7 14.7 15.3
% of under $25 million transactions sold10.3 13.2 13.7
% of $25 million and under par sold18.7 16.5 10.9
% of $25 million and under transactions sold17.6 15.4 10.7

 


7576

Table of Contents

New Business Production

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
PVP:     
PVP(1):     
Public Finance—U.S.     $124
 $128
 $116
Assumed from Radian$22
 $
 $
Primary Markets125
 148
 286
Secondary Markets19
 25
 42
Public Finance—non-U.S.     27
 7
 18
Primary Markets1
 3
 
Secondary Markets
 
 1
Structured Finance—U.S.43
 60
 30
22
 24
 7
Structured Finance—non-U.S.
 7
 4
6
 9
 
Total PVP$210
 $243
 363
$179
 $168
 $141
Gross Par Written:          
Public Finance—U.S.     $16,377
 $12,275
 $8,671
Assumed from Radian$1,797
 $
 
Primary Markets13,055
 14,015
 26,195
Secondary Markets1,309
 1,077
 1,567
Public Finance—non-U.S.     567
 128
 392
Primary Markets35
 127
 
Secondary Markets
 
 34
Structured Finance—U.S.620
 1,673
 2,963
327
 418
 287
Structured Finance—non-U.S.
 
 
65
 350
 
Total gross par written$16,816
 $16,892
 30,759
$17,336
 $13,171
 $9,350
____________________
(1)PVP represents the present value of estimated future earnings primarily on new financial guaranty contracts written in the period, before consideration of cessions to reinsurers. PVP and Gross Par Written in the table above are based on "close date," when the transaction settles. See “– Non-GAAP Financial Measures – PVP or Present Value of New Business Production.”

For the year ended December 31, 2015 compared with the year ended December 31, 2014, excluding business written in 2014 as part of the period, before considerationrestructuring of cessions to reinsurers. See “—Non-GAAP Measures—PVP or Present Value of New Business Production.”

Detroit's water and sewer bonds, the Company's U.S. public finance PVP increased, primarily due to higher issuance and gross par written have declined overgreater bond insurance penetration in the past two years as a result of record-low bond yields on new issuances, tight credit spreads and uncertainty over financial strength ratings of Assured Guaranty throughout 2011 and 2012. However, the Company's 2012 U.S. public finance premium rates were consistent by sector with ratesmarket. Issuance for 2015 in 2011 and the average rating of gross par written has remained in the Single-A category. The Company insured a select number of U.S. structured finance transactions in 2012, including a U.S. commercial receivables securitization and a life insurance reserve financing. The Company uses its AGC platform to underwrite new structured finance transactions, while most public finance transactions are written by AGM.
PVP for 2012 includes $22 million in assumed public finance business from Radian, representing the Company's first third party assumed reinsurance treaty written since 2009. On January 24, 2012, the Company announced a three-part agreement with Radian under which it reassumed $12.9 billion of par it had previously ceded to Radian, reinsured approximately $1.8 billion of U.S. public finance market increased approximately 20% compared with 2014, primarily driven by refundings. Insured municipal par for the same period was up 36% and represented a 6.7% market penetration, compared with 5.9% in 2014. The Company wrote 60% of the total insured par and agreed to acquire MAC. In addition to54% of the Radian reassumption, the Company also reassumed $6.2 billiontotal number of new issues in par from Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio”). The Company recognized $82 million in pre-tax commutation gains as a result of commutation transactions in 2012 and $32 million in 2011. The 2012 commutations resulted in approximately $109 million in additional future premium earnings.2015.

Other Rating Agency Outside the U.S., the Company's public finance PVP also increased, due to an increase in European infrastructure transactions. The Company believes the U.K. currently presents the most new business opportunities for financial guarantees of infrastructure financings, which have typically required such guarantees for capital market access. These transactions typically have long lead times. The Company believes it is the only company in the private sector offering such financial guarantees outside the United States.

Structured finance PVP decreased slightly in both U.S and non-U.S. markets. Structured finance transactions tend to be large with long lead times and vary from period to period. In general, the Company expects that structured finance opportunities will increase in the future as the global economy recovers, interest rates rise, more issuers return to the capital markets for financings and institutional investors again utilize financial guaranties. The Company considers its involvement in both structured finance and international infrastructure transactions to be beneficial because such transactions diversify both the Company's business opportunities and its risk profile beyond public finance.

Capital Improvement StrategiesManagement
    
In recent years, the Company has developed strategies to manage capital within the Assured Guaranty group more efficiently.

In 2013, AGL became tax resident in the United Kingdom, while remaining a Bermuda-based company and continuing to carry on its administrative and head office functions in Bermuda. As a U.K. tax resident company, AGL is subject to the tax rules applicable to companies resident in the U.K. More information about AGL becoming a U.K. tax resident is set out in the "Tax Matters" section of "Item 1. Business."
In 2014, AGUS issued 5.0% Senior Notes for net proceeds of $495 million. The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of common shares of AGL.


77


In 2015, the Company repurchased a total of 21 million common shares for approximately $555 million at an average price of $26.43 per share. Year to date through February 9, 2016, the Company repurchased a total of 2.3 million common shares for $55 million at an average price of $24.37 per share. With the purchase of common shares in 2016, the Company exhausted the share repurchase authorization that its Board of Directors approved in May 2015.

On February 24, 2016, the Board of Directors approved a $250 million share repurchase authorization. The Company expects the repurchases to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including free funds available at the parent company, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date. See Note 18, Shareholders' Equity, of the Financial Statements and Supplementary Data, for additional information about the Company's repurchases of its common shares.

Summary of Share Repurchases

 Amount Number of Shares Average price per share
 (in millions, except per share data)
2013$264
 12.5
 $21.12
2014590
 24.4
 24.17
2015555
 21.0
 26.43
2016 (through February 9, 2016)55
 2.3
 24.37
Cumulative repurchases since the beginning of 2013$1,464
 60.2
 $24.33


Accretive Effect of Cumulative Repurchases(1)

  Year Ended December 31,    
  2015 2014 As of
December 31, 2015
 As of
December 31, 2014
  (per share)
Net income $1.56
 $0.71
    
Operating income 0.98
 0.32
    
Shareholders' equity     $5.75
 $2.56
Operating shareholders' equity     5.49
 2.78
Adjusted book value     10.83
 5.84
_________________
(1)Cumulative repurchases since the beginning of 2013.

In order to reduce leverage, and possibly rating agency capital charges, the Company has mutually agreed with beneficiaries to terminate selected financial guaranty insurance and credit derivative contracts. In particular, the Company has targeted investment grade securities for which claims are not expected but which carry a disproportionatedisproportionately large rating agency capital charge. The Company terminated $4.1investment grade securities of $2.8 billion in 2015, $3.1 billion in 2014 and $6.3 billion in 2013 of financial guaranty and CDS contracts.

Alternative Strategies

The Company considers alternative strategies in order to create long-term shareholder value. For example, the Company considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, or by commuting business that it had previously ceded. These transactions enable the Company to improve its future earnings and deploy some of its excess capital.

On April 1, 2015 (the "Acquisition Date"), AGC completed the acquisition of Radian Asset Acquisition and merged Radian Asset with and into AGC, with AGC as the surviving company of the merger. The cash purchase price of $804.5 million

78


paid by AGC to Radian Guaranty Inc. reflected certain adjustments, for corporate overhead and interest payment expenses, to the $810 million purchase price previously announced. AGC paid the purchase price out of available funds and from the proceeds of a $200 million note from its parent AGUS. On April 14, 2015, AGC repaid in full the $200 million note. In connection with the acquisition, AGC acquired Radian Asset’s entire insured portfolio, which resulted in an increase in net par in 2012 and $12.8outstanding as of the Acquisition Date of approximately $13.6 billion, inconsisting of $9.4 billion public finance net par outstanding and $4.2 billion structured finance net par outstanding. In 2015, the acquisition contributed net income of approximately $2.46 per share and operating income of approximately $2.13 per share, including the bargain purchase gain, settlement of pre-existing relationships and activity since the Acquisition Date. Shareholders' equity benefited by $1.04 per share, operating shareholders' equity benefited by $1.26 per share and adjusted book value benefited by $3.73 per share as of the Acquisition Date.
The Company entered into various commutation agreements to reassume previously ceded business in 2011.2015 and 2014 that resulted in gains of $28 million in 2015 and $23 million in 2014 and additional net unearned premium reserve of $23 million in 2015 and $20 million in 2014. The commutation gains were recorded in other income.

Loss Mitigation
In an effort to avoid or reduce potential losses in its insurance portfolios, the Company employs a number of strategies.

In the public finance area, the Company believes that its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, has resulted in more favorable outcomes in distressed public finance situations than would have been the case without its participation, as illustrated, for example, by the Company's role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises. Currently, the Company is an active participant in discussions with the Commonwealth of Puerto Rico and its advisors with respect to a number of Puerto Rico credits. For example, on December 24, 2015, AGC and AGM entered into a Restructuring Support Agreement (“RSA”) with Puerto Rico Electric Power Authority ("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. 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. There also can be no assurance that the negotiations with respect to other Puerto Rico credits will result in agreements on a consensual recovery plans.

In an effort to recover losses the Company experienced in its insured U.S. RMBS portfolio, the Company pursued providers of representations and warranties ("R&W") by enforcing R&W provisions in contracts, negotiating agreements with R&W providers relating to those provisions and, where appropriate, initiating litigation against R&W providers. Through December 31, 2015, the Company's loss mitigation efforts on its U.S. RMBS exposure over the past several years have resulted in R&W providers paying, or agreeing to pay, or terminating insurance protection on future projected losses of, approximately $4.2 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided insurance. By reaching agreements with certain R&W providers in October 2015, the Company has completed its pursuit of R&W claims. See Note 5, Expected Loss to be Paid, of the Financial Statements.

The Company is also continuing to purchase attractively priced obligations, including BIG obligations, 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"). These purchases resulted in a reduction of net expected loss to be paid of $557 million as of December 31, 2015. The fair value of assets purchased for loss mitigation purposes in the Company's investment portfolio as of December 31, 2015 (excluding the value of the Company's insurance) was $1,017 million, with a par of $1,871 million (including bonds related to FG VIEs of $83 million in fair value and $282 million in par).

In some instances, the terms of the Company's policy gives it the option to pay principal on an accelerated basis, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses.

7679


Results of Operations
 
Estimates and Assumptions
 
The Company’s consolidated financial statements include amounts that are determined using estimates and assumptions. The actual amounts realized could ultimately be materially different from the amounts currently provided for in the Company’s consolidated financial statements. Management believes the most significant items requiring inherently subjective and complex estimates are expected losses, including assumptions for breaches of R&W, fair value estimates, other-than-temporary impairment, (“OTTI”), deferred income taxes, and premium revenue recognition. The following discussion of the results of operations includes information regarding the estimates and assumptions used for these items and should be read in conjunction with the notes to the Company’s consolidated financial statements.
 
An understanding of the Company’s accounting policies for these items is of critical importance to understanding its consolidated financial statements. See Part II, Item 8. “Financial Statements and Supplementary Data” for a discussion of significant accounting policies, and fair value methodologies.

The Company adoptedcarries a new pronouncementportion of its assets and liabilities at fair value, the majority of which are measured at fair value on January 1, 2012, in accordance with GAAP, which specifiesa recurring basis.  Level 3 assets, consisting primarily of financial guaranty variable interest entities’ assets, credit derivative assets and investments, represented approximately 20% and 17% of total assets measured at fair value on a recurring basis as of December 31, 2015 and 2014, respectively. All of the Company's liabilities that costs related directly toare measured at fair value are Level 3. See Note 7, Fair Value Measurement, of the successful acquisition of newFinancial Statements and renewal insurance contracts should be capitalized. The effect of retrospective application was a decrease to net income of $3 millionSupplementary Data for additional information about assets and $0.02 per share for 2011 and a decrease to net income of $10 million and $0.05 per share for 2010. The changes affected amortization of deferred acquisition costs, other operating expenses and taxes.liabilities classified as Level 3.


80


Consolidated Results of Operations

Consolidated Results of Operations
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Revenues:          
Net earned premiums$853
 $920
 $1,187
$766
 $570
 $752
Net investment income404
 396
 361
423
 403
 393
Net realized investment gains (losses)1
 (18) (2)(26) (60) 52
Net change in fair value of credit derivatives:          
Realized gains (losses) and other settlements(108) 6
 153
(18) 23
 (42)
Net unrealized gains(477) 554
 (155)
Net unrealized gains (losses)746
 800
 107
Net change in fair value of credit derivatives(585) 560
 (2)728
 823
 65
Fair value gains (losses) on committed capital securities ("CCS")(18) 35
 9
Fair value gains (losses) on CCS27
 (11) 10
Fair value gains (losses) on FG VIEs210
 (132) (274)38
 255
 346
Other income108
 58
 34
Bargain purchase gain and settlement of pre-existing relationships214
 
 
Other income (loss)37
 14
 (10)
Total revenues973
 1,819
 1,313
2,207
 1,994
 1,608
Expenses:          
Loss and LAE523
 462
 412
Loss and loss adjustment expenses424
 126
 154
Amortization of deferred acquisition costs14
 17
 22
20
 25
 12
AGMH acquisition-related expenses
 
 7
Interest expense92
 99
 100
101
 92
 82
Other operating expenses212
 212
 238
231
 220
 218
Total expenses841
 790
 779
776
 463
 466
Income (loss) before provision for income taxes132
 1,029
 534
1,431
 1,531
 1,142
Provision (benefit) for income taxes22
 256
 50
375
 443
 334
Net income (loss)$110
 $773
 $484
$1,056
 $1,088
 $808



7781


Net Earned Premiums

Net earned premiums are recognized over the remaining contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts.
Net Earned Premiums
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Financial guaranty:     
Public finance     
Scheduled net earned premiums and accretion$339
 $360
 $386
Accelerations(1)250
 125
 91
Total public finance589
 485
 477
Structured finance(2)263
 433
 708
Other1
 2
 2
Total net earned premiums$853
 $920
 $1,187
____________________
(1)Reflects the unscheduled refunding or early termination of underlying insured obligations.
(2)
Excludes $153 million, $75 million and $48 million for 2012, 2011 and 2010, respectively, related to consolidated FG VIEs.

2012 compared with 2011: Net earned premiums decreased compared with 2011 due primarily to the scheduled amortization The Company estimates remaining expected lives of the structured financeits insured portfolio, offsetobligations and makes prospective adjustments for such changes in part by an increase in premium accelerations for refundings and terminations. Refundings are higher due to the low interest rate environment, which encourages refinancings of relatively more expensive debt obligations with lower cost debt obligations. Scheduled net earned premiums in 2012 were consistent with the previously disclosed expected amortization of deferred premium revenue. At December 31, 2012, $4.8 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts.lives. Scheduled net earned premiums are expected to decrease each year unless replaced by a higher amount of new business, or reassumptions of previously ceded business (seeor books of business acquired in a business combination. See "Financial Guaranty Insurance Premiums" in Note 4,6, Financial Guaranty Insurance, Premiums, of the Financial Statements and Supplementary Data, for additional information and the expected timing of future premium earnings). Before considering the elimination of premiums related to consolidated FG VIEs, netearnings.
Net Earned Premiums
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Financial guaranty:     
Public finance     
Scheduled net earned premiums and accretion$308
 $279
 $292
Accelerations (1)317
 135
 207
Total public finance625
 414
 499
Structured finance (2)     
Scheduled net earned premiums and accretion125
 152
 195
Accelerations (1)14
 1
 56
Total structured finance139
 153
 251
Other2
 3
 2
Total net earned premiums$766
 $570
 $752
____________________
(1)Reflects the unscheduled refunding or termination of the insurance on an insured obligation as well as changes in scheduled earnings due to changes in the expected lives of the insured obligations. 

(2)
Excludes $21 million, $32 million and $60 million for 2015, 2014 and 2013, respectively, on consolidated FG VIEs.

2015 compared with 2014: Net earned premiums increased in 2015 compared with 2014 due primarily due to higher accelerations, and the accelerationaddition of $82 millionthe Radian Asset book of business, offset in netpart by lower earned premiums resulting from the scheduled decline in par outstanding. The Radian Asset Acquisition on two transactions that are accounted for as FG VIEs, for whichApril 1, 2015 increased deferred premium revenue by $549 million at the Company's financial guarantydate of acquisition. At December 31, 2015, $3.8 billion of net deferred premium revenue remained to be earned over the life of the insurance obligation was terminated.contracts.

20112014 compared with 2010:2013: Net earned premiums decreased in 2014 compared with 2013 due primarily due to lower accelerations and the scheduled decline in structured finance scheduled net earned premium as the par outstanding, declined, offsetas shown in part by an increase in accelerations in 2011. Scheduledthe table above. At December 31, 2014, $3.8 billion of net earned premiums in 2011 were consistent with the previously disclosed expected amortization of deferred premium revenue.revenue remained to be earned over the life of the insurance contracts.

Net Investment Income
 
Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets.



7882


Net Investment Income (1)
 
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Income from fixed maturity securities$407
 $399
 $360
Income from short-term investments1
 1
 3
Income from assets acquired in refinancing transactions5
 5
 7
Gross investment income413
 405
 370
Investment expenses(9) (9) (9)
Net investment income(1)$404
 $396
 $361
Average fixed and short-term maturity balance$10,358
 $10,534
 $10,348
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Income from fixed-maturity securities managed by third parties$335
 $324
 $322
Income from internally managed securities:     
Fixed maturities61
 74
 74
Other37
 14
 5
Gross investment income433
 412
 401
Investment expenses(10) (9) (8)
Net investment income$423
 $403
 $393
____________________
(1)Net investment income excludes $32 million for 2015 and $11 million for 2014 and $13 million for 2012 and $8 million for 2011in 2013, related to consolidated FG VIEs.

20122015 compared with 2011:2014: Net investment income increased due primarily to additional income on the Radian Asset investment portfolio and loss mitigation strategies resulting in additional income on securities within the internally managed portfolio. The overall pre-tax book yield was 4.56% as of December 31, 2015 and 3.65% as of December 31, 2014, respectively. Excluding the internally managed portfolio, pre-tax book yield was 3.58% as of December 31, 2015 compared with 3.36% as of December 31, 2014.

2014 compared with 2013: Net investment income increased primarily due to higher income earned on certain loss mitigation bonds, which the Company generally purchased at a discount and which carry high investment yields. Income earned on the general portfolio excluding loss mitigation bonds declined due to a lower fixed maturity balance and lower reinvestment rates.other risk management assets as well as higher average asset balance. The overall pre-tax book yield was 3.85% at December 31, 2012 and 4.00% at December 31, 2011, respectively. Excluding bonds purchased or obtained for loss mitigation purposes, pre-tax yield was 3.51% as of December 31, 2012 compared with 3.69% as of December 31, 2011.

2011 compared with 2010: The increase in net investment income is due to a shift from cash and short term assets to the fixed maturity portfolio and additional earnings on higher invested asset balances. The overall pre-tax book yield was 4.00% at December 31, 2011 and 3.72% at December 31, 2010, respectively. Excluding bonds purchased or obtained for loss mitigation purposes, pre-tax yield was 3.69%3.65% as of December 31, 2011 compared with 3.67%2014 and 3.79% as of December 31, 2010.2013, respectively. Excluding the internally managed portfolio, pre-tax yield was 3.36% as of December 31, 2014 compared with 3.42% as of December 31, 2013.

Net Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses). OTTI included below was primarily attributable to mortgage-backed securities that were acquired for loss mitigation purposes. See Note 11,10, Investments and Cash, in Item 8. of this Annual Report on Form 10-K.the Financial Statements and Supplementary Data.

Net Realized Investment Gains (Losses)(1)
 
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Realized investment gains (losses) on sales of investments$18
 $27
 $25
OTTI:     
Intent to sell0
 (5) (4)
Credit losses on securities(17) (40) (23)
OTTl(17) (45) (27)
Net realized investment gains (losses)$1
 $(18) $(2)
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Gross realized gains on the investment portfolio$46
 $22
 $113
Gross realized losses on the investment portfolio(25) (7) (19)
Other-than-temporary impairment(47) (75) (42)
Net realized investment gains (losses) (1)$(26) $(60) $52
____________________
(1)
NetExcludes realized investment gains (losses) reported in accordance with GAAP exclude $4 million for 2012 and $12 million for 2011 related to fixed maturity securities purchased in the investment portfolio that were issued by consolidated FG VIEs.
VIEs of $(10) million for 2015, $5 million for 2014 and $(2) million for 2013.

Net realized investment losses for 2015 include a loss on a forward contract to purchase a loss mitigation bond, gains due primarily to sales of securities in order to fund the purchase of Radian Asset by AGC and other-than-temporary-impairments primarily attributable to securities purchased for loss mitigation purposes. Net realized investment losses for 2014 included other-than-temporary impairment that was primarily attributable to securities in the internally managed portfolio received as part of a restructuring of an insured transaction. Net realized investment gains in 2013 included gains due primarily to sales of (i) assets acquired as part of negotiated settlements, (ii) bonds purchased for loss mitigation purposes and (iii) other invested assets and other-than-temporary-impairments primarily attributable to securities acquired for loss mitigation purposes.


83


Bargain Purchase Gain and Settlement of Pre-existing Relationships 

On April 1, 2015, AGC completed the acquisition of Radian Asset and merged Radian Asset with and into AGC, with AGC as the surviving company of the merger. In connection with the acquisition, in 2015, the Company recognized $55 million in a bargain purchase gain and $159 million in settlement of pre-existing relationships.

The excess of the fair value of net assets acquired over the consideration transferred was recorded as a bargain purchase gain in "bargain purchase gain and settlement of pre-existing relationships" in net income. In addition, the Company and Radian Asset had pre-existing reinsurance relationships, which were also effectively settled at fair value on the Acquisition Date. The gain on settlement of these pre-existing reinsurance relationships primarily represents the net difference between the historical ceded balances that were recorded by AGM and the fair value of assumed balances acquired from Radian Asset. The Company believes the bargain purchase resulted from the announced desire of Radian Guaranty Inc. to focus its business strategy on the mortgage and real estate markets and to monetize its investment in Radian Asset and thereby accelerate its ability to comply with the financial requirements of the final Private Mortgage Insurer Eligibility Requirements. See Note 2, Acquisition of Radian Asset Assurance Inc., of the Financial Statements and Supplementary Data for additional information.

Other Income (Loss)
 
Other income (loss) is comprised of recurring items such as foreign exchange remeasurement gains and losses, ancillary fees on financial guaranty policies such as commitment, consent and processing fees, andas well as other revenue items on financial guaranty insurance and reinsurance contracts such as commutation gains on re-assumptions of previously ceded business.business (see Note 13, Reinsurance and Other Monoline Exposures, of the Financial Statements and Supplementary Data) and other non-recurring items.

 

79


Other Income (Loss)

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Foreign exchange gain (loss) on remeasurement of premium receivable and loss reserves$22
 $(5) $(29)
Commutation gains (losses)82
 32
 50
R&W settlement benefit
 22
 
Other4
 9
 13
Total other income$108
 $58
 $34
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Foreign exchange gain (loss) on remeasurement of premium receivable and loss reserves$(15) $(21) $(1)
Commutation gains28
 23
 2
Other24
 12
 (11)
Total other income (loss)$37
 $14
 $(10)
 
Over the past several years, the Company has entered into several commutations in order to reassume previously ceded books of business from BIG financial guaranty companies and its other reinsurers. In 2012, the Company reassumed several large previously ceded reinsurance contracts, including Radian and Tokio, in exchange for a cash payment to the Company of $190 million. The Radian and Tokio transactions represented $19.1 billion in par and $108 million in related unearned premium reserve.
Economic Loss Development

The R&W settlement benefit recorded in other income in 2011 represented transactions where the Company had recovered more than its expected lifetime losses due to a negotiated agreement with the R&W provider. Such excess may not be recorded as an offset to loss and LAE under GAAP.

Other Operating Expenses and Amortization of Deferred Acquisition Costs
Other operating expenses and amortization of deferred acquisition costs were affected by the retrospective application of new accounting guidance, which changed the type and amount of expenses that may be deferred and amortized. The effect of this new guidance in the years ended December 31, 2011 and 2010 was an increase in operating expenses of $19 million and $26 million, respectively, and a decrease in amortization of deferred acquisition costs of $14 million and $12 million, respectively. The guidance was retrospectively applied and therefore prior period amounts presented herein have been revised from previously reported amounts.

Other operating expenses in 2012 were relatively consistent with 2011. Other operating expenses decreased in 2011 compared to 2010 due primarily to declines in gross compensation expense, offset in part by lower deferral rates. Deferral rates were 6.4% in 2012 compared with 7.3% in 2011, and 9.4% in 2010.
Losses in the Insured Portfolio
The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. Please refer to Note 6,5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, for a discussion of the accounting policies, assumptions and methodologies used in calculating the expected loss to be paid for all contracts. For a discussion of the measurement and recognition accounting policies under GAAP for each type of contract, see the following in Item 8, of the Annual Report on Form 10-K:Financial Statements and Supplementary Data:

Notes 4, 5 and 7Note 6 for financial guaranty insurance,
Note 9 for credit derivatives accounting policies,
Note 10 for consolidated FG VIE accounting policies, and
Note 87 for fair value methodologies for credit derivatives and FG VIE assets and liabilities.liabilities,
Note 8 for credit derivatives, and
Note 9 for consolidated FG VIEs.
    
The discussion of losses that follows encompasses losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. In order to effectively evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. That is, management monitors and assigns ratings and calculates expected losses in the same manner for all its exposures. Management also considers contract specific characteristics that affect the estimates of expected loss.

Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any

8084


deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate. AllThe surveillance process for identifying transactions with expected losses is described in the insured portfolio are assigned internal credit ratings, and Surveillance personnel are responsible for recommending adjustments to those ratings to reflect changes in transaction credit quality.
Surveillance personnel present analyses related to potential lossesnotes 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 andconsolidated financial market variability over the long duration of most contracts. The determination of net expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management.

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies.
The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. The Company models most assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.
Credits identified as BIG are subjected to further review to determine the probability of a loss. 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.)
statements. More extensive 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.

81


Net Par Outstanding and Number of Risks
By BIG Category
  Net Par Outstanding
as of December 31,
 Number of Risks (1)
as of December 31,
Description 2012 2011 2012 2011
  (dollars in millions)
BIG:  
  
  
  
Category 1 $9,254
 $12,250
 183
 211
Category 2 5,107
 4,981
 103
 104
Category 3 9,031
 9,531
 174
 152
Total BIG $23,392
 $26,762
 460
 467
____________________
(1)A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.
Infrastructure:

The Company has exposure to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued; the aggregate amount of the claim payments may be substantial and reimbursement may not occur for an extended time, if at all. For the three largest transactions with significant refinancing risk, the Company may be exposed to, and subsequently recover, payments aggregating $1.4 billion. These transactions generally involve long-term infrastructure projects that are financed by bonds that mature prior to the expiration of the project concession. While the cash flows from these projects were expected to be sufficient to repay all of the debt over the life of the project concession, in order to pay the principal on the early maturing debt, the Company expected it to be refinanced in the market at or prior to its maturity. Due to market dislocation and increased credit spreads, the Company may have to pay a claim at the maturity of the securities, and then recover its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. However, the recovery of the payments may take a long time and is uncertain. The claim payments are anticipated to occur substantially between 2014 and 2017, while the recoveries could take 20-45 years, depending on the transaction and the performance of the underlying collateral. For more information about this risk, see "The Company may require additional capital from time to time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on unfavorable terms" under "Risks Related to the Company's Capital and Liquidity Requirements" in Item 1A.

U.S. RMBS:

The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities or tranching) of the RMBS to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and either establishes a recovery for claims already paid or reduces its projected claim payments accordingly.
Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W, that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these requirements. The Company uses internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W. If a provider of R&W refuses to honor its repurchase obligations, the Company may choose to initiate litigation. See “-Recovery Litigation” in Note 6, Expected Loss to be Paid, of the Financial Statements and Supplementary Data. In February 2013, the Company was awarded damages plus costs and attorneys' fees, subject to appeal, in its litigation against Flagstar Bank.

The Company's success in pursuing R&W claims against a number of counterparties that provided R&W on a loan by loan basis has permitted the Company to pursue reimbursement agreements with R&W providers. Such agreements provide the Company with many of the benefits of pursuing the R&W claims but without the expense and uncertainty of pursuing the R&W claims on a loan by loan basis. The Company has entered into several such agreements, most notably with Bank of America and Deutsche Bank, and it continues to pursue such agreements with other counterparties as opportunities arise.


82


Through December 31, 2012 the Company has caused entities providing R&Ws to pay or agree to pay approximately $2.9 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided a financial guaranty. Of this, $2.3 billion are payments made or to be made directly to the Company pursuant to agreements with R&W providers (e.g. the Bank of America Agreement and Deutsche Bank Agreement) and approximately $557 million are amounts paid into the relevant RMBS financial guaranty transactions pursuant to the transaction documents.

The $2.3 billion of payments made or to be made directly to the Company by R&W providers under agreements with the Company includes $1.6 billion that has already been received by the Company, as well as $698 million the Company projects receiving in the future pursuant to such currently existing agreements. Because most of that $698 million is projected to be received through loss-sharing arrangements, the exact amount the Company will receive will depend on actual losses experienced by the covered transactions. This amount is included in the Company's calculated credit for R&W recoveries, described below.

The $557 million paid by R&W providers were paid into the relevant RMBS transactions in accordance with the priority of payments set out in the relevant transaction documents. Because the Company may insure only a portion of the capital structure of a transaction, such payments will not necessarily directly benefit the Company dollar-for-dollar, especially in first lien transactions. However, such payments do reduce collateral pool losses and so usually reduce the Company's expected losses.

The Company assumes that recoveries on transactions backed by second lien loans that were not subject to the Bank of America Agreement or Deutsche Bank Agreement will occur, depending on scenarios, in two to four years from the balance sheet date, and that recoveries on transactions backed by Alt-A first lien, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions. See Note 6, Expected loss to be Paid, of the Financial Statements and Supplementary Data, for a discussion of the significant terms of the Company's R&W settlement agreements to date.

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

The primary differencedifferences between net economic loss development and loss expense included in operating income relates to the consideration ofand LAE reported under GAAP are that GAAP (1) considers deferred premium revenue in the calculation of loss reserves and loss expense. expense for financial guaranty insurance contracts, (2) eliminates losses related to FG VIEs and (3) does not include estimated losses on credit derivatives. Loss expense reported in operating income includes losses on credit derivatives and does not eliminate losses on FG VIEs.

For financial guaranty insurance contracts, a GAAP loss is generally recorded only when expected losses exceed deferred premium revenue. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. AGM's U.S. RMBS transactionsTransactions acquired in a business combination generally have the largest deferred premium revenue balances because of the purchase accounting adjustments that were made in 2009 in connection with Assured Guaranty's purchase of AGM, and thereforeat acquisition. Therefore the largest differences between net economic loss development and loss expense is this sector.relate to these policies. See "–Losses Incurred" for amount recognized in the GAAPLoss and non-GAAP operating income statement.LAE (Financial Guaranty Insurance Contracts)" below.

Net Expected Loss to be Paid
 As of
December 31, 2015
 As of
December 31, 2014
 (in millions)
Public finance$809
 $348
Structured finance   
U.S. RMBS before benefit for recoveries for breaches of R&W488
 901
Net benefit for recoveries for breaches of R&W (1)(79) (317)
U.S. RMBS after benefit for recoveries for breaches of R&W409
 584
Other structured finance173
 237
Structured finance582
 821
Total$1,391
 $1,169
____________________
(1)As of December 31, 2015, the remaining estimated benefit for recoveries for breaches of R&W are subject to contractual settlement agreements. The Company is no longer actively pursuing any R&W providers for breaches.


8385


Economic Loss Development and (Paid) Recovered Losses(Benefit) (1)

Economic Loss Development(1) (Paid) Recovered LossesYear Ended December 31,
Year Ended December 31, Year Ended December 31,2015 2014 2013
2012 2011 2010 2012 2011 2010(in millions)
(in millions)
Public finance$405
 $171
 $256
Structured finance     
U.S. RMBS before benefit for recoveries for breaches of R&W$367
 $1,039
 $939
 $(996) $(1,051) $(1,066)(149) 0
 140
Net benefit for recoveries for breaches of R&W(179) (1,038) (649) 459
 1,059
 189
Net development (benefit) for recoveries for breaches of R&W67
 (268) (296)
U.S. RMBS after benefit for recoveries for breaches of R&W188
 1
 290
 (537) 8
 (877)(82) (268) (156)
Other structured finance(28) 80
 147
 (39) (26) (2)(4) 67
 (44)
Public finance295
 43
 11
 (303) (65) (53)
Other(17) 
 
 12
 
 
Structured finance(86) (201) (200)
Total$438
 $124
 $448
 $(867) $(83) $(932)$319
 $(30) $56
____________________
(1)Economic loss development includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.

Net Expected Loss to be Paid
 As of
December 31, 2012
 As of
December 31, 2011
 (in millions)
U.S. RMBS before benefit for recoveries for breaches of R&W$1,652
 $2,281
Net benefit for recoveries for breaches of R&W(1,370) (1,650)
U.S. RMBS after benefit for recoveries for breaches of R&W282
 631
Other structured finance339
 406
Public finance59
 67
Other(3) 2
Total$677
 $1,106

20122015 Net Economic Loss Development

Total economic loss development was $319 million in 2012 was $438 million ($319 million after tax), which was2015, due primarily driven by losses on its troubled European exposures, particularly a $189 million loss in relation to the Company's Greek sovereign bond exposures and loss development on Spanish sub-sovereign exposures, higher U.S. RMBS and U.S. public finance losses on Puerto Rico exposures, partially offset in part by positive developmentsa net benefit in the TruPS portfolio. Changes in discount rates did not have a significant effect on economic loss development in 2012 as theU.S. RMBS sector. The risk-free rates used to discount expected losses ranged from 0.0% to 3.28%3.25% as of December 31, 20122015 compared with 0.0% to 3.27%2.95% as of December 31, 2011.2014. The change in the risk-free rates used to discount expected losses was a benefit of $23 million in 2015.

U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated BIG by the Company was $7.8 billion as of December 31, 2015 compared with $7.9 billion as of December 31, 2014. The Company projects that its total net expected loss across its troubled U.S. public finance credits as of December 31, 2015 will be $771 million, compared with $303 million as of December 31, 2014. Economic loss development in 2015 was approximately $416 million, which was primarily attributable to certain Puerto Rico exposures. See "Insured Portfolio-Exposure to Puerto Rico" below for details about significant developments that have taken place in Puerto Rico over the course of 2015.

U.S. RMBS Economic Loss Development: The Company'snet benefit attributable to U.S. RMBS loss projection methodology assumes thatof $82 million was primarily due to the housingR&W settlements during the year and mortgage markets will improve. Each quartera benefit due to the Company makesacceleration of claim payments as a judgment asmeans of mitigating future losses on certain Alt-A transactions, which was partially offset by losses in certain second lien U.S. RMBS transactions due to whetherrising delinquencies and collateral deterioration associated with the increase in monthly payments when their loans reach their principal amortization period. Please refer to changeNote 5, Expected Loss to be Paid, of the assumptions it uses to make RMBS loss projections basedFinancial Statements and Supplementary Data, for additional information.

Based on its observation during the quarterperiod of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and for first liens, loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as whether those changes are normal fluctuations or part of a trend. Based on such observations, the Company chose to use essentially the same general assumptions and scenarios to project RMBS losslosses as of December 31, 20122015 as it used as of December 31, 2011,2014, except that, as compared to December 31, 2011:

infor its most optimistic scenario,first lien RMBS loss projections for 2015 it reducedshortened by threetwelve months the period it assumedis projecting it wouldwill take in the mortgage marketbase case to recover; and
reach the final conditional default rate ("CDR") as compared with December 31, 2014.

Infrastructure: The Company has insured exposure of approximately $2.9 billion to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued. For more information about this risk, see the Risk Factor captioned "Estimates of expected losses are subject to uncertainties and may not be adequate to cover potential paid claims" under Risks Related to the Company's Expected Losses in its most pessimistic scenario, it increased"Item 1A. Risk Factors."

2014 Net Economic Loss Development

Total economic loss development was a favorable $30 million in 2014, due primarily to the various U.S. RMBS R&W settlements during the year and improvements in some of the Company's insured TruPS transactions. This was partially offset by three monthsU.S. public finance losses related to Puerto Rico and Detroit and structured finance losses that resulted primarily from changes in underlying assumptions on life insurance securitization transactions and the period it assumed it would take the mortgage market to recover.
decrease in discount rates used. The

8486


risk-free rates used to discount expected losses ranged from 0.0% to 2.95% as of December 31, 2014 compared with 0.0% to 4.44% as of December 31, 2013.

U.S. Public Finance Economic Loss Development: The Company'snet par outstanding for U.S. public finance obligations rated BIG by the Company was $7.9 billion as of December 31, 2014 compared with $9.1 billion as of December 31, 2013. The Company projected that its total net expected loss across its troubled U.S. public finance credits as of December 31, 2014 would be $303 million, compared with $264 million as of December 31, 2013. Economic loss development in 2014 was approximately $183 million, which was primarily attributable to Puerto Rico and Detroit exposures.

U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS of $268 million was primarily due to the R&W settlements during the year. Please refer to Note 5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, for additional information.

Based on its observations of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, the Company chose to use of essentially the same assumptions and scenariosgeneral methodology to project first lien RMBS losses as of December 31, 20122014 as atit used as of December 31, 2011 was consistent2013, but it made a number of refinements to reflect its observations, notably:

updated the liquidation rates it uses on delinquent loans based on observations and on an assumption that loan modifications (which improve liquidation rates) would over the next year be less frequent than they were over the most recent year

updated the liquidation rate it uses for loans reported as current but that had been reported as modified over the previous twelve months, based on observed data

established a liquidation rate assumption for loans reported as current and not modified in the past twelve months but that had been reported as delinquent in the previous twelve months

established loss severity assumptions by vintage category as well as product type, rather than just product type as done previously

beginning with its view at December 31, 2012 that the housing and mortgage market recovery is occurring at a slower pace than it anticipated at December 31, 2011. The Company's changes during 2012 tothird quarter 2014, each quarter shortened by three months the period it wouldis projecting it will take in the mortgage marketbase case to recoverreach the final CDR

The methodology and revised assumptions the Company used to project first lien RMBS losses and the scenarios it employed are described in its most optimistic scenario and its most pessimistic scenario allowed itmore detail in Note 5, Expected Loss to consider a wider range of possibilities for the speedbe Paid, of the recovery. SinceFinancial Statements and Supplementary Data under " - U.S. First Lien RMBS Loss Projections: Alt A First Lien, Option ARM, Subprime and Prime". The Company estimated the Company's projectionsimpact of all of the refinements to its first lien RMBS assumptions described above to be a decrease of expected losses of approximately $42 million (before adjustments for each RMBS transaction are basedsettlements or loss mitigation purchases) in 2014. Based on its observations of the delinquency performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, the Company chose to use the same general methodology to project second lien RMBS losses as of December 31, 2014 as it used as of December 31, 2013, but it made a number of refinements to reflect its observations, notably with respect to most home equity lines of credit ("HELOC")projections to:

reflect increased recoveries on newly defaulted loans inas well as previously defaulted loans

project incremental defaults associated with increased monthly payments that individual RMBS transaction, improvement or deterioration in that aspect of a transaction's performance impactsoccur when interest-only periods end

increase the projections for that transaction. assumed final conditional prepayment rate from 10% to 15%

The methodology and assumptions the Company uses to project second lien RMBS losses and the scenarios it employs are described in more detail in Note 6,5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data.Data under " - U.S. Second Lien RMBS Loss Projections."


87


2013 Net Economic Loss Development

Total economic loss development was $56 million in 2013, primarily due to U.S. public finance losses related to Detroit, Puerto Rico and Harrisburg, partially offset by favorable development in U.S. RMBS due to the various settlements during the year. Excluding the settlements, U.S. RMBS loss development was primarily due to the change in assumptions for first liens. The following table provides a breakdownrisk-free rates used to discount expected losses ranged from 0.0% to 4.44% as of December 31, 2013 compared with 0.0% to 3.28% as of December 31, 2012.

U.S. Public Finance Economic Loss Development: The Company insured general obligation bonds of the developmentCommonwealth of Puerto Rico and accretionvarious obligations of its related authorities and public corporations aggregating $5.4 billion net par as of December 31, 2013. The Company rated $5.2 billion net par of that amount BIG. Debt obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations came under increasing pressure during 2013 and in February 2014, S&P, Moody's and Fitch Ratings downgraded much of the roll forwarddebt of estimated recoveries associated with alleged breaches of R&W.Puerto Rico and its related authorities and public corporations to BIG.

 Year Ended December 31, 2012
 (in millions)
Inclusion (removal) of deals with breaches of R&W during period$(3)
Change in recovery assumptions as the result of additional file review and recovery success70
Estimated increase (decrease) in defaults that will result in additional (lower) breaches63
Results of settlements and judgments40
Accretion of discount on balance9
Total$179
Many U.S. municipalities and related entities have beencontinued to be under increasingincreased pressure over the last few quarters,in 2013, and a few havehad filed for protection under the U.S. Bankruptcy Code, entered into state processes designed to help municipalities in fiscal distress or otherwise indicated they may consider defaulting onnot meeting their obligations to make timely payments on their debts. The Company expects that bondholder rights will be enforced. However, due to the early stage of these developments, and the circumstances surrounding each instance, the ultimate outcome cannot be certain. The Company will continue to analyze developments in each of these matters closely. The municipalities whose obligations the Company hashad insured that havehad filed for protection under Chapter 9 of the U.S Bankruptcy Code are:were: Detroit, Michigan; Jefferson County, AlabamaAlabama; and Stockton, California. The City Council of Harrisburg, Pennsylvania had also filed a purported bankruptcy petition, which was later dismissed by the bankruptcy court; a receiver for the City of Harrisburg was appointed by the Commonwealth Court of Pennsylvania on December 2, 2011. In 2013, the Company reached agreements with Jefferson County, Harrisburg and Stockton.

The net par outstanding for these and all other BIG rated U.S. public finance obligations was $4.6$9.1 billion as of December 31, 2012 and $4.5 billion as of December 31, 2011.2013. The Company projectsprojected that its total future expected net loss across its troubled U.S. public finance credits (after projected recoveries of claims already paid) will be $7 million as of December 31, 2012, down from $16 million as of December 31, 2011.
2011 Net Economic Loss Development

Net economic loss development in 2011 was $124 million ($116 million after tax) which was driven primarily by non-U.S. RMBS structured finance and non U.S public finance obligations. In the non U.S. RMBS structured finance portfolio, economic loss development was primarily driven by the decline in risk free rates used to discount expected losses. Loss development in life insurance and film securitizations also contributed to the net loss development, offset in part by positive development in the TruPS portfolio. Economic loss development in the non- U.S. public finance portfolio was comprised mainly of the probability weighted loss estimate on exposures to Greek sovereign debt based on information available at that time. In the U.S. RMBS portfolio, loss development was offset by positive developments in actual and expected recoveries for breaches of R&W. Changes in discount rates had a significant effect on the economic loss development in 2011 as the rates ranged from 0.0% to 3.27%as of December 31, 2011 compared with 0.0% to 5.34%2013 was $264 million, up from $7 million as of December 31, 2010.2012. The net increase of $257 million in expected loss was primarily attributable to deterioration in the credit of Puerto Rico and its related authorities and public corporations, the bankruptcy filing by the City of Detroit, and a final resolution in Harrisburg that was somewhat worse for the Company than it projected as of December 31, 2012, offset in part primarily by the final resolution of the Company's Jefferson County exposure.

During each quarter of 2011 also the Company made a judgment as to whether to change the assumptions it used to makeU.S. RMBS loss projections basedEconomic Loss Development: Based on its observation during the quarterobservations of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and for first liens, loss severity) as well as the residential property market and economy in general, and, to the extent it observed changes, it made a judgment as whether those changes were normal fluctuations or part of a trend. Based on such observations, the Company chose to use essentially the same assumptions and scenarios to project RMBS loss as of December 31, 2011 as it used as of December 31, 2010, except that as compared to December 31, 2010:

85



based on its observation ofgeneral approach (with the slow mortgage market recovery, the Company increased its base case expected period for reaching the final conditional default rate in second lien transactions and adjusted the probability weightings it applied to second lien scenarios from year-end 2010 to reflect the changes to those scenarios;

also based on its observation of the slow mortgage market recovery the Company added a more stressful first lien scenario at year-end 2011 reflecting an even slower potential recovery in the housing and mortgage markets, making what had prior to that been a stress scenario its base scenario;

based on its observation of increased loss severity rates, the Company increased its projected loss severity rates in various of its first lien scenarios; and

based on its observation of liquidation rates, the Company decreased the liquidation rates it applied to non-performing loans.

The Company's use of essentially the same methodology and scenariosrefinements described below) to project RMBS losses as of December 31, 20112013 as atit used as of December 31, 20102012. The Company's use of the same general methodology to project RMBS losses as of December 31, 2013 as it used as of December 31, 2012 was consistent with its view at December 31, 20112013 that the housing and mortgage market recovery was occurring at a slower pace than it anticipated at December 31, 2010. Since the Company's projections for each RMBS transaction are based on the delinquency performance of the loans in that individual RMBS transaction, improvement or deterioration in that aspect of a transaction's performance impacts the projections for that transaction.2012.

The following table provides a breakdown of the development and accretion amount in the roll forward of estimated recoveries associated with alleged breaches of R&W.
 Year Ended December 31, 2011
 (in millions)
Inclusion (removal) of deals with breaches of R&W during period$115
Change in recovery assumptions as the result of additional file review and recovery success218
Estimated increase (decrease) in defaults that will result in additional (lower) breaches17
Results of settlements668
Accretion of discount on balance20
Total$1,038

2010 Net Economic Loss Development

Net economicCompany refined its first lien RMBS loss development in 2010 was $448 million ($313 million after tax) which was driven primarily by U.S RMBS and other structure finance obligations.  Changes in discount rates had a significant effect on economic loss development as the risk free rates used to discount lossesprojection methodology as of December 31, 2013 to model explicitly the endbehavior of 2010borrowers with loans that had been modified. The Company had observed that mortgage loan servicers were 0.0%modifying more mortgage loans (reducing or forbearing from collecting interest or principal or both due on mortgage loans) to 5.34% compared with 0.0%reduce the borrowers’ monthly payments and so improve their payment performance than was the case before the mortgage crisis. Borrowers who are current based on their new, reduced monthly payments are generally reported as current, but are more likely to 5.12%default than borrowers who are current and whose loans have not been modified. The Company believed modified loans are most likely to default again during the first year after modification. The Company set its liquidation rate assumptions as of the endDecember 31, 2012 based on observed roll rates and with modification activity in mind. As of 2009.

During each quarter of 2010 alsoDecember 31, 2013, the Company made a judgment asnumber of refinements to whether to change the assumptions it used to makeits first lien RMBS loss projectionsprojection assumptions to treat loan modifications explicitly. Specifically, in the base case approach, it:

established a liquidation rate assumption for loans reported as current but that had been reported as modified in the previous 12 months

assumed that currently delinquent loans that did not roll to liquidation would behave like modified loans, and so applied the modified loan liquidation rate to them

increased from two to three years the period over which it calculates the initial CDR based on its observation during the quarterassumed liquidations of the performance of its insured transactions (including early stage delinquencies, late stage delinquenciesnon-performing loans and for first liens, loss severity) as well as the residential property market and economy in general, and,modified loans, to the extent it observed changes, it made a judgment as whether those changes were normal fluctuations or part of a trend. Based on such observations, the Company chose to use essentially the same assumptions and scenarios to project RMBS loss as of December 31, 2010 as it used as of December 31, 2009, except that as compared to December 31, 2009:

based on its observation of what appeared to be the beginnings of an improvement in the housing and mortgage markets in the first part of 2010, it adjustedaccount for the second quarter 2010 how its scenarios were run;

then based on its observations in the third and fourth quarters of 2010 that early stage delinquencies had not trended down as much as it had anticipated in the second quarter and its concerns in the fourth quarter about the timing and strength of any recovery in the mortgage and housing markets, it adjusted its probability weightingslonger period modified loans will take to reflect a somewhat more pessimistic view; and

default

8688


based on its observation of
increased loss severity rates, the Company increased its projectedperiod it assumes the transactions will experience the initial loss severity assumption before it improves and the period during which the transaction will experience low voluntary prepayment rates

established an assumption for subprime transactionsservicers not to 80%.advance loan payments on all delinquent loans

The Company's use of essentiallymethodology and revised assumptions the same assumptions and scenariosCompany used to project first lien RMBS losses and the scenarios it employed are described in more detail Note 5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data. The refinement in assumptions described above resulted in a reduction of the initial CDRs but the application of the initial CDRs for a longer period generally resulted in a higher amount of loans being liquidated at the initial CDR under the refined assumptions than under the initial CDR under the previous assumptions. The Company estimated the impact of all of the refinements to its assumptions described above to be an increase of expected losses of approximately $8 million (before adjustments for settlements or loss mitigation purchases) by running on the first lien RMBS portfolio as of December 31, 20102013 base case assumptions similar to what it used as atof December 31, 2009 was consistent with2012 and comparing those results to the results from the refined assumptions.

During 2013 the Company observed improvements in the performance of its second lien RMBS transactions that, when viewed in the context of their performance prior to 2013, suggested those transactions were beginning to respond to the improvements in the residential property market and economy being widely reported by market observers. Based on such observations, in projecting losses for second lien RMBS the Company chose to decrease by two months in its base scenario and by three months in its optimistic scenario the period it assumed it would take the mortgage market to recover as compared to December 31, 2012. Also during 2013 the Company observed material improvements in the delinquency measures of certain second lien RMBS for which the servicing had been transferred, and made certain adjustments on just those transactions to reflect its view at December 31, 2010 that much of this improvement was due to loan modifications and reinstatements made by the housingnew servicer and mortgage market recovery was occurring atthat such recently modified and reinstated loans may have a slower pace than it anticipated at December 31, 2009. Since the Company's projections for each RMBS transaction are based on the delinquency performancehigher likelihood of the loans in that individual RMBS transaction, improvement or deterioration in that aspect of a transaction's performance impacts the projections for that transaction.defaulting again.

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

 Year Ended December 31, 2010
 (in millions)
Inclusion (removal) of deals with breach of R&W during period$180
Change in recovery assumptions as the result of additional file review and recovery success253
Estimated increase (decrease) in defaults that will result in additional (lower) breaches211
Accretion of discount on balance5
     Total$649

Losses IncurredLAE (Financial Guaranty Insurance Contracts)
 
For transactions accounted for as financial guaranty insurance under GAAP, each transaction’s expected loss to be expensed, net of estimated R&W recoveries, is compared with the deferred premium revenue of that transaction. Generally, when the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in the income statement for the amount of such excess.

When the Company measures operating income, a non-GAAP financial measure, it calculates the credit derivative and FG VIE losses incurred in a similar manner. Changes in fair value in excess of

While expected loss that are not indicative of economic deterioration or improvement are not included in operating income.
Expected loss to be paid as discussed above under "Losses in the Insured Portfolio" is an important liquidity measure in that it provides the present value of amounts that the Company expects to pay or recover in future periods. Expectedperiods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of incurred losses that will be recognized in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be paid for FG VIEs pursuant to AGC’s and AGM’s financial guaranty policies is calculated in a manner consistent with financial guaranty insurance contracts, but eliminated in consolidation under GAAP.


8789


The following tables presenttable presents the loss and LAE recorded in the consolidated statements of operations by sector for non-derivative contractsoperations. These amounts are based on economic loss development and expected losses to be paid that are discussed above, and the loss expense recorded under non-GAAP operating income respectively.amortization of unearned premium reserve on a transaction by transaction basis. Amounts presented are net of reinsurance.

Loss and LAE Reported
on the Consolidated Statements of Operations

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Public finance$393
 $191
 $214
Structured finance     
U.S. RMBS$308
 $389
 $381
54
 (129) (4)
Other structured finance(7) 118
 64
5
 94
 (35)
Public finance285
 48
 33
Other(17) 
 
Structured finance59
 (35) (39)
Total insurance contracts before FG VIE consolidation569
 555
 478
452
 156
 175
Effect of consolidating FG VIEs(46) (93) (66)(28) (30) (21)
Total loss and LAE$523
 $462
 $412
Total loss and LAE (1)$424
 $126
 $154

____________________
(1)Excludes credit derivative loss expense of $22 million for 2015 and credit derivative benefit of $77 million and $1 million for 2014 and 2013, respectively, which are included in non-GAAP loss expense.

Loss Expense Non-GAAP Operatingand LAE in 2015 includes changes in loss estimates on Puerto Rico exposures, second lien U.S. RMBS HELOC transactions and Triple-X life insurance transactions. Some of the increases were partially offset by improvements in first lien U.S. RMBS and student loan transactions.

 Year Ended December 31,
 2012 2011 2010
 (in millions)
U.S. RMBS$369
 $365
 $499
Other structured finance(40) 99
 155
Public finance284
 29
 34
Other(17) 
 
Total$596
 $493
 $688


Reconciliation of LossIn 2014, losses and LAE primarily includes higher U.S. public finance loss estimates on Puerto Rico and Detroit, and higher structured finance losses attributable to Non-GAAP Loss Expense

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Loss and LAE$523
 $462
 $412
Credit derivative loss expense28
 (62) 210
FG VIE loss expense45
 93
 66
Loss expense included in operating income$596
 $493
 $688


For each ofTriple-X life insurance transactions. In 2014, loss and LAE also includes benefits in the three years in period ended December 31, 2012, U.S. RMBS insured transactions have generatedportfolio due primarily to the most lossessettlement of all the insured sectors. The recovery in the mortgage market has taken longer than originally anticipated, however, the loss development was mitigated byseveral R&W recoveries and negotiated loss sharing agreements as well as other loss mitigation strategies.claims. Changes in risk-free rates used to discount losses also contributed toadversely affected loss expense over the past three years for long-dated transactions, however this component of loss expense does not reflect actual credit impairment or improvement in the period. The

In 2013, losses incurred were due primarily to U.S. public finance, sector has also been under increasing stressincluding Detroit, Puerto Rico and Harrisburg partially offset by positive developments in structured finance, primarily Triple-X life insurance transactions and U.S. RMBS. The positive developments in U.S. RMBS were primarily due to the U.S. and abroad, in particular, certain troubled European countries such as Greece where the Company recognized losses.settlement of several R&W claims.

For financial guaranty contracts accounted for as insurance, the amounts reported in the GAAP financial statements may only reflect a portion of the current period’s economic loss development and may also include a portion of prior-period

88


economic loss development. The difference between economic loss development on financial guaranty insurance contracts and loss and LAE recognized in GAAP income relates to the effect of taking deferred premium revenue into account for GAAP loss and LAE, which is essentiallynot considered in economic loss development and accretion for financial guaranty insurance contracts that is, or was previously, absorbed in unearned premium reserve. Such amounts have not yet been recognized in income.development.





90


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

Financial Guaranty Insurance
Net Expected Loss to be Expensed
As of December 31, 2012
2015
 
 Net Expected Loss to be Expensed(1)
 
In GAAP
Reported
Income
 
In Non-GAAP
Operating
Income
 (in millions)
2013$72
 $110
201448
 70
201542
 55
201637
 48
201736
 46
2018-2022127
 158
2023-202759
 72
2028-203229
 37
After 203219
 29
Total expected PV of net expected loss to be expensed469
 625
Discount251
 287
Total future value$720
 $912
 
In GAAP
Reported
Income
 
In Non-GAAP
Operating
Income
 (in millions)
2016$38
 $48
201731
 40
201830
 38
201929
 36
202027
 32
2021-2025102
 117
2026-203070
 79
2031-203541
 50
After 203519
 24
Net expected loss to be expensed387
 464
Discount286
 327
Total expected future loss and LAE$673
 $791
____________________
(1)Net expected loss to be expensed for GAAP reported income is different than non-GAAP operating income, a non-GAAP financial measure, by the amount related to consolidated FG VIEs.VIEs and credit derivatives.

Net Change in Fair Value of Credit Derivatives
Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, and the issuing company's own credit rating, credit spreads and other market factors. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

Except for net estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives are expected to reduce to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims paying resources, rating agency capital or regulatory capital positions. Expected losses to be paid in respect of contracts accounted for as credit derivatives are included in the discussion above: “—Losses in the Insured Portfolio.”
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.
There are typically no quoted prices for its instruments or similar instruments as financial guaranty contracts do not typically trade in active markets. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to those in the credit derivatives issued by the Company. Therefore,

89


the valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. See Note 8, Fair Value Measurement, of the Financial Statements and Supplemental Data.
The fair value of the Company's credit derivative contracts represents the difference between the present value of remaining net premiums the Company expects to receive or pay for the credit protection under the contract and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay the Company for the same protection. The fair value of the Company's credit derivatives depends on a number of factors including notional amount of the contract, expected term, credit spreads, interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows.

The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past three years and as of December 31, 2012, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments.
Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. These terms differ from more standardized credit derivatives sold by companies outside of the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points. Because of these terms and conditions, the fair value of the Company’s credit derivatives may not reflect the same prices observed in an actively traded market of CDS that do not contain terms and conditions similar to those observed in the financial guaranty market. The Company considers R&W claim recoveries in determining the fair value of its CDS contracts.
Management considers factors such as current prices charged for similar agreements when available, performance of underlying assets, life of the instrument and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these credit derivative products, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.
Net Change in Fair Value of Credit Derivatives
Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, and the issuing company's own credit rating and credit spreads, and other market factors. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

Except for net estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives are expected to reduce to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Expected losses to be paid in respect of contracts accounted for as credit derivatives are included in the discussion above “—Economic Loss Development.”
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.
The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past several years and as of December 31, 2015, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value

91


include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments. See Note 7, Fair Value Measurement, of the Financial Statements and Supplemental Data for additional information.
Net Change in Fair Value of Credit Derivatives
Gain (Loss)
 
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Net credit derivative premiums received and receivable$127
 $185
 $207
Net ceding commissions (paid and payable) received and receivable1
 3
 3
Realized gains on credit derivatives128
 188
 210
Terminations(1) (23) 
Net credit derivative losses (paid and payable) recovered and recoverable(235) (159) (57)
Total realized gains (losses) and other settlements on credit derivatives(108) 6
 153
Net unrealized gains (losses) on credit derivatives(477) 554
 (155)
Net change in fair value of credit derivatives$(585) $560
 $(2)
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Realized gains on credit derivatives$63
 $73
 $121
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements(81) (50) (163)
Realized gains (losses) and other settlements on credit derivatives(1)(18) 23
 (42)
Net change in unrealized gains (losses) on credit derivatives:     
Pooled corporate obligations147
 (18) (32)
U.S. RMBS396
 814
 (69)
CMBS42
 2
 
Other161
 2
 208
Net change in unrealized gains (losses) on credit derivatives746
 800
 107
Net change in fair value of credit derivatives$728
 $823
 $65
____________________
(1)Includes realized gains and losses due to terminations of CDS contracts.

Net credit derivative premiums, included in the realized gains on credit derivatives line in the table above, have declined in 20122015 and 2014 due primarily to the decline in the net par outstanding to $70.8$25.6 billion at December 31, 20122015 from $85.0$35.0 billion at December 31, 2011. In years ended2014 and $54.5 billion at December 31, 20122013. The following table present the effect of terminations on realized gains (losses) and 2011,other settlements on credit derivatives.

Net Par and Realized Gain and Losses
from Terminations of Credit Derivative Contracts

 Year Ended December 31,
 2015 2014 2013
 (in millions)
Net par of terminated credit derivative contracts$2,777
 $3,591
 $4,054
Realized gains on credit derivatives13
 1
 21
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements116
 26
 

During 2015, unrealized fair value gains were generated primarily as a result of CDS contracts totaling $2.3 billionterminations. The Company reached a settlement agreement with one CDS counterparty to terminate five Alt-A first lien CDS transactions resulting in unrealized fair value gains of $213 million and $11.5 billionwas the primary driver of the unrealized fair value gains in the U.S. RMBS sector. The Company also terminated a CMBS transaction, a Triple-X life insurance securitization transaction, and a distressed middle market collateralized loan obligation ("CLO") securitization during the period and recognized unrealized fair value gains of $41 million, $99 million and $99 million, respectively. These were the primary drivers of the unrealized fair value gains in the CMBS, Other, and pooled corporate CLO sectors, respectively, during the period. The remainder of the fair value gains for the period were a result of tighter implied net parspreads across all sectors. The tighter implied net spreads were terminated.primarily a result of the increased cost to buy protection in AGC’s and AGM’s name, particularly for the one year CDS spread. These transactions were pricing at or above their floor levels, therefore when the cost of purchasing CDS protection on AGC and AGM increased, the implied spreads that the Company would expect to receive on these transactions decreased. Finally, during 2015 there was a refinement in methodology to address an instance in a U.S. RMBS transaction where the Company now expects recoveries. This refinement resulted in approximately $49 million in fair value gains in 2015.


9092


Net Change in Unrealized Gains (Losses) on Credit Derivatives By Sector
  Year Ended December 31,
Asset Type 2012 2011 2010
  (in millions)
U.S. RMBS:      
Option ARM and Alt-A first lien $(447) $300
 $(281)
Subprime first lien (55) 24
 (10)
Prime first lien (54) 47
 (8)
Closed end second lien and home equity lines of credit ("HELOCs") 5
 10
 (2)
Total U.S. RMBS (551) 381
 (301)
Pooled corporate obligations 59
 39
 70
CMBS 2
 11
 10
Other(1) 13
 123
 66
Total $(477) $554
 $(155)
____________________
(1)“Other” includes all other U.S. and international asset classes, such as commercial receivables, international infrastructure, international RMBS securities, and pooled infrastructure securities.
During 2012, U.S. RMBS2014, unrealized fair value lossesgains were generated primarily in the U.S. RMBS prime first lien, Alt-A, Option ARM and subprime RMBS sectorssectors. This is primarily due to a significant unrealized fair value gain in the Option ARM and Alt-A first lien sector of approximately $543 million, as a result of the terminations of three large Alt-A first lien resecuritization transactions and one Option ARM first lien transaction during the period. In addition, there was an unrealized gain of approximately $346 million related to the change in index used to determine fair value during the fourth quarter of 2014. In the fourth quarter of 2014, new market indices were published on Option ARM and Alt-A first lien securitizations. As part of the Company’s normal review process the Company reviewed these indices and based upon the collateral make-up, collateral vintage, and collateral loss experience, determined it to be a better market indication for the Company’s Option ARM and Alt-A first lien securitizations. The unrealized fair value gains were partially offset by unrealized fair value losses generated by wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC'sAGC’s and AGM’s name, as the market cost of AGC's and AGM’s credit protection decreased.decreased during the period. These transactions were pricing at or above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC which management refersand AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.

During 2013, unrealized fair value gains were generated in the “other” sector primarily as a result of the termination of a film securitization transaction and a U.K. infrastructure transaction, as well as price improvement on a Triple-X life insurance transaction. These unrealized gains were partially offset by unrealized fair value losses in the prime first lien, Alt-A, Option ARM and subprime RMBS sectors due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s name as the market cost of AGC’s credit protection decreased. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS spreadprotection on AGC decreased, the implied spreads that the Company would expect to receive on these transactions increased. The cost of AGM'sAGM’s credit protection also decreased slightly during 2012,2013, but did not lead to significant fair value losses, as the majority of AGM policies continue to price at floor levels.
In 2011, U.S. RMBS unrealized fair value gains were generated primarily in the Option ARM, Alt-A, prime first lien and subprime sectors primarily as a result of the increased cost to buy protection in AGC's name as the market cost of AGC's credit protection increased. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGC, increased the implied, spreads that the Company would expect to receive on these transactions decreased. The unrealized fair value gain in "other" primarily resulted from tighter implied net spreads on a XXX life securitization transaction andcompany terminated a film securitization CDS for a payment of $120 million which also resulted from the increased cost to buy protectionwas recorded in AGC's name, referenced above. The cost of AGM'srealized gains (losses) and other settlements on credit protection also increased during the year, but did not lead to significant fair value gains, as the majority of AGM policies continue to price at floor levels.

In 2010, U.S. RMBS unrealized fair value losses were generated primarily in the Option ARM and Alt-A first lien sector due to internal ratings downgrades on several of these Option ARM and Alt-A first lien policies. The unrealized fair value gain within the TruPS CDO and Other asset classes resulted from tighter implied spreads. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGC and AGM increased, the implied spreads that the Company would expect to receive on these transactions decreased. During 2010, AGC's and AGM's spreads widened. However, gains due to the wideningderivatives, with a corresponding release of the Company's own CDS spreads were offset by declinesunrealized loss recorded in unrealized gains (losses) on credit derivatives of $127 million for a net change in fair value resulting from price changes and the internal downgrades of several U.S. RMBS policies referenced above.credit derivatives of $7 million.

Five-Year CDS Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
 
As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2010
As of
December 31, 2015
 As of
December 31, 2014
 As of
December 31, 2013
Quoted price of CDS contract (in basis points): 
  
  
Five-year CDS spread:     
AGC678
 1,140
 804
376
 323
 460
AGM536
 778
 650
366
 325
 525
     
One-year CDS spread     
AGC139
 80
 185
AGM131
 85
 220


91


Effect of Changes in the Company’s Credit Spread on
Unrealized Gains (Losses) on Credit Derivatives
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Change in unrealized gains (losses) of credit derivatives:          
Before considering implication of the Company’s credit spreads$798
 $(68) $464
$663
 $1,396
 $1,374
Resulting from change in the Company’s credit spreads(1,275) 622
 (619)83
 (596) (1,267)
After considering implication of the Company’s credit spreads$(477) $554
 $(155)$746
 $800
 $107
 


93

Components
 As of
December 31, 2012
 As of
December 31, 2011
 (in millions)
Credit derivative assets$141
 $153
Credit derivative liabilities(1,934) (1,457)
Net fair value of credit derivatives$(1,793) $(1,304)

Management believes that the trading level of AGC’s and AGM’s credit spreads is due to (a) the correlation between AGC’s and AGM’s risk profile, (b) the current risk profile of the broader financial markets, (c)and to increased demand for credit protection against AGC and AGM as the result of its financial guaranty volume, and (d)as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security markets relative to pre-financial crisis levels. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high-yield CDO, Trust-Preferredtrust preferred securities CDO ("TruPS CDOs"), and collateralized loan obligation ("CLO")CLO markets as well as continuing market concerns over the most recent2005-2007 vintages of subprime RMBS.

The net par outstanding of the Company's credit derivatives with counterparties in the financial services industry is presented below.

Net Par Outstanding by Credit Derivative Counterparty

 As of December 31,
 2012 2011
 (in millions)
Deutsche Bank AG$8,893
 $9,882
Barclays Capital8,336
 9,244
Bank of America Corporation7,042
 7,339
JPMorgan Chase & Co.5,787
 7,660
BNP Paribas Finance Inc.5,480
 5,661
Belfius Bank(1)5,196
 7,103
Morgan Stanley4,408
 5,179
Groupe BPCE4,107
 4,614
Royal Bank of Scotland Group PLC3,898
 6,079
HSBC Holdings PLC3,889
 4,546
Other13,745
 17,740
Total$70,781
 $85,047
____________________
(1)Belfius Bank was formally known as Dexia Bank Belgium as of December 31, 2011.

92



Interest Expense

For the year ended December 31, 2012,Changes in interest expense decreased duebetween 2015 and 2013 relate to the retirementtiming of debt issuance. In June 2014, the Company issued $500 million aggregate principal amount of 5.0% Senior Notes due 2024. All other long term debt of the AGUS 8.5% Senior Notes (seeU.S. holding companies was outstanding throughout all three years presented. See Note 2, Business Changes, Risks, Uncertainties16, Long-Term Debt and Accounting Developments,Credit Facilities, of the Financial Statements and Supplementary Data).Data. The following table presents the components of interest expense.

Interest Expense

 Year Ended December 31,
 2012 2011 2010
 (in millions)
AGUS: 
  
  
7.0% Senior Notes$13
 $13
 $13
8.50% Senior Notes8
 16
 16
Series A Enhanced Junior Subordinated Debentures10
 10
 10
Total AGUS31
 39
 39
AGMH: 
  
  
67/8% QUIBS
7
 7
 7
6.25% Notes16
 16
 16
5.60% Notes6
 6
 6
Junior Subordinated Debentures25
 25
 25
Total AGMH54
 54
 54
AGM: 
  
  
Notes Payable7
 6
 7
Total AGM7
 6
 7
Total$92
 $99
 $100
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Debt issued by AGUS$49
 $36
 $23
Debt issued by AGMH54
 54
 54
Notes payable by AGM(2) 2
 5
Total$101
 $92
 $82


Provision for Income TaxOther Operating Expenses and Amortization of Deferred Acquisition Costs
 
Deferred income tax assets2015 compared with 2014: Other operating expenses increased in 2015 compared to 2014 due primarily to $12 million in expenses related to the Radian Asset Acquisition and liabilities are established forexpenses related to the temporary differences betweenplanned relocation of the New York offices in the summer of 2016. The Radian Asset Acquisition expenses were comprised mainly of fees paid to financial statement carrying amounts and tax baseslegal advisors and to the independent auditor. Relocation expenses include broker fees and accelerated depreciation of assets and liabilities using enacted ratesunamortized improvements in effect for the year in which the differences are expected to reverse. Such temporary differences relate principally to unrealized gains and losses on investments and credit derivatives, FG VIE fair value adjustments, loss and LAE reserve, unearned premium reserve and tax attributes for net operating losses, alternative minimum tax (“AMT”) credits and foreign tax credits. As of December 31, 2012 and December 31, 2011, the Company had a net deferred income tax asset of $721 million and $804 million, respectively. As of December 31, 2012, the Company has foreign tax credits carried forward of $30 million which expire in 2018 through 2021 and AMT credits of $58 million which do not expire. Foreign tax credits of $22 million are from its acquisition of Assured Guaranty Municipal Holdings Inc. (“AGMH”) on July 1, 2009 (“AGMH Acquisition”), the Internal Revenue Code limits the amount of credits the Company may utilize each year.current New York office.

Provision for Income Taxes2014 compared with 2013: Other operating expenses increased primarily due to higher employee compensation and Effective Tax Rates
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Total provision (benefit) for income taxes$22
 $256
 $50
Effective tax rate16.5% 24.9% 9.4%
The Company’s effective tax rates reflectseverance expense, partially offset by the proportion of income recognized by eachreduction in the credit facility fee with Dexia (see Note 16, Long-Term Debt and Credit Facilities, of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate incomeFinancial Statements and Supplementary Data) and lower premium tax rateexpense. In addition, amortization of 35%, United Kingdom (“U.K.”) subsidiaries taxed at the U.K. blended marginal corporate tax rate of 24.5% unless subjectdeferred acquisition costs increased due primarily to U.S. tax by election or as a U.S. controlled foreign corporation, and no taxes for the Company’s Bermuda holding company and subsidiaries unless subject to

93


U.S tax by election or as a U.S. controlled foreign corporation. For periods subsequent to April 1, 2012, the U.K. corporation tax rate has been reduced to 24%, for the periods April 1, 2011 to April 1, 2012, the U.K. corporation tax rate was 26% resulting in a blended tax rate of 24.5% in 2012 and prior to April 1, 2011, the U.K. corporation rate was 28% resulting in a blended tax rate of 26.5% in 2011. Accordingly, the Company’s overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. 2012 and 2011 had disproportionate losses and income across jurisdictions, offset by tax-exempt interest, and are the primary reasons for the 16.5% and 24.9% effective tax rates, respectively.certain premium accelerations.

During the year ended December 31, 2010, a net tax benefit of $56 million was recorded by the Company due to the filing of an amended tax return which included the AGMH and Subsidiaries tax group. The amended return filed in September 2010 was for a period prior to the AGMH Acquisition and consequently, the Company no longer has a deferred tax asset related to net operating loss or AMT credits associated with the AGMH Acquisition. Instead, the Company has recorded additional deferred tax assets for loss reserves and foreign tax credits and has decreased its liability for uncertain tax positions. The event giving rise to this recognition occurred after the measurement period as defined by acquisition accounting and thus the amount is included in the year ended December 31, 2010 net income. Included in the $56 million net tax benefit was a decrease for uncertain tax positions, including interest and penalties, of $9 million.

Financial Guaranty Variable Interest Entities
 
Pursuant to GAAP,As of December 31, 2015 and 2014, the Company evaluated its power to direct the activities that most significantly impact the economic performance ofconsolidated 34 and 32 VIEs, that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. As of December 31, 2012, the Company determined that, based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the VIEs’ most significant activities, 33 VIEs required consolidation.

respectively. The table below presents the effects on reported GAAP income resulting from consolidating these FG VIEs and eliminating their related insurance and investment accounting entriesaccounts and, in total, represents a difference between GAAP reported net income and non-GAAP operating income attributable to FG VIEs. The consolidation of FG VIEs has a significant effect on net income and shareholder’sshareholders' equity due to (1) changes in fair value gains (losses) on FG VIE assets and liabilities, (2) the eliminations of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse and (3) the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE debt. Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. See “—Non-GAAP Financial Measures—Operating Income” below.below and Note 9, Consolidated Variable Interest Entities, of the Financial Statements and Supplementary Data for more details.
 

94


Effect of Consolidating FG VIEs on Net Income (Loss) 

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Net earned premiums$(153) $(75) $(48)$(21) $(32) $(60)
Net investment income(13) (8) 
(32) (11) (13)
Net realized investment gains (losses)4
 12
 
10
 (5) 2
Fair value gains (losses) on FG VIEs210
 (132) (274)38
 255
 346
Loss and LAE46
 93
 66
28
 30
 21
Total pretax effect on net income94
 (110) (256)
Bargain purchase gain2
 
 
Other income (loss)0
 (2) 
Effect on net income before tax25
 235
 296
Less: tax provision (benefit)32
 (38) (90)8
 82
 103
Total effect on net income (loss)$62
 $(72) $(166)
Effect on net income (loss)$17
 $153
 $193
 
Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. For year ended December 31, 2012,In 2015, the Company recorded a pre-tax net fair value gainsgain on consolidated FG VIEs of $210$38 million,. The majority of this gain, approximately $166 million, is the result of a R&W settlement with Deutsche Bank that closed in second quarter 2012. While prices continued to appreciate during the period which was primarily driven by price appreciation on the Company's FG VIE assets and liabilities, gainsduring the year that resulted from improvements in the second half of the year were primarily driven byunderlying collateral, as well as large principal paydowns made on the Company's FG VIEs.

In 2014, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $255 million. The primary driver of this gain, $120 million, was a result of the deconsolidation of seven VIEs. There was an additional gain of $37 million resulting from the Company exercising its option to accelerate two second lien RMBS VIEs. These two VIEs were treated as maturities during the period. The remainder of the gain for the period was driven by the price appreciation on the Company's FG VIE assets during the year resulting from improvements in the underlying collateral, as well as large principal paydowns made on the Company's FG VIEs.

In 2013, the Company recorded a pre-tax net fair value gain of consolidated FG VIEs of $346 million. The gain was primarily driven by R&W benefits received on several VIE assets as a result of settlements with various counterparties throughout the year. These R&W settlements resulted in a gain of approximately $265 million. The remainder of the gain was driven by price appreciation on the Company's FG VIE assets during the year resulting from improvements in the underlying collateral, as well as large principal paydowns made on the Company's FG VIEs.

Provision for Income Tax
Deferred income tax assets and liabilities are established for the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Such temporary differences relate principally to unrealized gains and losses on investments and credit derivatives, FG VIE fair value adjustments, loss and LAE reserve, unearned premium reserve and tax attributes for net operating losses, alternative minimum tax credits and foreign tax credits. As of December 31, 2015 and December 31, 2014, the Company had a net deferred income tax asset of $276 million and $260 million, respectively. As of December 31, 2015, the Company had alternative minimum tax credits of $55 million which do not expire.

Provision for Income Taxes and Effective Tax Rates

 Year Ended December 31,
 2015 2014 2013
 (in millions)
Total provision (benefit) for income taxes$375
 $443
 $334
Effective tax rate26.2% 28.9% 29.2%

9495


Year ended December 31, 2011 pre-tax fair value losses on consolidated FG VIEsThe Company’s effective tax rates reflect the proportion of $132 million were drivenincome recognized by the unrealized loss on consolidation of eight new VIEs, as well as two existing transactions in which the fair valueeach of the underlying collateral depreciated, whileCompany’s operating subsidiaries, with U.S. subsidiaries taxed at the priceU.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the U.K. blended marginal corporate tax rate of 20.25% unless subject to U.S. tax by election or as a U.S. controlled foreign corporation, and no taxes for the Company’s Bermuda subsidiaries unless subject to U.S tax by election or as a U.S. controlled foreign corporation. The Company’s overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. In each of the wrapped senior bonds was largely unchangedperiods presented, the portion of taxable income from each jurisdiction varied. The non-taxable book-to-tax differences were consistent as compared to the prior year. Year ended December 31, 2010 pre-tax fair value losses on consolidated FG VIEperiod, except for bargain purchase gain that was not recognized for tax purposes. See Note 12, Income Taxes, of $274 million were driven by the unrealized loss on consolidation of ten new VIEs.Financial Statements and Supplementary Data for more details.
Expected losses to be recovered in respect of consolidated FG VIEs, which were $96 million as December 31, 2012 and $107 million as of December 31, 2011, are included in the discussion of “—Losses in the Insured Portfolio.”

Non-GAAP Financial Measures
 
To reflect the key financial measures management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discusses both measures promulgateddetermined in accordance with GAAP and measures not promulgated in accordance with GAAP (“non-GAAP financial measures”). Although the financial measures identified as non-GAAP should not be considered substitutes for GAAP measures, management considers them key performance indicators and employs them as well as other factors in determining compensation. Non-GAAP financial measures, therefore, provide investors with important information about the key financial measures management utilizes in measuring its business. The primary limitation of non-GAAP financial measures is the potential lack of comparability to those of other companies, which may define non-GAAP measures differently because there is limited literature with respect to such measures. Three of the primary non-GAAP financial measures analyzed by the Company’s senior management are: operating income, adjusted book value and PVP.
 
Management and the board of directors utilize non-GAAP financial measures in evaluating the Company’s financial performance and as a basis for determining senior management incentive compensation.performance. By providing these non-GAAP financial measures, the Company gives investors, analysts and financial news reporters have access to the same information that management reviews internally. In addition, Assured Guaranty’s presentation of non-GAAP financial measures is consistent with how analysts calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and with how investors, analysts and the financial news media evaluate Assured Guaranty’s financial results.
 
The following paragraphs define each non-GAAP financial measure and describe why it is useful. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure, if available, is also presented below.
 
Operating Income
 
Reconciliation of Net Income (Loss) to Operating Income
 Year Ended December 31,
 2012 2011 2010
    
Net income (loss)$110
 $773
 $484
Less after-tax adjustments:     
Realized gains (losses) on investments(4) (20) 1
Non-credit impairment unrealized fair value gains (losses) on credit derivatives(486) 244
 13
Fair value gains (losses) on CCS(12) 23
 6
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves15
 (3) (25)
Effect of consolidating FG VIEs62
 (72) (166)
Operating income$535

$601
 $655
      
Effective tax rate on operating income25.0% 24.4% 18.7%

95


Operating income for 2012 declined due primarily to higher losses, offset in part by higher gains on commutations of previously ceded business and higher net earned premiums from accelerations which were due to negotiated terminations and refundings. The primary driver of the increase in loss expense was the loss on Greek sovereign debt exposures, offset in part by lower losses in the TruPS portfolio.
In 2011, a decrease in net earned premiums and premiums received and receivable on credit derivatives were partially offset by a decrease in loss and LAE, lower operating expenses and increased net investment income. Operating income in 2010 included a $56 million tax benefit related to the filing of an amended pre-acquisition tax return of AGMH. (See “–Results of Operations–Provision for Income Tax”)

Management believes that operating income is a useful measure because it clarifies the understanding of the underwriting results of the Company’s financial guaranty business, and also includes financing costs and net investment income, and enables investors and analysts to evaluate the Company’s financial results as compared with the consensus analyst estimates distributed publicly by financial databases. Operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:
 
1)            Elimination of the after-tax realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. Trends in the underlying profitability of the Company’s business can be more clearly identified without the fluctuating effects of these transactions.

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

96


4)            Elimination of the after-tax foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves. Long-dated receivables constitute a significant portion of the net premium receivable balance and represent the present value of future contractual or expected collections. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.
 
5)            Elimination of the effects of consolidating FG VIEs in order to present all financial guaranty contracts on a more consistent basis of accounting, whether or not GAAP requires consolidation. GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company even though the Company does not own such VIEs.

Reconciliation of Net Income (Loss)
to Operating Income
 Year Ended December 31,
 2015 2014 2013
 (dollars in millions)
Net income (loss)$1,056
 $1,088
 $808
Less after-tax adjustments:     
Realized gains (losses) on investments(25) (34) 40
Non-credit impairment unrealized fair value gains (losses) on credit derivatives358
 500
 (40)
Fair value gains (losses) on CCS17
 (7) 7
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves(10) (15) (1)
Effect of consolidating FG VIEs17
 153
 193
Operating income$699
 $491
 $609
      
Effective tax rate on operating income24.5% 29.0% 26.7%

Adjusted Book Value and Operating Shareholders’ Equity
 
Management also uses adjusted book value to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value per share is one of the key financial measures used in determining the amount of certain long term compensation to management and employees and used by rating agencies and investors.
 

96


Reconciliation of Shareholders’ Equity
to Adjusted Book Value
     
 As of December 31, 2012 As of December 31, 2011
 Total Per Share Total Per Share
 
(dollars in millions, except
per share amounts)
Shareholders’ equity$4,994
 $25.74
 $4,652
 $25.52
Less after-tax adjustments:     
  
Effect of consolidating FG VIEs(348) (1.79) (405) (2.22)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives(988) (5.09) (498) (2.74)
Fair value gains (losses) on CCS23
 0.12
 35
 0.19
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect477
 2.45
 319
 1.75
Operating shareholders’ equity5,830
 30.05
 5,201
 28.54
After-tax adjustments:   
  
  
Less: Deferred acquisition costs165
 0.85
 174
 0.95
Plus: Net present value of estimated net future credit derivative revenue220
 1.14
 302
 1.66
Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed3,266
 16.83
 3,658
 20.07
Adjusted book value$9,151
 $47.17
 $8,987
 $49.32
As of December 31, 2012, shareholders’ equity increased to $5.0 billion from December 31, 2011 due primarily to the issuance of common shares, unrealized gains on the investment portfolio and net income, offset in part by share repurchases and dividends. Adjusted book value increased slightly, mainly due to the issuance of common shares, new business, and commutations of previously ceded business, partially offset by economic loss development. Shares outstanding increased by 11.8 million primarily to the issuance of 13.4 million common shares, partially offset by the repurchase of 2.1 million common shares in 2012.
Management believes that operating shareholders’ equity is a useful measure because it presents the equity of the Company with all financial guaranty contracts accounted for on a more consistent basis and excludes fair value adjustments that are not expected to result in economic gain or loss. Many investors, analysts and financial news reporters use operating shareholders’ equity as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buyingbuy or sellingsell AGL’s common shares. Many of the Company’s fixed income investors also use operating shareholders’ equity to evaluate the Company’s capital adequacy. Operating shareholders’ equity is the basis of the calculation of adjusted book value (see below). Operating shareholders’ equity is defined as shareholders’ equity attributable to Assured Guaranty Ltd., as reported under GAAP, adjusted for the following:
 
1)            Elimination of the effects of consolidating FG VIEs in order to present all financial guaranty contracts on a more consistent basis of accounting, whether or not GAAP requires consolidation. GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company even though the Company does not own such VIEs.
 
2)            Elimination of the after-tax non-credit impairment unrealized fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.
 

97


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

97


 
4)            Elimination of the after-tax unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss.
 
Management believes that adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company’s in-force premiums and revenues in addition to operating shareholders’ equity. The premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. Many investors, analysts and financial news reporters use adjusted book value to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Adjusted book value is operating shareholders’ equity, as defined above, further adjusted for the following:
 
1)            Elimination of after-tax deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.
 
2)            Addition of the after-tax net present value of estimated net future credit derivative revenue. See below.
 
3)            Addition of the after-tax value of the unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the expected future net earned premiums, net of expected losses to be expensed, which are not reflected in GAAP equity.

Net Present Value of Estimated Net Future Credit Derivative Revenue

Management believes that this amount is a useful measure because it enables an evaluation of the value of future estimated credit derivative revenue. There is no corresponding GAAP financial measure. This amount represents the present value of estimated future revenue from the Company’s credit derivative in-force book of business, net of reinsurance, ceding commissions and premium taxes, for contracts without expected economic losses, and is discounted at 6%. Estimated net future credit derivative revenue may change from period to period due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.


98


Reconciliation of Shareholders’ Equity
to Adjusted Book Value
 As of December 31, 2015 As of December 31, 2014
 Total Per Share Total Per Share
 
(dollars in millions, except
per share amounts)
Shareholders’ equity$6,063
 $43.96
 $5,758
 $36.37
Less after-tax adjustments:       
Effect of consolidating FG VIEs(23) (0.16) (44) (0.28)
Non-credit impairment unrealized fair value gains (losses) on credit derivatives(160) (1.16) (527) (3.33)
Fair value gains (losses) on CCS40
 0.29
 23
 0.14
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect260
 1.88
 373
 2.36
Operating shareholders’ equity5,946
 43.11
 5,933
 37.48
After-tax adjustments:       
Less: Deferred acquisition costs147
 1.06
 156
 0.99
Plus: Net present value of estimated net future credit derivative revenue116
 0.84
 109
 0.69
Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed2,524
 18.29
 2,609
 16.48
Adjusted book value$8,439
 $61.18
 $8,495
 $53.66

Shareholder's equity and operating shareholders' equity increased since December 31, 2014 due mainly to the Radian Asset Acquisition and positive income, partially offset by share repurchases and dividends. Adjusted book value decreased due mainly to share repurchases and dividends. Operating shareholders' equity per share and adjusted book value per share benefited from the repurchase of 21 million common shares in 2015.


99


PVP or Present Value of New Business Production
Reconciliation of PVP to Gross Written Premiums
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Total PVP$210
 $243
 $363
Less: Financial guaranty installment premium PVP45
 69
 33
Total: Financial guaranty upfront gross written premiums165
 174
 330
Plus: Financial guaranty installment gross written premiums88
 (47) (108)
Total gross written premiums$253
 $127
 $222

Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as premium supplements and additional installment premium on existing contracts as to which the issuer has the right to call the insured obligation but has not exercised such right, whether in insurance or credit derivative contract form, which GAAP gross premiums written and the net credit derivative premiums received and receivable portion of net realized gains and other settlementsettlements on credit derivatives (“Credit Derivative Revenues”) do not adequately measure. PVP in respect of financial guaranty contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums, in each case, discounted at 6%. For purposes of the PVP calculation, management discounts estimated future installment premiums on insurance contracts at 6%, while under GAAP, these amounts are discounted at a risk free rate. Additionally, under GAAP, management records future

98


installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual future net earned or written premiums and Credit Derivative Revenues may differ from PVP due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation.

Reconciliation of PVP to Gross Written Premiums
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Total PVP$179
 $168
 $141
Less: PVP of non-financial guaranty insurance7
 
 
PVP of financial guaranty insurance172
 168
 141
Less: Financial guaranty installment premium PVP46
 42
 26
Total: Financial guaranty upfront gross written premiums126
 126
 115
Plus: Installment gross written premiums and other GAAP adjustments55
 (22) 8
Total gross written premiums$181
 $104
 $123

Insured Portfolio
 
The following tables present the insured portfolio by asset class net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or VIE consolidation). 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 not insurance exposures.


99100


Net Par Outstanding and Average Internal Rating by Asset ClassSector

 As of December 31, 2012 As of December 31, 2011 As of December 31, 2015 As of December 31, 2014
Sector 
Net Par
Outstanding
 
Avg.
Rating
 
Net Par
Outstanding
 
Avg.
Rating
 
Net Par
Outstanding
 
Avg.
Rating
 
Net Par
Outstanding
 
Avg.
Rating
 (dollars in millions) (dollars in millions)
Public finance:  
    
      
  
U.S.:  
    
      
  
General obligation $169,985
 A+ $173,061
 A+ $126,255
 A $140,276
 A
Tax backed 73,787
 A+ 78,006
 A+ 58,062
 A 62,525
 A
Municipal utilities 62,116
 A 65,204
 A 45,936
 A 52,090
 A
Transportation 33,799
 A 35,396
 A 23,454
 A 27,823
 A
Healthcare 17,838
 A 19,495
 A 15,006
 A 14,848
 A
Higher education 15,770
 A+ 15,677
 A+ 11,936
 A 13,099
 A
Infrastructure finance 4,993
 BBB 4,181
 BBB
Housing 4,633
 AA- 5,696
 AA- 2,037
 A 2,779
 A+
Infrastructure finance 4,210
 BBB 4,110
 BBB
Investor-owned utilities 1,069
 A- 1,124
 A- 916
 A- 944
 A-
Other public finance—U.S. 4,760
 A 5,304
 A-
Other public finance 3,271
 A 3,558
 A
Total public finance—U.S. 387,967
 A 403,073
 A+ 291,866
 A 322,123
 A
Non-U.S.:  
  
      
  
Infrastructure finance 15,812
 BBB 15,405
 BBB 12,728
 BBB 12,808
 BBB
Regulated utilities 12,494
 BBB+ 13,260
 BBB+ 10,048
 BBB+ 10,914
 BBB+
Pooled infrastructure 3,200
 AA- 3,130
 AA- 1,879
 AA 2,420
 AA
Other public finance—non-U.S. 6,034
 A 7,251
 A+
Other public finance 4,922
 A 5,217
 A
Total public finance—non-U.S. 37,540
 BBB+ 39,046
 BBB+ 29,577
 BBB+ 31,359
 BBB+
Total public finance 425,507
 A 442,119
 A 321,443
 A 353,482
 A
Structured finance:  
  
      
  
U.S.:  
  
      
  
Pooled corporate obligations 41,886
 AAA 51,520
 AAA 16,008
 AAA 20,646
 AAA
RMBS 17,827
 BB+ 21,567
 BB+ 7,067
 BBB- 9,417
 BBB-
Insurance securitizations 3,000
 A+ 3,433
 A-
Consumer receivables 2,099
 A- 2,099
 BBB+
Financial products 1,906
 AA- 2,276
 AA-
CMBS and other commercial real estate related exposures 4,247
 AAA 4,774
 AAA 533
 AAA 1,957
 AAA
Financial products 3,653
 AA- 5,217
 AA-
Consumer receivables 2,369
 BBB+ 4,326
 AA-
Insurance securitizations 2,190
 A+ 1,893
 A+
Commercial receivables 1,025
 BBB+ 1,214
 BBB 427
 BBB+ 560
 BBB+
Structured credit 319
 CCC+ 424
 B-
Other structured finance—U.S. 1,179
 BBB+ 1,299
 A-
Other structured finance 730
 AA- 783
 AA-
Total structured finance—U.S. 74,695
 AA- 92,234
 AA- 31,770
 AA- 41,171
 AA-
Non-U.S.:  
  
      
  
Pooled corporate obligations 14,813
 AAA 17,731
 AAA 3,645
 AA 6,604
 AA+
Commercial receivables 1,463
 A- 1,865
 A- 600
 BBB+ 944
 BBB
RMBS 1,424
 AA- 1,598
 AA 492
 BBB 794
 A
Insurance securitizations 923
 CCC- 964
 CCC-
Structured credit 591
 BBB 979
 BBB
CMBS and other commercial real estate related exposures 100
 AAA 180
 AAA
Other structured finance—non-U.S. 377
 Super Senior 378
 Super Senior
Other structured finance 621
 AA- 734
 AA
Total structured finance—non-U.S. 19,691
 AA 23,695
 AA 5,358
 AA- 9,076
 AA
Total structured finance 94,386
 AA- 115,929
 AA- 37,128
 AA- 50,247
 AA-
Total net par outstanding $519,893
 A+ $558,048
 A+ $358,571
 A $403,729
 A



100101


The December 31, 2012 and 2011 amounts above include $48.1 billion and $60.7 billion, respectively, of AGM structured finance net par outstanding. AGM has not insured a mortgage-backed transaction since January 2008 and announced its complete withdrawal from the structured finance market in August 2008. The structured finance transactions that remain in AGM’s insured portfolio are of double-A average underlying credit quality, according to the Company’s internal rating system. Management expects AGM’s structured finance portfolio to run-off rapidly: 24% by year-end 2013, 65% by year end 2015, and 84% by year-end 2017.
The following tables set forth the Company’s net financial guaranty portfolio by internal rating.
 
Financial Guaranty Portfolio by Internal Rating
As of December 31, 20122015

 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 Total 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
 % Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 %
 (dollars in millions) (dollars in millions)
Super senior $
 % $1,130
 3.0% $13,572
 18.2% $4,874
 24.7% $19,576
 3.8%
AAA 4,502
 1.2
 576
 1.5
 28,615
 38.3
 8,295
 42.1
 41,988
 8.1
 $3,053
 1.1% $709
 2.4% $14,366
 45.2% $2,709
 50.6% $20,837
 5.8%
AA 124,525
 32.1
 875
 2.3
 9,589
 12.8
 722
 3.7
 135,711
 26.1
 69,274
 23.7
 2,017
 6.8
 7,934
 25.0
 177
 3.3
 79,402
 22.1
A 210,124
 54.1
 9,781
 26.1
 4,670
 6.2
 1,409
 7.2
 225,984
 43.4
 157,440
 53.9
 6,765
 22.9
 2,486
 7.8
 555
 10.3
 167,246
 46.7
BBB 44,213
 11.4
 22,885
 61.0
 3,717
 5.0
 2,427
 12.3
 73,242
 14.1
 54,315
 18.6
 18,708
 63.2
 1,515
 4.8
 1,365
 25.5
 75,903
 21.2
BIG 4,603
 1.2
 2,293
 6.1
 14,532
 19.5
 1,964
 10.0
 23,392
 4.5
 7,784
 2.7
 1,378
 4.7
 5,469
 17.2
 552
 10.3
 15,183
 4.2
Total net par outstanding $387,967
 100.0% $37,540
 100.0% $74,695
 100.0% $19,691
 100.0% $519,893
 100.0%
Total net par outstanding (1)(2) $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.

(2)The December 31, 2015 amounts include $10.9 billion of net par acquired from Radian Asset.


Financial Guaranty Portfolio by Internal Rating
As of December 31, 20112014

 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 Total 
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
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 %
 (dollars in millions) (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
 $4,082
 1.3% $615
 2.0% $20,037
 48.7% $5,409
 59.6% $30,143
 7.5%
AA 139,693
 34.6
 1,056
 2.7
 12,575
 13.6
 976
 4.1
 154,300
 27.7
 90,464
 28.1
 2,785
 8.9
 8,213
 19.9
 503
 5.5
 101,965
 25.3
A 213,164
 52.9
 11,744
 30.1
 4,115
 4.5
 1,518
 6.4
 230,541
 41.3
 176,298
 54.7
 7,192
 22.9
 2,940
 7.1
 445
 4.9
 186,875
 46.3
BBB 40,635
 10.1
 21,399
 54.8
 5,044
 5.5
 3,391
 14.3
 70,469
 12.6
 43,429
 13.5
 19,363
 61.7
 1,795
 4.4
 1,912
 21.1
 66,499
 16.4
BIG 4,507
 1.1
 2,328
 6.0
 18,008
 19.5
 1,919
 8.1
 26,762
 4.8
 7,850
 2.4
 1,404
 4.5
 8,186
 19.9
 807
 8.9
 18,247
 4.5
Total net par outstanding $403,073
 100.0% $39,046
 100.0% $92,234
 100.0% $23,695
 100.0% $558,048
 100.0%
Total net par outstanding (1) $322,123
 100.0% $31,359
 100.0% $41,171
 100.0% $9,076
 100.0% $403,729
 100.0%
_____________________
(1)Excludes $1.3 billion of loss mitigation securities insured and held by the Company as of December 31, 2014, which are primarily BIG.
 

Beginning in the first quarter 2012, the Company decided to classify those portions
102


Securities purchased for loss mitigation purposes represented $1,133 million and $1,293 million of gross par outstanding as of December 31, 2012 and 2011, respectively. In addition, under the terms of certain credit derivative contracts, the Company has obtained the obligations referenced in such contracts and recorded it in invested assets in the consolidated balance sheets. Such amounts totaled $220 million and $222 million in gross par outstanding as of December 31, 2012 and 2011, respectively.

The tables below show the Company's ten largest U.S. public finance, and U.S. structured finance and non-U.S. exposures direct and reinsurance exposures by revenue source, (stated as a percentage of the Company's total U.S.excluding related authorities and public finance, U.S. structured finance and non-U.S. net par outstanding)corporations, as of December 31, 2012:2015:

101


Ten Largest U.S. Public Finance Exposures
by Revenue Source
As of December 31, 20122015

 Net Par Outstanding Percent of Total U.S. Public Finance Net Par Outstanding Rating
 (dollars in millions)
New Jersey, State of$4,275
 1.1% A+
California, State of3,452
 0.9% BBB+
New York, City of New York3,241
 0.8% AA-
Massachusetts, Commonwealth of2,732
 0.7% AA
Chicago, City of Illinois2,726
 0.7% A+
New York, State of2,563
 0.7% A+
Miami-Dade County Florida Aviation Authority - Miami International Airport2,380
 0.6% A
Los Angeles California Unified School District2,263
 0.6% AA-
Port Authority of New York and New Jersey2,195
 0.6% AA-
Puerto Rico, Commonwealth of2,175
 0.6% BBB-
Total of top ten U.S. public finance exposures$28,002
 7.3%  
 Net Par Outstanding Percent of Total U.S. Public Finance Net Par Outstanding Rating
 (dollars in millions)
New Jersey (State of)$4,692
 1.6% BBB+
California (State of)2,400
 0.8
 A
Illinois (State of)2,136
 0.7
 BBB+
New York (City of) New York2,082
 0.7
 AA-
Chicago (City of) Illinois1,960
 0.7
 BBB+
New York (State of)1,916
 0.7
 A+
Skyway Concession Company LLC (1)1,842
 0.6
 BBB-
Puerto Rico General Obligation, Appropriations and Guarantees of the Commonwealth1,821
 0.6
 CCC
Massachusetts (Commonwealth of)1,780
 0.6
 AA
Los Angeles, California Unified School District1,615
 0.6
 AA-
Total of top ten U.S. public finance exposures$22,244
 7.6%  
_____________________
(1)On February 25, 2016, in connection with the sale of the membership interests in SCC, the various SCC obligations insured by the Company were retired. See Note 5, Expected Loss to be Paid for additional information.


Ten Largest U.S. Structured Finance Exposures
As of December 31, 20122015

Net Par Outstanding Percent of Total U.S. Structured Finance Net Par Outstanding RatingNet Par Outstanding Percent of Total U.S. Structured Finance Net Par Outstanding Rating
(dollars in millions)(dollars in millions)
Fortress Credit Opportunities I, LP.$1,328
 1.8% AA
Stone Tower Credit Funding1,254
 1.7% AAA$835
 2.6% AAA
Synthetic Investment Grade Pooled Corporate CDO1,188
 1.6% AAA
Synthetic High Yield Pooled Corporate CDO978
 1.3% AAA
Private US Insurance Securitization800
 2.5
 AA
Synthetic Investment Grade Pooled Corporate CDO767
 1.0% Super Senior767
 2.4
 AAA
Synthetic Investment Grade Pooled Corporate CDO763
 1.0% Super Senior744
 2.3
 AAA
Fortress Credit Opportunities I, LP.715
 2.3
 AA
Synthetic Investment Grade Pooled Corporate CDO745
 1.0% Super Senior655
 2.1
 AAA
Synthetic High Yield Pooled Corporate CDO734
 1.0% AAA
Wachovia Super Senior CDO 2007-1563
 1.8
 AAA
Synthetic Investment Grade Pooled Corporate CDO726
 1.0% Super Senior516
 1.6
 AAA
Mizuho II Synthetic CDO718
 1.0% A
Private US Insurance Securitization500
 1.6
 AA
Shenandoah Trust Capital I Term Securities484
 1.5
 A+
Total of top ten U.S. structured finance exposures$9,201
 12.4% $6,579
 20.7% 



102103


Ten Largest Non-U.S. Exposures
As of December 31, 20122015

Net Par Outstanding Percent of Total Non-U.S. Net Par Outstanding RatingCountry Net Par Outstanding Percent of Total Non-U.S. Net Par Outstanding Rating
(dollars in millions) (dollars in millions)
Quebec Province$2,338
 4.1% A+Canada $2,089
 6.0% A+
Sydney Airport Finance Company1,566
 2.7% BBB
Thames Water Utility Finance PLC1,558
 2.7% A-United Kingdom 1,167
 3.3
 A-
Channel Link Enterprises Finance PLC963
 1.7% BBB
Societe des Autoroutes du Nord et de l'Est de France S.A.France 960
 2.7
 BBB+
Channel Link Enterprises Finance PLC (Eurotunnel)France, United Kingdom 907
 2.6
 BBB
Capital Hospitals (Issuer) PLCUnited Kingdom 803
 2.3
 BBB-
Southern Water Services LimitedUnited Kingdom 729
 2.1
 A-
International Infrastructure PoolUnited Kingdom 671
 1.9
 AA
Southern Gas Networks PLC867
 1.5% BBBUnited Kingdom 661
 1.9
 BBB
Fortress Credit Investments I778
 1.4% AAA
Capital Hospitals (Issuer) PLC777
 1.4% BBB-
Societe des Autoroutes du Nord et de l'Est de France S.A.755
 1.3% BBB+
Campania Region - Healthcare receivable738
 1.3% BBB-
Southern Water Services Limited707
 1.2% A-
Verbund - Lease and Sublease of Hydro-Electric equipmentAustria 644
 1.8
 AAA
South Lanarkshire SchoolsScotland 631
 1.8
 BBB-
Total of top ten non-U.S. exposures$11,047
 19.3%  $9,262
 26.4% 



103104


Financial Guaranty Portfolio by Geographic Area

The following table sets forth the geographic distribution of the Company's financial guaranty portfolio.

Geographic Distribution
of Financial Guaranty Portfolio
asAs of December 31, 20122015

Number of Risks Net Par Outstanding Percent of Total Net Par OutstandingNumber of Risks Net Par Outstanding Percent of Total Net Par Outstanding
  (dollars in millions)  (dollars in millions)
U.S.:          
U.S. Public Finance:          
California1,532
 $57,302
 11.0%1,514
 $47,731
 13.3%
Texas1,307
 23,891
 6.7
Pennsylvania944
 23,655
 6.6
New York1,051
 31,402
 6.0
961
 22,513
 6.3
Pennsylvania1,133
 31,173
 6.0
Texas1,273
 29,942
 5.8
Illinois933
 25,297
 4.9
816
 22,220
 6.2
Florida446
 24,111
 4.6
369
 16,595
 4.6
New Jersey704
 15,999
 3.1
553
 13,605
 3.8
Michigan745
 15,516
 3.0
577
 10,898
 3.0
Georgia205
 10,001
 1.9
183
 6,991
 1.9
Ohio576
 9,634
 1.9
464
 6,753
 1.9
Other states4,889
 137,590
 26.4
Other states and U.S. territories3,927
 97,014
 27.0
Total U.S. public finance13,487
 387,967
 74.6
11,615
 291,866
 81.3
U.S. Structured finance (multiple states)1,080
 74,695
 14.4
723
 31,770
 8.9
Total U.S.14,567
 462,662
 89.0
12,338
 323,636
 90.2
Non-U.S.:          
United Kingdom124
 23,624
 4.5
101
 17,565
 4.9
Australia33
 7,558
 1.5
22
 3,349
 0.9
Canada11
 4,160
 0.8
10
 3,099
 0.9
France23
 3,914
 0.8
16
 2,609
 0.7
Italy12
 2,347
 0.5
8
 1,296
 0.4
Other116
 15,628
 2.9
72
 7,017
 2.0
Total non-U.S.319
 57,231
 11.0
229
 34,935
 9.8
Total14,886
 $519,893
 100.0%12,567
 $358,571
 100.0%


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 December 31, 2015, all of which are rated BIG. In 2015, the Company's Puerto Rico exposures increased due to (1) net par acquired in the Radian Asset Acquisition, $385 million of which was outstanding as of December 31, 2015, and (2) a commutation of previously ceded Puerto Rico exposures.

Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits, until recently, were covered primarily with the net proceeds of bond issuances, interim financings provided by GDB and, in some cases, one-time revenue measures or expense adjustment measures. In addition to high debt levels, Puerto Rico faces a challenging economic environment.


105


In June 2014, the Puerto Rico legislature passed 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 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 have been scheduled for 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 recent 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 June 29, 2015 a report commissioned by the Commonwealth and authored by former World Bank Chief Economist and former Deputy Director of the International Monetary Fund Dr. Anne Krueger and economists Dr. Ranjit Teja and Dr. Andrew Wolfe and calling for debt restructuring of all Puerto Rico bonds was released ("Krueger Report").

Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of the GDB, failed to make most of an approximately $58 million Debt Service payment on August 3, 2015 and to make subsequent Debt Service payments because the Commonwealth’s legislature did not appropriate funds for payment.  The Company does not insure any obligations of the PFC. On January 1, 2016, 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 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 projected that the Commonwealth would face a cumulative financing gap of $27.8 billion from fiscal year 2016 to fiscal year 2020 without corrective action. Various stakeholders and analysts have publicly questioned the accuracy of the $27.8 billion gap projected by the Working Group. The FEGP recommended economic development, structural, fiscal and institutional reform measures that it projects would reduce that gap to $14.0 billion. The Working Group asserts that the Commonwealth’s debt, including debt with a constitutional priority, is not sustainable. 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. The FEGP does not have the force of law and implementation of its recommendations would require actions by the governments of the Commonwealth and of the United States as well as the cooperation and agreement of various creditors.
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 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. The Puerto Rico credits insured by the Company impacted by the Clawback Orders are shown in the table “Puerto Rico Net Par Outstanding” below.

On January 18, 2016, the Working Group published an updated FEGP that projected the cumulative financing gap beyond 2020 would continue to increase to $63.4 billion without corrective action. The Working Group followed that up with the publication on February 1, 2016, of a proposal for a voluntary exchange of $49.2 billion of tax supported debt into $26.5 billion of new mandatorily payable base bonds and $22.7 billion of growth bonds.
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. U.S. House of Representatives Speaker Paul Ryan has asked that a legislative response be presented to the House of Representatives by the end of March 2016. 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.


106


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 December 31, 2015, the Company had $744 million insured net par outstanding of PREPA obligations. In August 2014, PREPA entered into forbearance agreements with the GDB, its bank lenders, and bondholders and financial guaranty insurers (including AGM and AGC) that hold or guarantee more than 60% of PREPA's outstanding bonds, in order to address its near-term liquidity issues. Creditors, including AGM and AGC, agreed not to exercise available rights and remedies until March 31, 2015, and the bank lenders agreed to extend the maturity of two revolving lines of credit to the same date. PREPA agreed it would continue to make principal and interest payments on its outstanding bonds, and interest payments on its lines of credit. It also agreed it would develop a five year business plan and a recovery program in respect of its operations. Subsequently, most of the parties extended these forbearance agreements several times.
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 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 purportedly 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 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. PREPA, during the pendency of the agreements, has suspended deposits into its debt service fund.

PRHTA

As of December 31, 2015, the Company had $909 million insured net par outstanding of PRHTA (Transportation revenue) bonds and $370 million net par of PRHTA (Highway revenue) bonds. In March 2015, legislation was passed in the Commonwealth that would have supported proposals involving the GDB and PRIFA and would have, among other things, strengthened PRHTA. The proposals involved the issuance of up to $2.95 billion of bonds by PRIFA, but the Company believes the Commonwealth is no longer pursuing those proposals. In addition, PRHTA is one of the public corporations affected by the Clawback Orders.

Municipal Finance Agency
As of December 31, 2015, the Company had $387 million net par outstanding of bonds issued by the Puerto Rico Municipal Finance Agency (“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.

107


Net Exposure to Puerto Rico
As of December 31, 2015

  Net Par Outstanding    
  AGM Consolidated AGC Consolidated AG Re (1) Consolidated Eliminations (2) Total Net Par Outstanding (4) Gross Par Outstanding Internal Rating
  (in millions)  
Exposures Previously Subject to the Voided Recovery Act(3):              
PRHTA (Transportation revenue) (5) $289
 $475
 $225
 $(80) $909
 $936
 CCC-
PREPA 431
 74
 239
 
 744
 902
 CC
Puerto Rico Aqueduct and Sewer Authority 
 296
 92
 
 388
 388
 CCC
PRHTA (Highway revenue) (5) 219
 101
 50
 
 370
 575
 CCC
Puerto Rico Convention Center District Authority ("PRCCDA") (5) 
 82
 82
 
 164
 164
 CCC-
Total 939
 1,028
 688
 (80) 2,575
 2,965
  
               
Exposures Not Previously Subject to the Voided Recovery Act:              
Commonwealth of Puerto Rico - General Obligation Bonds 720
 415
 480
 
 1,615
 1,737
 CCC
MFA 206
 65
 116
 
 387
 571
 CCC-
Puerto Rico Sales Tax Financing Corporation 261
 
 8
 
 269
 269
 CCC+
Puerto Rico Public Buildings Authority 14
 137
 37
 
 188
 194
 CCC
PRIFA (5) (6) 
 10
 8
 
 18
 18
 CCC-
University of Puerto Rico 
 1
 
 
 1
 1
 CCC-
Total 1,201
 628
 649
 
 2,478
 2,790
  
Total net exposure to Puerto Rico $2,140
 $1,656
 $1,337
 $(80) $5,053
 $5,755
  

108


 ___________________
(1)"AG Re" means Assured Guaranty Re Ltd.
(2)Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary.
(3)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.
(4)Includes exposure to capital appreciation bonds with a current aggregate net par outstanding of $32 million and a fully accreted net par at maturity of $66 million. Of these amounts, current net par of $17 million and fully accreted net par at maturity of $50 million relate to the Puerto Rico Sales Tax Financing Corporation, current net par of $10 million and fully accreted net par at maturity of $11 million relate to the PRHTA, and current net par of $4 million and fully accreted net par at maturity of $5 million relate to the Commonwealth General Obligation Bonds.
(5)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.  
(6)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.




109


The following table shows the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. 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 pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.
Amortization Schedule
of Net Par Outstanding of Puerto Rico
As of December 31, 2015

 Scheduled Net Par Amortization
 20162017201820192020202120222023202420252026 -20302031 -20352036 -20402041 -20452046 -2047Total
 (in millions)
Exposures Previously Subject to the Voided Recovery Act:                
PRHTA (Transportation revenue)$32
$36
$42
$28
$23
$18
$19
$21
$1
$26
$151
$227
$240
$45
$
$909
PREPA20
5
4
25
42
22
22
81
78
52
309
84
0


744
Puerto Rico Aqueduct and Sewer Authority15







2
25
84

2
92
168
388
PRHTA (Highway revenue)20
10
10
21
22
26
6
8
8
8
27
167
37


370
PRCCDA11









19
105
29


164
Total98
51
56
74
87
66
47
110
89
111
590
583
308
137
168
2,575
                 
Exposures Not Previously Subject to the Voided Recovery Act:                
Commonwealth of Puerto Rico - General Obligation Bonds142
95
75
82
137
16
37
15
73
68
254
475
146


1,615
MFA55
47
47
44
37
33
33
16
12
11
52




387
Puerto Rico Sales Tax Financing Corporation(1)(1)(1)(1)(1)(2)(2)1
0
(2)(6)32
98
155

269
Puerto Rico Public Buildings Authority8
30

5
10
12
0
7
0
8
52
40
16


188
PRIFA

2




2




3
11

18
University of Puerto Rico0
0
0
0
0
0
0
0
0
0
0
1



1
Total204
171
123
130
183
59
68
41
85
85
352
548
263
166

2,478
Total net par for Puerto Rico$302
$222
$179
$204
$270
$125
$115
$151
$174
$196
$942
$1,131
$571
$303
$168
$5,053





110


Amortization Schedule
of Net Debt Service Outstanding of Puerto Rico
As of December 31, 2015

 Scheduled Net Debt Service Amortization
 20162017201820192020202120222023202420252026 -20302031 -20352036 -20402041 -20452046 -2047Total
 (in millions)
Exposures Previously Subject to the Voided Recovery Act:                
PRHTA (Transportation revenue)$80
$82
$86
$69
$63
$57
$57
$58
$37
$61
$309
$348
$288
$47
$
$1,642
PREPA55
38
37
58
74
52
50
109
102
72
366
92
0


1,105
Puerto Rico Aqueduct and Sewer Authority35
19
19
19
19
19
19
19
21
45
160
68
70
160
181
873
PRHTA (Highway revenue)40
29
29
39
39
42
20
21
21
21
87
203
39


630
PRCCDA19
7
7
7
7
7
7
7
7
7
51
127
30


290
Total229
175
178
192
202
177
153
214
188
206
973
838
427
207
181
4,540
                 
Exposures Not Previously Subject to the Voided Recovery Act:                
Commonwealth of Puerto Rico - General Obligation Bonds226
172
146
150
201
72
93
69
127
116
458
606
161


2,597
MFA74
64
62
56
47
40
39
21
16
15
57




491
Puerto Rico Sales Tax Financing Corporation12
13
13
13
13
13
13
16
15
12
68
103
164
170

638
Puerto Rico Public Buildings Authority18
39
8
12
18
20
6
14
6
14
72
49
17


293
PRIFA0
1
3
1
1
1
1
3
0
0
4
4
6
12

37
University of Puerto Rico0
0
0
0
0
0
0
0
0
0
0
1



1
Total330
289
232
232
280
146
152
123
164
157
659
763
348
182

4,057
Total net debt service for Puerto Rico$559
$464
$410
$424
$482
$323
$305
$337
$352
$363
$1,632
$1,601
$775
$389
$181
$8,597


111


Financial Guaranty Portfolio by Issue Size

The Company seeks broad coverage of the market by insuring and reinsuring small and large issues alike. The following table sets forth the distribution of the Company's portfolio by original size of the Company's exposure.

Public Finance Portfolio by Issue Size
As of December 31, 2015

Original Par Amount Per Issue 
Number of
Issues
 
Net Par
Outstanding
 
% of Public
Finance
Net Par
Outstanding
 (dollars in millions)
Less than $10 million16,116 $44,672
 13.9%
$10 through $50 million5,746 97,227
 30.2
$50 through $100 million1,097 56,787
 17.7
$100 million to $200 million477 50,028
 15.6
$200 million or greater283 72,729
 22.6
Total23,719 $321,443
 100.0%

Structured Finance Portfolio by Issue Size
As of December 31, 2015

Original Par Amount Per Issue 
Number of
Issues
 
Net Par
Outstanding
 
% of Structured
Finance
Net Par
Outstanding
 (dollars in millions)
Less than $10 million217 $115
 0.3%
$10 through $50 million291 2,907
 7.8
$50 through $100 million105 3,313
 8.9
$100 million to $200 million157 8,069
 21.8
$200 million or greater169 22,724
 61.2
Total939 $37,128
 100.0%

Exposure to Residential Mortgage-Backed Securities
The tables below provide information on the risk ratings and certain other risk characteristics of the Company’s financial guaranty insurance and credit derivative RMBS exposures as of December 31, 2015. U.S. RMBS exposures represent 2% of the total net par outstanding, and BIG U.S. RMBS represent 26% of total BIG net par outstanding. See Note 5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, for a discussion of expected losses to be paid on U.S. RMBS exposures.

Distribution of U.S. RMBS by Rating and Type of Exposure as of December 31, 2015
Ratings: 
Prime
First Lien
 
Alt-A
First Lien
 
Option
ARMs
 
Subprime
First Lien
 
Second
Lien
 Total Net Par Outstanding
  (dollars in millions)
AAA $9
 $220
 $16
 $1,536
 $0
 $1,781
AA 95
 325
 91
 482
 108
 1,102
A 1
 
 4
 41
 1
 47
BBB 56
 15
 
 94
 0
 165
BIG 284
 793
 141
 1,304
 1,452
 3,973
Total exposures $445
 $1,353
 $252
 $3,457
 $1,560
 $7,067


112


Distribution of U.S. RMBS by Year Insured and Type of Exposure as of December 31, 2015
Year
insured:
 
Prime
First Lien
 
Alt-A
First Lien
 
Option
ARMs
 
Subprime
First Lien
 
Second
Lien
 Total Net Par Outstanding
  (in millions)
2004 and prior $55
 $56
 $18
 $1,069
 $108
 $1,305
2005 127
 450
 36
 182
 345
 1,140
2006 85
 196
 35
 724
 438
 1,478
2007 177
 651
 163
 1,414
 669
 3,075
2008 
 
 
 68
 
 68
Total exposures $445
 $1,353
 $252
 $3,457
 $1,560
 $7,067

Exposures by Reinsurer
Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and as a result have been downgraded by the rating agencies. In addition, state insurance regulators have intervened with respect to some of these insurers.

In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table below are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves, all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers in the table below post collateral on terms negotiated with the Company. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of December 31, 2015 was approximately $470 million.

 Assumed par outstanding represents the amount of par assumed by the Company from other monolines. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.
In addition to assumed and ceded reinsurance arrangements, the Company may also have exposure to financial guaranty insurers in "second-to-pay" transactions, where the Company provides insurance on an obligation that is already insured by another financial guarantor. In that case, if the underlying obligor and the financial guarantor both fail to pay an amount scheduled to be paid, the Company would be obligated to pay. The Company underwrites these transactions based on the underlying obligation, without regard to the financial obligor. See Note 13, Reinsurance and Other Monoline Exposures, of the Financial Statements and Supplementary Data.

113


Exposure by Reinsurer

  Ratings at Par Outstanding (1)
  February 24, 2016 As of December 31, 2015
Reinsurer Moody’s
Reinsurer
Rating
 S&P
Reinsurer
Rating
 Ceded Par
Outstanding
 Second-to-
Pay Insured
Par
Outstanding
 Assumed Par
Outstanding
  (dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) (2) WR (3) WR $5,227
 $
 $30
Tokio Marine & Nichido Fire Insurance Co., Ltd. (2) Aa3 (4) A+ (4) 4,216
 
 
Syncora Guarantee Inc. (2) WR WR 2,451
 1,244
 727
Mitsui Sumitomo Insurance Co. Ltd. (2) A1 A+ (4) 1,818
 
 
ACA Financial Guaranty Corp. NR (5) WR 714
 20
 
Ambac Assurance Corporation WR WR 117
 3,889
 10,388
National (6) A3 AA- 
 5,299
 5,100
MBIA (7) (7) 
 1,802
 440
FGIC (8) (8) 
 1,424
 652
Ambac Assurance Corp. Segregated Account NR NR 
 91
 873
CIFG Assurance North America Inc. WR WR 
 43
 2,996
Other (2) Various Various 78
 796
 133
Total     $14,621
 $14,608
 $21,339
____________________
(1)Includes par related to insured credit derivatives.

(2)
The total collateral posted by all non-affiliated reinsurers required or agreeing to post collateral as of December 31, 2015 was approximately $470 million.
(3)    Represents “Withdrawn Rating.”
(4)    The Company benefits from trust arrangements that satisfy the triple-A credit requirement of S&P and/or Moody’s.

(5)    Represents “Not Rated.”

(6)National is rated AA+ by KBRA.

(7)MBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and B3 by Moody's and MBIA U.K. Insurance Ltd. rated BB by S&P and Ba2 by Moody’s.

(8)FGIC includes subsidiaries Financial Guaranty Insurance Company and FGIC UK Limited both of which had their ratings withdrawn by rating agencies.

Selected European Exposure

 Several European countries are experiencinghave experienced significant economic, fiscal and / and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The Company has identified those European countries where it has exposure and where it believes heightened uncertainties exist to be: Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). The Company selected these European countries based on its view that their credit fundamentals are deteriorating,have weakened as a result of the global financial crisis, as well as on published reports identifying countries that may be experiencing reduced demand for their sovereign debt in the current environment. See “—Selected European Countries” below for an explanation ofThe Company has in the circumstances in each country leadingpast included Greece on the list, but the Company no longer has any meaningful exposure to select that country for further discussion.Greece.


104114


Direct Economic Exposure to 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 tables, both gross and net of ceded reinsurance:
 
Gross Direct Economic Exposure
to Selected European Countries(1)
As of December 31, 20122015
 
 Greece Hungary Ireland Italy Portugal Spain Total
 (in millions)
Sovereign and sub-sovereign exposure: 
  
  
  
  
  
  
Public finance$
 $
 $
 $1,351
 $125
 $428
 $1,904
Infrastructure finance
 461
 24
 352
 100
 172
 1,109
Sub-total
 461
 24
 1,703
 225
 600
 3,013
Non-sovereign exposure: 
  
  
  
  
  
  
Regulated utilities
 
 
 249
 
 9
 258
RMBS
 230
 139
 567
 
 
 936
Commercial receivables
 2
 13
 65
 16
 2
 98
Pooled corporate25
 
 211
 236
 14
 575
 1,061
Sub-total25
 232
 363
 1,117
 30
 586
 2,353
Total$25
 $693
 $387
 $2,820
 $255
 $1,186
 $5,366
Total BIG$
 $653
 $8
 $266
 $141
 $583
 $1,651
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance (2)$
 $1,023
 $91
 $331
 $1,445
Infrastructure finance274
 10
 
 120
 404
Total sub-sovereign exposure274
 1,033
 91
 451
 1,849
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 226
 
 
 226
RMBS and other structured finance176
 278
 
 13
 467
Total non-sovereign exposure176
 504
 
 13
 693
Total$450
 $1,537
 $91
 $464
 $2,542
Total BIG$380
 $
 $91
 $464
 $935
 
Net Direct Economic Exposure
to Selected European Countries(1)
December 31, 2012

 Greece Hungary Ireland Italy Portugal Spain Total
 (in millions)
Sovereign and sub-sovereign exposure: 
  
  
  
  
  
  
Public finance$
 $
 $
 $1,007
 $105
 $266
 $1,378
Infrastructure finance
 434
 24
 333
 100
 169
 1,060
Sub-total
 434
 24
 1,340
 205
 435
 2,438
Non-sovereign exposure: 
  
  
  
  
  
  
Regulated utilities
 
 
 229
 
 9
 238
RMBS
 219
 139
 498
 
 
 856
Commercial receivables
 2
 13
 63
 15
 2
 95
Pooled corporate25
 
 189
 217
 14
 524
 969
Sub-total25
 221
 341
 1,007
 29
 535
 2,158
Total$25
 $655
 $365
 $2,347
 $234
 $970
 $4,596
Total BIG$
 $616
 $7
 $248
 $121
 $419
 $1,411
____________________
(1)While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, including U.S. dollars, Euros and British pounds sterling. Included in both tables above is $139 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining legacy mortgage reinsurance business. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the tables.

As of December 31, 2012, the Company has not guaranteed 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-sovereigns2015

105
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance(2)$
 $780
 $85
 $240
 $1,105
Infrastructure finance271
 10
 
 120
 401
Total sub-sovereign exposure271
 790
 85
 360
 1,506
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 212
 
 
 212
RMBS and other structured finance170
 244
 
 13
 427
Total non-sovereign exposure170
 456
 
 13
 639
Total$441
 $1,246
 $85
 $373
 $2,145
Total BIG$374
 $
 $85
 $373
 $832


in Italy, Spain and Portugal. 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. At June 30, 2012, the Company had €218 million of net exposure to the sovereign debt of Greece. The Company paid claims under its financial guaranties during 2012, paying off in full its liabilities with respect to the Greek sovereign bonds it guaranteed. At December 31, 2012, the Company no longer had any direct exposure to Greece.____________________
(1)While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the tables.

(2)The exposure shown in the "Non-infrastructure public finance" category is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal.

The tables above include the par amount of financial guaranty contracts accounted for as derivatives.derivatives of $110 million with a fair value of $3 million, net of reinsurance. The Company’s credit derivative transactions are governed by ISDA documentation, and the Company is required to make a loss payment on them only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. For those financial guaranty contracts included in


115


The Company rates $374 million of its direct net par exposure to the tables above and accounted for as derivatives,Republic of Hungary BIG. The sub-sovereign transaction it rates BIG is an infrastructure financing dependent on payments by government agencies, while the tables below show their fair value, net of reinsurance:non-sovereign transactions it rates BIG are covered mortgage bonds issued by Hungarian banks.  The Company rates one insured Hungarian covered bond transaction investment grade.
Fair Value Gain (Loss) of Financial Guaranty Contracts Accounted for as Derivatives,
With Exposure to Selected European Countries, Net of Reinsurance
December 31, 2012
 Greece Hungary Ireland Italy Portugal Spain
 (in millions)
Sovereign and sub-sovereign exposure: 
  
  
  
  
  
Public finance$
 $
 $
 $
 $
 $
Infrastructure finance
 (2) (1) (3) (4) (1)
Total sovereign exposure
 (2) (1) (3) (4) (1)
Non-sovereign exposure: 
  
  
  
  
  
Regulated utilities
 
 
 
 
 
RMBS
 (4) 
 
 
 
Total non-sovereign exposure
 (4) 
 
 
 
Total$
 $(6) $(1) $(3) $(4) $(1)

The Company purchases reinsurance in the ordinary course to cover both its financial guaranty insurance and credit derivative exposures. Aside from this type of coverage the Company does not purchase credit default protection to manage the risk in its financial guaranty business. Rather, the Company has reduced its risks by ceding a portionrate any of its business (includingdirect exposure to the Republic of Italy BIG.  The Company’s sub-sovereign exposure to Italy depends on payments by Italian governmental entities in connection with infrastructure financings or for services already rendered, while its financial guaranty contracts accounted for as derivatives)non-sovereign Italian exposure is comprised primarily of securities backed by Italian residential mortgages or in one case a government-sponsored water utility.

The Company rates all of its direct exposure to third-party reinsurers that are generally required to pay their proportionate sharethe Kingdom of claims paid by the Company,Spain and the net amounts shown above are netRepublic of such third-party reinsurance (reinsurance of financial guaranty contracts accounted for as derivatives is accounted for as a purchased derivative). See Note 14, ReinsurancePortugal BIG.  The Company’s direct sub-sovereign exposure to Spain and Other Monoline Exposures, of the Financial StatementsPortugal includes infrastructure financings dependent on payments by sub-sovereigns and Supplementary Data.government agencies and financings dependent on lease and other payments by sub-sovereigns and government agencies.

 
Indirect Exposure to Selected European Countries
 
The Company has included in the exposure tables above its indirect economic exposure to the Selected European Countries through insurance it provides on (a) pooled corporate and (b) commercial receivables transactions. The Company considers economic exposure to a Selected European Country to be indirect when that exposure relates to only a small portion of an insured transaction that otherwise is not related to that Selected European Country.Country, and the Company has excluded its indirect exposure to the Selected European Countries from the exposure tables above. The Company has such indirect exposure to Selected European Countries through insurance it provides on pooled corporate and commercial receivables transactions.
 
The Company’s pooled corporate obligations with indirect exposure to Selected European Countries are highly diversified in terms of obligors and, except in the case of TruPS CDOs or transactions backed by perpetual preferred securities, (“Perps”), highly diversified in terms of industry. Most pooled corporate obligations are structured to limit exposure to any given obligor and any given non-U.S. country or region. The insured pooled corporate transactionsregion and generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim. Some pooled corporate obligations include investments in companies with a nexus to the Selected European Countries.
The Company’s commercial receivable transactions included in thewith indirect exposure tables aboveto Selected European Countries are rail car lease transactions and aircraft lease transactions where some of the lessees have a nexus with the Selected European Countries. Like

106


the pooled corporate transactions, the commercial receivable transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim.

The following table shows the Company’sCompany calculates indirect economic exposure (net of reinsurance) to the Selected European Countries in pooled corporate obligations and commercial receivable transactions. The amount shown in the table is calculateda country by multiplying the par amount of a transaction insured by the Company (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) times the percent of the relevant collateral pool reported as having a nexus to the Selected European Countries.:
Net Indirect Exposurecountry. On that basis, the Company has calculated exposure of $223 million to Selected European Countries
December 31, 2012
 Greece Hungary Ireland Italy Portugal Spain Total
 (dollars in millions)
Pooled corporate 
  
  
  
  
  
  
$ millions$25
 $
 $189
 $217
 $14
 $524
 $969
Average proportion2.5% % 2.5% 2.8% 1.2% 4.4% 3.3%
Commercial receivables 
  
  
  
  
  
  
$ millions$
 $2
 $13
 $63
 $15
 $2
 $95
Average proportion% 0.7% 8.3% 8.6% 2.4% 1.8% 5.0%
Total $ millions$25
 $2
 $202
 $280
 $29
 $526
 $1,064
(plus Greece) in transactions with $4.2 billion of net par outstanding. The table above includes, in the pooled corporate category,indirect exposure from primarily non-U.S. pooled corporate transactions insured by the Company. Many primarily U.S. pooled corporate obligations permit investments of up to 10% or 15% (or occasionally 20%) of the pool in non-U.S. (or non-U.S. or -Canadian) collateral. Given the relatively low level of permitted international investments in these transactions and their generally high current credit quality, they are excluded from the table above.
Selected European Countries
The Company follows and analyzes public information regarding developments in countries to which the Company has exposure, including the Selected European Countries, and utilizes this information to evaluate risks in its financial guaranty portfolio. Because the Company guarantees payments under its financial guaranty contracts, its analysis is focused primarily on the risk of payment defaults by these countries or obligors in these countries. However, dramatic developments with respect to the Selected European Countries would also impact the fair value of insurance contracts accounted for as derivatives andcredits with a nexus to those countries.Greece is $6 million across several highly rated pooled corporate obligations with net par outstanding of $244 million. 
    
On December 18, 2012 the Hellenic Republic of Greece was upgraded by S&P from “SD” (selective default) to “B-” reflecting the completion of Greece's distressed buyback. The action also considered the approval by the Eurogroup (the finance ministers of EU member states belonging to the eurozone) of a loan disbursement to Greece under the second economic adjustment program. S&P viewed such action as indicative of the eurozone's determination to restore stability to Greek finances, and to preserve Greece's eurozone membership. Moody’s rates Greece at "C", which is the lowest rating on Moody’s rating scale. Despite the exchange, which substantially lowered Greece’s debt burden, the country still faces a precarious fiscal position and generally uncertain economic prospects. As of December 31, 2012 the Company no longer had any direct economic exposure to Greece, although it does still have small, indirect exposures as described above under "Indirect Exposure to Selected European Countries".
The worsening domestic and global economic climate, high levels of public debt, limited funding availability and fiscal consolidation measures have had a negative impact on the Republic of Italy's economic growth prospects and credit ratings. The Republic of Italy was downgraded to “BBB+” from “A” by S&P on January 13, 2012 and to “Baa2” from “A3” by Moody’s on July 13, 2012. The September 6, 2012 announcement of a European Central Bank program to purchase unlimited amounts of secondary market debt of euro area sovereigns that apply for a full macroeconomic adjustment or precautionary program from the European Financial Stability Facility/European Stability Mechanism ("EFSF/ESM") has helped in the reduction of Italian sovereign bond yields. The Company’s sovereign exposure to Italy depends on payments by Italian governmental sub-sovereigns in connection with infrastructure financings or for services already rendered. The Company internally rates one of the infrastructure transactions ($248 million net par) below investment grade. The Company’s non-sovereign Italian exposure is comprised primarily of securities backed by Italian residential mortgages or in one case a

107


government-sponsored water utility. The Company is closely monitoring the ability and willingness of these obligors to make timely payments on their obligations.
On November 23, 2012 S&P downgraded the Republic of Hungary's rating from “BB+” to “BB” given the continued weakening of the predictability of the country's policy framework, which could affect its medium-term growth prospects. Moody's rates Hungary at “Ba1”. In October 2008 Hungary requested and later received financial assistance from the EU and the International Monetary Fund (“IMF”). Hungary again requested financial assistance in November 2011, with a potential second financial package currently being negotiated. The Company’s sub-sovereign exposure to Hungarian credits includes an infrastructure financing dependent on payments by government agencies. The Company rates this exposure ($396 million net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations. The Company’s non-sovereign exposure to Hungary comprises primarily covered mortgage bonds issued by Hungarian banks. The Company rates the covered bonds ($220 million net par) below investment grade.
The Kingdom of Spain's financial profile and credit ratings have deteriorated over the past few years, partly as a result of large borrowing needs in the context of a challenging funding environment. The weakening of the country's real estate sector has resulted in the deterioration of the banking system's financial profile, in particular that of the savings and loans. The regional finances are also a source of concern, given the fiscal slippage exhibited by some of the regions. The Kingdom of Spain was downgraded by S&P on October 10, 2012 to “BBB-” from “BBB+” and by Moody’s on June 13, 2012 to “Baa3” from “A3”. The September 6, 2012 announcement of a European Central Bank program to purchase unlimited amounts of secondary market debt of euro area sovereigns that apply for a full macroeconomic adjustment or precautionary program from the EFSF/ESM has helped in the reduction of Spanish sovereign bond yields. The Company’s direct exposure to Spanish credits includes infrastructure financings dependent on payments by sub-sovereigns and government agencies, financings dependent on lease and other payments by sub-sovereigns and government agencies, and an issuance by a regulated utility. The Company rates most ($419 million aggregate net par) of its exposure to sovereign credits in Spain below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations.
The Republic of Portugal is rated “BB” and “Ba3” by S&P and Moody's, respectively. Over the past few years, the Republic of Portugal’s economy and credit ratings have been adversely affected by fiscal imbalances, high indebtedness and the difficult macroeconomic situation generally facing the countries in the euro area. In order to stabilize its debt position, in April 2011 Portugal requested and subsequently received financial assistance from the EU and the IMF. In return, Portugal agreed to a set of deficit reduction and debt targets. The meeting of these targets will likely represent a significant burden on the Portuguese economy in an environment of slow economic activity and volatile bank and sovereign credit markets. Yields on Portuguese sovereign debt have been on a declining trend the last few months. The Company’s exposure to Portuguese credits includes infrastructure financings dependent on payments by sub-sovereigns and government agencies and financings dependent on lease payments by sub-sovereigns and government agencies. The Company rates four of these transactions ($121 million aggregate net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations.
The Republic of Ireland, currently rated “BBB+” and “Ba1” by S&P and Moody’s, respectively, has been adversely affected over the past few years by the weakening global economic environment and the need to provide wide-ranging support to its banking sector, which resulted in a rapid deterioration of the country’s public finances. In November 2010, the Republic of Ireland applied for and subsequently received a financial assistance package from the EU and the IMF. The package included an allocation to support the Irish banking system. Ireland’s fiscal consolidation plan is being implemented in the context of slow economic growth and restricted availability of credit. The Company’s exposure to Irish credits includes exposure in a pool of infrastructure financings dependent on payments by a sub-sovereign and mortgage reinsurance on a pool of Irish residential mortgages originated in 2004-2006 left from its legacy mortgage reinsurance business. Only $7 million of the Company’s exposure to Ireland is below investment grade, and it is indirect in non-sovereign pooled corporate transactions.

Identifying Exposure to Selected European CountriesResidential Mortgage-Backed Securities
 
WhenThe tables below provide information on the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its viewrisk ratings and certain other risk characteristics of the geographic locationCompany’s financial guaranty insurance and credit derivative RMBS exposures as of December 31, 2015. U.S. RMBS exposures represent 2% of the risk. For most exposures this cantotal net par outstanding, and BIG U.S. RMBS represent 26% of total BIG net par outstanding. See Note 5, Expected Loss to be a relatively straight-forward determination as, for example, a debt issue supported by availability paymentsPaid, of the Financial Statements and Supplementary Data, for a toll road in a particular country. The Company may also assign portionsdiscussion of a riskexpected losses to more than one geographic locationbe paid on U.S. RMBS exposures.

Distribution of U.S. RMBS by Rating and Type of Exposure as it has, for example, in a residential mortgage backed security backed by residential mortgage loans in both Germany and Italy. The Company may also have exposures to the Selected European Countries in business assumed from other monoline insurance companies. See Note 14, Reinsurance and Otherof December 31, 2015
Ratings: 
Prime
First Lien
 
Alt-A
First Lien
 
Option
ARMs
 
Subprime
First Lien
 
Second
Lien
 Total Net Par Outstanding
  (dollars in millions)
AAA $9
 $220
 $16
 $1,536
 $0
 $1,781
AA 95
 325
 91
 482
 108
 1,102
A 1
 
 4
 41
 1
 47
BBB 56
 15
 
 94
 0
 165
BIG 284
 793
 141
 1,304
 1,452
 3,973
Total exposures $445
 $1,353
 $252
 $3,457
 $1,560
 $7,067


108112


MonolineDistribution of U.S. RMBS by Year Insured and Type of Exposure of the Financial Statements and Supplementary Data. In the case of assumed business, the Company depends upon geographic information provided by the primary insurer.
The Company also has indirect exposure to the Selected European Countries through structured finance transactions backed by pools of corporate obligations or receivables, such as lease payments, with a nexus to such countries. In most instances, the trustees and/or servicers for such transactions provide reports that identify the domicile of the underlying obligors in the pool (and the Company relies on such reports), although occasionally such information is not available to the Company. The Company has reviewed transactions through which it believes it may have indirect exposure to the Selected European Countries that is material to the transaction and included in the tables above the proportion of the insured par equal to the proportion of obligors so identified as being domiciled in a Selected European Country. The Company may also have indirect exposures to Selected European Countries in business assumed from other monoline insurance companies. However, in the case of assumed business, the primary insurer generally does not provide information to the Company permitting it to geographically allocate the exposure proportionally to the domicile of the underlying obligors.

Financial Guaranty Portfolio by Issue Size

The Company seeks broad coverage of the market by insuring and reinsuring small and large issues alike. The following table sets forth the distribution of the Company's portfolio as of December 31, 2012 by original size of the Company's exposure:2015

Public Finance Portfolio by Issue Size
As of December 31, 2012

Original Par Amount Per Issue 
Number of
Issues
 
Net Par
Outstanding
 
% of Public
Finance
Net Par
Outstanding
 (dollars in millions)
Less than $10 million18,789 $55,037
 12.9%
$10 through $50 million7,144 126,309
 29.7%
$50 through $100 million1,359 75,724
 17.8%
$100 million to $200 million603 68,380
 16.1%
$200 million or greater366 100,057
 23.5%
Total28,261 $425,507
 100.0%

Structured Finance Portfolio by Issue Size
As of December 31, 2012

Original Par Amount Per Issue 
Number of
Issues
 
Net Par
Outstanding
 
% of Structured
Finance
Net Par
Outstanding
 (dollars in millions)
Less than $10 million306 $156
 0.2%
$10 through $50 million538 7,697
 8.2%
$50 through $100 million208 8,588
 9.1%
$100 million to $200 million261 20,896
 22.1%
$200 million or greater255 57,049
 60.4%
Total1,568 $94,386
 100.0%
Year
insured:
 
Prime
First Lien
 
Alt-A
First Lien
 
Option
ARMs
 
Subprime
First Lien
 
Second
Lien
 Total Net Par Outstanding
  (in millions)
2004 and prior $55
 $56
 $18
 $1,069
 $108
 $1,305
2005 127
 450
 36
 182
 345
 1,140
2006 85
 196
 35
 724
 438
 1,478
2007 177
 651
 163
 1,414
 669
 3,075
2008 
 
 
 68
 
 68
Total exposures $445
 $1,353
 $252
 $3,457
 $1,560
 $7,067

Exposures by Reinsurer
 
Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross

109


claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and as a result have been downgraded by the rating agencies. In addition, state insurance regulators have intervened with respect to some of these insurers.

In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table below are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves, all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers in the table below post collateral on terms negotiated with the Company. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of December 31, 2015 was approximately $470 million.

Assumed par outstanding represents the amount of par assumed by the Company from other monolines. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.
 
In addition to assumed and ceded reinsurance arrangements, the Company may also have exposure to some financial guaranty reinsurers (i.e. monolines)insurers in other areas. Second-to-pay insured par outstanding represents"second-to-pay" transactions, where the Company has insuredprovides insurance on an obligation that were previouslyis already insured by other monolines.another financial guarantor. In that case, if the underlying obligor and the financial guarantor both fail to pay an amount scheduled to be paid, the Company would be obligated to pay. The Company underwrites suchthese transactions based on the underlying insured obligation, without regard to the primary insurer.financial obligor. See Note 14,13, Reinsurance and Other Monoline Exposures, of the Financial Statements and Supplementary Data.
 

113


Exposure by Reinsurer

  Ratings at  Par Outstanding
  February 26, 2013 As of December 31, 2012
Reinsurer 
Moody’s
Reinsurer
Rating
 
S&P
Reinsurer
Rating
 
Ceded
Par
Outstanding(1)
 
Second-to-
Pay
Insured Par
Outstanding
 
Assumed
Par
Outstanding
  (dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) WR(2) WR $9,808
 $
 $24
Tokio Aa3(3) AA-(3) 8,369
 
 937
Radian(4) Ba1 B+ 5,250
 44
 1,382
Syncora Guarantee Inc. WR WR 4,156
 1,993
 162
Mitsui Sumitomo Insurance Co. Ltd. A1 A+(3) 2,232
 
 
ACA Financial Guaranty Corp. NR WR 819
 6
 1
Swiss Reinsurance Co. A1 AA- 429
 
 
Ambac WR WR 85
 7,122
 20,579
CIFG WR WR 65
 255
 5,523
MBIA Inc. (5) (5) 
 10,814
 8,143
Financial Guaranty Insurance Co. WR WR 
 3,227
 1,961
Other Various Various 933
 2,070
 45
Total     $32,146
 $25,531
 $38,757
  Ratings at Par Outstanding (1)
  February 24, 2016 As of December 31, 2015
Reinsurer Moody’s
Reinsurer
Rating
 S&P
Reinsurer
Rating
 Ceded Par
Outstanding
 Second-to-
Pay Insured
Par
Outstanding
 Assumed Par
Outstanding
  (dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) (2) WR (3) WR $5,227
 $
 $30
Tokio Marine & Nichido Fire Insurance Co., Ltd. (2) Aa3 (4) A+ (4) 4,216
 
 
Syncora Guarantee Inc. (2) WR WR 2,451
 1,244
 727
Mitsui Sumitomo Insurance Co. Ltd. (2) A1 A+ (4) 1,818
 
 
ACA Financial Guaranty Corp. NR (5) WR 714
 20
 
Ambac Assurance Corporation WR WR 117
 3,889
 10,388
National (6) A3 AA- 
 5,299
 5,100
MBIA (7) (7) 
 1,802
 440
FGIC (8) (8) 
 1,424
 652
Ambac Assurance Corp. Segregated Account NR NR 
 91
 873
CIFG Assurance North America Inc. WR WR 
 43
 2,996
Other (2) Various Various 78
 796
 133
Total     $14,621
 $14,608
 $21,339
____________________
(1)
Includes $3,928 million in ceded par outstanding related to insured credit derivatives.

(2)
The total collateral posted by all non-affiliated reinsurers required or agreeing to post collateral as of December 31, 2015 was approximately $470 million.
(3)    Represents “Withdrawn Rating.”
(4)    The Company benefits from trust arrangements that satisfy the triple-A credit requirement of S&P and/or Moody’s.

(5)    Represents “Not Rated.”

(6)National is rated AA+ by KBRA.

(3)(7)The Company has structural collateral agreements satisfying the triple-A credit requirement ofMBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and/orand B3 by Moody's and MBIA U.K. Insurance Ltd. rated BB by S&P and Ba2 by Moody’s.

(4)(8)TheFGIC includes subsidiaries Financial Guaranty Insurance Company entered into an agreement with Radian on January 24, 2012. See “—Key Business Strategies—New Business Development and Commutations.”

(5)MBIA Inc. includes various subsidiariesFGIC UK Limited both of which are rated B, BBBhad their ratings withdrawn by S&P and Caa2, B3, Baa2, WR and NR by Moody’s.rating agencies.

In accordanceSelected European Exposure

 Several European countries have experienced significant economic, fiscal and/or political strains such that the likelihood of default on obligations with statutory accounting requirements and U.S. insurance laws and regulations, in order fora nexus to those countries may be higher than the Company anticipated when such factors did not exist. The Company has identified those European countries where it has exposure and where it believes heightened uncertainties exist to receivebe: Hungary, Italy, Portugal and Spain (the “Selected European Countries”). The Company selected these European countries based on its view that their credit for liabilities ceded to reinsurers domiciled outsidefundamentals have weakened as a result of the U.S., such reinsurers must secureglobal financial crisis, as well as on published reports identifying countries that may be experiencing reduced demand for their liabilities to the Company. All of the unauthorized reinsurerssovereign debt in the table above post collateral forcurrent environment. The Company has in the benefit ofpast included Greece on the list, but the Company inno longer has any meaningful exposure to Greece.


110114


an amount at least equalDirect Economic Exposure to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. CIFG and Radian are authorized reinsurers. Radian's collateral equals or exceeds its ceded statutory loss reserves and CIFG's collateral covers a substantial portion of its ceded statutory loss reserves. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of December 31, 2012 is approximately $999 million.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 tables, both gross and net of ceded reinsurance:
Gross Direct Economic Exposure
to Selected European Countries(1)
As of December 31, 2015
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance (2)$
 $1,023
 $91
 $331
 $1,445
Infrastructure finance274
 10
 
 120
 404
Total sub-sovereign exposure274
 1,033
 91
 451
 1,849
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 226
 
 
 226
RMBS and other structured finance176
 278
 
 13
 467
Total non-sovereign exposure176
 504
 
 13
 693
Total$450
 $1,537
 $91
 $464
 $2,542
Total BIG$380
 $
 $91
 $464
 $935
Net Direct Economic Exposure
to Selected European Countries(1)
As of December 31, 2015
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance(2)$
 $780
 $85
 $240
 $1,105
Infrastructure finance271
 10
 
 120
 401
Total sub-sovereign exposure271
 790
 85
 360
 1,506
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 212
 
 
 212
RMBS and other structured finance170
 244
 
 13
 427
Total non-sovereign exposure170
 456
 
 13
 639
Total$441
 $1,246
 $85
 $373
 $2,145
Total BIG$374
 $
 $85
 $373
 $832
____________________
(1)While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the tables.

(2)The exposure shown in the "Non-infrastructure public finance" category is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal.

The tables above include the par amount of financial guaranty contracts accounted for as derivatives of $110 million with a fair value of $3 million, net of reinsurance. The Company’s credit derivative transactions are governed by ISDA documentation, and the Company is required to make a loss payment on them only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans.


115


The Company rates $374 million of its direct net par exposure to the Republic of Hungary BIG. The sub-sovereign transaction it rates BIG is an infrastructure financing dependent on payments by government agencies, while the non-sovereign transactions it rates BIG are covered mortgage bonds issued by Hungarian banks.  The Company rates one insured Hungarian covered bond transaction investment grade.

The Company does not rate any of its direct exposure to the Republic of Italy BIG.  The Company’s sub-sovereign exposure to Italy depends on payments by Italian governmental entities in connection with infrastructure financings or for services already rendered, while its non-sovereign Italian exposure is comprised primarily of securities backed by Italian residential mortgages or in one case a government-sponsored water utility.

The Company rates all of its direct exposure to the Kingdom of Spain and the Republic of Portugal BIG.  The Company’s direct sub-sovereign exposure to Spain and Portugal includes infrastructure financings dependent on payments by sub-sovereigns and government agencies and financings dependent on lease and other payments by sub-sovereigns and government agencies.

Indirect Exposure to Selected European Countries
The Company considers economic exposure to a Selected European Country to be indirect when that exposure relates to only a small portion of an insured transaction that otherwise is not related to that Selected European Country, and the Company has excluded its indirect exposure to the Selected European Countries from the exposure tables above. The Company has such indirect exposure to Selected European Countries through insurance it provides on pooled corporate and commercial receivables transactions.
The Company’s pooled corporate obligations with indirect exposure to Selected European Countries are highly diversified in terms of obligors and, except in the case of TruPS CDOs or transactions backed by perpetual preferred securities, highly diversified in terms of industry. Most pooled corporate obligations are structured to limit exposure to any given obligor and any given non-U.S. country or region and generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim. The Company’s commercial receivable transactions with indirect exposure to Selected European Countries are rail car lease transactions and aircraft lease transactions where some of the lessees have a nexus with the Selected European Countries. Like the pooled corporate transactions, the commercial receivable transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim.

The 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 $223 million to Selected European Countries (plus Greece) in transactions with $4.2 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 $244 million. 
Exposure to Residential Mortgage-Backed Securities
 
The tables below provide information on the risk ratings and certain other risk characteristics of the Company’s financial guaranty insurance and credit derivative RMBS exposures as of December 31, 2012.2015. U.S. RMBS exposures represent 3.4%2% of the total net par outstanding, and BIG U.S. RMBS represent 45%26% of total BIG net par outstanding. The tables presented provide information with respect to the underlying performance indicators of this book of business. See Note 6,5, Expected Loss to be Paid, of the Financial Statements and Supplementary Data, for a discussion of expected losses to be paid on U.S. RMBS exposures.
Net par outstanding in the following tables are based on values as of December 31, 2012. All performance information such as pool factor, subordination, cumulative losses and delinquency is based on December 31, 2012 information obtained from third parties and/or provided by the trustee and may be subject to restatement or correction.
Pool factor in the following tables is the percentage of the current collateral balance divided by the original collateral balance of the transactions at inception.
Subordination in the following tables represents the sum of subordinate tranches and overcollateralization, expressed as a percentage of total transaction size and does not include any benefit from excess spread collections that may be used to absorb losses. Many of the closed-end-second lien RMBS transactions insured by the Company have unique structures whereby the collateral may be written down for losses without a corresponding write-down of the obligations insured by the Company. Many of these transactions are currently undercollateralized, with the principal amount of collateral being less than the principal amount of the obligation insured by the Company. The Company is not required to pay principal shortfalls until legal maturity (rather than making timely principal payments), and takes the undercollateralization into account when estimating expected losses for these transactions.
Cumulative losses in the following tables are defined as net charge-offs on the underlying loan collateral divided by the original collateral balance.
60+ day delinquencies in the following tables are defined as loans that are greater than 60 days delinquent and all loans that are in foreclosure, bankruptcy or real estate owned divided by current collateral balance.
U.S. Prime First Lien in the tables below includes primarily prime first lien plus an insignificant amount of other miscellaneous RMBS transactions.

Distribution of U.S. RMBS by Internal Rating and Type of Exposure as of December 31, 20122015
 
Ratings: 
Prime
First
Lien
 
Closed
End
Second
Lien
 HELOC 
Alt-A
First Lien
 
Option
ARM
 
Subprime
First
Lien
 
Total Net
Par
Outstanding
 
Prime
First Lien
 
Alt-A
First Lien
 
Option
ARMs
 
Subprime
First Lien
 
Second
Lien
 Total Net Par Outstanding
 (in millions) (dollars in millions)
AAA $5
 $0
 $69
 $256
 $
 $2,359
 $2,689
 $9
 $220
 $16
 $1,536
 $0
 $1,781
AA 116
 116
 144
 469
 323
 1,316
 2,483
 95
 325
 91
 482
 108
 1,102
A 2
 0
 246
 9
 99
 833
 1,190
 1
 
 4
 41
 1
 47
BBB 45
 
 20
 280
 31
 485
 861
 56
 15
 
 94
 0
 165
BIG 474
 404
 2,718
 3,575
 1,096
 2,337
 10,605
 284
 793
 141
 1,304
 1,452
 3,973
Total exposures $641
 $521
 $3,196
 $4,589
 $1,550
 $7,330
17,827
$17,827
 $445
 $1,353
 $252
 $3,457
 $1,560
 $7,067


111112


Distribution of U.S. RMBS by Year Insured and Type of Exposure as of December 31, 20122015
 
Year
insured:
 
Prime
First
Lien
 
Closed
End
Second
Lien
 HELOC 
Alt-A
First Lien
 
Option
ARM
 
Subprime
First
Lien
 
Total Net
Par
Outstanding
 
Prime
First Lien
 
Alt-A
First Lien
 
Option
ARMs
 
Subprime
First Lien
 
Second
Lien
 Total Net Par Outstanding
 (in millions) (in millions)
2004 and prior $33
 $1
 $239
 $101
 $36
 $1,386
 $1,796
 $55
 $56
 $18
 $1,069
 $108
 $1,305
2005 170
 
 727
 581
 61
 218
 1,756
 127
 450
 36
 182
 345
 1,140
2006 106
 195
 936
 381
 239
 2,992
 4,848
 85
 196
 35
 724
 438
 1,478
2007 333
 325
 1,294
 2,290
 1,141
 2,657
 8,040
 177
 651
 163
 1,414
 669
 3,075
2008 
 
 
 1,236
 73
 78
 1,387
 
 
 
 68
 
 68
Total exposures $641
 $521
 $3,196
 $4,589
 $1,550
 $7,330
 $17,827
 $445
 $1,353
 $252
 $3,457
 $1,560
 $7,067

Exposures by Reinsurer
Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and as a result have been downgraded by the rating agencies. In addition, state insurance regulators have intervened with respect to some of these insurers.

DistributionIn accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S. RMBS, such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table below are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves, all calculated on a statutory basis of accounting. In addition, certain authorized reinsurers in the table below post collateral on terms negotiated with the Company. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by Internal Rating and Year Insuredall non-affiliated reinsurers as of December 31, 20122015 was approximately $470 million.

 Assumed par outstanding represents the amount of par assumed by the Company from other monolines. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.
 
Year
insured:
 
AAA
Rated
 
AA
Rated
 
A
Rated
 
BBB
Rated
 
BIG
Rated
 Total
  (dollars in millions)
2004 and prior $1,167
 $78
 $53
 $184
 $313
 $1,796
2005 145
 201
 
 42
 1,368
 1,756
2006 1,270
 994
 814
 187
 1,582
 4,848
2007 6
 1,209
 249
 448
 6,127
 8,040
2008 101
 
 73
 
 1,213
 1,387
Total exposures $2,689
 $2,483
 $1,190
 $861
 $10,605
 $17,827
% of total 15.1% 13.9% 6.7% 4.8% 59.5% 100.0%
DistributionIn addition to assumed and ceded reinsurance arrangements, the Company may also have exposure to financial guaranty insurers in "second-to-pay" transactions, where the Company provides insurance on an obligation that is already insured by another financial guarantor. In that case, if the underlying obligor and the financial guarantor both fail to pay an amount scheduled to be paid, the Company would be obligated to pay. The Company underwrites these transactions based on the underlying obligation, without regard to the financial obligor. See Note 13, Reinsurance and Other Monoline Exposures, of the Financial Guaranty Direct U.S. RMBS
Insured January 1, 2005 or Later by Exposure Type, Average Pool Factor, Subordination,
Cumulative LossesStatements and 60+ Day Delinquencies as of December 31, 2012
U.S. Prime First Lien
Year
insured:
 
Net Par
Outstanding
 
Pool
Factor
 Subordination 
Cumulative
Losses
 
60+ Day
Delinquencies
 
Number of
Transactions
  (dollars in millions)
2005 $167
 30.9% 4.3% 2.3% 11.6% 6
2006 106
 51.8% 8.7% 0.4% 17.9% 1
2007 333
 42.3% 5.2% 5.7% 18.7% 1
2008 
 % % % % 
  $605
 40.8% 5.5% 3.8% 16.6% 8
U.S. Closed End Second Lien
Year
insured:
 
Net Par
Outstanding
 
Pool
Factor
 Subordination 
Cumulative
Losses
 
60+ Day
Delinquencies
 
Number of
Transactions
  (dollars in millions)
2005 $
 % % % % 
2006 186
 12.7% % 59.7% 6.4% 1
2007 325
 15.4% % 69.1% 7.9% 9
2008 
 % % % % 
  $510
 14.4% % 65.7% 7.3% 10
Supplementary Data.
 

112113


U.S. HELOCExposure by Reinsurer

  Ratings at Par Outstanding (1)
  February 24, 2016 As of December 31, 2015
Reinsurer Moody’s
Reinsurer
Rating
 S&P
Reinsurer
Rating
 Ceded Par
Outstanding
 Second-to-
Pay Insured
Par
Outstanding
 Assumed Par
Outstanding
  (dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) (2) WR (3) WR $5,227
 $
 $30
Tokio Marine & Nichido Fire Insurance Co., Ltd. (2) Aa3 (4) A+ (4) 4,216
 
 
Syncora Guarantee Inc. (2) WR WR 2,451
 1,244
 727
Mitsui Sumitomo Insurance Co. Ltd. (2) A1 A+ (4) 1,818
 
 
ACA Financial Guaranty Corp. NR (5) WR 714
 20
 
Ambac Assurance Corporation WR WR 117
 3,889
 10,388
National (6) A3 AA- 
 5,299
 5,100
MBIA (7) (7) 
 1,802
 440
FGIC (8) (8) 
 1,424
 652
Ambac Assurance Corp. Segregated Account NR NR 
 91
 873
CIFG Assurance North America Inc. WR WR 
 43
 2,996
Other (2) Various Various 78
 796
 133
Total     $14,621
 $14,608
 $21,339
____________________
(1)Includes par related to insured credit derivatives.

(2)
The total collateral posted by all non-affiliated reinsurers required or agreeing to post collateral as of December 31, 2015 was approximately $470 million.
(3)    Represents “Withdrawn Rating.”
(4)    The Company benefits from trust arrangements that satisfy the triple-A credit requirement of S&P and/or Moody’s.

(5)    Represents “Not Rated.”

(6)National is rated AA+ by KBRA.

(7)MBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and B3 by Moody's and MBIA U.K. Insurance Ltd. rated BB by S&P and Ba2 by Moody’s.

(8)FGIC includes subsidiaries Financial Guaranty Insurance Company and FGIC UK Limited both of which had their ratings withdrawn by rating agencies.

Selected European Exposure

 Several European countries have experienced significant economic, fiscal and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The Company has identified those European countries where it has exposure and where it believes heightened uncertainties exist to be: Hungary, Italy, Portugal and Spain (the “Selected European Countries”). The Company selected these European countries based on its view that their credit fundamentals have weakened as a result of the global financial crisis, as well as on published reports identifying countries that may be experiencing reduced demand for their sovereign debt in the current environment. The Company has in the past included Greece on the list, but the Company no longer has any meaningful exposure to Greece.


114


Direct Economic Exposure to 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 tables, both gross and net of ceded reinsurance:
Gross Direct Economic Exposure
to Selected European Countries(1)
As of December 31, 2015
 
Year
insured:
 
Net Par
Outstanding
 
Pool
Factor
 Subordination 
Cumulative
Losses
 
60+ Day
Delinquencies
 
Number of
Transactions
  (dollars in millions)
2005 $682
 14.8% 3.0% 16.7% 11.2% 6
2006 918
 23.2% 3.4% 36.3% 7.7% 7
2007 1,294
 37.7% 2.8% 31.9% 5.8% 9
2008 
 % % % % 
  $2,893
 27.7% 3.0% 29.7% 7.7% 22
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance (2)$
 $1,023
 $91
 $331
 $1,445
Infrastructure finance274
 10
 
 120
 404
Total sub-sovereign exposure274
 1,033
 91
 451
 1,849
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 226
 
 
 226
RMBS and other structured finance176
 278
 
 13
 467
Total non-sovereign exposure176
 504
 
 13
 693
Total$450
 $1,537
 $91
 $464
 $2,542
Total BIG$380
 $
 $91
 $464
 $935
Net Direct Economic Exposure
to Selected European Countries(1)
As of December 31, 2015
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance(2)$
 $780
 $85
 $240
 $1,105
Infrastructure finance271
 10
 
 120
 401
Total sub-sovereign exposure271
 790
 85
 360
 1,506
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 212
 
 
 212
RMBS and other structured finance170
 244
 
 13
 427
Total non-sovereign exposure170
 456
 
 13
 639
Total$441
 $1,246
 $85
 $373
 $2,145
Total BIG$374
 $
 $85
 $373
 $832
____________________
(1)While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the tables.

(2)The exposure shown in the "Non-infrastructure public finance" category is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal.

The tables above include the par amount of financial guaranty contracts accounted for as derivatives of $110 million with a fair value of $3 million, net of reinsurance. The Company’s credit derivative transactions are governed by ISDA documentation, and the Company is required to make a loss payment on them only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans.


115


The Company rates $374 million of its direct net par exposure to the Republic of Hungary BIG. The sub-sovereign transaction it rates BIG is an infrastructure financing dependent on payments by government agencies, while the non-sovereign transactions it rates BIG are covered mortgage bonds issued by Hungarian banks.  The Company rates one insured Hungarian covered bond transaction investment grade.

U.S. Alt-A First LienThe Company does not rate any of its direct exposure to the Republic of Italy BIG.  The Company’s sub-sovereign exposure to Italy depends on payments by Italian governmental entities in connection with infrastructure financings or for services already rendered, while its non-sovereign Italian exposure is comprised primarily of securities backed by Italian residential mortgages or in one case a government-sponsored water utility.

The Company rates all of its direct exposure to the Kingdom of Spain and the Republic of Portugal BIG.  The Company’s direct sub-sovereign exposure to Spain and Portugal includes infrastructure financings dependent on payments by sub-sovereigns and government agencies and financings dependent on lease and other payments by sub-sovereigns and government agencies.

Indirect Exposure to Selected European Countries
 
Year
insured:
 
Net Par
Outstanding
 
Pool
Factor
 Subordination 
Cumulative
Losses
 
60+ Day
Delinquencies
 
Number of
Transactions
  (dollars in millions)
2005 $579
 28.5% 8.4% 7.1% 19.5% 21
2006 381
 34.5% 0.0% 20.0% 39.2% 7
2007 2,290
 43.2% 1.6% 15.6% 31.3% 12
2008 1,236
 40.8% 18.8% 15.2% 27.2% 5
  $4,486
 39.9% 7.1% 14.8% 29.3% 45
The Company considers economic exposure to a Selected European Country to be indirect when that exposure relates to only a small portion of an insured transaction that otherwise is not related to that Selected European Country, and the Company has excluded its indirect exposure to the Selected European Countries from the exposure tables above. The Company has such indirect exposure to Selected European Countries through insurance it provides on pooled corporate and commercial receivables transactions.
 
U.S. Option ARMsThe Company’s pooled corporate obligations with indirect exposure to Selected European Countries are highly diversified in terms of obligors and, except in the case of TruPS CDOs or transactions backed by perpetual preferred securities, highly diversified in terms of industry. Most pooled corporate obligations are structured to limit exposure to any given obligor and any given non-U.S. country or region and generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim. The Company’s commercial receivable transactions with indirect exposure to Selected European Countries are rail car lease transactions and aircraft lease transactions where some of the lessees have a nexus with the Selected European Countries. Like the pooled corporate transactions, the commercial receivable transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim.

The 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 $223 million to Selected European Countries (plus Greece) in transactions with $4.2 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 $244 million. 
    
Year
insured:
 
Net Par
Outstanding
 
Pool
Factor
 Subordination 
Cumulative
Losses
 
60+ Day
Delinquencies
 
Number of
Transactions
  (dollars in millions)
2005 $53
 17.9% 9.6% 10.8% 21.2% 3
2006 233
 38.2% % 19.9% 43.5% 5
2007 1,141
 42.4% 1.3% 20.6% 36.6% 11
2008 73
 44.6% 48.1% 15.5% 33.1% 1
  $1,501
 41.0% 3.7% 19.9% 37.0% 20
Identifying Exposure to Selected European Countries
 
U.S. Subprime First LienWhen the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For most exposures this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location as it has, for example, in a residential mortgage backed security backed by residential mortgage loans in both Germany and Italy. The Company may also have exposures to the Selected European Countries in business assumed from other monoline insurance companies. In the case of assumed business, the Company depends upon geographic information provided by the primary insurer.
Year
insured:
 
Net Par
Outstanding
 
Pool
Factor
 Subordination 
Cumulative
Losses
 
60+ Day
Delinquencies
 
Number of
Transactions
  (dollars in millions)
2005 $208
 36.7% 22.8% 7.6% 32.1% 4
2006 2,986
 19.6% 52.1% 18.7% 35.3% 4
2007 2,657
 45.1% 14.9% 24.1% 43.2% 13
2008 78
 56.6% 19.4% 19.5% 33.3% 1
  $5,929
 32.1% 33.9% 20.7% 38.7% 22


113116


Liquidity and Capital Resources
 
Liquidity Requirements and Sources

AGL and its Holding Company Subsidiaries
 
The liquidity of AGL, AGUS and its subsidiaries that are intermediate holding companiesAGMH is largely dependent on dividends from ittheir operating subsidiaries and their access to external financing. LiquidityThe liquidity requirements of these entities include the payment of operating expenses, interest on debt ofissued by AGUS and AGMH, and dividends on AGL's common shares. AGL and its holding company subsidiaries may also require liquidity to make periodic capital investments in their operating subsidiaries.subsidiaries or, in the case of AGL, to repurchase its common shares pursuant to its share repurchase authorization. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company targets a balance of its most liquid assets including cash and short term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months, including the ability to pay dividends on AGL common shares.months. See “—Insurance“Insurance Company Regulatory Restrictions” below for a discussion of the dividend restrictions of its insurance company subsidiaries.
 
The Company anticipates that for the next twelve months, amounts paid by AGL’s operating subsidiaries as dividends will be a major source of its liquidity. It is possible that in the future, AGL or its subsidiaries may need to seek additional external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company. As of December 31, 2012, AGL had $40 million in cash and short term investments and $205 million in fixed maturity securities with weighted average duration of 1.1 years. AGUS and AGMH had a total of $15 million in cash and short term investments and $31 million in fixed maturity securities with weighted average duration of 3.0 years. See also "—Insurance Company Regulatory Restrictions" below.
AGL and Holding Company Subsidiaries
Significant Cash Flow Items

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Dividends and return of capital from subsidiaries$286
 $166
 $124
Proceeds from issuance of common shares173
 
 
Dividends paid to AGL shareholders(69) (33) (33)
Repurchases of common shares(24) (23) (10)
Interest paid(77) (85) (85)
Acquisition of MAC, net of cash acquired(91) 
 
Loans from subsidiaries173
 
 
Payment of long-term debt(173) 
 
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Dividends paid by AGC to AGUS$90
 $69
 $67
Dividends paid by AGM to AGMH215
 160
 163
Dividends paid by AG Re to AGL150
 82
 144
Dividends paid by other subsidiaries of AGMH
 10
 
Repayment of surplus note by AGM to AGMH25
 50
 50
Dividends paid to AGL shareholders(72) (76) (75)
Repurchases of common shares by AGL(1)(555) (590) (264)
Interest paid by AGMH and AGUS(95) (83) (70)
Proceeds from issuance of long-term debt
 495
 
Payment of long-term debt by AGUS
 
 (7)
Issuance of note by AGUS to AGC(2)(200) 
 
Repayment of note by AGC to AGUS(2)200
 
 
____________________
(1)On May 6, 2015, in continuation of the Company's capital management strategy of repurchasing its common shares, the Company's Board of Directors approved the repurchase of an incremental $400 million of common shares. On a settlement date basis, the remaining authorization for share repurchases was $55 million on December 31, 2015. After the repurchase of additional shares in 2016, the Company exhausted the share repurchase authorization on February 9, 2016. On February 24, 2016, the Board of Directors approved a $250 million share repurchase authorization.

(2)On March 31, 2015, AGUS, as lender, provided $200 million to AGC, as borrower, from available funds to help fund the purchase of Radian Asset. AGC repaid that loan in full on April 14, 2015.

Dividends From Subsidiaries

The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance company subsidiaries as dividends or other distributions will be a major source of its liquidity. The insurance company subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. Dividend restrictions applicable to AGC and AGM, and to AG Re, are described under Note 11, Insurance Company Regulatory Requirements of the Financial Statements and Supplementary Data.

Under New York insurance law, AGM may only pay dividends out of "earned surplus," which is the portion of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not

117


been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the New York Superintendent that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income during that period. The maximum amount available during 2016 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $244 million, of which approximately $95 million is estimated to be available for distribution in the first quarter of 2016.

Under Maryland's insurance law, AGC may, with prior notice to the Maryland Insurance Commissioner, pay an ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. The maximum amount available during 2016 for AGC to distribute as ordinary dividends will be approximately $79 million, of which approximately $9 million is available for distribution in the first quarter of 2016.

MAC is a New York domiciled insurance company subject to the same dividend limitations described above for AGM. The Company does not currently anticipate that MAC will distribute any dividends.

For AG Re, any distribution (including repurchase of shares) of any share capital, contributed surplus or other statutory capital that would reduce its total statutory capital by 15% or more of its total statutory capital as set out in its previous year's financial statements requires the prior approval of the Bermuda Monetary Authority ("Authority"). Separately, dividends are paid out of an insurer's statutory surplus and cannot exceed that surplus. Further, annual dividends cannot exceed 25% of total statutory capital and surplus surplus as set out in its previous year's financial statements, which is $254 million, without AG Re certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 2016 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $127 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to the limit of its outstanding statutory surplus, which is $174 million. Such dividend capacity is further limited by the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements. As of December 31, 2015, AG Re had unencumbered assets of approximately $640 million.

Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.

External Financing

From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company.

On June 20, 2014, AGUS issued $500 million of 5.0% Senior Notes due 2014. The notes are guaranteed by AGL. The net proceeds of the notes were used for general corporate purposes, including the purchase of AGL common shares.

Intercompany Loans and Guarantees

On March 30, 2015, AGUS loaned $200 million to AGC to facilitate the acquisition of Radian Asset on April 1, 2015. AGC repaid the loan in full on April 14, 2015.


118


From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. Such commitment terminates on October 25, 2018 (the “loan termination date”). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then applicable Federal short-term or mid-term interest rate, as the case may be, as determined under Internal Revenue Code Sec. 1274(d), and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan termination date. No amounts are currently outstanding under the credit facility.

In addition, in connection with the acquisition of MAC, in May 2012 AGUS entered into a loan agreement with AGRO, a subsidiary of AGits affiliate Assured Guaranty Re Overseas Ltd. in 2012 to borrow $90 million in order to fund the purchase price. In addition,That loan remained outstanding as of December 31, 2015. Furthermore, AGUS obtained the following funds from its subsidiaries in 2012 to repurchase $173complete the remarketing of the $172.5 million principal amount of 8.50% Senior Notes:Notes due 2012 that it had issued in 2009 in connection with the acquisition of AGHM: (1) $83$82.5 million loaned from Assured Guaranty (Bermuda) Ltd., a subsidiary of AGM,an affiliate, (2) $50 million in dividends from AGMH, which obtained the cash after AGM repaid a portion of its surplus note to AGMH, and (3) $40 million in dividends from AGC. The $82.5 million loan was repaid in full in July 2013 with a combination of the outstanding common stock of MAC and cash.

Furthermore, AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130 million aggregate principal amount of senior notes issued by AGUS and AGMH, and the $450 million aggregate principal amount of junior subordinated debentures issued by AGUS and AGMH, in each case, as described under "Commitments and Contingencies -- Long-Term Debt Obligations " below.

Cash and Investments

As of December 31, 2015, AGL had $9.7 million in cash and short-term investments. AGUS and AGMH had a total of $114 million in cash and short-term investments . In addition, the Company's U.S. holding companies have $59 million in fixed-maturity securities with weighted average duration of 0.5 years.

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

operating expenses,
claims on the insured portfolio,
posting of collateral postings in connection with credit derivatives and reinsurance transactions,

114


reinsurance premiums,
dividends to AGL, AGUS and/or AGMH, and AGL, as applicable, for debt service and dividends,
principal paydownof and, where applicable, interest on surplus notes, issued, and
capital investments in their own subsidiaries, where appropriate.

Management believes that its subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios. The Company targets a balance of its most liquid assets including cash and short-term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold temporarily impaired debt securities until the date of anticipated recovery.
 
Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, insurance regulations and rating agency capital requirements and general economic conditions.
 
Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option. CDS may provide for acceleration of amounts due upon the occurrence of certain credit events, subject to single-risk limits specified in the insurance laws of the State of New York (the “New York Insurance Law”). These constraints prohibit or limit acceleration of certain claims according to Article 69 of the New York Insurance Law and serve to reduce the Company’s liquidity requirements.
 

119


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

 Year Ended December 31,
 2012 2011 2010
    
Claims paid before R&W recoveries, net of reinsurance$1,326
 $1,142
 $1,121
R&W recoveries(459) (1,059) (189)
Claims paid, net of reinsurance(1)$867
 $83
 $932
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Public finance$(29) $(144) $6
Structured finance:     
U.S. RMBS before benefit for recoveries for breaches of R&W(270) (304) (587)
Net benefit for recoveries for breaches of R&W173
 663
 954
U.S. RMBS after benefit for recoveries for breaches of R&W(97) 359
 367
Other structured finance(161) 2
 (124)
Structured finance(258) 361
 243
Claims (paid) recovered, net of reinsurance(1)$(287) $217
 $249
____________________
(1)
Includes $38$21 million and $20 million paid in 2015 and 2014, and $189 million recovered and $200 million and $143 million paidin 2013, respectively, for consolidated FG VIEs for the years ended December 31, 2012, 2011 and 2010, respectively.
VIEs. Claims recovered in 2013 include invested assets received as part of a restructuring.
 
As of December 31, 2015, the Company had exposure of approximately $2.9 billion to infrastructure transactions with refinancing risk. The Company may be required to make claim payments on such exposure, the aggregate amount of the claim payments may be substantial and, although the Company may not experience ultimate loss on a particular transaction, reimbursement may not occur for an extended time. These transactions generally involve long-term infrastructure projects that were financed by bonds that mature prior to the expiration of the project concession. The Company expects the cash flows from these projects to be sufficient to repay all of the debt over the life of the project concession, but also expects the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay a claim when the debt matures, and then recover from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such claim payments. However, the recovery of such amounts is uncertain and may take from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. As of December 31, 2015, the Company estimated total claims for the two largest transactions with significant refinancing risk, assuming no refinancing, and based on certain performance assumptions, could be $1.9 billion on a gross basis; such claims would occur from 2017 through 2022. Of such $1.9 billion in estimated gross claims, an estimated $1.3 billion related to obligations of SCC, which owned the concession for the Chicago Skyway toll road. In November 2015, a consortium of three Canadian pension plans announced that they had reached agreement, subject to regulatory approvals and customary closing conditions, to purchase SCC for $2.8 billion. The sale was completed on February 25, 2016 and the various SCC obligations insured by the Company were retired without a claim on the Company.

In addition, the Company has net par exposure of $5.1 billion to Commonwealth of Puerto Rico transactions, all of which are BIG. Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits have been covered primarily with the net proceeds of bond issuances, with interim financings provided by GDB and, in some cases, with one-time revenue measures or expense adjustment measures. In addition to high debt levels, Puerto Rico faces a challenging economic environment. Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public corporations is set forth in "Insured Portfolio-Exposure to Puerto Rico" above.

The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by ISDA in order to provide for payments on a scheduled basis and to replicate the terms of a traditional financial guaranty insurance policy. Some contracts the Company entered into as the credit protection seller, however, utilize standard ISDA settlement mechanics of cash settlement (i.e., a process to value the loss of market value of a reference obligation) or physical settlement (i.e., delivery of the reference obligation against payment of principal by the protection seller) in the event of a “credit event,” as defined in the relevant contract. Cash settlement or physical settlement generally requires the payment of a larger amount, prior to the maturity of the reference obligation, than would settlement on a “pay-as-you-go” basis, under which the Company would be required to pay scheduled interest shortfalls during the term of the reference obligation and scheduled principal shortfall only at the final maturity of the reference obligation. The Company’s CDS contracts also generally provide that if eventsAs of default or termination events specified in the CDS documentation were to occur, the non-defaulting or the non-affected party, which may be eitherDecember 31, 2015, the Company or the counterparty, depending upon the circumstances, may decidewas posting approximately $305 million to terminate the CDS contract prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination. In addition, under certain of the Company's CDS, the Company may be obligated to collateralizesecure its obligations under the CDS if it does not maintain financial strength ratings above the negotiated rating level specified in the CDS documentation.
Insurance Company Regulatory Restrictions
The insurance company subsidiaries’ abilityCDS. Of that amount, approximately $282 million related to pay dividends depends, among other things, upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to$3.6

115120


restrictions containedbillion in CDS gross par insured where the amount of required collateral is capped and the remaining $23 million related to $221 million in CDS gross par insured where the amount of required collateral is based on movements in the insurance laws and related regulations of their states of domicile. Dividends paid by a U.S. company to a Bermuda holding company presently are subject to a 30% withholding tax.
Under Maryland’s insurance law, AGC may pay dividends in any twelve-month period in an aggregate amount not exceeding the lesser of (a) 10% of policyholders’ surplus or (b) net investment income at the preceding December 31 (including net investment income that has not already been paid out as dividends for the three calendar years prior to the preceding calendar year) with notice to, but without prior approvalmark-to-market valuation of the Maryland Commissioner of Insurance. As of December 31, 2012, the amount available for distribution from AGC during 2012 with notice to, but without prior approval of, the Maryland Commissioner of Insurance is approximately $91 million.
Under the New York Insurance Law, AGM may pay dividends out of earned surplus, provided that, together with all dividends declared or distributed by AGM during the preceding 12 months, the dividends do not exceed the lesser of (a) 10% of policyholders’ surplus as of its last statement filed with the Superintendent of Insurance of the State of New York (the “New York Superintendent”) or (b) adjusted net investment income (net investment income at the preceding December 31 plus net investment income that has not already been paid out as dividends for the three calendar years prior to the preceding calendar year) during this period. Based on AGM’s statutory statements to be filed for the year ended December 31, 2012, the maximum amount available for payment of dividends by AGM without regulatory approval over the 12 months following December 31, 2012, is approximately $178 million. In connection with Assured Guaranty’s acquisition of AGMH, Assured Guaranty agreed with Dexia that, until July 1, 2012, AGM would not pay dividends in excess of 125% of AGMH’s annual debt service and unless it was rated at least AA- by S&P and Aa3 by Moody's. While this covenant was in effect, it constituted a limitation on AGM’s ability to pay dividends that was more restrictive than the statutory limitation.underlying exposure.

As of December 31, 2012, AG Re had unencumbered assets of $261 million, representing assets not held in trust for the benefit of cedants and therefore available for other uses. Based on regulatory dividend limitations, the maximum amount available at AG Re to pay dividends or make a distribution of contributed surplus in 2013 in compliance with Bermuda law is approximately $634 million. However, any distribution that results in a reduction of 15% (approximately $195 million as of December 31, 2012) or more of AG Re’s total statutory capital, as set out in its previous years’ financial statements, would require the prior approval of the Bermuda Monetary Authority. Dividends are limited by requirements that the subject company must at all times (i) maintain the minimum solvency margin and the Company’s applicable enhanced capital requirements required under the Insurance Act of 1978 and (ii) have relevant assets in an amount at least equal to 75% of relevant liabilities, both as defined under the Insurance Act of 1978. AG Re, as a Class 3B insurer, is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least seven days before payment of such dividends) with the Authority an affidavit stating that it will continue to meet the required margins.

Dividends Paid
By Insurance Company Subsidiaries

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Dividends paid by AGC to AGUS$55
 $30
 $50
Dividends paid by AGM to AGMH30
 
 
Dividends paid by AG Re to AGL151
 86
 24


116


Consolidated Cash Flows
 
Consolidated Cash Flow Summary
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
   (in millions)
Net cash flows provided by (used in) operating activities$(165) $676
 $129
Net cash flows provided by (used in) investing activities943
 561
 653
Net cash flows provided by (used in) financing activities(856) (1,132) (717)
Net cash flows provided by (used in) operating activities before effects of trading securities and FG VIEs consolidation$(103) $431
 $396
(Purchases) sales of trading securities, net8
 78
 (16)
Effect of FG VIEs consolidation43
 68
 (136)
Net cash flows provided by (used in) operating activities - reported(52) 577
 244
Net cash flows provided by (used in) investing activities before effects of FG VIEs consolidation823
 (423) 37
Effect of FG VIEs consolidation171
 327
 644
Net cash flows provided by (used in) investing activities - reported994
 (96) 681
Net cash flows provided by (used in) financing activities before effects of FG VIEs consolidation(633) (189) (367)
Effect of FG VIEs consolidation(214) (396) (511)
Net cash flows provided by (used in) financing activities - reported (1)(847) (585) (878)
Effect of exchange rate changes1
 2
 (1)(4) (5) (1)
Cash at beginning of period215
 108
 44
75
 184
 138
Total cash at the end of the period$138
 $215
 $108
$166
 $75
 $184
____________________
(1)Claims paid on consolidated FG VIEs are presented in the consolidated cash flow statements as a component of paydowns on FG VIE liabilities in financing activities as opposed to operating activities.

Operating cash flows includeExcluding net cash flows from FG VIEs. Claims paid on consolidated FG VIEs are presented inpurchases and sales of the consolidated cash flow statements as a componenttrading portfolio and the effect of paydowns on FG VIE liabilities in financing activities as opposed to operating activities. Excluding consolidatedconsolidating FG VIEs, cash outflowsinflows from operating activities for 2012 were mainlydecreased in 2015 compared with 2014 due primarily to claim paymentslower R&W cash recoveries in 2015 than the comparable prior year period.

Excluding net cash flows from purchases and sales of the trading portfolio and the effect of consolidating FG VIEs, cash inflows from operating activities increased in 2014 compared with 2013 due primarily to lower claims paid on losses (net of R&W recoveries from settlementrecoveries) and cash received on commutation agreements, offset in part by cash received(1) lower premiums and realized gains (losses) and other settlements on two commutations of $190 million. Losses paid in 2012 include claims related to Greek sovereign exposures. Cash inflows from operating activities in 2011 were due mainly to cash proceeds received from the Bank of America Agreement. Operating cash inflows in 2010 was due primarily to premium on financial guaranty and credit derivatives, offset in part by outflows for net paid losses,of commissions, (2) higher taxes and (3) interest other expenses and taxes.payments.

Investing activities were primarily net sales (purchases) of fixed maturityfixed-maturity and short-term investment securities. Investing cash flows in 2012, 20112015, 2014 and 20102013 include inflows of $545$400 million,, $760 $408 million and $424$663 million for FG VIEs, respectively. In addition, in 2012,the first quarter of 2015, the Company sold securities to fund the acquisition of Radian Asset by AGC. In the second quarter of 2015 the Company paid $91$800 million, net of cash acquired, to acquire MACRadian Asset. The 2013 amounts included proceeds from sales of third party surplus notes and received $56 million from a payment of a note receivable.other invested assets.
 
Financing activities consisted primarily of paydowns of FG VIE liabilities.liabilities and share repurchases. Financing cash flows in 2012, 20112015, 2014 and 20102013 include outflows of $$214 million, $396 million and 724 million, $1,053 million and $651511 million for FG VIEs, respectively. In 2015, the Company paid $555 million to repurchase 21.0 million common shares; in 2014, the Company paid $590 million to repurchase 24.4 million common shares; and in 2013, the Company paid $264 million to repurchase 12.5 million common shares.

From January 1, 2016 through February 9, 2016, the Company repurchased an additional 2.3 million shares for $55 million and exhausted its previous authorization to repurchase common shares. On January 18, 2013,February 24, 2016, the Company's Board of Directors authorizedapproved a $200 $250 million share repurchase program. This latestauthorization. For more information about the Company's share repurchase program replaces

121


authorization and the November 14, 2011 authorization to repurchase up to 5.0 million common shares. In 2012,amounts it repurchased in 2015, see Note 18, Shareholders' Equity, of the Company paid $24 million to repurchase 2.1 million common shares. In 2011, the Company paid $23 million to repurchase 2 million common shares,Financial Statements and in 2010, the Company paid $10 million to repurchase 0.7 million common shares.Supplementary Data.
 
Commitments and Contingencies
 
Leases
 
AGL and its subsidiaries are party to various lease agreements.

The principal executive offices of AGL and AG Re consist of approximately 8,250 square feet of office space located in Hamilton, Bermuda. TheBermuda; the lease for this space expires in April 2015.

2021. AGM entered into an operating lease as of September 30, 2015 for new office space comprising one full floor and one partial floor at 1633 Broadway in New York City.  The Company's primary lease forCompany plans to move the principal place of business of AGM, AGC, MAC and itsthe Company's other U.S. based subsidiaries from 31 West 52nd Street in New York City expiresto this new location during the summer of 2016.  The new lease is for approximately 88,000 square feet and runs until 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent.  The fixed annual rent, which commences after an initial rent holiday, begins at $6.2 million, rising in Apriltwo steps to $7.3 million for the last five years of the initial term.  In connection with the move and in return for rent abatement and certain other concessions, AGM agreed to terminate, eight months after its new space is delivered, its lease on its existing office space at 31 West 52nd Street, which had been scheduled to run until 2026. In addition, the Company and its subsidiaries lease additionalleases office space under non-cancelable operating leases, which expire at various dates through 2016. Prior to the AGMH Acquisition, the Company had entered into a five year lease agreement in New York City, however, as a result of the AGMH Acquisition, the Company decided not to occupy this office spaceLondon and subleased it to two tenants for total minimum annual payments of approximately $4 million until October 2013.San Francisco, California. See “–Contractual Obligations” for lease payments due by period. Rent expense was $$10.5 million in 2015, 10.0$10.1 million in 2012, $2014 and 10.7$9.9 million in 2011 and $11.4 million in 2010.2013.


117122


Long-Term Debt Obligations
 
The outstanding principal of and interest paid on long-term debt issued by AGUS and AGMH were as follows:

Principal Outstanding
and Interest Paid on Long-Term Debt
 
Principal Amount Interest PaidPrincipal Amount Interest Paid
As of December 31, Year Ended December 31,As of December 31, Year Ended December 31,
2012 2011 2012 2011 20102015 2014 2015 2014 2013
(in millions)(in millions)
AGUS: 
  
  
  
   
  
    
  
7.0% Senior Notes(1)$200
 $200
 $14
 $14
 $14
$200
 $200
 $14
 $14
 $14
8.50% Senior Notes(1)
 173
 7
 15
 15
5.0% Senior Notes(1)500
 500
 25
 13
 
Series A Enhanced Junior Subordinated Debentures(2)150
 150
 10
 10
 10
150
 150
 10
 10
 10
Total AGUS350
 523
 31
 39
 39
850
 850
 49
 37
 24
AGMH(1): 
  
  
  
  
AGMH(4): 
  
  
  
  
67/8% QUIBS(1)
100
 100
 7
 7
 7
100
 100
 7
 7
 7
6.25% Notes(1)230
 230
 14
 14
 14
230
 230
 14
 14
 14
5.60% Notes(1)100
 100
 6
 6
 6
100
 100
 6
 6
 6
Junior Subordinated Debentures(2)300
 300
 19
 19
 19
300
 300
 19
 19
 19
Total AGMH730
 730
 46
 46
 46
730
 730
 46
 46
 46
AGM(2): 
  
  
  
  
Notes Payable61
 97
 8
 7
 7
AGM(3): 
  
  
  
  
AGM Notes Payable12
 16
 0
 3
 6
Total AGM61
 97
 8
 7
 7
12
 16
 0
 3
 6
Total$1,141
 $1,350
 $85
 $92
 $92
$1,592
 $1,596
 $95
 $86
 $76
 ____________________
(1)On June 1, 2012, AGUS retired all of the 8.5% Senior Notes. See Note 2, Business Changes, Risks, Uncertainties and Accounting Developments, of the Financial Statements and Supplementary Data.
(1)AGL fully and unconditionally guarantees these obligations

(2)Principal amounts vary from carrying amounts due primarily to acquisition method fair value adjustments at the Acquisition Date, which are accreted or amortized into interest expense over the remaining terms of these obligations.Guaranteed by AGL on a junior subordinated basis.

AGL fully and unconditionally guarantees(3)Principal amounts vary from carrying amounts due primarily to acquisition method fair value adjustments at the following obligations:AGMH acquisition date, which are accreted or amortized into interest expense over the remaining terms of these obligations.

7.0%7.0% Senior Notes issued by AGUS
6 7/8% Quarterly Income Bonds Securities (“QUIBS”) issued by AGMH
6.25% Notes issued by AGMH
5.60% Notes issued by AGMH

In addition, AGL guarantees, on a junior subordinated basis, AGUS’s Series A, Enhanced Junior Subordinated Debentures and the $300 million of AGMH’s outstanding Junior Subordinated Debentures.
Debt Issued by AGUS
7.0% Senior Notes.AGUS.  On May 18, 2004, AGUS issued $200$200 million of 7.0%7.0% senior notes due 2034 (“7.0% Senior Notes”) for net proceeds of $197 million.$197 million. Although the coupon on the Senior Notes is 7.0%7.0%, the effective rate is approximately 6.4%6.4%, taking into account the effect of a cash flow hedge.
 
8.5%5.0% Senior Notes.Notes issued by AGUS. On June 24, 2009, AGL20, 2014, AGUS issued 3,450,000 equity units$500 million of 5.0% Senior Notes due 2024 for net proceeds of approximately $167 million in a registered public offering.$495 million. The notes are guaranteed by AGL. The net proceeds from the sale of the offeringnotes were used to pay a portionfor general corporate purposes, including the purchase of the consideration for the AGMH Acquisition. Each equity unit consisted of (i) a 5% undivided beneficial ownership interest in $1,000 principal amount of 8.5% senior notes due 2014 issued by AGUS and (ii) a forward purchase contract obligating the holders to purchase $50 of AGL common shares in June 2012. On June 1, 2012, the Company completed the remarketing of the $173 million aggregate principal amount of 8.5% Senior Notes; AGUS purchased all of the Senior Notes in the remarketing at a price of 100% of the

118


principal amount thereof, and retired all of such notes on June 1, 2012. The proceeds from the remarketing were used to satisfy the obligations of the holders of the Equity Units to purchase AGL common shares pursuant to the forward purchase contract. Accordingly, on June 1, 2012, AGL issued 3.8924 common shares to holders of each Equity Unit, which represented a settlement rate of 3.8685 common shares plus certain anti-dilution adjustments, or an aggregate of 13,428,770 common shares at approximately $12.85 per share. The Equity Units ceased to exist when the forward purchase contracts were settled on June 1, 2012.AGL.

Series A Enhanced Junior Subordinated Debentures.Debentures issued by AGUS.  On December 20, 2006, AGUS issued $150$150 million of the Debentures due 2066. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month LIBORLondon Interbank Offered Rate ("LIBOR") plus a margin equal to 2.38%. AGUS may select at 1.0one or more times to defer payment of interest for 1.0one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date.
 
Debt Issued by AGMH
6 7/8% QUIBS.8% QUIBS issued by AGMH.  On December 19, 2001, AGMH issued $100$100 million face amount of 6 7/8%8% QUIBS due December 15, 2101, which are callable without premium or penalty.
 
6.25% Notes.6.25% Notes issued by AGMH.  On November 26, 2002, AGMH issued $230$230 million face amount of 6.25%6.25% Notes due November 1, 2102, which are callable without premium or penalty in whole or in part.

123


 
5.60% Notes.5.60% Notes issued by AGMH.  On July 31, 2003, AGMH issued $100$100 million face amount of 5.60%5.60% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part.
 
Junior Subordinated Debentures.Debentures issued by AGMH.  On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.40%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month London Interbank Offered Rate ("LIBOR")LIBOR plus 2.215% until repaid. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is twenty years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH.
Debt Issued by AGM
Notes Payable represent debt, issued by special purpose entities consolidated by AGM, to the former AGMH subsidiaries that conducted AGMH’s Financial Products Business (the “Financial Products Companies”) transferred to Dexia Holdings prior to the AGMH Acquisition. The funds borrowed were used to finance the purchase of the underlying obligations of AGM-insured obligations which had breached triggers allowing AGM to exercise its right to accelerate payment of a claim in order to mitigate loss. The assets purchased are classified as assets acquired in refinancing transactions and recorded in “other invested assets.” The term of the notes payable matches the terms of the assets.

Recourse Credit Facilities
2009 Strip Coverage Facility
 
In connection with the acquisition of AGMH, Acquisition, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. The liquidity risk to AGM related to the strip policy portion of the leveraged lease business is mitigated by the strip coverage facility described below.
 

119


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

One event that may lead to an early termination of a lease is the downgrade of AGM, as the strip coverage provider, or the downgrade of the equity payment undertaker within the transaction, in each case, generally to a financial strength rating below double-A. Upon such downgrade, the tax-exempt entity is generally obligated to find a replacement credit enhancer within a specified period of time; failure to find a replacement could result in a lease default, and failure to cure the default within a specified period of time could lead to an early termination of the lease and a demand by the lessor for a termination payment from the tax-exempt entity. However, even in the event of an early termination of the lease, there would not necessarily be an automatic draw on AGM’s policy, as this would only occur to the extent the tax-exempt entity does not make the required termination payment.
As a result of the January 2013 Moody's downgrade of AGM,Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are currently breaching a ratingsrating trigger related to AGM. IfAGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment.If all the leases were to occurterminate early and the tax-exempt entities do not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $1.7$1.1 billion as of December 31, 2012.2015. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM guaranty.policy. It is difficult to determine the probability that the CompanyAGM will have to pay strip provider claims or the likely aggregate amount of such claims. At December 31, 2012,2015, approximately $947 million$1.4 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM.
 
On July 1, 2009, AGM and Dexia Crédit Local S.A. (“DCL”), acting through its New York Branch (“Dexia Crédit Local (NY)”), entered into a credit facility (the “Strip Coverage Facility”). Under the Strip Coverage Facility, Dexia Crédit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on AGM strip policies that were outstanding as of November 13, 2008, up to the commitment amount. The commitment amount of the Strip Coverage Facility was $1 billion at closing of the AGMH Acquisition but is scheduled to amortize over time. AsCompany's acquisition of December 31, 2012,AGMH. AGM has reduced the maximum commitment amount from time to time, after taking into account its experience with its exposure to leveraged lease transactions. Most recently, as of June 30, 2014, AGM reduced the Strip Coverage Facility has amortizedmaximum commitment amount to $960$495 million. It may also be reduced in 2014 to $750 million, if AGM does not have and agreed with Dexia Crédit Local (NY) that the commitment amount would no longer amortize on a specified consolidated net worth at that time.scheduled monthly basis.
 

124


Fundings under this facility are subject to certain conditions precedent, and their repayment is collateralized by a security interest that AGM granted to Dexia Crédit Local (NY) in amounts that AGM recovers – from the tax-
exempt entity, or from asset sale proceeds – following its payment of strip policy claims. TheOn June 30, 2014, AGM and Dexia Crédit Local (NY) agreed to shorten the duration of the facility. Accordingly, the Strip Coverage Facility will terminate upon the earliest to occur of an AGM change of control, the reduction of the commitment amount to $0, in accordance with the terms of the facility, and June 30, 2024 (rather than the original maturity date of January 31, 2042.2042).
     
The Strip Coverage Facility’s financial covenants require that AGM and its subsidiaries maintain maintain:

a maximum debt-to-capital ratio of 30%; and

30% and maintain a minimum net worth of 75% of consolidated net worth as of July 1, 2009, plus, starting July 1, 2014,beginning June 30, 2015 and on each anniversary of such date, an amount equal to the product of (i) 25% of the aggregate consolidated net income (or loss) for the period beginning July 1,2, 2009 and ending on June 30, 2014 or, (2) zero, ifand (ii) a fraction, the numerator of which is the commitment amount has been reduced toas of the relevant calculation date and the denominator of which is $750 million1 billion as described above. .

The Company iswas in compliance with all financial covenants as of December 31, 2012.2015.
 
The Strip Coverage Facility contains restrictions on AGM, including, among other things, in respect of its ability to incur debt, permit liens, pay dividends or make distributions, dissolve or become party to a merger or consolidation. Most of these restrictions are subject to exceptions. The Strip Coverage Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, bankruptcy or insolvency proceedings and cross-default to other debt agreements.
 
As of December 31, 2012, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.

120


Limited-Recourse Credit Facilities
AG Re Credit Facility
On July 31, 2007, AG Re entered into a limited recourse credit facility (“AG Re Credit Facility”) with a syndicate of banks which provides up to $200 million for the payment of losses in respect of the covered portfolio. The AG Re Credit Facility expires in June 2014. The facility can be utilized after AG Re has incurred, during the term of the facility, cumulative municipal losses (net of any recoveries) in excess of the greater of $260 million or the average annual debt service of the covered portfolio multiplied by 4.5%. The obligation to repay loans under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral.
As of December 31, 20122015, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.
 
Letters of Credit
AGC entered into a letter of credit agreement in December 2011 with Bank of New York Mellon totaling approximately $2.9 million in connection with a 2008 lease for office space, which space was subsequently sublet. As of December 31, 2012, $2.9 million was outstanding under this letter of credit.
Committed Capital Securities
 
TheEach of AGC and AGM have issued $200 million of CCS pursuant to transactions in which AGC CCS or AGM’s Committed Preferred Trust Securities
On April 8, 2005, AGC entered into separate agreements (the “Put Agreements”“AGM CPS”) with four, as applicable, were issued by custodial trusts (each, a “Custodial Trust”) pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50 million of perpetual preferred stock of AGC (the “AGC Preferred Stock”).
Each of the Custodial Trusts is a special purpose Delaware statutory trust formedcreated for the primary purpose of (a) issuing a series of flex AGC CCS Securities representing undivided beneficial interests in the assets of the Custodial Trust; (b)such securities, investing the proceeds fromin high-quality assets and providing put options to AGC or AGM, as applicable. The put options allow AGC and AGM to issue non-cumulative redeemable perpetual preferred securities to the issuancetrusts in exchange for cash. For both AGC and AGM, four initial trusts were created, each with an initial aggregate face amount of $50 million. The Company does not consider itself to be the primary beneficiary of the trusts for either the AGC CCS Securities or any redemption in full of AGC Preferred Stock in a portfolio of high-grade commercial paperAGM committed capital securities and (in limited cases) U.S. Treasury Securities (the “Eligible Assets”), and (c) entering into the Put Agreement and related agreements. The Custodial Truststrusts are not consolidated in Assured Guaranty’sGuaranty's financial statements.

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

AGC Committed Capital Securities.AGC entered into separate put agreements with four custodial trusts with respect to its committed capital securities in April 2005. The AGC put options have not been exercised through the date of this filing. Initially, all of AGC committed capital securities were issued to a special purpose pass-through trust (the “Pass-Through Trust”). The Pass-Through Trust was dissolved in April 2008 and the AGC committed capital securities were distributed to the holders of the Pass-Through Trust's securities. Neither the Pass-Through Trust nor the custodial trusts are consolidated in the Company's financial statements.  Income distributions on the AGC CCS SecuritiesPass-Through Trust securities and committed capital securities were equal to an annualized rate of one-month LIBOR plus 110 basis points for all periods ending on or prior to April 8, 2008. For periods after that date,Following dissolution of the Pass-Through Trust, distributions on the AGC CCS Securitiescommitted capital securities are determined pursuant to an auction process. On April 7, 2008 this auction process failed, thereby increasing the annualized rate on the AGC CCS Securitiescommitted capital securities to one-month LIBOR plus 250 basis points. When a Custodial Trust holds Eligible Assets,Distributions on the relevant distribution period is 28 days; when a Custodial Trust holds AGC Preferred Stock, however, the distribution period is 49 days.
Put Agreements.  Pursuantpreferred stock will be determined pursuant to the Put Agreements,same process. AGC pays a monthly put premiumcontinues to each Custodial Trust except during any periods whenhave the relevant Custodial Trust holds the AGC Preferred Stock that has been putability to it or upon termination of the Put Agreement. This put premium equals the product of:
·the applicable distribution rate on the AGC CCS Securities for the relevant period less the excess of (a) the Custodial Trust’s stated return on the Eligible Assets for the period (expressed as an annual rate) over (b) the expenses of the Custodial Trust for the period (expressed as an annual rate);
·the aggregate face amount of the AGC CCS Securities of the Custodial Trust outstanding on the date the put premium is calculated; and
·the number of days in the distribution period divided by 360.
Upon AGC’s exercise of its put option and cause the relevant Custodial Trust will liquidate its portfolio of Eligible Assets andrelated trusts to purchase the AGC Preferred Stock. The Custodial Trust will then hold the AGC Preferred Stock until the earlier of the redemption of the AGC Preferred Stock and the liquidation or dissolution of the Custodial Trust.

121125


AGM Committed Capital Securities.AGM entered into separate put agreements with four custodial trusts with respect to its committed capital securities in June 2003. The Put AgreementsAGM put options have no scheduled termination date or maturity. However, each Put Agreement will terminate if (subject to certain grace periods) (1) AGC fails to pay the put premium as required, (2) AGC elects to have the AGC Preferred Stock bear a fixed rate dividend (a “Fixed Rate Distribution Event”), (3) AGC fails to pay dividends on the AGC Preferred Stock, or the Custodial Trust’s fees and expenses for the related period, (4) AGC fails to pay the redemption price of the AGC Preferred Stock, (5) the face amount of a Custodial Trust’s CCS Securities is less than $20 million, (6) AGC terminates the Put Agreement, or (7) a decree of judicial dissolution of the Custodial Trust is entered. If, as a result of AGC’s failure to pay the put premium, the Custodial Trust is liquidated, AGC will be required to pay a termination payment, which will in turn be distributed to the holders of the AGC CCS Securities. The termination payment will be at a rate equal to 1.10% per annum of the amount invested in Eligible Assets calculated fromnot been exercised through the date of the failure to pay the put premium through the end of the applicable period. As of December 31, 2012 the put option had not been exercised.
AGC Preferred Stock.  The dividend rate on the AGC Preferred Stock is determined pursuant to the same auction process applicable to distributions on the AGC CCS Securities. However, if a Fixed Rate Distribution Event occurs, the distribution rate on the AGC Preferred Stock will be the fixed rate equivalent of one-month LIBOR plus 2.50%. For these purposes, a “Fixed Rate Distribution Event” will occur when AGC Preferred Stock is outstanding, if (subject to certain grace periods): (1) AGC elects to have the AGC Preferred Stock bear dividends at a fixed rate, (2) AGC does not pay dividends on the AGC Preferred Stock for the related distribution period or (3) AGC does pay the fees and expenses of the Custodial Trust for the related distribution period. During the period in which AGC Preferred Stock is held by a Custodial Trust and unless a Fixed Rate Distribution Event has occurred, dividends will be paid every 49 days. Following a Fixed Rate Distribution Event, dividends will be paid every 90 days.
Unless redeemed by AGC, the AGC Preferred Stock will be perpetual. Following exercise of the put option during any Flexed Rate Period, AGC may redeem the AGC Preferred Stock held by a Custodial Trust in whole and not in part on any distribution payment date by paying the Custodial Trust the liquidation preference amount of the AGC Preferred Stock plus any accrued but unpaid dividends for the then current distribution period. If AGC redeems the AGC Preferred Stock held by a Custodial Trust, the Custodial Trust will reinvest the redemption proceeds in Eligible Assets and AGC will pay the put premium to the Custodial Trust. If the AGC Preferred Stock was distributed to holders of AGC CCS Securities during any Flexed Rate Period then AGC may not redeem the AGC Preferred Stock until the end of the period.

Following exercise of the put option, AGC Preferred Stock held by a Custodial Trust in whole or in part on any distribution payment date by paying the Custodial Trust the liquidation preference amount of the AGC Preferred Stock to be redeemed plus any accrued but unpaid dividends for the then current distribution period. If AGC partially redeems the AGC Preferred Stock held by a Custodial Trust, the redemption proceeds will be distributed pro rata to the holders of the CCS Securities (with a corresponding reduction in the aggregate face amount of AGC CCS Securities). However, AGC must redeem all of the AGC Preferred Stock if, after giving effect to a partial redemption, the aggregate liquidation preference amount of the AGC Preferred Stock held by the Custodial Trust immediately following such redemption would be less than $20 million. If a Fixed Rate Distribution Event occurs, AGC may not redeem the AGC Preferred Stock for two years from the date of the Fixed Rate Distribution Event.
The AGM CPS Securities
In June 2003, $200 million of AGM CPS Securities, money market preferred trust securities, were issued by trusts created for the primary purpose of issuing the AGM CPS Securities, investing the proceeds in high-quality commercial paper and selling put options to AGM, allowing AGM to issue the trusts non-cumulative redeemable perpetual preferred stock (the “AGM Preferred Stock”) of AGM in exchange for cash. There are four trusts, each with an initial aggregate face amount of $50 million. These trusts hold auctions every 28 days, at which time investors submit bid orders to purchase AGM CPS Securities. If AGM were to exercise a put option, the applicable trust would transfer the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, to AGM in exchange for AGM Preferred Stock.this filing. AGM pays a floating put premium to the trusts, which represents the difference between the commercial paper yield and the winning auction rate (plus all fees and expenses of the trust). If an auction does not attract sufficient clearing bids, however, the auction rate is subject to a maximum rate of one-month LIBOR plus 200 basis points for the next succeeding distribution period. Beginning in August 2007, the AGM CPS Securitiescommitted capital securities required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock. The trusts provide AGM access to new capital at its sole discretion through the exercise of the put options. As of December 31, 2012 the put option had not been exercised. The Company does not consider itself to be the primary beneficiary of the trusts.


122


Contractual Obligations

The following table summarizes the Company's contractual obligations.obligations under its contracts, including debt and lease obligations, and also includes estimated claim payments, based on its loss estimation process, under financial guaranty policies it has issued.

As of December 31, 2012As of December 31, 2015
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
After
5 Years
 Total
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
After
5 Years
 Total
(in millions)(in millions)
Long-term debt:                 
7.0% Senior Notes$14
 $28
 $28
 $429
 $499
$14
 $28
 $28
 $387
 $457
5.0% Senior Notes25
 50
 50
 588
 713
Series A Enhanced Junior Subordinated Debentures10
 19
 19
 620
 668
10
 19
 19
 591
 639
67/8% QUIBS
7
 14
 14
 677
 712
7
 14
 14
 657
 692
6.25% Notes14
 29
 29
 1,450
 1,522
14
 29
 29
 1,407
 1,479
5.60% Notes6
 11
 11
 579
 607
6
 11
 11
 563
 591
Junior Subordinated Debentures19
 38
 38
 1,242
 1,337
19
 38
 38
 1,183
 1,278
Notes Payable29
 26
 23
 4
 82
4
 6
 1
 2
 13
Operating lease obligations(1)14
 16
 16
 66
 112
4
 13
 16
 84
 117
Financial guaranty claim payments(2)699
 644
 275
 1,772
 3,390
Other compensation plans(3)16
 1
 1
 
 18
17
 
 
 
 17
Estimated financial guaranty claim payments(2)242
 348
 143
 2,165
 2,898
Total$828
 $826
 $454
 $6,839
 $8,947
$362
 $556
 $349
 $7,627
 $8,894
 ____________________
(1)Operating lease obligations exclude escalations in building operating costs and real estate taxes.

(2)Financial guaranty claim payments represent estimated undiscounted expected cash outflows under direct and assumed financial guaranty contracts, whether accounted for as insurance or credit derivatives, including claim payments under contracts in consolidated FG VIEs. The amounts presented are not reduced for cessions under reinsurance contracts. Amounts include any benefit anticipated from excess spreadsspread or other recoveries within the contracts but do not reflect any benefit for recoveries under breaches of R&W.

(3)Amount excludes approximately $36$55 million of liabilities under various supplemental retirement plans, which are fair valued and payable at the time of termination of employment by either employer or employee. Amount also excludes approximately $21$70 million of liabilities under AGL 2004 long term incentive plan, which are fair valued and payable at the time of vesting or termination of employment by either employer or employee with change of control.employee. Given the nature of these awards, we are unable to determine the year in which they will be paid.

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

The Company’s fixed maturity securities and short-term investments had a duration of 4.3 years as of December 31, 2012 and 4.7 years as of December 31, 2011. Generally, the Company’s fixed maturity securities are designated as available-for-sale. Fixed maturity securities designated as available for sale are reported at their fair value, and the change in fair value is reported as part of AOCI except for the credit component of the unrealized loss for securities deemed to be OTTI. If management believes the decline in fair value is “other-than-temporary,” the Company writes down the carrying value of the investment and records a realized loss in the consolidated statements of operations for an amount equal to the credit component of the unrealized loss.

Fair value of fixed maturity securities is based upon market prices provided by either independent pricing services or, when such prices are not available, by reference to broker or underwriter bid indications. The Company’s fixed maturity and

123126


short term portfolio is primarily invested in publicly traded securities.The Company’s fixed-maturity securities and short-term investments had a duration of 5.4 years as of December 31, 2015 and 5.0 years as of December 31, 2014. Generally, the Company’s fixed-maturity securities are designated as available-for-sale. For more information about the Investment Portfolio, and a detailed description of the Company’s valuation of investments and of the Company's assessment of other-than temporary impairments, see Note 11,10, Investments and Cash, of the Financial Statements and Supplementary Data.

Fixed MaturityFixed-Maturity Securities and Short TermShort-Term Investments
by Security Type 

As of December 31, 2012 As of December 31, 2011As of December 31, 2015 As of December 31, 2014
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
(in millions)(in millions)
Fixed maturity securities: 
  
  
  
Fixed-maturity securities: 
  
  
  
Obligations of state and political subdivisions$5,528
 $5,841
 $5,416
 $5,795
U.S. government and agencies$732
 $794
 $850
 $922
377
 400
 635
 665
Obligations of state and political subdivisions5,153
 5,631
 5,097
 5,455
Corporate securities930
 1,010
 989
 1,039
1,505
 1,520
 1,320
 1,368
Mortgage-backed securities(1):       
       
RMBS1,281
 1,266
 1,454
 1,428
1,238
 1,245
 1,255
 1,285
CMBS482
 520
 476
 500
506
 513
 639
 659
Asset-backed securities482
 531
 439
 458
831
 825
 411
 417
Foreign government securities286
 304
 333
 340
290
 283
 296
 302
Total fixed maturity securities9,346
 10,056
 9,638
 10,142
Total fixed-maturity securities10,275
 10,627
 9,972
 10,491
Short-term investments817
 817
 734
 734
396
 396
 767
 767
Total fixed maturity and short-term investments$10,163
 $10,873
 $10,372
 $10,876
Total fixed-maturity and short-term investments$10,671
 $11,023
 $10,739
 $11,258
 ____________________
(1)
Government-agency obligations were approximately 61%54% of mortgage backed securities as of December 31, 20122015 and 66%44% as of December 31, 20112014, based on fair value.
 

127


The following tables summarize, for all fixed maturityfixed-maturity securities in an unrealized loss position as of December 31, 20122015 and December 31, 20112014, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

Fixed MaturityFixed-Maturity Securities
Gross Unrealized Loss by Length of Time 
As of December 31, 20122015

Less than 12 months 12 months or more TotalLess than 12 months 12 months or more Total
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
(dollars in millions)(dollars in millions)
Obligations of state and political subdivisions$316
 $(10) $7
 $0
 $323
 $(10)
U.S. government and agencies$62
 $0
 $
 $
 $62
 $0
77
 0
 
 
 77
 0
Obligations of state and political subdivisions79
 (11) 
 
 79
 (11)
Corporate securities25
 0
 
 
 25
 0
381
 (8) 95
 (15) 476
 (23)
Mortgage-backed securities:       
           
    
RMBS108
 (19) 121
 (58) 229
 (77)438
 (8) 90
 (14) 528
 (22)
CMBS5
 0
 
 
 5
 0
140
 (2) 2
 0
 142
 (2)
Asset-backed securities16
 0
 35
 (10) 51
 (10)517
 (10) 
 
 517
 (10)
Foreign government securities8
 0
 
 
 8
 0
97
 (4) 82
 (7) 179
 (11)
Total$303
 $(30) $156
 $(68) $459
 $(98)$1,966
 $(42) $276
 $(36) $2,242
 $(78)
Number of securities(1) 
 58
  
 16
  
 74
 
 335
  
 71
  
 396
Number of securities with OTTI 
 5
  
 6
  
 11
Number of securities with other-than-temporary impairment 
 9
  
 4
  
 13

124


 
Fixed Maturity
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time 
As of December 31, 20112014

Less than 12 months 12 months or more TotalLess than 12 months 12 months or more Total
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
(dollars in millions)(dollars in millions)
Obligations of state and political subdivisions$64
 $0
 $25
 $(1) $89
 $(1)
U.S. government and agencies$4
 $0
 $
 $
 $4
 $0
139
 0
 68
 (1) 207
 (1)
Obligations of state and political subdivisions17
 0
 21
 (1) 38
 (1)
Corporate securities80
 (2) 3
 
 83
 (2)189
 (3) 104
 (2) 293
 (5)
Mortgage-backed securities: 
  
  
  
 
 
 
  
  
  
    
RMBS187
 (68) 36
 (22) 223
 (90)205
 (3) 159
 (18) 364
 (21)
CMBS3
 0
 
 
 3
 0
36
 0
 19
 0
 55
 0
Asset-backed securities
 
 26
 (19) 26
 (19)56
 (2) 18
 (1) 74
 (3)
Foreign government securities141
 (6) 
 
 141
 (6)108
 (2) 0
 0
 108
 (2)
Total$432
 $(76) $86
 $(42) $518
 $(118)$797
 $(10) $393
 $(23) $1,190
 $(33)
Number of securities(1) 
 56
  
 20
  
 76
 
 125
  
 82
  
 198
Number of securities with OTTI 
 6
  
 4
  
 10
Number of securities with other-than-temporary impairment 
 3
  
 7
  
 10
___________________
(1)The number of securities does not add across because lots of the same securities have been purchased at different times and appear in both categories above (i.e., Less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the Total column.


128


Of the securities in an unrealized loss position for 12 months or more as of December 31, 20122015, nine securities had an unrealized loss greater than 10% of book value. The total unrealized loss for these securities as of December 31, 20122015 was $67 million.$26 million. The Company has determined that the unrealized losses recorded as of December 31, 20122015 are yield related and not the result of other-than-temporary impairments.impairment.
 
Changes in interest rates affect the value of the Company’s fixed maturityfixed-maturity portfolio. As interest rates fall, the fair value of fixed maturityfixed-maturity securities generally increases and as interest rates rise, the fair value of fixed maturityfixed-maturity securities generally decreases. The Company’s portfolio of fixed maturityfixed-maturity securities consists primarily of high-quality, liquid instruments. The Company continues to receive sufficient information to value its investments and has not had to modify its approach due to the current market conditions.
 
The amortized cost and estimated fair value of the Company’s available-for-sale fixed maturityfixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Fixed MaturityFixed-Maturity Securities
by Contractual Maturity
As of December 31, 20122015

Amortized
Cost
 
Estimated
Fair Value
Amortized
Cost
 
Estimated
Fair Value
(in millions)(in millions)
Due within one year$315
 $318
$234
 $233
Due after one year through five years1,392
 1,472
1,911
 1,965
Due after five years through 10 years2,284
 2,525
2,169
 2,257
Due after 10 years3,592
 3,955
4,217
 4,414
Mortgage-backed securities: 
  
 
  
RMBS1,281
 1,266
1,238
 1,245
CMBS482
 520
506
 513
Total$9,346
 $10,056
$10,275
 $10,627
 

125


The following table summarizes the ratings distributions of the Company’s investment portfolio as of December 31, 20122015 and December 31, 20112014. Ratings reflect the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or other risk management strategies, which use Assured Guaranty’s internal ratings classifications.
 
Distribution of Fixed Maturity
Fixed-Maturity Securities by Rating
 
Rating As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2015
 As of
December 31, 2014
AAA 18.5% 19.0% 10.8% 14.0%
AA 61.3
 62.6
 59.0
 60.3
A 14.3
 14.5
 17.6
 17.9
BBB 0.4
 
 0.9
 0.5
BIG(1) 5.5
 1.6
 11.4
 7.3
Not rated(1) 0.0
 2.3
 0.3
 
Total 100.0% 100.0% 100.0% 100.0%
____________________
(1)
Includes securities purchased or obtained as partComprised primarily of loss mitigation orand other risk management strategiesassets. See Note 10, Investments and Cash, of $1,160 million in par with carrying value of $556 million or 5.5% of fixed maturity securities as of December 31, 2012the Financial Statements and of $924 million in par with carrying value of $378 million or 3.7% of fixed maturity securities as of December 31, 2011.
Supplementary Data.
 
UnderThe investment portfolio contains securities and cash that are either held in trust for the termsbenefit of certain credit derivative contracts, the Company has obtained the obligations referenced in the transactions and recorded such assets in fixed maturity securities in the consolidated balance sheets. Such amounts totaled $200 million, representing $265 million in par.

The following table presents the fair value of securities with third-party guaranties.
Summary of Investments with Third-Party Guarantors (1)
at Fair Value
Guarantor As of
December 31, 2012
  (in millions)
National Public Finance Guarantee Corporation $667
Ambac (general account) 517
CIFG 22
Berkshire Hathaway Assurance Corporation 6
Syncora Guarantee Inc. 3
Total $1,215
___________________
(1)99% of these securities had investment grade ratings based on the lower of Moody’s and S&P.

Short-term investments include securities with maturity dates equal to or less than one year at the time of purchase. The Company’s short-term investments consist of money market funds, discount notes and certain time deposits for foreign cash portfolios. Short-term investments are reported at fair value.
In connection with its Assumed Business, under agreements with its ceding companies andthird party reinsurers in accordance with statutory requirements, the Company maintains fixed maturity securitiesinvested in trust accountsa guaranteed investment contract for the benefit of the ceding companies, which amounted to $368 million and $380 million as of December 31, 2012 and December 31, 2011, respectively. In addition,future claims payments, placed on deposit to fulfill state licensing requirements, or otherwise restricted in the Company has placed on deposit eligible securitiesamount of $27$283 million and $24$236 million as of December 31, 20122015 and December 31, 2011,2014, respectively, based on fair value. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries for the protectionbenefit of the policyholders. To provide collateral for a letter of credit, the Company holds a fixed maturity investmentother AGL subsidiaries in a segregated account equal to 120% of the letter of credit, which amounted to $3.5 million as of December 31, 2012 and December 31, 2011, respectively. In connectionaccordance with an excess of loss reinsurance facility, $22 million in premiums were released from the trust to the reinsurers in the first

126129


quarterstatutory and regulatory requirements in the amount of 2013. See Note 14, Reinsurance$1,411 million and Other Monoline Exposures,$1,395 million as of the Financial StatementsDecember 31, 2015 and Supplementary Data.
Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generallyDecember 31, 2014, respectively, based on mark-to-market valuations in excess of contractual thresholds. fair value.

The fair market value of the Company’s pledged securities totaled $660 million and $780 million as of December 31, 2012 and December 31, 2011, respectively. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivative, of the Financial Statements and Supplementary Data, for the effect of the downgrade on collateral posted.
Other Invested Assets

Assets Acquired in Refinancing Transactions
The Company has rights under certain ofto secure its financial guaranty insurance policies and indentures that allow it to accelerate the insured notes and pay claims under its insurance policies upon the occurrence of predefined events of default. To mitigate financial guaranty insurance losses, the Company elected to purchase certain outstanding insured obligation or its underlying collateral, primarily franchise loans. Generally, refinancing vehicles reimburse AGM in whole for its claims payments in exchange for assignments of certain of AGM’s rights against the trusts. The refinancing vehicles obtained their funds from the proceeds of AGM-insured GICs, issued in the ordinary course of business by the Financial Products Companies (See “—Liquidity Arrangements with respect to AGMH’s former Financial Products Business—The GIC Business” below). The refinancing vehicles are consolidated with the Company.
Investment in Portfolio Funding Company LLC I
In the third quarter of 2010, as part of loss mitigation efforts under a CDS contract insured by the Company, the Company acquired a 50% interest in Portfolio Funding Company LLC I (“PFC”). PFC owns the distribution rights of a motion picture film library. The Company accounts for its interest in PFC as an equity investment. The Company’s equity earnings in PFC are included in net change in fair value of credit derivatives, as any proceeds from the investment are used to offset the Company’s paymentsobligations under its CDS contract. During the year endedexposure totaled $305 million and $376 million as of December 31, 2012, the Company received $56 million from payments of notes receivable from PFC.2015 and December 31, 2014, respectively.
 
Liquidity Arrangements with respect to AGMH’s former Financial Products Business
 
AGMH’s former financial products segment had been in the business of borrowing funds through the issuance of GICs and medium term notes and reinvesting the proceeds in investments that met AGMH’s investment criteria. The financial products business also included the equity payment undertaking agreement portion of the leveraged lease business, as described further below in “—Strip Coverage Facility for the Leveraged Lease Business.”
 
The GIC Business
 
Until November 2008, AGMH, issued, through its financial products business, AGM-insuredoffered GICs to municipalities and other market participants. The GICs were issued through AGMH’scertain non-insurance subsidiaries (the “GIC Issuers”) FSA Capital Management Services LLC, FSA Capital Markets Services LLC and FSA Capital Markets Services (Caymans) Ltd.of AGMH. In return for an initial payment, each GIC entitles its holder to receive the return of the holder’s invested principal plus interest at a specified rate, and to withdraw principal from the GIC as permitted by its terms. AGM insures the GIC Issuer’s payment obligations on all GICs issued by the applicable GIC Issuer.these GICs.
 
The proceeds of GICs issued by the GIC Issuers were loaned to AGMH’s former subsidiary FSA Asset Management LLC ("FSAM") pursuant to certain intercompany financing agreements between the GIC Issuers and FSAM (the “Intercompany Financings”). FSAM in turn invested these funds in fixed-income obligations (primarily residential mortgage-backed securities, but also short-term investments, securities issued or guaranteed by U.S. government sponsored agencies, taxable municipal bonds, securities issued by utilities, infrastructure-related securities, collateralized debt obligations, other asset-backed securities and foreign currency denominated securities) (the “FSAM assets”). The terms governing FSAM’s repayment of GIC proceeds to the GIC Issuers under the Intercompany Financings were intended to match the payment terms under the related GIC. FSAM historically depended in large part on operating cash flow from interest and principal payments on the FSAM assets to provide sufficient liquidity to pay the GICs on a timely basis. FSAM also sought to manage the financial products business liquidity risk through the maintenance of liquid collateral and liquidity agreements. During the course of 2008, AGMH’s former financial products business developed significant liquidity shortfalls as a result of a number of factors, including (i) greater-than-anticipated GIC withdrawals and terminations due, for the most part, to redemptions caused by events

127


of default under collateralized debt obligations backed by asset-backed securities and under-collateralized loan obligations; (ii) slower-than-anticipated amortization of residential mortgage-backed securities, which comprised most of the portfolio of FSAM assets; (iii) redemption/collateralization requirements triggered by the downgrade of AGM’s financial strength ratings; and (iv) a significant decline in market value of certain of the FSAM assets due to a general market dislocation, leading to many of the FSAM assets becoming illiquid.
 
Prior to the completion of the AGMH Acquisition, AGMH sold its ownership interest in the GIC Issuers and FSAM to Dexia Holdings. Even though AGMH no longer owns the GIC Issuers or FSAM, AGM’s guarantees ofinsurance policies on the GICs remain in place, and must remain in place until each GIC is terminated.terminated, even though AGMH no longer holds any ownership interest in FSAM or the GIC issuers.
 
In June 2009, in connection with the Company's acquisition of AGMH Acquisition and as further described below,from Dexia Holdings Inc., Dexia SA, Dexia Holdings’the ultimate parent of Dexia Holdings Inc., and certain of its affiliates, have entered into a number of agreements pursuant to which they have guaranteed certain amounts, agreed to lend certain amounts or post liquid collateral, and agreed to provide hedges against interest rate risk to or in respect of AGMH’s former financial products business, including the GIC business. The purpose of these agreements isintended to mitigate the credit, interest rate and liquidity risks described above that are primarily associated with the GIC business and the related AGM guarantees. Theseinsurance policies. Some of those agreements includehave since terminated or expired, or been modified. In addition to the surviving agreements described below, AGM benefits from a guaranty jointly and severally issued by Dexia SA and DCLDexia Crédit Local S.A. to AGM that guarantees the payment obligations of AGM under its insurance policies related to the GIC business, and an indemnification agreement between AGM, Dexia SA and DCLDexia Crédit Local S.A. that protects AGM from other losses arising out of or as a result of the GIC business, as well as the liquidity facilities and the swap agreements described below.business.
 
On June 30, 2009, toTo support the primary payment obligations of FSAM andunder the GIC Issuers,GICs, each of Dexia SA and DCL entered into two separate ISDA Master Agreements, each with its associated schedule, confirmation and credit support annex (the “Guaranteed Put Contract” and the “Non-Guaranteed Put Contract” respectively, and collectively, the “Dexia Put Contracts”), the economic effect of which is that Dexia SA and DCL jointly and severally guarantee the scheduled payments of interest and principal in relationCrédit Local S.A. are party to each FSAM asset, as well as any failure of Dexia to provide liquidity or liquid collateral under the committed liquidity lending facilities provided by Dexia affiliates. The Dexia Put Contracts referenced separate portfolios of FSAM assets to which assets owned by FSAM as of September 30, 2008 were allocated, with the less-liquid assets and the assets with the lowest mark-to-market values generally being allocateda put contract. Pursuant to the Guaranteed Put Contract.
In May 2011, Dexia announced the acceleration of its asset divestment program as part of the financial restructuring of its group. Since such announcement, Dexia has exercised its par call option under the Guaranteed Put Contract, over time, with respect to all of the FSAM assets covered thereby and transferred to FSAM an amount of cash equal to the par value of such assets. As a result, the credit, interest rate and liquidity protection provided by the Guaranteed Put Contract effectively terminated when the last FSAM asset covered thereby was sold.
Separately, pursuant to the Non-Guaranteed Put Contract,put contract, FSAM may put an amount of its FSAM assets to Dexia SA and DCL:
Dexia Crédit Local S.A. in exchange for funds that FSAM would in anturn make available to meet demands for payment under the GICs. The amount generally equal tothat could be put varies depending on the lesser of:
(a)
the outstanding principal balance of the GICs and
(b)
the shortfall related to (i) the failure of a Dexia party to provide liquidity or collateral as required under the committed liquidity lending facilities provided by Dexia affiliates, as described below (a “Liquidity Default Trigger”), or (ii) the failure by either Dexia SA or DCL to transfer the required amount of eligible collateral under the credit support annex of the Non-Guaranteed Put Contract (a “Collateral Default Trigger”);
type of trigger event in exchange for funds in an amount equal to the outstanding principal amount of an FSAM asset with respect to which any of the following events have occurred (an “Asset Default Trigger”):
(a)
the issuer of such FSAM asset fails to pay the full amount of the expected interest when due or to pay the full amount of the expected principal when due (following expiration of any grace period) or within five business days following the scheduled due date,
(b)a writedown or applied loss results in a reduction of the outstanding principal amount, or
(c)the attribution of a principal deficiency or realized loss results in a reduction or subordination of the current interest payable on such FSAM asset;

128


provided, thatquestion. To secure their obligations under this put contract, Dexia SA and DCL have the rightDexia Crédit Local S.A. are required to elect to pay only the difference between the amount of the expected principal or interest payment and the amount of the actual principal or interest payment, in each case, as such amounts come due, rather than paying an amount equal to the outstanding principal amount of applicable FSAM asset; and/or
in exchange for funds in an amount equal to the lesser of:
(a)the aggregate outstanding principal amount of all FSAM assets and
(b)the aggregate outstanding principal balance of all of the GICs, upon the occurrence of an insolvency event with respect to Dexia SA as set forth in the Non-Guaranteed Put Contract (a “Bankruptcy Trigger”).

To secure the Non-Guaranteed Put Contract, Dexia SA and DCL will, pursuant to the credit support annex thereto, post eligible highly liquid collateral having an aggregate value (subject to agreed reductions)reductions and advance rates) equal to at least the excess of (i) the aggregate principal amount of all outstanding GICs over (ii) the aggregate mark-to-market value of FSAM’s assets. The agreed-to reductions applicable to

As of December 31, 2015, approximately 27.6% of the value of FSAM assets range from 98% to 82% percent for(measured by aggregate principal balance) were in cash or were obligations backed by the full faith and credit of the United States, sovereign obligations of the United Kingdom, Germany, the Netherlands, France or Belgium, obligations guaranteed by the Federal Deposit Insurance Corporation (FDIC) and for mortgage securities issued or guaranteed by U.S. sponsored agencies, and range from 75% to 0% for the other FSAM assets.States.

As of December 31, 2012,2015, the aggregate accreted GIC balance was approximately $3.6 billion.$1.8 billion, compared with approximately $10.2 billion as of December 31, 2009. As of the same date, with respect to the FSAM assets covered by the Non-Guaranteed Put Contract,December 31, 2015, the aggregate accreted principal balanceamount of FSAM assets was approximately $5.4$2.8 billion, the aggregate fair market value was approximately $5.3$2.6 billion and the aggregate market value after agreed upon reductions was approximately $4.1$1.8 billion. Cash and netpositive derivative value constituted another $0.2 billion of assets.exceeded the negative derivative values and other projected costs by approximately $41 million. Accordingly, as of December 31, 20122015, the aggregate fair market value (after agreed reductions) of the assets supporting the GIC business (disregarding the agreed upon reductions) plus cash and positive derivative value exceeded by nearly $0.9 billion the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Even after applying the agreed upon reductions to the fair market value of the assets, the aggregate value of the assets supporting the GIC business plus cash and positive derivative value exceeded the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Therefore,Accordingly, no posting of collateral was required under the credit support annex applicable to the Non-Guaranteed Put Contract. Under the termsprimary put contract.


130


To provide additional support, Dexia Crédit Local S.A. provides a liquidity commitment to the GIC Issuers’ ability to pay their GIC obligations when due, Dexia affiliates have agreed to assume the risk of loss and support the payment obligations of the GIC Subsidiaries in respect of the GICs and the GIC business by providing liquidity commitmentsFSAM to lend against FSAM assets under a revolving credit agreement. As of December 31, 2015, the FSAM assets.commitment totaled $1.5 billion, of which approximately $1.0 billion was drawn. The term ofagreement requires the commitments willcommitment remain in place, generally extend until the GICs have been paid in full. The liquidity commitments comprise:

an amendedDespite the put contract and restated revolving credit agreement, (the “Liquidity Facility”) pursuant to which DCL and Belfius (formerly Dexia Bank Belgium SA prior to its sale by Dexia to the Belgian state in October 2011) commit to provide funds to FSAM in an amount up to $8.0 billion, which was further amended on June 15, 2012 reducing the aggregate facility size down from $8.0 billion to $4.7 billion and further reduced to $4.4 billion as of December 31, 2012 as a result of GIC amortization (approximately $1.6 billion of which was outstanding as of December 31, 2012), and

a master repurchase agreement (the “Repurchase Facility Agreement” and, together with the Liquidity Facility, the “Guaranteed Liquidity Facilities”) pursuant to which DCL will provide up to $3.5 billion of funds in exchange for the transfer by FSAM to DCL of FSAM securities that are not eligible to satisfy collateralization obligations of the GIC Issuers under the GICs. As of December 31, 2012, no amounts were outstanding under the Repurchase Facility Agreement.

The failure of the Dexia affiliates to perform on the Guaranteed Liquidity Facilities will trigger Dexia SA’s and DCL’s obligations to purchase FSAM assets under the Non-Guaranteed Put Contract, as described above.
Despite the execution of the Non-Guaranteed Put Contract and the Guaranteed Liquidity Facilities, and the significant portion of FSAM assets comprised of highly liquid securities backed by the full faith and credit of the United States, (as of December 31, 2012, approximately 34.2% of the FSAM Assets (measured by aggregate principal balance) was in cash or were obligations backed by the full faith and credit of the United States), AGM remains subject to the risk that Dexia SA and its affiliates may not make payments or securities available (i) on a timely basis, which is referred to as “liquidity risk,” or (ii) at all, which is referred to as “credit risk,” because of the risk of default. Even if the Dexia hasentities have sufficient assets to pay all amounts when due concerns regarding Dexia’s financial condition(either under the GICs, or willingness to comply with their obligations could causeunder the guarantee, the put contract and the revolving credit agreement), one or more rating agencies tomay view

129


negatively the ability or willingness of Dexia SA and its affiliates to perform under their various agreements, andwhich could negatively affect AGM’s ratings.
 
If Dexia SA or its affiliates do not fulfill thetheir contractual obligations, the Financial Products CompaniesGIC issuers may not have the financial ability to pay upon the withdrawal of GIC funds or post collateral or make other payments in respect of the GICs, thereby resulting in claims upon the AGM financial guaranty insurance policies. If AGM is required to pay a claim due to a failure of the GIC Subsidiariesissuers to pay amounts in respect of the GICs, AGM is subject to the risk that the GICs will not be paid from funds received from Dexia SA and its affiliates before it is required to make payment under its financial guaranty policies or that it will not receive the guaranty payment at all.
 
One situation in which 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 is following aA downgrade of the financial strength rating of AGM.AGM could trigger a payment obligation of AGM in respect to AGMH's former GIC business. Most of the 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. The January 2013 Moody's downgrade of AGM could result in withdrawal of $226.5 million of GIC funds and the needThere are expected to post collateral on GICs with a balance of $1.9 billion. A further downgrade of AGM to below AA- by S&P could result in an incremental withdrawal or require collateral posting on GICs with a balance of $882.7 million. In the event of such a downgrade, assuming collateral posting on all transactions potentially impacted as a result of any additional rating action, with an average margin of 105%, the market value as of December 31, 2012 that the GIC issuers would be required to post in order to avoid withdrawal of any GIC funds would be $2.9 billion. There are sufficient eligible and liquid assets within the GIC businessFSAM to satisfy theany expected withdrawal and collateral posting obligations that arose as a result of the January 2013 AGM downgrade and would be expected to arise as a result of potentialresulting from future rating action.actions affecting AGM.
 
The Medium Term Notes Business
 
In connection with the acquisition of AGMH, Acquisition, DCLDexia Crédit Local S.A. agreed to fund, on behalf of AGM, and Assured Guaranty (Bermuda) Ltd., 100% of all policy claims made under financial guaranty insurance policies issued by AGM and Assured Guaranty (Bermuda) in relation to the medium term notes issuance program of FSA Global Funding Limited. Such agreement is set out in a Separation Agreement, dated as of July 1, 2009, between DCL,Dexia Crédit Local S.A., AGM, Assured Guaranty (Bermuda), FSA Global Funding and Premier International Funding Co., and in a funding guaranty and a reimbursement guaranty that DCLDexia Crédit Local S.A. issued for the benefit of AGM and Assured Guaranty (Bermuda).AGM. Under the funding guaranty, DCLDexia Crédit Local S.A. guarantees to pay to or on behalf of AGM or Assured Guaranty (Bermuda) amounts equal to the payments required to be made under policies issued by AGM or Assured Guaranty (Bermuda) relating to the medium term notes business. Under the reimbursement guaranty, DCLDexia Crédit Local S.A. guarantees to pay reimbursement amounts to AGM or Assured Guaranty (Bermuda) for payments they makeit makes following a claim for payment under an obligation insured by a policy they haveit has issued. Notwithstanding DCL’sDexia Crédit Local S.A.’s obligation to fund 100% of all policy claims under those policies, AGM and Assured Guaranty (Bermuda) havehas a separate obligation to remit to DCLDexia Crédit Local S.A. a certain percentage (ranging from 0% to 25%) of those policy claims. AGM, the Company and related parties are also protected against losses arising out of or as a result of the medium term note business through an indemnification agreement with DCL.Dexia Crédit Local S.A. As of December 31, 2015, FSA Global Funding Limited had approximately $679 million of medium term notes outstanding.
 
Strip Coverage Facility for the Leveraged Lease Business
 
Under the Strip Coverage Facility entered into in connection with the acquisition of AGMH, Acquisition, Dexia Credit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on certain AGM strip policies as described further under “Commitments and Contingencies—Recourse Credit Facilities—2009 Strip Coverage Facility” under this Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.issued in connection with the leveraged lease business. AGM may request advances under the Strip Coverage Facility without any explicit limit on the number of loan requests, provided that the aggregate principal amount of loans outstanding as of anythe date of the request may not initially exceed the commitment amount. The leveraged lease business, the AGM strip policies and the Strip Coverage Facility (including the commitment amount:amount) are described further under “Commitments and Contingencies-Recourse Credit Facility" above.
(a)may be reduced at the option of AGM without a premium or penalty; and
 

130131


(b)
will be reduced in the amounts and on the dates described in the Strip Coverage Facility either in connection with the scheduled amortization of the commitment amount or to $750 million if AGM’s consolidated net worth as of June 30, 2014 is less than a specified consolidated net worth.
As of December 31, 2012, the maximum commitment amount of the Strip Coverage Facility has amortized to $960 million. As of December 31, 2012, no advances were outstanding under the Strip Coverage Facility.
Dexia Crédit Local (NY)’s commitment to make advances under the Strip Coverage Facility is subject to the satisfaction by AGM of customary conditions precedent, including compliance with certain financial covenants,
and will terminate at the earliest of (i) the occurrence of a change of control with respect to AGM, (ii) the reduction of the Commitment Amount to $0 and (iii) January 31, 2042.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of adverse changes in earnings, cash flow or fair value as a result of changes in the value of financial instruments. The Company's primary market risk exposures include interest rate risk, foreign currency exchange rate risk and credit spread risk. The Company's primary exposure to market risk is summarized below:

The fair value of credit derivatives within the financial guaranty portfolio of insured obligations which fluctuate based on changes in credit spreads of the underlying obligations and the Company's own credit spreads.

The Investment Portfolio's fair value is primarily driven by changes in interest rates and also affected by changes in credit spreads.

The Investment Portfolio also contains foreign denominated securities whose value fluctuates based on changes in foreign exchange rates.

Premiums receivable include foreign denominated receivables whose carrying value fluctuates based on changes in foreign exchange rates.

The fair value of the assets and liabilities of consolidated FG VIE's may fluctuate based on changes in prepayment spreads, default rates, interest rates, and house price depreciation/appreciation.

Sensitivity of Credit Derivatives to Credit Risk

Unrealized gains and losses on credit derivatives are a function of changes in the estimated fair value of the Company's credit derivative contracts. If credit spreads of the underlying obligations change, the fair value of the related credit derivative changes. Market liquidity could also impact valuations of the underlying obligations. As such, Assured Guaranty experiences mark-to-market gains or losses. The Company considers the impact of its own credit risk, together with credit spreads on the risk that it assumesinsured through CDS contracts, in determining their fair value. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. The quoted price of five-year CDS contracts traded on AGC at December 31, 20122015 and December 31, 20112014 was 678376 bps and 1,140323 bps, respectively. The quoted price of five-year CDS contracts traded on AGM at December 31, 20122015 and December 31, 20112014 was 536366 bps and 778325 bps, respectively. Historically, the price of CDS traded on AGC and AGM moves directionally the same as general market spreads, although this may not always be the case. An overall narrowing of spreads generally results in an unrealized gain on credit derivatives for the Company, and an overall widening of spreads generally results in an unrealized loss for the Company. In certain circumstances, due to the fact that spread movements are not perfectly correlated, the narrowing or widening of the price of CDS traded on AGC and AGM can have a more significant financial statement impact than the changes in underlying collateral prices.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structurestructural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company's own credit cost, based on the price to purchase credit protection on AGC and AGM.

The Company generally holds these credit derivative contracts to maturity. The unrealized gains and losses on derivative financial instruments will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early termination. Given these facts, the Company does not actively hedge these exposures.

131132


The following table summarizes the estimated change in fair values on the net balance of the Company's CDSCompany’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both assume:assume.

Effect of Changes in Credit Spread

 As of December 31, 2012
Credit Spreads(1) 
Estimated Net
Fair Value (Pre-Tax)
 
Estimated
Change in Gain/(Loss)(Pre-Tax)
 (in millions)
100% widening in spreads$(3,765) $(1,972)
50% widening in spreads(2,777) (984)
25% widening in spreads(2,283) (490)
10% widening in spreads(1,987) (194)
Base Scenario(1,793) 
10% narrowing in spreads(1,634) 159
25% narrowing in spreads(1,402) 391
50% narrowing in spreads(1,028) 765

As of December 31, 2011 As of December 31, 2015 As of December 31, 2014
Credit Spreads(1) 
Estimated Net
Fair Value (Pre-Tax)
 
Estimated
Change in Gain/(Loss)(Pre-Tax)
 
Estimated Net
Fair Value
(Pre-Tax)
 
Estimated Change
in Gain/(Loss)
(Pre-Tax)
 Estimated Net
Fair Value
(Pre-Tax)
 Estimated Change
in Gain/(Loss)
(Pre-Tax)
(in millions) (in millions)
100% widening in spreads100% widening in spreads$(2,740) $(1,436)100% widening in spreads$(742) $(377) $(1,821) $(926)
50% widening in spreads50% widening in spreads(2,024) (720)50% widening in spreads(554) (189) (1,358) (463)
25% widening in spreads25% widening in spreads(1,666) (362)25% widening in spreads(460) (95) (1,128) (233)
10% widening in spreads10% widening in spreads(1,451) (147)10% widening in spreads(403) (38) (989) (94)
Base ScenarioBase Scenario(1,304) 
Base Scenario(365) 
 (895) 
10% narrowing in spreads10% narrowing in spreads(1,189) 115
10% narrowing in spreads(330) 35
 (809) 86
25% narrowing in spreads25% narrowing in spreads(1,018) 286
25% narrowing in spreads(277) 88
 (679) 216
50% narrowing in spreads50% narrowing in spreads(741) 563
50% narrowing in spreads(190) 175
 (466) 429
____________________
(1)Includes the effects of spreads on both the underlying asset classes and the Company's own credit spread.

Sensitivity of Investment Portfolio to Interest Rate Risk

Interest rate risk is the risk that financial instruments' values will change due to changes in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. The Company is exposed to interest rate risk primarily in its investment portfolio. As interest rates rise for an available-for-sale investment portfolio, the fair value of fixed‑income securities generally decreases. The Company's policy is generally to hold assets in the investment portfolio to maturity. Therefore, barring credit deterioration, interest rate movements do not result in realized gains or losses unless assets are sold prior to maturity. The Company does not hedge interest rate risk, however, interest rate fluctuation risk is managed through the investment guidelines which limit duration and prevent investment in high volatility sectors.

Interest rate sensitivity in the investment portfolio can be estimated by projecting a hypothetical instantaneous increase or decrease in interest rates. The following table presents the estimated pre-tax change in fair value of the Company's fixed maturityfixed-maturity securities and short-term investments from instantaneous parallel shifts in interest rates.

132



Sensitivity to Change in Interest Rates on the Investment Portfolio
As of December 31, 2012

 Change in Interest Rates
 
300 Basis
Point
Decrease
 
200 Basis
Point
Decrease
 
100 Basis
Point
Decrease
 
100 Basis
Point
Increase
 
200 Basis
Point
Increase
 
300 Basis
Point
Increase
 (in millions)
Estimated change in fair value$576
 $532
 $382
 $(478) $(970) $(1,456)

As of December 31, 2011

 Change in Interest Rates
 
300 Basis
Point
Decrease
 
200 Basis
Point
Decrease
 
100 Basis
Point
Decrease
 
100 Basis
Point
Increase
 
200 Basis
Point
Increase
 
300 Basis
Point
Increase
 (in millions)
Estimated change in fair value$683
 $626
 $434
 $(517) $(1,033) $(1,527)
 Increase (Decrease) in Fair Value from Changes in Interest Rates
 
300 Basis
Point
Decrease
 
200 Basis
Point
Decrease
 
100 Basis
Point
Decrease
 
100 Basis
Point
Increase
 
200 Basis
Point
Increase
 
300 Basis
Point
Increase
 (in millions)
December 31, 2015$1,561
 $1,107
 $568
 $(557) $(1,094) $(1,607)
December 31, 20141,294
 942
 496
 (509) (1,016) (1,514)

Sensitivity of Other Areas to Interest Rate Risk

Fluctuation in interest rates also affects the demand for the Company's product. When interest rates are lower or when the market is otherwise relatively less risk averse, the spread between insured and uninsured obligations typically narrows and, as a result, financial guaranty insurance typically provides lower cost savings to issuers than it would during periods of relatively wider spreads. These lower cost savings generally lead to a corresponding decrease in demand and premiums obtainable for financial guaranty insurance. Conversely,Changes in a deteriorating credit environment, credit spreads wideninterest rates also impact the amount of our losses and pricing for financial guaranty insurance typically improves. However, ifcould impact the weakening environment is sudden, pronounced or prolonged,amount of infrastructure exposures that can be refinanced in the stresses on the insured portfolio may result in claims payments in excess of normal or historical expectations.future. In addition, increases in prevailing interest rate levels can lead to a decreased volume of capital markets activity and, correspondingly, a decreased volume of insured transactions.


133


In addition, fluctuations in interest rates also impact the performance of insured transactions where there are differences between the interest rates on the underlying collateral and the interest rates on the insured securities. For example, a rise in interest rates could increase the amount of losses the Company projects for certain RMBS, Triple-X life insurance securitizations, student loan transactions and TruPS CDOs. The impact of fluctuations in interest rates on such transactions varies, depending on, among other things, the interest rates on the underlying collateral and insured securities, the relative amounts of underlying collateral and liabilities, the structure of the transaction, and the sensitivity to interest rates of the behavior of the underlying borrowers and the value of the underlying assets.

In the case of RMBS, fluctuations in interest rates impact the amount of periodic excess spread, which is created when a trust’s assets produce interest that exceeds the amount required to pay interest on the trust’s liabilities.  There are several RMBS transactions in our insured portfolio which benefit from excess spread either by covering losses in a particular period, or reimbursing past claims under our policies. As of December 31, 2015, the Company projects approximately $230 million of excess spread for all of its RMBS transactions over their remaining lives.

Since RMBS excess spread is determined by the relationship between interest rates on the underlying collateral and the trust’s certificates, it can be affected by unmatched moves in either of these interest rates.  Additionally, faster than expected prepayments can decrease the dollar amount of excess spread and therefore reduce the cash flow available to cover losses or reimburse past claims.  Further, modifications to underlying mortgage rates (e.g. rate reductions for troubled borrowers) can reduce excess spread since there would be no equivalent decrease in the certificate interest rates of the trust's certificates. Similarly, an upswing in short-term rates that increases the trust’s certificate interest rate that is not met with equal increases to the interest rates on the underlying mortgages can decrease excess spread.  These potential reductions in excess spread are mitigated by an interest rate cap, which goes into effect once the collateral rate falls below the stated certificate rate. Most of the RMBS securities we insure are capped at the collateral rate. The Company is not obligated to pay additional claims because the collateral interest rate drops below the trust's certificate stated interest rate, rather this just causes the Company to lose the benefit of potential positive excess spread.   

Sensitivity of Investment Portfolio to Foreign Exchange Rate Risk

Foreign exchange risk is the risk that a financial instrument's value will change due to a change in the foreign currency exchange rates. The Company has foreign denominated securities in its investment portfolio. Securities denominated in currencies other than U.S. Dollar were 3.7%4.9% and 3.5%4.0% of the fixed maturityfixed-maturity securities and short-term investments as of December 31, 20122015 and 2011,2014, respectively. The Company's material exposure is to changes in the dollar/pound sterling exchange rate. Changes in fair value of available for saleavailable-for-sale investments attributable to changes in foreign exchange rates are recorded in other comprehensive income.

Sensitivity to Change in Foreign Exchange Rates on the Investment Portfolio
As of December 31, 2012

 Change in Foreign Exchange Rates
 
30%
Decrease
 
20%
Decrease
 
10%
Decrease
 
10%
Increase
 
20%
Increase
 
30%
Increase
 (in millions)
Estimated change in fair value$(119) $(79) $(40) $40
 $79
 $119
 Increase (Decrease) in Fair Value from Changes in Foreign Exchange Rates
 
30%
Decrease
 
20%
Decrease
 
10%
Decrease
 
10%
Increase
 
20%
Increase
 
30%
Increase
 (in millions)
December 31, 2015$(163) $(108) $(54) $54
 $108
 $163
December 31, 2014(135) (90) (45) 45
 90
 135


133


As of December 31, 2011

 Change in Foreign Exchange Rates
 
30%
Decrease
 
20%
Decrease
 
10%
Decrease
 
10%
Increase
 
20%
Increase
 
30%
Increase
 (in millions)
Estimated change in fair value$(115) $(77) $(38) $38
 $77
 $115

Sensitivity of Premiums Receivable to Foreign Exchange Rate Risk

The Company has foreign denominated premium receivables. Premium receivables denominated in currencies other than U.S. Dollar were 47% of the premium receivable balance as of December 31, 2012 and 2011, respectively. The Company's material exposure is to changes in dollar/Pound Sterling and dollar/Euro exchange rates.


134


Sensitivity to Change in Foreign Exchange Rates
on Premium Receivable,
As Net of December 31, 2012Reinsurance

 Change in Foreign Exchange Rates
 
30%
Decrease
 
20%
Decrease
 
10%
Decrease
 
10%
Increase
 
20%
Increase
 
30%
Increase
 (in millions)
Estimated change in fair value$(119) $(79) $(40) $40
 $79
 $119

As of December 31, 2011

 Change in Foreign Exchange Rates
 
30%
Decrease
 
20%
Decrease
 
10%
Decrease
 
10%
Increase
 
20%
Increase
 
30%
Increase
 (in millions)
Estimated change in fair value$(116) $(77) $(39) $39
 $77
 $116
 Increase (Decrease) in Premium Receivable from Changes in Foreign Exchange Rates
 
30%
Decrease
 
20%
Decrease
 
10%
Decrease
 
10%
Increase
 
20%
Increase
 
30%
Increase
 (in millions)
December 31, 2015$(96) $(64) $(32) $32
 $64
 $96
December 31, 2014(95) (63) (32) 32
 63
 95

Sensitivity of FG VIE Assets and Liabilities to Market Risk

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

The fair value of the Company'sCompany’s FG VIE liabilities is alsogenerally sensitive to changes relating to estimated prepayment speeds; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); recoveries from excess spread, discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts.various model inputs described above. In addition, the Company'sCompany’s FG VIE liabilities with recourse are also sensitive to changes toin the Company'sCompany’s implied credit worthiness. Significant changes to any of these inputs could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit from the Company'sCompany’s insurance policy guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE tranchesthat is insured by the Company. In general, whenextending the timing of expected loss payments by the Company is extended into the future this typically leads to a decrease in the value of the Company'sCompany’s insurance and a decrease in the fair value of the Company'sCompany’s FG VIE liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically leads to an increase in the value of the Company'sCompany’s insurance and an increase in the fair value of the Company'sCompany’s FG VIE liabilities with recourse.


134135


Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


135136


Report of Independent Registered Public Accounting Firm

Tothe Board of Directors and Shareholders of Assured Guaranty Ltd.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of shareholders'shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Assured Guaranty Ltd. and its subsidiariesatDecember 31, 20122015 and December 31, 2011,2014, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 20122015 in conformity with accounting principles generally accepted in the United States of America. AlsoIn addition, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on criteria established in the 2013 Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for the costs associated with acquiring or renewing insurance contracts in 2012 and the manner in which it accounts for variable interest entities in 2010.

A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP

New York, New York
March 1, 2013February 26, 2016





136137


Assured Guaranty Ltd.

Consolidated Balance Sheets
 
(dollars in millions except per share and share amounts)
 
As of
December 31, 2012
 As of
December 31, 2011
As of
December 31, 2015
 As of
December 31, 2014
Assets 
  
 
  
Investment portfolio: 
  
 
  
Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,346 and $9,638)$10,056
 $10,142
Short term investments, at fair value817
 734
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,275 and $9,972)$10,627
 $10,491
Short-term investments, at fair value396
 767
Other invested assets212
 223
169
 126
Total investment portfolio11,085
 11,099
11,192
 11,384
Cash138
 215
166
 75
Premiums receivable, net of ceding commissions payable1,005
 1,003
Premiums receivable, net of commissions payable693
 729
Ceded unearned premium reserve561
 709
232
 381
Deferred acquisition costs116
 132
114
 121
Reinsurance recoverable on unpaid losses58
 69
69
 78
Salvage and subrogation recoverable456
 368
126
 151
Credit derivative assets141
 153
81
 68
Deferred tax asset, net721
 804
276
 260
Current income tax receivable1
 76
40
 
Financial guaranty variable interest entities’ assets, at fair value2,688
 2,819
1,261
 1,402
Other assets272
 262
294
 270
Total assets$17,242
 $17,709
$14,544
 $14,919
Liabilities and shareholders’ equity 
  
 
  
Unearned premium reserve$5,207
 $5,963
$3,996
 $4,261
Loss and loss adjustment expense reserve601
 679
1,067
 799
Reinsurance balances payable, net219
 171
51
 107
Long-term debt836
 1,038
1,300
 1,297
Credit derivative liabilities1,934
 1,457
446
 963
Current income tax payable
 5
Financial guaranty variable interest entities’ liabilities with recourse, at fair value2,090
 2,397
1,225
 1,277
Financial guaranty variable interest entities’ liabilities without recourse, at fair value1,051
 1,061
124
 142
Other liabilities310
 291
272
 310
Total liabilities12,248
 13,057
8,481
 9,161
Commitments and contingencies (See Note 16)
 
Common stock ($0.01 par value, 500,000,000 shares authorized; 194,003,297 and 182,235,798 shares issued and outstanding)2
 2
Commitments and contingencies (See Note 15)
 
Common stock ($0.01 par value, 500,000,000 shares authorized; 137,928,552 and 158,306,661 shares issued and outstanding)1
 2
Additional paid-in capital2,724
 2,570
1,342
 1,887
Retained earnings1,749
 1,708
4,478
 3,494
Accumulated other comprehensive income, net of tax of $198 and $135515
 368
Accumulated other comprehensive income, net of tax of $104 and $159237
 370
Deferred equity compensation (320,193 and 320,193 shares)4
 4
5
 5
Total shareholders’ equity4,994
 4,652
6,063
 5,758
Total liabilities and shareholders’ equity$17,242
 $17,709
$14,544
 $14,919
 
The accompanying notes are an integral part of these consolidated financial statements.


137138


Assured Guaranty Ltd.

Consolidated Statements of Operations
 
(dollars in millions except per share amounts)
 
 Year Ended December 31,
 2012 2011 2010
Revenues     
Net earned premiums$853
 $920
 $1,187
Net investment income404
 396
 361
Net realized investment gains (losses): 
  
  
Other-than-temporary impairment losses(58) (84) (44)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income(41) (39) (17)
Other net realized investment gains (losses)18
 27
 25
Net realized investment gains (losses)1
 (18) (2)
Net change in fair value of credit derivatives:     
Realized gains (losses) and other settlements(108) 6
 153
Net unrealized gains (losses)(477) 554
 (155)
Net change in fair value of credit derivatives(585) 560
 (2)
Fair value gains (losses) on committed capital securities(18) 35
 9
Fair value gains (losses) on financial guaranty variable interest entities210
 (132) (274)
Other income108
 58
 34
Total revenues973
 1,819
 1,313
Expenses

 

  
Loss and loss adjustment expenses523
 462
 412
Amortization of deferred acquisition costs14
 17
 22
Assured Guaranty Municipal Holdings Inc. acquisition-related expenses
 
 7
Interest expense92
 99
 100
Other operating expenses212
 212
 238
Total expenses841
 790
 779
Income (loss) before income taxes132
 1,029
 534
Provision (benefit) for income taxes 
  
  
Current57
 (127) (25)
Deferred(35) 383
 75
Total provision (benefit) for income taxes22
 256
 50
Net income (loss)$110
 $773
 $484
      
Earnings per share:     
Basic$0.58
 $4.21
 $2.63
Diluted$0.57
 $4.16
 $2.56
Dividends per share$0.36
 $0.18
 $0.18
The accompanying notes are an integral part of these consolidated financial statements.

138


Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income
(in millions)
 Year Ended December 31,
 2012 2011 2010
Net income (loss)$110
 $773
 $484
Unrealized holding gains (losses) arising during the period on: 
  
  
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $56, $105 and $(38)148
 234
 (33)
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(2), $5 and $(5)(7) 9
 6
Unrealized holding gains (losses) arising during the period, net of tax141
 243
 (27)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(7), $(7) and $(3)(4) (14) 2
Change in net unrealized gains on investments145
 257
 (29)
Other, net of tax provision2
 (1) (1)
Other comprehensive income (loss)$147
 $256
 $(30)
Comprehensive income (loss)$257
 $1,029
 $454
 Year Ended December 31,
 2015
2014
2013
Revenues     
Net earned premiums$766
 $570
 $752
Net investment income423
 403
 393
Net realized investment gains (losses): 
  
  
Other-than-temporary impairment losses(47) (76) (32)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income0
 (1) 10
Net impairment loss(47) (75) (42)
Other net realized investment gains (losses)21
 15
 94
Net realized investment gains (losses)(26) (60) 52
Net change in fair value of credit derivatives:     
Realized gains (losses) and other settlements(18) 23
 (42)
Net unrealized gains (losses)746
 800
 107
Net change in fair value of credit derivatives728
 823
 65
Fair value gains (losses) on committed capital securities27
 (11) 10
Fair value gains (losses) on financial guaranty variable interest entities38
 255
 346
Bargain purchase gain and settlement of pre-existing relationships214


 
Other income (loss)37
 14
 (10)
Total revenues2,207
 1,994
 1,608
Expenses

 

  
Loss and loss adjustment expenses424
 126
 154
Amortization of deferred acquisition costs20
 25
 12
Interest expense101
 92
 82
Other operating expenses231
 220
 218
Total expenses776
 463
 466
Income (loss) before income taxes1,431
 1,531
 1,142
Provision (benefit) for income taxes 
  
  
Current75
 96
 157
Deferred300
 347
 177
Total provision (benefit) for income taxes375
 443
 334
Net income (loss)$1,056
 $1,088
 $808
      
Earnings per share:     
Basic$7.12
 $6.30
 $4.32
Diluted$7.08
 $6.26
 $4.30
Dividends per share$0.48
 $0.44
 $0.40
 
The accompanying notes are an integral part of these consolidated financial statements.
 

139


Assured Guaranty Ltd.

Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2012, 2011 and 2010Comprehensive Income
 
(dollars in millions, except share data)millions)
 
 Common Stock 
Additional
Paid-in
Capital
 Retained Earnings 
Accumulated
Other
Comprehensive Income
 
Deferred
Equity Compensation
 
Total
Shareholders’ Equity Attributable to Assured Guaranty Ltd.
 
Noncontrolling Interest of
Financial Guaranty Consolidated Variable Interest Entities
 
Total
Shareholders’ Equity
 Shares Amount       
Balance at December 31, 2009 (as originally reported)184,162,896
 $2
 $2,585
 $779
 $142
 $2
 $3,510
 $(1) $3,509
Cumulative effect of accounting change- deferred acquisition costs (Note 5)
 
 
 (55) 
 
 (55) 
 (55)
Balance at December 31, 2009 (as adjusted)184,162,896
 2
 2,585
 724
 142
 2
 3,455
 (1) 3,454
Cumulative effect of accounting change-consolidation of variable interest entities (Note 10)
 
 
 (207) 
 
 (207) 1
 (206)
Balance, January 1, 2010184,162,896
 2
 2,585
 517
 142
 2
 3,248
 
 3,248
Net income
 
 
 484
 
 
 484
 
 484
Dividends ($0.18 per share)
 
 
 (33) 
 
 (33) 
 (33)
Common stock repurchases(707,350) 0
 (10) 
 
 
 (10) 
 (10)
Share-based compensation and other289,109
 0
 11
 
 
 
 11
 
 11
Other comprehensive income
 
 
 
 (30) 
 (30) 
 (30)
Balance at December 31, 2010183,744,655
 2
 2,586
 968
 112
 2
 3,670
 
 3,670
Net income
 
 
 773
 
 
 773
 
 773
Dividends ($0.18 per share)
 
 
 (33) 
 
 (33) 
 (33)
Common stock repurchases(2,000,000) 0
 (23) 
 
 
 (23) 
 (23)
Share-based compensation and other491,143
 0
 7
 
 
 2
 9
 
 9
Other comprehensive income
 
 
 
 256
 
 256
 
 256
Balance at December 31, 2011182,235,798
 $2
 $2,570
 $1,708
 $368
 $4
 $4,652
 $
 $4,652
 Year Ended December 31,
 2015 2014 2013
Net income (loss)$1,056
 $1,088
 $808
Unrealized holding gains (losses) arising during the period on: 
  
  
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $(36), $80 and $(106)(93) 196
 (309)
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(23), $(9) and $(17)(43) (20) (35)
Unrealized holding gains (losses) arising during the period, net of tax(136) 176
 (344)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(7), $(21) and $5(10) (41) 14
Change in net unrealized gains on investments(126) 217
 (358)
Other, net of tax provision(7) (7) 3
Other comprehensive income (loss)$(133) $210
 $(355)
Comprehensive income (loss)$923
 $1,298
 $453

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

140


Assured Guaranty Ltd.

Consolidated Statements of Shareholders’ Equity
 
Years Ended December 31, 2015, 20122014, 2011 and 20102013
 
(dollars in millions, except share data)

Common Stock 
Additional
Paid-in
Capital
 Retained Earnings 
Accumulated
Other
Comprehensive Income
 
Deferred
Equity Compensation
 
Total
Shareholders’ Equity Attributable to Assured Guaranty Ltd.
 
Noncontrolling Interest of
Financial Guaranty Consolidated Variable Interest Entities
 
Total
Shareholders’ Equity
Common Shares Outstanding  Common Stock Par Value Additional
Paid-in
Capital
 Retained Earnings Accumulated
Other
Comprehensive Income
 Deferred
Equity Compensation
 Total
Shareholders’ Equity
Shares Amount 
Balance at December 31, 2011182,235,798
 $2
 $2,570
 $1,708
 $368
 $4
 $4,652
 $
 $4,652
Balance at December 31, 2012194,003,297
  $2
 $2,724
 $1,749
 $515
 $4
 $4,994
Net income
 
 
 110
 
 
 110
 
 110

  
 
 808
 
 
 808
Dividends ($0.36 per share)
 
 
 (69) 
 
 (69) 
 (69)
Common stock issuance, net13,428,770
 0
 173
 
 
 
 173
 
 173
Dividends ($0.40 per share)
  
 
 (75) 
 
 (75)
Common stock repurchases(2,066,759) 0
 (24) 
 
 
 (24) 
 (24)(12,512,759)  0
 (264) 
 
 
 (264)
Share-based compensation and other405,488
 0
 5
 
 
 
 5
 
 5
687,328
  0
 6
 
 
 1
 7
Other comprehensive income
 
 
 
 147
 
 147
 
 147

  
 
 
 (355) 
 (355)
Balance at December 31, 2012194,003,297
 $2
 $2,724
 $1,749
 $515
 $4
 $4,994
 $
 $4,994
Balance at December 31, 2013182,177,866
  2
 2,466
 2,482
 160
 5
 5,115
Net income
  
 
 1,088
 
 
 1,088
Dividends ($0.44 per share)
  
 
 (76) 
 
 (76)
Common stock repurchases(24,413,781)  0
 (590) 
 
 
 (590)
Share-based compensation and other542,576
  0
 11
 
 
 
 11
Other comprehensive loss
  
 
 
 210
 
 210
Balance at December 31, 2014158,306,661
  $2
 $1,887
 $3,494
 $370
 $5
 $5,758
Net income
  
 
 1,056
 
 
 1,056
Dividends ($0.48 per share)
  
 
 (72) 
 
 (72)
Common stock repurchases(20,995,419)  (1) (554) 
 
 
 (555)
Share-based compensation and other617,310
  0
 9
 
 
 
 9
Other comprehensive loss
  
 
 
 (133) 
 (133)
Balance at December 31, 2015137,928,552
  $1
 $1,342
 $4,478
 $237
 $5
 $6,063

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


141


Assured Guaranty Ltd.

Consolidated Statements of Cash Flows
 
(in millions)
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
Operating Activities:          
Net Income$110
 $773
 $484
$1,056
 $1,088
 $808
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:     
Adjustments to reconcile net income to net cash flows provided by operating activities:     
Non-cash interest and operating expenses18
 20
 24
27
 23
 19
Net amortization of premium on fixed maturity securities4
 18
 46
Net amortization of premium (discount) on investments(25) (16) (8)
Provision (benefit) for deferred income taxes(35) 383
 75
300
 347
 177
Net realized investment losses (gains)(1) 18
 2
17
 60
 (52)
Net unrealized losses (gains) on credit derivatives477
 (554) 155
(746) (800) (107)
Fair value loss (gains) on committed capital securities18
 (35) (9)
Non-cash items in other income4
 5
 4
Fair value losses (gains) on committed capital securities(27) 11
 (10)
Bargain purchase gain and settlement of pre-existing relationships(214) 
 
Change in deferred acquisition costs18
 18
 18
9
 3
 (8)
Change in premiums receivable, net of ceding commissions48
 138
 376
Change in premiums receivable, net of premiums and commissions payable(8) 108
 86
Change in ceded unearned premium reserve141
 102
 256
79
 69
 109
Change in unearned premium reserve(749) (998) (1,278)(744) (332) (612)
Change in loss and loss adjustment expense reserve, net(258) 636
 (471)244
 182
 136
Change in current income tax129
 (182) (87)(45) (45) 30
Change in financial guaranty variable interest entities' assets and liabilities, net(7) 352
 541
(6) (170) (295)
(Purchases) sales of trading securities, net(59) (6) 
8
 78
 (16)
Other(23) (12) (7)23
 (29) (13)
Net cash flows provided by (used in) operating activities(165) 676
 129
(52) 577
 244
Investing activities 
  
   
  
  
Fixed maturity securities: 
  
  
Fixed-maturity securities: 
  
  
Purchases(1,649) (2,308) (2,462)(2,577) (2,801) (1,886)
Sales912
 1,107
 1,064
2,107
 1,251
 1,029
Maturities1,105
 663
 994
898
 877
 883
Net sales (purchases) of short-term investments29
 320
 613
897
 158
 (87)
Net proceeds from paydowns on financial guaranty variable interest entities’ assets545
 760
 424
400
 408
 663
Acquisition of MAC, net of cash acquired(91) 
 
Acquisition of Radian Asset, net of cash acquired(800) 
 
Other92
 19
 20
69
 11
 79
Net cash flows provided by (used in) investing activities943
 561
 653
994
 (96) 681
Financing activities 
  
   
  
  
Proceeds from issuances of common stock173
 
 
Dividends paid(69) (33) (33)(72) (76) (75)
Repurchases of common stock(24) (23) (10)(555) (590) (264)
Share activity under option and incentive plans(3) (1) (2)(2) 1
 (1)
Net paydowns of financial guaranty variable interest entities’ liabilities(724) (1,053) (651)(214) (396) (511)
Net proceeds from issuance of long-term debt
 495
 
Repayment of long-term debt(209) (22) (21)(4) (19) (27)
Net cash flows provided by (used in) financing activities(856) (1,132) (717)(847) (585) (878)
Effect of exchange rate changes1
 2
 (1)
Effect of foreign exchange rate changes(4) (5) (1)
Increase (decrease) in cash(77) 107
 64
91
 (109) 46
Cash at beginning of period215
 108
 44
75
 184
 138
Cash at end of period$138
 $215
 $108
$166
 $75
 $184
Supplemental cash flow information 
  
   
  
  
Cash paid (received) during the period for: 
  
   
  
  
Income taxes$(24) $34
 $39
$103
 $122
 $110
Interest$85
 $92
 $92
$95
 $86
 $76
The accompanying notes are an integral part of these consolidated financial statements.

142


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements
 
December 31, 20122015, 20112014 and 20102013 

1.Business and Basis of Presentation
 
Business
 
Assured Guaranty Ltd. (“AGL” and, together with its direct and indirect 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,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 principal payments.irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection productsfinancial 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 many countries, although its principal focus is on the U.S. and the United Kingdom ("U.K."), as well as Europe and Australia.also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

Financial guaranty insurance policies provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest ("Debt Service") when due. Upon an obligor’s default on scheduled principal or interest payments due on the obligation, the Company is required under the financial guaranty policy to pay the principal or interest shortfall. The Company has issued financial guaranty insurance policies on public finance obligations and structured finance obligations. Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings. Structured finance obligations insured by the Company are generally issued by special purpose entities and backed by pools of assets such as residential or commercial mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. The Company also includes within structured finance obligations other specialized financial obligations.
In the past, the Company had sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives.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 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”).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 (the “Dodd-Frank Act”) also contributed to the decision of the Company not to enterentering into such new CDS in the foreseeable future.since 2009. 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 actionswhich have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

Basis of Presentation
 
The 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.

143



The consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, (collectively, the “Subsidiaries”), and its consolidated FGfinancial guaranty ("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.

AGL’sThe Company's principal insurance company subsidiaries are Assured Guaranty Corp. ("AGC"), domiciled in Maryland; 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 also 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. The Company’s organizational structure includes various holdingsholding companies, two of which—Assured Guaranty US Holdings Inc. (“AGUS”) and Assured Guaranty Municipal Holdings Inc. (“AGMH”) – have public debt outstanding. See Note 17, Long Term16, Long-Term Debt and Credit Facilities.

On May 31, 2012, the Company purchased 100% of the outstanding common stock of Municipal Assurance Corp. (formerly Municipal and Infrastructure Assurance Corporation, "MAC") from Radian Asset Assurance Inc. ("Radian") for $91 million in cash, resulting in $16 million in indefinite-lived intangible assets which represents the value of MAC's insurance licenses. The other assets acquired consisted primarily of short-term investments. MAC is licensed to provide financial guaranty insurance and reinsurance in 38 U.S. jurisdictions including the District of Columbia. In January 2013, the Company announced its intention to launch MAC as a new financial guaranty insurer that provides insurance only on debt obligations in the U.S. public finance markets, in order to increase the Company's insurance penetration in such market.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders' equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Upon adoption, the Company expanded the Consolidated Statements of Comprehensive Income to include the other comprehensive income items now presented in the Consolidated Statement of Shareholders' Equity, with retrospective application. In February 2013, the FASB issued authoritative guidance which will require the disclosure of information about the amounts reclassified out of accumulated other comprehensive income by component. The nature of the disclosure will depend on whether the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. If the reclassification is required in its entirety to net income, the guidance will require the disclosure of significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, either on the face of the statement where net income is presented or in the notes. If reclassification to net income is not required under U.S. GAAP, the guidance will require a cross reference to other required disclosures that provide additional detail about the reclassified amount. The Company is evaluating the effect of this guidance, which is effective for reporting periods beginning after December 15, 2012.

In December 2011, the FASB issued guidance which will require disclosures for entities with financial instruments and derivatives that are either offset on the balance sheet or subject to a master netting arrangement. The guidance is effective for interim and annual periods beginning on or after January 1, 2013. The adoption of this guidance will not impact the Company's results of operations, financial position or cash flows.

Prior Period Revision
Credit derivative assets and liabilities presented on the consolidated balance sheet at December 31, 2011 have been revised to reflect the correction of a $316 million misclassification between credit derivative assets and credit derivative liabilities. The correction, recorded in the fourth quarter 2012, reduced the credit derivative asset and liability balances and had no effect on the statement of operations.
Segments

The chief operating decision maker manages the operations of the Company at a consolidated level. Therefore, segment financial information is no longer disclosed.

Significant Accounting Policies

The Company's significant accounting policies include when and how to measure fair value of assets and liabilities, when to consolidate an entity, and when and how to recognize premium revenue and loss expense. All other significant accounting policies are either discussed below or included in the following notes.

144143



Significant Accounting Policies

Premium revenue recognition on financial guaranty contracts accounted for as insuranceNote 4
Policy acquisition costsNote 5
Expected loss to be paidNote 6
Loss and loss adjustment expense on financial guaranty contracts accounted for as insuranceNote 7
Fair value measurementNote 8
Credit derivativesNote 9
Variable interest entitiesNote 10
InvestmentsNote 11
Income TaxesNote 13
Earnings per shareNote 18
Stock based compensationNote 20

The Company revalues assets, liabilities, revenue and expenses denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates. Gains and losses relating to translating foreign functional currency financial statements for U.S. GAAP reporting are includedrecorded in accumulated other comprehensive income (loss) within shareholders' equity.("OCI"). Gains and losses relating to U.S. dollar functional currency transactions such as those of non-U.S. operationsin foreign denominations in subsidiaries where the functional currency is the U.S. dollar, are reported in the consolidated statement of operations.

The chief operating decision maker manages the operations of the Company at a consolidated level. Therefore, all results of operations are reported as one segment.

Other significant accounting policies are included in the following notes.

Significant Accounting Policies

Acquisition of Radian Asset Assurance Inc.Note 2
Expected loss to be paid (insurance, credit derivatives and FG VIE contracts)Note 5
Financial guaranty insurance (premium revenue recognition, loss and loss adjustment expense and policy acquisition cost)Note 6
Fair value measurementNote 7
Credit derivatives (at fair value)Note 8
Variable interest entities (at fair value)Note 9
Investments and cashNote 10
Income taxesNote 12
Earnings per shareNote 17
Stock based compensationNote 19

Future Application of Accounting Standards

Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to present right-of-use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact that this ASU will have on its Consolidated Financial Statements.

Financial Instruments

In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")  2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.  The amendments in this ASU are intended to make targeted improvements to GAAP by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. One of the amendments pertains to liabilities that an entity has elected to measure at fair value in accordance with the fair value option for financial instruments. For these liabilities, the portion of fair value change related to credit risk will be separately presented in other comprehensive income.  Currently, the entire change in the fair value of these liabilities is reflected in the income statement.

            The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year in which the guidance is adopted.  For the Company, this would be as of January 1, 2018.  Early adoption is permitted only for the amendment related to the change in presentation of financial liabilities that are fair valued using the fair value option. The Company is currently evaluating the effect of adopting this ASU on its Consolidated Financial Statements.

144



Short Duration Insurance Contracts

In May 2015, the FASB issued ASU 2015-09, Financial Services - Insurance (Topic 944) - Disclosures about Short-Duration Contracts. The primary objective of this ASU is to improve disclosures for insurance entities which issue short-duration contracts. The ASU 2015-09 will have no impact on the Company's financial statement disclosures. The ASU is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016.

Consolidation

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve certain areas of consolidation guidance for legal entities such as limited partnerships, limited liability companies, and securitization structures. The ASU will be effective on January 1, 2016. Early adoption is permitted, including adoption in an interim period. The Company does not expect that ASU 2015-02 will have an effect on its Consolidated Financial Statements.

2.Business Changes, Risks, Uncertainties and Accounting DevelopmentsAcquisition of Radian Asset Assurance Inc.

Summarized below are updatesOn 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; the cash consideration was paid from AGC's available funds and from the proceeds of a $200 million loan from AGC’s direct parent, AGUS. AGC repaid the loan in full to AGUS on April 14, 2015. 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, and is consistent with one of the Company's key business strategies of supplementing its book of business through acquisitions.

The Radian Asset Acquisition was accounted for under the acquisition method of accounting which required that the assets and liabilities acquired be recorded at fair value. The Company was required to exercise significant judgment to determine the fair value of the assets it acquired and liabilities it assumed in the Radian Asset Acquisition. The most significant recent events that have had, or may haveof these determinations related to the valuation of Radian Asset's financial guaranty insurance and credit derivative contracts. On an aggregate basis, Radian Asset’s contractual premiums for financial guaranty contracts were less than the premiums a market participant of similar credit quality would demand to acquire those contracts at the Acquisition Date, particularly for below-investment-grade ("BIG") transactions, resulting in a significant amount of the purchase price being allocated to these contracts. For information on the methodology the Company used to measure the fair value of assets it acquired and liabilities it assumed in the future, a material effect on theRadian Asset Acquisition, including financial position, results of operations or business prospects of the Company.
Market Conditionsguaranty insurance and credit derivative contracts, please refer to Note 7, Fair Value Measurement.

The overall economic environmentfair value of the Company's stand-ready obligation for financial guaranty insurance contracts on the Acquisition Date is recorded in unearned premium reserve (please refer to Note 6, Financial Guaranty Insurance for additional information on stand-ready obligation). At the Acquisition Date, the fair value of each financial guaranty insurance contract acquired was in excess of the expected losses for each contract and therefore no explicit loss reserves were recorded on the Acquisition Date. Loss reserves and loss and loss adjustment expenses ("LAE") are recorded when the expected losses for each contract exceeds the remaining unearned premium reserve, in accordance with the Company's accounting policy described in Note 6, Financial Guaranty Insurance. The expected losses assumed by the Company as part of the Radian Asset Acquisition are included in the U.S. has improveddescription of expected losses to be paid under Note 5, Expected Loss to be Paid.

The excess of the fair value of net assets acquired over the last few yearsconsideration transferred was recorded as a bargain purchase gain in "bargain purchase gain and indicators such as lower delinquency rates and more stable housing prices point toward improvementsettlement of pre-existing relationships" in the housing market. However, unemployment rates remain too high for a robust general economic recovery to have taken hold and concerns over the fiscal cliff may have hampered the recovery towards the end of 2012. The low interest rate environment has also negatively affected new business opportunities. The Company's business and its financial condition will continue to be subject to the risk of global financial and economic conditions that could materially and negatively affect the demand for its products, the amount of losses incurred on transactions it guarantees, future profitability, financial position, investment portfolio, cash flow, statutory capital, financial strength ratings and stock price.
The financial crisis that began in 2008 has caused many state and local governments that issue some of the obligationsnet income. In addition, the Company insuresand Radian Asset had pre-existing reinsurance relationships, which were effectively settled at fair value on the Acquisition Date. The gain on settlement of these pre-existing reinsurance relationships primarily represents the net difference between the historical ceded balances that were recorded by AGM and the fair value of assumed balances acquired from Radian Asset. The Company believes the bargain purchase resulted from the announced desire of Radian Guaranty Inc. to experience significant budget deficits and revenue collection shortfalls that require them to significantly raise taxes and/or cut spending in order to satisfy their obligations. While the U.S. government has provided some financial support to state and local governments, significant budgetary pressures remain. If the issuers of the obligations in the Company's public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its public finance obligations, which would materially and adversely affectfocus its business financial conditionstrategy on the mortgage and results of operations. Additionally, future legislative, regulatory or judicial changesreal estate markets and to monetize its investment in the jurisdictions regulating the Company may adversely affectRadian Asset and thereby accelerate its ability to pursue its current mixcomply with the financial requirements of business, materially impacting its financial results.the final Private Mortgage Insurer Eligibility Requirements.

Internationally, several European countries are experiencing significant economic, fiscal and /or political strains. The European countries where it believes heightened uncertainties exist are: Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). See Note 3, Outstanding Exposure.

145


The following table shows the net effect of the Radian Asset Acquisition at the Acquisition Date, including the effects of the settlement of pre-existing relationships.

Rating Actions
 Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships Net effect of Settlement of Pre-existing Relationships Net Effect of Radian Asset Acquisition
 (in millions)
Cash purchase price(1)$804
 $
 $804
Identifiable assets acquired:     
Investments1,473
 
 1,473
Cash4
 
 4
Ceded unearned premium reserve(3) (65) (68)
Credit derivative assets30
 
 30
Deferred tax asset, net263
 (56) 207
Financial guaranty variable interest entities’ assets122
 
 122
Other assets86
 (67) 19
Total assets1,975
 (188) 1,787
  
    
Liabilities assumed:     
Unearned premium reserves697
 (216) 481
Credit derivative liabilities271
 (26) 245
Financial guaranty variable interest entities’ liabilities118
 
 118
Other liabilities30
 (49) (19)
Total liabilities1,116
 (291) 825
Net asset effect of Radian Asset Acquisition859
 103
 962
Bargain purchase gain and settlement of pre-existing relationships resulting from Radian Asset Acquisition, after-tax55
 103
 158
Deferred tax
 56
 56
Bargain purchase gain and settlement of pre-existing relationships resulting from Radian Asset Acquisition, pre-tax$55
 $159
 $214
_____________________
(1)The cash purchase price of $804 million was the cash transferred for the acquisition which was allocated as follows: (1) $987 million for the purchase of net assets of $1,042 million, and (2) the settlement of pre-existing relationships between Radian Asset and Assured Guaranty at a fair value of $(183) million.
Revenue and net income related to Radian Asset from the Acquisition Date through December 31, 2015 included in the consolidated statement of operations were approximately $560 million and $366 million, respectively. In 2015, the Company recorded transaction expenses related to the Radian Asset Acquisition in net income as part of other operating expenses. These expenses were primarily driven by the fees paid to the Company's legal and financial advisors and to the Company's independent auditor.

Radian Asset Acquisition-Related Expenses

 Year Ended December 31, 2015
 (in millions)
Professional services$2
Financial advisory fees10
Total$12


146


Unaudited Pro Forma Results of Operations

The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and Radian Asset as if the acquisition had been completed on January 1, 2014, as required under GAAP. The pro forma accounts include the estimated historical results of the Company and Radian Asset and pro forma adjustments primarily comprising the earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships and Radian Asset acquisition related expenses, all net of tax at the applicable statutory rate.

The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2014, nor is it indicative of the results of operations in future periods.

Unaudited Pro Forma Results of Operations

 Year Ended December 31, 2015 Year Ended December 31, 2014
 (in millions, except per share amounts)
Pro forma revenues$2,030
 $2,501
Pro forma net income922
 1,531
Pro forma earnings per share ("EPS"):   
  Basic6.22
 8.86
  Diluted6.18
 8.81


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 nationally recognized statisticalthe rating organizations (“NRSROs”)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 highstrong 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 itsthe impacted subsidiary's future business opportunities as well as the premiums itthe impacted subsidiary could charge for its insurance policiespolicies.     
The Company periodically assesses the value of each rating assigned to each of its companies, and consequently,may as a further downgrade could harmresult of such assessment request that a rating agency add or drop a rating from certain of its companies. For example, the Company’s new business productionKroll Bond Rating Agency ("KBRA") ratings were first assigned to MAC in 2013 and results of operationsto 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 material respect. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highestMoody's Investors Service, Inc. ("Moody's") rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demandwas never requested for the Company’s products)MAC and change frequently. Ratings reflect only the views of the respective NRSROswas dropped from AG Re and are subject to continuous review and revision or withdrawal at any time.AGRO in 2015.

In the last several years, Standard and Poor’s& Poor's Ratings Services (“("S&P”&P") and Moody’s Investors Service, Inc. (“Moody’s”)Moody's have downgradedchanged, 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 March 18, 2014, S&P upgraded the financial strength ratings of all the Company’sof AGL's insurance subsidiaries to AA (stable outlook) from AA- (stable outlook); it most recently affirmed such ratings in a credit analysis issued on June 29, 2015.

On July 2, 2014, Moody's affirmed the ratings of AGL’s insurance subsidiaries, but changed to negative the outlook of the insurance financial strength ratings of AGC and its subsidiary Assured Guaranty (UK) Ltd. ("AGUK"). Moody's

147


adopted changes to its credit methodology for financial guaranty insurance companies on January 20, 2015 and, on February 18, 2015, Moody's published a credit opinion maintaining its existing ratings of AGL and its subsidiaries under that they rate.new methodology. On January 17,December 8, 2015 Moody's published credit opinions maintaining its existing insurance financial strength ratings of A2 (stable outlook) on AGM and A3 (negative outlook) on AGC. 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 June 22, 2013, Moody’s downgraded the Insurance Financial Strength ("IFS")KBRA assigned a financial strength rating of AGMAA+ (stable outlook) to A2 from Aa3, the IFSMAC, and affirmed that rating on August 3, 2015. On November 13, 2014, KBRA assigned a financial strength rating of AGCAA+ (stable outlook) to A3 from Aa3,AGM, and the IFSaffirmed that rating on December 10, 2015.

On May 5, 2015, Best assigned to AGRO a financial strength rating of AG Re to Baa1 from A1. In the same rating action, Moody's also downgraded the senior unsecured debt ratings of AGUS and AGMH to Baa2 from A3. While the outlook for the ratings from S&P and Moody'sA+ (Stable), which is stable, theretheir second highest rating.

There can be no assurance that S&P and Moody'sany of the rating agencies will not take furthernegative action on their financial strength ratings of AGL's insurance subsidiaries in the Company’s ratings. future.

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

Note 6, Expected Loss to be PaidFinancial Guaranty Insurance
Note 9,8, Financial Guaranty Contracts Accounted for as Credit Derivatives
Note 14,13, Reinsurance and Other Monoline Exposures
Note 17, Long Term16, Long-Term Debt and Credit Facilities (regarding the impact on the Company's insured leveraged lease transactions)
        
In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA (the parent of Dexia Holdings Inc.) 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. The January 2013 Moody’s downgrade of AGM could result in withdrawal of $226.5 million of GIC funds and the need to post collateral on GICs with a balance of $1.9 billion. A further downgrade of AGM to below AA- by S&P could result in an incremental withdrawal or require collateral posting on GICs with a balance of $882.7 million. In the event of such a downgrade, assuming collateral posting on all transactions potentially impacted as a result of any additional rating action, with an average margin of 105%, the market value as of December 31, 2012 that the GIC issuers would be required to post in order to avoid withdrawal of any GIC funds would be $2.9 billion. There are sufficient eligible and liquid assets within the GIC business to satisfy the withdrawal and collateral posting obligations that arose as a result of the January 2013 AGM downgrade and would be expected to arise as a result of potential future rating action.
Accounting Changes

There has been significant GAAP rule making activity which has affected the accounting policies and presentation of the Company’s financial information, particularly:
adoption of a new VIE consolidation standard on January 1, 2010 results in the consolidation of variable interest entities of certain insured transactions (see Note 10, Consolidation of Variable Interest Entities),


146


adoption of new guidance that restricted the types and amounts of financial guaranty insurance acquisition costs that may be deferred, (see Note 5, Financial Guaranty Insurance Acquisition Costs),

adoption of guidance that changed the presentation of other comprehensive income (“OCI”), (see “Consolidated Statements of Comprehensive Income),” and

adoption of guidance requiring additional fair value disclosures (see Note 8, Fair Value Measurement).
In July 2012, the 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. The Company adopted ASU 2012-02 at December 31, 2012. There was no cumulative effect upon the adoption of ASU 2012-02 on the Company's consolidated financial position, results of operations or cash flows.

Significant Transactions

There have been four settlements of representation and warranty claims over the past three years. See Note 6, Expected Loss to be Paid.

The Company has entered into several agreements with reinsurers, including assumption and re-assumption agreements with Radian, a re-assumption agreement with Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio”) and a $435 million excess of loss reinsurance facility. See Note 14, Reinsurance and Other Monoline Exposures.

On June 1, 2012, the Company completed the remarketing of the $173 million aggregate principal amount of 8.50% 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. See Note 17, Long Term Debt and Credit Facilities.

3.4.Outstanding Exposure
 
The Company’s financial guaranty contracts are written in different forms,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 areit views as investment grade at inception, diversifyingalthough, as part of its loss mitigation strategy for existing troubled credits, it may underwrite new issuances that it views as BIG. The Company diversifies its insured portfolio across asset classes and, maintainingin the structured finance portfolio, requires rigorous subordination or collateralization requirements on structuredrequirements. Reinsurance may be used in order to reduce net exposure to certain insured transactions.

     Public finance obligations.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 has utilized reinsuranceincludes within public finance obligations those obligations backed by ceding business to third-party reinsurers.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 provides financial guaranties with respect to debtalso includes within public finance similar obligations ofissued 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.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 10, Consolidation of9, Consolidated Variable Interest Entities. TheUnless otherwise specified, the outstanding par and Debt Service amounts presented belowin this note include outstanding exposures on VIEs whether or not they are consolidated.

Significant Risk Management Activities

The Portfolio Risk Management Committee, which includes members of senior management and senior credit and surveillance officers, sets specific risk policies and limits and is responsible for enterprise risk management, establishing the Company's risk appetite, credit underwriting of new business, surveillance and work-out.
As part of the surveillance process, the Company monitors trends and changes in transaction credit quality, detects any deterioration in credit quality, and recommends such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, which are updated based on changes in transaction credit quality. The Company also develops strategies to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage the Company's litigation proceedings.

147148



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 is a claim that the Company expects to be reimbursed within one year) have yet been paid.
BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

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.

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.


149


Financial Guaranty
Debt Service OutstandingSignificant Risk Management Activities

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 December 31,
2012
 December 31,
2011
 December 31,
2012
 December 31,
2011
 (in millions)
Public finance$722,562
 $798,471
 $677,369
 $716,890
Structured finance112,388
 137,661
 104,811
 128,775
Total financial guaranty$834,950
 $936,132
 $782,180
 $845,665
The Portfolio Risk Management Committee, which includes members of senior management and senior credit and surveillance officers, sets specific risk policies and limits and is responsible for enterprise risk management, establishing the Company's risk appetite, credit underwriting of new business, surveillance and work-out.
    
As part of the surveillance process, the Company monitors trends and changes in transaction credit quality, detects any deterioration in credit quality, and recommends such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, which are updated based on changes in transaction credit quality. The Company also develops strategies to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage the Company's litigation proceedings.

148


Summary
Surveillance Categories
The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of Public Financeresources to monitoring and Structured Finance Insured Portfolioloss 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 is a claim that the Company expects to be reimbursed within one year) have yet been paid.
 Gross Par Outstanding Ceded Par Outstanding Net Par Outstanding
SectorAs of December 31, 2012 As of December 31, 2011 As of December 31, 2012 As of December 31, 2011 As of December 31, 2012 As of December 31, 2011
 (dollars in millions)
Public finance:         
  
U.S.:         
  
General obligation$175,932
 $187,857
 $5,947
 $14,796
 $169,985
 $173,061
Tax backed77,932
 85,866
 4,145
 7,860
 73,787
 78,006
Municipal utilities63,933
 69,803
 1,817
 4,599
 62,116
 65,204
Transportation35,624
 40,409
 1,825
 5,013
 33,799
 35,396
Healthcare19,507
 23,540
 1,669
 4,045
 17,838
 19,495
Higher education16,244
 16,535
 474
 858
 15,770
 15,677
Housing4,792
 6,363
 159
 667
 4,633
 5,696
Infrastructure finance5,100
 4,983
 890
 873
 4,210
 4,110
Investor-owned utilities1,070
 1,125
 1
 1
 1,069
 1,124
Other public finance—U.S.4,784
 5,380
 24
 76
 4,760
 5,304
Total public finance—U.S.404,918
 441,861
 16,951
 38,788
 387,967
 403,073
Non-U.S.:         
  
Infrastructure finance18,716
 18,231
 2,904
 2,826
 15,812
 15,405
Regulated utilities16,861
 17,639
 4,367
 4,379
 12,494
 13,260
Pooled infrastructure3,430
 3,351
 230
 221
 3,200
 3,130
Other public finance—non-U.S.7,297
 9,183
 1,263
 1,932
 6,034
 7,251
Total public finance—non-U.S.46,304
 48,404
 8,764
 9,358
 37,540
 39,046
Total public finance451,222
 490,265
 25,715
 48,146
 425,507
 442,119
Structured finance:         
  
U.S.:         
  
Pooled corporate obligations44,120
 54,585
 2,234
 3,065
 41,886
 51,520
Residential mortgage-backed security("RMBS")18,914
 22,842
 1,087
 1,275
 17,827
 21,567
Commercial mortgage-backed securities ("CMBS") and other commercial real estate related exposures4,293
 4,827
 46
 53
 4,247
 4,774
Financial products3,653
 5,217
 
 
 3,653
 5,217
Consumer receivables2,429
 4,489
 60
 163
 2,369
 4,326
Insurance securitizations2,238
 1,966
 48
 73
 2,190
 1,893
Commercial receivables1,033
 1,222
 8
 8
 1,025
 1,214
Structured credit373
 489
 54
 65
 319
 424
Other structured finance—U.S.2,307
 2,453
 1,128
 1,154
 1,179
 1,299
Total structured finance—U.S.79,360
 98,090
 4,665
 5,856
 74,695
 92,234
Non-U.S.:         
  
Pooled corporate obligations16,288
 19,670
 1,475
 1,939
 14,813
 17,731
Commercial receivables1,489
 1,893
 26
 28
 1,463
 1,865
RMBS1,586
 1,765
 162
 167
 1,424
 1,598
Insurance securitizations923
 979
 
 15
 923
 964
Structured credit669
 1,097
 78
 118
 591
 979
CMBS and other commercial real estate related exposures100
 180
 
 
 100
 180
Other structured finance—non-U.S.402
 403
 25
 25
 377
 378
Total structured finance—non-U.S.21,457
 25,987
 1,766
 2,292
 19,691
 23,695
Total structured finance100,817
 124,077
 6,431
 8,148
 94,386
 115,929
Total net par outstanding$552,039
 $614,342
 $32,146
 $56,294
 $519,893
 $558,048
BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.


149


In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance in force was approximately $154 million as of December 31, 2012. The net mortgage guaranty insurance in force is assumed excess of loss business and comprises $139 million covering loans originated in Ireland and $15 million covering loans originated in the UK.Outstanding Exposure

Unless otherwise noted, ratings disclosed herein on Assured Guaranty’sthe Company's insured portfolio reflect Assured Guaranty’sits 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.

Financial Guaranty Portfolio by Internal Rating
As of December 31, 2012

  
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 Total
Rating
Category
 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 % 
Net Par
Outstanding
 %
  (dollars in millions)
Super senior $
 % $1,130
 3.0% $13,572
 18.2% $4,874
 24.7% $19,576
 3.8%
AAA 4,502
 1.2
 576
 1.5
 28,615
 38.3
 8,295
 42.1
 41,988
 8.1
AA 124,525
 32.1
 875
 2.3
 9,589
 12.8
 722
 3.7
 135,711
 26.1
A 210,124
 54.1
 9,781
 26.1
 4,670
 6.2
 1,409
 7.2
 225,984
 43.4
BBB 44,213
 11.4
 22,885
 61.0
 3,717
 5.0
 2,427
 12.3
 73,242
 14.1
Below-investment-grade (“BIG”) 4,603
 1.2
 2,293
 6.1
 14,532
 19.5
 1,964
 10.0
 23,392
 4.5
Total net par outstanding $387,967
 100.0% $37,540
 100.0% $74,695
 100.0% $19,691
 100.0% $519,893
 100.0%
Financial Guaranty Portfolio by Internal Rating
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 the first quarter 2012, theThe Company decided to classifyclassifies 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 the third quarter 2012, the

The Company applied this policy to the Bank of America Agreementpurchases securities that it has insured, and the Deutsche Bank Agreement (see Note 6, Expected Lossfor which it has expected losses to be Paid)paid, in order to mitigate the economic effect of insured losses ("loss mitigation securities"). The Bank of America Agreement was entered into in April 2011Company 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 reclassification in the first quarter 2012 resulted in a decrease in BIGgross and net par outstanding as of December 31, 2011 of $1,452 million from that previously reported.debt service for all financial guaranty contracts.


150149


Securities purchased for loss mitigation purposes represented $1,133 million and $1,293 million of gross par outstanding as of December 31, 2012 and 2011, respectively. In addition, under the terms of certain credit derivative contracts, the Company has obtained the obligations referenced in such contracts and recorded it in invested assets in the consolidated balance sheets. Such amounts totaled $220 million and $222 million in gross par outstanding as of December 31, 2012 and 2011, respectively.

Actual maturities of insured obligations could differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. The expected maturities of structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.


Expected Amortization of
Net Par Outstanding of Financial Guaranty Insured Obligations
As of December 31, 2012

 Public Finance Structured Finance Total
 (in millions)
0 to 5 years$110,847
 $73,805
 $184,652
5 to 10 years90,846
 9,537
 100,383
10 to 15 years82,789
 3,817
 86,606
15 to 20 years62,006
 2,127
 64,133
20 years and above79,019
 5,100
 84,119
Total net par outstanding$425,507
 $94,386
 $519,893

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $1.9 billion for structured finance and $0.8 billion for public finance obligations at December 31, 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 January 15, 2013 and February 25, 2017, with $0.6 billion expiring prior to December 31, 2013. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

151


The Company seeks to maintain a diversified portfolio of insured obligations designed to spread its risk across a number of geographic areas.

Geographic Distribution of Financial Guaranty Portfolio
As of December 31, 2012


 Number of Risks Net Par Outstanding Percent of Total Net Par Outstanding
 (dollars in millions)
U.S.:     
U.S. Public Finance:     
California1,532
 $57,302
 11.0%
New York1,051
 31,402
 6.0
Pennsylvania1,133
 31,173
 6.0
Texas1,273
 29,942
 5.8
Illinois933
 25,297
 4.9
Florida446
 24,111
 4.6
New Jersey704
 15,999
 3.1
Michigan745
 15,516
 3.0
Georgia205
 10,001
 1.9
Ohio576
 9,634
 1.9
Other states4,889
 137,590
 26.4
Total U.S. public finance13,487
 387,967
 74.6
U.S. Structured finance (multiple states)1,080
 74,695
 14.4
Total U.S.14,567
 462,662
 89.0
Non-U.S.:     
United Kingdom124
 23,624
 4.5
Australia33
 7,558
 1.5
Canada11
 4,160
 0.8
France23
 3,914
 0.8
Italy12
 2,347
 0.5
Other116
 15,628
 2.9
Total non-U.S.319
 57,231
 11.0
Total14,886
 $519,893
 100.0%

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 Selected European Countries where it believes heightened uncertainties exist. Published reports have identified countries that may be experiencing reduced demand for their sovereign debt in the current environment. The Company selected these European countries based on these reports and its view that their credit fundamentals are deteriorating. The Company’s economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following table net of ceded reinsurance.

152


Net Economic Exposure to Selected European Countries(1)
December 31, 2012

 Greece Hungary Ireland Italy Portugal Spain (2) Total
 (in millions)
Sovereign and sub-sovereign exposure: 
  
  
  
  
  
  
Public finance$
 $
 $
 $1,007
 $105
 $266
 $1,378
Infrastructure finance
 434
 24
 333
 100
 169
 1,060
Sub-total
 434
 24
 1,340
 205
 435
 2,438
Non-sovereign exposure: 
  
  
  
  
  
  
Regulated utilities
 
 
 229
 
 9
 238
RMBS
 219
 139
 498
 
 
 856
Commercial receivables
 2
 13
 63
 15
 2
 95
Pooled corporate25
 
 189
 217
 14
 524
 969
Sub-total25
 221
 341
 1,007
 29
 535
 2,158
Total$25
 $655
 $365
 $2,347
 $234
 $970
 $4,596
Total BIG$
 $616
 $7
 $248
 $121
 $419
 $1,411
 ____________________
(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 $139 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 6, Expected Loss to be Paid.
When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For direct exposure this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies. In the case of assumed business for direct exposures, the Company depends upon geographic information provided by the primary insurer.

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

The Company no longer guarantees any sovereign bonds of the Selected European Countries. The exposure shown in the “Public Finance Category” is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal. Sub-sovereign debt is debt issued by a governmental entity or government backed entity, or supported by such an entity, that is other than direct sovereign debt of the ultimate governing body of the country. As of December 31, 2012, the Company no longer had any direct exposure to Greece. In 2012, the Company paid claims under its guarantees of €218 million in net exposure to the sovereign debt of Greece, paying off in full its liabilities with respect to the Greek sovereign bonds.

153



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.

Significant Risk Management Activities

The Risk Oversight and Audit Committees of the Board of Directors of AGL oversee the Company's risk management policies and procedures. With input from the board committees, specific risk policies and limits are set by the Portfolio Risk Management Committee, which includes members of senior management and senior Creditcredit and Surveillance officers. The Company's Risk Management function encompassessurveillance officers, sets specific risk policies and limits and is responsible for enterprise risk management, establishing the Company's risk appetite, credit underwriting of new business, surveillance and work-out.

Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio. The primary objectiveAs part of the surveillance process, is to monitorthe Company monitors trends and changes in transaction credit quality, detectdetects any deterioration in credit quality, and recommend to managementrecommends such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, and Surveillance personnelwhich are responsible for recommending adjustments to those ratings to reflectupdated based on changes in transaction credit quality.

Work-out personnel are responsible for managing work-out and loss mitigation situations, working with surveillance and legal personnel (as well as outside vendors) as appropriate. They develop The Company also develops strategies for the Company to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the Company's litigation proceedings.


148

Since the onset


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.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 new credits need to be internally downgraded to BIG. The CompanyBIG 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 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 (seeloss. See Note 6,5, Expected Loss to be Paid).Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetimefuture 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 “lifetime“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 overin the lifefuture of that transaction than it ultimately will have reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for recording of reserves for financial statement purposes.)
More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The three BIG categories are:
 

154


BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make lifetimefuture 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 lifetimefuture 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 lifetimefuture losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain

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 this category when claims have beentrust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

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 only a recoverable remains.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.


149


Financial Guaranty
Debt Service Outstanding

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 December 31,
2015
 December 31,
2014
 December 31,
2015
 December 31,
2014
 (in millions)
Public finance$515,494
 $587,245
 $494,426
 $553,612
Structured finance43,976
 59,477
 41,915
 56,010
Total financial guaranty$559,470
 $646,722
 $536,341
 $609,622

In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $102 million as of December 31, 2015 and $127 million as of December 31, 2014 related to loans originated in Ireland. As of December 31, 2015, the Company also had exposure to €12 million of reinsurance contracts relating to Spanish housing cooperatives risk, but the Company commuted back to the ceding company the exposure in January 2016.

Financial Guaranty ExposuresPortfolio 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)(2) $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.

(2)The December 31, 2015 amounts include $10.9 billion of net par acquired from Radian Asset.

Financial Guaranty Portfolio by Internal Rating
As of December 31, 2014

  
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 $4,082
 1.3% $615
 2.0% $20,037
 48.7% $5,409
 59.6% $30,143
 7.5%
AA 90,464
 28.1
 2,785
 8.9
 8,213
 19.9
 503
 5.5
 101,965
 25.3
A 176,298
 54.7
 7,192
 22.9
 2,940
 7.1
 445
 4.9
 186,875
 46.3
BBB 43,429
 13.5
 19,363
 61.7
 1,795
 4.4
 1,912
 21.1
 66,499
 16.4
BIG 7,850
 2.4
 1,404
 4.5
 8,186
 19.9
 807
 8.9
 18,247
 4.5
Total net par outstanding (1) $322,123
 100.0% $31,359
 100.0% $41,171
 100.0% $9,076
 100.0% $403,729
 100.0%
_____________________
(1)Excludes $1.3 billion of loss mitigation securities insured and held by the Company as of December 31, 2014, which are primarily BIG.


150


Financial Guaranty Portfolio
by Sector

 Gross Par Outstanding Ceded Par Outstanding Net Par Outstanding
SectorAs of December 31, 2015 As of December 31, 2014 As of December 31, 2015 As of December 31, 2014 As of December 31, 2015 As of December 31, 2014
 (in millions)
Public finance:         
  
U.S.:         
  
General obligation$129,386
 $144,714
 $3,131
 $4,438
 $126,255
 $140,276
Tax backed59,649
 65,600
 1,587
 3,075
 58,062
 62,525
Municipal utilities46,951
 53,471
 1,015
 1,381
 45,936
 52,090
Transportation24,351
 28,914
 897
 1,091
 23,454
 27,823
Healthcare15,967
 16,225
 961
 1,377
 15,006
 14,848
Higher education11,984
 13,485
 48
 386
 11,936
 13,099
Infrastructure finance5,241
 5,098
 248
 917
 4,993
 4,181
Housing2,075
 2,880
 38
 101
 2,037
 2,779
Investor-owned utilities916
 944
 0
 0
 916
 944
Other public finance3,288
 3,575
 17
 17
 3,271
 3,558
Total public finance—U.S.299,808
 334,906
 7,942
 12,783
 291,866
 322,123
Non-U.S.:         
  
Infrastructure finance14,040
 15,091
 1,312
 2,283
 12,728
 12,808
Regulated utilities12,616
 14,582
 2,568
 3,668
 10,048
 10,914
Pooled infrastructure2,013
 2,565
 134
 145
 1,879
 2,420
Other public finance5,714
 6,216
 792
 999
 4,922
 5,217
Total public finance—non-U.S.34,383
 38,454
 4,806
 7,095
 29,577
 31,359
Total public finance334,191
 373,360
 12,748
 19,878
 321,443
 353,482
Structured finance:         
  
U.S.:         
  
Pooled corporate obligations16,757
 21,791
 749
 1,145
 16,008
 20,646
Residential Mortgage-Backed Securities ("RMBS")7,441
 10,109
 374
 692
 7,067
 9,417
Insurance securitizations3,047
 3,480
 47
 47
 3,000
 3,433
Consumer receivables2,153
 2,157
 54
 58
 2,099
 2,099
Financial products1,906
 2,276
 
 
 1,906
 2,276
Commercial mortgage-backed securities ("CMBS") and other commercial real estate related exposures549
 1,979
 16
 22
 533
 1,957
Commercial receivables432
 567
 5
 7
 427
 560
Other structured finance823
 929
 93
 146
 730
 783
Total structured finance—U.S.33,108
 43,288
 1,338
 2,117
 31,770
 41,171
Non-U.S.:         
  
Pooled corporate obligations4,087
 7,439
 442
 835
 3,645
 6,604
Commercial receivables619
 965
 19
 21
 600
 944
RMBS552
 893
 60
 99
 492
 794
Other structured finance635
 759
 14
 25
 621
 734
Total structured finance—non-U.S.5,893
 10,056
 535
 980
 5,358
 9,076
Total structured finance39,001
 53,344
 1,873
 3,097
 37,128
 50,247
Total net par outstanding$373,192
 $426,704
 $14,621
 $22,975
 $358,571
 $403,729


151


In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $595 million for public finance obligations at December 31, 2015. The expiration dates for the public finance commitments range between January 15, 2016 and February 25, 2017, with $471 million expiring prior to the date of this filing and an additional $60 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.

Actual maturities of insured obligations could differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. The expected maturities of structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.

Expected Amortization of
Net Par Outstanding
As of December 31, 2015

 Public Finance Structured Finance Total
 (in millions)
0 to 5 years$97,518
 $24,430
 $121,948
5 to 10 years68,144
 4,786
 72,930
10 to 15 years58,348
 2,768
 61,116
15 to 20 years45,623
 2,765
 48,388
20 years and above51,810
 2,379
 54,189
Total net par outstanding$321,443
 $37,128
 $358,571


Components of BIG Portfolio

Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 2012
2015

BIG Net Par Outstanding Net Par BIG Net Par as
a % of Net Par
BIG Net Par Outstanding Net Par
BIG 1 BIG 2 BIG 3 Total BIG Outstanding OutstandingBIG 1 BIG 2 BIG 3 Total BIG Outstanding
    (in millions)          (in millions)    
U.S. public finance$4,765
 $2,883
 $136
 $7,784
 $291,866
Non-U.S. public finance875
 503
 
 1,378
 29,577
Structured finance         
First lien U.S. RMBS: 
  
  
  
  
  
 
  
  
  
  
Prime first lien$28
 $436
 $11
 $475
 $641
 0.1%225
 34
 25
 284
 445
Alt-A first lien109
 1,987
 1,479
 3,575
 4,589
 0.7
119
 73
 601
 793
 1,353
Option ARM61
 392
 643
 1,096
 1,550
 0.2
39
 12
 90
 141
 252
Subprime152
 1,161
 1,024
 2,337
 7,330
 0.4
146
 228
 930
 1,304
 3,457
Second lien U.S. RMBS: 
  
  
  
  
  
Closed end second lien
 247
 157
 404
 521
 0.1
Home equity lines of credit (“HELOCs”)91
 
 2,627
 2,718
 3,196
 0.5
Second lien U.S. RMBS491
 50
 910
 1,451
 1,560
Total U.S. RMBS441
 4,223
 5,941
 10,605
 17,827
 2.0
1,020
 397
 2,556
 3,973
 7,067
Triple-X life insurance transactions
 
 216
 216
 2,750
Trust preferred securities (“TruPS”)1,920
 
 952
 2,872
 5,693
 0.6
679
 127
 
 806
 4,379
Student loans12
 68
 83
 163
 1,818
Other structured finance1,310
 384
 1,325
 3,019
 70,866
 0.6
672
 151
 40
 863
 21,114
U.S. public finance3,290
 500
 813
 4,603
 387,967
 0.9
Non-U.S. public finance2,293
 
 
 2,293
 37,540
 0.4
Total$9,254
 $5,107
 $9,031
 $23,392
 $519,893
 4.5%$8,023
 $4,129
 $3,031
 $15,183
 $358,571



155152


Financial Guaranty ExposuresComponents of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 20112014

BIG Net Par Outstanding Net Par 
BIG Net Par as
a % of Net Par
BIG Net Par Outstanding Net Par
BIG 1 BIG 2 BIG 3 Total BIG Outstanding OutstandingBIG 1 BIG 2 BIG 3 Total BIG Outstanding
    (in millions)          (in millions)    
U.S. public finance$6,577
 $1,156
 $117
 $7,850
 $322,123
Non-U.S. public finance1,402
 2
 
 1,404
 31,359
Structured finance         
First lien U.S. RMBS: 
  
  
  
  
  
 
  
  
  
  
Prime first lien$77
 $465
 $
 $542
 $739
 0.1%68
 33
 252
 353
 471
Alt-A first lien1,695
 1,028
 1,540
 4,263
 5,329
 0.8
585
 531
 725
 1,841
 2,532
Option ARM25
 689
 882
 1,596
 2,433
 0.3
47
 18
 118
 183
 407
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
HELOCs421
 
 2,858
 3,279
 3,890
 0.6
Subprime156
 654
 765
 1,575
 4,051
Second lien U.S. RMBS1,012
 55
 624
 1,691
 1,956
Total U.S. RMBS3,013
 3,877
 6,313
 13,203
 21,567
 2.4
1,868
 1,291
 2,484
 5,643
 9,417
Triple-X life insurance transactions
 
 598
 598
 3,133
TruPS2,501
 
 951
 3,452
 6,334
 0.6
997
 
 336
 1,333
 4,326
Student loans14
 68
 113
 195
 1,857
Other structured finance1,295
 548
 1,429
 3,272
 88,028
 0.6
1,007
 172
 45
 1,224
 31,514
U.S. public finance3,395
 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%$11,865
 $2,689
 $3,693
 $18,247
 $403,729
_____________________
(1)
Includes $282 million in net par as of December 31, 2011, for bonds of the Hellenic Republic of Greece. See Note 6, Expected Loss to be Paid.

Below-Investment-Grade Credits
By CategoryBIG Net Par Outstanding
and Number of Risks
As of December 31, 2012
2015

 Net Par Outstanding Number of Risks(2) Net Par Outstanding Number of Risks(2)
Description 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total
 (dollars in millions) (dollars in millions)
BIG:  
  
  
  
  
  
  
  
  
  
  
  
Category 1 $7,049
 $2,205
 $9,254
 153
 30
 183
 $7,019
 $1,004
 $8,023
 202
 12
 214
Category 2 2,606
 2,501
 5,107
 76
 27
 103
 3,655
 474
 4,129
 85
 8
 93
Category 3 7,028
 2,003
 9,031
 142
 32
 174
 2,900
 131
 3,031
 132
 12
 144
Total BIG $16,683
 $6,709
 $23,392
 371
 89
 460
 $13,574
 $1,609
 $15,183
 419
 32
 451



156153


Below-Investment-Grade CreditsBIG Net Par Outstanding
By Categoryand Number of Risks
As of December 31, 2011
2014

 Net Par Outstanding Number of Risks(2) Net Par Outstanding Number of Risks(2)
Description 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 Total
 (dollars in millions) (dollars in millions)
BIG:  
  
  
  
  
  
  
  
  
  
  
  
Category 1 $8,297
 $3,953
 $12,250
 171
 40
 211
 $10,195
 $1,670
 $11,865
 164
 18
 182
Category 2 3,458
 1,523
 4,981
 71
 33
 104
 2,135
 554
 2,689
 75
 14
 89
Category 3 7,204
 2,327
 9,531
 126
 26
 152
 2,892
 801
 3,693
 119
 24
 143
Total BIG $18,959
 $7,803
 $26,762
 368
 99
 467
 $15,222
 $3,025
 $18,247
 358
 56
 414
_____________________
(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.
 

Superstorm Sandy
154


Geographic Distribution of Net Par Outstanding

The Company seeks to maintain a diversified portfolio of insured obligations designed to spread its risk across a number of geographic areas.

Geographic Distribution of
Net Par Outstanding
As of December 31, 2015

 Number of Risks Net Par Outstanding Percent of Total Net Par Outstanding
 (dollars in millions)
U.S.:     
U.S. Public finance:     
 California1,514
 $47,731
 13.3%
 Texas1,307
 23,891
 6.7
 Pennsylvania944
 23,655
 6.6
 New York961
 22,513
 6.3
 Illinois816
 22,220
 6.2
 Florida369
 16,595
 4.6
 New Jersey553
 13,605
 3.8
 Michigan577
 10,898
 3.0
 Georgia183
 6,991
 1.9
 Ohio464
 6,753
 1.9
 Other states and U.S. territories3,927
 97,014
 27.0
Total U.S. public finance11,615
 291,866
 81.3
U.S. Structured finance (multiple states)723
 31,770
 8.9
Total U.S.12,338
 323,636
 90.2
Non-U.S.:     
United Kingdom101
 17,565
 4.9
Australia22
 3,349
 0.9
Canada10
 3,099
 0.9
France16
 2,609
 0.7
Italy8
 1,296
 0.4
Other72
 7,017
 2.0
Total non-U.S.229
 34,935
 9.8
Total12,567
 $358,571
 100.0%


155


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 December 31, 2015, all of which are rated BIG. In 2015, the Company's Puerto Rico exposures increased due to (1) net par acquired in the Radian Asset Acquisition, which equals $385 million as of December 31, 2015, and (2) a commutation of previously ceded Puerto Rico exposures.

Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits, until recently, were covered primarily with the net proceeds of bond issuances, interim financings provided by Government Development Bank for Puerto Rico (“GDB”) and, in some cases, one-time revenue measures or expense adjustment measures. 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 have been scheduled for 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 recent Supreme Court vacancy.

On OctoberJune 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 June 29, 2012, Superstorm Sandy made landfall in New Jersey2015 a report commissioned by the Commonwealth and caused significant lossauthored by former World Bank Chief Economist and former Deputy Director of lifethe International Monetary Fund Dr. Anne Krueger and property damage in New Jersey, New Yorkeconomists Dr. Ranjit Teja and Connecticut.Dr. Andrew Wolfe and calling for debt restructuring of all Puerto Rico bonds was released ("Krueger Report").

Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of the GDB, failed to make most of an approximately $58 million Debt Service payment on August 3, 2015 and to make subsequent Debt Service payments because the Commonwealth’s legislature did not appropriate funds for payment.  The Company does not expectinsure any significant losses as a direct resultobligations of the superstorm at this time.PFC. 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.

4.Financial Guaranty Insurance Premiums

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 portfolioFEGP projected that the Commonwealth would face a cumulative financing gap of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts$27.8 billion from fiscal year 2016 to fiscal year 2020 without corrective action. Various stakeholders and analysts have publicly questioned the accuracy of the $27.8 billion gap projected by the Working Group. The FEGP recommended economic development, structural, fiscal and institutional reform measures that meetit projects would reduce that gap to $14.0 billion. The Working Group asserts that the definitionCommonwealth’s debt, including debt with a constitutional priority, is not sustainable. The FEGP included a recommendation that the Commonwealth’s advisors begin to work on a voluntary exchange offer to its creditors as part of insurance contractsthe FEGP. The FEGP does not have the force of law and implementation of its recommendations would require actions by the governments of the Commonwealth and of the United States as well as thosethe cooperation and agreement of various creditors.
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 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 meetthis attempt to “claw back” pledged taxes and revenues is unconstitutional, and demanding declaratory and injunctive relief. The Puerto Rico credits insured by the definitionCompany impacted by the Clawback Orders are shown in the table “Puerto Rico Net Par Outstanding” below.


156


On January 18, 2016 the Working Group published an updated FEGP that projected the cumulative financing gap beyond 2020 would continue to increase to $63.4 billion without corrective action. The Working Group followed that up with the publication on February 1, 2016, of a derivative under GAAP. Amountsproposal for a voluntary exchange of $49.2 billion of tax supported debt into $26.5 billion of new mandatorily payable base bonds and $22.7 billion of growth bonds.
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. U.S. House of Representatives Speaker Paul Ryan has asked that a legislative response be presented to the House of Representatives by the end of March 2016. 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 this note relate onlythe 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 December 31, 2015, the Company had $744 million insured net par outstanding of PREPA obligations. In August 2014, PREPA entered into forbearance agreements with the GDB, its bank lenders, and bondholders and financial guaranty insurers (including AGM and AGC) that hold or guarantee more than 60% of PREPA's outstanding bonds, in order to address its near-term liquidity issues. Creditors, including AGM and AGC, agreed not to exercise available rights and remedies until March 31, 2015, and the bank lenders agreed to extend the maturity of two revolving lines of credit to the same date. PREPA agreed it would continue to make principal and interest payments on its outstanding bonds, and interest payments on its lines of credit. It also agreed it would develop a five year business plan and a recovery program in respect of its operations. Subsequently, most of the parties extended these forbearance agreements several times.
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 contracts. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives,policies in an aggregate amount not expected to exceed $113 million in exchange for a discussionmarket premium and to support a portion of credit derivative revenues.

Accounting Policies

Accountingthe reserve fund for financial guaranty contracts that meet the scope exception under derivative accounting guidancesecuritization 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 purportedly 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 to industry specific guidance which prescribes revenue recognition methodologies. Contractscertain conditions, including confirmation that meet the definitionenacted legislation meets all requirements of a derivativethe 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 accounted for at fair value and discussed separately in these financial statements. The accounting for contracts that fall undermet, the financial guaranty insurance definition are consistent whether the contract was written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty, or acquired in a business combination.

Unearned premium reserve represents deferred premium revenue, net of paid claims that have not yet been expensed (“contra-paid”). The following discussion relatesRSA’s other provisions, including those related to the deferred premium revenue componentrestructuring of the unearned premium reserve, whileinsured PREPA revenue bonds, will be implemented. PREPA, during the contra-paid is discussed in Note 7, Financial Guaranty Insurance Losses.

The amount of deferred premium revenue at contract inception is determined as follows:

For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.

For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value of either (1) contractual premiums due or (2) premiums expected to be collected over the lifependency of the contract. For financial guaranty insurance contracts where the underlying collateral is comprised of homogeneous pools of assets, the expected premiums to be collected over the life of the contract is used to estimate the present value of future premiums. To be considered aagreements, has suspended deposits into its debt service fund.


157


homogeneous poolPRHTA

As of assets prepayments must be contractually prepayable,December 31, 2015, the amountCompany had $909 million insured net par outstanding of prepayments must be probable,PRHTA (Transportation revenue) bonds and $370 million net par of PRHTA (Highway revenue) bonds. In March 2015, legislation was passed in the Commonwealth that would have supported proposals involving the GDB and PRIFA and would have, among other things, strengthened PRHTA. The proposals involved the issuance of up to $2.95 billion of bonds by PRIFA, but the Company believes the Commonwealth is no longer pursuing those proposals. In addition, PRHTA is one of the public corporations affected by the Clawback Orders.

Municipal Finance Agency
As of December 31, 2015, the Company had $387 million net par outstanding of bonds issued by the Puerto Rico Municipal Finance Agency (“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 timingGDB in which CRIM was seeking to ensure that the pledged tax revenues are, and amountwill 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 prepayments can be reasonably estimated. Whentrust that requires the Company makes a significant adjustmentGDB, as fiduciary, to prepayment assumptions,keep the pledged tax revenues separate from any other GDB monies or expected premium collections, it recognizes a prospective change in premium revenues. Whenaccounts and that governs the Company adjusts prepayment assumptions, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable. For all other contracts, the present value of contractual premiums due is used. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is updated only when significant changes to prepayment assumptions are made. Installment premiums typically relate to structured finance transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the deal.

For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the fair value of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue differs significantly from cash collections due primarily to fair value adjustments recorded in connection with a business combination.

The Company recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function of the insured principal amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured principal amounts outstanding in the reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Any nonrefundable deferred premium revenue related to that contract is recognized as premium revenue. When a premium receivable balance is deemed uncollectible, it is written off to bad debt expense.

For reinsurance assumed contracts, earned premium reported in the Company's consolidated statements of operations are calculated based upon data received from ceding companies, however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period.  The Company estimates earned premiums for the lag period.  Differences between such estimates and actual amounts are recorded in the periodmanner in which the actual amounts are determined. When installment premiums arepledged revenues may be invested and dispersed.
The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related to reinsurance assumed contracts, the Company assesses the credit qualityauthorities and liquidity of the ceding companiespublic corporations.
Puerto Rico
Gross Par and the impact of any potential regulatory constraints to determine the collectability of such amounts.Gross Debt Service Outstanding

Deferred premium revenue ceded to reinsurers is recorded as an asset in the line item ceded unearned premium reserve. Direct, assumed and ceded premium revenue are presented net in the income statement line item, net earned premiums. Net earned premiums comprise the following:

Net Earned Premiums
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Scheduled net earned premiums$581
 $765
 $1,054
Acceleration of premium earnings249
 125
 90
Accretion of discount on net premiums receivable22
 28
 40
  Total financial guaranty insurance852
 918
 1,184
Other1
 2
 3
  Total net earned premiums(1)$853
 $920
 $1,187
 Gross Par Outstanding Gross Debt Service Outstanding
 December 31,
2015
 December 31,
2014
 December 31,
2015
 December 31,
2014
 (in millions)
Previously Subject to the Voided Recovery Act (1)$2,965
 $3,058
 $5,162
 $5,326
Not Previously Subject to the Voided Recovery Act2,790
 2,977
 4,470
 4,748
   Total$5,755
 $6,035
 $9,632
 $10,074
 _______________________________________
(1)
Excludes $153 million, $75 million and $48 millionOn February 6, 2015, the U.S. District Court for the year endedDistrict 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 31, 2012, 2011 and 2010, respectively, related4, 2015, the U.S. Supreme Court granted petitions for writs of certiorari relating to consolidated FG VIEs.
that ruling.


158


Components of Unearned Premium Reserve
 As of December 31, 2012 As of December 31, 2011
 Gross Ceded Net(1) Gross Ceded Net(1)
 (in millions)
Deferred premium revenue:           
   Financial guaranty$5,349
 $586
 $4,763
 $6,046
 $728
 $5,318
   Other7
 
 7
 9
 0
 9
Total deferred premium revenue$5,356
 $586
 $4,770
 $6,055
 $728
 $5,327
Contra-paid(149) (25) (124) (92) (19) (73)
Total$5,207
 $561
 $4,646
 $5,963
 $709
 $5,254
 ____________________
(1)
Excludes $262 million and $274 million deferred premium revenue and $98 million and $133 million contra-paid related to FG VIEs as of December 31, 2012 and December 31, 2011, respectively.

Puerto Rico
Net Deferred Premium Revenue Roll ForwardPar Outstanding

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Balance beginning of period, December 31$5,327
 $6,272
 $7,454
Change in accounting (1)
 
 (169)
Balance beginning of the period, adjusted5,327
 6,272
 7,285
Premium written, net167
 251
 570
Net premium earned, excluding accretion(831) (892) (1,147)
Commutations of reinsurance contracts(28) (19) 
Foreign exchange translation3
 
 (1)
Changes in expected premium137
 (120) (247)
Consolidation of FG VIEs(5) (165) (188)
Balance, end of period, December 31$4,770
 $5,327
 $6,272
  As of
December 31, 2015
 As of
December 31, 2014
  Total(1) Internal Rating Total Internal Rating
  (in millions)
Exposures Previously Subject to the Voided Recovery Act:        
PRHTA (Transportation revenue) (2) $909
 CCC- $844
 BB-
PREPA 744
 CC 772
 B-
Puerto Rico Aqueduct and Sewer Authority 388
 CCC 384
 BB-
PRHTA (Highway revenue) (2) 370
 CCC 273
 BB
Puerto Rico Convention Center District Authority ("PRCCDA")(2) 164
 CCC- 174
 BB-
Total 2,575
   2,447
  
         
Exposures Not Previously Subject to the Voided Recovery Act:        
Commonwealth of Puerto Rico - General Obligation Bonds 1,615
 CCC 1,672
 BB
MFA 387
 CCC- 399
 BB-
Puerto Rico Sales Tax Financing Corporation 269
 CCC+ 269
 BBB
Puerto Rico Public Buildings Authority 188
 CCC 100
 BB
GDB 
  33
 BB
PRIFA (2) (3) 18
 CCC- 18
 BB-
University of Puerto Rico 1
 CCC- 1
 BB-
Total 2,478
   2,492
  
Total net exposure to Puerto Rico $5,053
   $4,939
  
____________________
(1)Represents eliminationAs of deferred premium revenue relatedDecember 31, 2015, the Company's Puerto Rico net exposures increased due to (1) net par of $385 million acquired in the consolidationRadian Asset Acquisition, of FG VIEs.which $21 million was of PREPA and $166 million of PRHTA, and (2) a commutation of previously ceded Puerto Rico exposures.
(2)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.  

(3)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.



159


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.

Gross Premium Receivable,Amortization Schedule of Puerto Rico Net Par Outstanding
and Net Debt Service Outstanding
As of Ceding Commissions Roll Forward
December 31, 2015
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Balance beginning of period, December 31$1,003
 $1,168
 $1,418
Change in accounting (1)
 
 (19)
Balance beginning of the period, adjusted1,003
 1,168
 1,399
Premium written, net of ceding commissions211
 245
 347
Premium payments received, net of ceding commissions(294) (318) (487)
Adjustments:     
Changes in the expected term of financial guaranty insurance contracts44
 (104) (102)
Accretion of discount, net of ceding commissions36
 32
 43
Foreign exchange translation13
 (5) (31)
Consolidation of FG VIEs(5) (10) (6)
Other adjustments(3) (5) 5
Balance, end of period, December 31 (2)$1,005
 $1,003
 $1,168
 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$98
 $204
 $302
 $229
 $330
 $559
 
201751
 171
 222
 175
 289
 464
 
201856
 123
 179
 178
 232
 410
 
201974
 130
 204
 192
 232
 424
 
202087
 183
 270
 202
 280
 482
 
202166
 59
 125
 177
 146
 323
 
202247
 68
 115
 153
 152
 305
 
2023110
 41
 151
 214
 123
 337
 
202489
 85
 174
 188
 164
 352
 
2025111
 85
 196
 206
 157
 363
 
2026 - 2030590
 352
 942
 973
 659
 1,632
 
2031 - 2035583
 548
 1,131
 838
 763
 1,601
 
2036 - 2040308
 263
 571
 427
 348
 775
 
2041 - 2045137
 166
 303
 207
 182
 389
 
2046 - 2047168
 
 168
 181
 
 181
 
Total$2,575
 $2,478
 $5,053
 $4,540
 $4,057
 $8,597
 
____________________
(1)Represents elimination of premium receivable related to the consolidation of FG VIEs.

(2)
Excludes $29 million, $28 million and $23 million as of December 31, 2012 , 2011 and 2010, respectively, related to consolidated FG VIEs.

Exposure to the Selected European Countries

Gains Several European countries continue to experience significant economic, fiscal and/or losses duepolitical strains such that the likelihood of default on obligations with a nexus to foreign exchange rate changes relate to installment premium receivables denominated in currencies otherthose countries may be higher than the U.S. dollar. Approximately 47%,Company anticipated when such factors did not exist. The European countries where the Company has exposure and 47% of installment premiums at December 31, 2012believes heightened uncertainties exist are: Hungary, Italy, Portugal and 2011, respectively, are denominated in currencies other thanSpain (collectively, the U.S. dollar, primarily Euro and British Pound Sterling.
“Selected European Countries”). The timing and cumulative amount of actual collections may differ from expected collectionsCompany is closely monitoring its exposures in the tables below dueSelected European Countries where it believes heightened uncertainties exist. The Company’s direct economic exposure to factors suchthe Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changesderivatives) is shown in expected lives.
Expected Collectionsthe following table, net of Gross Premiums Receivable,
Net of Ceding Commissions (Undiscounted)ceded reinsurance.

 December 31, 2012
 (in millions)
2013 (January 1 - March 31)$50
2013 (April 1 – June 30)38
2013 (July 1 – September 30)27
2013 (October 1 – December 31)30
2014105
201595
201689
201782
2018-2022319
2023-2027204
2028-2032141
After 2032160
Total(1)$1,340
 ____________________
(1)
Excludes expected cash collections on FG VIEs of $36 million.

160

Table of Contents


Net Direct Economic Exposure to Selected European Countries(1)
Scheduled Net Earned PremiumsAs of December 31, 2015
Financial Guaranty Insurance Contracts

 As of December 31, 2012
 (in millions)
2013 (January 1 - March 31)$131
2013 (April 1 - June 30)126
2013 (July 1 - September 30)121
2013 (October 1–December 31)117
Subtotal 2013495
2014433
2015382
2016347
2017311
2018 - 20221,188
2023 - 2027741
2028 - 2032443
After 2032423
Total present value basis(1)4,763
Discount264
Total future value$5,027
 Hungary Italy Portugal Spain Total
 (in millions)
Sub-sovereign exposure: 
  
  
  
  
Non-infrastructure public finance(2)$
 $780
 $85
 $240
 $1,105
Infrastructure finance271
 10
 
 120
 401
Total sub-sovereign exposure271
 790
 85
 360
 1,506
Non-sovereign exposure: 
  
  
  
  
Regulated utilities
 212
 
 
 212
RMBS and other structured finance170
 244
 
 13
 427
Total non-sovereign exposure170
 456
 
 13
 639
Total$441
 $1,246
 $85
 $373
 $2,145
Total BIG (See Note 5)$374
 $
 $85
 $373
 $832
 ____________________
(1)
Excludes scheduled net earned premiums on consolidated FG VIEsWhile the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. One of $262 million.
the RMBS 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.

Selected Information for Policies Paid in Installments

 As of
December 31, 2012
 As of
December 31, 2011
 (dollars in millions)
Premiums receivable, net of ceding commission payable$1,005
 $1,003
Gross deferred premium revenue1,908
 2,193
Weighted-average risk-free rate used to discount premiums3.5% 3.4%
Weighted-average period of premiums receivable (in years)9.6
 9.8


5.(2)Financial Guaranty Insurance Acquisition CostsThe exposure shown in the “Non-infrastructure 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.

Accounting PolicyWhen the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies, in which case the Company depends upon geographic information provided by the primary insurer.

Policy acquisition costs that are directly related and essential to successful insurance contract acquisition are deferred for contracts accounted for as insurance. Amortization of deferred policy acquisition costs includes the accretion of discount on ceding commission income and expense. Acquisition costs associated with derivative contracts are not deferrable.

In October 2010, the FASB adopted Accounting Standards Update (“Update”) No. 2010-26. The Company adopted this guidance January 1, 2012, with retrospective application. As of January 1, 2010,has excluded from the effect of retrospective application of Update No. 2010-26 was a reduction to deferred acquisition costs ("DAC") of $80 million and a reduction to retained earnings of $55 million. There was no impact to cash flow. 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 essentialexposure tables above its indirect economic exposure to the contract transaction. These costs include expenses suchSelected 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 ceding commissions andhaving a nexus to the costcountry. On that basis, the Company has calculated exposure of underwriting personnel. Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated$223 million to Selected European Countries (plus Greece) in transactions with premiums received in installments are calculated at their contractually defined rates and included in DAC,$4.2 billion of net par outstanding. The indirect exposure to credits with a corresponding offsetnexus to Greece is $6 million across several highly rated pooled corporate obligations with net premiums receivable or reinsurance balances payable. Management uses its judgment in determining the type and amountpar outstanding of cost to be deferred. The Company conducts an annual$244 million.


161

Table of Contents

study to determine which operating costs qualify for deferral. 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. DAC are amortized in proportion to net earned premiums. When an insured obligation is retired early, the remaining related DAC is expensed at that time.
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 DAC.
Effect of Retrospective Application of New Deferred Acquisition Cost Guidance
On Consolidated Statements of Operations
 As Reported
Year Ended 2011
 Retroactive Application Adjustment As Revised Year Ended 2011
 (in millions except per share amounts)
Amortization of DAC$31
 $(14) $17
Other operating expenses193
 19
 212
Net income (loss)776
 (3) 773
Earnings per share: 
    
Basic4.23
 (0.02) 4.21
Diluted4.18
 (0.02) 4.16

 As Reported
Year Ended 2010
 Retroactive Application Adjustment As Revised Year Ended 2010
 (in millions except per share amounts)
Amortization of DAC$34
 $(12) $22
Other operating expenses212
 26
 238
Net income (loss)494
 (10) 484
Earnings per share: 
    
Basic2.68
 (0.05) 2.63
Diluted2.61
 (0.05) 2.56

The effect of retrospective application of Update No. 2010-26 was a reduction to DAC of $99 million as of December 31, 2011.

Rollforward of Deferred Acquisition Costs
With Retrospective Application of Change in Accounting Principle

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Balance, beginning of period$132
 $146
 $162
Costs deferred during the period:     
   Ceded and assumed commissions(13) (13) (18)
   Premium taxes4
 7
 12
   Compensation and other acquisition costs10
 9
 13
       Total1
 3
 7
Costs amortized during the period(17) (17) (22)
Foreign exchange translation
 
 (1)
Balance, end of period$116
 $132
 $146

162

Table of Contents


6.5.Expected Loss to be Paid
Accounting Policy
 
The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company's control rights. The Company has paid and expects to pay future losses on policies which fall under each of the three accounting models. The following provides a summarized description of the three accounting models prescribed by GAAP with a reference to the notes that describe the accounting policies and required under GAAP for each type of contract, with references to additional information provideddisclosures throughout this report. The three models areare: (1) insurance, (2) derivative and (3) VIE consolidation.

However, inIn order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management compiles and analyzes loss information for all policies on a consistent basis because loss payments must be made regardless of accounting model. That is, managementbasis. The Company monitors and assigns ratings and calculates expected losses in the same manner for all its exposures regardless of form or differing accounting models. Management also considers contract specific characteristics that affect the estimates of

This note provides information regarding expected loss. The discussion of expected lossclaim payments to be paid within this note encompasses expected losses onmade under all policiescontracts in the insured portfolio, whatever the accounting treatment.portfolio. Net expected loss to be paid in the tables below consists of the present value of future: expected claim and LAE payments, expected recoveries of excess spread in the transaction structures, cessions to reinsurers, and expected recoveries for breaches of representations and warranties ("R&W") and other loss mitigation strategies. Assumptions used in the determination of the net expectedExpected loss to be paid presented below, such as delinquency, severity, and discount rates and expected timeframesis important from a liquidity perspective in that it represents the present value of amounts that the Company expects to recoverypay or recover in the mortgage market were consistent by sectorfuture periods, regardless of the accounting model used.model. Expected loss to be paid is an important measure used by management to analyze the net economic loss on all contacts.

Accounting Models:Policy

The following is a summary of each of the accounting models prescribed by GAAP with a reference to the notes that describe the accounting polices and required disclosures. This note provides information regarding expected claim payments to be made under all insured contracts regardless of form of execution.

Insurance Accounting

For contracts accounted for as financial guaranty insurance, loss and LAE reserve is recorded only to the extent and for the amount that expected losses to be paid, exceed unearned premium reserve. As a result, the Company has expected lossesloss to be paid that have not yet been expensed but will be expensed in future periods.expensed. Such amounts will be expensedrecognized in future periods as deferred premium revenue amortizes into income. Expected loss to be paid is important from a liquidity perspective in that it represents the present value of amounts that the Company expects to pay or recover in future periods. Expected loss to be expensed is important because it presents the Company's projection of incurred losses that will be recognized in future periods as deferred premium revenue amortizes into income.(excluding accretion of discount). See "Financial Guaranty Insurance Losses" in Note 7,6, Financial Guaranty Insurance Losses.Insurance.

Derivative Accounting, at Fair Value

For contracts that do not meet the financial guaranty scope exception in the derivative accounting guidance (primarily due to the fact that the insured is not required to be exposed to the insured risk throughout the life of the contract), the Company records such credit derivative contracts at fair value on the consolidated balance sheet with changes in fair value recorded in the consolidated statement of operations. Expected loss to be paid is an important measure used by management to analyze the net economic loss on credit derivatives. The fair value recorded on the balance sheet represents an exit price in a hypothetical market because the Company does not trade its credit derivative contracts. The fair value is determined using significant Level 3 inputs in an internally developed model while the expected loss to be paid (which represents the net present value of expected cash outflows) uses methodologies and assumptions consistent with financial guaranty insurance expected losses to be paid. See Note 8,7, Fair Value Measurement and Note 9,8, Financial Guaranty Contracts Accounted for as Credit Derivatives.

VIE Consolidation, at Fair Value

For financial guaranty insurance contracts issued on the debt of variable interest entities over which the Company is deemed to be the primary beneficiary due to its control rights, as defined in accounting literature,GAAP, the Company consolidates the FG VIE. The Company's expected loss to be paid is reflected in the fair value of the FG VIEs liabilities. The Company carries the assets and liabilities of the FG VIEs at fair value under the fair value option election. Management assesses the losses on the insured debt of the consolidated FG VIEs in the same manner as other financial guaranty insurance and credit

163

Table of Contents

derivative contracts. Expected loss to be paid for FG VIEs pursuant to AGC's and AGM's financial guaranty insurance policies is calculated in a manner consistent with the Company's other financial guaranty insurance contracts.See Note 9, Consolidated Variable Interest Entities.
     
Expected Loss to be Paid

The expected loss to be paid is equal to the present value of expected future cash outflows for claim and LAE payments, net of inflows for expected salvage and subrogation (i.e.(e.g., excess spread on the underlying collateral, and estimatedexpected and contractual recoveries for breaches of representations and warranties)R&W or other expected recoveries), using current risk-free rates. When the Company becomes entitled to the cash flow from the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Net expected loss to be paid is defined as expected loss to be paid, net of amounts ceded to reinsurers.


162

Table of Contents

The current risk-free rate is based on the remaining period of the contract used in the premium revenue recognition calculation (i.e., the contractual or expected period, as applicable). The Company updates the discount rate each quarter and records the effect of such changes in economic loss development. Expected cash outflows and inflows are probability weighted cash flows that reflect the likelihood of all possible expected outcomes. The Company estimates the expected cash outflows and inflows using management's assumptions about the likelihood of all possible outcomes based on all information available to it. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company's risk-management activities.

Economic Loss Development

Economic loss development represents the change in net expected loss to be paid attributable to all factors other than loss and LAE payments. It includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.

Loss Mitigation

Expected loss to be paid and economic loss development include the effects of loss mitigation strategies and other contractual rights to mitigate losses such as:as negotiated and estimated recoveries for breaches of representations and warranties,R&W, and purchases of insured debt obligations. Additionally, in certain cases, issuers of insured obligations elected, or the Company and an issuer mutually agreed as part of a negotiation, to deliver the underlying collateral or insured obligation to the Company.

In circumstances where the Company has acquiredpurchased its own insured obligations that have expected losses, either as part of loss mitigation strategy or via delivery of underlying collateral, expected loss to be paid is reduced by the proportionate share of the insured obligation that was purchased.is held in the investment portfolio. The difference between the purchase price of the obligation and the fair value excluding the value of the Company's insurance is treated as a paid loss for both purchased bonds and delivered collateral or insured obligations.loss. Assets that are purchased or put toby the Company are recorded in the investment portfolio, at fair value, excluding the value of the Company's insurance or credit derivative contract.insurance. See Note 11,10, Investments and Cash and Note 8,7, Fair Value Measurement.

Loss Estimation Process
 
The Company’s loss reserve committees estimate expected loss to be paid for all contracts. Surveillance personnel presentcontracts by reviewing 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 ofthat consider various scenarios with potentialcorresponding 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 monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions and scenarios and the estimateprobabilities they assign to those scenarios based on actual developments during the quarter and their view of expected lossfuture performance.

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 be paid each quarter. The Company’scancel such financial guaranties. As a result, the Company's estimate of ultimate losslosses on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credittransaction. Credit performance as a result ofcan be adversely affected by 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.
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. Changes over a quarter in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a quarter in the Company’s loss estimates for its RMBS transactions may be influenced by such factors as the level and timing of loan defaults experienced; changes in housing prices; results from the Company's loss mitigation activities; and other variables. Similarly, changes over a quarter in the Company’s loss estimates for municipal obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. On the other hand, changes over a quarter in the Company’s loss estimates for its tax-supported public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s

164163

Table of Contents

ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency downgrades that reduce the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors.

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.

In some instances, the terms of the Company's policy gives it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which uses cash but reduces projected future losses.

The following table presentstables 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 FG VIEs, by sector, before and after the benefit for estimated and contractualexpected recoveries for breaches of R&W.&W or other expected recoveries. The Company used weighted average risk-free rates for U.S. dollar denominated obligations, whichthat ranged from 0.0% to 3.28%3.25% as of December 31, 20122015 and 0.0% to 3.27%2.95% as of December 31, 2011.2014.

Net Expected Loss to be Paid
BeforeAfter Net Expected Recoveries for Breaches of R&W
Roll Forward

 Year Ended December 31, 2015
 (in millions)
Net expected loss to be paid, beginning of period$1,169
Net expected loss to be paid on Radian Asset portfolio as of April 1, 2015190
Economic loss development due to: 
Accretion of discount32
Changes in discount rates(23)
Changes in timing and assumptions310
Total economic loss development319
Paid losses(287)
Net expected loss to be paid, end of period$1,391



164

Table of Contents

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
Year Ended December 31, 20122015

Net Expected
Loss to be
Paid as of
December 31, 2011(2)
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 Net Expected
Loss to be
Paid as of
December 31, 2012(2)
Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2014(2)
 Net Expected
Loss to be
Paid 
(Recovered)
on Radian Asset portfolio as of
April 1, 2015
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2015 (2)
(in millions)(in millions)
Public Finance:         
U.S. public finance$303
 $81
 $416
 $(29) $771
Non-U.S. public finance45
 4
 (11) 
 38
Public Finance348
 85
 405
 (29) 809
Structured Finance:         
U.S. RMBS: 
  
  
  
 
    
  
  
First lien: 
  
  
  
 
    
  
  
Prime first lien$5
 $5
 $
 $10
4
 
 (1) (5) (2)
Alt-A first lien702
 102
 (111) 693
304
 7
 (126) (58) 127
Option ARM935
 128
 (603) 460
(16) 0
 (16) 4
 (28)
Subprime342
 57
 (48) 351
303
 (4) 19
 (67) 251
Total first lien1,984
 292
 (762) 1,514
595
 3
 (124) (126) 348
Second lien: 
  
  
  
Closed-end second lien138
 (5) (34) 99
HELOCs159
 80
 (200) 39
Total second lien297
 75
 (234) 138
Second lien(11) 1
 42
 29
 61
Total U.S. RMBS2,281
 367
 (996) 1,652
584
 4
 (82) (97) 409
Triple-X life insurance transactions161
 
 11
 (73) 99
TruPS64
 (30) (7) 27
23
 
 (18) 
 5
Student loans68
 
 (9) (5) 54
Other structured finance342
 2
 (32) 312
(15) 101
 12
 (83) 15
U.S. public finance16
 74
 (83) 7
Non-U.S public finance51
 221
 (220) 52
Other insurance2
 (17) 12
 (3)
Structured Finance821
 105
 (86) (258) 582
Total$2,756
 $617
 $(1,326) $2,047
$1,169
 $190
 $319
 $(287) $1,391




165

Table of Contents

Net Expected Loss to be Paid
BeforeAfter Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
Year Ended December 31, 20112014

Net Expected
Loss to be
Paid as of
December 31, 2010
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 Expected
Loss to be
Paid as of
December 31, 2011
Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2013
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2014 (2)
(in millions)(in millions)
Public Finance:       
U.S. public finance$264
 $183
 $(144) $303
Non-U.S. public finance57
 (12) 
 45
Public Finance321
 171
 (144) 348
Structured Finance:       
U.S. RMBS: 
  
  
  
 
  
  
  
First lien: 
  
  
  
 
  
  
  
Prime first lien$2
 $3
 $
 $5
21
 (16) (1) 4
Alt-A first lien549
 250
 (97) 702
304
 (144) 144
 304
Option ARM941
 515
 (521) 935
(9) (59) 52
 (16)
Subprime337
 27
 (22) 342
304
 (7) 6
 303
Total first lien1,829
 795
 (640) 1,984
620
 (226) 201
 595
Second lien: 
  
  
  
Closed-end second lien266
 (46) (82) 138
HELOCs198
 290
 (329) 159
Total second lien464
 244
 (411) 297
Second lien(127) (42) 158
 (11)
Total U.S. RMBS2,293
 1,039
 (1,051) 2,281
493
 (268) 359
 584
Triple-X life insurance transactions75
 92
 (6) 161
TruPS90
 (21) (5) 64
51
 (28) 
 23
Student loans52
 16
 0
 68
Other structured finance262
 101
 (21) 342
(10) (13) 8
 (15)
U.S. public finance82
 (1) (65) 16
Non-U.S public finance7
 44
 
 51
Other insurance2
 
 
 2
Structured Finance661
 (201) 361
 821
Total$2,736
 $1,162
 $(1,142) $2,756
$982
 $(30) $217
 $1,169
____________________
(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 $25 million and $37 million in LAE for the years ended December 31, 2015 and 2014, respectively.

(2)
Includes expected LAE to be paid for mitigating claim liabilities of $39$12 million as of December 31, 20122015 and $35$16 million as of December 31, 2011. The Company paid $47 million and $25 million in LAE for the years ended December 31, 2012 and 2011, respectively.
2014.











166

Table of Contents

Future Net Expected Recoveries from
Breaches of R&W RollforwardBenefit
Year EndedAs of December 31, 2012 2015, 2014 and 2013
 
 
Future Net
R&W Benefit as of
December 31, 2011
 R&W Development
and Accretion of
Discount
During 2012
 R&W Recovered
During 2012(1)
 Future Net
R&W Benefit as of
December 31, 2012(2)
 (in millions)
U.S. RMBS:       
First lien:       
Prime first lien$3
 $1
 $
 $4
Alt-A first lien407
 40
 (69) 378
Option ARM725
 89
 (223) 591
Subprime101
 8
 
 109
Total first lien1,236
 138
 (292) 1,082
Second lien:       
Closed end second lien224
 5
 (91) 138
HELOC190
 36
 (76) 150
Total second lien414
 41
 (167) 288
Total$1,650
 $179
 $(459) $1,370
Net Expected Recoveries from
Breaches of R&W Rollforward
Year Ended December 31, 2011
 
Future Net
R&W Benefit as of
December 31, 2010
 R&W Development
and Accretion of
Discount
During 2011
 R&W Recovered
During 2011(1)
 Future Net
R&W Benefit as of
December 31, 2011
 (in millions)
U.S. RMBS:       
First lien:       
Prime first lien$1
 $2
 $
 $3
Alt-A first lien149
 260
 (2) 407
Option ARM312
 508
 (95) 725
Subprime27
 74
 
 101
Total first lien489
 844
 (97) 1,236
Second lien:       
Closed end second lien178
 55
 (9) 224
HELOC1,004
 139
 (953) 190
Total second lien1,182
 194
 (962) 414
Total$1,671
 $1,038
 $(1,059) $1,650
 Future Net
R&W Benefit as of
December 31, 2015 (1)
 Future Net
R&W Benefit as of
December 31, 2014
 Future Net
R&W Benefit as of
December 31, 2013
 (in millions)
U.S. RMBS:     
First lien$0
 $232
 $569
Second lien79
 85
 143
Total$79
 $317
 $712
____________________
(1)
Gross amounts recovered were $485 millionSee the section "Breaches of Representations and $1,212 millionWarranties" below for years ended December 31, 2012 and 2011, respectively.
(2)Includes excess spread that the Company will receive as salvage as a result of a settlement agreement with a R&W provider.

167

Table of Contents


Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward
Year Ended December 31, 2012

 
Net Expected
Loss to be
Paid as of
December 31, 2011
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 Net Expected
Loss to be
Paid as of
December 31, 2012
 (in millions)
U.S. RMBS: 
  
  
  
First lien: 
  
  
  
Prime first lien$2
 $4
 $
 $6
Alt-A first lien295
 62
 (42) 315
Option ARM210
 39
 (380) (131)
Subprime241
 49
 (48) 242
Total first lien748
 154
 (470) 432
Second lien: 
  
  
  
Closed-end second lien(86) (10) 57
 (39)
HELOCs(31) 44
 (124) (111)
Total second lien(117) 34
 (67) (150)
Total U.S. RMBS631
 188
 (537) 282
TruPS64
 (30) (7) 27
Other structured finance342
 2
 (32) 312
U.S. public finance16
 74
 (83) 7
Non-U.S public finance51
 221
 (220) 52
Other2
 (17) 12
 (3)
Total$1,106
 $438
 $(867) $677


168

Table of Contents

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward
Year Ended December 31, 2011

 
Net Expected
Loss to be
Paid as of
December 31, 2010
 
Economic Loss
Development
 
(Paid)
Recovered
Losses(1)
 Expected
Loss to be
Paid as of
December 31, 2011
 (in millions)
U.S. RMBS: 
  
  
  
First lien: 
  
  
  
Prime first lien$1
 $1
 $
 $2
Alt-A first lien400
 (10) (95) 295
Option ARM629
 7
 (426) 210
Subprime310
 (47) (22) 241
Total first lien1,340
 (49) (543) 748
Second lien: 
  
  
  
Closed-end second lien88
 (101) (73) (86)
HELOCs(806) 151
 624
 (31)
Total second lien(718) 50
 551
 (117)
Total U.S. RMBS622
 1
 8
 631
TruPS90
 (21) (5) 64
Other structured finance262
 101
 (21) 342
U.S. public finance82
 (1) (65) 16
Non-U.S public finance7
 44
 
 51
Other2
 
 
 2
Total$1,065
 $124
 $(83) $1,106
 ____________________
(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 recordedeligible assets held in reinsurance recoverable on paid losses included in other assets.
trust.


169


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

Net Expected Loss to be Paid (Recovered)
By Accounting Model
As of December 31, 2012
2015
 
Financial
Guaranty
Insurance
 FG VIEs(1) 
Credit
Derivatives
 Total
Financial
Guaranty
Insurance
 FG VIEs(1) and Other Credit
Derivatives(2)
 Total
(in millions)(in millions)
US RMBS: 
  
  
  
Public Finance:       
U.S. public finance$771
 $
 $0
 $771
Non-U.S. public finance38
 
 
 38
Public Finance809
 
 
 809
Structured Finance:       
U.S. RMBS: 
  
  
  
First lien: 
  
  
  
 
  
  
  
Prime first lien$4
 $
 $2
 $6
2
 
 (4) (2)
Alt-A first lien164
 27
 124
 315
110
 17
 0
 127
Option ARM(114) (37) 20
 (131)(27) 
 (1) (28)
Subprime118
 50
 74
 242
153
 59
 39
 251
Total first lien172
 40
 220
 432
238
 76
 34
 348
Second Lien: 
  
  
  
Closed-end second lien(60) 31
 (10) (39)
HELOCs56
 (167) 
 (111)
Total second lien(4) (136) (10) (150)
Second lien13
 44
 4
 61
Total U.S. RMBS168
 (96) 210
 282
251
 120
 38
 409
Triple-X life insurance transactions88
 
 11
 99
TruPS1
 
 26
 27
0
 
 5
 5
Student loans54
 
 
 54
Other structured finance224
 
 88
 312
37
 16
 (38) 15
U.S. public finance7
 
 
 7
Non-U.S. public finance51
 
 1
 52
Subtotal$451
 $(96) $325
 680
Other      (3)
Structured Finance430
 136
 16
 582
Total      $677
$1,239
 $136
 $16
 $1,391



170167

Table of Contents

Net Expected Loss to be Paid (Recovered)
By Accounting Model
As of December 31, 20112014

Financial
Guaranty
Insurance
 FG VIEs(1) 
Credit
Derivatives
 Total
Financial
Guaranty
Insurance
 FG VIEs(1) and Other Credit
Derivatives(2)
 Total
(in millions)(in millions)
US RMBS: 
 
  
  
Public Finance:       
U.S. public finance$303
 $
 $
 $303
Non-U.S. public finance45
 
 
 45
Public Finance348
 
 
 348
Structured Finance:       
U.S. RMBS: 
    
  
First lien: 
 
  
  
 
    
  
Prime first lien$2
 $
 $
 $2
2
 
 2
 4
Alt-A first lien130
 5
 160
 295
288
 17
 (1) 304
Option ARM128
 25
 57
 210
(15) 
 (1) (16)
Subprime96
 44
 101
 241
163
 71
 69
 303
Total first lien356
 74
 318
 748
438
 88
 69
 595
Second Lien: 
  
  
  
Closed-end second lien(58) (22) (6) (86)
HELOCs128
 (159) 
 (31)
Total second lien70
 (181) (6) (117)
Second lien(53) 38
 4
 (11)
Total U.S. RMBS426
 (107) 312
 631
385
 126
 73
 584
Triple-X life insurance transactions153
 
 8
 161
TruPS13
 
 51
 64
1
 
 22
 23
Student loans68
 
 
 68
Other structured finance240
 
 102
 342
34
 (4) (45) (15)
U.S. public finance16
 
 
 16
Non-U.S. public finance50
 
 1
 51
Subtotal$745
 $(107) $466
 1,104
Other      2
Structured Finance641
 122
 58
 821
Total      $1,106
$989
 $122
 $58
 $1,169
________________________________
(1)    Refer to Note 10, Consolidation of9, Consolidated Variable Interest Entities.

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



171168

Table of Contents

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

Net Economic Loss Development (Benefit)
By Accounting Model
Year Ended December 31, 20122015
 
Financial
Guaranty
Insurance
 FG VIEs(1) 
Credit
Derivatives(2)
 Total
Financial
Guaranty
Insurance
 FG VIEs(1) and Other 
Credit
Derivatives(2)
 Total
(in millions)(in millions)
US RMBS: 
  
  
  
Public Finance:       
U.S. public finance$421
 $
 $(5) $416
Non-U.S. public finance(11) 
 
 (11)
Public Finance410
 
 (5) 405
Structured Finance:       
U.S. RMBS: 
  
  
  
First lien: 
  
  
  
 
  
  
  
Prime first lien$2
 $
 $2
 $4
0
 
 (1) (1)
Alt-A first lien38
 (10) 34
 62
(49) 0
 (77) (126)
Option ARM37
 (8) 10
 39
(17) 
 1
 (16)
Subprime31
 7
 11
 49
9
 11
 (1) 19
Total first lien108
 (11) 57
 154
(57) 11
 (78) (124)
Second Lien: 
  
  
  
Closed-end second lien13
 (23) 
 (10)
HELOCs37
 7
 
 44
Total second lien50
 (16) 
 34
Second lien35
 7
 
 42
Total U.S. RMBS158
 (27) 57
 188
(22) 18
 (78) (82)
Triple-X life insurance transactions6
 
 5
 11
TruPS(11) 
 (19) (30)(1) 
 (17) (18)
Student loans(9) 
 
 (9)
Other structured finance15
 
 (13) 2
1
 (2) 13
 12
U.S. public finance75
 
 (1) 74
Non-U.S. public finance222
 
 (1) 221
Subtotal$459
 $(27) $23
 455
Other      (17)
Structured Finance(25) 16
 (77) (86)
Total      $438
$385
 $16
 $(82) $319



172169

Table of Contents

Net Economic Loss Development (Benefit)
By Accounting Model
Year Ended December 31, 20112014

Financial
Guaranty
Insurance
 FG VIEs(1) 
Credit
Derivatives(2)
 Total
Financial
Guaranty
Insurance
 FG VIEs(1) and Other 
Credit
Derivatives(2)
 Total
(in millions)(in millions)
US RMBS: 
 
  
  
Public Finance:       
U.S. public finance$183
 $
 $
 $183
Non-U.S. public finance(10) 
 (2) (12)
Public Finance173
 
 (2) 171
Structured Finance:       
U.S. RMBS: 
    
  
First lien: 
 
  
  
 
    
  
Prime first lien$
 $
 $1
 $1

 
 (16) (16)
Alt-A first lien(2) 17
 (25) (10)(87) (13) (44) (144)
Option ARM(94) 98
 3
 7
(48) 1
 (12) (59)
Subprime(121) 78
 (4) (47)(15) 6
 2
 (7)
Total first lien(217) 193
 (25) (49)(150) (6) (70) (226)
Second Lien: 
  
  
  
Closed-end second lien(96) 18
 (23) (101)
HELOCs318
 (167) 
 151
Total second lien222
 (149) (23) 50
Second lien(130) 91
 (3) (42)
Total U.S. RMBS5
 44
 (48) 1
(280) 85
 (73) (268)
Triple-X life insurance transactions86
 
 6
 92
TruPS
 
 (21) (21)(2) 
 (26) (28)
Student loans16
 
 
 16
Other structured finance111
 
 (10) 101
(5) (1) (7) (13)
U.S. public finance42
 
 (43) (1)
Non-U.S. public finance
 
 44
 44
Subtotal$158
 $44
 $(78) 124
Other      
Structured Finance(185) 84
 (100) (201)
Total      $124
$(12) $84
 $(102) $(30)
_______________________________
(1)    Refer to Note 10, Consolidation of9, Consolidated Variable Interest Entities.

(2)    Refer to Note 9,8, Financial Guaranty Contracts Accounted for as Credit Derivatives.


Selected U.S. Public Finance Transactions
The Company insures 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 December 31, 2015, all of which are BIG. For additional information regarding the Company's exposure to general obligations of Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations, please refer to "Exposure to Puerto Rico" in Note 4, Outstanding Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the U.S. Bankruptcy Code became effective. As of December 31, 2015, the Company’s net exposure subject to the plan consists of $115 million of pension obligation bonds. As part of the plan settlement, the City will repay the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City's revenue growth. The Company agreed as part of the plan to cancel its $40 million of the City’s lease revenue bonds in exchange for the irrevocable option to take title to the office building that served as collateral for the lease revenue bonds. The Company also receives net rental payments from the office building. The Company no longer reflects the canceled lease revenue bonds as outstanding insured net par, but instead the financial statements reflect an investment in the office building and related lease revenue and expenses. As of December 31, 2015, the office building is carried at approximately $29 million and is reported as part of Other Assets.


170

Table of Contents

As a result of the Radian Asset Acquisition, the Company has approximately $21 million of net par exposure as of December 31, 2015 to bonds issued by Parkway East Public Improvement District, which is located in Madison County, Mississippi. The bonds, which are rated BIG, are payable from special assessments on properties within the District, as well as amounts paid under a contribution agreement with the County in which the County covenants that it will provide funds in the event special assessments are not sufficient to make a debt service payment. The special assessments have not been sufficient to pay debt service in full. In earlier years, the County provided funding to cover the balance of the debt service requirement, but the County now claims that the District’s failure to reimburse it within the two years stipulated in the contribution agreement means that the County is not required to provide funding until it is reimbursed. A declaratory judgment action is pending against the District and the County to establish the Company's rights under the contribution agreement. See "Recovery Litigation" below.

The Company also has $15.0 billion of net par exposure to healthcare transactions. The BIG net par outstanding in this sector is $351 million, $242 million of which was acquired as part of the Radian Asset Acquisition.

The Company projects that its total net expected loss across its troubled U.S. public finance credits as of December 31, 2015, which incorporated the likelihood of the various outcomes, will be $771 million, compared with a net expected loss of $303 million as of December 31, 2014. On April 1, 2015, the Radian Asset Acquisition added $81 million in net expected losses to be paid for U.S. public finance credits. Economic loss development in 2015 was $416 million, which was primarily attributable to Puerto Rico exposures.

Certain Selected European Country Sub-Sovereign Transactions

The Company insures and reinsures credits with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the sub-sovereigns also to default. The Company's gross exposure to these Spanish and Portuguese credits is $452 million and $91 million, respectively, and exposure net of reinsurance for Spanish and Portuguese credits is $360 million and $85 million, respectively. The Company rates most of these issuers in the BB category due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities. The Company's gross exposure to these Hungarian credits is $274 million and its exposure net of reinsurance is $271 million, all of which is rated BIG. The Company estimated net expected losses of $35 million related to these Spanish, Portuguese and Hungarian credits. The economic benefit of approximately $11 million during 2015 was primarily related to changes in the exchange rate between the Euro and US Dollar and certain assumption updates.
Infrastructure Finance

As of December 31, 2015, the Company had exposure of approximately $2.9 billion to infrastructure transactions with refinancing risk. The Company may be required to make claim payments on such exposure, the aggregate amount of the claim payments may be substantial and, although the Company may not experience ultimate loss on a particular transaction, reimbursement may not occur for an extended time. These transactions generally involve long-term infrastructure projects that were financed by bonds that mature prior to the expiration of the project concession. The Company expects the cash flows from these projects to be sufficient to repay all of the debt over the life of the project concession, but also expects the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay a claim when the debt matures, and then recover from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such claim payments. However, the recovery of such amounts is uncertain and may take from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. As of December 31, 2015, the Company estimated total claims for the two largest transactions with significant refinancing risk, assuming no refinancing, and based on certain performance assumptions, could be $1.9 billion on a gross basis; such claims would occur from 2017 through 2022. Of such $1.9 billion in estimated gross claims, an estimated $1.3 billion related to obligations of Skyway Concession Company LLC (“SCC”), which owned the concession for the Chicago Skyway toll road. In November 2015, a consortium of three Canadian pension plans announced that they had reached agreement, subject to regulatory approvals and customary closing conditions, to purchase SCC for $2.8 billion. The sale was completed on February 25, 2016 and the various SCC obligations insured by the Company were retired without a claim on the Company.


171

Table of Contents

Approach to Projecting Losses in U.S. RMBS
 
The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any R&W agreements to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and either establishes a recovery for claims already paid or reduces its projected claim payments accordingly.
 
The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” Liquidation rates may be derivedThe Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
 
Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will

173

Table of Contents

default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates ("CDR"), then projecting how the conditional default ratesCDR will develop over time. Loans that are defaulted pursuant to the conditional default rate after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A conditional default rate is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral pool balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.
 
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on its experience to date. Further detail regarding the assumptions and variables theThe Company usedcontinues to project collateral losses inupdate its U.S. RMBS portfolio may be found below in the sections “U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien” and “U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime.”evaluation of these loss severities as new information becomes available.
 
The Company is in the process ofhas been enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools.pools, and by reaching agreements with certain R&W providers in early October 2015, has completed its active pursuit of significant R&W claims. The Company calculates a credit from the RMBS issuer for such recoveries where the R&W were provided by an entity the Company believesrecoveries to be financially viable and where the Company already has access or
believes it will attain access to the underlying mortgage loan files. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement or the Deutsche Bank Agreement) or where it isinclude in advanced discussions on a potential agreement, that credit isits cash flow projections based on the agreement or potential agreement. In second lien RMBS transactions where there is no agreement or advanced discussions, this credit is based on a percentage of actual repurchase rates achieved across those transactions where material repurchases have been made. In certain scenarios includedagreements it has with R&W providers, which are described in the probability weighted R&W estimates for first lien RMBS transactions where there is no agreement or advanced discussions, this credit is estimated by reducing collateral losses projected by the Company to reflect a percentage of the recoveries the Company believes it will achieve, based on a percentage of actual repurchase rates achieved or based on the Company's two largest settlements with Bank of America Agreement and Deutsche Bank Agreement. The first lien approach is different from the second lien approach because the Company’s first lien transactions have multiple tranches and a more complicated method is required to correctly allocate credit to each tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses generally increases the R&W credit calculated by the Company for the RMBS issuer. Further detail regarding how the Company calculates these credits may be found under Breaches"Breaches of Representations and WarrantiesWarranties" below.

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

The ultimate performance of the Company’s RMBS transactions remains highly uncertain, may differ from the Company's projections and may be subject to considerable volatility due to the influence of many factors, including the level and timing of loan defaults, changes in housing prices, results from the Company’s loss mitigation activities and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust its RMBS loss projection assumptions and scenarios based on actual performance and management’s view of future performance.
Year-End 2012 Compared to Year-End 2011 U.S. RMBS Loss Projections
The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will eventually improve.continue improving. Each quarterperiod the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the quarterperiod of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and for first liens, loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as whether those changes are normal fluctuations or part of a trend. Based on such observations, the Company chose to use essentially the same assumptions and scenarios to project RMBS loss as of December 31, 2012 as it used as of December 31, 2011, except that as compared to December 31, 2011:


174172

Table of Contents

in its most optimistic scenario, it reduced by three months the period it assumed it would take the mortgage market to recover; and

in its most pessimistic scenario, it increased by three months the period it assumed it would take the mortgage market to recover.

The Company's use of essentially the same assumptions and scenarios to project RMBS losses as of December 31, 2012 as at December 31, 2011 was consistent with its view at December 31, 2012 that the housing and mortgage market recovery is occurring at a slower pace than it anticipated at December 31, 2011. The Company's changes during 2012 to the period it would take the mortgage market to recover in its most optimistic scenario and its most pessimistic scenario allowed it to consider a wider range of possibilities for the speed of the recovery. Since the Company's projections for each RMBS transaction are based on the delinquency performance of the loans in that individual RMBS transaction, improvement or deterioration in that aspect of a transaction's performance impacts the projections for that transaction. The methodology and assumptions the Company uses to project RMBS losses and the scenarios it employs are described in more detail below under "– U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien" and " – U.S. First Lien RMBS Loss Projections: Alt A First Lien, Option ARM, Subprime and Prime".

Year-End 20112015 Compared to Year-End 20102014 U.S. RMBS Loss Projections

During 2011 the Company made a judgment as to whether to change the assumptions it used to make RMBS loss projections basedBased on its observation during the period of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and for first liens, loss severity) as well as the residential property market and economy in general, and, to the extent it observed changes, it made a judgment as whether those changes were normal fluctuations or part of a trend. Based on such observations, the Company chose to use essentially the same general assumptions and scenarios to project RMBS loss as of December 31, 2011 as it used as of December 31, 2010, except that as compared to December 31, 2010:

based on its observation of the slow mortgage market recovery, the Company increased its base case expected period for reaching the final conditional default rate in second lien transactions and adjusted the probability weightings it applied to second lien scenarios from year-end 2010 to reflect the changes to those scenarios;

also based on its observation of the slow mortgage market recovery the Company added a more stressful first lien scenario at year-end 2011 reflecting an even slower potential recovery in the housing and mortgage markets, making what had prior to that been a stress scenario its base scenario;

based on its observation of increased loss severity rates, the Company increased its projected loss severity rates in various of its first lien scenarios; and

based on its observation of liquidation rates, the Company decreased the liquidation rates it applied to non-performing loans.

The Company's use of essentially the same assumptions and scenarios to project RMBS losses as of December 31, 20112015 as atit used as of December 31, 2010 was consistent2014, except that, for its first lien RMBS loss projections for 2015, it shortened by twelve months the period it is projecting it will take in the base case to reach the final CDR as compared with its view at December 31, 2011 that2014. The methodology and revised assumptions the housingCompany used to project first lien RMBS losses and mortgage market recovery was occurring at a slower pace thanthe scenarios it anticipated at December 31, 2010. Sinceemployed are described in more detail below under " - U.S. First Lien RMBS Loss Projections: Alt A First Lien, Option ARM, Subprime and Prime", and the Company's projections for each RMBS transaction are based on the delinquency performance of the loans in that individual RMBS transaction, improvement or deterioration in that aspect of a transaction's performance impacts the projections for that transaction. The methodology and assumptions the Company uses to project second lien RMBS losses and the scenarios it employs are described in more detail below under "–" - U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien" and Projections."

Year-End 2014 Compared to Year-End 2013 U.S. First Lien RMBS Loss Projections: Alt A First Lien, Option ARM, Subprime and Prime".Projections

U.S. Second LienBased on its observations of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, the Company chose to use the same general methodology to project first lien RMBS Loss Projections: HELOCslosses as of December 31, 2014 as it used as of December 31, 2013, but it made a number of refinements to reflect its observations, notably:
updated the liquidation rates it uses on delinquent loans based on observations and Closed-End Second Lienon an assumption that loan modifications (which improve liquidation rates) would over the next year be less frequent than they were over the most recent year

updated the liquidation rate it uses for loans reported as current but that had been reported as modified over the previous twelve months, based on observed data

established a liquidation rate assumption for loans reported as current and not modified in the past twelve months but that had been reported as delinquent in the previous twelve months

established loss severity assumptions by vintage category as well as product type, rather than just product type as done previously

beginning with the third quarter 2014, each quarter shortened by three months the period it is projecting it will take in the base case to reach the final CDR

The Company insures two typesestimated the impact of all of the refinements to its first lien RMBS assumptions described above to be a decrease of expected losses of approximately $42 million (before adjustments for settlements or loss mitigation purchases) in 2014.
Based on its observations of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, the Company chose to use the same general methodology to project second lien RMBS: those secured by HELOCs and those secured by closed end second lien mortgages. HELOCs are revolvingRMBS losses as of December 31, 2014 as it used as of December 31, 2013, but it made a number of refinements to reflect its observations, notably with respect to most home equity lines of credit generally secured by a second lien("HELOC") projections to:
reflect increased recoveries on a onenewly defaulted loans as well as previously defaulted loans

project incremental defaults associated with increased monthly payments that occur when interest-only periods end

increase the assumed final conditional prepayment rate ("CPR") from 10% to four family home. A mortgage for a fixed amount secured by a second lien on a one to four family home is generally referred to as a closed end second lien. Second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority15%

The net impact of the collateral.refinements in the first two bullet points, which were implemented in the third quarter 2014, was an increase of $36 million in expected losses in the Company's base case as of September 30, 2014. The Company has material exposure to second lien mortgage loans originated and serviced by a numbernet impact of parties, but the Company’s most significant second lien exposure is to HELOCs originated and serviced by Countrywide, a subsidiaryrefinements in the third bullet point was an increase in $13 million in expected losses in the Company's base case as of Bank of America. See “—Breaches of Representations and Warranties.”December 31, 2014.

175173

Table of Contents

The delinquency performance of HELOC and closed end second lien exposures included in transactions insured by the Company began to deteriorate in 2007, and such transactions continue to perform below the Company’s original underwriting expectations. While insured securities benefit from structural protections within the transactions designed to absorb collateral losses in excess of previous historically high levels, in many second lien RMBS projected losses now exceed those structural protections.
The Company believes the primary variables affecting its expected losses in second lien RMBS transactions are the amount and timing of future losses in the collateral pool supporting the transactions and the amount of loans repurchased for breaches of R&W (or agreements with R&W providers related to such obligations). Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as conditional prepayment rate ("CPR") of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity. These variables are interrelated, difficult to predict and subject to considerable volatility. If actual experience differs from the Company’s assumptions, the losses incurred could be materially different from the estimate. The Company continues to update its evaluation of these exposures as new information becomes available.
The following table shows the range of key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 second lien U.S. RMBS.
Key Assumptions in Base Case Expected Loss Estimates
Second Lien RMBS(1)
HELOC key assumptions As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2010
Plateau CDR 3.8%15.9% 4.0%27.4% 4.2%22.0%
Final CDR trended down to 0.4%3.2% 0.4%3.2% 0.4%3.2%
Expected period until final CDR 36 months 36 months 36 months
Initial CPR 2.9%15.4% 1.4%25.8% 3.3%17.5%
Final CPR 10% 10% 10%
Loss severity 98% 98% 98%
Initial draw rate 0.0%4.8% 0.0%15.3% 0.0%6.8%
Closed-end second lien key assumptions As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2010
Plateau CDR 7.3%20.7% 6.9%29.5% 7.3%38.8%
Final CDR trended down to 3.5%9.1% 3.5%9.1% 3.3%9.1%
Expected period until final CDR 36 months 36 months 36 months
Initial CPR 1.9%12.5% 0.9%14.7% 1.3%9.7%
Final CPR 10% 10% 10%
Loss severity 98% 98% 98%
 ____________________
(1)Represents variables for most heavily weighted scenario (the “base case”).
In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected representative transactions and then applying an average of the preceding twelve months’ liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a CDR. The first four months’ CDR is calculated by applying the liquidation rates to the current period past due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day

176

Table of Contents

balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the CDR is calculated using the average 30-59 day past due balances for the prior three months. The fifth month CDR is then used as the basis for the plateau period that follows the embedded five months of losses.
As of December 31, 2012, for the base case scenario, the CDR (the “plateau CDR”) was held constant for one month. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. In the base case scenario, the time over which the CDR trends down to its final CDR is 30 months. Therefore, the total stress period for second lien transactions is 36 months, comprising five months of delinquent data, a one month plateau period and 30 months of decrease to the steady state CDR. This is the same as December 31, 2011, but 12 months longer than the total stress period of 24 months (comprising five months of delinquent data, a one month plateau period and 18 months of decrease to the steady state CDR) it used for December 31, 2010. The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally a very low recovery. Based on current expectations of future performance, the Company assumes that it will only recover 2% of the collateral, the same as December 31, 2011 and December 31, 2010.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (which is a function of the CDR and the loan balance over time) as well as the amount of excess spread (which is the excess of the interest paid by the borrowers on the underlying loan over the amount of interest and expenses owed on the insured obligations). In the base case, the current CPR (based on experience of the most recent three quarters) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant. The final CPR is assumed to be 10% for both HELOC and closed-end second lien transactions. This level is much higher than current rates for most transactions, but lower than the historical average, which reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the CPR at December 31, 2011 and December 31, 2010. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.
The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to a final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 2.4%.
In estimating expected losses, the Company modeled and probability weighted three possible CDR curves applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer (before considering the effects of repurchases of ineligible loans). The Company continues to evaluate the assumptions affecting its modeling results.
As of December 31, 2012, the Company’s base case assumed a one month CDR plateau and a 30 month ramp-down (for a total stress period of 36 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults and weighted them the same as of December 31, 2011. Increasing the CDR plateau to four months and increasing the ramp-down by three months to 33-months (for a total stress period of 42 months) would increase the expected loss by approximately $48 million for HELOC transactions and $3 million for closed-end second lien transactions. On the other hand, keeping the CDR plateau at one month but decreasing the length of the CDR ramp-down to 21 months (for a total stress period of 27 months) would decrease the expected loss by approximately $50 million for HELOC transactions and $3 million for closed-end second lien transactions. The length of the total stress period the Company used in its pessimistic scenario December 31, 2012 was three months longer than the total stress period it used at December 31, 2011 and 15 months longer than the total stress period it used at December 31, 2010. On the other hand, the total stress period the Company used in its optimistic scenario at December 31, 2012 was threemonths shorter than the total stress period it used at December 31, 2011 but ninemonths longer than the total stress period it used at December 31, 2010.
U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime

     First lien RMBS are generally categorized in accordance with the characteristics of the first lien mortgage loans on one-to-four family homes supporting the transactions. The collateral supporting “subprime RMBS” transactions consists of first-lien residential mortgage loans made to subprime borrowers. A “subprime borrower” is one considered to be a higher risk credit based on credit scores or other risk characteristics. Another type of RMBS transaction is generally referred to as “Alt-A

177

Table of Contents

first lien.” The collateral supporting such transactions consists of first-lien residential mortgage loans made to “prime” quality borrowers who lack certain ancillary characteristics that would make them prime. When more than 66% of the loans originally included in the pool are mortgage loans with an option to make a minimum payment that has the potential to amortize the loan negatively (i.e., increase the amount of principal owed), the transaction is referred to as an “Option ARM.” Finally, transactions may be composed primarily of loans made to prime borrowers. First lien RMBS sometimes include a portion of loan collateral that differs in priority from the majority of the collateral.
The performance of the Company’s first lien RMBS exposures began to deteriorate in 2007 and such transactions, continue to perform below the Company’s original underwriting expectations. The Company currently projects first lien collateral losses many times those expected at the time of underwriting. While insured securities benefited from structural protections within the transactions designed to absorb some of the collateral losses, in many first lien RMBS transactions, projected losses exceed those structural protections.
The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent or in the past twelve months have been two or more payments behind, have been modified, are in foreclosure, or where the loan hashave been foreclosed and the RMBS issuer owns the underlying real estate)upon). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquencynon-performing categories. The Company arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations to occur over two years. For both year-end 2012 and year-end 2011Each quarter the Company reviewedreviews the most recent twelve months of this data supplied by the third-party provider. Basedand (if necessary) adjusts its liquidation rates based on its review of that data, the Company maintained the same liquidation assumptions at December 31, 2012 as it had used at December 31, 2011, but these were updated from December 31, 2010.observations. The following table shows liquidation assumptions for various delinquencynon-performing categories.
First Lien Liquidation Rates

December 31, 2012 December 31, 2011 December 31, 2010December 31, 2015 December 31, 2014 December 31, 2013
Current Loans Modified in the Previous 12 Months 
Alt A and Prime25% 25% 35%
Option ARM25 25 35
Subprime25 25 35
Current Loans Delinquent in the Previous 12 Months 
Alt A and Prime25 25 N/A
Option ARM25 25 N/A
Subprime25 25 N/A
30 – 59 Days Delinquent    
Alt A and Prime35% 35% 50%35 35 50
Option ARM50 50 5040 40 50
Subprime30 30 4545 35 45
60 – 89 Days Delinquent  
Alt A and Prime55 55 6545 50 60
Option ARM65 65 6550 55 65
Subprime45 45 6555 40 50
90+ Days Delinquent  
Alt A and Prime65 65 7555 60 75
Option ARM75 75 7560 65 70
Subprime60 60 7060 55 60
Bankruptcy  
Alt A and Prime55 55 7545 45 60
Option ARM70 70 7550 50 60
Subprime50 50 7040 40 55
Foreclosure  
Alt A and Prime85 85 8565 75 85
Option ARM85 85 8570 80 80
Subprime80 80 8570 70 70
Real Estate Owned ("REO") 
Real Estate Owned 
All100 100 100100 100 100
 

178174

Table of Contents

While the Company uses liquidation rates as described above to project defaults of non-performing loans (including current loans modified or delinquent within the last 12 months), it projects defaults on presently current loans by applying a CDR trend. The start of that CDR trend is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 2436 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.
 
In the base case, after the initial 24-month36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. In the base case, the Company assumes the final CDR will be reached 7.5 years after the initial 36-month CDR plateau period, which is twelve months shorter than assumed at December 31, 2014. Under the Company’s methodology, defaults projected to occur in the first 2436 months represent defaults that can be attributed to loans that were modified or delinquent in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 2436 month period represent defaults attributable to borrowers that are currently performing. The CDR trend the Company used in its base case for December 31, 2012 was the same as it used for December 31, 2011 but had small differences from the one it used for December 31, 2010 (for example, for December 31, 2010 the intermediate CDR was calculated as 15% of the plateau CDR).performing or are projected to reperform.
     
Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historichistorically high levels, and the Company is assuming in the base case that these high levels generally will continue for another year (in the case of subprime loans, the Company assumes the unprecedented 90% loss severity rate will continue for six months then drop to 80% for six months before following the ramp described below).18 months. The Company determines its initial loss severity based on actual recent experience. The Company’s loss severity assumptions for December 31, 2012 were the same as it used for December 31, 2011 but, as shown in the table below, higher than the loss severity assumptions it used for December 31, 2010. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in June 2013, andafter the initial 18 month period, declining to 40% in the base case scenario, decline over two years to 40%.2.5 years. Beginning for December 31, 2014, the Company differentiated the loss severity assumptions depending on the vintage of the transaction, as shown in the table below.
 

179

Table of Contents

The following table shows the range ofas well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 first lien U.S. RMBS.

175

Table of Contents

Key Assumptions in Base Case Expected Loss Estimates
First Lien RMBS(1)

As of
December 31, 2015
 As of
December 31, 2014
 As of
December 31, 2013
As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2010
Range Weighted Average Range Weighted Average Range Weighted Average
Alt-A First Lien              
Plateau CDR3.8%23.2% 2.8%41.3% 2.4%42.1%1.7%26.4% 6.4% 2.0%13.4% 7.3% 2.8%18.4% 9.7%
Intermediate CDR0.8%4.6% 0.6%8.3% 0.4%6.3%0.3%5.3% 1.3% 0.4%2.7% 1.5% 0.6%3.7% 1.9%
Period until intermediate CDR48 months 48 months 48 months 
Final CDR0.2%1.2% 0.1%2.1% 0.1%2.1%0.1%1.3% 0.3% 0.1%0.7% 0.3% 0.1%0.9% 0.5%
Initial loss severity65% 65% 60%
Initial loss severity:      
2005 and prior60.0% 60.0% 65.0% 
200670.0% 70.0% 65.0% 
200765.0% 65.0% 65.0% 
Initial CPR0.0%39.4% 0.0%37.5% 0.0%37.2%2.7%32.5% 11.5% 1.7%21.0% 7.7% 0.0%34.2% 9.7%
Final CPR15% 15% 15%
Final CPR(2)15% 15% 15% 
Option ARM              
Plateau CDR7.0%26.1% 9.6%31.5% 9.8%32.7%3.5%10.3% 7.8% 4.3%14.2% 10.6% 4.9%16.8% 11.9%
Intermediate CDR1.4%5.2% 1.9%6.3% 1.5%4.9%0.7%2.1% 1.6% 0.9%2.8% 2.1% 1.0%3.4% 2.4%
Period until intermediate CDR48 months 48 months 48 months 
Final CDR0.4%1.3% 0.5%1.6% 0.5%1.6%0.2%0.5% 0.4% 0.2%0.7% 0.5% 0.2%0.8% 0.5%
Initial loss severity65% 65% 60%
Initial loss severity:      
2005 and prior60.0% 60.0% 65.0% 
200670.0% 70.0% 65.0% 
200765.0% 65.0% 65.0% 
Initial CPR0.0%10.7% 0.0%29.1% 0.0%18.7%1.5%10.9% 5.1% 1.1%11.8% 4.9% 0.4%13.1% 4.7%
Final CPR15% 15% 15%
Final CPR(2)15% 15% 15% 
Subprime              
Plateau CDR7.3%26.2% 8.3%29.9% 9.0%34.6%4.7%13.2% 9.5% 4.9%15% 10.6% 5.6%16.2% 11.8%
Intermediate CDR1.5%5.2% 1.7%6.0% 1.3%5.2%0.9%2.6% 1.9% 1.0%3.0% 2.1% 1.1%3.2% 2.4%
Period until intermediate CDR48 months 48 months 48 months 
Final CDR0.4%1.3% 0.4%1.5% 0.4%1.7%0.2%0.7% 0.4% 0.2%0.7% 0.4% 0.3%0.8% 0.4%
Initial loss severity90% 90% 80%
Initial loss severity:      
2005 and prior75.0% 75.0% 90.0% 
200690.0% 90.0% 90.0% 
200790.0% 90.0% 90.0% 
Initial CPR0.0%17.6% 0.0%16.3% 0.0%17%0.0%10.1% 3.6% 0.0%10.5% 6.1% 0.0%15.7% 4.1%
Final CPR15% 15% 15%
Final CPR(2)15% 15% 15% 
____________________
(1)                                Represents variables for most heavily weighted scenario (the “base case”).

(2) For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.


176


 The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary CPR follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be either 10% or 15% depending on in the scenario run.base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant.constant and the final CPR is not used. These assumptions are the same as those itthe Company used for December 31, 2011 and December 31, 2010.2014.
 
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the currentinitial conditional default rate. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) as of December 31, 2012. For 2015. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of December 31, 2012 the Company used the same five scenarios and weightings2015 as it used for as of December 31, 2011 except that for December 31, 2012 it assumed2014, increasing and decreasing the periods of stress from those used in the most stressful scenario that the recovery would occur three months more slowly and in the most optimistic scenario that it would occur three months more quickly than it had assumed would be the case for December 31, 2011. For December 31, 2010 the Company used only four scenarios, and there were some other differences in the assumptions used for the December 31, 2010 as compared to those used for December 31, 2012. base case.

In a somewhat more stressful environment than that of the base case, where the conditional default rate plateau was extended threesix months (to be 2742 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over four4.5 rather than two

180

Table of Contents

2.5 years (and subprime loss severities were assumed to recover only to 60% and Option ARM and Alt A loss severities to only 45%), expected loss to be paid would increase from current projections by approximately $83$12 million for Alt-A first liens, $21$5 million for Option ARM, $121$46 million for subprime and $4$0.2 million for prime transactions.

In an even more stressful scenario where loss severities were assumed to rise and then recover over eightnine years and the initial ramp-down of the conditional default rate was assumed to occur over 15 months (rather than 12 months as of December 31, 2011) and other assumptions were the same as the other stress scenario, expected loss to be paid would increase from current projections by approximately $223$31 million for Alt-A first liens, $60$9 million for Option ARM, $188$64 million for subprime and $17$1 million for prime transactions. The Company also considered two scenarios where the recovery was faster than in its base case.

In a scenario with a somewhat less stressful environment than the base case, where conditional default rate recovery was somewhat less gradual, and the initial subprime loss severity rate was assumed to be 80% for 12 months and was assumed to recover to 40% over two years, expected loss to be paid would decrease from current projections by approximately $11$1 million for Alt-A first lien, $27liens, $15 million for Option ARM, $34$8 million for subprime and $1 million$14 thousand for prime transactions.

In an even less stressful scenario where the conditional default rate plateau was threesix months shorter (21(30 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, (including an initial ramp-down of the conditional default rate over nine months rather than 12 months as at December 31, 2011) months), expected loss to be paid would decrease from current projections by approximately $82$12 million for Alt-A first lien, $61liens, $25 million for Option ARM, $75$34 million for subprime and $1$0.2 million for prime transactions.
U.S. Second Lien RMBS Loss Projections
 
Second lien RMBS transactions include both HELOC and closed end second lien. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as CPR of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity.
In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates. A liquidation rate is the percent of loans in a given cohort (in this instance, delinquency category) that ultimately default. Similar to first liens, the Company then calculates a CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau period that follows the embedded five months of losses. Liquidation rates assumed as of December 31, 2015, were from 10% to 100%.


177


For the base case scenario, the CDR (the “plateau CDR”) was held constant for six months. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprising five months of delinquent data, a one month plateau period and 28 months of decrease to the steady state CDR, the same as of December 31, 2014.

HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment, and so increase the borrower's aggregate monthly payment. Some of the HELOC loans underlying the Company's insured HELOC transactions have reached their principal amortization period. The Company has observed that the increase in monthly payments occurring when a loan reaches its principal amortization period, even if mitigated by borrower relief offered by the servicer, is associated with increased borrower defaults. Thus, most of the Company's HELOC projections incorporate an assumption that a percentage of loans reaching their amortization periods will default around the time of the payment increase. These projected defaults are in addition to those generated using the CDR curve as described above. This assumption is similar to the one used at December 31, 2014. For December 31, 2015 the Company used the approach it had refined in the third quarter of 2015 to calculate the number of additional delinquencies as a function of the number of modified loans in the transaction and the final steady state CDR but increased those additional resulting defaults. Under this refined approach, transactions that have worse than average expected experience will have higher defaults and transactions where borrowers are receiving modifications so that they will not default when their interest only period ends will have higher losses.

When a second lien loan defaults, there is generally a very low recovery. The Company had assumed as of December 31, 2015 that it will generally recover only 2% of the collateral defaulting in the future and declining additional amounts of post-default receipts on previously defaulted collateral. Based on experience, the Company changed this assumption from the assumption it had used as at December 31, 2014, when it assumed it would generally recover 10% or less of the collateral defaulting in the future and declining additional amounts of post-default receipts on previously defaulted collateral.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, an average CPR (based on experience of the most recent three quarters) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien transactions, which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is generally consistent with how the Company modeled the CPR at December 31, 2014. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.
The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices. These variables have been relatively stable and in the relevant ranges have less impact on the projection results than the variables discussed above. However, in a number of HELOC transactions the servicers have been modifying poorly performing loans from floating to fixed rates, and, as a result, rising interest rates would negatively impact the excess spread available from these modified loans to support the transactions.  The Company incorporated these modifications in its assumptions.

In estimating expected losses, the Company modeled and probability weighted five possible CDR curves applicable to the period preceding the return to the long-term steady state CDR. The Company used five scenarios at December 31, 2015 and three scenarios at December 31, 2014. The Company believes that the level of the elevated CDR and the length of time it will persist, the ultimate prepayment rate, and the amount of additional defaults because of the expiry of the interest only period, are the primary drivers behind the likely amount of losses the collateral will suffer. The Company continues to evaluate the assumptions affecting its modeling results.

Most of the Company's projected second lien RMBS losses are from HELOC transactions. The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 HELOCs.


178


Key Assumptions in Base Case Expected Loss Estimates
HELOCs(1)
 As of
December 31, 2015
 As of
December 31, 2014
 As of
December 31, 2013
 Range Weighted Average Range Weighted Average Range Weighted Average
Plateau CDR4.9%23.5% 10.3% 2.8%6.8% 4.1% 2.3%7.7% 4.9%
Final CDR trended down to0.5%3.2% 1.2% 0.5%3.2% 1.2% 0.4%3.2% 1.1%
Period until final CDR34 months   34 months   34 months  
Initial CPR10.9%   6.9%21.8% 11.0% 2.7%21.5% 9.9%
Final CPR(2)10.0%15.0% 13.3% 15.0%21.8% 15.5% 10%  
Loss severity98.0%   90.0%98.0% 90.4% 98%  
____________________
(1)Represents variables for most heavily weighted scenario (the “base case”).

(2) For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.
The Company’s base case assumed a six month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. Increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months), and doubling the defaults relating to the end of the interest only period would increase the expected loss by approximately $52 million for HELOC transactions. On the other hand, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by approximately $28 million for HELOC transactions.

Breaches of Representations and Warranties
 
Generally, when mortgage loans arewere transferred into a securitization, the loan originator(s) and/or sponsor(s) provideprovided R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these requirements. The Company uses internal resources as well as third party forensic underwriting firms and legal firms to pursuehas pursued such breaches of R&W. If&W on a loan-by-loan basis or in cases where a provider of R&W refusesrefused to honor its repurchase obligations, the Company may choosesometimes chose to initiate litigation. See “-Recovery Litigation” below.

The Company's success in pursuing R&W claims against a number of counterparties that provided R&W on a loan by loan basis hasthese strategies permitted the Company to pursue reimbursemententer into agreements with R&W providers. Such agreements provideproviders under which those providers made payments to the Company, with many of the benefits of pursuing the R&W claims but without the expense and uncertainty of pursuing the R&W claims on a loan by loan basis.

The Company may also employ other strategies as appropriate to avoid or mitigate losses in U.S. RMBS or other areas, including pursuing litigation in areas other than RMBS or entering into other arrangements to alleviate or reduce all or a portion of certain risks.

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

On April 14, 2011, Assured Guaranty reached a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, "Bank of America"), regarding their liabilities with respect to 29 RMBS transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of R&W and historical loan servicing issues ("Bank of America Agreement"). Of the 29 RMBS transactions, eight were second lien transactions and 21 were first lien transactions, all of which were financial guaranty insurance except for one first lien in credit derivative form. The Bank of America Agreement covers Bank of America-sponsored securitizations that AGM or AGC has insured, as well as certain other securitizations containing concentrations of Countrywide-originated loans that AGM or AGC has insured. The transactions covered by the Bank of America Agreement have a gross par outstanding of $3.5 billion ($3.2 billion net par outstanding) as of December 31, 2012.

Bank of America paid the Company $1,043 million in 2011 in respect of covered second lien transactions and $57 million in March 2012. In consideration of the $1.1 billion, the Company has agreed to release its claims for the repurchase of mortgage loans underlying the eight second lien transactions (i.e., Assured Guaranty will retain the risk of future insured losses without further offset for R&W claims against Bank of America).

In addition, Bank of America will reimburse Assured Guaranty 80% of claims Assured Guaranty pays on the 21 first lien transactions, until aggregate collateral losses on such RMBS transactions reach $6.6 billion. As of December 31, 2012,

181


collateral losses for covered first lien transactions were $3.1 billion. The Company estimates that cumulative projected collateral losses for the 21 first lien transactions will be $5.1 billion. The Company accounts for the 80% loss sharing agreement with Bank of America as subrogation. As the Company calculates expected losses for these 21 first lien transactions, such expected losses will be offset by an R&W benefit from Bank of America for 80% of these amounts. As of December 31, 2012, Bank of America had placed $812 million of eligible assets in trust in order to collateralize the reimbursement obligation relatingmake payments to the first lien transactions. The amount of assets required to be posted may increase or decrease from time to time, as determined by rating agency requirements. As of December 31, 2012, and before cessions to reinsurers, the Company collected $296 million, had invoiced for an additional $25 million in claims paid in December and expected to collect an additional $353 million, on a discounted basis, for covered first lien transactions under the Bank of America 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 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 December 31, 2012 the balance of the assets held in trust of $278 million was sufficient to fully collateralize Deutsche Bank's obligations, based on the Company's estimate of expected loss forand / or repurchased loans from the transactions, covered underall in return for releases of related liability by the agreement.
The settlement includes eight RMBS transactions (“Covered Transactions”)Company. In some instances, the entity providing the R&W (or an affiliate of that Assured Guaranty has insuredentity) also benefited from credit protection sold by the Company through financial guaranty insurance policies. The Covered Transactions are backed by first liena CDS, and second lien mortgage loans. Under the Deutsche Bank Agreement,Company entered into an agreement terminating the Deutsche Bank reinsurance affiliate will reimburse 80% of Assured Guaranty’sCDS protection it provided (and so avoiding future losses on the Covered Transactions until Assured Guaranty’s aggregate losses (including those to date that are partially reimbursedtransaction), again in return for releases of related liability by the $166 million cash payment) reach $319 million. Assured Guaranty currently projects thatCompany and 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 $531 million of gross par outstanding ($457 million on a net basis) as of December 31, 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. As of December 31, 2012, lifetime losses in the base case are expected to be $144 million, before taking the reinsurance into account. The Uninsured Tranches represent $306 million of par outstanding as of December 31, 2012.
As of December 31, 2012 and before cessions to reinsurers, the Company collected $8 million and had invoiced for an additional $4 million in claims paid in the fourth quarter 2012.certain instances other consideration.

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.

In the fourth quarter of 2012, the Company reached agreement with another R&W provider in an RMBS securitization transaction to repurchase underlying loans in that transaction. Such amount was applied by the securities administrator to the transaction's flow of funds and is available to support the R&W benefit on this transaction, as ofThrough December 31, 2012, of $81 million


182


The Company has included in its net expected loss estimates as of December 31, 2012 an estimated net benefit from loan repurchases related to breaches of R&W of $1.4 billion, which includes $676 million from agreements with and judgments against R&W providers and $694 million in transactions where the Company does not yet have such an agreement or judgment. (Included in the $676 million is a credit for amounts awarded in a judgment subject to appeal.) Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims, projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company's exposure. See “Recovery Litigation” below for a description of the related legal proceedings the Company has commenced.

The Company's success in pursuing breaches of R&W is based upon a detailed review of loan files. The Company reviewed approximately 41,400 second lien and 6,800 first lien loan files (representing approximately $3,140 million and $2,357 million, respectively, of loans) in transactions as to which it eventually reached agreements or won a judgment. For the RMBS transactions as to which the Company had not settled its claims or won a judgment for breaches of R&W as of December 31, 2012, the Company had performed a detailed review of approximately 3,700 second lien and 29,600 first lien loan files, representing approximately $264 million in second lien and $9,644 million in first lien outstanding par of loans underlying insured transactions. In the majority of its loan file reviews, the Company identified breaches of one or more R&W regarding the characteristics of the loans, such as misrepresentation of income or employment of the borrower, occupancy, undisclosed debt and non-compliance with underwriting guidelines at loan origination.

Through December 31, 2012 (but including judgments and settlements reached through February 28, 2013)2015 the Company has caused entities providing R&Ws to pay, or agree to pay, (or has won a judgment requiring themor to pay)terminate or agree to terminate insurance protection on future projected losses of, approximately $2.9$4.2 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided a financial guaranty. Of this, $2.3 billion are payments made or to be made pursuant to agreements with or judgments against R&W providers and approximately $557 million are amounts paid into the relevant RMBS financial guaranty transactions pursuant to the transaction documents in the regular course.insurance.

The $2.3 billionCompany has included in its net expected loss estimates as of payments made or to be made by R&W providers under agreements with the Company or a judgment against them includes $1.6 billion that has already been received by the Company, as well as $698December 31, 2015 an estimated net benefit of $79 million the Company projects receiving in the future pursuant to such currently existing agreements or judgment. Because much (net of that $698 millionreinsurance), all of which is projected to be received through loss-sharing arrangements,pursuant to existing agreements with R&W providers or is otherwise collateralized. The Company is no longer actively pursuing R&W providers where it does not have such an agreement. Most of the exact amount projected to be received pursuant to existing agreements with R&W providers benefits from eligible assets placed in trusts to collateralize the R&W provider’s future reimbursement obligation, with the amount of such collateral subject to increase or decrease from time to time as determined by rating agency requirements. Currently the Company will receive will dependhas agreements with three counterparties where a future reimbursement obligation is collateralized by eligible assets held in trust:

Bank of America. Under the Company's agreement with Bank of America Corporation and certain of its subsidiaries (“Bank of America”), Bank of America agreed to reimburse the Company for 80% of claims on actual losses experiencedthe first lien transactions covered by the Covered Transactions. This amount is includedagreement that the Company pays in the Company's calculated credit for R&W recoveries, described below.

The $557 million paid by R&W providers were paid infuture, until the regular course into the relevant RMBS transactions in accordance with the priority of payments set out in the relevant transaction documents. Because the Company may insure only a portion of the capital structure of a transaction, such payments will not necessarily directly benefit the Company dollar-for-dollar, especially in first lien transactions. However, such payments do reduceaggregate lifetime collateral pool losses and so usually reduce the Company's expected losses.
The Company did not incorporate any gain contingencies(not insurance losses or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty’s ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company’s estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the creditworthiness of the provider of the R&W, the number of breaches foundclaims) on defaulted loans, the success rate in resolving these breaches across those transactions where material repurchases have been made and the potential amountreach $6.6 billion. As of time until the recovery is realized.December 31, 2015 aggregate
The calculation of expected recovery from breaches of R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing limited recoveries. These scenarios were probability weighted in order to determine the recovery incorporated into the Company’s estimate of expected losses. This approach was used for both loans that had already defaulted and those assumed to default in the future.

183179


U.S. RMBS Risks with R&W Benefit
 Number of Risks (1) as of Debt Service as of
 December 31, 2012 December 31, 2011 December 31, 2012 December 31, 2011
     (dollars in millions)
Prime first lien1
 1
 $35
 $42
Alt-A first lien26
 29
 4,030
 4,672
Option ARM10
 13
 1,101
 1,843
Subprime5
 5
 820
 906
Closed-end second lien4
 4
 196
 361
HELOC (2)7
 15
 549
 2,978
Total53
 67
 $6,731
 $10,802
____________________
(1)A risk representslifetime collateral losses on those transactions was $4.4 billion, and the aggregate of the financial guaranty policiesCompany was projecting in its base case that share the same revenue source for purposes of making Debt Service payments.
(2)The decline in number of HELOC risks and Debt Service relates to the final payment fromsuch collateral losses would eventually reach $5.2 billion. Bank of AmericaAmerica's reimbursement obligation is secured by $543 million of collateral held in trust for covered HELOC transactions.the Company's benefit.

The following table provides a breakdown
Deutsche Bank.Under the Company's May 2012 agreement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), Deutsche Bank agreed to reimburse the development and accretion amountCompany for certain claims it pays in the roll forward of estimated recoveries associated with alleged breaches of R&W.
 Year Ended December 31,
 2012 2011
 (in millions)
Inclusion or removal of deals with breaches of R&W during period$(3) $115
Change in recovery assumptions as the result of additional file review and recovery success70
 218
Estimated increase (decrease) in defaults that will result in additional (lower) breaches63
 17
Results of settlements/judgments40
 668
Accretion of discount on balance9
 20
Total$179
 $1,038
The Company assumes that recoveriesfuture on eight first and second lien transactions, including 80% of claims it pays on those transactions until the aggregate lifetime claims (before reimbursement) reach $319 million. As of December 31, 2015, the Company was projecting in its base case that such aggregate lifetime claims would remain below $319 million. In the event aggregate lifetime claims paid exceed $389 million, Deutsche Bank must reimburse the Company for 85% of such claims paid (in excess of $389 million) until such claims paid reach $600 million. Deutsche Bank’s reimbursement obligation is secured by $71 million of collateral held in trust for the Company’s benefit.

UBS. On May 6, 2013, the Company entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") and a third party resolving the Company’s claims and liabilities related to specified RMBS transactions that were notissued, underwritten or sponsored by UBS and insured by AGM or AGC under financial guaranty insurance policies. Under the agreement, UBS agreed to reimburse the Company for 85% of future losses on three first lien RMBS transactions, and such reimbursement obligation is secured by $54 million of collateral held in trust for the Company's benefit.

The Company uses the same RMBS projection scenarios and weightings to project its future R&W benefit as it uses to project RMBS losses on its portfolio. To the extent the Company increases its loss projections, the R&W benefit generally will also increase, subject to the Deutsche Bank Agreementagreement limits and thresholds described above. Similarly, to the extent the Company decreases its loss projections, the R&W benefit generally will occur in two to four years from the balance sheet date depending on the scenarios, and that recoveries on transactions backed by Alt-A first lien, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions.
The quality of servicing of the mortgage loans underlying an RMBS transaction influences collateral performance and ultimately the amount (if any) of the Company's insured losses. The Company has established a group to mitigate RMBS losses by influencing mortgage servicing, including, if possible, causing the transfer of servicing or establishing special servicing arrangements. “Special servicing” is an industry term referencing more intense servicing applied to delinquent loans aimed at mitigating losses. Special servicing arrangements provide incentives to a servicer to achieve better performance on the mortgage loans it services. As a result of the Company’s efforts, as of February  28, 2013 the servicing of approximately $3.0 billion of mortgage loans had been transferred to a new servicer and another $1.7 billion of mortgage loans werealso decrease, subject to special servicing arrangements. The December 31, 2012 net insured par of the transactions subject to a servicing transfer was $2.7 billionagreement limits and the net insured par of the transactions subject to a special servicing arrangement was $0.9 billion.thresholds described above.

“XXX”Triple-X Life Insurance Transactions
 
The Company’s $2.8Company had $2.8 billion of net par of XXXexposure to Triple-X life insurance transactions as of December 31, 2012 include $9232015. Two of these transactions, with $216 million of net par outstanding, are rated BIG. The BIG “XXX”Triple-X life insurance reserve securitizationstransactions are based on discrete blocks of individual life insurance business. In each such transactionolder vintage Triple-X life insurance securitization transactions, which include the moniestwo BIG-rated transactions, the amounts raised by the sale of the bondsnotes insured by the Company were used to

184


capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers.
The BIG “XXX” life insurance In the case of the two BIG-rated transactions, consist of two transactions: Ballantyne Re p.l.c and Orkney Re II p.l.c. These transactions had material amounts of their assets were invested in U.S. RMBS transactions.RMBS. Based on its analysis of the information currently available, including estimates of future investment performance, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at December 31, 2012,2015, the Company’s projected net expected loss to be paid is $139$99 million. The economic loss development during 2015 was approximately $11 million,. which was due primarily to changes in the risk free rates used to discount the losses and life insurance mortality projections earlier in the year as well as assumption updates related to future transaction cashflows.
In the case of one of the BIG-rated transactions, AGM had guaranteed a CDS that referenced the entire issued and outstanding amount of its Series A-1 Notes, which AGUK guarantees. On July 9, 2015, in consideration of a cash payment by AGM, the swap counterparty delivered to AGM all of the Series A-1 Notes, and the parties terminated the CDS. AGUK continues to guarantee the Series A-1 Notes. However, consistent with the Company's practice of excluding from its par and Debt Service outstanding amounts attributable to loss mitigation securities it has purchased because it manages such securities as investments and not insurance exposure, the Company excluded from its consolidated net par outstanding as of December 31, 2015 the $382.5 million net par of such notes.

Student Loan Transactions
 
The Company has insured or reinsured $3.0$1.8 billion net par of student loan securitizations of which $1.9 billion was issued by private issuers and classifiedthat it classifies as asset-backed and $1.1 billion was issued by public authorities and classified as publicstructured finance. Of these amounts, $217this amount, $163 million and $327 million, respectively, are is rated BIG. The Company is projecting approximately $54$54 million of net expected loss to be paid inon these portfolios.transactions. In general, the losses are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The largest of these losseseconomic benefit during 2015 was approximately $25$9 million, and related to a transaction backed by a pool of private student loans assumed by AG Re from another monoline insurer. The guaranteed bonds were issued as auction rate securities that now bear a high rate of interest due to the downgrade of the primary insurer’s financial strength rating. Further, the underlying loan collateral has performed below expectations. The overall decrease of approximately $21 million in net expected loss during 2012 is primarily due to loss mitigation efforts.
Trust Preferred Securities Collateralized Debt Obligations
The Company has insured or reinsured $5.7 billion of net par (72% of which is in CDS form) of collateralized debt obligations (“CDOs”) backed by TruPS and similar debt instruments, or “TruPS CDOs.” Of the $5.7 billion, $2.9 billion is rated BIG. The underlying collateral in the TruPS CDOs consists of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, real estate investment trusts (“REITs”) and other real estate related issuers.
The Company projects losses for TruPS CDOs by projecting the performance of the asset pools across several scenarios (which it weights) and applying the CDO structures to the resulting cash flows. At December 31, 2012, the Company has projected expected losses to be paid for TruPS CDOs of $27 million. The decrease of approximately $37 million in net expected loss during 2012 was driven primarily by a partial commutation by the terminationunderlying insurer during the first quarter of certain hedges for amounts lower than their estimated impact on cash flows if they had not been terminated.2015.

Selected U.S. Public Finance Transactions

U.S. municipalities and related entities have been under increasing pressure over the last few quarters, and a few have filed for protection under the U.S. Bankruptcy Code, entered into state processes designed to help municipalities in fiscal distress or otherwise indicated they may consider not meeting their obligations to make timely payments on their debts. The Company expects that bondholder rights will be enforced. However, given some of these developments, and the circumstances surrounding each instance, the ultimate outcome cannot be certain. The Company will continue to analyze developments in each of these matters closely. The municipalities whose obligations the Company has insured that have filed for protection under Chapter 9 of the U.S Bankruptcy Code are: Jefferson County, Alabama and Stockton, California. The City Council of Harrisburg, Pennsylvania had also filed a purported bankruptcy petition, which was later dismissed by the bankruptcy court; a receiver for the City of Harrisburg was appointed by the Commonwealth Court of Pennsylvania on December 2, 2011.

The Company has net exposure to Jefferson County, Alabama of $708 million as of December 31, 2012. On November 9, 2011, Jefferson County filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. Most of the Company's net Jefferson County exposure relates to $479 million in sewer revenue exposure, of which $206 million is direct and $273 million is assumed reinsurance exposure. The sewer revenue warrants are secured by a pledge of the net revenues of the sewer system. The bankruptcy court has affirmed that the net revenues constitute a “special revenue” under Chapter 9. Therefore, the lien on net revenues of the sewer system survives the bankruptcy filing and such net revenues are not subject to the automatic stay during the pendency of Jefferson County's bankruptcy case. BNY Mellon, as trustee, had brought a lawsuit regarding the amount of net revenues to which it is entitled. Since its bankruptcy filing, Jefferson County had been withholding estimated bankruptcy-related legal expenses and an amount representing a monthly reserve for future expenditures and depreciation and amortization from the monthly payments it had been making to the trustee from sewer revenues for Debt Service. On June 29, 2012, the Bankruptcy Court ruled that “Operating Expenses” as determined under the

185180


bond indenture do not include (1) a reserve for depreciation, amortization, or future expenditures, or (2) an estimate for professional fees and expenses, such that, after payment of Operating Expenses (as defined in the indenture), monies remaining in the Revenue Account created under the bond indenture must be distributed in accordance with the waterfall set forth in the indenture without withholding any monies for depreciation, amortization, reserves, or estimated expenditures that are the subject of this litigation. Whether sufficient net revenues will be available for the payment of regularly scheduled debt service ultimately depends on the bankruptcy court's valuation of the sewer revenue stream. The Company also has assumed exposure of $32 million to warrants that are payable from Jefferson County's general fund on a "subject to appropriation" basis. In 2012 Jefferson County chose not to make payment under its General Obligation bonds, so the Company has established a projected loss for these warrants as well. The Company's remaining net exposure of $197 million to Jefferson County relates to obligations that are secured by, or payable from, certain taxes that may have the benefit of a statutory lien or a lien on “special revenues” or other collateral.Other structured finance

On June 28, 2012, the City of Stockton, California filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. The Company's net exposure to Stockton's general fund is $158 million, consisting of pension obligation and lease revenue bonds. As of December 31, 2012, the Company had paid $9 million in net claims.

The Company has $154 million ofother structured finance exposures include $0.9 billion net par exposure to The City of Harrisburg, Pennsylvania, of which $92 million is BIG. The Company has paid $13 million in net claims as of December 31, 2012, and expects a full recovery.

The Company has $336 million of net par exposure to the Louisville Arena Authority. The bond proceeds were used to construct the KFC Yum Center, home to the University of Louisville men's and women's basketball teams. Actual revenues available for Debt Service are well below original projections, and under the Company's internal rating scale, the transaction is below investment grade.

The Company has $26 million remaining in net par exposure to bonds secured by the excess free cash flow of the Foxwoods Casino, run by the Mashantucket Pequot Tribe. The Company had paid $88 million in net claims as of December 31, 2012, and expects full recovery of such amount.

The Company projects that its total future expected net loss across its troubled U.S. public finance credits (after projected recoveries of claims already paid) will be $7 million as of December 31, 2012, down from $16 million as of December 31, 2011. This decrease was due primarily to the increase in expected recoveries on Foxwoods Casino.

Certain Selected European Country Transactions

The Company insures and reinsures credits with sub-sovereign exposure to various Spanish regions where a Spanish sovereign default causes the regions also to default. The Company's gross exposure to these credits is €455 million and its exposure net of reinsurance is €330 million. During 2012, the Company downgraded most of these exposures to the BB category due to concerns that these regions would not pay under their contractual obligations. As a result the Company estimated a net expected loss of $35 million, which represents a $35 million increase from December 31, 2011. During 2012 the Company paid $289 million in net claims in respect of the €314 million (€218 million net) Greek sovereign bonds it had guaranteed, and no longer has any direct financial guaranty exposure to Greece. Information regarding the Company's exposure to other Selected European Countries may be found under Note 3, Outstanding Exposure, –Economic Exposure to the Selected European Countries.
Manufactured Housing

The Company insures or reinsures a total of $297 million net par of securitiesrated BIG, including transactions backed by manufactured housing loans a totaland quota share surety reinsurance contracts on Spanish housing cooperatives. As of $204April 1, 2015, the Radian Asset Acquisition added $101 million rated BIG. in net economic losses for other structured finance credits. The Company has expected loss to be paid of $33$15 million as of December 31, 2012 compared2015. The economic loss development during 2015 was $12 million, which was attributable primarily to $24 million asthe purchase of notes issued by a distressed collateralized loan obligation (“CLO”) and termination of the related credit derivative in December 31, 2011.2015. In January 2016 the Company agreed with the ceding company to commute the Spanish housing cooperative surety reinsurance.
    
Infrastructure Finance

The Company has exposure to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued; the aggregate amount of the claim payments may be substantial and reimbursement may not occur for an extended time, if at all. For the three largest transactions with significant refinancing risk, the Company may be exposed to, and subsequently recover, payments aggregating $1.4 billion. These transactions generally involve long-term infrastructure projects that are financed by bonds that mature prior to the expiration of the project concession. While the cash flows from these projects were expected to be sufficient to repay all of the debt over the life of the project concession, in order to pay the principal on the early maturing

186


debt, the Company expected it to be refinanced in the market at or prior to its maturity. Due to market dislocation and increased credit spreads, the Company may have to pay a claim at the maturity of the securities, and then recover its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. However, the recovery of the payments may take a long time and is uncertain. The claim payments are anticipated to occur substantially between 2014 and 2017, while the recoveries could take 20-45 years, depending on the transaction and the performance of the underlying collateral.

Recovery Litigation
 
RMBSPublic Finance Transactions

On January 7, 2016, AGM, AGC and Ambac Insurance Corporation (“Ambac”) commenced an action for declaratory judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico to invalidate the executive orders issued by the Governor on November 30, 2015 and December 8, 2015 directing that the Secretary of the Treasury of the Commonwealth of Puerto Rico and the Puerto Rico Tourism Company retain or transfer certain taxes and revenues pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation Authority, the Puerto Rico Convention Center District Authority and the Puerto Rico Infrastructure Financing Authority.  The action is still in its early stages.

On November 1, 2013, Radian Asset commenced a declaratory judgment action in the U.S. District Court for the Southern District of Mississippi against Madison County, Mississippi and the Parkway East Public Improvement District to establish its rights under a contribution agreement from the County supporting certain special assessment bonds issued by the District and insured by Radian Asset (now AGC). As of December 31, 2015, $21 million of such bonds were outstanding. The County maintains that its payment obligation is limited to two years of annual debt service, while AGC contends no such limitation applies. On April 20, 2015, the Court issued an order addressing AGC's and the County's cross-motions for partial summary judgment, and denied the County's motion for summary judgment that its payment obligation lasts only two years. On May 1, 2015, AGC paid its first claim on the insured bonds. Discovery is ongoing.

Triple-X Life Insurance Transactions
 
As of the date of this filing, AGM and AGC have lawsuits pending against a number of providers of representations and warrantiesIn December 2008, AGUK filed an action in U.S. RMBS transactions insured by them, seeking damages. In all the lawsuits, AGM and AGC have alleged breaches of R&W in respect of the underlying loans in the transactions, and failure to cure or repurchase defective loans identified by AGM and AGC to such persons. In addition, in the lawsuits against DLJ Mortgage Capital, Inc. (“DLJ”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”) and UBS Real Estate Securities Inc. ("UBS"), AGM and AGC have alleged breaches of contract in procuring falsely inflated shadow ratings (a condition to the issuance by AGM and AGC of its policies) by providing false and misleading information to the rating agencies:
Flagstar: AGM has sued Flagstar Bank, FSB, Flagstar Capital Markets Corporation and Flagstar ABS, LLC on the Flagstar Home Equity Loan Trust, Series 2005-1 and Series 2006-2 second lien transactions. In February 2013, the court granted judgment in favor of AGM on its claims for breach of contract in the amount of approximately $90 million plus contractual interest and attorneys' fees and costs to be determined. Flagstar Bank has indicated it intends to appeal the decision.

Deutsche Bank: AGM has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp. on the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1 second lien transaction.

J.P. Morgan: AGC has sued JPMorgan Chase & Co.’s affiliate EMC Mortgage LLC, J.P. Morgan Securities Inc. (formerly known as Bear, Stearns & Co. Inc.) and JPMorgan Chase Bank, N.A. on theSACO I Trust 2005-GP1 second lien transaction and EMC Mortgage LLC on the Bear Stearns Asset Backed Securities I Trust 2005-AC5 and Bear Stearns Asset Backed Securities I Trust 2005-AC6 first lien transactions.

ResCap: AGM has sued GMAC Mortgage, LLC (formerly GMAC Mortgage Corporation; Residential Asset Mortgage Products, Inc.; Ally Bank (formerly GMAC Bank); Residential Funding Company, LLC (formerly Residential Funding Corporation); Residential Capital, LLC (formerly Residential Capital Corporation, "ResCap"); Ally Financial (formerly GMAC, LLC); and Residential Funding Mortgage Securities II, Inc. on the GMAC RFC Home Equity Loan-Backed Notes, Series 2006-HSA3 and GMAC Home Equity Loan-Backed Notes, Series 2004-HE3 second lien transactions. On May 14, 2012, ResCap and several of its affiliates (the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court. The automatic stay of Bankruptcy Code Section 362 (a) stays lawsuits (such as the suit brought by AGM) against the Debtors and AGM, the Debtors and the non-Debtor affiliates have filed a stipulation with the court agreeing to extend the stay to the non-Debtor affiliates until April 30, 2013.

Credit Suisse: AGM and AGC have sued DLJ and Credit Suisse on first lien U.S. RMBS transactions insured by them. The ones insured by AGM are: CSAB Mortgage-Backed Pass Through Certificates, Series 2006-2; CSAB Mortgage-Backed Pass Through Certificates, Series 2006-3; CSAB Mortgage-Backed Pass Through Certificates, Series 2006-4; and CMSC Mortgage-Backed Pass Through Certificates, Series 2007-3. The ones insured by AGC are: CSAB Mortgage-Backed Pass Through Certificates, Series 2007-1 and TBW Mortgage-Backed Pass Through Certificates, Series 2007-2. On December 6, 2011, DLJ and Credit Suisse filed a motion to dismiss the cause of action asserting breach of the document containing the condition precedent regarding the rating of the securities and claims for recissionary damages and other relief in the complaint, and on October 11, 2012, the Supreme Court of the State of New York granted the motion to dismiss. AGM and AGC intend to appeal the dismissal of certain of its claims. The causes of action against DLJ for breach of R&W and breach of its repurchase obligations remain.

UBS: AGM has sued UBS on the MASTR Adjustable Rate Mortgages Trust 2006-OA2, MASTR Adjustable Rate Mortgages Trust 2007-1 and MASTR Adjustable Rate Mortgages Trust 2007-3 first lien transactions. In

187


April 2012, UBS filed a motion to dismiss the complaint and on August 15, 2012, the United States District Court for the Southern District of New York rejected the motion to dismiss as to AGM's claims of breach of R&W and for recissory damages. It also upheld AGM's breach of warranty claim related to the shadow ratings issued with respect to the transactions. The motion to dismiss was granted against AGM's claims for breach of the repurchase obligation, which the court held could only be enforced by the trustee of the applicable trusts, and for declaratory judgments that UBS failed to cure breaches and for reimbursement of all insurance payments made to UBS. On September 28, 2012, at the direction of AGM, the trustee of the trusts filed a breach of contract complaint against UBS on behalf of the applicable trusts.
AGM also has a lawsuit pending against UBS Securities LLC, as underwriter, as well as several named and unnamed control persons of IndyMac Bank, FSB and related IndyMac entities, that it filed in September 2010 on the IndyMac IMSC Mortgage Loan Trust, Series 2007-HOA-1a first lien transaction (the "HOA1 Transaction"), seeking damages for alleged violations of state securities laws and breach of contract, among other claims. In addition, on August 9, 2012, AGM filed a complaint against OneWest Bank, FSB, the servicer of the mortgage loans underlying the HOA1 Transaction and the IndyMac Home Equity Mortgage Loan Asset-Backed Trust, Series 2007-H1 HELOC transaction seeking damages, specific performance and declaratory relief in connection with OneWest failing to properly service the mortgage loans.
“XXX” Life Insurance Transactions
In December 2008, Assured Guaranty (UK) Ltd. (“AGUK”) filed an action against J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager in thefor a triple-X life insurance transaction, Orkney Re II transaction, in the Supreme Court of the State of New York allegingplc ("Orkney"), involving securities guaranteed by AGUK. The action alleges that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II.investments. After AGUK’s claims were dismissed with prejudice in January 2010, AGUK was successful in its subsequent motions and appeals and, as of December 2011, all of AGUK’s claims for breaches of fiduciary duty, gross negligence and contract were reinstated in full. Separately,

6.Financial Guaranty Insurance

Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 4, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of a derivative under GAAP. Amounts presented in this note relate to financial guaranty insurance contracts, unless otherwise noted. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives for amounts that relate to CDS and Note 9, Consolidated Variable Interest Entities for amounts that relate to FG VIEs.

Accounting Policies

Accounting for financial guaranty contracts that meet the scope exception under derivative accounting guidance are subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial guaranty insurance definition are consistent whether the contract was written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty, or acquired in a business combination.

Premium receivables comprise the present value of contractual or expected future premium collections discounted using the risk-free rate. Unearned premium reserve represents deferred premium revenue, less claim payments and recoveries received that have not yet been recognized in the statement of operations (“contra-paid”). The following discussion relates to

181


the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below under "Financial Guaranty Insurance Losses."

The amount of deferred premium revenue at contract inception is determined as follows:

For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate to public finance transactions.

For premiums received in installments on financial guaranty insurance contracts that were originally underwritten by the Company, deferred premium revenue is the present value of either (1) contractual premiums due or (2) in cases where the underlying collateral is comprised of homogeneous pools of assets, the expected premiums to be collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be contractually prepayable, the amount of prepayments must be probable, and the timing and amount of prepayments must be reasonably estimable. When the Company adjusts prepayment assumptions or expected premium collections, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the premium receivable, and prospective changes are recognized in premium revenues. Premiums receivable are discounted at the trial court level, discoveryrisk-free rate at inception and such discount rate is ongoing.
Public Finance Transactions
In June 2010, AGM sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, “JPMorgan”),updated only when changes to prepayment assumptions are made that change the underwriterexpected date of debt issued by Jefferson County, infinal maturity. Installment premiums typically relate to structured finance transactions, where the Supreme Courtinsurance premium rate is determined at the inception of the State of New York alleging that JPMorgan induced AGMcontract but the insured par is subject to issue its insurance policies in respect of such debt through material and fraudulent misrepresentations and omissions, including concealing that it had secured its position as underwriter and swap provider through bribes to Jefferson County commissioners and others. In December 2010,prepayment throughout the court denied JPMorgan’s motion to dismiss. AGM has filed a motion with the Jefferson County bankruptcy court to confirm that continued prosecutionlife of the lawsuit against JPMorgan will not violatetransaction.

For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal to the automatic stay applicable to Jefferson County notwithstanding JPMorgan’s interpleading of Jefferson County into the lawsuit. AGM is continuing its risk remediation efforts for this exposure.
In September 2010, AGM, together with TD Bank, National Association and Manufacturers and Traders Trust Company, as trustees, filed a complaint in the Court of Common Pleas of Dauphin County, Pennsylvania against The Harrisburg Authority, The City of Harrisburg, Pennsylvania, and the Treasurerfair value of the CityCompany's stand-ready obligation portion of the insurance contract at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium revenue may differ significantly from cash collections due primarily to fair value adjustments recorded in connection with certain Resource Recovery Facility bonds and notes issued by a business combination.

The Harrisburg Authority, alleging, among other claims, breachCompany recognizes deferred premium revenue as earned premium over the contractual period or expected period of the contract by bothin proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease to the deferred premium revenue is recorded. The Harrisburg Authority and The Cityamount of Harrisburg, and seeking remedies including an orderinsurance protection provided is a function of mandamus compelling the City to satisfy its obligationsinsured principal amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the defaulted bondsrelationship between the insured principal amounts outstanding in the reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When an insured financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Any nonrefundable deferred premium revenue related to that contract is accelerated and notesrecognized as premium revenue. When a premium receivable balance is deemed uncollectible, it is written off to bad debt expense.

For reinsurance assumed contracts, earned premiums reported in the Company's consolidated statements of operations are calculated based upon data received from ceding companies, however, some ceding companies report premium data between 30 and 90 days after the end of the reporting period. The Company estimates earned premiums for the lag period.  Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. When installment premiums are related to reinsurance assumed contracts, the Company assesses the credit quality and liquidity of the ceding companies and the appointmentimpact of a receiverany potential regulatory constraints to determine the collectability of such amounts.


182


Deferred premium revenue ceded to reinsurers (ceded unearned premium reserve) is recorded as an asset. Direct, assumed and ceded earned premium revenue are presented together as net earned premiums in the statement of operations. Net earned premiums comprise the following:

Net Earned Premiums
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Scheduled net earned premiums$416
 $415
 $470
Acceleration of net earned premiums (1)331
 136
 263
Accretion of discount on net premiums receivable17
 16
 17
  Financial guaranty insurance net earned premiums764
 567
 750
Other2
 3
 2
  Net earned premiums (2)$766
 $570
 $752
 ___________________
(1)Reflects the unscheduled refunding or termination of the insurance on an insured obligation as well as changes in scheduled earnings due to changes in the expected lives of the insured obligations. 
(2)Excludes $21 million, $32 million and $60 million for the year ended December 31, 2015, 2014 and 2013, respectively, related to consolidated FG VIEs.


Components of
Unearned Premium Reserve
 As of December 31, 2015 As of December 31, 2014
 Gross Ceded Net(1) Gross Ceded Net(1)
 (in millions)
Deferred premium revenue$4,008
 $238
 $3,770
 $4,167
 $387
 $3,780
Contra-paid(2)(12) (6) (6) 94
 (6) 100
Unearned premium reserve$3,996
 $232
 $3,764
 $4,261
 $381
 $3,880
 ____________________
(1)Excludes $110 million and $125 million of deferred premium revenue and $30 million and $42 million of contra-paid related to FG VIEs as of December 31, 2015 and December 31, 2014, respectively.

(2)See "Financial Guaranty Insurance Losses – Insurance Contracts' Loss Information" below for an explanation of "contra-paid".

183


Gross Premium Receivable,
Net of Commissions on Assumed Business
Roll Forward

 Year Ended December 31,
 2015 2014 2013
 (in millions)
Beginning of period, December 31$729
 $876
 $1,005
Premiums receivable acquired in Radian Asset Acquisition on April 1, 20152
 
 
Gross premium written, net of commissions on assumed business198
 171
 145
Gross premiums received, net of commissions on assumed business(206) (230) (259)
Adjustments:     
Changes in the expected term(19) (66) (28)
Accretion of discount, net of commissions on assumed business18
 10
 20
Foreign exchange translation(25) (31) (1)
Consolidation/deconsolidation of FG VIEs(4) (1) 
Other adjustments0
 
 (6)
End of period, December 31 (1)$693
 $729
 $876
____________________
(1)Excludes $17 million, $19 million and $21 million as of December 31, 2015 , 2014 and 2013, respectively, related to consolidated FG VIEs.
Foreign exchange translation relates to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 52% and 51% of installment premiums at December 31, 2015 and 2014, respectively, are denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound Sterling.
The timing and cumulative amount of actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and changes in expected lives.

Expected Collections of
Financial Guaranty Gross Premiums Receivable,
Net of Commissions on Assumed Business
(Undiscounted)

 As of December 31, 2015
 (in millions)
2016 (January 1 – March 31)$34
2016 (April 1 – June 30)23
2016 (July 1 – September 30)18
2016 (October 1 – December 31)17
201767
201861
201957
202056
2021-2025226
2026-2030147
2031-2035103
After 203584
Total(1)$893
____________________
(1)Excludes expected cash collections on FG VIEs of $22 million.

184


Scheduled Financial Guaranty Net Earned Premiums
 As of December 31, 2015
 (in millions)
2016 (January 1 – March 31)$100
2016 (April 1 – June 30)97
2016 (July 1 – September 30)93
2016 (October 1 – December 31)91
Subtotal 2016381
2017332
2018298
2019272
2020250
2021-2025977
2026-2030616
2031-2035363
After 2035281
Net deferred premium revenue(1)3,770
Future accretion186
Total future net earned premiums$3,956
 ____________________
(1)Excludes scheduled net earned premiums on consolidated FG VIEs of $110 million.


Selected Information for The Harrisburg Authority. ActingFinancial Guaranty Policies Paid in Installments

 As of
December 31, 2015
 As of
December 31, 2014
 (dollars in millions)
Premiums receivable, net of commission payable$693
 $729
Gross deferred premium revenue1,240
 1,370
Weighted-average risk-free rate used to discount premiums3.1% 3.5%
Weighted-average period of premiums receivable (in years)9.4
 9.4


Financial Guaranty Insurance Acquisition Costs

Accounting Policy

Policy acquisition costs that are directly related and essential to successful insurance contract acquisition and ceding commission income on its own,ceded reinsurance contracts are deferred for contracts accounted for as insurance, and reported net. Amortization of deferred policy acquisition costs includes the City Councilaccretion of Harrisburg filed a purported bankruptcy petition for the City in October 2011, which petitiondiscount on ceding commission income and a subsequent appeal were dismissed by the bankruptcy court in November 2011. The City Council appealed the dismissal of the appeal andexpense.

Capitalized policy acquisition costs costs include expenses such appeal was dismissed as untimely both by the District Courtceding commissions expense on assumed reinsurance contracts and the Third Circuit Courtcost of Appeals. Asunderwriting personnel attributable to successful underwriting efforts. Ceding commission expense on assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with premiums received in installments are calculated at their contractually defined commission rates, discounted consistent with premiums receivable for all future periods, and included in deferred acquisition costs ("DAC"), with a resultcorresponding offset to net premiums receivable or reinsurance balances payable. Management uses its judgment in determining the type and amount of costs to be deferred. The Company conducts an annual study to determine which operating costs qualify for deferral. Costs incurred 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. DAC is amortized in proportion to

185


net earned premiums. When an insured obligation is retired early, the dismissal, the actions brought by AGMremaining related DAC, net of ceding commission income is recognized at that time.
Expected losses, which include LAE, investment income, and the trustees against The Cityremaining costs of Harrisburg and The Harrisburg Authorityservicing the insured or reinsured business, are no longer stayed. A receiver for The Cityconsidered in determining the recoverability of Harrisburg (the “City Receiver”) was appointed by the Commonwealth Court of Pennsylvania in December 2011. The City Receiver filed a motion to intervene in the mandamus action and action for the appointment of a receiver for the resource recovery facility. In March 2012, the Court of Common Pleas of Dauphin County, Pennsylvania issued an order granting the motion for the appointment of a receiver for the resource recovery facility, which order has been appealed by The Harrisburg Authority.DAC.
  
Rollforward of
Deferred Acquisition Costs

7.    
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Beginning of period$121
 $124
 $116
DAC adjustments related to Radian Asset Acquisition on April 1, 20151
 
 
Costs deferred during the period:     
Commissions on assumed and ceded business(1) 7
 9
Premium taxes2
 3
 4
Compensation and other acquisition costs11
 10
 8
Total12
 20
 21
Costs amortized during the period(20) (23) (13)
End of period$114
 $121
 $124


Financial Guaranty Insurance Losses

Accounting Policies

Loss and LAE Reserve

188



Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on unpaid losses. As discussed in Note 8,7, Fair Value Measurement, contracts that meet the definition of a derivative, as well as consolidated FG VIE assets and liabilities, are recorded separately at fair value. Any expected losses related to consolidated FG VIEs are eliminated upon consolidation. Any expected losses on credit derivatives are not recorded as loss and LAE reserve on the consolidated balance sheet.

Under financial guaranty insurance accounting, the sum of unearned premium reserve (deferred premium revenue, less claim payments that have not yet been expensed or "contra-paid"), and loss and LAE reserve represents the Company's stand‑ready obligation. Unearned premium reserve is deferred premium revenue, less claim payments and recoveries received that have not yet been recognized in the statement of operations ("contra-paid"). At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. A loss and LAE reserve for an insurance contract is recorded only recorded whento the extent, and for the amount, that expected loss to be paid plusnet of contra-paid (“total losses”) exceed the deferred premium revenue, on a contract by contract basis.

As a result, the Company has expected loss to be paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes into income.
When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent athere is no loss and LAE reserve is not recorded on a contract, which occurs when total losses are less than deferred premium revenue, or to the extent loss and LAE reserve is not sufficient to cover a claim payment, then such claim payment is recorded as “contra-paid,” which reduces the unearned premium reserve. The contra-paid is recognized in the line item “loss and LAE” in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract. Loss and LAE in the consolidated statement of operations is presented net of cessions to reinsurers.


186


Salvage and Subrogation Recoverable

When the Company becomes entitled to the cash flow from the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to be paid on the contract. Such reduction in expected loss to be paid can result in one of the following:

a reduction in the corresponding loss and LAE reserve with a benefit to the income statement,

no entry recorded, if “total loss” is not in excess of deferred premium revenue, or

the recording of a salvage asset with a benefit to the income statement if the transaction is in a net recovery position at the reporting date.

The Company recognizes the expected recovery of claim payments made by an acquired subsidiary, including(including recoveries from settlement with R&W providers,providers) made by an acquired subsidiary prior to the date of acquisition, consistent with its policy for recognizing recoveries on all financial guaranty insurance contracts. To the extent that the estimated amount of recoveries increases or decreases due to changes in facts and circumstances including the examination of additional loan files and our experience in recovering loans put back to the originator, the Company would recognize a benefit or expense consistent with how changes in the expected recovery of all other claim payments are recorded. The ceded component of salvage and subrogation recoverable is recorded in the line item reinsurance balances payable.

Expected Loss to be Expensed

Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is important because it presents the Company's projection of incurred losses that will be recognized in future periods, based on current expected losses to be paid.excluding accretion of discount.


189187


Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and LAE reserves net of reinsurance and salvage and subrogation recoverable.recoverable, net of reinsurance. The Company used weighted average risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.0% to 3.25% as of December 31, 2015 and 0.0% to 2.95% as of December 31, 2014. Financial guaranty insurance expected LAE reserve was $10 million as of December 31, 2015 and $12 million as of December 31, 2014.

Loss and LAE Reserve (Recovery)
Net of Reinsurance and Salvage and Subrogation Recoverable
Net of Reinsurance
Insurance Contracts
 
As of December 31, 2012 As of December 31, 2011As of December 31, 2015 As of December 31, 2014
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 Net 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 Net
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 Net Reserve (Recoverable) 
Loss and
LAE
Reserve, net
 
Salvage and
Subrogation
Recoverable, net 
 Net Reserve (Recoverable)
(in millions)(in millions)
Public Finance:           
U.S. public finance$604
 $7
 $597
 $243
 $8
 $235
Non-U.S. public finance25
 
 25
 30
 
 30
Public Finance629
 7
 622
 273
 8
 265
Structured Finance:           
U.S. RMBS: 
  
  
  
  
  
 
  
  
  
  
  
First lien: 
  
  
  
  
  
 
  
  
  
  
  
Prime first lien$3
 $
 $3
 $1
 $
 $1
2
 
 2
 2
 
 2
Alt-A first lien93
 
 93
 70
 55
 15
46
 
 46
 87
 
 87
Option ARM52
 216
 (164) 142
 141
 1
13
 42
 (29) 28
 40
 (12)
Subprime82
 0
 82
 51
 0
 51
169
 21
 148
 166
 8
 158
Total first lien230
 216
 14
 264
 196
 68
Second lien: 
  
  
  
  
  
Closed-end second lien5
 72
 (67) 11
 136
 (125)
HELOC37
 196
 (159) 61
 177
 (116)
Total second lien42
 268
 (226) 72
 313
 (241)
First lien230
 63
 167
 283
 48
 235
Second lien32
 53
 (21) 7
 78
 (71)
Total U.S. RMBS272
 484
 (212) 336
 509
 (173)262
 116
 146
 290
 126
 164
Triple-X life insurance transactions82
 
 82
 140
 
 140
TruPS1
 
 1
 11
 
 11

 
 
 0
 
 0
Student loans51
 
 51
 64
 
 64
Other structured finance197
 4
 193
 223
 6
 217
48
 
 48
 34
 8
 26
U.S. public finance104
 134
 (30) 62
 70
 (8)
Non-U.S. public finance31
 
 31
 38
 
 38
Total financial guaranty605
 622
 (17) 670
 585
 85
Other2
 5
 (3) 2
 
 2
Structured Finance443
 116
 327
 528
 134
 394
Subtotal1,072
 123
 949
 801
 142
 659
Other recoverables
 3
 (3) 
 13
 (13)
Subtotal607
 627
 (20) 672
 585
 87
1,072
 126
 946
 801
 155
 646
Effect of consolidating FG VIEs(64) (217) 153
 (62) (258) 196
(74) 0
 (74) (80) (1) (79)
Total (1)$543
 $410
 $133
 $610
 $327
 $283
$998
 $126
 $872
 $721
 $154
 $567
__________________________________
(1)                                 See “Components of Net Reserves (Salvage)” table for loss and LAE reserve and salvage and subrogation recoverable components.
 

190188


The following table reconciles the loss and LAE reserve and salvage and subrogation components on the consolidated balance sheet to the financial guaranty net reserves (salvage) in the financial guaranty BIG transaction loss summary tables.
Components of Net Reserves (Salvage)
Insurance Contracts
 
 As of
December 31, 2012
 As of
December 31, 2011
 (in millions)
Loss and LAE reserve$601
 $679
Reinsurance recoverable on unpaid losses(58) (69)
Subtotal543
 610
Salvage and subrogation recoverable(456) (368)
Salvage and subrogation payable(1)46
 41
Subtotal(410) (327)
Other recoveries(2)(30) 
Subtotal(440) (327)
  Total103
 283
Less: other(3) 2
Financial guaranty net reserves (salvage)$106
 $281
 As of
December 31, 2015
 As of
December 31, 2014
 (in millions)
Loss and LAE reserve$1,067
 $799
Reinsurance recoverable on unpaid losses(69) (78)
Loss and LAE reserve, net998
 721
Salvage and subrogation recoverable(126) (151)
Salvage and subrogation payable(1)3
 10
Other recoverables(3) (13)
Salvage and subrogation recoverable, net, and other recoverable(126) (154)
Net reserves (salvage)$872
 $567
____________________
(1)          Recorded as a component of reinsurance balances payable.

(2)     R&W recoveries recorded in other assets on the consolidated balance sheet.
 
Balance Sheet Classification of
Net Expected Recoveries for Breaches of R&W
 As of December 31, 2012 As of December 31, 2011
 
For all
Financial
Guaranty
Insurance
Contracts
 
Effect of
Consolidating
FG VIEs
 
Reported on
Balance Sheet(1)
 
For all
Financial
Guaranty
Insurance
Contracts
 
Effect of
Consolidating
FG VIEs
 
Reported on
Balance Sheet(1)
 (in millions)
Salvage and subrogation recoverable$449
 $(169) $280
 $402
 $(197) $205
Loss and LAE reserve571
 (33) 538
 858
 (75) 783
____________________
(1)The remaining benefit for R&W is not recorded on the balance sheet until the expected loss, net of R&W, exceeds unearned premium reserve.

The table below provides a reconciliation of net expected loss to be paid to net expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid which represent the claim payments that have been made butand recoveries received that have not yet been expensed,recognized in the statement of operations, (2) salvage and subrogation recoverable for transactions withthat are in a net expected recovery position where the additionCompany has not yet received recoveries on claims previously paid (having the effect of claim payments that have been made (and therefore are not included inreducing net expected loss to be paid) that arepaid by the amount of the previously paid claim and the expected to be recoveredrecovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offset in theincome in future (and therefore have reduced expected loss to be paid)periods), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).
 

191


Reconciliation of Net Expected Loss to be Paid and
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
 
As of December 31, 2012As of December 31, 2015
(in millions)(in millions)
Net expected loss to be paid$355
$1,375
Less: net expected loss to be paid for FG VIEs(96)
Less: net expected loss to be paid for FG VIEs and other136
Total451
1,239
Contra-paid, net124
5
Salvage and subrogation recoverable, net of reinsurance405
123
Loss and LAE reserve, net of reinsurance(541)(982)
Other recoveries (1)30
2
Net expected loss to be expensed (2)$469
Net expected loss to be expensed (present value)(1)$387
____________________
(1)R&W recoveries recorded in other assets on the consolidated balance sheet.
(2)
Excludes $156$77 million and $223 million as of December 31, 2012 and 2011, respectively,2015 related to consolidated FG VIEs.


189


The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as refundings, accelerations, commutations, changes in expected lives and updates to loss estimates. A loss and LAE reserve is only recorded for the amount by which expected loss to be expensed exceeds deferred premium revenue determined on a contract-by-contract basis. This table excludes amounts related to consolidated FG VIEs, which are eliminated in consolidation.
 

Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
 
 As of December 31, 2012
 (in millions)
2013 (January 1 - March 31)$19
2013 (April 1 - June 30)19
2013 (July 1 - September 30)18
2013 (October 1–December 31)16
Subtotal 201372
201448
201542
201637
201736
2018 - 2022127
2023 - 202759
2028 - 203229
After 203219
Total present value basis(1)469
Discount251
Total future value$720
 As of December 31, 2015
 (in millions)
2016 (January 1 – March 31)$12
2016 (April 1 – June 30)10
2016 (July 1 – September 30)8
2016 (October 1 – December 31)8
Subtotal 201638
201731
201830
201929
202027
2021-2025102
2026-203070
2031-203541
After 203519
Net expected loss to be expensed387
Discount286
Total expected future loss and LAE$673
 
____________________
(1)
Consolidation of FG VIEs resulted in reductions of $156 million in net expected loss to be expensed.



192190


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

Loss and LAE
Reported on the
Consolidated Statements of Operations
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
 (in millions)
Public Finance:     
U.S. public finance$392
 $192
 $198
Non-U.S. public finance1
 (1) 16
Public finance393
 191
 214
Structured Finance:     
U.S. RMBS:          
First lien:          
Prime first lien$2
 $
 $1
(1) (1) 1
Alt-A first lien51
 53
 37
(23) (66) (2)
Option ARM137
 203
 272
(15) (37) (48)
Subprime38
 (39) 86
33
 8
 80
Total first lien228
 217
 396
Second lien:     
Closed end second lien31
 1
 5
HELOC49
 171
 (20)
Total second lien80
 172
 (15)
First lien(6) (96) 31
Second lien60
 (33) (35)
Total U.S. RMBS308
 389
 381
54
 (129) (4)
Triple-X life insurance transactions16
 85
 (44)
TruPS(10) 11
 (5)(1) (1) (1)
Student loans(9) 17
 10
Other structured finance3
 107
 69
(1) (7) 0
U.S. public finance51
 15
 28
Non-U.S. public finance234
 33
 5
Subtotal586
 555
 478
Other(17) 
 
Total insurance contracts before FG VIE consolidation569
 555
 478
Structured finance59
 (35) (39)
Loss and LAE on insurance contracts before FG VIE consolidation452
 156
 175
Effect of consolidating FG VIEs(46) (93) (66)(28) (30) (21)
Total loss and LAE$523
 $462
 $412
Loss and LAE$424
 $126
 $154



193


The following table provides information on non-derivative financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2012
 BIG Categories
 BIG 1 BIG 2 BIG 3 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 Total
 Gross Ceded Gross Ceded Gross Ceded   

(dollars in millions)
Number of risks(1)153
 (57) 76
 (22) 142
 (51) 371
 
 371
Remaining weighted-average contract period (in years)11.0
 9.3
 11.5
 15.3
 8.5
 5.8
 10.2
 
 10.2
Outstanding exposure: 
  
  
  
  
  
  
  
  
Principal$8,533
 $(1,484) $2,741
 $(135) $7,568
 $(540) $16,683
 $
 $16,683
Interest4,357
 (585) 1,813
 (131) 2,269
 (137) 7,586
 
 7,586
Total(2)$12,890
 $(2,069) $4,554
 $(266) $9,837
 $(677) $24,269
 $
 $24,269
Expected cash outflows (inflows)$1,582
 $(677) $863
 $(58) $3,052
 $(156) $4,606
 $(738) $3,868
Potential recoveries(3)(1,629) 653
 (509) 18
 (2,639) 142
 (3,964) 798
 (3,166)
Subtotal(47) (24) 354
 (40) 413
 (14) 642
 60
 702
Discount(1) 9
 (107) 14
 (202) 0
 (287) 36
 (251)
Present value of expected cash flows$(48) $(15) $247
 $(26) $211
 $(14) $355
 $96
 $451
Deferred premium revenue$111
 $(24) $227
 $(15) $757
 $(90) $966
 $(251) $715
Reserves (salvage)(4)$(103) $(4) $102
 $(18) $(35) $11
 $(47) $153
 $106
Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2011
 BIG Categories
 BIG 1 BIG 2 BIG 3 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 Total
 Gross Ceded Gross Ceded Gross Ceded 
 (dollars in millions)
Number of risks(1)171
 (68) 71
 (26) 126
 (48) 368
 
 368
Remaining weighted-average contract period (in years)10.0
 9.2
 13.7
 20.5
 9.2
 6.4
 10.4
 
 10.4
Outstanding exposure: 
  
  
  
  
  
  
  
  
Principal$9,675
 $(1,378) $3,732
 $(274) $7,831
 $(627) $18,959
 $
 $18,959
Interest4,309
 (486) 2,889
 (405) 2,486
 (170) 8,623
 
 8,623
Total(2)$13,984
 $(1,864) $6,621
 $(679) $10,317
 $(797) $27,582
 $
 $27,582
Expected cash outflows (inflows)$1,731
 $(659) $1,833
 $(121) $2,423
 $(133) $5,074
 $(998) $4,076
Potential recoveries(3)(1,798) 664
 (1,079) 39
 (2,041) 100
 (4,115) 1,060
 (3,055)
Subtotal(67) 5
 754
 (82) 382
 (33) 959
 62
 1,021
Discount16
 (5) (241) 32
 (125) 2
 (321) 45
 (276)
Present value of expected cash flows$(51) $0
 $513
 $(50) $257
 $(31) $638
 $107
 $745
Deferred premium revenue$261
 $(69) $281
 $(12) $992
 $(127) $1,326
 $(391) $935
Reserves (salvage)(4)$(97) $7
 $320
 $(42) $(110) $7
 $85
 $196
 $281

194191


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

Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2015
 BIG Categories
 BIG 1 BIG 2 BIG 3 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 Total
 Gross Ceded Gross Ceded Gross Ceded   
 (dollars in millions)
Number of risks(1)202
 (46) 85
 (13) 132
 (44) 419
 
 419
Remaining weighted-average contract period (in years)10.0
 8.7
 13.8
 9.5
 7.7
 5.9
 10.7
 
 10.7
Outstanding exposure: 
  
  
  
  
  
  
  
  
Principal$7,751
 $(732) $3,895
 $(240) $3,087
 $(187) $13,574
 $
 $13,574
Interest4,109
 (354) 2,805
 (110) 1,011
 (42) 7,419
 
 7,419
Total(2)$11,860
 $(1,086) $6,700
 $(350) $4,098
 $(229) $20,993
 $
 $20,993
Expected cash outflows (inflows)$386
 $(42) $1,158
 $(60) $1,464
 $(53) $2,853
 $(343) $2,510
Potential recoveries                 
Undiscounted R&W69
 (2) (49) 1
 (85) 5
 (61) 7
 (54)
Other(3)(441) 14
 (118) 7
 (587) 19
 (1,106) 175
 (931)
Total potential recoveries(372) 12
 (167) 8
 (672) 24
 (1,167) 182
 (985)
Subtotal14
 (30) 991
 (52) 792
 (29) 1,686
 (161) 1,525
Discount91
 3
 (286) 12
 (58) (89) (327) 41
 (286)
Present value of expected cash flows$105
 $(27) $705
 $(40) $734
 $(118) $1,359
 $(120) $1,239
Deferred premium revenue$371
 $(37) $150
 $(4) $386
 $(32) $834
 $(100) $734
Reserves (salvage)$2
 $(19) $591
 $(38) $404
 $(9) $931
 $(74) $857

192


Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2014
 BIG Categories
 BIG 1 BIG 2 BIG 3 
Total
BIG, Net
 
Effect of
Consolidating
FG VIEs
 Total
 Gross Ceded Gross Ceded Gross Ceded 
 (dollars in millions)
Number of risks(1)164
 (59) 75
 (15) 119
 (38) 358
 
 358
Remaining weighted-average contract period (in years)9.9
 7.4
 10.1
 8.9
 9.6
 6.9
 10.3
 
 10.3
Outstanding exposure: 
  
  
  
  
  
  
  
  
Principal$12,358
 $(2,163) $2,421
 $(286) $3,067
 $(175) $15,222
 $
 $15,222
Interest6,350
 (838) 1,274
 (121) 1,034
 (48) 7,651
 
 7,651
Total(2)$18,708
 $(3,001) $3,695
 $(407) $4,101
 $(223) $22,873
 $
 $22,873
Expected cash outflows (inflows)$1,762
 $(626) $763
 $(77) $1,716
 $(75) $3,463
 $(345) $3,118
Potential recoveries                 
Undiscounted R&W(39) 0
 (48) 2
 (171) 9
 (247) 8
 (239)
Other(3)(1,687) 608
 (206) 5
 (404) 30
 (1,654) 177
 (1,477)
Total potential recoveries(1,726) 608
 (254) 7
 (575) 39
 (1,901) 185
 (1,716)
Subtotal36
 (18) 509
 (70) 1,141
 (36) 1,562
 (160) 1,402
Discount3
 0
 (117) 11
 (353) 9
 (447) 34
 (413)
Present value of expected cash flows$39
 $(18) $392
 $(59) $788
 $(27) $1,115
 $(126) $989
Deferred premium revenue$378
 $(70) $119
 $(6) $312
 $(33) $700
 $(116) $584
Reserves (salvage)$(42) $(5) $278
 $(53) $482
 $(10) $650
 $(79) $571
____________________
(1)A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments. The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.

(2)Includes BIG amounts related to FG VIEs.

(3)Includes estimated future recoveries for breaches of R&W as well as excess spread and draws on HELOCs.
 
(4)See table “Components of net reserves (salvage).”

Ratings Impact on Financial Guaranty Business
 
A downgrade of one of the Company’sAGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company, if the insured obligors were unable to pay.
 
For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. Under the swaps, AGM insures periodic payments owed by the municipal obligors to the bank counterparties. UnderIn certain of the swaps,cases, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. The claim payments would be subject to recovery from the municipal obligor. As a result of the January 2013 Moody's downgrade of theAt AGM's current financial strength rating of AGM,ratings, if the conditions giving rise to the obligation of AGM to make a termination payment under the swap termination policies were all satisfied, then AGM could pay claims in an amount

193


not exceeding $109approximately $150 million in respect of such termination payments. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding $258approximately $377 million in respect of such termination payments.
     
As another example, with respect to variable rate demand obligations ("VRDOs") for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 20122015, AGM and AGC had insured approximately $12.3$5.7 billion net par of VRDOs, of which approximately $0.6$0.3 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. As of the date of this filing, the Company has not been notified that a bank has terminated a liquidity facility as a result of the January 2013 Moody's downgrade, nor has there been a failed remarketing of the AGM or AGC VRDOs, although in some cases, VRDOs insured by AGM or AGC have remarketed at higher interest rates. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, 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 the GIC holder to terminate the GIC and withdraw the funds in the event of a downgrade of AGM below A3 or A-, 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. If the entire aggregate accreted GIC balance of approximately $1.8 billion as of December 31, 2015 were terminated, the assets of the GIC issuers (which had an aggregate market value which exceed the liabilities by $0.8 billion) would be sufficient to fund the withdrawal of the GIC funds.

8.7.Fair Value Measurement
 
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there

195


is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
 
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third-party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.
 
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During 2012,2015, no changes were made to the Company’s valuation models that had or are expected to have, a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.
 
The Company’s methods for calculating fair value produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 

194


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

Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
 
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
 
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share, which removes the requirement to make certain disclosures and categorize within the fair value hierarchy, certain investments for which fair value is measured using the net asset value ("NAV") per share as a practical expedient. Effective December 31, 2015, the Company retrospectively adopted this accounting guidance that no longer requires investments measured at fair value using NAV per share practical expedient to be categorized within the fair value hierarchy. Therefore, the Company no longer includes its investments in partially-owned investment companies, investment funds, and limited partnerships within the fair value hierarchy and the Level 3 rollforward tables disclosed below. Prior period amounts within the fair value hierarchy disclosures contained in this section have been revised to conform to the current period presentation. This guidance requires a change in disclosure only and adoption of this guidance did not have an impact on our financial condition or results of operations.

Transfers between Levels 1, 2 and 3 are recognized at the end of the period when the transfer occurs. The Company reviews the classification between Levels 1, 2 and 3 quarterly to determine whether a transfer is necessary. During the periods presented, there were no transfers between Level 1, 2 and Level 2. The committed capital securities ("CCS") were transferred to Level 3 in the fair value hierarchy in the third quarter 2011 because the Company was no longer able to obtain the same level of pricing information as in past quarters. There were no transfers in or out Level 3 during 2012.3.
 
In May 2011, the FASB issued new guidance that develops common requirements for measuring fair value and for disclosing information about fair value measurements to improve the comparability of financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The new guidance clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. The amendments were adopted in the first quarter of 2012. The Company did not have an impact on its financial position and results of operations as a result of these amendments.


196


Measured and Carried at Fair Value
 
Fixed MaturityFixed-Maturity Securities and Short-termShort-Term Investments
 
The fair value of bonds in the investment portfolio is generally based on prices received from third party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value measurements using their pricing applications,models, which include available relevant market information, benchmark curves, benchmarking of like securities, and sector groupings, and matrix pricing.groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently.frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, the valuation of fixed maturityfixed-maturity investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. The vast majority of fixed maturities are classified as Level 2.
 
Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and are based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Prices Short term securities that were obtained as part of loss mitigation efforts and whose prices were determined based upon model processeson models, where at least one significant model assumption or input is unobservable, are considered to be Level 3 in the fair value hierarchy. At

195


Annually, the Company reviews each pricing service’s procedures, controls and models used in the valuations of the Company’s investment portfolio, as well as the competency of the pricing service’s key personnel. In addition, on a quarterly basis, the Company holds a meeting of the internal valuation committee (comprised of individuals within the Company with market, valuation, accounting, and/or finance experience) that reviews and approves prices and assumptions used by the pricing services.

For Level 1 and 2 securities, the Company, on a quarterly basis, reviews internally developed analytic packages that highlight, at a CUSIP level, price changes from the previous quarter to the current quarter. Where unexpected price movements are noted for a specific CUSIP, the Company formally challenges the price provided, and reviews all key inputs utilized in the third party’s pricing model, and compares such information to management’s own market information.

For Level 3 securities, the Company, on a quarterly basis:

reviews methodologies, any model updates and inputs and compares such information to management’s own market information and, where applicable, the internal models,

reviews internally developed analytic packages that highlight, at a CUSIP level, price changes from the previous quarter to the current quarter, and evaluates, documents, and resolves any significant pricing differences with the assistance of the third party pricing source, and

compares prices received from different third party pricing sources, and evaluates, documents the rationale for, and resolves any significant pricing differences.
As of December 31, 2012,2015, the Company used model processesmodels to price 37 fixed maturity38 fixed-maturity securities and short-term investments (which were purchased or obtained for loss mitigation or other risk management purposes), which was 5.2%10.4% or $560$1,144 million of the Company’s fixed maturityfixed-maturity securities and short-term investments at fair value. Most Level 3 securities were priced with the assistance of an independent third-party. The pricing is based on a discounted cash flow approach using the third-party’s proprietary pricing models. The models use inputs such as projected prepayment speeds;  severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); househome price depreciation/appreciation rates based on macroeconomic forecasts and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the bond including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could materially change the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.
 
Other Invested Assets
 
OtherAs of December 31, 2015 and December 31, 2014, other invested assets includes certaininclude investments that are carried and measured at fair value on a recurring basis of $53 million and non-recurring basis,$95 million, respectively, and include primarily an investment in the global property catastrophe risk market and an investment in a fund that invests primarily in senior loans and bonds. Fair values for the majority of these investments are based on their respective NAV per share or equivalent, as well as assets not carried ata practical expedient, and are excluded from the fair value. Within othervalue hierarchy table below. Other invested assets $112 million are carried at fair value on a recurring basis as of December 31, 2012. These assets primarily comprise certain short-term investments and fixed maturityalso include fixed-maturity securities classified as trading and are Level 2 in the fair value hierarchy. Also carried at fair value on a recurring basis are $1 million in notes classified as Level 3 in the fair value hierarchy. The fair value of these notes is determined by calculating the present value of the expected cash flows. The unobservable inputs used in the fair value measurement of the notes are discount rate, prepayment speed and default rate.
Within other invested assets, $7 million are carried at fair value on a non-recurring basis as of December 31, 2012. These assets are comprised of mortgage loans which are classified as Level 3 in the fair value hierarchy as there are significant unobservable inputs used in the valuation of such loans. The non-performing portion of these mortgage loans is valued using an average recovery rate. The performing loans are valued using management’s determination of future cash flows arising from these loans, discounted at the rate of return that would be required by a market participant. The unobservable inputs used in the fair value measurement of the mortgage loans are discount rate, recovery on delinquent loans, loss severity, prepayment speed and default rate.2.
 
Other Assets
 
Committed Capital Securities
 
The fair value of CCS,committed capital securities ("CCS"), which is recorded in “other assets” on the consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s CCS (the “AGC CCS Securities”CCS”)

197


and AGM’s Committed Preferred Trust Securities (the “AGM CPS Securities”CPS”) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (see Note 17,16, Long Term Debt and Credit Facilities). The AGC CCS and AGM CPS are carried at fair value with changes in fair value recorded in the consolidated statement of operations. The estimated current cost of the Company’s CCS dependsis based on several factors, including broker-dealer quotes for the outstanding securities, AGM and AGC CDS spreads, the U.S. dollar forward swap curve, London Interbank Offered Rate ("LIBOR") curve projections and the term the securities are estimated to remain outstanding.
 

In the third quarter 2011, these securities were transferred to Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including a broker-dealer quote and the Company’s estimate
196


 Supplemental Executive Retirement Plans

The Company classifies the fair value measurement of the assets of the Company's various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is valued based on the observable published daily values of the underlying mutual fund included in the aforementioned plans (Level 1) or based upon the net asset value of the funds if a published daily value is not available (Level 2). The net asset values are based on observable information.
 
Financial Guaranty Contracts Accounted for as Credit Derivatives
 
The Company’s credit derivatives consist primarily of insured CDS contracts, and also include interest rate swaps that fall under derivative accounting standards requiring fair value accounting through the statement of operations. The Company does not enter into CDS with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate;terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. Such terminations generally are not completed at fair value but instead for an amount that approximates the present value of future premiums not at fair value.or for a negotiated amount.
 
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells or purchases for credit protection purposes, except under specific circumstances such as mutual agreements with counterparties to terminate certain CDScounterparties. Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts.
 
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through modelinginternally developed, proprietary models that uses varioususe both observable and unobservable market data inputs to derive an estimate of the fair value of the Company’sCompany's contracts in its principal markets. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain termsmarkets (see "Assumptions and conditions similar to the credit derivative contracts issued by the Company. Management does not believe thereInputs"). There is anno established market where financial guaranty insured credit derivatives are actively traded. The terms of the protection under an insured financial guaranty credit derivative do not, except for certain rare circumstances, allow the Company to exit its contracts. Managementtraded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s deals to establish historical price points in the hypothetical market that are used in the fair value calculation. These contracts are classified as Level 3 in the fair value hierarchy since there is reliance on at least one unobservable input deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and of the Company’s current credit standing.

The Company’s models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely and relevant market information.
 
The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining net premiums the Company expects to receive or pay for the credit protection under the contract and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay at the Companyreporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. These cash flows include premiums to be received or paid under the terms of the contract. Credit spreads capture the effect of recovery rates and performance of underlying assets of

198


these contracts, among other factors. If credit spreads of the underlying obligations change, the fair value of the related credit derivative changes. Market liquidity also affects valuations of the underlying obligations. MarketConsistent with previous years, market conditions at December 31, 20122015 were such that market prices of the Company’s CDS contracts were not available. Since market prices were not available, the Company used proprietary valuation models that used both unobservable and observable market data inputs as described under “Assumptions and Inputs” below. These models are primarily developed internally based on market conventions for similar transactions.
 
Valuation models include management estimates and current market information. Management is also required to make assumptions of how the fair value of credit derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, when available, performance of underlying assets, life of the instrument, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models, to determine the fair value of these credit derivative products, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.


197


Assumptions and Inputs
 
Listed below areThe various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts.contracts are as follows:
 
·How gross spread is calculated.Gross spread.

·The allocation of gross spread among:
 
the profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction (“bank profit”);
the profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction (“bank profit”);
premiums paid to the Company for the Company’s credit protection provided (“net spread”); and

the cost of CDS protection purchased by the originator to hedge their counterparty credit risk exposure to the Company (“hedge cost”).
 
premiums paid to the Company for the Company’s credit protection provided (“net spread”); and
the cost of CDS protection purchased by the originator to hedge their counterparty credit risk exposure to the Company (“hedge cost”).
·      The weighted average life which is based on expected remaining contractual cash flows and Debt Service schedules, which are readily observable inputs since they are based on the CDS contractual terms.schedules.

·The rates used to discount future expected cash flows.
The expected future premium cash flows for the Company’s credit derivatives were discountedranged from 0.44% to 2.51% at rates ranging from 0.21% to 2.81% at December 31, 20122015 and 0.30%0.26% to 2.70% at December 31, 2011.2014.
 
Gross spread is used to ultimately determine the net spread a comparable financial guarantor would charge the Company to transfer its risk at the reporting date. The Company obtains gross spreads on risks assumedits outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided by trustees or obtained from market sources. If observable market credit spreads are not available or reliable for the underlying reference obligations, then market indices are used that most closely resemble the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. These indices are adjusted to reflect the non-standard terms of the Company’s CDS contracts. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders who are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process.

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

199


 
The following spread hierarchy is utilized in determining which source of gross spread to use, with the rule being to use CDS spreads where available. If not available, the CompanyCDS spreads are either interpolatesinterpolated or extrapolates CDS spreadsextrapolated based on similar transactions or market indices.
 
·Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).

·Deals priced or closed during a specific quarter within a specific asset class and specific rating. No transactions closed during the periods presented.

·Credit spreads interpolated based upon market indices.

·Credit spreads provided by the counterparty of the CDS.

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

198


Information by Credit Spread Type (1)
 
As of
December 31, 2012
 As of
December 31, 2011
As of
December 31, 2015
 As of
December 31, 2014
Based on actual collateral specific spreads6% 5%13% 9%
Based on market indices88% 90%73% 82%
Provided by the CDS counterparty6% 5%14% 9%
Total100% 100%100% 100%
 ____________________
(1)    Based on par.
 
Over time the data inputs can change as new sources become available or existing sources are discontinued or are no longer considered to be the most appropriate. It is the Company’s objective to move to higher levels on the hierarchy whenever possible, but it is sometimes necessary to move to lower priority inputs because of discontinued data sources or management’s assessment that the higher priority inputs are no longer considered to be representative of market spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.

The Company interpolates a curve based on the historical relationship between the premium the Company receives when a credit derivative is closed to the daily closing price of the market index related to the specific asset class and rating of the deal. This curve indicates expected credit spreads at each indicative level on the related market index. For transactions with unique terms or characteristics where no price quotes are available, management extrapolates credit spreads based on an alternativea similar transaction for which the Company has received a spread quote from one of the first three sources within the Company’s spread hierarchy. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transactions’ current spread. Counterparties determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. These quotes are validated by cross-referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness.
 
The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its deals. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC or AGM. For credit spreads on the Company’s name the Company obtains the quoted price of CDS contracts traded on AGC and AGM from market data sources published by third parties. The cost to acquire CDS protection referencing AGC or AGM affects the amount of spread on CDS deals that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC or AGM increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGC or AGM decreases, the amount of premium the Company retains on a deal generally increases. In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. Given the current market

200


conditions and the Company’s own credit spreads, approximately 71%20% and 21% , asbased on number of December 31, 2012 and approximately 78% asdeals, of December 31, 2011 of ourthe Company's CDS contracts are fair valued using this minimum premium.premium as of December 31, 2015 and December 31, 2014, respectively. The percentage of deals that price using the minimum premiums fluctuates due to changes in AGM's and AGC's credit spreads. In general when AGM's and AGC's credit spreads narrow, the cost to hedge AGM's and AGC's name declines and more transactions price above previously established floor levels. Meanwhile, when AGM's and AGC's credit spreads widen, the cost to hedge AGM's and AGC's name increases causing more transactions to price at previously established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC and AGM hedged by its counterparties, with independent third parties each reporting period. The current level of AGC’s and AGM’s own credit spread has resulted in the bank or deal originator hedging a significant portion of its exposure to AGC and AGM. This reduces the amount of contractual cash flows AGC and AGM can capture as premium for selling its protection.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to

199


the fact that the Company’s contracts’ contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor. The widening of a financial guarantor’s own credit spread increases the cost to buy credit protection on the guarantor, thereby reducing the amount of premium the guarantor can capture out of the gross spread on the deal. The extent of the hedge depends on the types of instruments insured and the current market conditions.
 
A fair value resulting in a credit derivative asset on protection sold is the result of contractual cash inflows on in-force deals in excess of what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would be able to realize a gain representing the difference between the higher contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts.contracts and taking the present value of such amounts discounted at the corresponding LIBOR over the weighted average remaining life of the contract.
 
Example
 
FollowingThe following is an example of how changes in gross spreads, the Company’s own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. The assumptions used in these examples are hypothetical amounts. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.
 
Scenario 1 Scenario 2Scenario 1 Scenario 2
bps % of Total bps % of Totalbps % of Total bps % of Total
Original gross spread/cash bond price (in bps)185
  
 500
  
185
  
 500
  
Bank profit (in bps)115
 62% 50
 10%115
 62% 50
 10%
Hedge cost (in bps)30
 16% 440
 88%30
 16% 440
 88%
The Company premium received per annum (in bps)40
 22% 10
 2%
The premium the Company receives per annum (in bps)40
 22% 10
 2%
 
In Scenario 1, the gross spread is 185 basis points. The bank or deal originator captures 115 basis points of the original gross spread and hedges 10% of its exposure to AGC, when the CDS spread on AGC was 300 basis points (300(300 basis points × 10% = 30 basis points). Under this scenario the Company receivedreceives premium of 40 basis points, or 22% of the gross spread.
 
In Scenario 2, the gross spread is 500 basis points. The bank or deal originator captures 50 basis points of the original gross spread and hedges 25% of its exposure to AGC, when the CDS spread on AGC was 1,760 basis points (1,760(1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread. Due to the increased cost to hedge AGC’s name, the amount of profit the bank would expect to receive, and the premium the Company would expect to receive decline significantly.
 
In this example, the contractual cash flows (the Company premium received per annum above) exceed the amount a market participant would require the Company to pay in today’s market to accept its obligations under the CDS contract, thus resulting in an asset. This credit derivative asset is equal to the difference in premium rates discounted at the corresponding LIBOR over the weighted average remaining life of the contract.

Strengths and Weaknesses of Model
 
The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
 
The primary strengths of the Company’s CDS modeling techniques are:

201


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

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

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

200


The primary weaknesses of the Company’s CDS modeling techniques are:
 
·There is no exit market or actual exit transactions. Therefore the Company’s exit market is a hypothetical one based on the Company’s entry market.

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

·At December 31, 20122015 and 2011,2014, the markets for the inputs to the model were highly illiquid, which impacts their reliability.
 
·Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.

As of December 31, 2012 theseThese contracts were classified as Level 3 in the fair value hierarchy because there is a reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company's estimate of the value of non-standard terms and conditions of its credit derivative contracts and of amount of protection purchased on AGC or AGM's name.

Fair Value Option on FG VIEs’ Assets and Liabilities
 
The Company elected the fair value option for all the FG VIEs’ assets and liabilities. See Note 10, Consolidation of9, Consolidated Variable Interest Entities.
 
The FG VIEs that are consolidated by the Company issued securities collateralized by HELOCs, first lien and second lien RMBS subprime automobile loans, and otheras well as loans and receivables. The lowest level input that is significant to the fair value measurement of these assets and liabilities in its entirety was a Level 3 input (i.e., unobservable), therefore management classified them as Level 3 in the fair value hierarchy. Prices wereare generally determined with the assistance of an independent third-party. The pricing isthird-party, based on a discounted cash flow approach and the third-party’s proprietary pricing models.approach. The models to price the FG VIEs’ liabilities used, where appropriate, inputs such as estimated prepayment speeds; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount ratesyields implied by market prices for similar securities; house price depreciation/appreciation rates based on macroeconomic forecasts and, for those liabilities insured by the Company, the benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest, for the FG VIE tranches insured by the Company, taking into account the timing of the potential default and the Company’s own credit rating. These inputs are utilized to project the future cash flows of the security and to evaluate the overall bond profile. The third-party also utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithm’salgorithms designed to aggregate market color, received by the third-party, on comparable bonds.
 
Changes in fair value of the FG VIEs’ assets and liabilities are included in fair value gains (losses) on FG VIEs within the consolidated statement of operations. Except for net credit impairment that triggers a claim on the financial guaranty contract (i.e. net expected loss to be paid as described in Note 6), the unrealized fair value gains (losses) related to the consolidated FG VIEs will reverse to zero over the terms of these financial instruments.

202


The fair value of the Company’s FG VIE assets is generally sensitive to changes related to estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could materially change the market value of the FG VIE’s assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIE asset is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically leads to a decrease in the fair value of FG VIE assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets. These factors also directly impact the fair value of the Company’s FG VIE liabilities.
 
The fair value of the Company’s FG VIE liabilities is alsogenerally sensitive to changes relating to estimated prepayment speeds; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts.various model inputs described above. In addition, the Company’s FG VIE liabilities with recourse are also sensitive to changes in the Company’s implied credit worthiness. Significant changes to any of these inputs could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE that is insured by the Company. In general, extending the timing of expected loss payments by the Company into the future typically leads to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIE liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically leads to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIE liabilities with recourse.
 

201


Not Carried at Fair Value
 
Financial Guaranty Insurance Contracts

TheFor financial guaranty insurance contracts that are acquired in a business combination, the Company measures each contract at fair value on the date of acquisition, and then follows insurance accounting guidance on a recurring basis thereafter.  On a quarterly basis, the Company also discloses the fair value of the Company’sits outstanding financial guaranty contracts accounted for as insurance wascontracts.  In both cases, fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. This amount wasIt is based on thea variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, as well as prices observed in the credit derivative market with an adjustment for illiquidity so that the terms would be similar to a financial guaranty insurance contract, and includedincludes adjustments to the carrying value of unearned premium reserve for stressed losses, ceding commissions and return on capital. The significant inputs were not readily observable. The Company accordingly classified this fair value measurement as Level 3.
 
Long-Term Debt
 
The Company’s long-term debt, excluding notes payable, is valued by broker-dealers using third party independent pricing sources and standard market conventions. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. The fair value measurement was classified as Level 2 in the fair value hierarchy.
 
The fair value of the notes payable that are recorded within long-term debt was determined by calculating the present value of the expected cash flows. The Company determines discounted future cash flows using market driven discount rates and a variety of assumptions, including a projection of the LIBOR curve projections,rate, prepayment and default assumptions, and AGM CDS spreads. The fair value measurement was classified as Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including the discount rates, prepayment and default assumptions, loss severity and recovery on delinquent loans.
 
Other Invested Assets
 
The other invested assets not carried at fair value consist primarily of investments in a guaranteed investment contract for future claims payments. The fair value of the other invested assets, which primarily consist of assets acquiredinvestments in refinancing transactions, was determined by calculating the presenta guaranteed investment contract approximated their carrying value of the expected cash flows. The Company uses a market approachdue to determine discounted future cash flows using market driven discount rates and a variety of assumptions, including LIBOR curve projections and prepayment and default assumptions. The fair value measurement was classified as Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including the discount rates, prepayment and default assumptions, loss severity and recovery on delinquent loans.their short term nature.
 

203


Other Assets and Other Liabilities
 
The Company’s other assets and other liabilities consist predominantly of accrued interest, receivables for securities sold and payables for securities purchased, the carrying values of which approximate fair value.


202


Financial Instruments Carried at Fair Value
 
Amounts recorded at fair value in the Company’s financial statements are includedpresented in the tables below.
 
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 20122015
 
  Fair Value Hierarchy  Fair Value Hierarchy
Fair Value Level 1 Level 2 Level 3Fair Value Level 1 Level 2 Level 3
(in millions)(in millions)
Assets: 
  
  
  
 
  
  
  
Investment portfolio, available-for-sale: 
  
  
  
 
  
  
  
Fixed maturity securities 
  
  
  
Fixed-maturity securities 
  
  
  
Obligations of state and political subdivisions$5,841
 $
 $5,833
 $8
U.S. government and agencies$794
 $
 $794
 $
400
 
 400
 
Obligations of state and political subdivisions5,631
 
 5,596
 35
Corporate securities1,010
 
 1,010
 
1,520
 
 1,449
 71
Mortgage-backed securities: 
       
      
RMBS1,266
 
 1,047
 219
1,245
 
 897
 348
CMBS520
 
 520
 
513
 
 513
 
Asset-backed securities531
 
 225
 306
825
 
 168
 657
Foreign government securities304
 
 304
 
283
 
 283
 
Total fixed maturity securities10,056


 9,496
 560
Total fixed-maturity securities10,627


 9,543
 1,084
Short-term investments817
 446
 371
 
396
 305
 31
 60
Other invested assets(1)120
 
 112
 8
Other invested assets (1)12
 
 5
 7
Credit derivative assets141
 
 
 141
81
 
 
 81
FG VIEs’ assets, at fair value2,688
 
 
 2,688
1,261
 
 
 1,261
Other assets(2)65
 24
 5
 36
106
 23
 21
 62
Total assets carried at fair value$13,887
 $470
 $9,984
 $3,433
$12,483
 $328
 $9,600
 $2,555
Liabilities: 
  
  
  
 
  
  
  
Credit derivative liabilities$1,934
 $
 $
 $1,934
$446
 $
 $
 $446
FG VIEs’ liabilities with recourse, at fair value2,090
 
 
 2,090
1,225
 
 
 1,225
FG VIEs’ liabilities without recourse, at fair value1,051
 
 
 1,051
124
 
 
 124
Total liabilities carried at fair value$5,075
 $
 $
 $5,075
$1,795
 $
 $
 $1,795
 

204203


Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 20112014
 
  Fair Value Hierarchy  Fair Value Hierarchy
Fair Value Level 1 Level 2 Level 3Fair Value Level 1 Level 2 Level 3
(in millions)(in millions)
Assets: 
  
  
  
 
  
  
  
Investment portfolio, available-for-sale: 
  
  
  
 
  
  
  
Fixed maturity securities 
  
  
  
Fixed-maturity securities 
  
  
  
Obligations of state and political subdivisions$5,795
 $
 $5,757
 $38
U.S. government and agencies$922
 $
 $922
 $
665
 
 665
 
Obligations of state and political subdivisions5,456
 
 5,446
 10
Corporate securities1,038
 
 1,038
 
1,368
 
 1,289
 79
Mortgage-backed securities: 
  
  
  
 
  
  
  
RMBS1,428
 
 1,294
 134
1,285
 
 860
 425
CMBS500
 
 500
 
659
 
 659
 
Asset-backed securities458
 
 223
 235
417
 
 189
 228
Foreign government securities340
 
 340
 
302
 
 302
 
Total fixed maturity securities10,142
 
 9,763
 379
Total fixed-maturity securities10,491
 
 9,721
 770
Short-term investments734
 210
 524
 
767
 359
 408
 
Other invested assets(1)43
 
 32
 11
24
 
 17
 7
Credit derivative assets153
 
 
 153
68
 
 
 68
FG VIEs’ assets, at fair value(2)2,819
 
 
 2,819
1,398
 
 
 1,398
Other assets(2)80
 26
 
 54
78
 26
 17
 35
Total assets carried at fair value$13,971
 $236
 $10,319
 $3,416
$12,826
 $385
 $10,163
 $2,278
Liabilities: 
  
  
  
 
  
  
  
Credit derivative liabilities$1,457
 $
 $
 $1,457
$963
 $
 $
 $963
FG VIEs’ liabilities with recourse, at fair value2,397
 
 
 2,397
1,277
 
 
 1,277
FG VIEs’ liabilities without recourse, at fair value1,061
 
 
 1,061
142
 
 
 142
Total liabilities carried at fair value$4,915
 $
 $
 $4,915
$2,382
 $
 $
 $2,382
 ____________________
(1)
Excluded from the table above are investments funds of $45 million and $76 million as of December 31, 2015 and December 31, 2014, respectively, measured using NAV per share practical expedient. Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. At December 31, 2012 and December 31, 2011, such investments were carried at their market value of $7 million and $9 million, respectively.

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

205204


Changes in Level 3 Fair Value Measurements
 
The table below presents a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during the years ended December 31, 20122015 and 2011.2014.

Fair Value Level 3 Rollforward
Recurring Basis
Year Ended December 31, 20122015
 
Fixed Maturity Securities   
 

 

 
 
 Fixed-Maturity Securities             
Obligations
of State and
Political
Subdivisions
 RMBS Asset-
Backed
Securities
 Other
Invested
Assets
 FG VIEs’
Assets at
Fair
Value
 Other
Assets
 Credit
Derivative
Asset
(Liability),
net(5)
 FG VIEs' Liabilities
with
Recourse,
at Fair
Value
 FG VIEs’ Liabilities
without
Recourse,
at Fair
Value
 Obligations
of State and
Political
Subdivisions
 Corporate Securities RMBS Asset-
Backed
Securities
 Short-Term Investments FG VIEs’
Assets at
Fair
Value
 Other
Assets (8)
 Credit
Derivative
Asset
(Liability),
net (5)
 FG VIEs' Liabilities with Recourse,
at Fair
Value
 FG VIEs' Liabilities without Recourse,
at Fair
Value
 
(in millions)(in millions)
Fair value as of December 31, 2011$10
 
$134
 
$235
 
$2
 $2,819
 
$54
 
$(1,304) $(2,397) $(1,061) 
Total pretax realized and unrealized gains/(losses) recorded in:(1)  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
Fair value as of December 31, 2014$38
 $79
 $425
 $228
 
$
 $1,398
 
$37
 
$(895) $(1,277) $(142) 
Radian Asset Acquisition
 
 4
 
 
 122
 2
 (215) (114) (4) 
Total pretax realized and unrealized gains/(losses) recorded in: (1)        
   
 
 
 
 
 
 
 
  
Net income (loss)1
(2)11
(2)29
(2)0
 403
(3)(18)(4)(585)(6)(264)(3)(195)(3)3
(2)3
(2)18
(2)1
(2)24
(2)59
(3)26
(4)728
(6)111
(3)(28)(3)
Other comprehensive income (loss)(10) 
16
 
30
 
(1) 
 

 

 

 

 
(2) (11) (12) (9) 
0
 
 
0
 

 

 

 
Purchases34
 
108
 
40
 

 
 

 

 

 

 

 
 48
 471
 
52
(7)
 

 

 

 

 
Settlements
 (50) (28) 
 (549) 
 
96
 
507
 
205
 
(31)(7)
 (134) (34) (16) (400) 
 
17
 
186
 
28
 
FG VIE consolidations
 

 

 

 15
 

 

 
(18) 
 

 
 (1) 
 

 104
 

 

 
(131) 
 
FG VIE elimination
 
 
 
 
 
 
 82
 
 
Fair value as of December 31, 2012$35
 
$219
 
$306
 
$1
 $2,688
 
$36
 
$(1,793) $(2,090) $(1,051) 
Change in unrealized gains/(losses) related to financial instruments held as of December 31, 2012$(10) $11
 $33
 $(1) $674
 $(18) $(480) $(608) $50
 
FG VIE deconsolidations
 
 
 
 
 (22) 
 
 
 22
 
Fair value as of December 31, 2015$8
 $71
 $348
 $657
 
$60
 $1,261
 
$65
 
$(365) $(1,225) $(124) 
Change in unrealized gains/(losses) related to financial instruments held as of December 31, 2015$0
 $(11) $(9) $(9) $0
 $110
 $26
 $281
 $4
 $(22) 




206205


Fair Value Level 3 Rollforward
Recurring Basis
Year Ended December 31, 20112014

Fixed Maturity Securities 

     
  
   Fixed-Maturity Securities           
Obligations of state and political subdivisions RMBS Asset Backed Securities Other
Invested
Assets
 FG VIEs’
Assets at
Fair
Value
 Other
Assets
 Credit
Derivative
Asset
(Liability),
net(5)
 FG VIEs’ Liabilities
with
Recourse,
at Fair
Value
 FG VIEs’ Liabilities
without
Recourse,
at Fair
Value
 Obligations
of State and
Political
Subdivisions
 Corporate Securities RMBS Asset-
Backed
Securities
 FG VIEs’
Assets at
Fair
Value
 Other
Assets (8)
 Credit
Derivative
Asset
(Liability),
net (5)
 FG VIEs' Liabilities with Recourse,
at Fair
Value
 FG VIEs' Liabilities without Recourse,
at Fair
Value
 
(in millions)(in millions) 
Fair value as of December 31, 2010$
 $100
 
$210
 
$2
 $3,657
 
$
 $(1,870) 
$(3,031) (1,337) 
Fair value as of December 31, 2013$36
 $136
 $290
 $268
 $2,565
 
$48
 $(1,693) 
$(1,790) $(1,081) 
Total pretax realized and unrealized gains/(losses) recorded in:(1)   
 
  
    
    
  
  
          
    
  
  
Net income (loss)
 (23)(2)(8)(2)
 (314)(3)34
(4)560
(6)80
(3)56
(3)4
(2)(46)(2)21
(2)17
(2)164
(3)(11)(4)823
(6)94
(3)(43)(3)
Other comprehensive income (loss)1
 (94) 
9
 
0
 
 

 
 

 

 
(1) (6) 24
 5
 
 

 
 

 

 
Purchases9
 254
 
47
 

 
 

 
 

 

 

 
 263
 
 
 

 
 

 

 
Sales
 (4) 
 
 
 
 
 
 
 
Settlements
 (35) (23) 0
 (806) 
 6
 
826
 
283
 
(1) (5) (59) (62) (408) 
 (25) 
374
 
22
 
FG VIE consolidations
 (64) 

 

 282
 

 
 
(272) (63) 

 
 (127) 
 206
 

 
 
(189) (42) 
Transfers into Level 3
 
 
 
 
 20
 
 
 
 
Fair value as of December 31, 2011$10
 $134
 
$235
 
$2
 $2,819
 
$54
 $(1,304) 
$(2,397) (1,061) 
Change in unrealized gains/(losses) related to financial instruments held as of December 31, 2011$
 $(93) $9
 $0
 $161
 $34
 $570
 $88
 (78) 
FG VIE deconsolidations
 
 13
 
 (1,129) 
 
 234
 1,002
 
Fair value as of December 31, 2014$38
 $79
 $425
 $228
 $1,398
 
$37
 $(895) 
$(1,277) $(142) 
Change in unrealized gains/(losses) related to financial instruments held as of December 31, 2014$(1) $(6) $21
 $4
 $141
 $(11) $254
 $(22) $3
 
 _______________________________________
(1)Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3.

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

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

(4)Recorded in fair value gains (losses) on committed capital securities.CCS, net realized investment gains (losses) and net investment income.

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

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

(7)Primarily non-cash transaction.

(8)Includes CCS and other invested assets.


 

207206


Level 3 Fair Value Disclosures
 
Quantitative Information About Level 3 Fair Value Inputs
At December 31, 20122015
 
Financial Instrument Description (in millions) Valuation
Technique
 Significant Unobservable Inputs Range
Assets:  
        
Fixed maturity securities:  
        
Obligations of state and political subdivisions $35
 Discounted Rate of inflation 1.0%-3.0%
  cash flow Cash flow receipts4.9%-85.8%
    Discount rates4.3% 9.0%
    Collateral recovery period1 month
-43 years
           
RMBS 219
 Discounted CPR 0.8%-7.5%
   cash flow CDR 4.4%-28.6%
    Severity 48.1%-102.8%
    Yield 3.5%-12.8%
Asset-backed securities:          
Whole business securitization 63
 Discounted cash flow Annual gross revenue projections (in millions) 
$54
-$96
   Value of primary financial guaranty policy 43.8%
   Liquidity discount 5.0%-20.0%
           
Investor owned utility 186
 Discounted cash flow Liquidation value (in millions) 
$212
-$242
   Years to liquidation 0 years
-3 years
   Discount factor 15.3%
           
XXX life insurance transactions 57
 Discounted Yield 12.5%
   cash flow   
           
Other invested assets 8
 Discounted cash flow Discount for lack of liquidity 10.0%-20.0%
   Recovery on delinquent loans 20.0%-60.0%
   Default rates 1.0%-12.0%
   Loss severity 40.0%-90.0%
   Prepayment speeds 6.0%-15.0%
           
FG VIEs’ assets, at fair value 2,688
 Discounted CPR 0.5%-10.9%
   cash flow CDR 3.0%-28.6%
    Loss severity 37.5%-103.8%
    Yield 4.5%-20.0%
Financial Instrument Description(1) Fair Value at December 31, 2015(in millions) Significant Unobservable Inputs Range Weighted Average as a Percentage of Current Par Outstanding
Assets (2):  
        
Fixed-maturity securities (3):  
        
Corporate securities $71
 Yield 21.8%  
         
           
RMBS 348
 CPR 0.3%-9.0% 2.6%
  CDR 2.7%-9.3% 7.0%
  Loss severity 60.0%-100.0% 74.0%
  Yield 4.7%-8.2% 6.0%
Asset-backed securities:          
Investor owned utility 69
 Cash flow receipts 100.0%  
  Collateral recovery period 2.9 years  
  Discount factor 7.0%  
           
Triple-X life insurance transactions 329
 Yield 3.5%-7.5% 5.0%
       
           
Collateralized debt obligations ("CDO") 259
 Yield 20.0%  
           
Short-term investments 60
 Yield 17.0%  
           
FG VIEs’ assets, at fair value 1,261
 CPR 0.3%-9.2% 3.9%
  CDR 1.2%-16.0% 4.7%
  Loss severity 40.0%-100.0% 85.9%
  Yield 1.9%-20.0% 6.4%
           
Other assets 62
 Quotes from third party pricing $44-$46 $45
  Term (years) 5 years  


 

207


Financial Instrument Description(1) Fair Value at
December 31, 2015
(in millions)
 Significant Unobservable Inputs Range Weighted Average as a Percentage of Current Par Outstanding
Liabilities:  
        
Credit derivative liabilities, net (365) Year 1 loss estimates 0.0%-41.0% 0.6%
  Hedge cost (in bps) 32.8
-282.0 66.3
  Bank profit (in bps) 3.8
-1,017.5 110.8
  Internal floor (in bps) 7.0
-100.0 16.8
  Internal credit rating AAA
-CCC AA+
           
FG VIEs’ liabilities, at fair value (1,349) CPR 0.3%-9.2% 3.9%
  CDR 1.2%-16.0% 4.7%
  Loss severity 40.0%-100.0% 85.9%
  Yield 1.9%-20.0% 5.6%
____________________
(1)Discounted cash flow is used as valuation technique for all financial instruments.

(2)Excludes several investments recorded in other invested assets with fair value of $7 million.

(3)Excludes obligations of state and political subdivisions investments with fair value of $8 million.


208


Quantitative Information About Level 3 Fair Value Inputs
At December 31, 2014

Financial Instrument Description Fair Value at
December 31, 2012
(in millions)
 Valuation
Technique
 Significant Unobservable Inputs Range
Other assets 36
 Discounted cash flow Quotes from third party pricing $38-$51
    Term (years) 3 years
           
Liabilities:  
        
Credit derivative liabilities, net (1,793) Discounted Year 1 loss estimates 0.0%-58.7%
   cash flow Hedge cost (in bps) 64.2
-678.4
     Bank profit (in bps) 1.0
-1,312.9
     Internal floor (in bps) 7.0
-60.0
     Internal credit rating AAA
-BIG
           
FG VIEs’ liabilities, at fair value (3,141) Discounted CPR 0.5%-10.9%
  cash flow CDR 3.0%-28.6%
    Loss severity 37.5%-103.8%
    Yield 4.5%-20.0%
Financial Instrument Description(1) Fair Value at December 31, 2014(in millions) Significant Unobservable Inputs Range Weighted Average as a Percentage of Current Par Outstanding
Assets:  
        
Fixed-maturity securities:  
        
Obligations of state and political subdivisions $38
 Rate of inflation 1.0%-3.0% 2.0%
  Cash flow receipts0.5%-74.3% 63.0%
  Discount rates4.6%-8.0% 7.3%
  Collateral recovery period1 month
-34 years 28 years
           
Corporate securities 79
 Yield 17.8%  
         
           
RMBS 425
 CPR 0.3%-8.1% 3.3%
  CDR 2.7%-10.6% 5.3%
  Loss severity 52.6%-100.0% 75.2%
  Yield 4.7%-11.7% 6.4%
Asset-backed securities:          
Investor owned utility 95
 Cash flow receipts 100.0%  
  Collateral recovery period 4 years  
  Discount factor 7.0%  
           
Triple-X life insurance transactions 133
 Yield 7.3%  
       
           
Other invested assets 7
 Discount for lack of liquidity 20.0%  
  Recovery on delinquent loans 40.0%  
  Default rates 0.0%-7.0% 5.8%
  Loss severity 40.0%-75.0% 68.3%
  Prepayment speeds 5.0%-15.0% 12.3%
           
FG VIEs’ assets, at fair value 1,398
 CPR 0.3%-11.0% 3.3%
  CDR 1.6%-11.8% 5.1%
  Loss severity 40.0%-100.0% 82.2%
  Yield 2.7%-17.7% 7.9%
           
Other assets 35
 Quotes from third party pricing $52-$61 $57
   Term (years) 5 years  


 


209


Financial Instrument Description(1) Fair Value at
December 31, 2014
(in millions)
 Significant Unobservable Inputs Range Weighted Average as a Percentage of Current Par Outstanding
Liabilities:  
        
Credit derivative liabilities, net (895) Year 1 loss estimates 0.0%-93.0% 2.1%
  Hedge cost (in bps) 20.0
-243.8 61.5
  Bank profit (in bps) 1.0
-994.4 127.0
  Internal floor (in bps) 7.0
-100.0 15.9
  Internal credit rating AAA
-CCC AA+
           
FG VIEs’ liabilities, at fair value (1,419) CPR 0.3%-11.0% 3.3%
  CDR 1.6%-11.8% 5.1%
  Loss severity 40.0%-100.0% 82.2%
  Yield 2.7%-17.7% 5.8%
____________________
(1)Discounted cash flow is used as valuation technique for all financial instruments.


The carrying amount and estimated fair value of the Company’s financial instruments are presented in the following table.
 
Fair Value of Financial Instruments
 
As of
December 31, 2012
 As of
December 31, 2011
As of
December 31, 2015
 As of
December 31, 2014
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
(in millions)(in millions)
Assets: 
  
  
  
 
  
  
  
Fixed maturity securities$10,056
 $10,056
 $10,142
 $10,142
Fixed-maturity securities$10,627
 $10,627
 $10,491
 $10,491
Short-term investments817
 817
 734
 734
396
 396
 767
 767
Other invested assets(1)177
 182
 170
 182
150
 152
 108
 110
Credit derivative assets141
 141
 153
 153
81
 81
 68
 68
FG VIEs’ assets, at fair value2,688
 2,688
 2,819
 2,819
1,261
 1,261
 1,398
 1,398
Other assets166
 166
 186
 186
206
 206
 184
 184
Liabilities: 
  
  
  
 
  
  
  
Financial guaranty insurance contracts(1)(2)3,918
 6,537
 4,657
 4,313
3,998
 8,712
 3,823
 6,205
Long-term debt836
 1,091
 1,038
 1,186
1,300
 1,512
 1,297
 1,603
Credit derivative liabilities1,934
 1,934
 1,457
 1,457
446
 446
 963
 963
FG VIEs’ liabilities with recourse, at fair value2,090
 2,090
 2,397
 2,397
1,225
 1,225
 1,277
 1,277
FG VIEs’ liabilities without recourse, at fair value1,051
 1,051
 1,061
 1,061
124
 124
 142
 142
Other liabilities47
 47
 16
 16
9
 9
 27
 27
____________________
(1)Includes investments not carried at fair value with a carrying value of $93 million. Excludes investments carried under the equity method.

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


209210


9.8.Financial Guaranty Contracts Accounted for as Credit Derivatives
 
The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with GAAP (primarily CDS).

Accounting Policy

Credit derivatives are recorded at fair value. Changes in fair value are recorded in “net change in fair value of credit derivatives” on the consolidated statement of operations. Realized gains (losses) and other settlements on credit derivatives include credit derivative premiums received and receivable for credit protection the Company has sold under its insured CDS contracts, premiums paid and payable for credit protection the Company has purchased, contractual claims paid and payable and received and receivable related to insured credit events under these contracts, ceding commissionscommission expense or income and realized gains or losses related to their early termination. Net unrealized gains and losses on credit derivatives represent the adjustments for changes in fair value in excess of realized gains and other settlements. Fair value of credit derivatives is reflected as either net assets or net liabilities determined on a contract by contract basis in the Company's consolidated balance sheets. See Note 8,7, Fair Value Measurement, for a discussion on the fair value methodology for credit derivatives.

Credit Derivative Net Par Outstanding by Sector
Credit derivative transactions are governed by ISDA documentation and have different characteristics from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. The Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

211


     The estimated remaining weighted average life of credit derivatives was 5.4 years at December 31, 2015 and 4.7 years at December 31, 2014. The components of the Company’s credit derivative net par outstanding are presented below.
Credit Derivatives

The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with GAAP (primarily CDS). Until the Company ceased selling credit protection through credit derivative contracts in the beginning of 2009, following the issuance of regulatory guidelines that limited the terms under which the credit protection could be sold, management considered these agreements to be a normal part of its financial guaranty business. The potential capital or margin requirements that may apply under the Dodd-Frank Wall Street ReformSubordination and Consumer Protection Act contributed to the decision of the Company not to sell new credit protection through CDS in the foreseeable future.
Credit derivative transactions are governed by ISDA documentation and have different characteristics from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, while the Company’s exposure under credit derivatives, like the Company’s exposure under financial guaranty insurance contracts, has been generally for as long as the reference obligation remains outstanding, unlike financial guaranty contracts, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events. A loss payment is made only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. A credit event may be a non-payment event such as a failure to pay, bankruptcy or restructuring, as negotiated by the parties to the credit derivative transactions. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination. The Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.
Credit Derivative Net Par Outstanding by Sector
The estimated remaining weighted average life of credit derivatives was 3.7 years at December 31, 2012 and 4.3 years at December 31, 2011. The components of the Company’s credit derivative net par outstanding are presented below.

210


Credit Derivatives Net Par OutstandingRatings
 
 As of December 31, 2012 As of December 31, 2011 As of December 31, 2015 As of December 31, 2014
Asset Type 
Net Par
Outstanding
 
Original
Subordination(1)
 
Current
Subordination(1)
 
Weighted
Average
Credit
Rating
 
Net Par
Outstanding
 
Original
Subordination(1)
 
Current
Subordination(1)
 
Weighted
Average
Credit
Rating
 
Net Par
Outstanding
 
Original
Subordination(1)
 
Current
Subordination(1)
 
Weighted
Average
Credit
Rating
 
Net Par
Outstanding
 
Original
Subordination(1)
 
Current
Subordination(1)
 
Weighted
Average
Credit
Rating
 (dollars in millions) (dollars in millions)
Pooled corporate obligations:  
  
  
    
  
  
    
  
  
    
  
  
  
Collateralized loan obligation/collateral bond obligations $29,142
 32.8% 33.3% AAA $34,567
 32.6% 32.0% AAA
Collateralized loan obligations/collateralized bond obligations $5,873
 30.9% 42.3%  AAA $11,688
 32.0% 36.9% AAA
Synthetic investment grade pooled corporate 9,658
 21.6
 19.7
 AAA 12,393
 20.4
 18.7
 AAA 7,108
 21.7
 19.4
  AAA 7,640
 22.6
 20.6
 AAA
Synthetic high yield pooled corporate 3,626
 35.0
 30.3
 AAA 5,049
 35.7
 30.3
 AA+
TruPS CDOs 4,099
 46.5
 32.7
 BB 4,518
 46.6
 31.9
 BB 3,429
 45.8
 42.6
  A- 3,119
 45.3
 35.8
 BBB-
Market value CDOs of corporate obligations 3,595
 30.1
 32.0
 AAA 4,546
 30.6
 28.9
 AAA 1,113
 17.0
 30.1
  AAA 1,174
 19.1
 20.7
 AAA
Total pooled corporate obligations 50,120
 31.7
 30.4
 AAA 61,073
 31.2
 28.9
 AAA 17,523
 29.2
 32.3
 AAA 23,621
 30.1
 30.7
 AAA
U.S. RMBS:  
  
  
    
  
  
    
  
  
    
  
  
  
Option ARM and Alt-A first lien 3,381
 20.2
 10.4
 B+ 4,060
 19.6
 13.6
 BB- 351
 10.5
 12.7
  AA- 1,378
 16.3
 10.7
 BB+
Subprime first lien 3,494
 29.8
 52.6
 A+ 4,012
 30.1
 53.9
 A+ 981
 27.7
 45.2
  AA 1,366
 31.1
 50.5
 A
Prime first lien 333
 10.9
 5.2
 B 398
 10.9
 8.4
 B 177
 10.9
 0.0
  BB 223
 10.9
 0.0
 B
Closed end second lien and HELOCs 49
 
 
 B- 62
 
 
 B
Closed-end second lien 17
 
 
  CCC 19
 
 
 CCC
Total U.S. RMBS 7,257
 24.2
 30.4
 BBB 8,532
 24.1
 32.2
 BBB 1,526
 24.1
 37.4
 A+ 2,986
 24.8
 33.9
 BBB
CMBS 4,094
 33.3
 41.8
 AAA 4,612
 32.6
 38.9
 AAA 530
 44.8
 52.6
  AAA 1,952
 35.3
 43.6
 AAA
Other 9,310
 

 

 A- 10,830
 
 
 A 6,015
 
 
 A 6,437
 
 
 A
Total $70,781
  
  
 AA+ $85,047
  
  
 AA+
Total(2) $25,594
  
  
 AA+ $34,996
  
  
 AA+
____________________
(1)Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

(2)The December 31, 2015 total amount includes $3.5 billion net par outstanding of credit derivatives acquired from Radian Asset.

Except for TruPS CDOs, the Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and industries. Most pooled corporate transactions are structured to limit exposure to any given obligor and industry. The majority of the Company’s pooled corporate exposure consists of collateralized loan obligation (“CLO”)CLO or synthetic pooled corporate obligations. Most of these CLOs have an average obligor size of less than 1% of the total transaction and typically restrict the maximum exposure to any one industry to approximately 10%. The Company’s exposure also benefits from embedded credit enhancement in the transactions which allows a transaction to sustain a certain level of losses in the underlying collateral, further insulating the Company from industry specific concentrations of credit risk on these deals.
 
The Company’s TruPS CDO asset pools are generally less diversified by obligors and industries than the typical CLO asset pool. Also, the underlying collateral in TruPS CDOs consists primarily of subordinated debt instruments such as TruPS issued by bank holding companies and similar instruments issued by insurance companies, REITsreal estate investment trusts and other real estate related issuers while CLOs typically contain primarily senior secured obligations. However, to mitigate these risks TruPS CDOs were typically structured with higher levels of embedded credit enhancement than typical CLOs.
 

212


The Company’s exposure to “Other” CDS contracts is also highly diversified. It includes $3.2$1.9 billion of exposure to threeone pooled infrastructure transactionstransaction comprising diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels at origination. The remaining $6.1$4.1 billion of exposure in “Other” CDS contracts comprises numerous deals across various asset classes, such as commercial receivables, international RMBS, infrastructure, regulated utilities and consumer receivables. Of the total net par outstanding in the "Other" sector, $983 million is rated BIG.

211



Distribution of Credit Derivative Net Par Outstanding by Internal Rating
 
 As of December 31, 2012 As of December 31, 2011 As of December 31, 2015 As of December 31, 2014
Ratings 
Net Par
Outstanding
 % of Total 
Net Par
Outstanding
 % of Total 
Net Par
Outstanding
 % of Total 
Net Par
Outstanding
 % of Total
 (dollars in millions) (dollars in millions)
Super Senior $18,908
 26.7% $21,802
 25.6%
AAA 32,010
 45.2
 40,240
 47.3
 $14,808
 57.9% $21,817
 62.3%
AA 3,083
 4.4
 4,342
 5.1
 4,821
 18.8
 5,398
 15.4
A 5,487
 7.8
 5,830
 6.9
 2,144
 8.4
 1,982
 5.7
BBB 4,584
 6.4
 5,030
 5.9
 2,212
 8.6
 2,774
 8.0
BIG 6,709
 9.5
 7,803
 9.2
Total credit derivative net par outstanding $70,781
 100.0% $85,047
 100.0%
BIG(1) 1,609
 6.3
 3,025
 8.6
Credit derivative net par outstanding $25,594
 100.0% $34,996
 100.0%

Credit Derivative
U.S. Residential Mortgage-Backed Securities
  As of December 31, 2012 Net Change in Unrealized Gain (Loss)
Vintage 
Net Par
Outstanding
 
Original
Subordination(1)
 
Current
Subordination(1)
 
Weighted
Average
Credit Rating
 Year Ended December 31, 2012
  (in millions)       (in millions)
2004 and Prior $124
 6.4% 19.2% BBB+ $3
2005 2,036
 31.2
 66.3
 AA+ 12
2006 1,572
 29.4
 34.5
 A- (63)
2007 3,525
 18.5
 8.2
 B (503)
Total $7,257
 24.2% 30.4% BBB $(551)
____________________
(1)Represents the sumThe December 31, 2015 BIG amount includes $125 million net par outstanding of subordinate tranches and overcollateralization and does not include any benefitcredit derivatives acquired from excess interest collections that may be used to absorb losses.Radian Asset.
 
Net Change in Fair Value of Credit Derivatives
 
Net Change in Fair Value of Credit Derivatives Gain (Loss)
 
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Net credit derivative premiums received and receivable$127
 $185
 $207
Net ceding commissions (paid and payable) received and receivable1
 3
 3
Realized gains on credit derivatives128
 188
 210
Terminations(1) (23) 
Net credit derivative losses (paid and payable) recovered and recoverable(235) (159) (57)
Total realized gains (losses) and other settlements on credit derivatives(108) 6
 153
Net unrealized gains (losses) on credit derivatives(477) 554
 (155)
Net change in fair value of credit derivatives$(585) $560
 $(2)
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Realized gains on credit derivatives$63
 $73
 $121
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements(81) (50) (163)
Realized gains (losses) and other settlements on credit derivatives(18) 23
 (42)
Net change in unrealized gains (losses) on credit derivatives:     
Pooled corporate obligations147
 (18) (32)
U.S. RMBS396
 814
 (69)
CMBS42
 2
 
Other161
 2
 208
Net change in unrealized gains (losses) on credit derivatives746
 800
 107
Net change in fair value of credit derivatives$728
 $823
 $65

In years ended December 31, 2012Net Par and 2011, CDS contracts totaling $2.3 billionRealized Gain and $11.5 billion in net par were terminated, resulting in accelerationsLosses
from Terminations of credit derivative revenue of $3 million in 2012 and $25 million in 2011.Credit Derivative Contracts

 Year Ended December 31,
 2015 2014 2013
 (in millions)
Net par of terminated credit derivative contracts$2,777
 $3,591
 $4,054
Realized gains on credit derivatives13
 1
 21
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements116
 26
 

212213



ChangesDuring 2015, unrealized fair value gains were generated primarily as a result of CDS terminations. The Company reached a settlement agreement with one CDS counterparty to terminate five Alt-A first lien CDS transactions resulting in unrealized fair value gains of $213 million and was the primary driver of the unrealized fair value gains in the U.S. RMBS sector. The Company also terminated a CMBS transaction, a Triple-X life insurance securitization transaction, and a distressed middle market CLO securitization during the period and recognized unrealized fair value gains of $41 million, $99 million and $99 million, respectively. These were the primary drivers of the unrealized fair value gains in the CMBS, Other, and pooled corporate CLO sectors, respectively, during the period. The remainder of the fair value gains for the period were a result of credit derivatives occurtighter implied net spreads across all sectors. The tighter implied net spreads were primarily because of changes in interest rates, credit spreads, notional amounts, credit ratingsa result of the referenced entities, expected terms, realizedincreased cost to buy protection in AGC’s and AGM’s name, particularly for the one year CDS spread. These transactions were pricing at or above their floor levels, therefore when the cost of purchasing CDS protection on AGC and AGM increased, the implied spreads that the Company would expect to receive on these transactions decreased. Finally, during 2015, there was a refinement in methodology to address an instance in a U.S. RMBS transaction where the Company now expects recoveries. This refinement resulted in approximately $49 million in fair value gains (losses) and other settlements, and the issuing company’s own credit rating, credit spreads and other market factors. Except for net estimated credit impairments (i.e., net expected loss to be paid as discussed in Note 6), the unrealized gains and losses on credit derivatives are expected to reduce to zero as the exposure approaches its maturity date. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.2015.
Net Change in Unrealized Gains (Losses) on Credit Derivatives By Sector
  Year Ended December 31,
Asset Type 2012 2011 2010
  (in millions)
       
Pooled corporate obligations:      
CLOs/Collateral bond obligations $6
 $10
 $2
Synthetic investment grade pooled corporate 18
 16
 (2)
Synthetic high yield pooled corporate 21
 (1) 11
TruPS CDOs 15
 14
 59
Market value CDOs of corporate obligations (1) 0
 0
Total pooled corporate obligations 59
 39
 70
U.S. RMBS:      
Option ARMs and Alt-A first lien (447) 300
 (281)
Subprime first lien (55) 24
 (10)
Prime first lien (54) 47
 (8)
Closed end second lien and HELOCs 5
 10
 (2)
Total U.S. RMBS (551) 381
 (301)
CMBS 2
 11
 10
Other 13
 123
 66
Total $(477) $554
 $(155)

During 2012, U.S. RMBS2014, unrealized fair value lossesgains were generated primarily in the U.S. RMBS prime first lien, Alt-A, Option ARM and subprime RMBS sectorssectors. This is primarily due to a significant unrealized fair value gain in the Option ARM and Alt-A first lien sector of approximately $543 million, as a result of the terminations of three large Alt-A first lien resecuritization transactions and one Option ARM first lien transaction during the period. In addition, there was an unrealized gain of approximately $346 million related to the change in index used to determine fair value during the fourth quarter of 2014. In the fourth quarter of 2014, new market indices were published on Option ARM and Alt-A first lien securitizations. As part of the Company’s normal review process the Company reviewed these indices and based upon the collateral make-up, collateral vintage, and collateral loss experience, determined it to be a better market indication for the Company’s Option ARM and Alt-A first lien securitizations. The unrealized fair value gains were partially offset by unrealized fair value losses generated by wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC'sAGC’s and AGM’s name, as the market cost of AGC's and AGM’s credit protection decreased.decreased during the period. These transactions were pricing at or above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC which management refersand AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.

During 2013, unrealized fair value gains were generated in the “other” sector primarily as a result of the termination of a film securitization transaction and a U.K. infrastructure transaction, as well as price improvement on a Triple-X life insurance transaction. These unrealized gains were partially offset by unrealized fair value losses in the prime first lien, Alt-A, Option ARM and subprime RMBS sectors due to wider implied net spreads. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGC’s name as the market cost of AGC’s credit protection decreased. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS spreadprotection on AGC decreased, the implied spreads that the Company would expect to receive on these transactions increased. The cost of AGM'sAGM’s credit protection also decreased slightly during 2012,2013, but did not lead to significant fair value losses, as the majority of AGM policies continue to price at floor levels. The company terminated a film securitization CDS for a payment of $120 million which was recorded in realized gains (losses) and other settlements on credit derivatives, with a corresponding release of the unrealized loss recorded in unrealized gains (losses) on credit derivatives of $127 million for a net change in fair value of credit derivatives of $7 million.
 
In 2011, U.S. RMBS unrealized fair value gains were generated primarily in the Option ARM, Alt-A, prime first lien and subprime sectors primarily as a result of the increased cost to buy protection in AGC's name as the market cost of AGC's credit protection increased. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGC, increased the implied, spreads that the Company would expect to receive on these transactions decreased. The unrealized fair value gain in "other" primarily resulted from tighter implied net spreads on a XXX life securitization transaction and a film securitization, which also resulted from the increased cost to buy protection in AGC's name, referenced above. The cost of AGM's credit protection also increased during the year, but did not lead to significant fair value gains, as the majority of AGM policies continue to price at floor levels.

In 2010, U.S. RMBS unrealized fair value losses were generated primarily in the Option ARM and Alt-A first lien sector due to internal ratings downgrades on several of these Option ARM and Alt-A first lien policies. The unrealized fair value gain within the TruPS CDO and Other asset classes resulted from tighter implied spreads. These transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGC and AGM increased, the implied spreads that the Company would expect to receive on these transactions decreased. During 2010, AGC's and AGM's spreads widened. However, gains due to the widening of the Company's own CDS spreads were offset by declines in fair value resulting from price changes and the internal downgrades of several U.S. RMBS policies referenced above.

213



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

Five-Year
214


CDS Spread on AGC and AGM
 As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2010
Quoted price of CDS contract (in basis points): 
  
  
AGC678
 1,140
 804
AGM536
 778
 650
ComponentsQuoted price of Credit Derivative Assets (Liabilities)CDS contract (in basis points)
 
 As of
December 31, 2012
 As of
December 31, 2011
 (in millions)
Credit derivative assets$141
 $153
Credit derivative liabilities(1,934) (1,457)
Net fair value of credit derivatives$(1,793) $(1,304)
 As of
December 31, 2015
 As of
December 31, 2014
 As of
December 31, 2013
Five-year CDS spread:     
AGC376
 323
 460
AGM366
 325
 525
      
One-year CDS spread     
AGC139
 80
 185
AGM131
 85
 220
 

Fair Value of Credit Derivatives Assets (Liabilities)
and Effect of AGC and AGM
Credit Spreads
As of
December 31, 2012
 As of
December 31, 2011
As of
December 31, 2015
 As of
December 31, 2014
(in millions)(in millions)
Fair value of credit derivatives before effect of AGC and AGM credit spreads$(4,809) $(5,596)$(1,448) $(2,029)
Plus: Effect of AGC and AGM credit spreads3,016
 4,292
1,083
 1,134
Net fair value of credit derivatives(1)$(1,793) $(1,304)$(365) $(895)
____________________
(1)December 31, 2015 amount includes $44 million of net fair value loss of credit derivatives acquired from Radian Asset.
 
The fair value of CDS contracts at December 31, 20122015, before considering the implications of AGC’s and AGM’s credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets and ratings downgrades. The asset classes that remain most affected are recent2005-2007 vintages of prime first lien, Alt-A, Option ARM, subprime RMBS deals as well as trust-preferredTruPS and pooled corporate securities. Comparing December 31, 20122015 with December 31, 20112014, there was a narrowing of spreads primarily related to Alt-A first lien and subprime RMBS transactions.the Company's pooled corporate obligations as well as several large CDS terminations which resulted in a mark to market benefit. This benefit was partially offset by the Company's acquisition of Radian Asset's CDS portfolio which increased the Company's mark to market liability. This narrowing of spreads combined with the acquisition of Radian Asset, and the CDS terminations resulted in a gain of approximately $787$581 million,, before taking into account AGC’s or AGM’s credit spreads.
 
Management believes that the trading level of AGC’s and AGM’s credit spreads areover the past several years has been due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against AGC and AGM as the result of its financial guaranty volume, as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security markets. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high yield CDO, Trust- PreferredTruPS CDO, and CLO markets as well as continuing market concerns over the most recent2005-2007 vintages of subprime RMBS.
 

214215


The following table presents the fair value and the present value of expected claim payments or recoveries (i.e., net expected loss to be paid as described in Note 6)5) for contracts accounted for as derivatives.
 
Net Fair Value and Expected Losses of
Credit Derivatives by Sector

  
Fair Value of Credit Derivative
Asset (Liability), net
 
Present Value of Expected Claim
(Payments) Recoveries(1)
Asset Type As of
December 31, 2012
 As of
December 31, 2011
 As of
December 31, 2012
 As of
December 31, 2011
  (in millions)
Pooled corporate obligations:  
  
  
  
CLOs/ Collateralized bond obligations $3
 $(1) $
 $
Synthetic investment grade pooled corporate (5) (24) 
 
Synthetic high-yield pooled corporate 3
 (16) 
 (5)
TruPS CDOs 3
 (12) (16) (40)
Market value CDOs of corporate obligations 2
 3
 
 
Total pooled corporate obligations 6
 (50) (16) (45)
U.S. RMBS:  
  
  
  
Option ARM and Alt-A first lien (1,076) (596) (121) (191)
Subprime first lien (52) (23) (70) (95)
Prime first lien (99) (44) 
 
Closed-end second lien and HELOCs (10) (15) 10
 7
Total U.S. RMBS (1,237) (678) (181) (279)
CMBS (2) (5) 
 
Other (560) (571) (85) (95)
Total $(1,793) $(1,304) $(282) $(419)
  
Fair Value of Credit Derivative
Asset (Liability), net
 
Expected Loss to be (Paid)
Recovered (1)
Asset Type As of
December 31, 2015
 As of
December 31, 2014
 As of
December 31, 2015
 As of
December 31, 2014
  (in millions)
Pooled corporate obligations $(82) $(49) $(5) $(23)
U.S. RMBS (98) (494) (38) (73)
CMBS 0
 0
 
 
Other (185) (352) 27
 38
Total $(365) $(895) $(16) $(58)
 ____________________
(1) 
Represents amount in excess of the present value of future installment fees to be received of $43 million as of December 31, 2012 and $47 million as of December 31, 2011. Includes R&W benefit of $237$0.4 million as of December 31, 20122015 and $215$86 million as of December 31, 2011.
2014.


Ratings Sensitivities of Credit Derivative Contracts
 
Within the Company’s insured CDS portfolio, the transaction documentation for approximately $2.0$3.8 billion in CDS gross par insured as of December 31, 2012 provides that a downgrade of AGC's financial strength rating below BBB- or Baa3 would constitute a termination event that would allow the relevant CDS counterparty to terminate the affected transactions. If the CDS counterparty elected to terminate the affected transactions,2015 requires AGC could be required to make a termination payment (or may be entitled to receive a termination payment from the CDS counterparty). Of the transactions described above, for one of the CDS counterparties, a downgrade of AGC's financial strength rating below A- or A3 (but not below BBB- or Baa3) would constitute a termination event for which the Company has the right to cure by posting collateral, assigning its rights and obligations in respect of the transactions to a third party, or seeking a third party guaranty of its obligations. No counterparty had a right to terminate any transactions as a result of the January 2013 Moody's downgrade of AGC. The Company does not believe that it can accurately estimate the termination payments AGC could be required to make if, as a result of any such downgrade, a CDS counterparty terminated the affected transactions. These payments could have a material adverse effect on the Company’s liquidity and financial condition.
The transaction documentation for approximately $13.2 billion in CDS gross par insured as of December 31, 2012 requires certain of the Company's insurance subsidiaries to post eligible collateral to secure its obligationobligations to make payments under such contracts based on (i) the mark-to-market valuation of the underlying exposure and (ii) in some cases, the financial strength ratings of such subsidiaries.contracts. Eligible collateral is generally cash or U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. As a result of the January 2013 Moody's downgrade of AGC's financial strength rating, AGC was required under such transaction documentation to post approximately $70 million of additional collateral, for a total amount posted by the Company's insurance subsidiaries of approximately $728 million (which amount reflects some of the eligible collateral being valued at a discount to the face amount).

215



For approximately $12.8$3.6 billion of such contracts, AGC has negotiated caps such that after giving effect to the January 2013 Moody's downgrade of AGC, the posting requirement cannot exceed a certain fixed amount, regardless of the mark-to-market valuation of the exposure or the financial strength ratings of AGC. For such contracts, AGC need not post on a cash basis an aggregate of more than $675$575 million,, which amount is already being posted by AGC and is part although the value of the approximately $728 millioncollateral posted bymay exceed such fixed amount depending on the Company's insurance subsidiaries.
advance rate agreed with the counterparty for the particular type of collateral posted.

For the remaining approximately $400$221 million of such contracts, AGC could be required from time to time to post additional collateral without such cap based on movements in the mark-to-market valuation of the underlying exposure. Of

As of December 31, 2015, the $728Company was posting approximately $305 million being posted by to secure its obligations under CDS, of which approximately $23 million related to the $221 million of notional described above, as to which the obligation to collateralize is not capped. In contrast, as of December 31, 2014, the Company was posting approximately $376 million to secure its obligations under CDS, of which approximately $25 million related to $242 million of notional as to which the obligation to collateralize was not capped. The obligation to post collateral could impair the Company's insurance subsidiaries, approximately $68 million relate to such $400 millionliquidity and results of notional.
operations.


216


Sensitivity to Changes in Credit Spread
 
The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both assume.
 
Effect of Changes in Credit Spread
As of December 31, 20122015

Credit Spreads(1) 
Estimated Net
Fair Value
(Pre-Tax)
 
Estimated Change
in Gain/(Loss)
(Pre-Tax)
 
Estimated Net
Fair Value
(Pre-Tax)
 
Estimated Change
in Gain/(Loss)
(Pre-Tax)
 (in millions) (in millions)
100% widening in spreads $(3,765) $(1,972) $(742) $(377)
50% widening in spreads (2,777) (984) (554) (189)
25% widening in spreads (2,283) (490) (460) (95)
10% widening in spreads (1,987) (194) (403) (38)
Base Scenario (1,793) 
 (365) 
10% narrowing in spreads (1,634) 159
 (330) 35
25% narrowing in spreads (1,402) 391
 (277) 88
50% narrowing in spreads (1,028) 765
 (190) 175
 ____________________
(1)Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread.
 
10.9.Consolidation ofConsolidated Variable Interest Entities
 
Background

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. AGC and AGM doAssured Guaranty does not sponsor any VIEs when underwriting third party financial guaranty insurance or credit derivative transactions, nor has either of them actedact as the servicer or collateral manager for any VIE obligations that it insures.insured by its companies. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate cash flowsinterest income that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

AGC and AGM areAssured Guaranty is not primarily liable for the debt obligations issued by the VIEs they insureit insures and would only be required to make payments on thesethose insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due.due and only for the amount of the shortfall. AGL’s and its Subsidiaries’ creditors do not have any rights with regard to the assets ofcollateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from VIE assetssuch underlying collateral may only be used to pay Debt Service on VIE

216


liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero at maturity of the VIE debt, except for net premiums received and receivable, andnet claims paid and expected to be paid by AGC or AGMAssured Guaranty under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 6,5, Expected Loss to be Paid.
 
Accounting Policy

For all years presented, theThe Company has evaluatedevaluates whether it wasis the primary beneficiary or control party of its VIEs. If the Company concludes that it is the primary beneficiary, it is required to consolidate the entire VIE in the Company's financial statements. The accounting rules governingstatements and eliminate the criteria for determiningeffects of the primary beneficiary or control partyfinancial guaranty insurance contracts issued by AGM and AGC on the consolidated FG VIEs debt obligations.

217



Effective January 1, 2010, GAAP requires the Company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a VIE. This analysis identifies theThe primary beneficiary of a VIE asis the enterprise that has both 1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance; and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. This guidance requires an ongoing reassessment of whether the Company is the primary beneficiary of a VIE.

As part of the terms of its financial guaranty contracts, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The Company obtains protective rights under its insurance contracts that give the Company additional controls over a VIE if there is either deterioration of deal performance or in the financial health of the deal servicer. The Company is deemed to be the control party for certain VIEs under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. If the Company’s protective rights that could make itthe Company the control party have not been triggered, then it doesthe VIE is not consolidate the VIE. As of December 31, 2012,consolidated. If the Company had issued financial guaranty contracts for approximately 1,200 VIEs that it did not consolidate.is deemed no longer to have those protective rights, the transaction is deconsolidated.

The FG VIEs' liabilities that are insured by the Company are considered to be with recourse, because the Company guarantees the payment of principal and interest regardless of the performance of the related FG VIEs' assets. FG VIEs' liabilities that are not insured by the Company are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs' assets.

The Company has limited contractual rights to obtain the financial records of its consolidated FG VIEs. The FG VIEs do not prepare separate GAAP financial statements; therefore, the Company compiles GAAP financial information for them based on trustee reports prepared by and received from third parties. Such trustee reports are not available to the Company until approximately 30 days after the end of any given period. The time required to perform adequate reconciliations and analyses of the information in these trustee reports results in a one quarter lag in reporting the FG VIEs' activities. The Company records the fair value of FG VIE assets and liabilities based on modeled prices. The Company updates the model assumptions each reporting period for the most recent available information, which incorporates the impact of material events that may have occurred since the quarter lag date. The net change in the fair value of consolidated FG VIE assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the consolidated statements of operations. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs” in the consolidated statement of operations.VIEs.” The Company has elected the fair value option for assets and liabilities classified as FG VIEs' assets and liabilities because the carrying amount transition method was not practical.

The cash flows generated by the FG VIE assets, including R&W recoveries, are classified as cash flows from investing activities. Paydowns of FG liabilities are supported by the cash flows generated by FG VIE assets, and for liabilities with recourse, possibly claim payments made by AGM or AGC under its financial guaranty insurance contracts. Paydowns of FG liabilities both with and without recourse are classified as cash flows used in financing activities by the Company. Interest income, interest expense and other expenses of the FG VIE assets and liabilities are classified as operating cash flows. Claim payments made by AGC and AGM under the financial guaranty contracts issued to the FG VIEs are eliminated upon consolidation and therefore such claim payments are treated as paydowns of FG VIE liabilities as a financing activity as opposed to an operating activity of AGM and AGC.


217218


Consolidated FG VIEs 

Number of FG VIEs Consolidated

 Year Ended December 31,
 2015 2014 2013
  
Beginning of the period, December 3132
 40
 33
Radian Asset Acquisition4
 
 
Consolidated(1)1
 2
 11
Deconsolidated(1)(1) (8) (3)
Matured(2) (2) (1)
End of the period, December 3134
 32
 40
____________________
(1)
Net loss on consolidation was $26 million in 2015. Net gain on deconsolidation was $120 million and net loss on consolidation was $26 million in 2014. Net loss on consolidation and deconsolidation was $7 million in 2013.
The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately $154 million at December 31, 2015 and $183 million at December 31, 2014. The aggregate unpaid principal of the FG VIEs’ assets was approximately $804 million greater than the aggregate fair value at December 31, 2015, excluding the effect of R&W settlements. The aggregate unpaid principal of the FG VIEs’ assets was approximately $941 million greater than the aggregate fair value at December 31, 2014, excluding the effect of R&W settlements and restricted cash. The change in the instrument-specific credit risk of the FG VIEs’ assets held as of December 31, 2015 that was recorded in the consolidated statements of operations for 2015 were gains of $90 million. The change in the instrument-specific credit risk of the FG VIEs’ assets held as of December 31, 2014 that was recorded in the consolidated statements of operations for 2014 were gains of $116 million. The change in the instrument-specific credit risk of the FG VIEs’ assets for 2013 were gains of $340 million. To calculate the instrument specific credit risk, the changes in the fair value of the FG VIE assets are allocated between those changes that are due to the instrument specific credit risk and those are due to other factors, including interest rates. The instrument specific credit risk amount is determined by using expected contractual cash flows versus current expected cash flows discounted at original contractual rate. The net present value is calculated by discounting the expected cash flows of the underlying security, excluding the Company’s financial guaranty insurance, at the relevant effective interest rate.
The unpaid principal for FG VIE liabilities with recourse was $1,436 million and $1,912 million as of December 31, 2015 and December 31, 2014, respectively. FG VIE liabilities with recourse will mature at various dates ranging from 2025 to 2046. The aggregate unpaid principal balance of the FG VIE liabilities with and without recourse was approximately $423 million greater than the aggregate fair value of the FG VIEs’ liabilities as of December 31, 2015. The aggregate unpaid principal balance was approximately $916 million greater than the aggregate fair value of the FG VIEs’ liabilities as of December 31, 2014.

219


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

Consolidated FG VIEs
Number of FG VIE's Consolidated
 Year Ended December 31,
 2012 2011 2010
  
Beginning of the year33
 29
 21
Consolidated(1)2
 8
 10
Deconsolidated(1)
 
 (2)
Matured(2) (4) 
End of the year33 33 29
____________________
(1)
Net loss on consolidation and deconsolidation was $6 million in 2012, $95 million in 2011 and $242 million in 2010 and recorded in “fair value gains (losses) on FG VIEs” in the consolidated statement of operations.

The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately $893 million. The aggregate unpaid principal of the FG VIEs’ assets was approximately $2,631 million greater than the aggregate fair value at December 31, 2012. The change in the instrument-specific credit risk of the FG VIEs’ assets for 2012 were gains of $413 million. The change in the instrument-specific credit risk of the FG VIEs’ assets for 2011 were losses of $600 million.
The aggregate unpaid principal balance was approximately $2,150 million greater than the aggregate fair value of the FG VIEs’ liabilities as of December 31, 2012.
The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the consolidated financial statements, segregated by the types of assets that collateralize their respective debt obligations.

Consolidated FG VIEs
By Type of Collateral 

 As of December 31, 2012 As of December 31, 2011
 
Number of
FG VIEs
 Assets Liabilities 
Number of
FG VIEs
 Assets Liabilities
 (dollars in millions)
With recourse: 
  
  
  
  
  
HELOCs8
 $525
 $786
 8
 $573
 $908
First liens: 
  
  
  
  
  
Alt-A first lien5
 200
 162
 5
 176
 169
Option ARM2
 42
 170
 2
 50
 244
Subprime7
 399
 493
 5
 387
 473
Closed-end second lien8
 85
 129
 8
 126
 157
Automobile loans2
 39
 39
 4
 156
 156
Life insurance1
 311
 311
 1
 290
 290
Total with recourse33
 1,601
 2,090
 33
 1,758
 2,397
Without recourse
 1,087
 1,051
 
 1,061
 1,061
Total33
 $2,688
 $3,141
 33
 $2,819
 $3,458
 As of December 31, 2015 (1) As of December 31, 2014
 Assets Liabilities Assets Liabilities
 (in millions)
With recourse: 
  
  
  
U.S. RMBS first lien$506
 $521
 $632
 $581
U.S. RMBS second lien194
 273
 238
 327
Other431
 431
 369
 369
Total with recourse1,131
 1,225
 1,239
 1,277
Without recourse130
 124
 163
 142
Total$1,261
 $1,349
 $1,402
 $1,419
____________________


218


Gross Unpaid Principal for FG VIEs’ Liabilities
with Recourse

 As of
December 31, 2012
 As of
December 31, 2011
 (in millions)
Gross unpaid principal for FG VIEs’ liabilities with recourse$2,808
 $3,796
(1)The December 31, 2015 amounts include $111 million of FG VIE assets and $107 million of FG VIE liabilities acquired from Radian Asset.
 
Contractual Maturity Schedule of FG VIE Liabilities with Recourse
Contractual Maturity As of
December 31, 2012
  (in millions)
2013 $
2014 39
2015 
2016 
2017 
Thereafter 2,769
Total $2,808

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

Effect of Consolidating FG VIEs on Net Income,
Cash Flows From Operating Activities and Shareholders’ Equity
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Net earned premiums$(153) $(75) $(48)$(21) $(32) $(60)
Net investment income(13) (8) 
(32) (11) (13)
Net realized investment gains (losses)4
 12
 
10
 (5) 2
Fair value gains (losses) on FG VIEs210
 (132) (274)38
 255
 346
Loss and LAE46
 93
 66
28
 30
 21
Total pretax effect on net income94
 (110) (256)
Bargain purchase gain2




Other income (loss)0
 (2) 
Effect on net income before tax25
 235
 296
Less: tax provision (benefit)32
 (38) (90)8
 82
 103
Total effect on net income (loss)$62
 $(72) $(166)
Effect on net income (loss)$17
 $153
 $193
     
Effect on cash flows from operating activities$43
 $68
 $(136)
 

 As of
December 31, 2012
 As of
December 31, 2011
 (in millions)
Total (decrease) increase on shareholders’ equity$(348) $(405)
 As of
December 31, 2015
 As of
December 31, 2014
 (in millions)
Effect on shareholders’ equity (decrease) increase$(23) $(44)


Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and liabilities. For year ended December 31, 2012, the Company recorded a pre-tax fair value gain on FG VIEs of $210 million.

219220


The majorityIn 2015, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of this gain, approximately $166$38 million, is a result of a R&W settlement with Deutsche Bank that closed during the second quarter 2012. While prices continued to appreciate during the period which was primarily driven by price appreciation on the Company's FG VIE assets and liabilities, gainsduring the year that resulted from improvements in the second half of the year were primarily driven byunderlying collateral, as well as large principal paydowns made on the Company's FG VIEs.

Year ended December 31, 2011In 2014, the Company recorded a pre-tax net fair value lossesgain on consolidated FG VIEs of $132$255 million. The primary driver of this gain, $120 million, was a result of the deconsolidation of seven VIEs. There was an additional gain of $37 million resulting from the Company exercising its option to accelerate two second lien RMBS VIEs. These two VIEs were treated as maturities during the period. The remainder of the gain for the period was driven by the unrealized lossprice appreciation on consolidation of eight new VIEs,the Company's FG VIE assets during the year resulting from improvements in the underlying collateral, as well as two existing transactions in whichlarge principal paydowns made on the Company's FG VIEs.

In 2013, the Company recorded a pre-tax net fair value gain of the underlying collateral depreciated, while the price of the wrapped senior bonds was largely unchanged from the prior year. Year ended December 31, 2010 pre-tax fair value losses on consolidated FG VIEs of $274 million were$346 million. The gain was primarily driven by R&W benefits received on several VIE assets as a result of settlements with various counterparties throughout the unrealized lossyear. These R&W settlements resulted in a gain of approximately $265 million. The remainder of the gain was driven by price appreciation on consolidation of ten newthe Company's FG VIE assets during the year resulting from improvements in the underlying collateral, as well as large principal paydowns made on the Company's FG VIEs.

Other Consolidated VIEs

In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiation settlement agreement that results in the termination of the original insured financial guaranty insurance or credit derivative contract the Company classifies the assets and liabilities of those VIEs in the line items that most accurately reflect the nature of the items, as opposed to within the FG VIE assets and FG VIE liabilities.

Non-Consolidated VIEs
 
As of December 31, 2015 and December 31, 2014, the Company had financial guaranty contracts outstanding for approximately 750 and 930 VIEs, respectively, that it did not consolidate. To date, the Company’s analyses have indicated that it does not have a controlling financial interest in any other VIEs and, as a result, they are not consolidated in the consolidated financial statements. The Company’s exposure provided through its financial guaranties with respect to debt obligations of special purpose entities is included within net par outstanding in Note 3,4, Outstanding Exposure.
 
11.10.Investments and Cash
 
Accounting Policy

The vast majority of the Company's investment portfolio is fixed maturitycomposed of fixed-maturity and short-term investments, classified as available-for-sale at the time of purchase (approximately 98%98.5% based on fair value at as of December 31, 2012)2015), and therefore carried at fair value. Changes in fair value for other than temporarily impairedother-than-temporarily-impaired ("OTTI") securities are bifurcated between credit losses and non-credit changes in fair value. Credit lossesThe credit loss on other-than-temporary impairmentOTTI securities areis recorded in the statement of operations and the non-credit component of the change in fair value of securities, whether OTTI securities areor not, is recorded in OCI. For securities where the Company has the intent to sell or it is more-likely-than-not that it will be required to sell the security before recovery, declines in fair value are recorded in the consolidated statements of operations. OTTI credit

Credit losses adjustreduce the amortized cost of impaired securities and that amortized cost basis is not increased for any subsequent recoveries in fair value. However, thesecurities. The amortized cost basis is adjusted for accretion and amortization using(using the effective interest methodmethod) with a corresponding entry recorded in net investment income.

Realized gains and losses on sales of investments are determined using the specific identification method. Realized loss includes amounts recorded for other than temporaryother-than-temporary impairments on debt securities and the declines in fair value of securities for which the Company has the intent to sell the security or inability to hold until recovery of amortized cost.

For mortgage‑backed securities, and any other holdings for which there is prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any necessary adjustments due to changes in effective yields and maturities are recognized in currentnet investment income.

The Company purchasedLoss mitigation securities that it has insured, and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses ("loss mitigation bonds"). These securities wereare generally purchased at a discount and are accounted for excludingbased on their underlying investment type and exclude the effects of the Company’s insuranceinsurance. Interest income on loss mitigation securities is recognized on a level yield basis over the securities.life of the security


221

Table of Contents

Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in money market funds.

Other invested assets includes assets acquired in refinancing transactionsprimarily include:

guaranteed investment contracts, which are primarily comprised of franchise loans thatcarried at amortized cost plus accrued interest,

preferred stocks, which are evaluated for impairment by assessing the probability of collecting expected cash flows. Any impairment iscarried at fair value with changes in unrealized gains and losses recorded in the consolidated statement of operations and any subsequent increases in expected cash flow are recorded as an increase in yield over the remaining life of the loans. Other invested assets also include trading securities and OCI,

a 50% equity investment acquired in a restructuring of an insured CDS and other investments. Trading securities are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in net income. The Company's 50% equity investment is carried at its proportionate share of the underlying entity's U.S. GAAP equity value.

Cash consists of cash on hand and demand deposits. As a result of the lag in reporting FG VIEs, cash and short termshort-term investments reported on the consolidated balance sheet doesdo not reflect cash outflow to the holders of the debt issued by the FG VIEs for claim payments made by the Company's insurance subsidiaries to the consolidated FG VIEs until the subsequent reporting period.

220



Assessment for Other-Than Temporary Impairments

Once an OTTI has occurred, theThe amount of the OTTIother-than-temporary-impairment recognized in earnings depends on whether (1) an entity intends to sell the security or more likely than not(2) it is more-likely-than-not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date.basis.

If an entity does not intend to sell the security and it is not more likely than notmore-likely-than-not that the entityCompany will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTIother-than-temporary-impairment is separated into (1) the amount representing the credit loss and (2) the amount related to all other factors.

The Company has a formal review process to determine OTTIother-than-temporary-impairment for securities in its investment portfolio where there is no intent to sell and it is not more likely than notmore-likely-than-not that it will be required to sell the security before recovery. Factors considered when assessing impairment include:

a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;

a decline in the market value of a security for a continuous period of 12 months;

recent credit downgrades of the applicable security or the issuer by rating agencies;

the financial condition of the applicable issuer;

whether loss of investment principal is anticipated;

the impact of foreign exchange rates; and

whether scheduled interest payments are past due; anddue.

whether we have the intent to sell the security prior to its recovery in fair value.

For these securities, the Company's formal review process includes analyses ofThe Company assesses the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the security is in an unrealized loss position and its net present value is less than the amortized cost of the investment, an OTTI lossother-than-temporary impairment is recorded. . The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment.at the time of purchase. The Company's estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis of an investment, as mentioned above, and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of the security.data. For mortgage‑backed and asset backed securities, cash flow estimates also include prepayment assumptions and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The determination of the assumptions used in these projections requires the use of significant management judgment.


222


The Company's assessment of a decline in value included management's current assessment of the factors noted above. The Company also seeks advice from its outside investment managers. If that assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

Net Investment PortfolioIncome and Realized Gains (Losses)

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Net investment income increased primarily due to higher income earned on loss mitigation bonds. Income earned on the general portfolio excluding loss mitigation bonds declined slightly due to lower reinvestment rates. Accrued investment income, on fixed maturity, short-term investments and assets acquiredwhich is recorded in refinancing transactionsOther Assets, was $97$99 million and $10198 million as of December 31, 20122015 and December 31, 20112014, respectively.
 

221


Net Investment Income
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Income from fixed maturity securities$407
 $399
 $360
Income from short-term investments1
 1
 3
Income from assets acquired in refinancing transactions5
 5
 7
Income from fixed-maturity securities managed by third parties$335

$324

$322
Income from internally managed securities:     
Fixed maturities61

74

74
Other37
 14
 5
Gross investment income413
 405
 370
433

412

401
Investment expenses(9) (9) (9)(10)
(9)
(8)
Net investment income$404
 $396
 $361
$423
 $403
 $393

 
Net Realized Investment Gains (Losses)
 
 Year Ended December 31,
 2012 2011 2010
 (in millions)
Realized gains on investment portfolio$42
 $36
 $31
Realized losses on investment portfolio(24) (9) (6)
OTTI     
Intent to sell0
 (5) (4)
Credit component of OTTI securities(17) (40) (23)
OTTI(17) (45) (27)
Net realized investment gains (losses)$1
 $(18) $(2)
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Gross realized gains on available-for-sale securities$44
 $14
 $73
Gross realized gains on other assets in investment portfolio2
 8
 40
Gross realized losses on available-for-sale securities(15) (5) (12)
Gross realized losses on other assets in investment portfolio(10) (2) (7)
Other-than-temporary impairment(47) (75) (42)
Net realized investment gains (losses)$(26) $(60) $52
 

223


The following table presents the roll-forward of the credit losses of fixed maturityfixed-maturity securities for which the Company has recognized OTTIan other-than-temporary-impairment and where the portion of the fair value adjustment related to other factors was recognized in OCI.
 
Roll Forward of Credit Losses
in the Investment Portfolio

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Balance, beginning of period$47
 $27
 $20
$124
 $80
 $64
Additions for credit losses on securities for which an OTTI was not previously recognized14
 27
 7
Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized3
 64
 18
Eliminations of securities issued by FG VIEs
 (14) 

 (15) 
Reductions for securities sold during the period
 (6) 
Additions for credit losses on securities for which an OTTI was previously recognized3
 13
 0
Reductions for securities sold and other settlement during the period(28) (12) (21)
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized9
 7
 19
Balance, end of period$64
 $47
 $27
$108
 $124
 $80
 
Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of December 31, 2015

Investment Category 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI(2)
Gain
(Loss) on
Securities
with
Other-Than-Temporary Impairment
 
Weighted
Average
Credit
Rating
 (3)
  (dollars in millions)
Fixed-maturity securities:  
  
  
  
  
  
  
Obligations of state and political subdivisions 52% $5,528
 $323
 $(10) $5,841
 $5
 AA
U.S. government and agencies 3
 377
 23
 0
 400
 
 AA+
Corporate securities 14
 1,505
 38
 (23) 1,520
 (13) A-
Mortgage-backed securities(4): 
      
    
 
RMBS 11
 1,238
 29
 (22) 1,245
 (7) A
CMBS 5
 506
 9
 (2) 513
 
 AAA
Asset-backed securities 8
 831
 4
 (10) 825
 (6) B+
Foreign government securities 3
 290
 4
 (11) 283
 
 AA+
Total fixed-maturity securities 96
 10,275
 430
 (78) 10,627
 (21) A+
Short-term investments 4
 396
 0
 0
 396
 
 AA-
Total investment portfolio 100% $10,671
 $430
 $(78) $11,023
 $(21) A+


222224


Fixed MaturityFixed-Maturity Securities and Short TermShort-Term Investments
by Security Type 
As of December 31, 2012
2014

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

Fixed Maturity Securities and Short Term Investments
by Security Type
As of December 31, 2011
Investment Category 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI
Gain
(Loss) on
Securities
with
OTTI
 
Weighted
Average
Credit
Quality
 (3)
 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI
Gain
(Loss) on
Securities
with
Other-Than-Temporary Impairment
 
Weighted
Average
Credit
Rating
 (3)
 (dollars in millions) (dollars in millions)
Fixed maturity securities:  
  
  
  
  
  
  
Fixed-maturity securities:  
  
  
  
  
  
  
Obligations of state and political subdivisions 50% $5,416
 $380
 $(1) $5,795
 $7
 AA
U.S. government and agencies 8% $850
 $72
 $0
 $922
 $
 AA+ 6
 635
 31
 (1) 665
 
 AA+
Obligations of state and political subdivisions 49
 5,097
 359
 (1) 5,455
 6
 AA
Corporate securities 10
 989
 52
 (2) 1,039
 0
 A+ 12
 1,320
 53
 (5) 1,368
 (2) A
Mortgage-backed securities(4):  
  
  
  
  
  
    
  
  
  
  
  
  
RMBS 14
 1,454
 64
 (90) 1,428
 (35) AA 12
 1,255
 51
 (21) 1,285
 0
 A-
CMBS 5
 476
 24
 0
 500
 2
 AAA 6
 639
 20
 0
 659
 
 AAA
Asset-backed securities 4
 439
 38
 (19) 458
 29
 BBB- 4
 411
 9
 (3) 417
 3
 BBB-
Foreign government securities 3
 333
 13
 (6) 340
 
 AAA 3
 296
 8
 (2) 302
 
 AA+
Total fixed maturity securities 93
 9,638
 622
 (118) 10,142
 2
 AA
Total fixed-maturity securities 93
 9,972
 552
 (33) 10,491
 8
 AA-
Short-term investments 7
 734
 
 
 734
 
 AAA 7
 767
 0
 0
 767
 0
 AA+
Total investment portfolio 100% $10,372
 $622
 $(118) $10,876
 $2
 AA 100% $10,739
 $552
 $(33) $11,258
 $8
 AA-
____________________
(1)Based on amortized cost.
 
(2)Accumulated OCI. See also Note 20, Other Comprehensive Income ("AOCI").Income.
 
(3)Ratings in the tables above represent the lower of the Moody’s and S&P classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-quality, liquid instruments.

223


 
(4)
Government-agency obligations were approximately 61%54% of mortgage backed securities as of December 31, 20122015 and 66%44% as of December 31, 20112014 based on fair value.

The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. As of December 31, 2012, amounts, net of tax, in AOCI included a net unrealized loss of $4 million for securities for which the Company had recognized OTTI and a net unrealized gain of $516 million for securities for which the Company had not recognized OTTI. As of December 31, 2011, amounts, net of tax, in AOCI included a net unrealized gain of $3 million for securities for which the Company had recognized OTTI and a net unrealized gain of $364 million for securities for which the Company had not recognized OTTI.
The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories. This is a high quality portfolio of municipalUnder the Company's investment guidelines, securities with an average rating of AA- as of December 31, 2012 and AA as of December 31, 2011. Securities rated lower than A-/A3 by S&P or Moody’s are typically not eligible to be purchased for the Company’s portfolio unless acquired for loss mitigation or risk management strategies.


225


The following tables present the fair value of the Company’s available-for-sale municipal bond portfolio of obligations of state and political subdivisions as of December 31, 20122015 and December 31, 20112014 by state, excluding $496 million and $403 million of pre-refunded bonds, respectively. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.state.
 
Fair Value of Available-for-Sale Municipal Bond Portfolio byof
Obligations of State and Political Subdivisions
As of December 31, 2012

2015 (1)
 
State 
State
General
Obligation
 
Local
General
Obligation
 Revenue 
Fair
Value
 
Amortized
Cost
 
Average
Credit
Rating
 
State
General
Obligation
 
Local
General
Obligation
 Revenue Bonds 
Fair
Value
 
Amortized
Cost
 
Average
Credit
Rating
 (in millions) (in millions)
Fixed-maturity securities:           
New York $13
 $59
 $571
 $643
 $610
 AA
Texas $88
 $345
 $342
 $775
 $708
 AA 28
 224
 325
 577
 542
 AA
New York 22
 58
 593
 673
 620
 AA
California 23
 77
 359
 459
 425
 A+ 78
 66
 411
 555
 521
 A+
Washington 59
 79
 200
 338
 323
 AA
Florida 47
 50
 259
 356
 319
 AA- 17
 
 268
 285
 266
 AA-
Illinois 15
 84
 188
 287
 260
 A+ 47
 69
 128
 244
 234
 A
Massachusetts 42
 18
 165
 225
 199
 AA 75
 
 148
 223
 207
 AA
Washington 33
 40
 145
 218
 200
 AA
Arizona 
 8
 180
 188
 171
 AA 
 10
 181
 191
 181
 AA
Georgia 14
 20
 108
 142
 132
 A+
Pennsylvania 68
 32
 40
 140
 129
 AA- 48
 26
 47
 121
 115
 A
Ohio 17
 14
 83
 114
 106
 AA
All others 229
 248
 1,195
 1,672
 1,533
 AA 156
 168
 1,148
 1,472
 1,396
 AA-
Subtotal 538
 715
 3,510
 4,763
 4,501
 AA-
Short-term investments (2) 
 
 60
 60
 60
 CC
Total $581
 $980
 $3,574
 $5,135
 $4,696
 AA- $538
 $715
 $3,570
 $4,823
 $4,561
 AA-

Fair Value of Available-for-Sale Portfolio of
Obligations of State and Political Subdivisions
As of December 31, 2014 (1)

State 
State
General
Obligation
 
Local
General
Obligation
 Revenue Bonds 
Fair
Value
 
Amortized
Cost
 
Average
Credit
Rating
  (in millions)
Fixed-maturity securities:            
Texas $60
 $293
 $305
 $658
 $613
  AA
New York 13
 41
 551
 605
 571
  AA
California 45
 70
 377
 492
 449
  A+
Florida 47
 34
 256
 337
 311
  AA-
Illinois 20
 99
 177
 296
 275
  A+
Washington 67
 48
 163
 278
 262
 AA
Massachusetts 46
 8
 169
 223
 204
 AA
Arizona 
 7
 170
 177
 165
  AA
Michigan 
 
 132
 132
 122
  AA-
Ohio 6
 40
 82
 128
 119
  AA
All others 276
 251
 1,096
 1,623
 1,528
  AA-
Total $580
 $891
 $3,478
 $4,949
 $4,619
 AA-
____________________
(1)Excludes $1,078 million and $846 million as of December 31, 2015 and 2014, respectively, of pre-refunded bonds, at fair value. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

(2)    Matured in the first quarter of 2016.


224226


Fair Value of Available-for-Sale Municipal Bond Portfolio by State
As of December 31, 2011

State 
State
General
Obligation
 
Local
General
Obligation
 Revenue 
Fair
Value
 
Amortized
Cost
 
Average
Credit
Rating
  (in millions)
Texas $86
 $342
 $346
 $774
 $724
 AA
New York 12
 60
 623
 695
 654
 AA
California 19
 51
 297
 367
 336
 AA
Florida 34
 62
 247
 343
 317
 AA
Illinois 16
 87
 197
 300
 281
 AA
Massachusetts 43
 9
 164
 216
 199
 AA
Washington 38
 53
 123
 214
 200
 AA
Arizona 
 8
 164
 172
 163
 AA
Ohio 
 53
 86
 139
 129
 AA
Michigan 
 37
 99
 136
 129
 AA
All others 311
 271
 1,114
 1,696
 1,588
 AA
Total $559
 $1,033
 $3,460
 $5,052
 $4,720
 AA
The revenue bond portfolio is comprised primarily of essential service revenue bonds issued by water and sewertransportation authorities and other utilities, transportationwater and sewer authorities, universities and healthcare providers.
 
Revenue Bonds
Sources of Funds
 
 As of December 31, 2012 As of December 31, 2011 As of December 31, 2015 As of December 31, 2014
Type 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 (in millions) (in millions)
Tax backed $720
 $656
 $717
 $670
Fixed-maturity securities:        
Transportation 717
 646
 800
 749
 $867
 $815
 $796
 $733
Water and sewer 567
 520
 530
 501
 612
 576
 563
 527
Tax backed 610
 576
 551
 514
Higher education 518
 487
 527
 492
Municipal utilities 567
 519
 529
 494
 414
 393
 512
 479
Higher education 430
 389
 332
 307
Healthcare 323
 296
 273
 258
 344
 321
 346
 317
All others 250
 247
 279
 264
 145
 141
 183
 173
Subtotal 3,510
 3,309
 3,478
 3,235
Short-term investments (1) 60
 60
 
 
Total $3,574
 $3,273
 $3,460
 $3,243
 $3,570
 $3,369
 $3,478
 $3,235
____________________
(1)    Matured in the first quarter of 2016.
 
The Company’smajority of the investment portfolio is managed by four outside managers. As municipal investments are a material portion of the Company’s overall investment portfolio, theThe Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. Each of the portfolio managers perform independent analysis on every municipal security they purchase for the Company’s portfolio. The Company meets with each of its portfolio managers quarterly and reviews all investments with a change in credit rating as well as any investments on the manager’s watch list of securities with the potential for downgrade.
 

225


The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
 
Fixed MaturityFixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 20122015
 
Less than 12 months 12 months or more TotalLess than 12 months 12 months or more Total
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
(dollars in millions)(dollars in millions)
Obligations of state and political subdivisions$316
 $(10) $7
 $0
 $323
 $(10)
U.S. government and agencies$62
 $0
 $
 $
 $62
 $0
77
 0
 
 
 77
 0
Obligations of state and political subdivisions79
 (11) 
 
 79
 (11)
Corporate securities25
 0
 
 
 25
 0
381
 (8) 95
 (15) 476
 (23)
Mortgage-backed securities:       
 

 

       
 

 

RMBS108
 (19) 121
 (58) 229
 (77)438
 (8) 90
 (14) 528
 (22)
CMBS5
 0
 
 
 5
 0
140
 (2) 2
 0
 142
 (2)
Asset-backed securities16
 0
 35
 (10) 51
 (10)517
 (10) 
 
 517
 (10)
Foreign government securities8
 0
 
 
 8
 0
97
 (4) 82
 (7) 179
 (11)
Total$303
 $(30) $156
 $(68) $459
 $(98)$1,966
 $(42) $276
 $(36) $2,242
 $(78)
Number of securities(1) 
 58
  
 16
  
 74
 
 335
  
 71
  
 396
Number of securities with OTTI 
 5
  
 6
  
 11
Number of securities with other-than-temporary impairment 
 9
  
 4
  
 13
 

Fixed Maturity
227


Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 20112014

Less than 12 months 12 months or more TotalLess than 12 months 12 months or more Total
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
(dollars in millions)(dollars in millions)
Obligations of state and political subdivisions$64
 $0
 $25
 $(1) $89
 $(1)
U.S. government and agencies$4
 $0
 $
 $
 $4
 $0
139
 0
 68
 (1) 207
 (1)
Obligations of state and political subdivisions17
 0
 21
 (1) 38
 (1)
Corporate securities80
 (2) 3
 
 83
 (2)189
 (3) 104
 (2) 293
 (5)
Mortgage-backed securities: 
  
  
  
 

 

 
  
  
  
    
RMBS187
 (68) 36
 (22) 223
 (90)205
 (3) 159
 (18) 364
 (21)
CMBS3
 0
 
 
 3
 0
36
 0
 19
 0
 55
 0
Asset-backed securities
 
 26
 (19) 26
 (19)56
 (2) 18
 (1) 74
 (3)
Foreign government securities141
 (6) 
 
 141
 (6)108
 (2) 0
 0
 108
 (2)
Total$432
 $(76) $86
 $(42) $518
 $(118)$797
 $(10) $393
 $(23) $1,190
 $(33)
Number of securities(1) 
 56
  
 20
  
 76
 
 125
  
 82
  
 198
Number of securities with OTTI 
 6
  
 4
  
 10
Number of securities with other-than-temporary impairment 
 3
  
 7
  
 10
___________________
(1)The number of securities does not add across because lots of the same securities have been purchased at different times and appear in both categories above (i.e., Less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.
 
Of the securities in an unrealized loss position for 12 months or more as of December 31, 2012, 2015, nine securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 20122015 was $67 million.$26 million. The Company has determined that the unrealized losses recorded as of December 31, 20122015 are yield related and not the result of OTTI.other-than-temporary-impairment.
 

226


The amortized cost and estimated fair value of available-for-sale fixed maturityfixed-maturity securities by contractual maturity as of December 31, 20122015 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Distribution of Fixed-Maturity Securities
by Contractual Maturity
As of December 31, 20122015
 
Amortized
Cost
 
Estimated
Fair Value
Amortized
Cost
 
Estimated
Fair Value
(in millions)(in millions)
Due within one year$315
 $318
$234
 $233
Due after one year through five years1,392
 1,472
1,911
 1,965
Due after five years through 10 years2,284
 2,525
2,169
 2,257
Due after 10 years3,592
 3,955
4,217
 4,414
Mortgage-backed securities: 
  
 
  
RMBS1,281
 1,266
1,238
 1,245
CMBS482
 520
506
 513
Total$9,346
 $10,056
$10,275
 $10,627
 

Under agreements with its cedants
228


The investment portfolio contains securities and cash that are either held in trust for the benefit of third party reinsurers in accordance with statutory requirements, the Company maintains fixed maturity securitiesinvested in trust accountsa guaranteed investment contract for the benefit of reinsured companies, which amounted to $368 million and $380 million as of December 31, 2012 and December 31, 2011, respectively. In addition,future claims payments, placed on deposit to fulfill state licensing requirements, or otherwise restricted in the Company has placed on deposit eligible securitiesamount of $27$283 million and $24$236 million as of December 31, 20122015 and December 31, 2011, respectively. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account equal to 120% of the letter of credit, which amounted to $3.5 million and $3.5 million as of December 31, 2012 and December 31, 2011, respectively. In connection with an excess of loss reinsurance facility, $22 million were released from the trust to the reinsurers in the first quarter of 2013. See Note 14, Reinsurance and other Monoline Exposures.
Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally2014, respectively, based on fair value assessmentsvalue. The investment portfolio also contains securities that are held in excesstrust by certain AGL subsidiaries for the benefit of contractual thresholds. other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,411 million and $1,395 million as of December 31, 2015 and December 31, 2014, respectively, based on fair value.

The fair value of the Company’s pledged securities to secure its obligations under its CDS exposure totaled $660$305 million and $780$376 million as of December 31, 20122015 and December 31, 20112014, respectively. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives, for the effect of the downgrade on collateral posted.
 
No material investments of the Company were non-income producing for years ended December 31, 2015 and 2014, respectively.
Internally Managed Portfolio

The investment portfolio tables shown above include both assets managed externally and internally. In the table below, more detailed information is provided for the component of the total investment portfolio that is internally managed (excluding short-term investments). The internally managed portfolio, as defined below, represents approximately 13% and 8% of the investment portfolio, on a fair value basis as of 2012December 31, 2015 and 2011December 31, 2014, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an attractive investment opportunity.
    
Loss Mitigation Assets

One of the Company's strategies for mitigating losses has been to purchase securities it has insured securities that have expected losses, at discounted prices. The Company may also obtain the obligations referenced in CDS transactions that have triggered the insured's obligation to put these bonds to AGM or AGC.

Prior to its acquisition, AGM had alsoprices (assets purchased assets of certain insured obligations that had triggered rights under the financial guaranty contracts. The Company has rights under certain of its financial guaranty insurance policies and indentures that allow it to accelerate the insured notes and pay claims under its insurance policies upon the occurrence of predefined events of default. To mitigate financial guaranty insurance losses,for loss mitigation purposes). In addition, the Company had elected to purchase the outstanding insured obligationholds other invested assets that were obtained or its underlying collateral. Generally, refinancing vehicles reimburse AGM in whole for its claims payments in exchange for assignments of certain of AGM's rights against the trusts. The refinancing vehicles obtained their funds from the proceeds of AGM-insured GICs issued in the ordinary course of business by the Financial Products Companies. The refinancing vehicles are consolidated with the Company. The accretable yield on the securitized loans was $150 million and $141 million at December 31, 2012 and 2011, respectively.

In 2010,purchased as part of loss mitigation effortsnegotiated settlements with insured counterparties or under a CDS contract insured by the Company, the Company acquired a 50% interest in Portfolio Funding Company LLC I (“PFC”). PFC owns the distribution rightsterms of a motion picture film library. The Company accounts for its interest in PFC as an equity investment. The Company's equity earnings in PFC are included in net

227


change in fair value of credit derivatives, as these proceeds are used to offset the Company's payments under its CDS contract. As part of the aforementioned loss mitigation efforts, the Company also provided through PFC a subordinated debt and a working capital facility valued at $38 million as of December 31, 2011. In January 2012, the subordinated debt and working capital facility were repaid in their entirety.our financial guaranties (other risk management assets).

Loss Mitigation AssetsInternally Managed Portfolio
Carrying Value

 As of December 31,
 2012 2011
 (in millions)
Fixed maturity securities:   
   Obligations of state and political subdivisions$35
 $9
   RMBS215
 134
   Asset-backed securities306
 235
Other invested assets:   
   Assets acquired in refinancing transactions72
 107
   Other42
 52
Total$670
 $537
 As of December 31,
 2015 2014
 (in millions)
Assets purchased for loss mitigation and other risk management purposes:   
   Fixed-maturity securities, at fair value$1,266
 $835
   Other invested assets114
 46
Other55
 79
Total$1,435
 $960


12.11.Insurance Company Regulatory Requirements
 
Each of the Company's insurance companies' ability to pay dividends depends, among other things, upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their state of domicile and other states. Financial statements prepared in accordance with accounting practices prescribed or permitted by local insurance regulatory authorities differ in certain respects from GAAP.

The Company's U.S. domiciled insurance companies prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (“NAIC”) and their respective insurance departments. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual. The Company has no permitted accounting practices on a statutory basis.


AG Re, a Bermuda regulated Class 3B insurer, prepares its statutory financial statements in conformity with the accounting principles set forth in the Insurance Act 1978, amendments thereto and related regulations.
229


GAAP differs in certain significant respects from U.S. insurance companies' statutory accounting practices prescribed or permitted by insurance regulatory authorities. The principal differences result from the following statutory accounting practices:

upfront premiums are earned when related principal and interest have expired rather than earned over the expected period of coverage;

acquisition costs are charged to expense as incurred rather than over the period that related premiums are earned;

a contingency reserve is computed based on the following statutory requirements:requirements, whereas no such reserve is required under GAAP;

1)
for all policies written prior to July 1, 1989, an amount equal to 50% of cumulative earned premiums less permitted reductions, plus

2)
for all policies written on or after July 1, 1989, an amount equal to the greater of 50% of premiums written for each category of insured obligation or a designated percentage of principal guaranteed for that category. These amounts are provided each quarter as either 1/60th or 1/80th of the total required for each category, less permitted reductions;


228


certain assets designated as “non-admitted assets” are charged directly to statutory surplus, but arerather than reflected as assets under GAAP;

investments in subsidiaries are carried on the balance sheet on the equity basis, to the extent admissible, rather than consolidated with the parent;

the amount of deferred tax assets that may be admitted is subject to an adjusted surplus threshold and is generally limited to the lesser of those assets the Company expects to realize within three years of the balance sheet date or fifteen percent of the Company's adjusted surplus. This realization period and surplus percentage is subject to change based on the amount of adjusted surplus;surplus. Under GAAP there is no non-admitted asset determination, rather a valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized;

insured CDScredit derivatives are accounted for as insurance contracts rather than as derivative contracts recordedmeasured at fair value;

bonds are generally carried at amortized cost rather than fair value;

VIEs and refinancing vehicles are not consolidated;

surplus notes are recognized as surplus and each payment of principal and interest is recorded only upon approval of the insurance regulator rather than as a liability unless approved for repayment;liabilities with periodic accrual of interest;

push-down acquisition accounting is not applicable under statutory accounting practices;practices, as it is under GAAP;

present value of expected losses are discounted at 5%a rate of 4.0% or 5.0%, recorded when the loss is deemed probable and recorded without consideration of the deferred premium revenue as opposed torather than discounted at the risk free rate at the end of each reporting period and only to the extent they exceed deferred premium revenue;

the present value of installment premiums and commissions are not recorded on the balance sheets.sheet as they are under GAAP;

mergers of acquired companies are treated as statutory mergers at historical balances and financial statements are retroactively revised assuming the merger occurred at the beginning of the prior year, rather than prospectively beginning with the date of acquisition at fair value under GAAP.

AG Re, a Bermuda regulated Class 3B insurer, prepares its statutory financial statements in conformity with the accounting principles set forth in the Insurance Act 1978, amendments thereto and related regulations. GAAP differs in certain significant respects from statutory accounting practices prescribed or permitted by Bermuda insurance regulatory authorities. The principal differences result from the following statutory accounting practices:

acquisition costs on upfront premiums are charged to operations as incurred, rather than over the period that related premiums are earned;

certain assets designated as “non-admitted assets” are charged directly to statutory surplus rather than reflected as assets under GAAP;


230


insured credit derivatives are accounted for as insurance contracts (except that loss reserves on insured credit derivatives are not net of unearned premium reserve), rather than as derivative contracts measured at fair value;

Loss reserves on non derivative contracts are net of unearned premium, which is offset by deferred acquisition costs, rather than only unearned premium. Loss reserves include a statutory reserve which includes a discount safety margin and statutory catastrophe reserve.


Insurance Regulatory Amounts Reported

Policyholders' Surplus Net Income (Loss)Policyholders' Surplus Net Income (Loss)
As of December 31, Year Ended December 31,As of December 31, Year Ended December 31,
2012 2011 2012 2011 20102015 2014 2015 2014 2013
(in millions)(in millions)
AGC(1)$905
 $1,021
 $31
 $230
 $(182)
U.S. statutory companies:         
AGM(1)1,785
 1,227
 256
 632
 402
$2,441
 $2,267
 $217
 $304
 $340
MAC730
 612
 102
 75
 26
AGC(1)(2)1,365
 1,086
 (92) 116
 211
Bermuda statutory company:         
AG Re1,300
 1,282
 133
 133
 (26)1,018
 1,114
 85
 28
 103
____________________
(1)
In 2009,Policyholders' surplus of AGM and AGC issuedinclude their indirect share of MAC. AGM and AGC own approximately 61% and 39%, respectively, of the outstanding stock of Municipal Assurance Holdings Inc. ("MAC Holdings"), which owns 100% of the outstanding common stock of MAC.

(2)As indicated in Note 2, Acquisition of Radian Asset Assurance Inc., AGC completed the acquisition of Radian Asset on April 1, 2015. Radian Asset was merged with and into AGC, with AGC as the surviving company of the merger. The impact to AGC's policyholders' surplus was approximately $333 million, on a $300 million surplus note to AGM. AGM records the notes in other invested assets.statutory basis, as of April 1, 2015.

On July 16, 2013, the Company completed a series of transactions that increased the capitalization of MAC to $800 million on a statutory basis. The Company does not currently anticipate that MAC will distribute any dividends.

AGM and its subsidiaries Assured Guaranty Municipal Insurance Company ("AGMIC") and Assured Guaranty (Bermuda) Ltd. ("AGBM") terminated the reinsurance pooling agreement pursuant to which AGMIC and AGBM had assumed a quota share percentage of the financial guaranty insurance policies issued by AGM, and AGM reassumed such ceded business. Subsequently, AGMIC was merged into AGM, with AGM as the surviving company.
AGBM, which had made a loan of $82.5 million to AGUS, an indirect parent holding company of AGM, received all of the outstanding shares of MAC held by AGUS and cash, in full satisfaction of the principal of and interest on such loan. After AGBM distributed substantially all of its assets, including the MAC shares, to AGM as a dividend, AGM sold AGBM to its affiliate AG Re. Subsequently, AGBM and AG Re merged, with AG Re as the surviving company. The sale of AGBM to, and subsequent merger with, AG Re were each effective as of July 17, 2013.
MAC Holdings was formed to own 100% of the outstanding stock of MAC. AGM and its affiliate AGC subscribed for approximately 61% and 39% of the outstanding MAC Holdings common stock, respectively, for which AGM paid $425 million and AGC paid $275 million, as consideration. The consideration consisted of all of MAC's outstanding common stock (in the case of AGM), cash and marketable securities. 
MAC Holdings then contributed cash and marketable securities having a fair market value sufficient to increase MAC's policyholders' surplus to approximately $400 million, and purchased a surplus note issued by MAC in the principal amount of $300 million. In addition, AGM purchased a surplus note issued by MAC in the principal amount of $100 million.
Following the increase in MAC's capitalization, AGM ceded par exposure of approximately $87 billion and unearned premiums of approximately $468 million to MAC, and AGC ceded par exposure of approximately $24 billion and unearned premiums of approximately $249 million to MAC.

231


Contingency Reserves

On July 15, 2013, AGM and its wholly-owned subsidiary AGE (together, the "AGM Group") and AGC, were notified that the New York State Department of Financial Services ("NYDFS") and the Maryland Insurance Administration (“MIA”) do not object to the AGM Group and AGC, respectively, reassuming all of the outstanding contingency reserves that the AGM Group and AGC had ceded to AG Re and electing to cease ceding future contingency reserves to AG Re. The insurance regulators permitted the AGM Group and AGC to reassume the contingency reserves in increments over three years. In the third quarter of 2015, the AGM Group and AGC each reassumed their respective final installments and as of December 31, 2015, the AGM Group and AGC had collectively reassumed an aggregate of approximately $522 million.

From time to time, AGM and AGC have obtained the approval of their regulators to release contingency reserves based on losses or because the accumulated reserve is deemed excessive in relation to the insurer's outstanding insured obligations.  In 2015, on the latter basis, AGM obtained the NYDFS's approval for a contingency reserve release of approximately $253 million and AGC obtained the MIA's approval for a contingency reserve release of approximately $134 million. In addition, MAC also released approximately $56 million of contingency reserves, which consisted of the assumed contingency reserves maintained by MAC, as reinsurer of AGM, in respect of the same obligations that were the subject of AGM's $253 million release.

With respect to the regular, quarterly contributions to contingency reserves required by the applicable Maryland and New York laws and regulations, such laws and regulations permit the discontinuation of such quarterly contributions to a company’s contingency reserves when such company’s aggregate contingency reserves for a particular line of business (i.e., municipal or non-municipal) exceed the sum of the company’s outstanding principal for each specified category of obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category.  In accordance with such laws and regulations, and with the approval of the MIA and the NYDFS, respectively, AGC ceased making quarterly contributions to its contingency reserves for both municipal and non-municipal business and AGM ceased making quarterly contributions to its contingency reserves for non-municipal business, in each case beginning in the fourth quarter of 2014. Such cessations are expected to continue for as long as AGC and AGM satisfy the foregoing condition for their applicable lines of business.

Dividend Restrictions and Capital Requirements
      
AGCUnder New York insurance law, AGM may only pay dividends out of "earned surplus," which is a Maryland domiciled insurance company. Asthe portion of December 31, 2012, the amount available for distribution from AGC during 2013 with noticecompany's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the Maryland CommissionerNew York Superintendent of Insurance underFinancial Services ("New York Superintendent") that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income during that period. The maximum amount available during 2016 for AGM to distribute as dividends without regulatory approval, is estimated to be approximately $244 million, of which approximately $95 million is estimated to be available for distribution in the first quarter of 2016.
Under Maryland's insurance law, AGC may, with prior notice to the Maryland insurance lawInsurance Commissioner, pay an ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. The maximum amount available during 2016 for AGC to distribute as ordinary dividends is approximately $91$79 million,. of which approximately $9 million is available for distribution in the first quarter of 2016.

AGMMAC is a New York domiciled insurance company. Based on AGM’s statutory statements to be filed for the year ended December 31, 2012, the maximum amount available for payment of dividends by AGM without regulatory approval over the 12 months following December 31, 2012, is approximately $178 million. Also in connection with the acquisition of AGMH on July 1, 2009 ("AGMH Acquisition"), the Company committedcompany subject to the New York Department of Financial Servicessame dividend limitations described above for AGM. The Company does not currently anticipate that AGM would not payMAC will distribute any dividends for a period of two years from the Acquisition Date without written approval of the New York Department of Financial Services.dividends.

As of December 31, 2012,For AG Re, had unencumbered assetsany distribution (including repurchase of $261 million, representing assets not held in trust for the benefitshares) of cedants and therefore available for other uses. Based on regulatory dividend limitations, the maximum amount available at AG Re to pay dividends or make a distribution ofany share capital, contributed surplus in 2013 in compliance with Bermuda law is approximately $634 million. However, any distributionor other statutory capital that results in a reduction of would reduce its total statutory capital by 15% (approximately $195 million as of December 31, 2012) or more of AG Re'sits total statutory capital as set out in its previous years'year's financial statements would requirerequires the prior approval of the Bermuda Monetary Authority. DividendsAuthority ("Authority"). Separately, dividends are paid out of an insurer's statutory surplus and cannot exceed that surplus. Further, annual dividends cannot exceed 25% of total statutory capital and surplus as set out in its previous year's financial statements, which is $254 million, without AG Re certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 2016 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $127 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to the limit of its outstanding statutory surplus, which is $174 million. Such dividend capacity is further limited by requirements that the subject company must at all times (i) maintain the minimum solvency margin and the Company's applicable enhanced capital requirements required under the Insurance Actactual amount of 1978 and (ii) have relevantAG Re’s unencumbered assets, in an amount at least equal to 75% of relevant liabilities,which

229232


both as defined under the Insurance Actamount changes from time to time due in part to collateral posting requirements. As of 1978.December 31, 2015, AG Re had unencumbered assets of approximately $640 million.

U.K. company law prohibits each of AGE and AGUK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer's ability to declare a dividend, the Prudential Regulation Authority's capital requirements may in practice act as a Class 3B insurer, is prohibited from declaringrestriction on dividends. The Company does not expect AGE or paying inAGUK to distribute any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least seven days before payment of such dividends) with the Authority an affidavit stating that it will continue to meet the required margins.at this time

Dividends Paidand Surplus Notes
By Insurance Company Subsidiaries

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Dividends paid by AGC to AGUS$55
 $30
 $50
$90
 $69
 $67
Dividends paid by AGM to AGMH30
 
 
215
 160
 163
Dividends paid by AG Re to AGL151
 86
 24
150
 82
 144
Repayment of surplus note by AGM to AGMH25
 50
 50
Issuance of surplus notes by MAC to MAC Holdings
 
 (300)
Issuance of surplus notes by MAC to AGM
 
 (100)


13.12.Income Taxes

Accounting Policy

The provision for income taxes consists of an amount for taxes currently payable and an amount for deferred taxes. Deferred income taxes are provided for temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized.

Non-interest‑bearing tax and loss bonds are purchased to prepayin the amount of the tax benefit that results from deducting contingency reserves as provided under Internal Revenue Code Section 832(e). The Company records the purchase of tax and loss bonds in deferred taxes.

The Company recognizes tax benefits only if a tax position is “more likely than not” to prevail.

Overview
AGL, and its "Bermuda Subsidiaries," which consist of AG Re, AGRO, and Cedar Personnel Ltd., are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL's U.S. and U.K. subsidiaries are subject to income taxes imposed by U.S. and U.K. authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company and AGE, a U.K. domiciled company, have elected under Section 953(d) of the U.S. Internal Revenue Code to be taxed as a U.S. domestic corporation.
In November 2013, AGL became tax resident in the U.K. although it will remain a Bermuda-based company and its administrative and head office functions will continue to be carried on in Bermuda. As a U.K. tax resident company, AGL is required to file a corporation tax return with Her Majesty’s Revenue & Customs (“HMRC”).  AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The main rate of corporation tax is 20% as of April 1, 2015. AGL has also registered in the U.K. to report its Value Added Tax (“VAT”) liability.  The current rate of VAT is 20%. Assured Guaranty expects that the dividends AGL receives from its direct subsidiaries will be exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act

233


2009. In addition, any dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. The U.K. government implemented a new tax regime for “controlled foreign companies” (“CFC regime”) effective January 1, 2013.  Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be taxed under the CFC regime and has obtained a clearance from HMRC confirming this on the basis of current facts.

AGUS files a consolidated federal income tax return with AGC, AG Financial Products Inc. ("AGFP"), AG Analytics Inc., AGMH, beginning May 12, 2012 MAC and MAC Holdings, and beginning April 1, 2015 Radian Asset and Van American (“AGUS consolidated tax group”). Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO and AG Intermediary Inc., file their own consolidated federal income tax return.
Provision for Income Taxes
AGL and its Bermuda Subsidiaries, which include AG Re, Assured Guaranty Re Overseas Ltd. (“AGRO”), Assured Guaranty (Bermuda) Ltd. and Cedar Personnel Ltd., are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. The Company’s U.S. and United Kingdom (“U.K.”) subsidiaries are subject to income taxes imposed by U.S. and U.K. authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company and Assured Guaranty (Europe) Ltd., a U.K. domiciled company, have elected under Section 953(d) of the U.S. Internal Revenue Code to be taxed as a U.S. domestic corporation.
In conjunction with AGMH Acquisition, AGMH has joined the consolidated federal tax group of AGUS, AGC, and AG Financial Products Inc. (“AGFP”). In conjunction with the acquisition of MAC (formerly Municipal and Infrastructure Assurance Corporation) on May 31, 2012 (the "MAC Acquisition"), MAC has joined the consolidated federal tax group. For the periods beginning on July 1, 2009 and forward, AGMH files a consolidated federal income tax return with AGUS, AGC, AGFP and AG Analytics Inc. (“AGUS consolidated tax group”). Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO, Assured Guaranty Mortgage Insurance Company and AG Intermediary Inc., have historically filed their own consolidated federal income tax return.

The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the U.K. blended marginal corporate tax rate of 24.5%20.25% unless subject to U.S. tax by election or as a U.S. controlled foreign corporation, and no taxes for the Company’s Bermuda holding company and Bermuda subsidiaries unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. For periods subsequent to April 1, 2012,2015, the U.K. corporation tax rate has been reduced to 24%20%, for the period April 1, 20112014 to April 1, 20122015 the U.K. corporation tax rate was 26% resulting in a blended tax rate of

230


24.5% in 2012 and prior to April 1, 2011, the U.K. corporation tax rate was 28%21% resulting in a blended tax rate of 26.5%20.25% in 2011.2015, and prior to April 1, 2014, the U.K. corporation tax rate was 23% resulting in a blended tax rate of 21.5% in 2014. The Company’s overall corporate effective tax rate fluctuates based on the distribution of income across jurisdictions.
 
A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below.

Effective Tax Rate Reconciliation
 
Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Expected tax provision (benefit) at statutory rates in taxable jurisdictions$76
 $313
 $173
$443
 $490
 $390
Tax-exempt interest(61) (62) (61)(54) (53) (57)
True-up from tax return filings(1)
 (3) (52)
Gain on bargain purchase(19) 
 
Change in liability for uncertain tax positions2
 2
 (5)12
 9
 (2)
Change in valuation allowance


 (7)
Other5
 6
 2
(7) (3) 3
Total provision (benefit) for income taxes$22
 $256
 $50
$375
 $443
 $334
Effective tax rate16.5% 24.9% 9.4%26.2% 28.9% 29.2%
____________________
(1)
For the year ended December 31, 2010, the Company recorded a $56 million tax benefit related to an amended return for a period prior to the AGMH Acquisition, $9 million was related to a change in liability for uncertain tax positions.

The expected tax provision at statutory rates in taxable jurisdictions is calculated as the sum of pretax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Pretax income of the Company’s subsidiaries which are not U.S. or U.K. domiciled but are subject to U.S. or U.K. tax by election, establishment of tax residency or as controlled foreign corporations, are included at the U.S. or U.K. statutory tax rate. Where there is a pretax loss in one jurisdiction and pretax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.
 

In addition, during the year ended December 31, 2010, a net tax benefit
234


The following table presents pretax income and revenue by jurisdiction.
 
Pretax Income (Loss) by Tax Jurisdiction

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
United States$218
 $896
 $496
$1,284
 $1,420
 $1,118
Bermuda(86) 133
 38
177
 142
 27
UK0
 0
 0
U.K.(30) (31) (3)
Total$132
 $1,029
 $534
$1,431
 $1,531
 $1,142

 

231


Revenue by Tax Jurisdiction

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
United States$894
 $1,518
 $1,094
$1,853
 $1,633
 $1,389
Bermuda79
 301
 219
361
 365
 219
UK0
 0
 0
U.K.(7) (4) 0
Total$973
 $1,819
 $1,313
$2,207
 $1,994
 $1,608
 

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

235


Components of Net Deferred Tax Assets

As of December 31,As of December 31,
2012 20112015 2014
(in millions)(in millions)
Deferred tax assets:      
Unrealized losses on credit derivative financial instruments, net$425
 $267
$33
 $224
Unearned premium reserves, net109
 424
254
 55
Loss and LAE reserve90
 
64
 66
Tax and loss bonds15
 71
39
 39
NOL carry forward7
 9
AMT credit58
 32
Tax basis step-up5
 6
Alternative minimum tax credit55
 57
Foreign tax credit30
 30
11
 
FG VIEs179
 221

 13
DAC59
 38
27
 35
Investment basis difference82
 18
86
 104
Deferred compensation41
 38
Other48
 95
17
 19
Total deferred income tax assets1,107
 1,211
627
 650
Deferred tax liabilities:      
Contingency reserves15
 76
64
 64
Loss and LAE reserve
 1
Tax basis of public debt100
 105
Public debt94
 96
Unrealized appreciation on investments198
 136
108
 159
Unrealized gains on CCS12
 19
22
 22
Market discount42
 9
21
 28
FG VIEs13
 
Other19
 61
18
 21
Total deferred income tax liabilities386
 407
340
 390
Less: Valuation allowance11
 
Net deferred income tax asset$721
 $804
$276
 $260

As of December 31, 2012,2015, the Company had foreignalternative minimum tax credits carried forward of $30$55 million which expire in 2018 through 2021 and had AMT credits of $58 million which do not expire. Foreign tax credits of $22 million are from its acquisition of AGMH, the Internal Revenue Code limits the amount of foreign tax credits available that the Company may utilize each year. Management believes sufficient future taxable income exists to realize the full benefit of these tax credits.

As of December 31, 2012, AGRO had a standalone NOL of $20 million, compared with $27 million as of December 31, 2011, which is available through 2023 to offset its future U.S. taxable income. AGRO's stand alone NOL may not offset the income of any other members of AGRO's consolidated group with very limited exceptions and the Internal Revenue Code limits the amounts of NOL that AGRO may utilize each year.

232



Valuation Allowance
 
As part of the Radian Asset Acquisition, the Company acquired $11 million of foreign tax credits (“FTC”) which will expire between 2018 and 2020. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC will not be utilized, and therefore recorded a valuation allowance with respect to this tax attribute.

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

Audits

AGUS has open tax years with the U.S. Internal Revenue Service (“IRS”) for 2009 forward and is currently under audit for the 20092009-2012 tax year. The IRS concluded its field work with respect to tax years 2006 through 2008 without adjustment.years. On February 20, 2013 the IRS notified AGUS that the Joint Committee on Taxation completed its review of the 2006 through 2008 tax years and has accepted the results of the IRS examination without exception. Assured Guaranty Oversees US Holdings Inc. has open tax years of 20092012 forward. AGMH and subsidiaries have separate open tax years with the IRS of 2008 through the July 1, 2009 when they joined the AGUS consolidated group. AGMH and subsidiaries are under audit for 2008 while members of the Dexia Holdings Inc. consolidated tax group. The Company is indemnified by Dexia for any potential liability associated with this audit of any periods prior to the AGMH Acquisition. The Company's U.K. subsidiaries are not currently under examination and have open tax years of 20102014 forward.

236



Uncertain Tax Positions

The following table provides a reconciliation of the beginning and ending balances of the total liability for unrecognized tax benefits. The balance of unrecognized tax benefitsCompany does not believe it is reasonably possible that this amount will be reduced withinchange significantly in the next twelve months due to the closing of an IRS audit. The Company does not expect the changes to be material to the consolidated financial condition or results of operations.months.

2012 2011 20102015 2014 2013
(in millions)(in millions)
Balance as of January 1,$20
 $18
 $24
$28
 $20
 $22
True-up from tax return filings
 
 (8)10
 6
 4
Increase in unrecognized tax benefits as a result of position taken during the current period2
 2
 2
2
 2
 3
Decrease due to closing of IRS audit
 
 (9)
Balance as of December 31,$22
 $20
 $18
$40
 $28
 $20

The Company's policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.expense and has accrued $1 million per year from 2013 to 2015. As of December 31, 2012,2015 and December 31, 2014, the Company has accrued $4$5.4 million and $4.5 million of interest.interest, respectively.

The total amount of unrecognized tax benefits atas of December 31, 2012, that2015 would affect the effective tax rate, if recognized, is $22 million.

Liability For Tax Basis Step-Up Adjustment

In connection with the Company's initial public offering, the Company and ACE Financial Services Inc. (“AFS”), a subsidiary of ACE, entered into a tax allocation agreement, whereby the Company and AFS made a “Section 338 (h)(10)” election that has the effect of increasing the tax basis of certain affected subsidiaries' tangible and intangible assets to fair value. Future tax benefits that the Company derives from the election will be payable to AFS when realized by the Company.

As a result of the election, the Company has adjusted its net deferred tax liability, to reflect the new tax basis of the Company's affected assets. The additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company. Any tax benefit realized by the Company will be paid to AFS. Such tax benefits will generally be calculated by comparing the Company's affected subsidiaries' actual taxes to the taxes that would have been owed by those subsidiaries had the increase in basis not occurred. After a 15 year period, to the extent there remains an unrealized tax benefit, the Company and AFS will negotiate a settlement of the unrealized benefit based on the expected realization at that time.

233



As of December 31, 2012 and December 31, 2011, the liability for tax basis step-up adjustment, which is included in the Company's balance sheets in “Other liabilities,” was $6 million and $7 million, respectively. The Company has paid ACE and correspondingly reduced its liability by $1 million in 2012.recognized.

Tax Treatment of CDS

The Company treats the guaranty it provides on CDS as an insurance contractscontract for tax purposes and as such a taxable loss does not occur until the Company expects to make a loss payment to the buyer of credit protection based upon the occurrence of one or more specified credit events with respect to the contractually referenced obligation or entity. The Company holds its CDS to maturity, at which time any unrealized fair value loss in excess of credit-related losses would revert to zero. The tax treatment of CDS is an unsettled area of the law. The uncertainty relates to the IRS determination of the income or potential loss associated with CDS as either subject to capital gain (loss) or ordinary income (loss) treatment. In treating CDS as insurance contracts the Company treats both the receipt of premium and payment of losses as ordinary income and believes it is more likely than not that any CDS credit related losses will be treated as ordinary by the IRS. To the extent the IRS takes the view that the losses are capital losses in the future and the Company incurred actual losses associated with the CDS, the Company would need sufficient taxable income of the same character within the carryback and carryforward period available under the tax law.

14.13.Reinsurance and Other Monoline Exposures
 
The Company assumes exposure on insured obligations (“Assumed Business”) and cedesmay cede portions of its exposure on obligations it has insured (“Ceded Business”) in exchange for premiums, net of ceding commissions. The Company has historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.
 
Accounting Policy

For business assumed and ceded, the accounting model of the underlying direct financial guaranty contract dictates the accounting model used for the reinsurance contract (except for those eliminated as FG VIEs). For any assumed or ceded financial guaranty insurance premiums the accounting model described in Note 4 is followed, for assumed and ceded financial guaranty insurance losses, the accounting models described in Note 6 are followed. For any assumed or ceded credit derivative contracts, the accounting model in Note 68 is followed.


237


Assumed and Ceded Business
 
The Company is party to reinsurance agreements as a reinsurer toassumes business from other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums. The Company’s facultative and treaty agreements are generally subject to termination at the option of the ceding company:
 
if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum financial strength rating, or

upon certain changes of control of the Company.
 
Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, attributable to reinsurance cededassumed pursuant to such agreements after which the Company would be released from liability with respect to the Assumed Business.

Upon the occurrence of the conditions set forth in the first bullet above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.
 
The downgrade of the financial strength ratings of AG Re or of AGC gives certain ceding companies the right to recapture business they had ceded to AG Re and AGC, which would lead to a reduction in the Company's unearned premium reserve and related earnings on such reserve. With respect to a significant portion of the Company’sCompany's in-force financial guaranty Assumed Business,assumed business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the third party ceding company may have the right to recapture Assumed Businessbusiness it had ceded to AG Re and/or AGC, respectively, and in most cases, assets representingconnection therewith, to receive payment from AG Re or AGC of an amount equal to the statutory

234


unearned premium (net of ceding commissions) and statutory loss reserves (if any), associated with that business, plus, in certain cases, an additional ceding commission, associated with that business.

commission. As of December 31, 2012,2015, if each third party insurer ceding business to AG Re and/or AGC had posted $328 million of collateral in trust accounts fora right to recapture such business, and chose to exercise such right, the benefit of third party ceding companies to secure its obligations under its reinsurance agreements, excluding contingency reserves. The equivalent amount foraggregate amounts that AG Re and AGC is $147 million; AGC is notcould be required to post collateral. On February 14, 2013, AG Re posted an additional $27pay to all such companies would be approximately $55 million of collateral due to the January 2013 downgrade by Moody's of its financial strength rating to Baa1. At December 31, 2012, the amount of additional ceding commission for AG Re was $8 and $34 million,. respectively.

The Company has Ceded Business to non-affiliated companies to limit its exposure to risk. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers. The Company’s ceded contracts generally allow the Company to recapture Ceded Business after certain triggering events, such as reinsurer downgrades.
 
Over the past several years, the Company has entered into several commutations in order to reassume previously ceded books of business from BIG financial guaranty companies and its other reinsurers. The Company has also cancelledcanceled assumed reinsurance contracts. These commutations of ceded and cancellations of Assumed Business resulted in gains of $82 million, $32 million and $50 million for the years ended December 31, 2012, 2011 and 2010, respectively, which were recorded in other income. While certain Ceded Business has been reassumed, the Company still has significant Ceded Business with third parties.
 
Net Effect of Commutations of Ceded and
Cancellations of Assumed Reinsurance Contracts 

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Increase (decrease) in net unearned premium reserve$109
 $(20) $20
$23
 $20
 $11
Increase (decrease) in net par outstanding19,173
 (780) 12,373
855
 1,167
 151
Commutation gains recorded in other income28
 23
 2


238


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


235


Effect of Reinsurance on Statement of Operations

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
Premiums Written:          
Direct$244
 $190
 343
$164
 $116
 106
Assumed(1)9
 (63) (121)17
 (12) 17
Ceded(2)51
 4
 101
10
 15
 2
Net$304
 $131
 323
$191
 $119
 125
Premiums Earned:          
Direct$936
 $997
 1,243
$792
 $581
 819
Assumed50
 46
 73
40
 47
 40
Ceded(133) (123) (129)(66) (58) (107)
Net$853
 $920
 1,187
$766
 $570
 752
Loss and LAE:          
Direct$655
 $578
 399
$399
 $132
 110
Assumed(4) 4
 74
45
 37
 73
Ceded(128) (120) (61)(20) (43) (29)
Net$523
 $462
 412
$424
 $126
 154
____________________
(1)Negative assumed premiums written were due to cancellations and changes in expected Debt Service schedules.

(2)Positive ceded premiums written were due to commutations and changes in expected Debt Service schedules.
 
Reinsurer Exposure
Other Monoline Exposures
 
In addition to assumed and ceded reinsurance arrangements, the Company may also have exposure to some financial guaranty reinsurers (i.e., monolines) in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by other monolines. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed maturityfixed-maturity securities that are wrapped by monolines and whose value may declinechange based on the rating of the monoline. AtAs of December 31, 20122015, based on fair value, the Company had $667 million of fixed maturityfixed-maturity securities in its investment portfolio wrappedconsisting of $194 million insured by National Public Finance Guarantee Corporation $517("National"), $154 million insured by Ambac Assurance Corporation ("Ambac") and $31$8 million insured by other guarantors.

236


Exposure$123 million insured by Reinsurer
  Ratings at Par Outstanding
  February 26, 2013 As of December 31, 2012
Reinsurer 
Moody’s
Reinsurer
Rating
 
S&P
Reinsurer
Rating
 
Ceded Par
Outstanding(1)
 
Second-to-
Pay Insured
Par
Outstanding
 
Assumed Par
Outstanding
  (dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) WR(2) WR $9,808
 $
 $24
Tokio Aa3(3) AA-(3) 8,369
 
 937
Radian Ba1 B+ 5,250
 44
 1,382
Syncora Guarantee Inc. WR WR 4,156
 1,993
 162
Mitsui Sumitomo Insurance Co. Ltd. A1 A+(3) 2,232
 
 
ACA Financial Guaranty Corp. NR WR 819
 6
 1
Swiss Reinsurance Co. A1 AA- 429
 
 
Ambac WR WR 85
 7,122
 20,579
CIFG Assurance North America Inc. ("CIFG") WR WR 65
 255
 5,523
MBIA Inc. (4) (4) 
 10,814
 8,143
Financial Guaranty Insurance Co. WR WR 
 3,227
 1,961
Other Various Various 933
 2,070
 45
Total     $32,146
 $25,531
 $38,757
____________________
(1)
Includes $3,928FGIC UK Limited and $259 million in ceded par outstanding related to insured credit derivatives.
(2)    Represents “Withdrawn Rating.”
(3)    The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody’s..

(4)MBIA Inc. includes various subsidiaries which are rated B, BBB by S&P and Caa2, B3, Baa2, WR and NR by Moody’s.

237


Ceded Par Outstanding by Reinsurer and Credit Rating
As of December 31, 2012
MBIA Insurance Corp.

 Internal Credit Rating
Reinsurer 
Super
Senior
 AAA AA A BBB BIG Total
 (in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re)$229
 $1,257
 $3,237
 $2,978
 $1,598
 $509
 $9,808
Tokio313
 1,072
 1,396
 2,457
 2,411
 720
 8,369
Radian10
 256
 334
 2,395
 1,877
 378
 5,250
Syncora Guarantee Inc.
 
 241
 761
 2,495
 659
 4,156
Mitsui Sumitomo Insurance Co. Ltd.7
 151
 702
 865
 449
 58
 2,232
ACA Financial Guaranty Corp
 
 474
 325
 20
 
 819
Swiss Reinsurance Co.
 8
 6
 261
 111
 43
 429
Ambac
 
 
 85
 
 
 85
CIFG
 
 
 
 
 65
 65
Other
 
 114
 742
 77
 
 933
Total$559
 $2,744
 $6,504
 $10,869
 $9,038
 $2,432
 $32,146

In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table abovetables below are required to post collateral for the benefit of the Company in an amount at least equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. CIFG and Radian areIn addition, certain authorized reinsurers. Radian's collateral equals or exceeds its ceded statutory loss reserves and CIFG's collateral covers a substantial portion of its ceded statutory loss reserves. Collateral may bereinsurers in the formtables below post collateral on terms negotiated with the Company.


239


Exposure by Reinsurer

  Ratings at Par Outstanding (1)
  February 24, 2016 As of December 31, 2015
Reinsurer 
Moody’s
Reinsurer
Rating
 
S&P
Reinsurer
Rating
 
Ceded Par
Outstanding
 
Second-to-
Pay Insured
Par
Outstanding
 
Assumed Par
Outstanding
  (dollars in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) (2) WR (3) WR $5,227
 $
 $30
Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio”) (2) Aa3 (4) A+ (4) 4,216
 
 
Syncora Guarantee Inc. (2) WR WR 2,451
 1,244
 727
Mitsui Sumitomo Insurance Co. Ltd. (2) A1 A+ (4) 1,818
 
 
ACA Financial Guaranty Corp. NR (5) WR 714
 20
 
Ambac WR WR 117
 3,889
 10,388
National (6) A3 AA- 
 5,299
 5,100
MBIA (7) (7) 
 1,802
 440
FGIC (8) (8) 
 1,424
 652
Ambac Assurance Corp. Segregated Account NR NR 
 91
 873
CIFG Assurance North America Inc. ("CIFG") WR WR 
 43
 2,996
Other (2) Various Various 78
 796
 133
Total     $14,621
 $14,608
 $21,339
____________________
(1)Includes par related to insured credit derivatives.
(2)
The total collateral posted by all non-affiliated reinsurers required or agreeing to post collateral as of December 31, 2015, is approximately $470 million.

(3)    Represents “Withdrawn Rating.”
(4)    The Company benefits from trust arrangements that satisfy the triple-A credit requirement of credit S&P and/or trust accounts. The total collateral postedMoody’s.

(5)    Represents “Not Rated.”

(6)National is rated AA+ by KBRA.

(7)MBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and B3 by Moody's and MBIA U.K. Insurance Ltd. rated BB by S&P and Ba2 by Moody’s.

(8)FGIC includes subsidiaries Financial Guaranty Insurance Company and FGIC UK Limited both of which had their ratings withdrawn by rating agencies.


240


Ceded Par Outstanding by all non-affiliated reinsurers asReinsurer and Credit Rating
As of December 31, 2012 is approximately $999 million.2015

  Internal Credit Rating
Reinsurer  AAA AA A BBB BIG Total
  (in millions)
American Overseas Reinsurance Company Limited (f/k/a Ram Re) $403
 $1,809
 $1,607
 $1,087
 $321
 $5,227
Tokio 564
 529
 1,131
 1,365
 627
 4,216
Syncora Guarantee Inc. 
 132
 430
 1,766
 123
 2,451
Mitsui Sumitomo Insurance Co. Ltd. 131
 552
 590
 372
 173
 1,818
ACA Financial Guaranty Corp 
 449
 246
 19
 
 714
Ambac 
 
 117
 
 
 117
Other 49
 0
 1
 28
 
 78
Total $1,147
 $3,471
 $4,122
 $4,637
 $1,244
 $14,621



Second-to-Pay
Insured Par Outstanding by Internal Rating
As of December 31, 20122015(1)
 
Public Finance Structured Finance  Public Finance Structured Finance
AAA AA A BBB BIG 
Super
Senior
 AAA AA A BBB BIG TotalAAA AA A BBB BIG AAA AA A BBB BIG Total
(in millions)(in millions)
Radian$
 $
 $13
 $19
 $12
 $
 $
 $
 $
 $
 $
 $44
Syncora Guarantee Inc.
 25
 377
 772
 334
 
 203
 
 78
 
 204
 1,993
$
 $71
 $176
 $624
 $329
 $
 $
 $
 $
 $44
 $1,244
ACA Financial Guaranty Corp.
 3
 
 3
 
 
 
 
 
 
 
 6

 
 
 1
 19
 
 
 
 
 
 20
Ambac
 1,471
 3,431
 1,194
 333
 
 15
 54
 235
 78
 311
 7,122
10
 1,024
 1,517
 1,085
 49
 1
 
 58
 137
 8
 3,889
National71
 1,649
 3,555
 
 
 
 
 24
 
 
 5,299
MBIA
 65
 254
 240
 
 
 886
 16
 234
 107
 1,802
FGIC
 31
 749
 251
 201
 149
 
 8
 
 35
 1,424
Ambac Assurance Corp. Segregated Account
 
 
 
 
 
 24
 
 
 67
 91
CIFG
 11
 69
 130
 45
 
 
 
 
 
 
 255

 
 
 22
 21
 
 
 
 
 
 43
MBIA Inc.69
 2,567
 4,367
 1,947
 
 
 
 1,378
 47
 205
 234
 10,814
Financial Guaranty Insurance Co.
 130
 966
 560
 361
 372
 635
 
 149
 
 54
 3,227
Other
 
 2,070
 
 
 
 
 
 
 
 
 2,070

 796
 
 
 
 
 
 
 
 
 796
Total$69
 $4,207
 $11,293
 $4,625
 $1,085
 $372
 $853
 $1,432
 $509
 $283
 $803
 $25,531
$81
 $3,636
 $6,251
 $2,223
 $619
 $150
 $910
 $106
 $371
 $261
 $14,608
____________________
(1)Assured Guaranty’s internal rating.


238241


Amounts Due (To) From Reinsurers
As of December 31, 20122015
 
Assumed
Premium, net
of Commissions
 
Ceded
Premium, net
of Commissions
 
Assumed
Expected
Loss and LAE
 
Ceded
Expected
Loss and LAE
Assumed
Premium, net
of Commissions
 
Ceded
Premium, net
of Commissions
 Assumed
Expected
Loss to be Paid
 Ceded
Expected
Loss to be Paid
(in millions)(in millions)
American Overseas Reinsurance Company Limited$
 $(12) $
 $5
American Overseas Reinsurance Company Limited (f/k/a Ram Re)$
 $(7) $
 $24
Tokio
 (27) 
 37

 (12) 
 43
Radian
 (20) 
 (4)
Syncora Guarantee Inc.
 (43) 28
 1
15
 (22) 
 5
Mitsui Sumitomo Insurance Co. Ltd.
 (5) 
 9

 (3) 
 17
Swiss Reinsurance Co.
 (3) 
 2
Ambac76
 
 (73) 
41
 
 (5) 
National6
 
 (4) 
MBIA5
 
 (11) 
FGIC4
 
 (14) 
Ambac Assurance Corp. Segregated Account11
 
 (67) 
CIFG
 
 
 3
0
 
 (62) 
MBIA Inc.1
 
 (19) 
Financial Guaranty Insurance Co.9
 
 (58) 
Other
 (63) 
 

 (3) 
 
Total$86
 $(173) $(122) $53
$82
 $(47) $(163) $89
 
Excess of Loss Reinsurance Facility
 
On January 22, 2012, AGC, AGM and AGMMAC entered into ana $360 million aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2012.2016. This facility replaces a similar $450 million aggregate excess of loss reinsurance facility that AGC, AGM and MAC had entered into effective January 1, 2014 and which terminated on December 31, 2015. The new facility covercovers losses occurring either from January 1, 20132016 through December 31, 2020.2023, or January 1, 2017 through December 31, 2024, at the option of AGC, AGM and MAC. It terminates on January 1, 20142018, unless AGC, AGM and AGMMAC choose to extend it. The new facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and AGMMAC as of September 30, 2011,2015, excluding credits that were rated non-investment grade as of December 31, 20112015 by Moody’s or S&P or internally by AGC, AGM or AGMMAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The new facility attaches when AGC’s, or AGM’s and MAC’s net losses (net of AGC’s and AGM otherAGM's reinsurance other than pooling reinsurance provided to AGM by AGM’s subsidiaries(including from affiliates) and net of recoveries) exceed $1.25 billion in the aggregate $2 billion andaggregate. The new facility covers a portion of the next $600$400 million of losses, with the reinsurers assuming pro rata in the aggregate $435$360 million of the $600$400 million of losses and AGC, AGM and AGMMAC jointly retaining the remaining $165 million of losses.$40 million. The reinsurers are required to be rated at least AA-(Stable Outlook) through December 31, 2014 or to post collateral sufficient to provide AGM, AGC and AGCMAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and AGCMAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. This obligation is secured by a pledgeAGC, AGM and MAC paid approximately $9 million of premiums in 2016 for the recoveries, which will beterm January 1, 2016 through December 31, 2016 and deposited approximately $9 million of securities into a trust accounts for the benefit of the reinsurers.reinsurers to be used to pay the premium for January 1, 2017 through December 31, 2017. The Company has paid approximately $22 million of premiums during 2012. The remaining $22 million of premium was released frommain differences between the trust tonew facility and the reinsurers in the first quarter of 2013.
Re-Assumption and Reinsurance Agreements with Radian Asset Assurance Inc.
On January 24, 2012, AGM reassumed $12.9 billion of par it had previously ceded to Radian and AGC reinsured approximately $1.8 billion of U.S. public finance par from Radian. The Company received a payment of $86 million from Radian for the re-assumption, which consisted 96% of public finance exposure and 4% of structured finance credits. In connection withprior facility that terminated on December 31, 2015 are the reinsurance assumption,attachment point ($1.25 billion versus $1.5 billion), the Company received a paymenttotal reinsurance coverage ($360 million part of $22$400 million versus $450 million part of $500 million) and the annual premium ($9 million versus $19 million)Both the reassumed and reinsured portfolios were composed entirely of selected credits that met the Company’s underwriting standards.
Tokio Marine & Nichido Fire Insurance Co., Ltd. Agreement
Effective as of March 1, 2012, AGM and Tokio entered into a Commutation, Reassumption and Release Agreement for a portfolio consisting of approximately $6.2 billion in par of U.S. public finance exposures outstanding as of February 29, 2012. Tokio paid AGM the statutory unearned premium outstanding as of February 29, 2012 plus a commutation premium.
 

239242


15.14.Related Party Transactions

In 2012, there were no related party transactions that were material to the Company. The Company was party to transactions with entities that are affiliated with Wilbur L. Ross, Jr., who had been a director of the Company until November 21, 2014. Mr. Ross and the funds under his control which in the aggregate owned approximately 10.2%8.2% of the AGL common shares of AGL as of December 31, 2012. 2013. However, in 2014, Mr. Ross and the funds sold all of the AGL shares they owned and Mr. Ross resigned from the AGL board. At the time of his resignation, WL Ross and Co. LLC issued a press release announcing that Mr. Ross had been elected Vice Chairman of Bank of Cyprus and, due to rules limiting directorships of bank officers, would be resigning from the boards of directors of several companies, including that of Assured Guaranty.

In addition, the Company retains Wellington Management Company, LLP which owns approximately 8.6% of the common shares of AGL as of December 31, 2012,("Wellington"), as investment manager for a portion of the Company's investment portfolio. Wellington owned approximately 9.0% of the common shares of AGL as of December 31, 2015, 9.3% as of December 31, 2014 and 6.6% as of December 31, 2013.

The net expenses from transactions with these related partiesWellington were approximately $3.4$1.9 million, in 2015 and $1.9 million in 2014. The net expenses from transactions with Wellington and WL Ross were $2.5 million in 2013, with no individual related party expense item exceeding $2.0 million.$1.9 million. As of December 31, 2012,2015 and 2014 there were no significant amounts payable to or amounts receivable from related parties. In addition, please refer to Note 18, Shareholders' Equity, for a description of the transaction under which the Company purchased common shares from funds associated with WL Ross & Co. LLC and its affiliates and from Mr. Ross.

16.15.Commitments and Contingencies
 
Leases

AGL and its subsidiaries are party to various lease agreements accounted for as operating leases. In June 2008, the Company entered into a five-year lease agreement for New York City office space. Future minimum annual payments of $5 million for the first twelve month period and $6 million for subsequent twelve month periods commenced October 1, 2008 and are subject to escalation in building operating costs and real estate taxes. As a result of the AGMH Acquisition, in second quarter 2009 the Company decided not to occupy the office space described above and subleased it to two tenants for total minimum annual payments of approximately $4 million until October 2013.

The Company leases and occupies space in New York City through April 2026.2032. In addition, AGL and its subsidiaries lease additional office space in various locations under non-cancelable operating leases which expire at various dates through 2016.2029. Rent expense was $10.0$10.5 million in 2012, $10.72015, $10.1 million in 20112014 and $11.4$9.9 million in 2010.2013.

AGM entered into an operating lease effective January 1, 2016, for new office space comprising one full floor and one partial floor at 1633 Broadway in New York City.  The Company plans to move the principal place of business of AGM, AGC, MAC and the Company's other U.S. based subsidiaries from 31 West 52nd Street in New York City to this new location during the summer of 2016.  The new lease is for approximately 88,000 square feet and runs until 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent.  The fixed annual rent, which commences after an initial rent holiday, begins at $6.2 million, rising in two steps to $7.3 million for the last five years of the initial term.  In connection with the move and in return for rent abatement and certain other concessions, AGM agreed to terminate, eight months after its new space is delivered, its lease on its existing office space at 31 West 52nd Street, which had been scheduled to run until 2026.

Future Minimum Rental Payments

Year (in millions) (in millions)
2013$14
20148
20158
201620168
2016$4
201720178
20176
201820187
201920198
202020208
ThereafterThereafter66
Thereafter84
TotalTotal$112
Total$117


243


Legal Proceedings
Litigation

Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations in a particular quarter or year.

In addition, in the ordinary course of their respective businesses, certain of the Company’sCompany's subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods.periods or prevent losses in the future. For example, as described in the "Recovery Litigation" section of Note 6,5, Expected Loss to be Paid, "Recovery Litigation", asin January 2016 the Company commenced an action for declaratory judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico to invalidate executive orders issued by the Governor of Puerto Rico directing the retention or transfer of certain taxes and revenues pledged to secure the payment of certain bonds insured by the Company. Also, in December 2008, the Company filed a claim in the Supreme Court of the dateState of this filing, AGC and AGM have filed complaintsNew York against certain sponsors and underwriters of RMBS securities that AGC or AGM hadan investment manager in a transaction it insured alleging among other claims, that such persons had breached R&W in the transaction documents, failed to cure or repurchase defective loans and/or violated state securities laws.breach of fiduciary duty, gross negligence and breach of contract. The amounts, if any, the Company will recover in proceedings to recover losses are uncertain, and recoveries, or failure to obtain recoveries, in any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year.

Accounting Policy
    

240

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

Litigation

Proceedings Relating to the Company’s Financial Guaranty Business
 
The Company receives subpoenas duces tecum and interrogatories from regulators from time to time.
In August 2008, a number of financial institutions and other parties, including AGM and other bond insurers, were named as defendants in a civil action brought in the circuit court of Jefferson County, Alabama relating to the County’s problems meeting its sewer debt obligations: Charles E. Wilson vs. JPMorgan Chase & Co et al (filed the Circuit Court of Jefferson County, Alabama), Case No. 01-CV-2008-901907.00, a putative class action. The action was brought on behalf of rate payers, tax payers and citizens residing in Jefferson County, and alleges conspiracy and fraud in connection with the issuance of the County’s debt. The complaint in this lawsuit seeks equitable relief, unspecified monetary damages, interest, attorneys’ fees and other costs. On January, 13, 2011, the circuit court issued an order denying a motion by the bond insurers and other defendants to dismiss the action. Defendants, including the bond insurers, have petitioned the Alabama Supreme Court for a writ of mandamus to the circuit court vacating such order and directing the dismissal with prejudice of plaintiffs’ claims for lack of standing. On January 23, 2012, the Alabama Supreme Court entered a stay pending the resolution of the Jefferson County bankruptcy. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from this lawsuit.
Beginning in July 2008, AGM and various other financial guarantors were named in complaints filed in the Superior Court for the State of California, City and County of San Francisco. Since that time, plaintiffs’ counsel has filed amended complaints against AGM and AGC and added additional plaintiffs. As of the date of this filing, the plaintiffs with complaints against AGM and AGC, among other financial guaranty insurers, are: (a) City of Los Angeles, acting by and through the Los Angeles Department of Water and Power; (b) City of Sacramento; (c) City of Los Angeles; (d) City of Oakland; (e) City of Riverside; (f) City of Stockton; (g) County of Alameda; (h) Contra Costa County; (i) County of San Mateo; (j) Los Angeles World Airports; (k) City of Richmond; (l) Redwood City; (m) East Bay Municipal Utility District; (n) Sacramento Suburban Water District; (o) City of San Jose; (p) County of Tulare; (q) The Regents of the University of California; (r) The Redevelopment Agency of the City of Riverside; (s) The Public Financing Authority of the City of Riverside; (t) The Jewish Community Center of San Francisco; (u) The San Jose Redevelopment Agency; (v) The Redevelopment Agency of the City of Stockton; (w) The Public Financing Authority of the City of Stockton; and (x) The Olympic Club. Complaints filed by the City and County of San Francisco and the Sacramento Municipal Utility District were subsequently dismissed as to AGM and AGC. These complaints allege that the financial guaranty insurer defendants (i) participated in a conspiracy in violation of California’s antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance, (ii) participated in risky financial transactions in other lines of business that damaged each insurer’s financial condition (thereby undermining the value of each of their guaranties), and (iii) failed to adequately disclose the impact of those transactions on their financial condition. In addition to their antitrust claims, various plaintiffs in these actions assert claims for breach of the covenant of good faith and fair dealing, fraud, unjust enrichment, negligence, and negligent misrepresentation. At hearings held in July and October 2011 relating to AGM, AGC and the other defendants’ demurrer, the court overruled the demurrer on the following claims: breach of contract, violation of California’s antitrust statute and of its unfair business practices law, and fraud. The remaining claims were dismissed. On December 2, 2011, AGM, AGC and the other bond insurer defendants filed an anti-SLAPP (“Strategic Lawsuit Against Public Participation”) motion to strike the complaints under California’s Code of Civil Procedure. On May 1, 2012, the court ruled in favor of the bond insurer defendants on the first stage of the anti-SLAPP motion as to the causes of action arising from the alleged conspiracy, but denied the motion as to those causes of action based on transaction specific representations and omissions about the bond insurer defendants’ credit ratings and financial health.  The court has scheduled a hearing on the second stage of the anti-SLAPP motion for March 12, 2013. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from these lawsuits.
On April 8, 2011, AG Re and AGC filed a Petition to Compel Arbitration with the Supreme Court of the State of New York, requesting an order compelling Ambac to arbitrate Ambac’s disputes with AG Re and AGC concerning their obligations under reinsurance agreements with Ambac. In March 2010, Ambac placed a number of insurance policies that it had issued, including policies reinsured by AG Re and AGC pursuant to the reinsurance agreements, into a segregated account. The Wisconsin state court has approved a rehabilitation plan whereby permitted claims under the policies in the segregated account will be paid 25% in cash and 75% in surplus notes issued by the segregated account. Ambac has advised AG Re and AGC that it has and intends to continue to enter into commutation agreements with holders of policies issued by Ambac, and reinsured by AG Re and AGC, pursuant to which Ambac will pay a combination of cash and surplus notes to the policyholder. AG Re and AGC have informed Ambac that they believe their only current payment obligation with respect to the commutations arises from the cash payment, and that there is no obligation to pay any amounts in respect of the surplus notes until payments of principal or interest are made on such notes. Ambac has disputed this position on one commutation and may take a similar position on subsequent commutations. On April 15, 2011, attorneys for the Wisconsin Insurance Commissioner, as

241


Rehabilitator of Ambac’s segregated account, and for Ambac filed a motion with Lafayette County, Wisconsin, Circuit Court Judge William Johnston, asking him to find AG Re and AGC to be in violation of an injunction protecting the interests of the segregated account by their seeking to compel arbitration on this matter and failing to pay in full all amounts with respect to Ambac’s payments in the form of surplus notes. On June 14, 2011, Judge Johnston issued an order granting the Rehabilitator’s and Ambac’s motion to enforce the injunction against AGC and AG Re and the parties filed a stipulation dismissing the Petition to Compel Arbitration without prejudice. AGC and AG Re have appealed Judge Johnston’s order to the Wisconsin Court of Appeals.
 
On November 28, 2011, Lehman Brothers International (Europe) (in administration) (“LBIE”) sued AGFP, an affiliate of AGC which in the past had provided credit protection to counterparties under credit default swaps. AGC acts as the credit support provider of AGFP under these credit default swaps. LBIE’s complaint, which was filed in the Supreme Court of the State of New York, alleged that AGFP improperly terminated nine credit derivative transactions between LBIE and AGFP and improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions between LBIE and AGFP. With respect toFollowing defaults by LBIE, AGFP properly terminated the 28 credit derivative transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP calculated that LBIE owes AGFP approximately $2529 million, in connection with the termination of the credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. LBIE is seeking unspecified damages. On February 3, 2012, AGFP filed a motion to dismiss certain of the counts in the complaint. Oral argumentscomplaint, and on suchMarch 15, 2013, the court granted AGFP's motion to dismiss took placethe count relating to improper termination of the nine credit derivative transactions and denied AGFP's motion to dismiss the counts relating to the remaining transactions. On February 22, 2016, AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP's counterclaims. LBIE's administrators disclosed in September 2012. LBIEan April 10, 2015 report to LBIE’s unsecured creditors that LBIE's valuation expert has calculated LBIE's damages in aggregate for the 28 transactions to range between a minimum of approximately $200 million and a maximum of approximately $500 million, depending on what adjustment, if any, is seeking unspecified damages. Themade for AGFP's credit risk and excluding any applicable interest. Notwithstanding the range calculated by LBIE's valuation expert, the Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.

On November 19, 2012, Lehman Brothers Holdings Inc. (“LBHI”) and Lehman Brothers Special Financing Inc. (“LBSF") commencedSeptember 25, 2013, Wells Fargo Bank, N.A., as trust administrator of the MASTR Adjustable Rate Mortgages Trust 2007-3, filed an adversaryinterpleader complaint and claim objection in the United States BankruptcyU.S. District Court for the Southern District of New York against Credit Protection Trust 283AGM, among others, relating to the right of AGM to be reimbursed from certain cashflows for principal claims paid in respect of insured certificates. The Company estimates that an adverse outcome to the interpleader proceeding could increase losses on the transaction by approximately $10 - $20 million, net of expected settlement payments and reinsurance in force.

244


On May 28, 2014, Houston Casualty Company Europe, Seguros y Reseguros, S.A. (“CPT 283”HCCE”), FSA Administrative Services, LLC, as trustee for CPT 283, and AGM, notified Radian Asset that it was demanding arbitration against Radian Asset in connection with CPT 283's terminationhousing cooperative losses presented to Radian Asset by HCCE under several years of a CDS between LBSFquota-share surety reinsurance contracts. Through November 30, 2015, HCCE had presented AGC, as successor to Radian Asset, with approximately €15 million in claims.  In January 2016, Assured Guaranty and CPT 283. CPT 283 terminatedHCCE settled all the CDS as a consequence of LBSF failingclaims related to make a scheduled payment owed to CPT 283, which termination occurred after LBHI filed for bankruptcy but before LBSF filed for bankruptcy. The CDS provided that CPT 283 was entitled to receive from LBSF a termination payment in that circumstance of approximately $43.8 million (representing the economic equivalent of the future fixed payments CPT 283 would have been entitled to receive from LBSF had the CDS not been terminated), and CPT 283 filed proofs of claim against LBSF and LBHI (as LBSF's credit support provider) for such amount. LBHI and LBSF seek to disallow and expunge (as impermissible and unenforceable penalties) CPT 283's proofs of claim against LBHI and LBSF and recover approximately $67.3 million, which LBHI and LBSF allege was the mark-to-market value of the CDS to LBSF (less unpaid amounts) on the day CPT 283 terminated the CDS, plus interest, attorney's fees, costs and other expenses. On the same day, LBHI and LBSF also commenced an adversary complaint and claim objection against Credit Protection Trust 207 (“CPT 207”), FSA Administrative Services, LLC, as trustee for CPT 207, and AGM, in connection with CPT 207's termination of a CDS between LBSF and CPT 207. Similarly, the CDS provided that CPT 207 was entitled to receive from LBSF a termination payment in that circumstance of $492,555. LBHI and LBSF seek to disallow and expunge CPT 207's proofs of claim against LBHI and LBSF and recover approximately $1.5 million. AGM believes the terminations of the CDS and the calculation of the termination payment amounts were consistent with the terms of the ISDA master agreements between the parties. The Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.Spanish housing cooperative losses.
Proceedings Related to AGMH’s Former Financial Products Business
     
The following is a description of legal proceedings involving AGMH’s former Financial Products Business. Although the Company did not acquire AGMH’s former Financial Products Business, which included AGMH’s former GIC business, medium term notes business and portions of the leveraged lease businesses, certain legal proceedings relating to those businesses are against entities that the Company did acquire. While Dexia SA and Dexia Crédit Local S.A. (“DCL”), jointly and severally, have agreed to indemnify the Company against liability arising out of the proceedings described below, in the “—Proceedings Related to AGMH’s Former Financial Products Business” section, such indemnification might not be sufficient to fully hold the Company harmless against any injunctive relief or civil or criminal sanction that is imposed against AGMH or its subsidiaries.
 
Governmental Investigations into Former Financial Products Business
 
AGMH and/or AGM have received subpoenas duces tecum and interrogatories or civil investigative demands from the Attorneys General of the States of Connecticut, Florida, Illinois, Massachusetts, Missouri, New York, Texas and West Virginia relating to their investigations of alleged bid rigging of municipal GICs. AGMH ishas been responding to such requests. AGMH may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future. In addition,

242


AGMH received a subpoena from the Antitrust Division of the Department of Justice in November 2006 issued in connection with an ongoing criminal investigation of bid rigging of awards of municipal GICs and other municipal derivatives;
AGM received a subpoena from the Securities and Exchange Commission ("SEC") in November 2006 related to an ongoing industry-wide investigation concerning the bidding of municipal GICs and other municipal derivatives; and
AGMH received a “Wells Notice” from the staff of the Philadelphia Regional Office of the SEC in February 2008 relating to the investigation concerning the bidding of municipal GICs and other municipal derivatives. The Wells Notice indicates that the SEC staff is considering recommending that the SEC authorize the staff to bring a civil injunctive action and/or institute administrative proceedings against AGMH, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act.
Pursuant to the subpoenas,that subpoena, AGMH has furnished to the Department of Justice and SEC records and other information with respect to AGMH’s municipal GIC business. The ultimate loss that may arise from these investigations remains uncertain.
In July 2010, a former employee of AGM who had been involved in AGMH's former Financial Products Business was indicted along with two other persons with whom he had worked at Financial Guaranty Insurance Company. Such former employee and the other two persons were convicted on fraud conspiracy counts. They have appealed the convictions.

Lawsuits Relating to Former Financial Products Business
 
During 2008, nine putative class action lawsuits were filed in federal court alleging federal antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. These cases have been coordinated and consolidated for pretrial proceedings in the U.S. District Court for the Southern District of New York as MDL 1950, In re Municipal Derivatives Antitrust Litigation, Case No. 1:08-cv-2516 (“MDL 1950”).
Five of these cases named both AGMH and AGM: (a) Hinds County, Mississippi v. Wachovia Bank, N.A.; (b) Fairfax County, Virginia v. Wachovia Bank, N.A.; (c) Central Bucks School District, Pennsylvania v. Wachovia Bank, N.A.; (d) Mayor and City Council of Baltimore, Maryland v. Wachovia Bank, N.A.; and (e) Washington County, Tennessee v. Wachovia Bank, N.A. In April 2009, the MDL 1950 court granted the defendants’ motion to dismiss on the federal claims for these five cases, but granted leave for the plaintiffs to file a secondan amended complaint. In June 2009, interim lead plaintiffs’ counsel filed a Second Consolidated Amended Class Action Complaint; although the SecondThe Corrected Third Consolidated Amended Class Action Complaint, currently describes some of AGMH’s and AGM’s activities, it does not name those entitiesfiled on October 9, 2013, lists neither AGM nor AGMH as defendants. In March 2010, the MDL 1950 court denied thea named defendants’ motions to dismiss the Second Consolidated Amended Class Action Complaint.defendant or a co-conspirator. The complaints in these lawsuitscomplaint generally seekseeks unspecified monetary damages, interest, attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.
Fourother of thefour cases named AGMH (but not AGM) and also alleged that the defendants violated California state antitrust law and common law by engaging in illegal bid-rigging and market allocation, thereby depriving the cities or municipalities of competition in the awarding of GICs and ultimately resulting in the cities paying higher fees for these products: (f) City of Oakland, California v. AIG Financial Products Corp.; (g) County of Alameda, California v. AIG Financial Products Corp.; (h) City of Fresno, California v. AIG Financial Products Corp.; and (i) Fresno County Financing Authority v. AIG Financial Products Corp. When the four plaintiffs filed a consolidated complaint in September 2009, the plaintiffs did not name AGMH as a defendant. However, the complaint does describe some of AGMH’s and AGM’s activities. The consolidated complaint generally seeks unspecified monetary damages, interest, attorneys’ fees and other costs. In April 2010, the MDL 1950 court granted in part and denied in part the named defendants’ motions to dismiss this consolidated complaint. On September 22, 2015, the remaining parties to the putative class action reported to the MDL 1950 Court that settlements in principle had been reached, and a motion for preliminary approval of those putative class claims was filed on February 24, 2016. The parties have reported that final settlement with those remaining defendants would resolve the putative class case. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.
 
In 2008, AGMH and AGM also were named in five non-class action lawsuits originally filed in the California Superior Courts alleging violations of California law related to the municipal derivatives industry: (a) City of Los Angeles, California v. Bank of America, N.A.; (b) City of Stockton, California v. Bank of America, N.A.; (c) County of San Diego, California v. Bank of America, N.A.; (d) County of San Mateo, California v. Bank of America, N.A.; and (e) County of Contra Costa, California v.

245


Bank of America, N.A. Amended complaints in these actions were filed in September 2009, adding a federal antitrust claim and naming AGM (but not AGMH) and AGUS, among other defendants. These cases have been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings.

243


In late 2009, AGM and AGUS, among other defendants, were named in six additional non-class action cases filed in federal court, which also have been coordinated and consolidated for pretrial proceedings with MDL 1950:1950; one was voluntarily dismissed with prejudice in October 2010, leaving five that are currently pending: (f) City of Riverside, California v. Bank of America, N.A.; (g) Sacramento Municipal Utility District v. Bank of America, N.A.; (h) Los Angeles World Airports v. Bank of America, N.A.; (i)(h) Redevelopment Agency of the City of Stockton v. Bank of America, N.A.; (j)(i) Sacramento Suburban Water District v. Bank of America, N.A.; and (k)(j) County of Tulare, California v. Bank of America, N.A.
The MDL 1950 court denied AGM and AGUS’s motions to dismiss these the eleven complaints inthat were pending as of April 2010. Amended complaints were filed in May 2010. On October 29, 2010, AGM and AGUS were voluntarily dismissed with prejudice from the Sacramento Municipal Utility District case only. The complaints in these lawsuits generally seek or sought unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from the remaining lawsuits.
 
In May 2010, AGM and AGUS, among other defendants, were named in five additional non-class action cases filed in federal court in California: (a) City of Richmond, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); (b) City of Redwood City, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); (c) Redevelopment Agency of the City and County of San Francisco, California v. Bank of America, N.A. (filed on May 21, 2010, N.D. California); (d) East Bay Municipal Utility District, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); and (e) City of San Jose and the San Jose Redevelopment Agency, California v. Bank of America, N.A (filed on May 18, 2010, N.D. California). These cases have also been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings. In September 2010, AGM and AGUS, among other defendants, were named in a sixth additional non-class action filed in federal court in New York, but which alleges violation of New York’s Donnelly Act in addition to federal antitrust law: Active Retirement Community, Inc. d/b/a Jefferson’s Ferry v. Bank of America, N.A. (filed on September 21, 2010, E.D. New York), which has also been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings. In December 2010, AGM and AGUS, among other defendants, were named in a seventh additional non-class action filed in federal court in the Central District of California, Los Angeles Unified School District v. Bank of America, N.A., and in an eighth additional non-class action filed in federal court in the Southern District of New York, Kendal on Hudson, Inc. v. Bank of America, N.A. These cases also have been consolidated with MDL 1950 for pretrial proceedings. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.
 
In January 2011, AGM and AGUS, among other defendants, were named in an additional non-class action case filed in federal court in New York, which alleges violation of New York’s Donnelly Act in addition to federal antitrust law: Peconic Landing at Southold, Inc. v. Bank of America, N.A. This case has been consolidated with MDL 1950 for pretrial proceedings. The complaint in this lawsuit generally seeks unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from this lawsuit.
 
In September 2009, the Attorney General of the State of West Virginia filed a lawsuit (Circuit Ct. Mason County, W. Va.) against Bank of America, N.A. alleging West Virginia state antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. An amended complaint in this action was filed in June 2010, adding a federal antitrust claim and naming AGM (but not AGMH) and AGUS, among other defendants. This case has been removed to federal court as well as transferred to the S.D.N.Y. and consolidated with MDL 1950 for pretrial proceedings. AGM and AGUS answered West Virginia's Second Amended Complaint on November 11, 2013. The complaint in this lawsuit generally seeks civil penalties, unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from this lawsuit.
 
17.16.Long-Term Debt and Credit Facilities
      
The Company's long term debt has been issued by AGUS and AGMH, and notes payable to the Financial Products Companies were issued by refinancing vehicles consolidated by AGM. With respect to the notes payable, the funds borrowed were used to finance the purchase of the underlying obligations of AGM-insured obligations. See Note 11, Investments and Cash.

AGL fully and unconditionally guarantees the 7.0% Senior Notes issued by AGUS. AGL also fully and unconditionally guarantees the following AGMH debt obligations: (1) 6 7/8% Quarterly Income Bonds Securities (“QUIBS”), (2) 6.25% Notes and (3) 5.60% Notes. In addition, AGL guarantees, on a junior subordinated basis, AGUS’s Series A, Enhanced Junior Subordinated Debentures and the $300 million of AGMH’s outstanding Junior Subordinated Debentures.

244


Accounting Policy

Long-term debt is recorded at principal amounts net of any unamortized original issue discount or premium and unamortized AGMH Acquisition date fair value adjustment for AGMH debt. Discount isdebt (as of the date of the AGMH acquisition). Discounts and acquisition date fair value adjustments are accreted into interest expense over the life of the applicable debt.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest(Topic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Effective December 31, 2015, the Company retrospectively adopted this accounting guidance. Therefore, the Company no

246


longer includes debt issuance costs in assets. The Company early-adopted this guidance effective December 31, 2015 and has retrospectively revised the prior year consolidated balance sheet and long-term debt disclosures. The adoption resulted in the reduction of other assets and long-term debt of $5 million and $6 million as of December 31, 2015 and 2014, respectively.

Long Term Debt

The Company has outstanding long-term debt comprising primarily debt issued by AGUS and AGMH. AGUS has issued 7.0% Senior Notes, 5.0% Senior Notes and Series A, Enhanced Junior Subordinated Debentures. AGMH has issued 6 7/8% Quarterly Income Bonds Securities (“QUIBS”), 6.25% Notes and 5.60% Notes, as well $300 million Junior Subordinated Debentures. All of such debt is fully and unconditionally guaranteed by AGL; AGL's guarantee of the junior subordinated debentures is on a junior subordinated basis.

Debt Issued by AGUS
 
7.0% Senior Notes.  On May 18, 2004, AGUS issued $200 million of 7.0% senior notes due 2034 (“7.0% Senior Notes”) for net proceeds of $197 million. Although the coupon on the Senior Notes is 7.07.0%%, the effective rate is approximately 6.46.4%%, taking into account the effect of a cash flow hedge executed by the Company in March 2004.
 
8.5%5.0% Senior Notes.On June 24, 2009, AGL20, 2014, AGUS issued 3,450,000 equity units$500 million of 5.0% Senior Notes due 2024 ("5.0% Senior Notes") for net proceeds of approximately $167 million in a registered public offering.$495 million. The notes are guaranteed by AGL. The net proceeds from the sale of the offeringnotes were used to pay a portion offor general corporate purposes, including the consideration for the AGMH Acquisition. Each equity unit consisted of (i) a 5% undivided beneficial ownership interest in $1,000 principal amount of 8.5% senior notes due 2014 issued by AGUS and (ii) a forward purchase contract obligating the holders to purchase $50 of AGL common shares in June 2012. On June 1, 2012, the Company completed the remarketing of the $173 million aggregate principal amount of 8.5% Senior Notes; AGUS purchased all of the Senior Notes in the remarketing at a price of 100% of the principal amount thereof, and retired all of such notes on June 1, 2012. The proceeds from the remarketing were used to satisfy the obligations of the holders of the Equity Units to purchase AGL common shares pursuant to the forward purchase contract. Accordingly, on June 1, 2012, AGL issued 3.8924 common shares to holders of each Equity Unit, which represented a settlement rate of 3.8685 common shares plus certain anti-dilution adjustments, or an aggregate of 13,428,770 common shares at approximately $12.85 per share. The Equity Units ceased to exist when the forward purchase contracts were settled on June 1, 2012.shares.

Series A Enhanced Junior Subordinated Debentures.  On December 20, 2006, AGUS issued $150 million of the Debentures due 2066. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%. AGUS may select at 1.0one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date.
 
Debt Issued by AGMH
 
6 7/8% QUIBS.  On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due December 15, 2101, which are callable without premium or penalty.
 
6.25% Notes.  On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are callable without premium or penalty in whole or in part.
 
5.60% Notes.  On July 31, 2003, AGMH issued $100 million face amount of 5.60% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part.
 
Junior Subordinated Debentures.  On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.40%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215%% until repaid. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is 20 years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH.


245247


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

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

As of December 31, 2012 As of December 31, 2011As of December 31, 2015 As of December 31, 2014
Principal
Carrying
Value

Principal
Carrying
Value
Principal
Carrying
Value

Principal
Carrying
Value
(in millions)(in millions)
AGUS: 

 

 

 
 

 

 

 
7.0% Senior Notes$200
 $197

$200
 $197
$200
 $197

$200
 $196
8.50% Senior Notes
 

173
 172
5.0% Senior Notes500
 495
 500
 495
Series A Enhanced Junior Subordinated Debentures150
 150

150
 150
150
 150

150
 150
Total AGUS350
 347

523
 519
850
 842

850
 841
AGMH: 
  

 
  
 
  

 
  
67/8% QUIBS
100
 68

100
 67
100
 69

100
 68
6.25% Notes230
 137

230
 136
230
 140

230
 139
5.60% Notes100
 54

100
 54
100
 56

100
 55
Junior Subordinated Debentures300
 164

300
 158
300
 180

300
 175
Total AGMH730
 423

730
 415
730
 445

730
 437
AGM: 
  

 
  
 
  

 
  
Notes Payable61
 66

97
 104
12
 13

16
 19
Total AGM61
 66

97
 104
12
 13

16
 19
Total$1,141
 $836

$1,350
 $1,038
$1,592
 $1,300

$1,596
 $1,297


Principal payments due under the long-term debt are as follows:

Expected Maturity Schedule of Debt

 Expected Withdrawal Date AGUS AGMH AGM Total
  (in millions)
2013 $
 $
 $22
 $22
2014 
 
 10
 10
2015 
 
 10
 10
2016 
 
 6
 6
2017 
 
 13
 13
2018-2037 200
 
 0
 200
2038-2057 
 
 
 
2058-2077 150
 300
 
 450
Thereafter 
 430
 
 430
Total $350
 $730
 $61
 $1,141

 Expected Withdrawal Date AGUS AGMH AGM Total
  (in millions)
2016 $
 $
 $4
 $4
2017 
 
 4
 4
2018 
 
 2
 2
2019 
 
 1
 1
2020 
 
 0
 0
2021-2040 700
 
 1
 701
2041-2060 
 
 
 
2061-2080 150
 300
 
 450
Thereafter 
 430
 
 430
Total $850
 $730
 $12
 $1,592



246248


Interest Expense

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions)(in millions)
AGUS: 
  
  
 
  
  
7.0% Senior Notes$13
 $13
 $13
$13
 $13
 $13
8.50% Senior Notes8
 16
 16
5.0% Senior Notes26
 13
 
Series A Enhanced Junior Subordinated Debentures10
 10
 10
10
 10
 10
Total AGUS31
 39
 39
49
 36
 23
AGMH: 
  
  
 
  
  
67/8% QUIBS
7
 7
 7
7
 7
 7
6.25% Notes16
 16
 16
16
 16
 16
5.60% Notes6
 6
 6
6
 6
 6
Junior Subordinated Debentures25
 25
 25
25
 25
 25
Total AGMH54
 54
 54
54
 54
 54
AGM: 
  
  
 
  
  
Notes Payable7
 6
 7
(2) 2
 5
Total AGM7
 6
 7
(2) 2
 5
Total$92
 $99
 $100
$101
 $92
 $82


Recourse Credit Facilities
 
2009 Strip Coverage Facility
 
In connection with the Company's acquisition of AGMH Acquisition,and its subsidiaries from Dexia Holdings Inc., AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. The liquidity risk to AGM related to the strip policy portion of the leveraged lease business is mitigated by the strip coverage facility described below.
 
In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.
 
If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the “strip coverage”) from its own sources. AGM issued financial guaranty insurance policies (known as “strip policies”) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.
 
One event that may lead to an early termination of a lease is the downgrade of AGM, as the strip coverage provider, or the downgrade of the equity payment undertaker within the transaction, in each case, generally to a financial strength rating below double-A. Upon such downgrade, the tax exempt entity is generally obligated to find a replacement credit enhancer within a specified period of time; failure to find a replacement could result in a lease default, and failure to cure the default within a specified period of time could lead to an early termination of the lease and a demand by the lessor for a termination payment from the tax exempt entity. However, even in the event of an early termination of the lease, there would not necessarily be an automatic draw on AGM’s policy, as this would only occur to the extent the tax-exempt entity does not make the required termination payment.
As a result of the January 2013 Moody's downgrade of AGM,Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are currently breaching a ratingsrating trigger related to AGM. IfAGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to occurterminate early and the tax-exempt entities do not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $1.7$1.1 billion as of December 31, 2012.2015. To date, none of the

247


leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM guaranty.policy. It is difficult to determine the probability that the CompanyAGM will have to pay strip provider claims or the likely aggregate amount of such claims. At December 31, 2012,2015, approximately $947 million$1.4 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM.
 
On July 1, 2009, AGM and DCL,Dexia Crédit Local S.A., acting through its New York Branch (“Dexia Crédit Local (NY)”), entered into a credit facility (the “Strip Coverage Facility”). Under the Strip Coverage Facility, Dexia Crédit Local

249


(NY) agreed to make loans to AGM to finance all draws made by lessors on AGM strip policies that were outstanding as of November 13, 2008, up to the commitment amount. The commitment amount of the Strip Coverage Facility was $1 billion at closing of the AGMH Acquisition but is scheduled to amortize over time. AsCompany's acquisition of December 31, 2012,AGMH. AGM has reduced the maximum commitment amount from time to time, after taking into account its experience with its exposure to leveraged lease transactions. Most recently, as of June 30, 2014, AGM reduced the Strip Coverage Facility has amortizedmaximum commitment amount to $960$495 million. It may also be reduced in 2014 to $750 million, if AGM does not have and agreed with Dexia Crédit Local (NY) that the commitment amount would no longer amortize on a specified consolidated net worth at that time.scheduled monthly basis.
 
Fundings under this facility are subject to certain conditions precedent, and their repayment is collateralized by a security interest that AGM granted to Dexia Crédit Local (NY) in amounts that AGM recovers—from the tax-exempt entity, or from asset sale proceeds—following its payment of strip policy claims. TheOn June 30, 2014, AGM and Dexia Crédit Local (NY) agreed to shorten the duration of the facility. Accordingly, the Strip Coverage Facility will terminate upon the earliest to occur of an AGM change of control, the reduction of the commitment amount to $$0, in accordance with the terms of the facility, and June 30, 2024 (rather than the original maturity date of January 31, 2042.2042).
 
The Strip Coverage Facility’s financial covenants require that AGM and its subsidiaries maintain maintain:
a maximum debt-to-capital ratio of 30%; and maintain

a minimum net worth of 75% of consolidated net worth as of July 1, 2009, plus, starting July 1, 2014,beginning June 30, 2015 and on each anniversary of such date, an amount equal to the product of (i) 25% of the aggregate consolidated net income (or loss) for the period beginning July 1,2, 2009 and ending on June 30, 2014 or, (2) zero, ifand (ii) a fraction, the numerator of which is the commitment amount has been reduced to $750 millionas described above. of the relevant calculation date and the denominator of which is $1 billion.

The Company iswas in compliance with all financial covenants as of December 31, 2012.2015.

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

As of December 31, 20122015, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.
 
Limited RecourseIntercompany Credit FacilitiesFacility and Intercompany Debt

AG Re Credit Facility
On July 31, 2007, AG ReOctober 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a limited recourserevolving credit facility (“AG Re Credit Facility”) withpursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a syndicateprincipal amount not exceeding $225 million in the aggregate. Such commitment terminates on October 25, 2018 (the “loan termination date”). The unpaid principal amount of banks which provides upeach loan will bear interest at a fixed rate equal to $200 million100% of the then applicable Federal short-term or mid-term interest rate, as the case may be, as determined under Internal Revenue Code Sec. 1274(d), and interest on all loans will be computed for the paymentactual number of losses in respectdays elapsed on the basis of a year consisting of 360 days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013, and at maturity.  AGL must repay the then unpaid principal amounts of the covered portfolio. The AG Re Credit Facility expires in June 2014 and is not likely to be renewed. The facility can be utilized after AG Re has incurred, duringloans by the termthird anniversary of the facility, cumulative municipal losses (netloan termination date. No amounts are currently outstanding under the credit facility.

On March 30, 2015, AGUS loaned $200 million to AGC to facilitate the acquisition of any recoveries)Radian Asset on April 1, 2015. AGC repaid the loan in excessfull on April 14, 2015.

In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of the greaterMAC. That loan remained outstanding as of $260 million or the average annual Debt Service of the covered portfolio multiplied by 4.5%. The obligation to repay loans under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral.
As of December 31, 2012 no amounts were outstanding under this facility nor have there been any borrowings during the life2015.


250

Letters of Credit
AGC entered into a letter of credit agreement in December 2011 with Bank of New York Mellon totaling approximately $2.9 million in connection with a 2008 lease for office space, which space was subsequently sublet. As of December 31, 2012, $2.9 million was outstanding under this letter of credit. This letter of credit expires in November 2013.

Committed Capital Securities

On April 8, 2005, AGC entered into separate agreements (the “Put Agreements”) with four custodial trusts (each, a “Custodial Trust”) pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50 million of perpetual preferred stock of AGC (the “AGC Preferred Stock”). The custodial trusts were created as a vehicle for providing

248


capital support to AGC by allowing AGC to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, AGC would receive $200 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose, including the payment of claims. The put options have not been exercised through the date of this filing. Initially, all of AGC CCS were issued to a special purpose pass-through trust (the “Pass-Through Trust”). The Pass-Through Trust was dissolved in April 2008 and the AGC CCS were distributed to the holders of the Pass-Through Trust’s securities. Neither the Pass-Through Trust nor the custodial trusts are consolidated in the Company’s financial statements.
 
Income distributions on the Pass-Through Trust Securities and AGC CCS were equal to an annualized rate of one-month LIBOR plus 110 basis points for all periods ending on or prior to April 8, 2008. Following dissolution of the Pass-Through Trust, distributionsDistributions on the AGC CCS Securities are determined pursuant to an auction process. OnBeginning on April 7, 2008 this auction process failed, thereby increasing the annualized rate on the AGC CCS to one-month LIBOR plus 250 basis points. Distributions on the AGC preferred stock will be determined pursuant to the same process.
 
In June 2003, $200$200 million of “AGM CPS Securities”CPS”, money market preferred trust securities, were issued by trusts created for the primary purpose of issuing the AGM CPS, Securities, investing the proceeds in high-quality commercial paper and selling put options to AGM, allowing AGM to issue the trusts non-cumulative redeemable perpetual preferred stock (the “AGM Preferred Stock”) of AGM in exchange for cash. There are four trusts, each with an initial aggregate face amount of $50 million.$50 million. These trusts hold auctions every 28 days, at which time investors submit bid orders to purchase AGM CPS Securities.CPS. If AGM were to exercise a put option, the applicable trust would transfer the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, to AGM in exchange for AGM Preferred Stock. AGM pays a floating put premium to the trusts, which represents the difference between the commercial paper yield and the winning auction rate (plus all fees and expenses of the trust). If an auction does not attract sufficient clearing bids, however, the auction rate is subject to a maximum rate of one-month LIBOR plus 200 basis points for the next succeeding distribution period. Beginning in August 2007, the AGM CPS Securities required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock. The trusts provide AGM access to new capital at its sole discretion through the exercise of the put options. As of December 31, 20122015 the put option had not been exercised. The Company does not consider itself to be the primary beneficiary of the trusts. See Note 8,7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement discussion.
 
18.17.Earnings Per Share
 
Accounting Policy

The Company computes earnings per share ("EPS")EPS using a two-class method by including participating securities which entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting. Restricted stock awards and share units under the AGC supplemental employeeexecutive retirement plan ("AGC SERP") plan are considered participating securities as they received non-forfeitable rights to dividends at the same rate as common stock.

The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Basic EPS is then calculated by dividing net (loss) income available to common shareholders of Assured Guaranty by the weighted‑average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock, restricted stock units, stock options equity units and other potentially dilutive financial instruments (“dilutive securities”), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method assuming nonvested shares are not converted into common shares. With respect to the equity units, which were settled on June 1, 2012 (see Note 17, Long-Term Debt and Credit Facilities), the Company used the treasury stock method in computing diluted EPS. Equity forwards were included in the calculation of basic EPS when such forward contracts were satisfied and the holders thereof became common stock holders. The Company has a single class of common stock.


249251



Computation of Earnings Per Share 

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(in millions, except per share amounts)(in millions, except per share amounts)
Basic EPS:          
Net income (loss) attributable to AGL$110
 $773
 484
$1,056
 $1,088
 808
Less: Distributed and undistributed income (loss) available to nonvested shareholders0
 1
 0
1
 0
 1
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic$110
 $772
 484
$1,055
 $1,088
 807
Basic shares189.2
 183.4
 184.0
148.1
 172.6
 186.6
Basic EPS$0.58
 $4.21
 $2.63
$7.12
 $6.30
 $4.32
     
Diluted EPS:          
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic$110
 $772
 $484
$1,055
 $1,088
 $807
Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries
 0
 0
0
 0
 0
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted$110
 $772
 $484
$1,055
 $1,088
 $807
          
Basic shares189.2
 183.4
 184.0
148.1
 172.6
 186.6
Effect of dilutive securities:     
Options and restricted stock awards0.8
 0.9
 0.9
Equity units0.7
 1.2
 4.0
Dilutive securities0.9
 1.0
 1.0
Diluted shares190.7
 185.5
 188.9
149.0
 173.6
 187.6
Diluted EPS$0.57
 $4.16
 $2.56
$7.08
 $6.26
 $4.30
Potentially dilutive securities excluded from computation of EPS because of antidilutive effect9.9
 7.2
 3.0
0.5
 1.6
 2.7

 

19.18.Shareholders' Equity
    
Share Issuances

CompanyAGL has an authorized share capital of $5 million divided into 500,000,000 shares, par value $0.01 per share. Except as described below, the Company'sAGL's common shares have no preemptive rights or other rights to subscribe for additional common shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of the Company'sAGL's common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in the Company'sAGL's assets, if any remain after the payment of all the Company'sits liabilities and the liquidation preference of any outstanding preferred shares. Under certain circumstances, the CompanyAGL has the right to purchase all or a portion of the shares held by a shareholder at fair market value. All of the common shares are fully paid and non assessable. Holders of the Company'sAGL's common shares are entitled to receive dividends as lawfully may be declared from time to time by the Company'sAGL's Board of Directors.

In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common shares (and other of AGL's shares) of a shareholder are treated as "controlled shares" (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL's issued and outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula specified in AGL's Bye-laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute 9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize income with respect to AGL under the Code if AGL were a controlled foreign corporation as defined in the Code and if the ownership threshold under the Code were 9.5% (as defined in AGL's Bye-Laws as a "9.5% U.S. Shareholder").

Subject to the Company'sAGL's Bye-Laws and Bermuda law, the Company'sAGL's Board of Directors has the power to issue any of the Company'sAGL's unissued shares as it determines, including the issuance of any shares or class of shares with preferred, deferred or other special rights.


250252


Issuance of Shares

 
Number of
Shares
 
Price per
Share
 Proceeds 
Net
Proceeds
 (in millions, except share and per share amounts)
June 1, 2012(1)13,428,770
 $12.85
 $173
 $173
 ____________________
(1)Relates to the settlement of forward purchase contracts. See Note 2, Business Changes, Risks, Uncertainties and Accounting Developments.

Under the Company'sAGL's Bye-Laws and subject to Bermuda law, if the Company'sAGL's Board of Directors determines that any ownership of the Company'sAGL's shares may result in adverse tax, legal or regulatory consequences to the Company, any of the Company's subsidiaries or any of its shareholders or indirect holders of shares or its Affiliates (other than such as the Company'sAGL's Board of Directors considers de minimis), the Company has the option, but not the obligation, to require such shareholder to sell to the CompanyAGL or to a third party to whom the CompanyAGL assigns the repurchase right the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the discretion of the Board of Directors to represent the shares' fair market value (as defined in AGL's Bye-Laws). In addition, AGL's Board of Directors may determine that shares held carry different voting rights when it deems it appropriate to do so to (i) avoid the Company's Bye-Laws)existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or indirect holder of shares or its affiliates. "Controlled shares" includes, among other things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding shares.

Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. AGL's Bye-laws provide that it will use its best efforts to notify shareholders of their voting interests prior to any vote to be taken by them.

Share Repurchases

On January 18, 2013,As of December 31, 2015, the Company's share repurchase authorization was $55 million. After additional repurchases in 2016, the Company exhausted its previous authorization to repurchase common shares on February 9, 2016. On February 24, 2016, the Board of Directors authorizedapproved a $200 $250 million share repurchase program. This latestauthorization. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including free funds available at the parent company, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program replacesmay be modified, extended or terminated by the November 14, 2011 5.0 million common shares authorization.

Board of Directors at any time. It does not have an expiration date.

Share Repurchases

Year Number of Shares Repurchased Total Payments
    (in millions)
2012 2,066,759
 $24
2011 2,000,000
 23
2010 707,350
 10
Year Number of Shares Repurchased 
Total Payments
(in millions)
 Average Price Paid Per Share
2013 12,512,759
 $264
 $21.12
2014 24,413,781
 $590
 $24.17
2015 20,995,419
 $555
 $26.43
2016 (through February 9, 2016 on a settlement date basis) 2,258,602
 $55
 $24.37
Cumulative repurchases since the beginning of 2013 60,180,561
 $1,464
 $24.33

The 2013 share repurchases included 5.0 million common shares purchased on June 5, 2013 from funds associated with WL Ross & Co. LLC and its affiliates (collectively, the “WLR Funds”) and Wilbur L. Ross, Jr., a former director of the Company, for $109.7 million.


253


Deferred Compensation

In August 2011,Each of the Chief Executive Officer and the General Counsel of the Company has elected to invest a portion of their accounts under the Company's SERP in 138,375 unitshis AGL supplemental employee retirement plan ("AGL SERP") account in the employer stock fund inwithin the AGL SERP. Each unit in the employer stock fund represents the right to receive one AGL common share upon a distribution from the AGL SERP. The 138,375 unitsEach unit equals the number of AGL common shares which could have been purchased with the value of the account deemed invested in the employer stock fund as of the date of such election. The election to invest in the employer stock fund is irrevocable (i.e., any portion of a AGL SERP account allocated to the employer stock fund and invested in units shall remain allocated to the employer stock fund until the participant receives a distribution from AGL SERP). At the same time such investment elections were made, in August 2011, the Company purchased138,375 AGL common shares and placed such shares in trust to be distributed to the Chief Executive Officer and the General Counsel upon a distribution from the AGL SERP in settlement of their units invested in the employer stock fund. As of December 31, 2015 and 2014, the Company had 320,193 and 320,193 shares, respectively, in the trust. The Company recorded the purchase of such shares in “deferred equity compensation” in the consolidated balance sheet.

In December 2011, certainCertain executives of the Company elected toto invest a portion of their accounts under the Assured Guaranty Corp. supplemental employee retirement plan (“AGC SERP”) in 68,181 unitsSERP accounts in the employer stock fund in the AGC SERP. Each unit in the employer stock fund represents the right to receive one AGL common share upon a distribution from the AGC SERP. The 68,181 unitsEach unit equals the number of AGL common shares whichwhich could have been purchased with the value of the account deemed invested in the employer stock fund as of the date of such election. As of December 31, 2015 and 2014, there were 74,309 and 74,309 units, respectively, in the AGC SERP. See Note 20,19, Employee Benefit Plans.

251



Dividends

Any determination to pay cash dividends is at the discretion of the Company's Board of Directors, and depends upon the Company's results of operations and operating cash flows, its financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual restrictions on the payment of dividends, and any other factors the Company's Board of Directors deems relevant. For more information concerning regulatory constraints that affect the Company's ability to pay dividends, see Note 12,11, Insurance Company Regulatory Requirements.

On February 7, 2013,24, 2016, the Company declared a quarterly dividend of $0.10$0.13 per common share, an increase of 11%8% from a quarterly dividend of $0.09$0.12 per common share paid in 2012. On February 9, 2012, the Company declared a quarterly dividend of $0.09 per common share, an increase of 100% from a quarterly dividend of $0.045 per common share paid in 2011 and 2010.2015.

20. Employee Benefit Plans
19.Employee Benefit Plans

Accounting Policy

The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with the exception of retirement eligible employees. For retirement eligible employees, the expense is recognized immediately.

Share-based compensation expense is based on the grant date fair value using the grant date closing price, the Black‑Scholes pricing model orlattice, Monte Carlo or Black-Scholes-Merton (“Black-Scholes”) pricing model.models. The Company amortizes the fair value of share-based awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the exception of retirement‑eligible employees. For retirement‑eligibleretirement-eligible employees, certain awards contain retirement provisions and therefore are amortized over the period through the date the employee first becomes eligible to retire and is no longer required to provide service to earn part or all of the award.

The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan (the “Stock Purchase Plan”) is estimated at the beginning of each offering period using the Black‑ScholesBlack-Scholes option valuation model.

The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with the exception of retirement eligible employees. For retirement eligible employees, the expense is recognized immediately.

Assured Guaranty Ltd. 2004 Long-Term Incentive Plan

Under the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended (the “Incentive Plan”), the number of AGL common shares that may be delivered under the Incentive Plan may not exceed 10,970,000.18,670,000. In the event of certain transactions affecting the Company'sAGL's common shares, the number or type of shares subject to the Incentive Plan, the number and type of shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may be adjusted.


254


The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and full value awards that are based on the Company'sAGL's common shares. The grant of full value awards may be in return for a participant's previously performed services, or in return for the participant surrendering other compensation that may be due, or may be contingent on the achievement of performance or other objectives during a specified period, or may be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become vested upon a change in control of the Company.AGL.

The Incentive Plan is administered by a committee of the Board of Directors. The Compensation Committee of the Board serves as this committeeof Directors, except as otherwise determined by the Board. The Board may amend or terminate the Incentive Plan. As of December 31, 2012, 2,565,0072015, 10,367,163 common shares were available for grant under the Incentive Plan.

Time Vested Stock Options

Nonqualified or incentive stock options may be granted to employees and directors of the Company. Stock options are generally granted once a year with exercise prices equal to the closing price on the date of grant. To date, the Company has only issued nonqualifiednon-qualified stock options. All stock options, except for performance stock options, granted to employees vest in equal annual installments over a three-year period and expire seven years or ten years from the date of grant. Stock options granted to directors vest over one year and expire in seven years or ten years from grant date. None of the Company's options, except for performance stock options, have a performance or market condition.

252



Time Vested Stock Options

 
Options for
Common Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average Grant
Date Fair Value
 
Number of
Exercisable
Options
 
Year of
Expiration
Balance as of December 31, 20114,198,597
 $20.11
 
 3,808,539
 
Options granted60,500
 17.01
 $8.62
 
 2019
Options exercised(5,908) 7.44
 
 
 
Options forfeited(23,634) 17.92
 
 
 
Balance as of December 31, 20124,229,555
 $20.10
 
 4,047,374
 
 
Options for
Common Shares
 
Weighted
Average
Exercise Price
 
Number of
Exercisable
Options
 
Balance as of December 31, 20142,802,853
 $21.45
 2,631,653
 
Options granted
 
 
 
Options exercised(432,974) 20.12
 
 
Options forfeited/expired(9,539) 20.76
 
 
Balance as of December 31, 20152,360,340
 $21.73
 2,275,096
 

As of December 31, 2012,2015, the aggregate intrinsic value and weighted average remaining contractual term of stock options outstanding were $2$11 million and 3.62.2 years,, respectively. As of December 31, 2012,2015, the aggregate intrinsic value and weighted average remaining contractual term of exercisable stock options were $2$11 million and 3.42.1 years,, respectively.

As of December 31, 20122015 the total unrecognized compensation expense related to outstanding nonvested stock options was $0.4 million,$342 thousand, which will be adjusted in the future for the difference between estimated and actual forfeitures. The Company expects to recognize that expense over the weighted average remaining service period of 1.4 years.0.9 years.


255


Lattice Option Pricing
Weighted Average Assumptions (1)

 2014 2013
Dividend yield2.03% 2.07%
Expected volatility53.24% 53.41%
Risk free interest rate2.21% 1.35%
Expected life6.6 years
 6.6 years
Forfeiture rate3.5% 4.5%
Weighted average grant date fair value$10.35
 $8.94
____________________
(1)No options were granted in 2015.

  2012
Dividend yield 2.06%
Expected volatility 58.89%
Risk free interest rate 1.45%
Expected life 6.6 years
Forfeiture rate 4.5%
Weighted average grant date fair value $8.62
The Company uses a lattice model to value its employee and director stock options, rather than a simple Black-Scholes formula. The Black-Scholes approach is designed for options exercisable only at maturity (European style), but can still be used to value options exercisable at any time after they vest (“American style”) as long as no dividend payments are being made on the stock.  A lattice model can be used for both European and American style options and regardless of whether or not the stock is paying regular dividends. Because the options the Company has granted to its employees and directors are American style and because the Company pays regular dividends on its stock, the Company has selected a lattice model as the appropriate method to value these options.

The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The expected volatility is estimated at the date of grant based on an average of the 7-year historical share price volatility and implied volatilities of certain at-the-money actively traded call options in the Company. The risk-free interest rate is the implied 7-year yield currently available on U.S. Treasury zero-coupon issues at the date of grant. The forfeiture rate is based on the historical employee termination information.

Black‑Scholes Option Pricing Weighted Average Assumptions(1)

  2010
Dividend yield 0.9%
Expected volatility 74.68%
Risk free interest rate 2.4%
Expected life 5.0 years
Forfeiture rate 4.5%
Weighted average grant date fair value $11.51
____________________
(1)No options were granted in 2011.

The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The expected volatility is estimated at the date of grant based on the historical share price volatility, calculated on a daily basis. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term to the granted stock options. The expected life is based on the average expected term of the Company's guideline companies, which are defined as similar or peer entities, since the Company has insufficient expected life data. The forfeiture

253


rate is based on the rate used by the Company's guideline companies, since the Company has insufficient forfeiture data. Estimated forfeitures will be reassessed at each grant vesting date and may change based on new facts and circumstances.

The total intrinsic value of stock options exercised during the years ended December 31, 2012, 20112015, 2014 and 20102013 was $2.8 million, $0.1 million, $0.33.0 million and $0.27.5 million, respectively. During the years ended December 31, 2012, 20112015, 2014 and 2010, $44 thousand, $0.62013, $4.9 million, $4.3 million and $0.2$2.6 million,, respectively, was received from the exercise of stock options. In order to satisfy stock option exercises, the Company will issueissues new shares.

Performance Stock Options

Beginning in 2012, theThe Company has grantedgrants performance stock options under the Incentive Plan. These awards are non-qualified stock options with exercise prices equal to the closing price of an AGL common share on the applicable date of grant. These awards vest 35%, 50% or 100% on, if the third anniversaryprice of grant date, ifAGL's common shares using the highest 40-day average share price during the relevant three-year performance period reaches certain target hurdle prices are met.hurdles. If the share price is between the specified levels, the vesting level will be interpolated accordingly. These awards expire seven years from the date of grant.

Performance Stock Options

 
Options for
Common Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average Grant
Date Fair Value
 
Number of
Exercisable
Options
 
Year of
Expiration
Balance as of December 31, 2011
 $
 
 
 
Options granted293,077
 17.44
 $7.84
 
 2019
Options exercised
 
 
 
 
Options forfeited
 
 
 
 
Balance as of December 31, 2012293,077
 $17.44
 
 0
 
 
Options for
Common Shares
 
Weighted
Average
Exercise Price
 
Number of
Exercisable
Options
 
Balance as of December 31, 2014246,879
 $17.97
 0
 
Options granted
 
 
 
Options exercised(7,342) 17.44
 
 
Options forfeited/expired
 
 
 
Balance as of December 31, 2015239,537
 $17.92
 166,897
 

No performance stock options were exercised during the year ended December 31, 2012. In order to satisfy stock option exercises, the Company will issue new shares.


256


As of December 31, 2012,2015, the aggregate intrinsic value and weighted average remaining contractual term of performance stock options outstanding was 6.1were $1.9 million and 3.4 years,. respectively. As of December 31, 2012, all2015, the aggregate intrinsic value and weighted average remaining contractual term of exercisable performance stock options were out-of-the-money$1.5 million and no options were exercisable.3.1 years, respectively.

As of December 31, 20122015 the total unrecognized compensation expense related to outstanding nonvested performance stock options was $2 million,$17 thousand, which will be adjusted in the future for the difference between estimated and actual forfeitures. The Company expects to recognize that expense over the weighted average remaining service period of 2.1 years.0.1 years.

Monte Carlo and Lattice Option Pricing
Weighted Average Assumptions (1)

20122013
Dividend yield2.06%2.07%
Expected volatility58.89%53.5%
Risk free interest rate1.45%1.36%
Expected life6.3 years
6.3 years
Forfeiture rate4.5%4.5%
Weighted average grant date fair value$7.84
$8.17
____________________
(1)No options were granted in neither 2015 nor 2014.

The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The expected volatility is estimated at the date of grant based on an average of the 7-year historical share price volatility and implied volatilities of certain at-the-money actively traded call options in the Company. The risk-free interest rate is the implied 7-year yield currently available on U.S. Treasury zero-coupon issues at the date of grant. The forfeiture rate is based on the historical employee termination information.


254

TableThe total intrinsic value of Contentsperformance stock options exercised during the year ended December 31, 2015 was $75 thousand. During the year ended December 31, 2015, $98 thousand was received from the exercise of performance stock options. In order to satisfy stock option exercises, the Company issues new shares.


Restricted Stock Awards

Restricted stock awards to employees generally vest in equal annual installments over a four-year period and restricted stock awards to outside directors vest in full in one year. Restricted stock awards are amortized on a straight-line basis over the requisite service periods of the awards, and restricted stock awards to outside directors are amortized over one year, which are generally the vesting periods, with the exception of retirement‑eligible employees, discussed above.

Restricted Stock Award Activity

Nonvested Shares 
Number of
Shares
 
Weighted
Average
Grant-Date
Fair Value
 
Number of
Shares
 
Weighted
Average Grant
Date Fair Value
Per Share
Nonvested at December 31, 201176,060
 $18.99
Nonvested at December 31, 2014Nonvested at December 31, 201443,577
 $23.98
GrantedGranted88,549
 12.93
Granted62,145
 25.67
VestedVested(76,060) 18.99
Vested(43,577) 23.98
ForfeitedForfeited
 
Forfeited
 
Nonvested at December 31, 201288,549
 $12.93
Nonvested at December 31, 2015Nonvested at December 31, 201562,145
 $25.67

As of December 31, 20122015 the total unrecognized compensation cost related to outstanding nonvested restricted stock awards was $0.5$0.7 million,, which the Company expects to recognize over the weighted‑average remaining service period of 0.5 years.years. The total fair value of shares vested during the years ended December 31, 2012, 20112015, 2014 and 20102013 was $1$1 million,, $4 $1 million and $5$1 million,, respectively.


257


Restricted Stock Units

Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. Restricted stock units awarded to employees have vesting terms similar to those of the restricted stock awards and are delivered on the vesting date. The Company has granted restricted stock units to directors of the Company. Restricted stock units awarded to directors vest over a one-year period and are delivered after directors terminate from the board of directors.

Restricted Stock Unit Activity
(Excluding Dividend Equivalents)

Nonvested Stock Units 
Number of
Stock Units
 
Weighted
Average
Grant-Date
Fair Value
 
Number of
Stock Units
 
Weighted
Average Grant
Date Fair Value
Per Share
Nonvested at December 31, 20111,233,175
 $16.33
Nonvested at December 31, 2014Nonvested at December 31, 2014691,303
 $19.23
GrantedGranted208,416
 16.68
Granted320,983
 25.23
DeliveredDelivered(401,579) 15.92
Delivered(321,210) 16.96
ForfeitedForfeited(33,601) 10.12
Forfeited(1,795) 21.73
Nonvested at December 31, 20121,006,411
 $16.78
Nonvested at December 31, 2015Nonvested at December 31, 2015689,281
 $23.23

As of December 31, 2012,2015, the total unrecognized compensation cost related to outstanding nonvested restricted stock units was $5$8.4 million,, which the Company expects to recognize over the weighted‑average remaining service period of 1.7 years.1.8 years. The total fair value of restricted stock units delivered during the years ended December 31, 2012, 20112015, 2014 and 20102013 was $$6 million, 6 million, $5 million and $2$5 million, respectively.

Performance Restricted Stock Units

Beginning in 2012, theThe Company has granted performance restricted stock units under the Incentive Plan. These awards vest 35%, 50%, 100% on, or 200%, if the third anniversaryprice of grant date, ifAGL's common shares using the highest 40-day average share price during the relevant three-year performance period reaches certain target hurdle prices are met.hurdles. If the share price is between the specified levels, the vesting level will be interpolated accordingly.


255


Performance Restricted Stock Unit Activity

Performance Restricted Stock Units 
Number of
Performance Share Units
 
Weighted
Average
Grant-Date
Fair Value
 
Number of
Performance Share Units
 
Weighted
Average Grant
Date Fair Value
Per Share
Nonvested at December 31, 2011
 $
Nonvested at December 31, 2014Nonvested at December 31, 2014423,302
 $26.72
GrantedGranted178,970
 27.35
Granted200,353
 28.31
DeliveredDelivered
 
Delivered(215,395) 27.39
ForfeitedForfeited
 
Forfeited
 
Nonvested at December 31, 2012178,970
 $27.35
Nonvested at December 31, 2015Nonvested at December 31, 2015408,260
 $27.32

As of December 31, 2012,2015, the total unrecognized compensation cost related to outstanding nonvested performance share units was $4$5.7 million,, which the Company expects to recognize over the weighted‑average remaining service period of 2.1 years. No1.8 years. The total fair value of performance sharerestricted stock units were delivered during the year ended December 31, 2012.2015 was $6 million.

Employee Stock Purchase Plan

The Company established the AGL Employee Stock Purchase Plan ("Stock Purchase Plan") in accordance with Internal Revenue Code Section 423, and participation is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10% of the participant's compensation or, if less, shares having a value of $25,000. Participants may purchase shares at a purchase price equal to 85% of the lesser of the fair market value of the stock on the first day or the last day of the subscription period. The Company has reserved for issuance and purchases under the Stock Purchase Plan 350,000600,000 Assured Guaranty Ltd. common shares.


On November 8, 2012, the Board
258


The fair value of each award under the Stock Purchase Plan is estimated at the beginning of each offering period using the Black‑Scholes option‑pricing model and the following assumptions: a) the expected dividend yield is based on the current expected annual dividend and share price on the grant date; b) the expected volatility is estimated at the date of grant based on the historical share price volatility, calculated on a daily basis; c) the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; and d) the expected life is based on the term of the offering period.

Stock Purchase Plan

Year Ended December 31,Year Ended December 31,
2012 2011 20102015 2014 2013
(dollars in millions)(dollars in millions)
Proceeds from purchase of shares by employees$0.6
 $0.7
 $0.7
$0.8
 $0.9
 $0.9
Number of shares issued by the Company54,612
 50,523
 54,101
38,565
 43,273
 57,980
Recorded in share-based compensation, after the effects of DAC$0.2
 $0.2
 $0.3
Recorded in share-based compensation, net of deferral$0.2
 $0.2
 $0.3


256



Share‑Based Compensation Expense

The following table presents stock based compensation costs by type of award and the effect of deferring such costs as policy acquisition costs, pre-tax. Amortization of previously deferred stock compensation costs is not shown in the table below.

Share‑Based Compensation Expense Summary

 Year Ended December 31,
 2012 2011 2010
 (in millions)
Share‑Based Employee Cost:     
Recurring amortization$6
 $5
 $6
Accelerated amortization for retirement eligible employees1
 5
 6
Subtotal7
 10
 12
ESPP0
 0
 0
Total Share‑Based Employee Cost7
 10
 12
      
Share‑Based Directors Cost:     
Restricted Stock1
 1
 1
Restricted Stock Units
 
 
Stock Options
 0
 0
Total Share‑Based Directors Cost1
 1
 1
Total Share‑Based Cost8
 11
 13
Less: Share‑based compensation capitalized as DAC1
 3
 2
Share‑based compensation expense$7
 $8
 $11
Income tax benefit$2
 $2
 $2
 Year Ended December 31,
 2015 2014 2013
 (in millions)
Share‑based compensation expense$10
 $10
 $8
Share‑based compensation capitalized as DAC0.5
 0.3
 0.2
Income tax benefit2
 2
 2

Defined Contribution Plan

The Company maintains a savings incentive plan, which is qualified under Section 401(a) of the Internal Revenue Code for U.S. employees. The savings incentive plan is available to eligible full-time employees upon hire. Eligible participants could contribute a percentage of their salary subject to a maximum of $17,000$18,000 for 2012.2015. Contributions are matched by the Company at a rate of 100% up to 6% of participant's compensation, subject to IRS limitations. Any amounts over the IRS limits are contributed to and matched by the Company into a nonqualified supplemental executive retirement plan for employees eligible to participate in such nonqualified plan. The Company also makes a core contribution of 6% of the participant's compensation to the qualified plan, subject to IRS limitations, and the nonqualified supplemental executive retirement plan for eligible employees, regardless of whether the employee contributes to the plan(s). Employees become fully vested in Company contributions after one year of service, as defined in the plan. Plan eligibility is immediate upon hire. The Company also maintains similar non-qualified plans for non-U.S. employees.

Through September 30, 2012, a savings incentive plan qualified under Section 401(a) of the Internal Revenue Code was available in Bermuda to eligible full-time Bermuda-based employees upon their first date of employment. Eligible participants could contribute a percentage of their salary subject to a maximum of $17,000 for 2012. Contributions are matched by the Company at a rate of 100% up to 6% of the participant's compensation, subject to IRS limitations. Eligible participants also receive a Company core contribution equal to 6% of the participant's compensation, subject to IRS limitations, without requiring the participant to contribute to the plan. Participants generally vest in Company contributions upon the completion of one year of service. With respect to those employees who are Bermudian or spouses of Bermudians and who must participate in the Bermuda national pension scheme plan maintained by the Company, a portion of the foregoing contributions are made to the Bermuda national pension scheme plan. If employee or employer contributions in the Bermuda savings incentive plan are limited by the tax-qualification rules of Code section 401(a), then contributions in excess of those limits are allocated to a nonqualified plan for eligible employees. The Company may contribute an additional amount to eligible employees' Bermuda nonqualified plan accounts at the discretion of the Board of Directors. No such contribution was made for plan years 2012, 2011 or in 2010. Effective at close of business on September 30, 2012, the qualified and non-qualified plans for Bermuda-based

257


employees were terminated and effective October 1, 2012 new non-qualified plans were launched with similar terms but on a new recordkeeping platform.

The Company recognized defined contribution expenses of $10 million, $9 million, $1011 million and $1110 million for the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively.

Cash-Based Compensation

Performance Retention Plan Plans

The Company has established the Assured Guaranty Ltd.maintains a Performance Retention Plan (“PRP”) whichthat permits the grant of deferred cash based awards to selected employees. PRP awards may be treated as nonqualified deferred compensation subject to the rules of Internal Revenue Code Section 409A. The PRP is a sub-plan under the Company's Long-Term Incentive Plan (enabling awards under the plan to be performance based compensation exempt from the $1 million limit on tax deductible compensation).

The Company granted a limited number of PRP awards in 2007, which vested after four years of continued employment (or if earlier, on employment termination, if the participant's termination occured as a result of death, disability, or retirement). Participants received the designated award in a single lump sum in 2011.

Generally, each PRP award is divided into three installments with 25% of the award allocated to a performance period that includes the year of the award and the next year, 25% of the award allocated to a performance period that includes the year of the award and the next two years, and 50% of the award allocated to a performance period that includes the year of the award and the next threevest over four years. Each installment of an award vests if the participant remains employed through the end of the performance period for that installment. Awards may vest upon the occurrence of other events as set forthThe cash payment depends on growth in the plan documents. Payment for each performance period is made at the end of that performance period. One half of each installment is increased or decreased in proportion to the increase or decrease of per share adjusted book value during the performance period,per share and one half of each installment is increased or decreased in proportion to theon operating return on equity, during the performance period. As of December 31, 2012, a limited number of awards had cliff vesting in five years. Operating return on equity and adjusted book valuewhich are defined in each PRP award agreement. The Company recognized performance retention plan expenses of $11 million, $15 million and $17 million for the years ended December 31, 2015, 2014 and 2013, respectively.

A payment otherwise subject to the $1 million limit on tax deductible compensation, will not be made unless performance satisfies a minimum threshold.

As described above, the performance measures used to determine the amounts distributable under the PRP are based on the Company's operating return on equity and growth in per share adjusted book value, or in the case of the 2007 awards growth in adjusted book value, as defined. The Compensation Committee believes that management's focus on achievement of these performance measures will lead to increases in the Company's intrinsic value. For PRP awards, the Compensation Committee uses the following methods to determine operating return on equity and adjusted book value.

Operating return on equity as of any date is determined by the Compensation Committee and equals the Company's operating income as a percentage of average shareholders' equity, excluding AOCI and after-tax unrealized gains (losses) on derivative financial instruments and the effect of consolidating FG VIE's. To determine operating income, the Compensation Committee adjusts reported net income or loss to remove realized gains and losses on investments and items that are determined by the Compensation Committee to increase or decrease reported net income or loss without a corresponding increase or decrease in value of AGL.

To determine adjusted book value, the Compensation Committee adjusts the reported shareholder equity (i) to remove items that are determined by the Compensation Committee to increase or decrease reported shareholder equity without a corresponding increase or decrease in the value of the Company, and (ii) to include items that are determined by the Compensation Committee to increase or decrease the value of the Company without a corresponding increase or decrease to reported shareholder equity.

The adjustments described above may be made by the AGL Compensation Committee at any time before distribution, except that, for certain senior executive officers, any adjustment made after the grant of the award may decrease but may not increase the amount of the distribution.

In the event of a corporate transaction involving the Company, including, without limitation, any share dividend, share split, extraordinary cash dividend, recapitalization, reorganization, merger, amalgamation, consolidation, split-up, spin-off, sale

258259


The Company’s executive officers are eligible to receive compensation under a non-equity incentive plan. The amount of assets or subsidiaries, combination or exchangecompensation payable is subject to a performance goal being met. The Compensation Committee then uses discretion to determine the actual amount of shares,cash incentive compensation payable to each executive officer for such performance year based on factors and criteria as determined by the Compensation Committee, may adjustprovided that such discretion cannot be used to increase the calculation of the Company's adjusted book value and operating return on equity asamount that was determined to be payable to each executive officer. For an applicable performance year, the Compensation Committee deems necessary or desirable in order to preserve the benefits or potential benefits of PRP awards.

The Company recognizedestablishes target financial performance retention plan expenses of $13 million, $8 million and $14 millionmeasures for the years ended December 31, 2012, 2011Company and 2010, respectively.individual non-financial objectives for the executive officers.

21.20.Other Comprehensive Income
 
The following tables present the changes in the balances of each component of accumulated other comprehensiveAOCI and the effect of significant reclassifications out of AOCI on the respective line items in net income.
 
Changes in Accumulated Other Comprehensive Income by Component
Year Ended Ended December 31, 20122015

 
Net Unrealized
Gains (Losses) on
Investments
 
Cumulative
Translation
Adjustment
 Cash Flow Hedge 
Total Accumulated
Other
Comprehensive
Income
 (in millions)
Balance, December 31, 2011$367
 $(8) $9
 $368
Other comprehensive income (loss)145
 2
 0
 147
Balance, December 31, 2012$512
 $(6) $9
 $515
 
Net Unrealized
Gains (Losses) on
Investments with no Other-Than-Temporary Impairment
 
Net Unrealized
Gains (Losses) on
Investments with Other-Than-Temporary Impairment
 
Cumulative
Translation
Adjustment
 Cash Flow Hedge 
Total Accumulated
Other
Comprehensive
Income
 (in millions)
Balance, December 31, 2014$367
 $4
 $(10) $9
 $370
Other comprehensive income (loss) before reclassifications(93) (43) (6) 
 (142)
Amounts reclassified from AOCI to:         
Net realized investment gains (losses)(11) 37
 
 
 26
Net investment income(9) 
 
 
 (9)
Interest expense
 
 
 (1) (1)
Total before tax(20) 37
 
 (1) 16
Tax (provision) benefit6
 (13) 
 0
 (7)
Total amount reclassified from AOCI, net of tax(14) 24
 
 (1) 9
Net current period other comprehensive income (loss)(107) (19) (6) (1) (133)
Balance, December 31, 2015$260
 $(15) $(16) $8
 $237



260


Changes in Accumulated Other Comprehensive Income by Component
Year Ended Ended December 31, 20112014

 
Net Unrealized
Gains (Losses) on
Investments
 
Cumulative
Translation
Adjustment
 Cash Flow Hedge 
Total Accumulated
Other
Comprehensive
Income
 (in millions)
Balance, December 31, 2010$110
 $(8) $10
 $112
Other comprehensive income (loss)257
 0
 (1) 256
Balance, December 31, 2011$367
 $(8) $9
 $368
 
Net Unrealized
Gains (Losses) on
Investments with no Other-Than-Temporary Impairment
 
Net Unrealized
Gains (Losses) on
Investments with Other-Than-Temporary Impairment
 
Cumulative
Translation
Adjustment
 Cash Flow Hedge 
Total Accumulated
Other
Comprehensive
Income
 (in millions)
Balance, December 31, 2013$178
 $(24) $(3) $9
 $160
Other comprehensive income (loss) before reclassifications196
 (20) (7) 
 169
Amounts reclassified from AOCI to:         
Net realized investment gains (losses)(12) 74
 
 
 62
Interest expense
 
 
 0
 0
Total before tax(12) 74
 
 0
 62
Tax (provision) benefit5
 (26) 
 0
 (21)
Total amount reclassified from AOCI, net of tax(7) 48
 
 0
 41
Net current period other comprehensive income (loss)189
 28
 (7) 0
 210
Balance, December 31, 2014$367
 $4
 $(10) $9
 $370


Changes in Accumulated Other Comprehensive Income by Component
Year Ended Ended December 31, 20102013

 
Net Unrealized
Gains (Losses) on
Investments
 
Cumulative
Translation
Adjustment
 Cash Flow Hedge 
Total Accumulated
Other
Comprehensive
Income
 (in millions)
Balance, December 31, 2009$139
 $(7) $10
 $142
Other comprehensive income (loss)(29) (1) 0
 (30)
Balance, December 31, 2010$110
 $(8) $10
 $112
 
Net Unrealized
Gains (Losses) on
Investments with no Other-Than-Temporary Impairment
 
Net Unrealized
Gains (Losses) on
Investments with Other-Than-Temporary Impairment
 
Cumulative
Translation
Adjustment
 Cash Flow Hedge 
Total Accumulated
Other
Comprehensive
Income
 (in millions)
Balance, December 31, 2012$517
 $(5) $(6) $9
 $515
Other comprehensive income (loss) before reclassifications(309) (35) 3
 
 (341)
Amounts reclassified from AOCI to:         
Net realized investment gains (losses)(43) 24
 
 
 (19)
Interest expense
 
 
 (1) (1)
Total before tax(43) 24
 
 (1) (20)
Tax (provision) benefit13
 (8) 
 1
 6
Total amount reclassified from AOCI, net of tax(30) 16
 
 0
 (14)
Net current period other comprehensive income (loss)(339) (19) 3
 0
 (355)
Balance, December 31, 2013$178
 $(24) $(3) $9
 $160



259261


22.21.Subsidiary Information
 
The following tables present the condensed consolidating financial information for AGUS and AGMH, wholly-owned100%-owned subsidiaries of AGL, which have issued publicly traded debt securities (see Note 17, Long-Term16, Long Term Debt and Credit Facilities, for the full description of AGUS and AGMH debt and the related AGL guarantees for such debt) as of December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, 2011 and 2010.Facilities). The information for AGL, AGUS and AGMH presents its subsidiaries on the equity method of accounting.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2012
(in millions)
 
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
ASSETS 
  
  
  
  
  
Total investment portfolio and cash$245
 $15
 $30
 $10,933
 $
 $11,223
Investment in subsidiaries4,734
 3,958
 3,225
 3,524
 (15,441) 
Premiums receivable, net of ceding commissions payable
 
 
 1,147
 (142) 1,005
Ceded unearned premium reserve
 
 
 1,550
 (989) 561
Deferred acquisition costs
 
 
 190
 (74) 116
Reinsurance recoverable on unpaid losses
 
 
 223
 (165) 58
Credit derivative assets
 
 
 553
 (412) 141
Deferred tax asset, net
 48
 (94) 789
 (22) 721
Intercompany receivable
 
 
 473
 (473) 
Financial guaranty variable interest entities’ assets, at fair value
 
 
 2,688
 
 2,688
Other23
 29
 26
 816
 (165) 729
TOTAL ASSETS$5,002
 $4,050
 $3,187
 $22,886
 $(17,883) $17,242
LIABILITIES AND SHAREHOLDERS’ EQUITY 
  
  
  
  
  
Unearned premium reserves$
 $
 $
 $6,168
 $(961) $5,207
Loss and LAE reserve
 
 
 778
 (177) 601
Long-term debt
 347
 423
 66
 
 836
Intercompany payable
 173
 
 300
 (473) 
Credit derivative liabilities
 
 
 2,346
 (412) 1,934
Financial guaranty variable interest entities’ liabilities, at fair value
 
 
 3,141
 
 3,141
Other8
 6
 15
 803
 (303) 529
TOTAL LIABILITIES8
 526
 438
 13,602
 (2,326) 12,248
TOTAL SHAREHOLDERS’ EQUITY4,994
 3,524
 2,749
 9,284
 (15,557) 4,994
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$5,002
 $4,050
 $3,187
 $22,886
 $(17,883) $17,242
 

260262


CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 20112015
(in millions)

 
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
ASSETS 
  
  
  
  
  
Total investment portfolio and cash$10
 $156
 $22
 $11,530
 $(360) $11,358
Investment in subsidiaries5,961
 5,569
 4,081
 377
 (15,988) 
Premiums receivable, net of commissions payable
 
 
 833
 (140) 693
Ceded unearned premium reserve
 
 
 1,266
 (1,034) 232
Deferred acquisition costs
 
 
 176
 (62) 114
Reinsurance recoverable on unpaid losses
 
 
 467
 (398) 69
Credit derivative assets
 
 
 207
 (126) 81
Deferred tax asset, net
 52
 
 357
 (133) 276
Intercompany receivable
 
 
 90
 (90) 
Financial guaranty variable interest entities’ assets, at fair value
 
 
 1,261
 
 1,261
Other98
 29
 26
 571
 (264) 460
TOTAL ASSETS$6,069
 $5,806
 $4,129
 $17,135
 $(18,595) $14,544
LIABILITIES AND SHAREHOLDERS’ EQUITY 
  
  
  
  
  
Unearned premium reserves$
 $
 $
 $5,143
 $(1,147) $3,996
Loss and LAE reserve
 
 
 1,537
 (470) 1,067
Long-term debt
 842
 445
 13
 
 1,300
Intercompany payable
 90
 
 300
 (390) 
Credit derivative liabilities
 
 
 572
 (126) 446
Deferred tax liabilities, net
 
 91
 
 (91) 
Financial guaranty variable interest entities’ liabilities, at fair value
 
 
 1,349
 
 1,349
Other6
 82
 15
 622
 (402) 323
TOTAL LIABILITIES6
 1,014
 551
 9,536
 (2,626) 8,481
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD.6,063
 4,792
 3,578
 7,222
 (15,592) 6,063
Noncontrolling interest
 
 
 377
 (377) 
TOTAL SHAREHOLDERS’ EQUITY6,063
 4,792
 3,578
 7,599
 (15,969) 6,063
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$6,069
 $5,806
 $4,129
 $17,135
 $(18,595) $14,544

263


CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2014
(in millions)
 
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
ASSETS 
  
  
  
  
  
 
  
  
  
  
  
Total investment portfolio and cash$33
 $99
 $61
 $11,121
 $
 $11,314
$126
 $204
 $47
 $11,382
 $(300) $11,459
Investment in subsidiaries4,607
 3,730
 2,802
 3,258
 (14,397) 
5,612
 5,072
 3,965
 339
 (14,988) 
Premiums receivable, net of ceding commissions payable
 
 
 1,150
 (147) 1,003
Premiums receivable, net of commissions payable
 
 
 864
 (135) 729
Ceded unearned premium reserve
 
 
 1,739
 (1,030) 709

 
 
 1,469
 (1,088) 381
Deferred acquisition costs
 
 
 223
 (91) 132

 
 
 186
 (65) 121
Reinsurance recoverable on unpaid losses
 
 
 212
 (143) 69

 
 
 338
 (260) 78
Credit derivative assets
 
 
 404
 (251) 153

 
 
 277
 (209) 68
Deferred tax asset, net
 22
 (77) 867
 (8) 804

 54
 
 295
 (89) 260
Intercompany receivable
 
 
 300
 (300) 

 
 
 90
 (90) 
Financial guaranty variable interest entities’ assets, at fair value
 
 
 2,819
 
 2,819

 
 
 1,402
 
 1,402
Other23
 (71) 27
 836
 (109) 706
27
 71
 27
 538
 (242) 421
TOTAL ASSETS$4,663
 $3,780
 $2,813
 $22,929
 $(16,476) $17,709
$5,765
 $5,401
 $4,039
 $17,180
 $(17,466) $14,919
LIABILITIES AND SHAREHOLDERS’ EQUITY 
  
  
  
  
  
 
  
  
  
  
  
Unearned premium reserves$
 $
 $
 $6,950
 $(987) $5,963
$
 $
 $
 $5,328
 $(1,067) $4,261
Loss and LAE reserve
 
 
 834
 (155) 679

 
 
 1,066
 (267) 799
Long-term debt
 519
 415
 104
 
 1,038

 841
 437
 19
 
 1,297
Intercompany payable
 
 
 300
 (300) 

 90
 
 300
 (390) 
Credit derivative liabilities
 0
 
 1,708
 (251) 1,457

 
 
 1,172
 (209) 963
Deferred tax liabilities, net
 
 94
 
 (94) 
Financial guaranty variable interest entities’ liabilities, at fair value
 
 
 3,458
 
 3,458

 
 
 1,419
 
 1,419
Other11
 3
 16
 675
 (243) 462
7
 9
 16
 764
 (374) 422
TOTAL LIABILITIES11
 522
 431
 14,029
 (1,936) 13,057
7
 940
 547
 10,068
 (2,401) 9,161
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO ASSURED GUARANTY LTD.5,758
 4,461
 3,492
 6,773
 (14,726) 5,758
Noncontrolling interest
 
 
 339
 (339) 
TOTAL SHAREHOLDERS’ EQUITY4,652
 3,258
 2,382
 8,900
 (14,540) 4,652
5,758
 4,461
 3,492
 7,112
 (15,065) 5,758
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$4,663
 $3,780
 $2,813
 $22,929
 $(16,476) $17,709
$5,765
 $5,401
 $4,039
 $17,180
 $(17,466) $14,919
 

 

 

261264


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 20122015
(in millions)

Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
REVENUES 
  
  
  
  
  
 
  
  
  
  
  
Net earned premiums$
 $
 $
 $833
 $20
 $853
$
 $
 $
 $783
 $(17) $766
Net investment income0
 
 1
 422
 (19) 404
0
 1
 0
 432
 (10) 423
Net realized investment gains (losses)
 
 
 1
 
 1
0
 0
 1
 (19) (8) (26)
Net change in fair value of credit derivatives: 
  
  
  
  
   
  
  
  
  
  
Realized gains (losses) and other settlements
 
 
 (108) 
 (108)
 
 
 (18) 0
 (18)
Net unrealized gains (losses)
 
 
 (477) 
 (477)
 
 
 773
 (27) 746
Net change in fair value of credit derivatives
 
 
 (585) 
 (585)
 
 
 755
 (27) 728
Equity in earnings of subsidiaries131
 177
 424
 153
 (885) 
Bargain purchase gain and settlement of pre-existing relationships
 
 
 54
 160
 214
Other
 
 
 303
 (3) 300
0
 0
 
 102
 0
 102
TOTAL REVENUES131
 177
 425
 1,127
 (887) 973
0
 1
 1
 2,107
 98
 2,207
EXPENSES 
  
  
  
  
  
 
  
  
  
  
  
Loss and LAE
 
 
 528
 (5) 523

 
 
 434
 (10) 424
Amortization of deferred acquisition costs
 
 
 28
 (14) 14

 
 
 29
 (9) 20
Interest expense
 35
 54
 22
 (19) 92

 52
 54
 14
 (19) 101
Other operating expenses21
 2
 1
 194
 (6) 212
30
 1
 1
 202
 (3) 231
TOTAL EXPENSES21
 37
 55
 772
 (44) 841
30
 53
 55
 679
 (41) 776
INCOME (LOSS) BEFORE INCOME TAXES110
 140
 370
 355
 (843) 132
Total provision (benefit) for income taxes
 (13) (19) 38
 16
 22
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES(30) (52) (54) 1,428
 139
 1,431
Total (provision) benefit for income taxes
 18
 19
 (365) (47) (375)
Equity in net earnings of subsidiaries1,086
 923
 468
 39
 (2,516) 
NET INCOME (LOSS)$110
 $153
 $389
 $317
 $(859) $110
1,056
 889
 433
 1,102
 (2,424) 1,056
Less: noncontrolling interest
 
 
 39
 (39) 
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD.$1,056
 $889
 $433
 $1,063
 $(2,385) $1,056
                      
COMPREHENSIVE INCOME (LOSS)$257
 $266
 $465
 $577
 $(1,308) $257
$923
 $787
 $359
 $967
 $(2,113) $923



262265


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 20112014
(in millions)

Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
REVENUES 
  
  
  
  
  
 
  
  
  
  
  
Net earned premiums$
 $
 $
 $904
 $16
 $920
$
 $
 $
 $566
 $4
 $570
Net investment income
 
 1
 410
 (15) 396
0
 0
 1
 412
 (10) 403
Net realized investment gains (losses)
 
 
 (18) 
 (18)0
 0
 0
 (58) (2) (60)
Net change in fair value of credit derivatives: 
  
  
  
  
   
  
  
  
  
  
Realized gains (losses) and other settlements
 
 
 6
 
 6

 
 
 23
 
 23
Net unrealized gains (losses)
 
 
 554
 
 554

 
 
 800
 
 800
Net change in fair value of credit derivatives
 
 
 560
 
 560

 
 
 823
 
 823
Equity in earnings of subsidiaries798
 640
 398
 614
 (2,450) 
Other
 
 
 (34) (5) (39)
 
 
 259
 (1) 258
TOTAL REVENUES798
 640
 399
 2,436
 (2,454) 1,819
0
 0
 1
 2,002
 (9) 1,994
EXPENSES 
  
  
  
  
  
 
  
  
  
  
  
Loss and LAE
 
 
 454
 8
 462

 
 
 122
 4
 126
Amortization of deferred acquisition costs
 
 
 37
 (20) 17

 
 
 33
 (8) 25
Interest expense
 39
 54
 21
 (15) 99

 40
 54
 16
 (18) 92
Other operating expenses25
 1
 1
 194
 (9) 212
31
 1
 1
 195
 (8) 220
TOTAL EXPENSES25
 40
 55
 706
 (36) 790
31
 41
 55
 366
 (30) 463
INCOME (LOSS) BEFORE INCOME TAXES773
 600
 344
 1,730
 (2,418) 1,029
Total provision (benefit) for income taxes
 (14) (19) 277
 12
 256
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES(31) (41) (54) 1,636
 21
 1,531
Total (provision) benefit for income taxes
 14
 19
 (469) (7) (443)
Equity in net earnings of subsidiaries1,119
 983
 513
 32
 (2,647) 
NET INCOME (LOSS)$773
 $614
 $363
 $1,453
 $(2,430) $773
1,088
 956
 478
 1,199
 (2,633) 1,088
Less: noncontrolling interest
 
 
 32
 (32) 
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD.$1,088
 $956
 $478
 $1,167
 $(2,601) $1,088
                      
COMPREHENSIVE INCOME (LOSS)$1,029
 $824
 $507
 $1,918
 $(3,249) $1,029
$1,298
 $1,114
 $577
 $1,570
 $(3,261) $1,298


263266


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 20102013
(in millions)

Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
REVENUES 
  
  
  
  
  
 
  
  
  
  
  
Net earned premiums$
 $
 $
 $1,168
 $19
 $1,187
$
 $
 $
 $740
 $12
 $752
Net investment income
 
 0
 384
 (23) 361
0
 0
 1
 408
 (16) 393
Net realized investment gains (losses)
 
 
 (6) 4
 (2)0
 0
 0
 87
 (35) 52
Net change in fair value of credit derivatives: 
  
  
  
  
   
  
  
  
  
  
Realized gains (losses) and other settlements
 
 
 153
 
 153

 
 
 (42) 
 (42)
Net unrealized gains (losses)
 
 
 (155) 
 (155)
 
 
 107
 
 107
Net change in fair value of credit derivatives
 
 
 (2) 
 (2)
 
 
 65
 
 65
Equity in earnings of subsidiaries508
 443
 525
 416
 (1,892) 
Other

 

 

 (230) (1) (231)
 
 
 348
 (2) 346
TOTAL REVENUES508
 443
 525
 1,730
 (1,893) 1,313
0
 0
 1
 1,648
 (41) 1,608
EXPENSES 
  
  
  
  
  
 
  
  
  
  
  
Loss and LAE
 
 
 406
 6
 412

 
 
 144
 10
 154
Amortization of deferred acquisition costs
 
 
 30
 (8) 22

 
 
 12
 0
 12
Interest expense
 39
 54
 28
 (21) 100

 28
 54
 20
 (20) 82
Other operating expenses24
 3
 3
 217
 (2) 245
22
 1
 1
 199
 (5) 218
TOTAL EXPENSES24
 42
 57
 681
 (25) 779
22
 29
 55
 375
 (15) 466
INCOME (LOSS) BEFORE INCOME TAXES484
 401
 468
 1,049
 (1,868) 534
Total provision (benefit) for income taxes
 (15) (21) 74
 12
 50
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET EARNINGS OF SUBSIDIARIES(22) (29) (54) 1,273
 (26) 1,142
Total (provision) benefit for income taxes
 9
 17
 (387) 27
 (334)
Equity in net earnings of subsidiaries830
 768
 701
 19
 (2,318) 
NET INCOME (LOSS)$484
 $416
 $489
 $975
 $(1,880) $484
808
 748
 664
 905
 (2,317) 808
Less: noncontrolling interest
 
 
 19
 (19) 
NET INCOME (LOSS) ATTRIBUTABLE TO ASSURED GUARANTY LTD.$808
 $748
 $664
 $886
 $(2,298) $808
                      
COMPREHENSIVE INCOME (LOSS)$454
 $341
 $428
 $1,036
 $(1,805) $454
$453
 $522
 $515
 $309
 $(1,346) $453


264267


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 20122015
(in millions)
 
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Net cash flows provided by (used in) operating activities$138
 $6
 $20
 $5
 $(334) $(165)$513
 $408
 $185
 $52
 $(1,210) $(52)
Cash flows from investing activities 
  
  
  
  
  
 
  
  
  
  
  
Fixed maturity securities: 
  
  
  
  
  
Fixed-maturity securities: 
  
  
  
  
  
Purchases(211) (1) (13) (1,424) 
 (1,649)
 (72) (21) (2,550) 66
 (2,577)
Sales
 
 13
 899
 
 912

 177
 30
 1,900
 
 2,107
Maturities3
 
 6
 1,096
 
 1,105

 9
 
 889
 
 898
Sales (purchases) of short-term investments, net(7) 27
 26
 (17) 
 29
116
 33
 19
 729
 
 897
Net proceeds from financial guaranty variable entities’ assets
 
 
 545
 
 545

 
 
 400
 
 400
Acquisition of MAC
 (91) 
 
 
 (91)
Intercompany debt
 
 
 (173) 173
 

 
 
 
 
 
Investment in subsidiary
 
 46
 
 (46) 

 
 25
 
 (25) 
Acquisition of Radian Asset, net of cash acquired
 
 
 (800) 
 (800)
Other
 
 
 92
 
 92

 (5) 
 74
 
 69
Net cash flows provided by (used in) investing activities(215) (65) 78
 1,018
 127
 943
116
 142
 53
 642
 41
 994
Cash flows from financing activities 
  
  
  
  
  
 
  
  
  
  
  
Issuance of common stock173
 
 
 
 
 173
Return of capital
 
 
 (50) 50
 

 
 
 (25) 25
 
Capital contribution from parent
 
 
 4
 (4) 

 
 
 
 
 
Dividends paid(69) 
 (98) (236) 334
 (69)(72) (455) (234) (455) 1,144
 (72)
Repurchases of common stock(24) 
 
 
 
 (24)(555) 
 
 
 
 (555)
Share activity under option and incentive plans(3) 
 
 
 
 (3)(2) 
 
 
 
 (2)
Net paydowns of financial guaranty variable entities’ liabilities
 
 
 (724) 
 (724)
 
 
 (214) 
 (214)
Net proceeds from issuance of long-term debt
 
 
 
 
 
Payment of long-term debt
 (173) 
 (36) 
 (209)
 
 
 (4) 
 (4)
Intercompany debt
 173
 
 
 (173) 

 
 
 
 
 
Net cash flows provided by (used in) financing activities77
 
 (98) (1,042) 207
 (856)(629) (455) (234) (698) 1,169
 (847)
Effect of exchange rate changes
 
 
 1
 
 1

 
 
 (4) 
 (4)
Increase (decrease) in cash
 (59) 
 (18) 
 (77)
 95
 4
 (8) 
 91
Cash at beginning of period
 72
 0
 143
 
 215
0
 0
 4
 71
 
 75
Cash at end of period$
 $13
 $0
 $125
 $
 $138
$0
 $95
 $8
 $63
 $
 $166
 

265268


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 20112014
(in millions)
 
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Net cash flows provided by (used in) operating activities$68
 $84
 $(36) $676
 $(116) $676
$758
 $223
 $144
 $663
 $(1,211) $577
Cash flows from investing activities 
  
  
  
  
  
 
  
  
  
  
  
Fixed maturity securities: 
  
  
  
  
  
Fixed-maturity securities: 
  
  
  
  
  
Purchases
 
 (14) (2,294) 
 (2,308)
 (540) (8) (2,253) 
 (2,801)
Sales
 
 
 1,107
 
 1,107

 464
 10
 777
 
 1,251
Maturities
 
 1
 662
 
 663

 6
 1
 870
 
 877
Sales (purchases) of short-term investments, net(11) (25) (1) 357
 
 320
(93) (15) (3) 269
 
 158
Net proceeds from financial guaranty variable entities’ assets
 
 
 760
 
 760

 
 
 408
 
 408
Intercompany debt
 
 
 
 
 
Investment in subsidiary
 
 50
 
 (50) 

 
 50
 
 (50) 
Other
 
 
 19
 
 19

 
 
 11
 
 11
Net cash flows provided by (used in) investing activities(11) (25) 36
 611
 (50) 561
(93) (85) 50
 82
 (50) (96)
Cash flows from financing activities 
  
  
  
  
   
  
  
  
  
 
Return of capital
 
 
 (50) 50
 

 
 
 (50) 50
 
Capital contribution from parent
 
 
 
 
 
Dividends paid(33) 
 
 (116) 116
 (33)(76) (700) (190) (321)��1,211
 (76)
Repurchases of common stock(23) 
 
 
 
 (23)(590) 
 
 
 
 (590)
Share activity under option and incentive plans(1) 
 
 
 
 (1)1
 
 
 
 
 1
Net paydowns of financial guaranty variable entities’ liabilities
 
 
 (1,053) 
 (1,053)
 
 
 (396) 
 (396)
Net proceeds from issuance of long-term debt
 495
 
 
 
 495
Payment of long-term debt
 
 
 (22) 
 (22)
 
 
 (19) 
 (19)
Intercompany debt
 
 
 
 
 
Net cash flows provided by (used in) financing activities(57) 
 
 (1,241) 166
 (1,132)(665) (205) (190) (786) 1,261
 (585)
Effect of exchange rate changes
 
 
 2
 
 2

 
 
 (5) 
 (5)
Increase (decrease) in cash
 59
 
 48
 
 107

 (67) 4
 (46) 
 (109)
Cash at beginning of period
 13
 
 95
 
 108
0
 67
 0
 117
 
 184
Cash at end of period$
 $72
 $
 $143
 $
 $215
$0
 $0
 $4
 $71
 $
 $75


266269


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 20102013
(in millions)
 
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Assured
Guaranty Ltd.
(Parent)
 
AGUS
(Issuer)
 
AGMH
(Issuer)
 
Other
Entities
 
Consolidating
Adjustments
 
Assured
Guaranty Ltd.
(Consolidated)
Net cash flows provided by (used in) operating activities$15
 $12
 $(49) $225
 $(74) $129
$128
 $178
 $133
 $347
 $(542) $244
Cash flows from investing activities 
  
  
  
  
  
 
  
  
  
  
  
Fixed maturity securities: 
  
  
  
  
  
Fixed-maturity securities: 
  
  
  
  
  
Purchases
 
 (15) (2,447) 
 (2,462)
 (93) (26) (1,832) 65
 (1,886)
Sales
 
 5
 1,059
 
 1,064
176
 1
 25
 892
 (65) 1,029
Maturities
 
 6
 988
 
 994
29
 3
 2
 849
 
 883
Sales (purchases) of short-term investments, net30
 1
 3
 579
 
 613
7
 (28) (15) (51) 
 (87)
Net proceeds from financial guaranty variable entities’ assets
 
 
 424
 
 424

 
 
 663
 
 663
Intercompany debt
 
 
 7
 (7) 
Investment in subsidiary
 
 50
 
 (50) 

 0
 49
 
 (49) 
Other
 
 
 20
 
 20

 
 
 79
 
 79
Net cash flows provided by (used in) investing activities30
 1
 49
 623
 (50) 653
212
 (117) 35
 607
 (56) 681
Cash flows from financing activities 
  
  
  
  
   
  
  
  
  
  
Return of capital
 
 
 (50) 50
 

 
 
 (50) 50
 
Capital contribution from parent
 
 
 1
 (1) 
Dividends paid(33) 
 
 (74) 74
 (33)(75) 
 (168) (374) 542
 (75)
Repurchases of common stock(10) 
 
 
 
 (10)(264) 
 
 
 
 (264)
Share activity under option and incentive plans(2) 
 
 
 
 (2)(1) 
 
 
 
 (1)
Net paydowns of financial guaranty variable entities’ liabilities
 
 
 (651) 
 (651)
 
 
 (511) 
 (511)
Payment of long-term debt
 
 
 (21) 
 (21)
 
 
 (27) 
 (27)
Intercompany debt
 (7) 
 
 7
 
Net cash flows provided by (used in) financing activities(45) 
 
 (796) 124
 (717)(340) (7) (168) (961) 598
 (878)
Effect of exchange rate changes
 
 
 (1) 
 (1)
 
 
 (1) 
 (1)
Increase (decrease) in cash
 13
 
 51
 
 64
0
 54
 
 (8) 
 46
Cash at beginning of period
 0
 
 44
 
 44

 13
 0
 125
 
 138
Cash at end of period$
 $13
 $
 $95
 $
 $108
$0
 $67
 $0
 $117
 $
 $184



267270


23. Quarterly Financial Information (Unaudited)
22.Quarterly Financial Information (Unaudited)

A summary of selected quarterly information follows:

2012 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
2015 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
(dollars in millions, except per share data) (dollars in millions, except per share data)
RevenuesRevenues         Revenues         
Net earned premiums Net earned premiums$194
 $219
 $222
 $218
 $853
Net earned premiums$142
 $219
 $213
 $192
 $766
Net investment income Net investment income98
 101
 102
 103
 404
Net investment income101
 98
 112
 112
 423
Net realized investment gains (losses) Net realized investment gains (losses)1
 (3) 2
 1
 1
Net realized investment gains (losses)16
 (9) (27) (6) (26)
Net change in fair value of credit derivatives Net change in fair value of credit derivatives(691) 261
 (36) (119) (585) Net change in fair value of credit derivatives124
 90
 86
 428
 728
Fair value gains (losses) on CCS Fair value gains (losses) on CCS(14) 4
 (2) (6) (18) Fair value gains (losses) on CCS2
 23
 (15) 17
 27
Fair value gains (losses) on FG VIEs Fair value gains (losses) on FG VIEs(36) 172
 38
 36
 210
Fair value gains (losses) on FG VIEs(7) 5
 2
 38
 38
Other income91
 5
 16
 (4) 108
Bargain purchase gain and settlement of pre-existing relationshipsBargain purchase gain and settlement of pre-existing relationships
 214
 
 
 214
Other income (loss) Other income (loss)(9) 55
 (3) (6) 37
ExpensesExpenses         Expenses         
Loss and LAE Loss and LAE247
 122
 90
 64
 523
Loss and LAE18
 188
 112
 106
 424
Amortization of DAC Amortization of DAC5
 5
 4
 0
 14
Amortization of DAC4
 6
 5
 5
 20
Interest expense Interest expense25
 25
 21
 21
 92
Interest expense25
 26
 25
 25
 101
Other operating expenses Other operating expenses62
 53
 48
 49
 212
Other operating expenses56
 66
 54
 55
 231
Income (loss) before provision for income taxesIncome (loss) before provision for income taxes(696) 554
 179
 95
 132
Income (loss) before provision for income taxes266
 409
 172
 584
 1,431
Provision (benefit) for income taxesProvision (benefit) for income taxes(213) 177
 37
 21
 22
Provision (benefit) for income taxes65
 112
 43
 155
 375
Net income (loss)Net income (loss)(483) 377
 142
 74
 110
Net income (loss)201
 297
 129
 429
 1,056
Earnings (loss) per share(1):Earnings (loss) per share(1):
 
 
 
  Earnings (loss) per share(1):         
Basic Basic$(2.65) $2.02
 $0.73
 $0.38
 $0.58
Basic$1.29
 $1.97
 $0.88
 $3.05
 $7.12
Diluted Diluted$(2.65) $2.01
 $0.73
 $0.38
 $0.57
Diluted$1.28
 $1.96
 $0.88
 $3.03
 $7.08
Dividends per share Dividends per share$0.09
 $0.09
 $0.09
 $0.09
 $0.36
Dividends per share$0.12
 $0.12
 $0.12
 $0.12
 $0.48


268271


2011 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
2014 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
(dollars in millions, except per share data) (dollars in millions, except per share data)
RevenuesRevenues         Revenues         
Net earned premiums Net earned premiums$254
 $230
 $211
 $225
 $920
Net earned premiums$132
 $136
 $144
 $158
 $570
Net investment income Net investment income97
 103
 95
 101
 396
Net investment income103
 96
 102
 102
 403
Net realized investment gains (losses) Net realized investment gains (losses)3
 (5) (11) (5) (18) Net realized investment gains (losses)2
 (8) (19) (35) (60)
Net change in fair value of credit derivatives Net change in fair value of credit derivatives(236) (65) 1,156
 (295) 560
Net change in fair value of credit derivatives(211) 103
 255
 676
 823
Fair value gains (losses) on CCS Fair value gains (losses) on CCS1
 0
 2
 32
 35
Fair value gains (losses) on CCS(9) (6) 4
 
 (11)
Fair value gains (losses) on FG VIEs Fair value gains (losses) on FG VIEs119
 (174) (99) 22
 (132) Fair value gains (losses) on FG VIEs157
 25
 50
 23
 255
Other income41
 27
 (9) (1) 58
Bargain purchase gain and settlement of pre-existing relationshipsBargain purchase gain and settlement of pre-existing relationships
 
 
 
 
Other income (loss) Other income (loss)21
 7
 (11) (3) 14
ExpensesExpenses         Expenses         
Loss and LAE Loss and LAE(26) 124
 215
 149
 462
Loss and LAE41
 57
 (44) 72
 126
Amortization of DAC Amortization of DAC3
 6
 4
 4
 17
Amortization of DAC5
 3
 4
 13
 25
Interest expense Interest expense25
 24
 25
 25
 99
Interest expense20
 20
 27
 25
 92
Other operating expenses Other operating expenses64
 53
 46
 49
 212
Other operating expenses60
 55
 50
 55
 220
Income (loss) before provision for income taxesIncome (loss) before provision for income taxes213
 (91) 1,055
 (148) 1,029
Income (loss) before provision for income taxes69
 218
 488
 756
 1,531
Provision (benefit) for income taxesProvision (benefit) for income taxes74
 (48) 294
 (64) 256
Provision (benefit) for income taxes27
 59
 133
 224
 443
Net income (loss)Net income (loss)139
 (43) 761
 (84) 773
Net income (loss)42
 159
 355
 532
 1,088
Earnings (loss) per share(1):Earnings (loss) per share(1):
 
 
 
  Earnings (loss) per share(1):         
Basic Basic$0.76
 $(0.23) $4.15
 $(0.46) $4.21
Basic$0.23
 $0.89
 $2.10
 $3.30
 $6.30
Diluted Diluted$0.74
 $(0.23) $4.13
 $(0.46) $4.16
Diluted$0.23
 $0.89
 $2.09
 $3.28
 $6.26
Dividends per share Dividends per share$0.045
 $0.045
 $0.045
 $0.045
 $0.18
Dividends per share$0.11
 $0.11
 $0.11
 $0.11
 $0.44
____________________
(1)Per share amounts for the quarters and the full years have each been calculated separately. Accordingly, quarterly amounts may not sum up to the annual amounts because of differences in the average common shares outstanding during each period and, with regard to diluted per share amounts only, because of the inclusion of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Assured Guaranty's management, with the participation of Assured Guaranty Ltd.'s President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Assured Guaranty Ltd.'s disclosure controls and procedures (as such term is defined in Rules 13a 15(e) and 15d 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, Assured Guaranty Ltd.'s President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Assured Guaranty Ltd.'s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Assured Guaranty Ltd. (including its consolidated subsidiaries) in the reports that it files or submits under the Exchange Act.
There has been no change in the Company's internal controls over financial reporting during the Company's quarter ended December 31, 2012,2015, that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

272


Management's Report on Internal Control over Financial Reporting
The management of Assured Guaranty Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of the Company's President and Chief Executive Officer and Chief Financial

269


Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On April 1, 2015 the Company acquired Radian Asset. See Note 2, Acquisition of Radian Asset Assurance Inc., of the Financial Statements and Supplementary Data, for additional information.The Company has extended its Section 404 compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations under such Act to include Radian Asset. The Company integrated Radian Asset’s financial data into the Company’s existing systems, processes and related controls, and introduced new processes and controls to accommodate the business combination accounting and financial consolidation of Radian Asset.
Management of the Company has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 20122015 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control—Integrated Framework.Control-Integrated Framework. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 20122015 based on criteria in the 2013 Internal ControlControl- Integrated Framework issued by the COSO.
The effectiveness of the Company's internal control over financial reporting as of December 31, 20122015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their "Report of Independent Registered Public Accounting Firm" included in Item 8. Financial Statements and Supplementary Data..

Data.

ITEM 9B.OTHER INFORMATION
None.

270273



PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Information pertaining to this item is incorporated by reference to the sections entitled “Proposal No. 1: Election of Directors”, “Corporate Governance--Did our insiders complyGovernance—Did Our Insiders Comply with Section 16(a) beneficial ownership reportingBeneficial Ownership Reporting in 2012?2015?”, “Corporate Governance--How are directorsGovernance—How Are Directors nominated?” and “Corporate Governance--The committeesGovernance—The Committees of the Board--TheBoard—The Audit Committee” of the definitive proxy statement for the Annual General Meeting of Shareholders, which involves the election of directors and will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

Information about the executive officers of AGL is set forth at the end of Part I of this Form 10-K and is hereby incorporated by reference.

Code of Conduct
The Company has adopted a Code of Conduct, which sets forth standards by which all employees, officers and directors of the Company must abide as they work for the Company. The Code of Conduct is available at www.assuredguaranty.com/governance. The Company intends to disclose on its internet site any amendments to, or waivers from, its Code of Conduct that are required to be publicly disclosed pursuant to the rules of the SEC or the New York Stock Exchange.

ITEM 11.EXECUTIVE COMPENSATION
This item is incorporated by reference to the sectionsections entitled “Executive Compensation”, “Corporate Governance-CompensationGovernance—Compensation Committee interlocking and insider participation” and “Corporate Governance-HowGovernance—How are the directors compensated?” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This item is incorporated by reference to the sections entitled "Information about our Common Share Ownership" and "Equity Compensation Plans Information" of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This item is incorporated by reference to the sections entitled “Corporate Governance—What is our related person transactions approval policy and what procedures do we use to implement it?”, “Corporate Governance—What related person transactions do we have?” and “Corporate Governance—Director independence” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.


ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
This item is incorporated by reference to the section entitled “Proposal No. 4: Ratification of3: Appointment of Independent Auditors—Independent Auditor Fee Information” and “Proposal No. 4: Ratification of3: Appointment of Independent Auditors—Pre-Approval Policy of Audit and Non-Audit Services” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.


PART IV

271274


PART IV


ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)Financial Statements, Financial Statement Schedules and Exhibits
1.Financial Statements
The following financial statements of Assured Guaranty Ltd. have been included in Item 8 hereof:

2.    Financial Statement Schedules
The financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3.    Exhibits*


Exhibit
Number
Description of Document
3.1Certificate of Incorporation and Memorandum of Association of the Registrant, as amended by Certificate of Incorporation on Change of Name dated March 30, 2004 and Certificate of Deposit of Memorandum of Increase of Capital dated April 21, 2004 (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2009)
3.2First Amended and Restated Bye-laws of the Registrant, as amended (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on May 10, 2011)
4.1Specimen Common Share Certificate (Incorporated by reference to Exhibit 4.1 to Form S-1 (#333-111491))
4.2Certificate of Incorporation and Memorandum of Association of the Registrant, as amended by Certificate of Incorporation on Change of Name dated March 30, 2004 and Certificate of Deposit of Memorandum of Increase of Capital dated April 21, 2004 (See Exhibit 3.1)
4.3Bye-laws of the Registrant (See Exhibit 3.2)
4.4Indenture, dated as of May 1, 2004, among the Company, Assured Guaranty U.S. Holdings Inc. and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended March 31, 2004)
4.5Indenture, dated as of December 1, 2006, entered into among Assured Guaranty Ltd., Assured Guaranty U.S. Holdings Inc. and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 20, 2006)
4.6First Supplemental Subordinated Indenture, dated as of December 20, 2006, entered into among Assured Guaranty Ltd., Assured Guaranty U.S. Holdings Inc. and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on December 20, 2006)
4.7Replacement Capital Covenant, dated as of December 20, 2006, between Assured Guaranty U.S. Holdings Inc. and Assured Guaranty Ltd., in favor of and for the benefit of each Covered Debtholder (as defined therein) (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 20, 2006)
4.8Amended and Restated Trust Indenture dated as of February 24, 1999 between Financial Security Assurance Holdings Ltd. and the Senior Debt Trustee (Incorporated by reference to Exhibit 4.1 to Financial Security Assurance Holdings Ltd.'s Registration Statement to Form S-3 (#333-74165))

272275




Exhibit
Number
Description of Document
4.9
Form of Assured Guaranty Municipal Holdings Inc., formerly known as Financial Security Assurance Holdings Ltd. 67/8% Quarterly Interest Bond Securities due 2101 (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended March 31, 2010)
4.10Form of Assured Guaranty Municipal Holdings Inc., formerly known as Financial Security Assurance Holdings Ltd. 6.25% Notes due November 1, 2102 (Incorporated by reference to Exhibit 4.2 to Form 10-Q for the quarter ended March 31, 2010)
4.11Form of Assured Guaranty Municipal Holdings Inc., formerly known as Financial Security Assurance Holdings Ltd. 5.60% Notes due July 15, 2103 (Incorporated by reference to Exhibit 4.3 to Form 10-Q for the quarter ended March 31, 2010)
4.12Supplemental indenture, dated as of August 26, 2009, between Assured Guaranty Ltd., Financial Security Assurance Holdings Ltd. and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit 99.1 to Form 8-K filed on September 1, 2009)
4.13Indenture, dated as of November 22, 2006, between Financial Security Assurance Holdings Ltd. and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.1 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on November 28, 2006)
4.14Form of Financial Security Assurance Holdings Ltd. Junior Subordinated Debenture, Series 2006-1 (Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on November 25, 2002)
4.15Supplemental indenture, dated as of August 26, 2009, between Assured Guaranty Ltd., Financial Security Assurance Holdings Ltd. and The Bank of New York Mellon, as trustee (Incorporated by reference to Exhibit 99.2 to Form 8-K filed on September 1, 2009)
4.16First Supplemental Indenture, to be dated as of June 24, 2009, between Assured Guaranty US Holdings Inc., Assured Guaranty Ltd. and The Bank of New York Mellon, as trustee (including the form of 8.50% Senior Note due 2014 of Assured Guaranty US Holdings Inc.) (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on June 23, 2009)
4.17Officers’ Certificate, dated June 20, 2014, related to 5.000% Senior Notes due 2024, containing form of 5.000% Senior Notes due 2024 as Exhibit A thereto (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on June 20, 2014)
10.1Guaranty by Assured Guaranty Re Ltd. 2004 Long-Term Incentive Plan, asin favor of Assured Guaranty Re Overseas Ltd., amended and restated as of May 7, 20091, 2014 (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2009)*June 30, 2014)
10.2Guaranty by Assured Guaranty Re International Ltd. in favor of Assured Guaranty Re Overseas Ltd. (Incorporated by reference to Exhibit 10.31 to Form S-1 (#333-111491))
10.3Guaranty by Assured Guaranty Re Overseas Ltd. in favor of Assured Guaranty Mortgage Insurance Company (Incorporated by reference to Exhibit 10.32 to Form S-1 (#333-111491))
10.4Summary of Annual Compensation*
10.5Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.34 to Form 10-K for the year ended December 31, 2005)*
10.6Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.35 to Form 10-K for the year ended December 31, 2005)*
10.7Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long Term Incentive Plan (Incorporated by reference to Exhibit 10.37 to Form 10-K for the year ended December 31, 2005)*
10.8Assured Guaranty Ltd. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2009)*
10.9Form of Indemnification Agreement between the Company and its executive officers and directors (Incorporated by reference to Exhibit 10.42 to Form 10-K for the year ended December 31, 2005)*
10.10Put Agreement between Assured Guaranty Corp. and Woodbourne Capital Trust [I][II][III][IV] (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2005)
10.1110.3Custodial Trust Expense Reimbursement Agreement (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2005)
10.1210.4Assured Guaranty Corp. Articles Supplementary Classifying and Designating Series of Preferred Stock as Series A Perpetual Preferred Stock, Series B Perpetual Preferred Stock, Series C Perpetual Preferred Stock, Series D Perpetual Preferred Stock (Incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarter ended March 31, 2005)
10.13Assured Guaranty Ltd. Performance Retention Plan (As Amended and Restated as of February 14, 2008 for Awards Granted during 2007) (Incorporated by reference to Exhibit 10.50 to Form 10-K for the year ended December 31, 2007)*

273




Exhibit
Number
Description of Document
10.14Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2007)*
10.15$200.0 million soft-capital credit facility, dated as of July 31, 2007, under which Assured Guaranty Re Ltd. is the borrower and for which Deutsche Bank AG New York Branch acted as administrative agent and lead arranger (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2007)
10.16Assured Guaranty Ltd. Performance Retention Plan (As Amended and Restated as of February 14, 2008) (Incorporated by reference to Exhibit 10.58 to Form 10-K for the year ended December 31, 2007)*
10.17Terms of Performance Retention Award Five Year Cliff Vest Granted on February 14, 2008 (Incorporated by reference to Exhibit 10.59 to Form 10-K for the year ended December 31, 2007)*
10.18Form of Award Letter for Performance Retention Award Five Year Cliff Vest Granted on February 14, 2008 (Incorporated by reference to Exhibit 10.60 to Form 10-K for the year ended December 31, 2007)*
10.19Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.66 to Form 10-K for the year ended December 31, 2007)*
10.20Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.67 to Form 10-K for the year ended December 31, 2007)*
10.21Investment Agreement dated as of February 28, 2008 between Assured Guaranty Ltd. and WLR Recovery Fund IV, L.P. (Incorporated by reference to Exhibit 10.68 to Form 10-K for the year ended December 31, 2007)
10.22Director Compensation (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2012)*
10.23Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2008)*
10.24Form of amendment to Restricted Stock Unit Awards for Outside Directors (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2008)*
10.25Employment Agreement between Dominic J. Frederico and the Registrant (Incorporated by reference to Exhibit 10.64 to Form 10-K for the year ended December 31, 2008)*
10.26Employment Agreement between Robert B. Mills and the Registrant (Incorporated by reference to Exhibit 10.66 to Form 10-K for the year ended December 31, 2008)*
10.27Employment Agreement between James M. Michener and the Registrant (Incorporated by reference to Exhibit 10.67 to Form 10-K for the year ended December 31, 2008)*
10.28Employment Agreement between Robert A. Bailenson and the Registrant (Incorporated by reference to Exhibit 10.68 to Form 10-K for the year ended December 31, 2008)*
10.29Assured Guaranty Ltd. Executive Officer Recoupment Policy (Incorporated by reference to Exhibit 10.69 to Form 10-K for the year ended December 31, 2008)*
10.30Form of Acknowledgement of Assured Guaranty Ltd. Executive Officer Recoupment Policy (Incorporated by reference to Exhibit 10.70 to Form 10-K for the year ended December 31, 2008)*
10.31Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.71 to Form 10-K for the year ended December 31, 2008)*
10.32Terms of Performance Retention Award Four Year Installment Vesting Granted on February 5, 2009 (Incorporated by reference to Exhibit 10.73 to Form 10-K for the year ended December 31, 2008)*
10.33Approval dated September 16, 2008 pursuant to Investment Agreement dated as of February 28, 2008 with WLR Recovery Fund IV, L.P. Pursuant to the Investment Agreement, WLR Recovery Fund IV, L.P. and other funds affiliated with WL Ross & Co. LLC (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on September 19, 2008)
10.3410.5Purchase Agreement among Dexia Holdings Inc., Dexia CreditCrédit Local S.A. and the Company dated as of November 14, 2008 (Incorporated by reference to Exhibit 99.1 to Form 8-K filed on November 17, 2008)
10.35Amendment to Investment Agreement dated as of November 13, 2008 between the Company and WLR Recovery Fund IV, L.P. (Incorporated by reference to Exhibit 99.2 to Form 8-K filed on November 17, 2008)
10.3610.6Amended and Restated Revolving Credit Agreement dated as of June 30, 2009 among FSA Asset Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium S.A. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 8, 2009)

274



 10.7
First Amendment to Amended and Restated Revolving Credit Agreement dated as of September 20, 2010 among FSA Asset Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium S.A. (Incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2013)
10.8Second Amendment to Amended and Restated Revolving Credit Agreement dated as of May 16, 2012 among FSA Asset Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium S.A. (Incorporated by reference to Exhibit 10.12 to Form 10-K for the year ended December 31, 2013)

Exhibit
Number
10.9
DescriptionAssignment Pursuant to the Amended and Restated Revolving Credit Agreement, as amended, dated as of DocumentDecember 12, 2013 between Belfius Bank SA/NV and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended December 31, 2013)
10.3710.10Master Repurchase Agreement (September 1996 Version) dated as of June 30, 2009 between Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.2.1 to Form 8-K filed on July 8, 2009)

276


10.38

Exhibit
Number
Description of Document
10.11Annex I-Committed Term Repurchase Agreement Annex dated as of June 30, 2009 between Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.2.2 to Form 8-K filed on July 8, 2009)
10.3910.12ISDA Master Agreement (Multicurrency-Cross Border) dated as of June 30, 2009 among Dexia SA, Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.1 to Form 8-K filed on July 8, 2009)
10.4010.13Schedule to the 1992 Master Agreement, Guaranteed Put Contract, dated as of June 30, 2009 among Dexia Crédit Local S.A., Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.2 to Form 8-K filed on July 8, 2009)
10.4110.14Put Option Confirmation, Guaranteed Put Contract, dated June 30, 2009 to FSA Asset Management LLC from Dexia SA and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.3.3 to Form 8-K filed on July 8, 2009)
10.4210.15ISDA Credit Support Annex (New York Law) to the Schedule to the ISDA Master Agreement, Guaranteed Put Contract, dated as of June 30, 2009 between Dexia Crédit Local S.A. and Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.4 to Form 8-K filed on July 8, 2009)
10.4310.16ISDA Master Agreement (Multicurrency-Cross Border) dated as of June 30, 2009 among Dexia SA, Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.1 to Form 8-K filed on July 8, 2009)
10.4410.17Schedule to the 1992 Master Agreement, Non-Guaranteed Put Contract, dated as of June 30, 2009 among Dexia Crédit Local S.A., Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.2 to Form 8-K filed on July 8, 2009)
10.4510.18Put Option Confirmation, Non-Guaranteed Put Contract, dated June 30, 2009 to FSA Asset Management LLC from Dexia SA and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.4.3 to Form 8-K filed on July 8, 2009)
10.4610.19ISDA Credit Support Annex (New York Law) to the Schedule to the ISDA Master Agreement, Non-Guaranteed Put Contract, dated as of June 30, 2009 between Dexia Crédit Local S.A. and Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.4 to Form 8-K filed on July 8, 2009)
10.4710.20First Demand Guarantee Relating to the “Financial Products” Portfolio of FSA Asset Management LLC issued by the Belgian State and the French State and executed as of June 30, 2009 (Incorporated by reference to Exhibit 10.5 to Form 8-K filed on July 8, 2009)
10.4810.21Guaranty, dated as of June 30, 2009, made jointly and severally by Dexia SA and Dexia Crédit Local S.A., in favor of Financial Security Assurance Inc. (Incorporated by reference to Exhibit 10.6 to Form 8-K filed on July 8, 2009)
10.4910.22Indemnification Agreement (GIC Business) dated as of June 30, 2009 by and among Financial Security Assurance Inc., Dexia Crédit Local S.A. and Dexia SA (Incorporated by reference to Exhibit 10.7 to Form 8-K filed on July 8, 2009)
10.5010.23Pledge and Administration Agreement, dated as of June 30, 2009, among Dexia SA, Dexia Crédit Local S.A., Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSA Asset Management LLC, FSA Portfolio Asset Limited, FSA Capital Markets Services LLC, FSA Capital Markets Services (Caymans) Ltd., FSA Capital Management Services LLC and The Bank of New York Mellon Trust Company, National Association (Incorporated by reference to Exhibit 10.8 to Form 8-K filed on July 8, 2009)
10.5110.24Separation Agreement, dated as of July 1, 2009, among Dexia Crédit Local S.A., Financial Security Assurance Inc., Financial Security Assurance International, Ltd., FSA Global Funding Limited and Premier International Funding Co. (Incorporated by reference to Exhibit 10.9 to Form 8-K filed on July 8, 2009)
10.5210.25Funding Guaranty, dated as of July 1, 2009, made by Dexia Crédit Local S.A. in favor of Financial Security Assurance Inc. and Financial Security Assurance International, Ltd. (Incorporated by reference to Exhibit 10.10 to Form 8-K filed on July 8, 2009)
10.5310.26Reimbursement Guaranty, dated as of July 1, 2009, made by Dexia Crédit Local S.A. in favor of Financial Security Assurance Inc. and Financial Security Assurance International, Ltd. (Incorporated by reference to Exhibit 10.11 to Form 8-K filed on July 8, 2009)
10.5410.27Amended and Restated Strip Coverage Liquidity and Security Agreement, dated as of July 1, 2009, between Financial Security Assurance Inc.Assured Guaranty Municipal Corp. and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.1210.31 to Form 8-K filed on July 8, 2009)10-K for the year ended December 31, 2013)
10.28First Amendment to Amended and Restated Strip Coverage Liquidity and Security Agreement, dated as of June 30, 2014, between Assured Guaranty Municipal Corp. and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended June 30, 2014)

275277




Exhibit
Number
Description of Document
10.5510.29Indemnification Agreement (FSA Global Business), dated as of July 1, 2009, by and between Financial Security Assurance Inc., Assured Guaranty Ltd. and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.13 to Form 8-K filed on July 8, 2009)
10.5610.30Pledge and Administration Annex Amendment Agreement dated as of July 1, 2009 among Dexia SA, Dexia Crédit Local S.A., Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSA Asset Management LLC, FSA Portfolio Asset Limited, FSA Capital Markets Services LLC, FSA Capital Markets Services (Caymans) Ltd., FSA Capital Management Services LLC and The Bank of New York Mellon Trust Company, National Association (Incorporated by reference to Exhibit 10.14 to Form 8-K filed on July 8, 2009)
10.5710.31Put Confirmation Annex Amendment Agreement dated as of July 1, 2009 among Dexia SA and Dexia Crédit Local S.A. and FSA Asset Management LLC and Financial Security Assurance Inc. (Incorporated by reference to Exhibit 10.15 to Form 8-K filed on July 8, 2009)
10.58Non-Qualified Stock Option Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.19 to Form 10-Q for the quarter ended June 30, 2009)*
10.5910.32Master Repurchase Agreement between FSA Capital Management Services LLC and FSA Capital Markets Services LLC (Incorporated by reference to Exhibit 10.20 to Form 10-Q for the quarter ended June 30, 2009)
10.6010.33Confirmation to Master Repurchase Agreement (Incorporated by reference to Exhibit 10.21 to Form 10-Q for the quarter ended June 30, 2009)
10.6110.34Master Repurchase Agreement Annex I (Incorporated by reference to Exhibit 10.22 to Form 10-Q for the quarter ended June 30, 2009)
10.62Financial Security Assurance Holdings Ltd. 1989 Supplemental Executive Retirement Plan (amended and restated as of December 17, 2004) (Incorporated by reference to Exhibit 10.4 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on December 17, 2004)*
10.63Amendment to the Financial Security Assurance Holdings Ltd. 1989 Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 10.29 to Form 10-Q for the quarter ended June 30, 2009)*
10.64Financial Security Assurance Holdings Ltd. 2004 Supplemental Executive Retirement Plan, dated as of December 17, 2004 (Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on December 17, 2004)*
10.65Financial Security Assurance Holdings Ltd. 2004 Supplemental Executive Retirement Plan, as amended on May 18, 2006 (Incorporated by reference to Exhibit 10.1 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on May 22, 2006)*
10.66Financial Security Assurance Holdings Ltd. 2004 Supplemental Executive Retirement Plan, as amended on February 14, 2008 (Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on February 15, 2008)*
10.6710.35Pledge and Intercreditor Agreement, among Dexia Crédit Local, Dexia Bank Belgium S.A., Financial Security Assurance Inc. and FSA Asset Management LLC, dated November 13, 2008 (Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended September 30, 2008)
10.6810.36Amended and Restated Pledge and Intercreditor Agreement, dated as of February 20, 2009, between Dexia Crédit Local, Dexia Bank Belgium S.A., Financial Security Assurance Inc., FSA Asset Management LLC, FSA Capital Markets Services LLC and FSA Capital Management Services LLC (Incorporated by reference to Exhibit 10.19 to Financial Security Assurance Holdings Ltd.'s Form 10-K for the year ended December 31, 2008)
10.6910.37Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust I (Incorporated by reference to Exhibit 99.5 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended June 30, 2003)
10.7010.38Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust II (Incorporated by reference to Exhibit 99.6 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended June 30, 2003)
10.7110.39Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust III (Incorporated by reference to Exhibit 99.7 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended June 30, 2003)
10.7210.40Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust IV (Incorporated by reference to Exhibit 99.8 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended June 30, 2003)

276




Exhibit
Number
Description of Document
10.7310.41Contribution Agreement, dated as of November 22, 2006, between Dexia S.A. and Financial Security Assurance Holdings Ltd. (Incorporated by reference to Exhibit 10.4 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on November 28, 2006)
10.7410.42Replacement Capital Covenant, dated as of November 22, 2006, by Financial Security Assurance Holdings Ltd. (Incorporated by reference to Exhibit 10.5 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on November 28, 2006)
10.7510.43Agreement and Amendment between Dexia Holdings Inc., Dexia Credit Local S.A. and the Company dated as of June 9, 2009 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 12, 2009)
10.7610.44Second Amendment to InvestmentStock Purchase Agreement, dated as June 10, 2009of December 22, 2014, between the CompanyAssured Guaranty Corp. and WLR Recovery Fund IV, L.P.Radian Guaranty Inc. (Incorporated by reference to Exhibit 10.210.44 to Form 8-K filed on June 12, 2009)10-K for the year ended December 31, 2014)
10.7710.45Restricted Stock AgreementSummary of Annual Compensation*
10.46Director Compensation Summary (Incorporated by reference to Exhibit 10.1 to Form 10-Q for Outside Directors under the quarter ended March 31, 2015)*

278




Exhibit
Number
Description of Document
10.47Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended and restated as of May 7, 2009 and as amended through the Third Amendment (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2008)March 31, 2014)*
10.7810.482010 Form of RestrictedNon-Qualified Stock UnitOption Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.110.34 to Form 10-Q10-K for the quarteryear ended MarchDecember 31, 2010)2005)*
10.7910.492010Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.35 to Form of Restricted10-K for the year ended December 31, 2005)*
10.50Non-Qualified Stock UnitOption Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used withoutwith employment agreement (Incorporated by reference to Exhibit 10.210.66 to Form 10-K for the year ended December 31, 2007)*
10.51Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.67 to Form 10-K for the year ended December 31, 2007)*
10.52Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.71 to Form 10-K for the year ended December 31, 2008)*
10.53Non-Qualified Stock Option Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.19 to Form 10-Q for the quarter ended March 31, 2010)June 30, 2009)*
10.8010.542010 Form of Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2010)*
10.8110.552010 Form of Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan for use without employment agreement (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2010)*
10.82Terms of Performance Retention Award, Four Year Installment Vesting Granted on February 25, 2010 for participants subject to $1 million limit (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2010)*
10.83Terms of Performance Retention Award, Four Year Installment Vesting Granted on February 9, 2011 for participants subject to $1 million limit (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2011)*
10.84Form of Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2011)*
10.85Form of Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used without employment agreement (Incorporated by reference to Exhibit 10.7 to the Form 10-Q for the quarter ended March 31, 2011)*
10.86Waiver Letter dated April 21, 2011 from Dominic J. Frederico (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 22, 2011)*
10.87Waiver Letter dated April 21, 2011 from Robert B. Mills (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on April 22, 2011)*
10.88Waiver Letter dated April 21, 2011 from James M. Michener (Incorporated by reference to Exhibit 10.3 to Form 8-K filed on April 22, 2011)*
10.89Waiver Letter dated April 21, 2011 from Robert A. Bailenson (Incorporated by reference to Exhibit 10.4 to Form 8-K filed on April 22, 2011)*
10.90Letter Agreement with Robert B. Mills dated May 13, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 13, 2011)*
10.91Letter Agreement with Robert A. Bailenson dated May 13, 2011 (incorporated by reference to Exhibit 10.2 to Form 8-K filed May on 13, 2011)*
10.92Assured Guaranty Corp. Supplemental Executive Retirement Plan as amended through the Third Amendment thereto (Incorporated by reference to Exhibit 4.5 to Form S-8 (#333-178625))*
10.93Employment Continuation and Termination of Employment Agreement between Dominic J. Frederico and the Registrant (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2012)*
10.94Employment Continuation and Termination of Employment Agreement between James M. Michener and the Registrant (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2012)*

277




Exhibit
Number
Description of Document
10.95Employment Continuation and Termination of Employment Agreement between Robert B. Mills and the Registrant (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2012)*
10.96Employment Continuation and Termination of Employment Agreement between Robert A. Bailenson and the Registrant (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2012)*
10.97Assured Guaranty Ltd. Executive Severance Plan (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2012)*
10.98Assured Guaranty Ltd. Perquisite Policy (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2012)*
10.9910.562012 Form of Executive Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2012)*
10.10010.5720122013 Form of Executive Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2013)*
10.58Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long Term Incentive Plan (Incorporated by reference to Exhibit 10.37 to Form 10-K for the year ended December 31, 2005)*
10.59Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2007)*
10.60Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2008)*
10.61Form of amendment to Restricted Stock Unit Awards for Outside Directors (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2008)*
10.62Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2008)*
10.632014 Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended June 30, 2014)*
10.64Form of Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as in effect for awards commencing in 2015 (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2015)*
10.652013 Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.810.2 to Form 10-Q for the quarter ended March 31, 2012)2013)*
10.10110.6620122014 Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2014)*
10.67Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as in effect for awards commencing in 2015 (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2015)*
10.682013 Form of Executive Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.910.3 to Form 10-Q for the quarter ended March 31, 2013)*

279




Exhibit
Number
Description of Document
10.692014 Form of Executive Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2014)*
10.702015 Form of Executive Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2015)*
10.71First Amendment to the Restricted Stock Unit Agreement for Outside Directors (Incorporated by reference to Exhibit 10.106 to Form 10-K for the year ended December 31, 2012)*
10.10210.72Assured Guaranty Ltd. Employee Stock Purchase Plan, as amended through the second amendment (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2013)*
10.73Assured Guaranty Ltd. Performance Retention Plan (As Amended and Restated as of February 14, 2008 for Awards Granted during 2007) (Incorporated by reference to Exhibit 10.50 to Form 10-K for the year ended December 31, 2007)*
10.74Assured Guaranty Ltd. Performance Retention Plan (As Amended and Restated as of February 14, 2008) (Incorporated by reference to Exhibit 10.58 to Form 10-K for the year ended December 31, 2007)*
10.75Terms of Performance Retention Award Four Year Installment Vesting Granted on February 9, 2012 for participants Subject to $1 million Limit (Incorporated by reference to Exhibit 10.10 to Form 10-Q for the quarter ended March 31, 2012)*
10.10310.76Terms of Performance Retention Award Four Year Installment Vesting Granted on February 7, 2013 for Participants Subject to $1 million Limit (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2013)*
10.77Terms of Performance Retention Award Four Year Installment Vesting Granted on February 5, 2014 for Participants Subject to $1 million Limit (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2014)*
10.78Assured Guaranty Ltd. Executive Severance Plan (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2012)*
10.79Form of Acknowledgement Letter for Participants in Assured Guaranty Ltd. Executive Severance Plan (Incorporated by reference to Exhibit 10.11 to Form 10-Q for the quarter ended March 31, 2012)*
10.10410.80
Assured Guaranty Ltd. Perquisite Policy (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2012)*
10.81Form of Indemnification Agreement between the Company and its executive officers and directors (Incorporated by reference to Exhibit 10.42 to Form 10-K for the year ended December 31, 2005)*
10.82Assured Guaranty Ltd. Executive Officer Recoupment Policy (Incorporated by reference to Exhibit 10.69 to Form 10-K for the year ended December 31, 2008)*
10.83Form of Acknowledgement of Assured Guaranty Ltd. Executive Officer Recoupment Policy (Incorporated by reference to Exhibit 10.70 to Form 10-K for the year ended December 31, 2008)*
10.84Amended and Restated Assured Guaranty Ltd. Executive Officer Recoupment Policy (amended and restated effective November 3, 2015)*
10.85Form of Acknowledgement of Amended and Restated Assured Guaranty Ltd. Executive Officer Recoupment Policy*
10.86Assured Guaranty Ltd. Supplemental Employee Retirement Plan, as amended and restated effective January 1, 2009 and as amended by the First, Second, Third, Fourth and Fifth Amendments (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2012)*
10.10510.87Assured Guaranty Ltd. 2004 Long-Term IncentiveCorp. Supplemental Executive Retirement Plan as amended and restated as of May 7, 2009 and as amended bythrough the FirstThird Amendment thereto (Incorporated by reference to Exhibit 10.24.5 to Form S-8 (#333-178625))*
10.88Financial Security Assurance Holdings Ltd. 1989 Supplemental Executive Retirement Plan (amended and restated as of December 17, 2004) (Incorporated by reference to Exhibit 10.4 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on December 17, 2004)*
10.89Amendment to the Financial Security Assurance Holdings Ltd. 1989 Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 10.29 to Form 10-Q for the quarter ended SeptemberJune 30, 2012)2009)*
10.10610.90First AmendmentFinancial Security Assurance Holdings Ltd. 2004 Supplemental Executive Retirement Plan, as amended on February 14, 2008 (Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on February 15, 2008)*

280




Exhibit
Number
Description of Document
10.91Separation Agreement, dated February 4, 2015, between Robert B. Mills and the Restricted Stock Unit AgreementRegistrant (Incorporated by reference to Exhibit 10.91 to Form 10-K for Outside Directors*the year ended December 31, 2014)*
12.1Computation of Ratio of Earnings to Fixed Charges
21.1Subsidiaries of the registrantRegistrant
23.1Accountants Consent
31.1Certification of CEO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
31.2Certification of CFO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
32.1Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑ Oxley Act of 2002
32.2Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑ Oxley Act of 2002
101.1The following financial information from Registrant's Annual Report on Form 10-K for the year ended December 31, 20122015 formatted in XBRL (eXtensible Business Reporting Language) interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at December 31, 20122015 and 2011;2014; (ii) Consolidated Statements of Operations for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; (iv) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; and (vi) Notes to Consolidated Financial Statements.

*Management contract or compensatory plan



278281


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 Assured Guaranty Ltd.
  
  
 By:
/s/ Dominic J. Frederico
Name: Dominic J. Frederico
Title:  President and Chief Executive Officer
Date: March 1, 2013February 26, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
  Name    Position    Date  
   
/s/ Walter A. ScottFrancisco L. Borges
Walter A. ScottFrancisco L. Borges
Chairman of the Board; DirectorMarch 1, 2013February 26, 2016
   
/s/ Dominic J. Frederico
Dominic J. Frederico
President and Chief Executive Officer; DirectorMarch 1, 2013February 26, 2016
   
/s/ Robert A. Bailenson
Robert A. Bailenson
Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)March 1, 2013
/s/ Neil Baron
Neil Baron
DirectorMarch 1, 2013
/s/ Francisco L. Borges
Francisco L. Borges
DirectorMarch 1, 2013February 26, 2016
   
/s/ G. Lawrence Buhl
G. Lawrence Buhl
DirectorMarch 1, 2013February 26, 2016
   
/s/ Stephen A. Cozen
Stephen A. Cozen
DirectorMarch 1, 2013February 26, 2016
   
/s/ Bonnie L. Howard
Bonnie L. Howard
DirectorMarch 1, 2013February 26, 2016
/s/ Thomas W. Jones
Thomas W. Jones
DirectorFebruary 26, 2016
   
/s/ Patrick W. Kenny
Patrick W. Kenny
DirectorMarch 1, 2013February 26, 2016
   
/s/ Robin Monro‑DaviesAlan J. Kreczko
Robin Monro‑DaviesAlan J. Kreczko
DirectorMarch 1, 2013February 26, 2016
/s/ Simon W. Leathes
Simon W. Leathes
DirectorFebruary 26, 2016
   
/s/ Michael T. O'Kane
Michael T. O'Kane
DirectorMarch 1, 2013February 26, 2016
   
/s/ Wilbur L. Ross, Jr.Yukiko Omura
Wilbur L. Ross, Jr.Yukiko Omura
DirectorMarch 1, 2013February 26, 2016


279282