Assured Guaranty (AGO) 8-K Results of Operations and Financial Condition

Exhibit 99.1

Assured Guaranty Municipal Corp.

Consolidated Financial Statements

(Unaudited)

September 30, 2015

ASSURED GUARANTY MUNICIPAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Balance Sheets (unaudited) as of September 30, 2015 and December 31, 2014	1
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014	2
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014	3
Consolidated Statements of Shareholder's Equity (unaudited) for the Nine Months Ended September 30, 2015 and 2014	4
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2015 and 2014	5
Notes to Consolidated Financial Statements (unaudited)	6

Assured Guaranty Municipal Corp.

Consolidated Balance Sheets (unaudited)

(dollars in millions except per share and share amounts)

	As of September 30, 2015		As of December 31, 2014
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $5,868and $5,920)	$	6,096	$	6,212
Short-term investments, at fair value	202		377
Other invested assets (includes Surplus Note from affiliate of $300 and $300)	361		406
Total investment portfolio	6,659		6,995
Cash	24		23
Premiums receivable	398		450
Ceded unearned premium reserve	869		958
Reinsurance recoverable on unpaid losses	185		133
Salvage and subrogation recoverable	115		130
Credit derivative assets	75		79
Deferred tax asset, net	134		161
Financial guaranty variable interest entities’ assets, at fair value	875		823
Other assets	149		154
Total assets	$	9,483	$	9,906
Liabilities and shareholder's equity
Unearned premium reserve	$	2,960	$	3,425
Loss and loss adjustment expense reserve	526		404
Reinsurance balances payable, net	115		158
Notes payable	15		19
Credit derivative liabilities	192		287
Current income tax payable	59		57
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	776		830
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	126		114
Other liabilities	317		322
Total liabilities	5,086		5,616
Commitments and contingencies (See Note 14)
Preferred stock ($1,000 par value, 5,000.1 shares authorized; 0 shares issued and outstanding)	—		—
Common stock ($45,455 par value, 330 shares authorized; issued and outstanding)	15		15
Additional paid-in capital	975		1,000
Retained earnings	2,906		2,752
Accumulated other comprehensive income, net of tax of $78 and $107	132		184
Total shareholder's equity attributable to Assured Guaranty Municipal Corp.	4,028		3,951
Noncontrolling interest	369		339
Total shareholder's equity	4,397		4,290
Total liabilities and shareholder's equity	$	9,483	$	9,906

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

1

Assured Guaranty Municipal Corp.

Consolidated Statements of Operations (unaudited)

(in millions)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenues
Net earned premiums	$	117		$	95		$	319		$	274
Net investment income	77			68			206			198
Net realized investment gains (losses):
Other-than-temporary impairment losses	(12		)	(17		)	(22		)	(44		)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income	0			3			2			(9		)
Net impairment loss	(12		)	(20		)	(24		)	(35		)
Other net realized investment gains (losses)	(8		)	2			0			12
Net realized investment gains (losses)	(20		)	(18		)	(24		)	(23		)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	5			6			27			24
Net unrealized gains (losses)	82			6			91			17
Net change in fair value of credit derivatives	87			12			118			41
Fair value gains (losses) on committed capital securities	(7		)	2			5			(4		)
Fair value gains (losses) on financial guaranty variable interest entities	3			49			(1		)	220
Other income (loss)	(8		)	(17		)	29			7
Total revenues	249			191			652			713
Expenses
Loss and loss adjustment expenses	37			(55		)	101			(23		)
Amortization of deferred ceding commissions	(3		)	(4		)	(10		)	(9		)
Interest expense	(1		)	1			(1		)	2
Other operating expenses	29			25			79			82
Total expenses	62			(33		)	169			52
Income (loss) before income taxes	187			224			483			661
Provision (benefit) for income taxes
Current	37			(9		)	81			38
Deferred	17			76			55			162
Total provision (benefit) for income taxes	54			67			136			200
Net income (loss)	133			157			347			461
Less: Noncontrolling interest	10			9			30			24
Net income (loss) attributable to Assured Guaranty Municipal Corp.	$	123		$	148		$	317		$	437

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

2

Assured Guaranty Municipal Corp.

Consolidated Statements of Comprehensive Income (unaudited)

(in millions)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income (loss)	$	133		$	157		$	347		$	461
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $10, $1, $(27) and $50	19			0			(49		)	95
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(5), $0, $(7) and $(5)	(8		)	(1		)	(13		)	(12		)
Unrealized holding gains (losses) arising during the period, net of tax	11			(1		)	(62		)	83
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(4), $(5), $(5) and $(9)	(7		)	(10		)	(10		)	(17		)
Other comprehensive income (loss)	18			9			(52		)	100
Comprehensive income (loss)	151			166			295			561
Less: Comprehensive income (loss) attributable to noncontrolling interest	13			10			30			40
Comprehensive income (loss) attributable to Assured Guaranty Municipal Corp.	$	138		$	156		$	265		$	521

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

3

Assured Guaranty Municipal Corp.

Consolidated Statements of Shareholder’s Equity (unaudited)

For the Nine Months Ended September 30, 2015

(dollars in millions, except share data)

	Common Shares Outstanding	Common Stock Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholder's Equity Attributable to Assured Guaranty Municipal Corp.			Noncontrolling Interest		Total Shareholder's Equity
Balance at December 31, 2014	330	15		1,000			2,752			184			3,951			339		4,290
Net income	—	—		—			317			—			317			30		347
Dividends	—	—		—			(163		)	—			(163		)	—		(163		)
Other comprehensive income (loss)	—	—		—			—			(52		)	(52		)	0		(52		)
Return of capital: repayment of Surplus Notes	—	—		(25		)	—			—			(25		)	—		(25		)
Balance at September 30, 2015	330	$	15	$	975		$	2,906		$	132		$	4,028		$	369	$	4,397

For the Nine Months Ended September 30, 2014

(dollars in millions, except share data)

	Common Shares Outstanding	Common Stock Par Value		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholder's Equity Attributable to Assured Guaranty Municipal Corp.			Noncontrolling Interest		Total Shareholder's Equity
Balance at December 31, 2013	330	$	15	$	1,051		$	2,400		$	86	$	3,552		$	289	$	3,841
Net income	—	—		—			437			—		437			24		461
Dividends	—	—		—			(105		)	—		(105		)	—		(105		)
Other comprehensive income (loss)	—	—		—			—			84		84			16		100
Return of capital:
Repayment of Surplus Notes	—	—		(50		)	—			—		(50		)	—		(50		)
Other	—	—		(1		)	—			—		(1		)	1		0
Balance at September 30, 2014	330	15		1,000			2,732			170		3,917			330		4,247

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

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Assured Guaranty Municipal Corp.

Consolidated Statements of Cash Flows (unaudited)

(in millions)

	Nine Months Ended September 30,
	2015			2014
Net cash flows provided by (used in) operating activities	$	21		$	210
Investing activities
Fixed-maturity securities:
Purchases	(888		)	(1,037		)
Sales	508			244
Maturities	306			283
Net sales (purchases) of short-term investments	231			457
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	85			328
Other	32			(2		)
Net cash flows provided by (used in) investing activities	274			273
Financing activities
Dividends paid	(163		)	(105		)
Repayment of notes payable	(3		)	(18		)
Net paydowns of financial guaranty variable interest entities' liabilities	(102		)	(329		)
Repayment of Surplus Notes	(25		)	(50		)
Net cash flows provided by (used in) financing activities	(293		)	(502		)
Effect of foreign exchange rate changes	(1		)	(2		)
Increase (decrease) in cash	1			(21		)
Cash at beginning of period	23			53
Cash at end of period	$	24		$	32
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	71		$	64
Interest	$	0		$	3

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

5

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2015

1.    Business and Basis of Presentation

Business

Assured Guaranty Municipal Corp. (“AGM,” or together with its direct and indirect subsidiaries, the “Company”), a New York domiciled insurance company, is a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. (“AGMH”). AGMH is an indirect and wholly owned subsidiary of Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty”). AGL is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (“U.S.”) and international public finance (including infrastructure) and structured finance markets. AGM was formerly known as Financial Security Assurance Inc.

The Company applies its credit underwriting judgment, risk management skills and capital markets experience to offer financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (“Debt Service”), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. Obligations insured by the Company include bonds issued by U.S. state or municipal governmental authorities and notes issued to finance international infrastructure projects. AGM had previously offered insurance and reinsurance in the global structured finance market, but has not done so since mid-2008. AGM and its indirect subsidiary Municipal Assurance Corp. ("MAC") markets its financial guaranty insurance directly to issuers and underwriters of public finance bonds as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom ("U.K."), and also guarantees obligations issued in other countries and regions, including Australia and Western Europe. While AGM has ceased insuring new originations of asset-backed securities, a significant portfolio of such obligations remains outstanding. AGM's wholly owned subsidiary Assured Guaranty (Europe) Ltd. (“AGE”) provides financial guarantees in the international public finance market and intends to provide such guarantees in the international structured finance market, subject to regulatory approval.

In the past, the Company sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (“CDS”). Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty insurance contracts. The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation. The Company has not entered into any new CDS in order to sell credit protection since 2008. Regulatory guidelines issued in 2009 limiting the terms under which such protection could be sold as well as the capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contributed to the Company not entering into new CDS. The Company actively pursues opportunities to terminate existing CDS, which have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company and its consolidated financial guaranty variable interest entities (“FG VIEs”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements are as of September 30, 2015 and cover the three-month period ended September 30, 2015 ("Third Quarter 2015"), the three-month period ended September 30, 2014 ("Third Quarter 2014"), the nine-month period ended September 30, 2015 ("Nine Months 2015") and the nine-month period ended September 30, 2014 ("Nine Months 2014"). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end balance sheet data was derived from audited financial statements.

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The unaudited interim consolidated financial statements include the accounts of AGM, its direct and indirect subsidiaries (collectively, the “Subsidiaries”), and its consolidated FG VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

These unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of AGM included in Exhibit 99.1 in AGL's Form 8-K dated March 30, 2015, filed with the U.S. Securities and Exchange Commission (the “SEC”).

AGM's direct and indirect subsidiaries are as follows:

•AGE, organized in the United Kingdom ("U.K.") and 100% owned by AGM;

• Municipal Assurance Holdings Inc. (“MAC Holdings”), incorporated in Delaware and 60.7% owned by AGM and 39.3% owned by AGM's affiliate, Assured Guaranty Corp. ("AGC"); and

• MAC, domiciled in New York and 100% owned by MAC Holdings.

Future Application of Accounting Standards

Consolidation

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 any material effect on its Consolidated Financial Statements.

Investments

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 per share. The ASU will be effective on January 1, 2016 and should be applied retrospectively to all periods presented; earlier adoption is permitted. The Company has investments with a fair value of $45 million and $76 million, as of September 30, 2015 and December 31, 2014, respectively, that are carried at fair value using the net asset value per share subject to this ASU.

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. As a financial guaranty insurance provider, ASU 2015-09 is not expected to have a material 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.

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2.    Rating Actions

Rating Actions

When a rating agency assigns a public rating to a financial obligation guaranteed by AGM, AGE or MAC, it generally awards that obligation the same rating it has assigned to the financial strength of those insurance companies. Investors in products insured by AGM or MAC or guaranteed by AGE frequently rely on ratings published by the rating agencies because such ratings influence the trading value of securities and form the basis for many institutions’ investment guidelines as well as individuals’ bond purchase decisions. Therefore, the Company manages its business with the goal of achieving strong financial strength ratings. However, the methodologies and models used by rating agencies differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The methodologies and models are not fully transparent, contain subjective elements and data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings are subject to continuous review and revision or withdrawal at any time. If the financial strength ratings of one (or more) of AGM, AGE or MAC were reduced below current levels, the Company expects it could have adverse effects on the impacted insurance company's future business opportunities as well as the premiums the impacted company could charge for its insurance policies.

In the last several years, Standard & Poor's Ratings Services ("S&P") and Moody’s Investors Service, Inc. ("Moody's") have changed, multiple times, their financial strength ratings of AGM and AGE, or changed the outlook on such ratings. More recently, Kroll Bond Rating Agency ("KBRA") has assigned financial strength ratings to MAC and AGM. The rating agencies' most recent actions and proposals related to AGM and its subsidiaries are:

• On March 18, 2014, S&P upgraded the financial strength ratings of AGM, AGE and MAC 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 AGM's and AGE's A2 (stable outlook) financial strength ratings. Moody's 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 AGM and AGE under that new methodology. In an August 10, 2015 issuer comment, Moody's indicated that it was a "credit negative" for the Company that the Puerto Rico Public Finance Corporation (as to which the Company has no exposure) failed to make its full debt service payment due on August 1, 2015. However, in a summary opinion published on June 4, 2015, Moody’s noted that, despite adverse developments in Puerto Rico, Moody’s believed its current ratings on the financial guarantors remained well positioned.

• On June 22, 2013, KBRA assigned a financial strength rating of AA+ (stable outlook) to MAC, and affirmed that rating on August 3, 2015. On November 13, 2014, KBRA assigned a financial strength rating of AA+ (stable outlook) to AGM. On July 6, 2015, KBRA released a comment reviewing the approach it had taken to Puerto Rico exposures in its stress loss analysis of AGM, noting that its financial model showed AGM’s claims paying resources were sufficient to meet all requirements by a comfortable margin.

There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings of AGM or its insurance subsidiaries in the future.

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

• Note 6, Financial Guaranty Insurance Losses

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

• Note 13, Reinsurance and Other Monoline Exposures

• Note 15, Notes Payable and Credit Facilities (regarding the impact on AGM's insured leveraged lease transactions)

3.    Outstanding Exposure

The Company’s financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that it views as investment grade at inception, although, as part of its loss mitigation strategy for existing troubled credits, it may underwrite new issuances that it views as below-investment-grade ("BIG"). The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, requires rigorous subordination or collateralization requirements. Reinsurance is utilized in order to reduce net exposure to certain insured transactions.

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The Company has issued financial guaranty insurance policies on public finance obligations and, prior to mid-2008, 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, including variable interest entities ("VIEs"), and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 9, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and Debt Service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated. While AGM has ceased writing new originations of asset-backed securities, a significant portfolio of such obligations remains outstanding and AGE may, subject to regulatory approval, provide guarantees on structured finance obligations outside the U.S.

Debt Service and par outstanding exposures presented in these financial statements are presented on a consolidated basis. That is, amounts presented include 100% of the exposures of AGM, AGE and MAC, despite the fact that AGM indirectly owns only 60.7% of MAC.

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 models the performance of many of its structured finance transactions as part of its periodic internal credit rating review of them.

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 5%. (A risk-free rate is 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.

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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.

Financial Guaranty

Debt Service Outstanding

	Gross Debt Service Outstanding				Net Debt Service Outstanding(1)
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(in millions)
Public finance	$	426,337	$	473,492	$	310,200	$	348,905
Structured finance	24,557		33,196		21,712		29,756
Total financial guaranty	$	450,894	$	506,688	$	331,912	$	378,661

_____________________

(1) Includes $110.8 billion and $132.0 billion of net debt service outstanding, as of September 30, 2015 and December 31, 2014, respectively, from MAC, which represents 100% of MAC's net debt service outstanding. However, AGM's indirect ownership of MAC is only 60.7%.

Financial Guaranty Portfolio by Internal Rating

As of September 30, 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	$	2,440	1.3	%	$	548	3.0	%	$	9,073	57.8	%	$	1,865	65.5	%	$	13,926	6.2	%
AA	49,460		26.6		135		0.7		3,667		23.3		166		5.8		53,428		23.9
A	105,594		56.7		5,189		28.0		36		0.2		75		2.6		110,894		49.7
BBB	25,216		13.5		11,693		63.1		175		1.1		338		11.9		37,422		16.8
BIG	3,484		1.9		957		5.2		2,774		17.6		404		14.2		7,619		3.4
Total net par outstanding (1) (2)	$	186,194	100.0	%	$	18,522	100.0	%	$	15,725	100.0	%	$	2,848	100.0	%	$	223,289	100.0	%

_____________________

(1) Excludes $672 million of loss mitigation securities insured and held by the Company as of September 30, 2015, which are primarily in the BIG category.

(2) Includes $77.8 billion of net par outstanding as of September 30, 2015, from MAC, which represents 100% of MAC's net par outstanding. However, AGM's indirect ownership of MAC is only 60.7%.

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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	$	3,254	1.6	%	$	541	2.7	%	$	13,185	61.3	%	$	3,311	73.1	%	$	20,291	8.0	%
AA	62,175		30.1		348		1.7		4,883		22.7		312		6.9		67,718		26.8
A	112,119		54.3		5,488		27.1		45		0.2		175		3.9		117,827		46.6
BBB	25,604		12.4		12,891		63.5		266		1.2		226		5.0		38,987		15.5
BIG	3,274		1.6		1,024		5.0		3,130		14.6		501		11.1		7,929		3.1
Total net par outstanding (1) (2)	$	206,426	100.0	%	$	20,292	100.0	%	$	21,509	100.0	%	$	4,525	100.0	%	$	252,752	100.0	%

_____________________

(1) Excludes $675 million of loss mitigation securities insured and held by the Company as of December 31, 2014, which are primarily in the BIG category.

(2) Includes $90.6 billion of net par outstanding as of December 31, 2014, from MAC, which represents 100% of MAC's net par outstanding. However, AGM's indirect ownership of MAC is only 60.7%.

In addition to amounts shown in the tables above, AGM had outstanding commitments to provide guaranties of $370 million for public finance obligations as of September 30, 2015, all of which expired prior to the date of this filing. The commitments were contingent on the satisfaction of all conditions set forth in them and could have expired unused or been canceled at the counterparty’s request. Therefore, the total commitment amount did not necessarily reflect actual future guaranteed amounts.

Components of BIG Portfolio

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of September 30, 2015

	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
	(in millions)
U.S. public finance	$	2,786	$	637	$	61	$	3,484	$	186,194
Non-U.S. public finance	650		307		—		957		18,522
Structured finance:
First lien U.S. residential mortgage-backed securities ("RMBS"):
Prime first lien	—		17		—		17		51
Alt-A first lien	31		31		451		513		667
Option ARM	3		—		47		50		115
Subprime	45		386		585		1,016		2,257
Second lien U.S. RMBS:
Closed-end second lien	—		19		58		77		166
Home equity lines of credit ("HELOCs")	444		—		496		940		1,033
Total U.S. RMBS	523		453		1,637		2,613		4,289
Other structured finance	469		56		40		565		14,284
Total	$	4,428	$	1,453	$	1,738	$	7,619	$	223,289

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Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of December 31, 2014

	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
	(in millions)
U.S. public finance	$	2,748	$	464	$	62	$	3,274	$	206,426
Non-U.S. public finance	1,024		—		—		1,024		20,292
Structured finance:
First lien U.S. RMBS:
Prime first lien	—		—		—		—		57
Alt-A first lien	27		98		523		648		819
Option ARM	4		—		56		60		175
Subprime	46		483		573		1,102		2,487
Second lien U.S. RMBS:
Closed-end second lien	—		19		61		80		181
HELOCs	636		—		434		1,070		1,248
Total U.S. RMBS	713		600		1,647		2,960		4,967
Other structured finance	565		62		44		671		21,067
Total	$	5,050	$	1,126	$	1,753	$	7,929	$	252,752

BIG Net Par Outstanding

and Number of Risks

As of September 30, 2015

	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	4,321	$	107	$	4,428	65	2	67
Category 2	1,453		—		1,453		13	—	13
Category 3	1,722		16		1,738		40	2	42
Total BIG	$	7,496	$	123	$	7,619	118	4	122

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BIG Net Par Outstanding

and Number of Risks

As of December 31, 2014

	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	4,940	$	110	$	5,050	71	2	73
Category 2	1,126		—		1,126		14	—	14
Category 3	1,734		19		1,753		38	2	40
Total BIG	$	7,800	$	129	$	7,929	123	4	127

____________________

(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.

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 $2.14 billion net par as of September 30, 2015, $2.06 billion of which is rated BIG. In Nine Months 2015, the Company's Puerto Rico exposures increased due to a commutation of previously ceded Puerto Rico exposures.

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, 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. In addition, the Commonwealth's Resident Commissioner has introduced a bill to the U.S. Congress that, if passed, would enable the Commonwealth to authorize one or more of its public corporations to restructure their debts under chapter 9 of the U.S. Bankruptcy Code if they were to become insolvent.

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. 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. Also on August 3, 2015, the Commonwealth announced that it had temporarily suspended its monthly deposits to the general obligation redemption fund.

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 projects

13

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 recommends 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 includes 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 October 21, 2015, the U.S. Treasury Department proposed a four-point plan for Puerto Rico which, most significantly, would extend some form of bankruptcy protection not only to Puerto Rico’s municipalities and instrumentalities but also the Commonwealth itself. The plan also calls for an independent fiscal oversight board. The Treasury Department’s plan requires congressional action to be implemented.

On November 30, 2015, the Governor signed an executive order (“Clawback Order”) that provides that the Commonwealth will begin to redirect certain available revenues pledged to pay debt service on the debt of certain public corporations to pay “public debt” issued or guaranteed by the Commonwealth. The Company does not believe the conditions permitting such redirection have been met. The Puerto Rico credits insured by the Company potentially impacted by the Clawback Order are shown in the table “Puerto Rico Net Par Outstanding” below.

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. The final shape 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 FEGP, the four-point plan offered by the Treasury Department, or any other proposals or plans 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 September 30, 2015, the Company had $431 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; a preliminary business plan was released in December 2014. 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 purchased $74 million aggregate principal amount of those bonds.

On September 2, 2015, PREPA announced that on September 1, 2015, it and an ad hoc group of uninsured bondholders (the “Ad Hoc Group”) had reached an agreement on certain economic terms of a recovery plan, subject to certain terms and conditions. On September 22, 2015, PREPA announced it and a group of fuel-line lenders had reached an agreement on the economic terms of a recovery plan, subject to certain terms and conditions. Neither AGM nor AGC are parties to either of those agreements. Other than AGM, AGC, National Public Finance Guarantee Corporation (“National”) and Syncora Guarantee Inc. (together the "Monolines"), parties to the original forbearance agreements continued to extend the forbearance agreements through November 5, 2015, when, according to a public announcement from PREPA, those other parties entered into a restructuring support agreement formalizing the previously announced agreements.

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PREPA continues to negotiate with the Monolines, including AGM and AGC. There can be no assurance that the negotiations will result in agreement or that the consensual recovery plan reportedly outlined in the recovery support agreement will be implemented. PREPA, during the pendency of the agreements, has suspended deposits into its Debt Service fund.

PRHTA

As of September 30, 2015, the Company had $289 million insured net par outstanding of PRHTA (Transportation revenue) bonds and $219 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 Puerto Rico Infrastructure Finance Authority ("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 Order.

Municipal Finance Agency

As of September 30, 2015, the Company had $206 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 is 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.

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

Puerto Rico

Gross Par and Gross Debt Service Outstanding

	Gross Par Outstanding				Gross Debt Service Outstanding
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(in millions)
Previously Subject to the Voided Recovery Act (1)	$	1,708	$	1,844	$	2,642	$	2,868
Not Previously Subject to the Voided Recovery Act	2,058		2,204		3,450		3,711
Total	$	3,766	$	4,048	$	6,092	$	6,579

 ____________________

(1) 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.

15

Puerto Rico

Net Par Outstanding

	As of September 30, 2015			As of December 31, 2014
	Total (2)		Internal Rating	Total		Internal Rating
	(in millions)
Exposures Previously Subject to the Voided Recovery Act:
PRHTA (Transportation revenue) ("Primary policies") (3)	$	209	CCC-	$	223	BB-
PRHTA (Transportation revenue) ("Second-to-pay policies") (1)(3)	80		AA	80		AA
Total	289		B	303		BB+
PREPA	431		CC	464		B-
PRHTA (Highway revenue) (3)	219		CCC	197		BB
Total	939			964
Exposures Not Previously Subject to the Voided Recovery Act:
Commonwealth of Puerto Rico - General Obligation Bonds	720		CCC	749		BB
Puerto Rico Sales Tax Financing Corporation	261		CCC+	261		BBB
MFA	206		CCC-	223		BB-
Puerto Rico Public Buildings Authority	14		CCC+	18		BB+
Total	1,201			1,251
Total net exposure to Puerto Rico	$	2,140		$	2,215

__________________

(1) Represents exposure as to which AGM guarantees payment of principal and interest when due in the event that both the obligor and the AGM affiliate that issued a primary insurance policy fail to pay.

(2) As of September 30, 2015, the Company's Puerto Rico exposures include the effect of a reassumption agreement for previously ceded Puerto Rico exposures.

(3) Some of the revenue of these entities is subject to being applied first to the general obligation debt of, and debt guaranteed by, the Commonwealth of Puerto Rico. However, such revenues are to be used for such Commonwealth payments only to the extent that the other available revenues of the Commonwealth are insufficient.

16

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 rated BIG 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 be required to pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.

Amortization Schedule of Puerto Rico BIG Net Par Outstanding

and Net Debt Service Outstanding

As of September 30, 2015

	Scheduled BIG Net Par Amortization						Scheduled BIG 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)
2015 (October 1 - December 31)	$	—	$	0	$	0	$	1		$	0	$	1
2016	36		74		110		78			138		216
2017	29		74		103		70			134		204
2018	23		40		63		61			96		157
2019	33		58		91		72			111		183
2020	47		51		98		83			101		184
2021	35		13		48		68			60		128
2022	31		25		56		62			72		134
2023	73		12		85		104			56		160
2024	58		45		103		85			90		175
2025 - 2029	244		148		392		342			339		681
2030 - 2034	193		255		448		235			409		644
2035 - 2039	57		153		210		60			234		294
2040 - 2043	—		253		253		—			281		281
Total	$	859	$	1,201	$	2,060	$	1,321	��	$	2,121	$	3,442

Exposure to the Selected European Countries

Several European countries continue to experience significant economic, fiscal and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal and Spain (collectively, the “Selected European Countries”). The Company is closely monitoring its exposures in the Selected European Countries where it believes heightened uncertainties exist. The Company’s direct economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following table, net of ceded reinsurance.

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Net Direct Economic Exposure to Selected European Countries(1)

As of September 30, 2015

	Hungary		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Non-infrastructure public finance (2)	$	—	$	659	$	82	$	179	$	920
Infrastructure finance	216		6		—		115		337
Total sovereign and sub-sovereign exposure	216		665		82		294		1,257
Non-sovereign exposure:
Regulated utilities	—		126		—		—		126
RMBS	166		223		—		—		389
Total non-sovereign exposure	166		349		—		—		515
Total	$	382	$	1,014	$	82	$	294	$	1,772
Total BIG (See Note 5)	$	314	$	—	$	82	$	294	$	690

____________________

(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 table.

(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. 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.

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. 

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $47 million to Selected European Countries in transactions with $2.2 billion of net par outstanding.

4. Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of a derivative under GAAP. Amounts presented in this note relate only to financial guaranty insurance contracts. See Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives for amounts that relate to CDS.

Net Earned Premiums

	Third Quarter				Nine Months
	2015		2014		2015		2014
	(in millions)
Scheduled net earned premiums	$	59	$	70	$	187	$	214
Acceleration of net earned premiums	56		24		126		53
Accretion of discount on net premiums receivable	2		1		6		7
Net earned premiums(1)	$	117	$	95	$	319	$	274

____________________

(1) Excludes $5 million and $5 million for Third Quarter 2015 and 2014, respectively, and $14 million and $26 million for Nine Months 2015 and 2014, respectively, related to consolidated FG VIEs.

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Components of Unearned Premium Reserve

	As of September 30, 2015									As of December 31, 2014
	Gross			Ceded			Net(1)			Gross		Ceded			Net(1)
	(in millions)
Deferred premium revenue	$	2,972		$	878		$	2,094		$	3,331	$	966		$	2,365
Contra-paid(2)	(12		)	(9		)	(3		)	94		(8		)	102
Unearned premium reserve	$	2,960		$	869		$	2,091		$	3,425	$	958		$	2,467

____________________

(1) Excludes $105 million and $114 million of deferred premium revenue, and $35 million and $42 million of contra-paid related to FG VIEs as of September 30, 2015 and December 31, 2014, respectively.

(2) See Note 6, "Financial Guaranty Insurance Losses - Insurance Contracts' Loss Information" for an explanation of "contra-paid".

Gross Premium Receivable

Roll Forward

	Nine Months
	2015			2014
	(in millions)
Beginning of period, December 31	$	450		$	578
Gross premium written	78			98
Gross premiums received	(116		)	(141		)
Adjustments:
Changes in the expected term	(4		)	(6		)
Accretion of discount	10			12
Foreign exchange translation	(16		)	(15		)
Consolidation/deconsolidation of FG VIEs	(4		)	0
Other adjustments	0			0
End of period, September 30 (1)	$	398		$	526

____________________

(1) Excludes $8 million and $6 million as of September 30, 2015 and September 30, 2014, respectively, related to consolidated FG VIEs.

Foreign exchange translation relates to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 79% and 78% of installment premiums at September 30, 2015 and December 31, 2014, respectively, are denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound Sterling.

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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

(Undiscounted)

	As of September 30, 2015
	(in millions)
2015 (October 1 – December 31)	$	16
2016	46
2017	40
2018	35
2019	33
2020-2024	137
2025-2029	95
2030-2034	69
After 2034	73
Total (1)	$	544

____________________

(1) Excludes expected cash collections on FG VIEs of $10 million.

Scheduled Financial Guaranty Net Earned Premiums

	As of September 30, 2015
	(in millions)
2015 (October 1 – December 31)	$	57
2016	219
2017	187
2018	166
2019	149
2020-2024	567
2025-2029	350
2030-2034	210
After 2034	189
Net deferred premium revenue(1)	2,094
Future accretion	96
Total future net earned premiums	$	2,190

____________________

(1) Excludes scheduled net earned premiums on consolidated FG VIEs of $105 million.

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Selected Information for Financial Guaranty Policies Paid in Installments

	As of September 30, 2015			As of December 31, 2014
	(dollars in millions)
Premiums receivable	$	398		$	450
Gross deferred premium revenue	964			1,097
Weighted-average risk-free rate used to discount premiums	3.7		%	3.6		%
Weighted-average period of premiums receivable (in years)	10.0			10.1

5.    Expected Loss to be Paid

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid for all contracts. Surveillance personnel present analyses related to potential losses to the Company’s loss reserve committees for consideration in estimating the expected loss to be paid. Such analyses include the consideration of various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. 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 probabilities they assign to those scenarios based on actual developments during the quarter and their view of future 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 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. Credit performance can 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, 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 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.

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The following tables present a roll forward of the present value of net expected loss to be paid for all contracts, whether accounted for as insurance, credit derivatives or FG VIEs, by sector, after the benefit for net expected recoveries for contractual breaches of representations and warranties ("R&W"). The Company used weighted average risk-free rates for U.S. dollar denominated obligations that ranged from 0.0% to 3.34% as of September 30, 2015 and 0.0% to 2.95% as of December 31, 2014.

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward

	Third Quarter 2015			Nine Months 2015
	(in millions)
Net expected loss to be paid, beginning of period	$	648		$	619
Economic loss development due to:
Accretion of discount	4			11
Changes in discount rates	3			(12		)
Changes in timing and assumptions	6			72
Total economic loss development	13			71
Paid losses	(97		)	(126		)
Net expected loss to be paid, end of period	$	564		$	564

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Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Third Quarter 2015

	Net Expected Loss to be Paid (Recovered) as of June 30, 2015			Economic Loss Development			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of September 30, 2015(2)
	(in millions)
Public Finance:
U.S. public finance	$	217		$	18		$	(13	)	$	222
Non-U.S. public finance	31			(1		)	—			30
Public Finance	248			17			(13		)	252
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	206			(34		)	(82		)	90
Option ARM	(25		)	(2		)	5			(22		)
Subprime	207			22			(14		)	215
Total first lien	388			(14		)	(91		)	283
Second lien:
Closed-end second lien	1			0			1			2
HELOCs	(11		)	11			6			6
Total second lien	(10		)	11			7			8
Total U.S. RMBS	378			(3		)	(84		)	291
Other structured finance	22			(1		)	0			21
Structured Finance	400			(4		)	(84		)	312
Total	$	648		$	13		$	(97	)	$	564

23

Net Expected Loss to be Paid,

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Third Quarter 2014

	Net Expected Loss to be Paid (Recovered) as of June 30, 2014			Economic Loss Development			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of September 30, 2014
	(in millions)
Public Finance:
U.S. public finance	$	102		$	(1	)	$	(3	)	$	98
Non-U.S. public finance	39			(1		)	—			38
Public Finance	141			(2		)	(3		)	136
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	183			3			(4		)	182
Option ARM	(29		)	9			(16		)	(36		)
Subprime	256			(14		)	(21		)	221
Total first lien	410			(2		)	(41		)	367
Second lien:
Closed-end second lien	(17		)	1			2			(14		)
HELOCs	(108		)	(37		)	2			(143		)
Total second lien	(125		)	(36		)	4			(157		)
Total U.S. RMBS	285			(38		)	(37		)	210
Other structured finance	25			2			—			27
Structured Finance	310			(36		)	(37		)	237
Total	$	451		$	(38	)	$	(40	)	$	373

24

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Nine Months 2015

	Net Expected Loss to be Paid (Recovered) as of December 31, 2014 (2)			Economic Loss Development			(Paid) Recovered Losses (1)			Net Expected Loss to be Paid (Recovered) as of September 30, 2015(2)
	(in millions)
Public Finance:
U.S. public finance	$	142		$	93		$	(13	)	$	222
Non-U.S. public finance	34			(4		)	—			30
Public Finance	176			89			(13		)	252
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	237			(43		)	(104		)	90
Option ARM	(19		)	(6		)	3			(22		)
Subprime	223			21			(29		)	215
Total first lien	441			(28		)	(130		)	283
Second lien:
Closed-end second lien	(2		)	0			4			2
HELOCs	(20		)	13			13			6
Total second lien	(22		)	13			17			8
Total U.S. RMBS	419			(15		)	(113		)	291
Other structured finance	24			(3		)	0			21
Structured Finance	443			(18		)	(113		)	312
Total	$	619		$	71		$	(126	)	$	564

25

Net Expected Loss to be Paid,

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Nine Months 2014

	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 September 30, 2014
	(in millions)
Public Finance:
U.S. public finance	$	61		$	50		$	(13	)	$	98
Non-U.S. public finance	42			(4		)	—			38
Public Finance	103			46			(13		)	136
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	183			14			(15		)	182
Option ARM	(4		)	(16		)	(16		)	(36		)
Subprime	222			(21		)	20			221
Total first lien	401			(23		)	(11		)	367
Second lien:
Closed-end second lien	(20		)	1			5			(14		)
HELOCs	(108		)	(57		)	22			(143		)
Total second lien	(128		)	(56		)	27			(157		)
Total U.S. RMBS	273			(79		)	16			210
Other structured finance	27			—			—			27
Structured Finance	300			(79		)	16			237
Total	$	403		$	(33	)	$	3		$	373

____________________

(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 $3 million and $4 million in loss adjustment expenses ("LAE") for Third Quarter 2015 and 2014, respectively, and $6 million and $12 million in LAE for Nine Months 2015 and 2014 , respectively.

(2) Includes expected LAE to be paid of $2 million as of September 30, 2015 and $4 million as of December 31, 2014.

26

Net Expected Recoveries from

Breaches of R&W Rollforward

Third Quarter 2015

	Future Net R&W Benefit as of June 30, 2015			R&W Development and Accretion of Discount During Third Quarter 2015			R&W (Recovered) During Third Quarter 2015			Future Net R&W Benefit as of September 30, 2015(1)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	16		$	0		$	(1	)	$	15
Option ARM	(48		)	(1		)	(16		)	(65		)
Subprime	79			(3		)	(3		)	73
Total first lien	47			(4		)	(20		)	23
Second lien:
Closed-end second lien	73			0			(1		)	72
HELOC	—			—			—			—
Total second lien	73			0			(1		)	72
Total	$	120		$	(4	)	$	(21	)	$	95

Net Expected Recoveries from

Breaches of R&W Rollforward

Third Quarter 2014

	Future Net R&W Benefit as of June 30, 2014		R&W Development and Accretion of Discount During Third Quarter 2014			R&W (Recovered) During Third Quarter 2014			Future Net R&W Benefit as of September 30, 2014
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	79	$	1		(1		)	$	79
Option ARM	65		—			(19		)	46
Subprime	97		5			(7		)	95
Total first lien	241		6			(27		)	220
Second lien:
Closed-end second lien	80		(1		)	(2		)	77
HELOC	49		59			—			108
Total second lien	129		58			(2		)	185
Total	$	370	$	64		$	(29	)	$	405

27

Net Expected Recoveries from

Breaches of R&W Rollforward

Nine Months 2015

	Future Net R&W Benefit as of December 31, 2014			R&W Development and Accretion of Discount During 2015			R&W (Recovered) During 2015				Future Net R&W Benefit as of September 30, 2015(1)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	18		$	1		$	(4	)		$	15
Option ARM	(11		)	(9		)	(45		)		(65		)
Subprime	108			(26		)	(9		)		73
Total first lien	115			(34		)	(58		)		23
Second lien:
Closed-end second lien	76			0			(4		)		72
HELOC	—			—			—				—
Total second lien	76			0			(4		)		72
Total	$	191		$	(34	)	$	(62	)	��	$	95

Net Expected Recoveries from

Breaches of R&W Rollforward

Nine Months 2014

	Future Net R&W Benefit as of December 31, 2013		R&W Development and Accretion of Discount During 2014			R&W (Recovered) During 2014			Future Net R&W Benefit as of September 30, 2014
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	78	$	5		(4		)	$	79
Option ARM	98		8			(60		)	46
Subprime	117		33			(55		)	95
Total first lien	293		46			(119		)	220
Second lien:
Closed-end second lien	82		(1		)	(4		)	77
HELOC	45		72			(9		)	108
Total second lien	127		71			(13		)	185
Total	$	420	$	117		$	(132	)	$	405

____________________

(1) See the section "Breaches of Representations and Warranties" below for eligible assets held in trust.

28

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 September 30, 2015

	Financial Guaranty Insurance			FG VIEs(1)		Credit Derivatives (2)		Total
	(in millions)
Public Finance:
U.S. public finance	$	222		$	—	$	—	$	222
Non-U.S. public finance	30			—		—		30
Public Finance	252			—		—		252
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	74			16		—		90
Option ARM	(22		)	—		—		(22		)
Subprime	153			62		—		215
Total first lien	205			78		—		283
Second lien:
Closed-end second lien	(26		)	24		4		2
HELOCs	(2		)	8		—		6
Total second lien	(28		)	32		4		8
Total U.S. RMBS	177			110		4		291
Other structured finance	20			—		1		21
Structured Finance	197			110		5		312
Total	$	449		$	110	$	5	$	564

29

Net Expected Loss to be Paid (Recovered)

By Accounting Model

As of December 31, 2014

	Financial Guaranty Insurance			FG VIEs(1)		Credit Derivatives (2)		Total
	(in millions)
Public Finance:
U.S. public finance	$	142		$	—	$	—	$	142
Non-U.S. public finance	34			—		—		34
Public Finance	176			—		—		176
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	220			17		—		237
Option ARM	(19		)	—		—		(19		)
Subprime	153			70		—		223
Total first lien	354			87		—		441
Second lien:
Closed-end second lien	(31		)	25		4		(2		)
HELOCs	(27		)	7		—		(20		)
Total second lien	(58		)	32		4		(22		)
Total U.S. RMBS	296			119		4		419
Other structured finance	22			—		2		24
Structured Finance	318			119		6		443
Total	$	494		$	119	$	6	$	619

___________________

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

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

30

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

Third Quarter 2015

	Financial Guaranty Insurance			FG VIEs(1)		Credit Derivatives(2)		Total
	(in millions)
Public Finance:
U.S. public finance	$	18		$	—	$	—	$	18
Non-U.S. public finance	(1		)	—		—		(1		)
Public Finance	17			—		—		17
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	(34		)	0		—		(34		)
Option ARM	(2		)	—		—		(2		)
Subprime	17			5		—		22
Total first lien	(19		)	5		—		(14		)
Second lien:
Closed-end second lien	(1		)	0		1		0
HELOCs	10			1		—		11
Total second lien	9			1		1		11
Total U.S. RMBS	(10		)	6		1		(3		)
Other structured finance	(1		)	—		0		(1		)
Structured Finance	(11		)	6		1		(4		)
Total	$	6		$	6	$	1	$	13

31

Net Economic Loss Development (Benefit)

By Accounting Model

Third Quarter 2014

	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)		Total
	(in millions)
Public Finance:
U.S. public finance	$	(1	)	$	—		$	—	$	(1	)
Non-U.S. public finance	(1		)	—			—		(1		)
Public Finance	(2		)	—			—		(2		)
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	4			(1		)	—		3
Option ARM	9			—			—		9
Subprime	(22		)	8			—		(14		)
Total first lien	(9		)	7			—		(2		)
Second lien:
Closed-end second lien	1			—			—		1
HELOCs	(51		)	14			—		(37		)
Total second lien	(50		)	14			—		(36		)
Total U.S. RMBS	(59		)	21			—		(38		)
Other structured finance	—			—			2		2
Structured Finance	(59		)	21			2		(36		)
Total	$	(61	)	$	21		$	2	$	(38	)

32

Net Economic Loss Development (Benefit)

By Accounting Model

Nine Months 2015

	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	93		$	—		$	—		$	93
Non-U.S. public finance	(4		)	—			—			(4		)
Public Finance	89			—			—			89
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	(42		)	(1		)	—			(43		)
Option ARM	(6		)	—			—			(6		)
Subprime	12			9			—			21
Total first lien	(36		)	8			—			(28		)
Second lien:
Closed-end second lien	0			(1		)	1			0
HELOCs	13			0			—			13
Total second lien	13			(1		)	1			13
Total U.S. RMBS	(23		)	7			1			(15		)
Other structured finance	(2		)	—			(1		)	(3		)
Structured Finance	(25		)	7			0			(18		)
Total	$	64		$	7		$	0		$	71

33

Net Economic Loss Development (Benefit)

By Accounting Model

Nine Months 2014

	Financial Guaranty Insurance			FG VIEs(1)		Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	50		$	—	$	—		$	50
Non-U.S. public finance	(4		)	—		—			(4		)
Public Finance	46			—		—			46
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	13			1		—			14
Option ARM	(17		)	1		—			(16		)
Subprime	(30		)	9		—			(21		)
Total first lien	(34		)	11		—			(23		)
Second lien:
Closed-end second lien	—			3		(2		)	1
HELOCs	(130		)	73		—			(57		)
Total second lien	(130		)	76		(2		)	(56		)
Total U.S. RMBS	(164		)	87		(2		)	(79		)
Other structured finance	(1		)	—		1			—
Structured Finance	(165		)	87		(1		)	(79		)
Total	$	(119	)	$	87	$	(1	)	$	(33	)

___________________

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

(2)    Refer to Note 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 $2.14 billion net par as of September 30, 2015, $2.06 billion of which is rated BIG. For additional information regarding the Company's exposure to general obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations, please refer to "Exposure to Puerto Rico" in Note 3, 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 September 30, 2015, the Company’s net exposure subject to the plan consisted of $61 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. 

In December 2014, the City of Detroit emerged from bankruptcy under chapter 9 of the U.S. Bankruptcy Code. The Company still expects to make debt service payments on the 15.5% of the City’s unlimited tax general obligation that were not exchanged as part of the related settlement. As of September 30, 2015, these bonds had $7 million of remaining debt service, net of reinsurance.

The Company projects that its total net expected loss across its troubled U.S. public finance credits as of September 30, 2015, which incorporated the likelihood of the outcomes mentioned above, will be $222 million compared with

34

a net expected loss of $217 million as of June 30, 2015 and $142 million as of December 31, 2014. Economic loss development in Third Quarter 2015 was $18 million, which was primarily attributable to Puerto Rico exposures. Economic loss development in Nine Months 2015 was $93 million, which was also primarily attributable to Puerto Rico exposures.

Certain Selected European Country Sub-Sovereign Transactions

The Company insures 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 $468 million and $96 million, respectively and exposure net of reinsurance for Spanish and Portuguese credits is $294 million and $82 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 $282 million and its exposure net of reinsurance is $216 million, all of which is rated BIG. The Company estimated net expected losses of $30 million related to these Spanish, Portuguese and Hungarian credits. The economic loss development was relatively flat during Third Quarter 2015 and the economic benefit of $3 million during Nine Months 2015 was primarily related to changes in the exchange rate between the Euro and US Dollar.

Infrastructure Finance

The Company has insured exposure of approximately $2.8 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. Although the Company may not experience ultimate loss on a particular transaction, the aggregate amount of the claim payments may be substantial and 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 its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. However, the recovery of the payments is uncertain and may take from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. The Company estimates total claims for the two largest transactions with significant refinancing risk, assuming no refinancing and based on certain performance assumptions, could be $1.7 billion on a gross basis; such claims would be payable from 2017 through 2022. Of such $1.7 billion in estimated gross claims, an estimated $1.3 billion relates to obligations of Skyway Concession Company LLC (“SCC”), which owns 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 Company believes that the consummation of the agreed sale of SCC would increase the likelihood that the various SCC obligations insured by the Company and payable from 2017 through 2022 either will be retired in connection with the sale or will be refinanced as they become due, thus reducing the likelihood that the Company will be required to make such estimated claim payments.

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.

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.” The 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 default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from

35

liquidation rates into a vector of conditional default rates ("CDR"), then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the 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. The Company continues to update its evaluation of these loss severities as new information becomes available.

The Company has been enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools, and by reaching agreements with certain R&W providers in early October, has completed its pursuit of R&W claims. The Company calculates a credit for R&W recoveries to include in its cash flow projections based on agreements it has with R&W providers, which are described in more detail under "Breaches of Representations and Warranties" below.

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.

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 the collateral losses it projects as described above; assumed voluntary prepayments; and 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. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will continue improving. Each period 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 period of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as whether those changes are normal fluctuations or part of a trend.

Third Quarter and Nine Months 2015 U.S. RMBS Loss Projections

Based on its observation during the period 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 assumptions to project RMBS losses as of September 30, 2015 as it used as of June 30, 2015, except that, for its first lien RMBS loss projections it again this quarter shortened by three months the period it is projecting it will take in the base case to reach the final CDR. For the Nine Months 2015, first lien RMBS projections reflect a shortening of the period it is projecting it will take in the base case to reach the final CDR by nine months as compared with December 31, 2014.

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

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed 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 non-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. Each year the Company reviews the most recent twenty-four months of this data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing categories.

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First Lien Liquidation Rates

	September 30, 2015	June 30, 2015	December 31, 2014
Current Loans Modified in the Previous 12 Months
Alt-A	25%	25%	25%
Option ARM	25	25	25
Subprime	25	25	25
Current Loans Delinquent in the Previous 12 Months
Alt-A	25	25	25
Option ARM	25	25	25
Subprime	25	25	25
30 - 59 Days Delinquent
Alt-A	35	35	35
Option ARM	45	40	40
Subprime	50	35	35
60 - 89 Days Delinquent
Alt-A	45	50	50
Option ARM	55	55	55
Subprime	55	40	40
90 + Days Delinquent
Alt-A	55	60	60
Option ARM	65	65	65
Subprime	60	55	55
Bankruptcy
Alt-A	45	45	45
Option ARM	50	50	50
Subprime	40	40	40
Foreclosure
Alt-A	65	75	75
Option ARM	75	80	80
Subprime	70	70	70
Real Estate Owned
All	100	100	100

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 36 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 36-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 7.75 years after the initial 36-month CDR plateau period, which is three months shorter than assumed as of June 30, 2015 and nine months shorter than assumed at December 31, 2014. Under the Company’s methodology, defaults projected to occur in the first 36 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 36 month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.

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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 historically high levels, and the Company is assuming in the base case that these high levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 month period, declining to 40% in the base case over 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.

The following table shows the range as 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.

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Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS(1)

	As of September 30, 2015		As of June 30, 2015		As of December 31, 2014
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Alt-A First Lien
Plateau CDR	3.8% - 12.2%	7.9%	4.2% - 13.3%	9.1%	3.7% - 13.4%	9.3%
Intermediate CDR	0.8% - 2.4%	1.6%	0.8% - 2.7%	1.8%	0.7% - 2.7%	1.9%
Period until intermediate CDR	48 months		48 months		48 months
Final CDR	0.2% - 0.6%	0.4%	0.2% - 0.7%	0.5%	0.2% - 0.7%	0.5%
Initial loss severity:
2005 and prior	60.0%		60.0%		60.0%
2006	70.0%		70.0%		70.0%
2007	65.0%		65.0%		65.0%
Initial conditional prepayment rate ("CPR")	2.7% - 11.7%	5.5%	1.6% - 10.1%	5.2%	1.7% - 9.5%	5.1%
Final CPR(2)	15%		15%		15%
Option ARM
Plateau CDR	3.6% - 11.2%	8.6%	4.0% - 11.8%	9.3%	4.3% - 14.2%	10.9%
Intermediate CDR	0.7% - 2.2%	1.7%	0.8% - 2.4%	1.9%	0.9% - 2.8%	2.2%
Period until intermediate CDR	48 months		48 months		48 months
Final CDR	0.2% - 0.6%	0.4%	0.2% - 0.6%	0.5%	0.2% - 0.7%	0.5%
Initial loss severity:
2005 and prior	60.0%		60.0%		60.0%
2006	70.0%		70.0%		70.0%
2007	65.0%		65.0%		65.0%
Initial CPR	2.2% - 5.8%	2.9%	2.0% - 5.3%	2.8%	2.3% - 6.2%	3.3%
Final CPR(2)	15%		15%		15%
Subprime
Plateau CDR	6.0% - 13.7%	10.1%	6.0% - 13.5%	9.9%	6.0% - 15.0%	10.8%
Intermediate CDR	1.2% - 2.7%	2.0%	1.2% - 2.7%	2.0%	1.2% - 3.0%	2.2%
Period until intermediate CDR	48 months		48 months		48 months
Final CDR	0.3% - 0.7%	0.5%	0.3% - 0.7%	0.5%	0.3% - 0.7%	0.5%
Initial loss severity:
2005 and prior	75.0%		75.0%		75.0%
2006	90.0%		90.0%		90.0%
2007	90.0%		90.0%		90.0%
Initial CPR	0.0% - 6.0%	3.3%	0.0% - 5.7%	3.1%	0.1% - 5.3%	3.4%
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.

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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 15% in the base case. 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. These assumptions are the same as those the Company used for June 30, 2015 and December 31, 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 initial conditional default rate. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) as of September 30, 2015. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of September 30, 2015 as it used as of June 30, 2015 and December 31, 2014, increasing and decreasing the periods of stress from those used in the base case.

In a somewhat more stressful environment than that of the base case, where the conditional default rate plateau was extended six months (to be 42 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over 4.5 rather than 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 $10 million for Alt-A first liens, $3 million for Option ARM and $41 million for subprime transactions.

In an even more stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the conditional default rate was assumed to occur over 15 months and other assumptions were the same as the other stress scenario, expected loss to be paid would increase from current projections by approximately $26 million for Alt-A first liens, $7 million for Option ARM and $58 million for subprime transactions.

In a scenario with a somewhat less stressful environment than the base case, where conditional default rate recovery was somewhat less gradual, expected loss to be paid would decrease from current projections by approximately $1 million for Alt-A first liens, $11 million for Option ARM and $9 million for subprime transactions.

In an even less stressful scenario where the conditional default rate plateau was six months shorter (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), expected loss to be paid would decrease from current projections by approximately $11 million for Alt-A first liens, $18 million for Option ARM and $32 million for subprime transactions.

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

The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction; the voluntary prepayment rate (typically also referred to as CPR of the collateral); the interest rate environment; and assumptions about the draw rate and loss severity.

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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 second lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

Second Lien RMBS(1)

HELOC key assumptions	As of September 30, 2015		As of June 30, 2015		As of December 31, 2014
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Plateau CDR	6.0% - 24.0%	9.9%	5.3% - 23.3%	9.2%	2.8% - 6.8%	4.1%
Final CDR trended down to	0.6% - 3.2%	1.2%	0.6% - 3.2%	1.2%	0.6% - 3.2%	1.2%
Period until final CDR	34 months		34 months		34 months
Initial CPR	9.8%	9.8%	9.3%	9.3%	6.9% - 21.8%	10.8%
Final CPR(2)	10.0% - 15.0%	13.3%	10.0% - 15.0%	13.3%	15.0% - 21.8%	15.6%
Loss severity	90.0% - 98.0%	90.3%	90.0% - 98.0%	90.6%	90.0% - 98.0%	90.3%

Closed-end second lien key assumptions	As of September 30, 2015		As of June 30, 2015		As of December 31, 2014
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Plateau CDR	9.7% - 19.7%	10.7%	9.8% - 21.4%	11.5%	6.1% - 12.5%	7.3%
Final CDR trended down to	3.5% - 8.6%	3.9%	3.5% - 8.6%	3.9%	3.5% - 8.6%	4.0%
Period until final CDR	34 months		34 months		34 months
Initial CPR	5.7% - 9.8%	8.8%	5.3% - 9.3%	8.7%	2.8% - 13.1%	10.1%
Final CPR(2)	15%		15%		15%
Loss severity	98%		98%		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.

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 September 30, 2015, were from 10% to 100%.

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 June 30, 2015 and 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

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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 June 30, 2015 and December 31, 2014. For September 30, 2015 the Company used the approach it had refined for June 30, 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. 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 September 30, 2015 that it will generally recover only 10% or less of the collateral defaulting in the future and declining additional amounts on post-default receipts on previously defaulted collateral. This is the same as at June 30, 2015 and December 31, 2014.

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 both HELOC and closed-end 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. This pattern is generally consistent with how the Company modeled the CPR at June 30, 2015 and 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 June 30, 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.

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 $26 million for HELOC transactions and $1 million for closed-end second lien 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 $26 million for HELOC transactions and $1 million for closed-end second lien transactions.

Breaches of Representations and Warranties

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. The Company has pursued such breaches of R&W on a loan-by-loan basis or in cases where a provider of R&W refused to honor its repurchase obligations, the Company sometimes chose to initiate litigation. The Company's success in pursuing these strategies permitted the Company to enter into agreements with R&W providers under which those providers made payments to the Company, agreed to make payments to the Company in the future, and / or repurchased loans from the transactions, all in return for releases of related liability by the Company.

Through October 31, 2015 the Company has caused entities providing R&Ws to pay, or agree to pay approximately $3.2 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided insurance. The Company has included in its net expected loss estimates as of September 30, 2015 an estimated net benefit of

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$95 million (net of reinsurance), all of which is projected to be received pursuant to existing agreements with R&W providers. The Company is no longer actively pursuing R&W providers where it does not have such an agreement. Most of the 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 has agreements with three counterparties where a future reimbursement obligation is collateralized by eligible assets held in trust:

• Bank of America. Under Assured Guaranty's agreement with Bank of America Corporation and certain of its subsidiaries (“Bank of America”), Bank of America agreed to reimburse Assured Guaranty for 80% of claims on the first lien transactions covered by the agreement that Assured Guaranty pays in the future, until the aggregate lifetime collateral losses (not insurance losses or claims) on those transactions reach $6.6 billion. As of September 30, 2015, aggregate lifetime collateral losses on those transactions was $4.3 billion ($4.0 billion for AGM and $0.3 billion for AGC), and Assured Guaranty was projecting in its base case that such collateral losses would eventually reach $5.2 billion ($4.74 billion for AGM and $0.43 billion for AGC). Bank of America's reimbursement obligation is secured by $139 million of collateral held in trust for the Company's benefit and $333 million of collateral held in trust that is available for either AGM or AGC.

• Deutsche Bank. Under Assured Guaranty's May 2012 agreement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), Deutsche Bank agreed to reimburse Assured Guaranty for certain claims it pays in the future on eight first and second lien transactions, including 80% of claims it pays on those transactions until the aggregate lifetime claims (before reimbursement) reach $319 million. As of September 30, 2015, Assured Guaranty was projecting in its base case that such aggregate lifetime claims would remain below $319 million. In the event aggregate lifetime claims paid exceed $389 million, Deutsche Bank must reimburse Assured Guaranty for 85% of such claims paid (in excess of $389 million) until such claims paid reach $600 million. Deutsche Bank's reimbursement obligation is secured by $55 million of collateral held in trust for AGM's benefit and $0.7 million of collateral held in trust that is available for either AGM or AGC.

• UBS. On May 6, 2013, Assured Guaranty entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") and a third party resolving Assured Guaranty’s claims and liabilities related to specified RMBS transactions that were issued, underwritten or sponsored by UBS and insured by AGM or AGC under financial guaranty insurance policies. Under the agreement, UBS agreed to reimburse AGM for 85% of future losses on three first lien RMBS transactions, and such reimbursement obligation is secured by $62 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 agreement limits and thresholds described above. Similarly, to the extent the Company decreases its loss projections, the R&W benefit generally will also decrease, subject to the agreement limits and thresholds described above.

The number of risks subject to R&W recovery is 17, with related net debt service of $0.9 billion as of September 30, 2015 compared to 16, with related net debt service of $1.0 billion as of December 31, 2014. A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments.

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

Components of R&W Development

	Third Quarter					Nine Months
	2015			2014		2015			2014
	(in millions)
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	$	(5	)	$	—	$	(37	)	$	(6	)
Inclusion or removal of deals with breaches of R&W during period	—			—		0			—
Change in recovery assumptions	—			4		—			31
Settlements and anticipated settlements	—			59		—			87
Accretion of discount on balance	1			1		3			5
Total	$	(4	)	$	64	$	(34	)	$	117

Other structured finance

The Company's other structured finance includes $565 million net par rated BIG, including transactions backed by manufactured housing loans. The Company has expected loss to be paid of $21 million as of September 30, 2015. The economic benefit during Third Quarter 2015 was $1 million and for Nine Months 2015 was a benefit of $3 million.

Recovery Litigation

RMBS Transactions

In November 2014, AGM and its affiliate AGC reached a confidential settlement with DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corp. and Credit Suisse Securities (USA) LLC to resolve a lawsuit relating to six first lien U.S. RMBS transactions. AGM and AGC sought damages for alleged breaches of representations and warranties in respect of the underlying loans in these transactions, and failure to cure or repurchase defective loans identified by AGM and AGC.  On November 25, 2014, the parties filed a joint stipulation discontinuing the lawsuit with prejudice.  However, on November 20, 2014, U.S. Bank National Association, as trustee for the transactions, had filed a motion to intervene as a plaintiff in the lawsuit.  On November 26, 2014, the trustee submitted a letter stating that the joint stipulation is ineffective and that the lawsuit may be discontinued only by court order, and requesting an opportunity to review and potentially oppose the settlement.  On March 5, 2015 the Court denied the motion to intervene.

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6.    Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and LAE reserves and salvage and subrogation 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 3.34% as of September 30, 2015 and 0.0% to 2.95% as of December 31, 2014. Financial guaranty insurance expected LAE reserve was $2 million as of September 30, 2015 and $4 million as of December 31, 2014.

Loss and LAE Reserve

and Salvage and Subrogation Recoverable

Net of Reinsurance

Insurance Contracts

	As of September 30, 2015									As of December 31, 2014
	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)
Public Finance:
U.S. public finance	$	184		$	0		$	184		$	119		$	—		$	119
Non-U.S. public finance	20			0			20			21			—			21
Public Finance	204			0			204			140			—			140
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	13			—			13			22			—			22
Option ARM	9			34			(25		)	11			39			(28		)
Subprime	165			15			150			156			7			149
First lien	187			49			138			189			46			143
Second lien:
Closed-end second lien	—			34			(34		)	—			39			(39		)
HELOCs	4			25			(21		)	0			34			(34		)
Second lien	4			59			(55		)	0			73			(73		)
Total U.S. RMBS	191			108			83			189			119			70
Other structured finance	18			—			18			20			—			20
Structured Finance	209			108			101			209			119			90
Subtotal	413			108			305			349			119			230
Effect of consolidating FG VIEs	(72		)	(1		)	(71		)	(78		)	(1		)	(77		)
Total (1)	$	341		$	107		$	234		$	271		$	118		$	153

____________________

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

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Components of Net Reserves (Salvage)

Insurance Contracts

	As of September 30, 2015			As of December 31, 2014
	(in millions)
Loss and LAE reserve	$	526		$	404
Reinsurance recoverable on unpaid losses	(185		)	(133		)
Loss and LAE reserve, net	341			271
Salvage and subrogation recoverable	(115		)	(130		)
Salvage and subrogation payable(1)	8			12
Salvage and subrogation recoverable, net	(107		)	(118		)
Net reserves (salvage)	$	234		$	153

____________________

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

Balance Sheet Classification of

Net Expected Recoveries for Breaches of R&W

Insurance Contracts

	As of September 30, 2015								As of December 31, 2014
	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, net	$	(23	)	$	—	$	(23	)	$	7	$	—	$	7
Loss and LAE reserve, net	100			—		100			158		—		158

____________________

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

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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 made and recoveries received that have not yet been recognized in the statement of operations, (2) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (having the effect of reducing net expected loss to be paid by the amount of the previously paid claim and the expected recovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offset in income in future periods), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Net Expected Loss to be Paid and

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts

	As of September 30, 2015
	(in millions)
Net expected loss to be paid	$	559
Less: net expected loss to be paid for FG VIEs	110
Total	449
Contra-paid, net	3
Salvage and subrogation recoverable, net of reinsurance	107
Loss and LAE reserve, net of reinsurance	(341		)
Net expected loss to be expensed (present value)(1)	$	218

____________________

(1)    Excludes $75 million as of September 30, 2015, related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts

	As of September 30, 2015
	(in millions)
2015 (October 1 - December 31)	$	10
Subtotal 2015	10
2016	30
2017	22
2018	19
2019	19
2020-2024	60
2025-2029	31
2030-2034	18
After 2034	9
Net expected loss to be expensed	218
Discount	118
Total expected future loss and LAE	$	336

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

Loss and LAE

Reported on the

Consolidated Statements of Operations

	Third Quarter						Nine Months
	2015			2014			2015			2014
	(in millions)
Public Finance:
U.S. public finance	$	16		$	1		$	79		$	51
Non-U.S. public finance	(1		)	(1		)	3			(1		)
Public finance	15			0			82			50
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	(12		)	3			(16		)	16
Option ARM	0			11			(1		)	(9		)
Subprime	30			(8		)	30			(9		)
First lien	18			6			13			(2		)
Second lien:
Closed-end second lien	1			1			1			0
HELOCs	14			(47		)	23			(49		)
Second lien	15			(46		)	24			(49		)
Total U.S. RMBS	33			(40		)	37			(51		)
Other structured finance	(1		)	0			(1		)	0
Structured finance	32			(40		)	36			(51		)
Loss and LAE on insurance contracts before FG VIE consolidation	47			(40		)	118			(1		)
Effect of consolidating FG VIEs	(10		)	(15		)	(17		)	(22		)
Loss and LAE	$	37		$	(55	)	$	101		$	(23	)

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

Financial Guaranty Insurance

BIG Transaction Loss Summary

As of September 30, 2015

	BIG Categories
	BIG 1						BIG 2						BIG 3						Total BIG, Net			Effect of Consolidating VIEs
	Gross			Ceded			Gross			Ceded			Gross			Ceded									Total
	(dollars in millions)
Number of risks(1)	65			(59		)	13			(13		)	40			(40		)	118			—			118
Remaining weighted-average contract period (in years)	9.2			8.0			7.1			8.4			7.2			7.6			8.6			—			8.6
Outstanding exposure:																						—
Principal	$	7,171		$	(2,850	)	$	2,030		$	(577	)	$	2,013		$	(291	)	$	7,496		$	—		$	7,496
Interest	3,520			(1,209		)	733			(232		)	697			(92		)	3,417			—			3,417
Total(2)	$	10,691		$	(4,059	)	$	2,763		$	(809	)	$	2,710		$	(383	)	$	10,913		$	—		$	10,913
Expected cash outflows (inflows)	$	1,532		$	(849	)	$	669		$	(143	)	$	822		$	(71	)	$	1,960		$	(287	)	$	1,673
Potential recoveries
Undiscounted R&W	42			(1		)	(46		)	2			(84		)	8			(79		)	—			(79		)
Other(3)	(1,473		)	748			(250		)	19			(250		)	32			(1,174		)	147			(1,027		)
Total potential recoveries	(1,431		)	747			(296		)	21			(334		)	40			(1,253		)	147			(1,106		)
Subtotal	101			(102		)	373			(122		)	488			(31		)	707			(140		)	567
Discount	(11		)	14			(59		)	20			(104		)	(8		)	(148		)	30			(118		)
Present value of expected cash flows	$	90		$	(88	)	$	314		$	(102	)	$	384		$	(39	)	$	559		$	(110	)	$	449
Deferred premium revenue	$	239		$	(73	)	$	87		$	(9	)	$	290		$	(40	)	$	494		$	(98	)	$	396
Reserves (salvage)(4)	$	24		$	(63	)	$	248		$	(95	)	$	210		$	(19	)	$	305		$	(71	)	$	234

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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 VIEs
	Gross			Ceded			Gross			Ceded			Gross			Ceded									Total
	(dollars in millions)
Number of risks(1)	71			(65		)	14			(14		)	38			(38		)	123			—			123
Remaining weighted-average contract period (in years)	8.4			8.1			7.9			8.8			7.6			8.1			8.2			—			8.2
Outstanding exposure:
Principal	$	8,281		$	(3,341	)	$	1,594		$	(468	)	$	2,013		$	(279	)	$	7,800		$	—		$	7,800
Interest	3,693			(1,435		)	616			(187		)	784			(105		)	3,366			—			3,366
Total(2)	$	11,974		$	(4,776	)	$	2,210		$	(655	)	$	2,797		$	(384	)	$	11,166		$	—		$	11,166
Expected cash outflows (inflows)	$	1,538		$	(796	)	$	621		$	(128	)	$	1,101		$	(101	)	$	2,235		$	(298	)	$	1,937
Potential recoveries
Undiscounted R&W	(12		)	0			(46		)	2			(160		)	11			(205		)	—			(205		)
Other(3)	(1,526		)	767			(197		)	6			(326		)	44			(1,232		)	149			(1,083		)
Total potential recoveries	(1,538		)	767			(243		)	8			(486		)	55			(1,437		)	149			(1,288		)
Subtotal	0			(29		)	378			(120		)	615			(46		)	798			(149		)	649
Discount	11			0			(67		)	18			(150		)	3			(185		)	30			(155		)
Present value of expected cash flows	$	11		$	(29	)	$	311		$	(102	)	$	465		$	(43	)	$	613		$	(119	)	$	494
Deferred premium revenue	$	324		$	(100	)	$	107		$	(9	)	$	287		$	(43	)	$	566		$	(111	)	$	455
Reserves (salvage)(4)	$	(41	)	$	(9	)	$	207		$	(92	)	$	185		$	(20	)	$	230		$	(77	)	$	153

____________________

(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 excess spread and draws on HELOCs.

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

Ratings Impact on Financial Guaranty Business

A downgrade of the Company 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. AGM insures periodic payments owed by the municipal obligors to the bank counterparties. In certain 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

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guaranty insurance policy. At AGM's current financial strength 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 not exceeding approximately $157 million in respect of such termination payments. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding approximately $399 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 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 under its financial guaranty policy. As of September 30, 2015, the Company had insured approximately $4.9 billion net par of VRDOs, of which approximately $0.2 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which Assured Guaranty 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 $1.9 billion as of September 30, 2015 were terminated, the assets of the GIC issuers (which had an aggregate market value which exceed the liabilities by $0.9 billion) would be sufficient to fund the withdrawal of the GIC funds.

7.    Fair Value Measurement

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

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

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During Nine Months 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 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.

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

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

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

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

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

Measured and Carried at Fair Value

Fixed-Maturity Securities and Short-Term Investments

The fair value of bonds in the investment portfolio is generally based on prices received from third party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value measurements using their pricing models, which include available relevant market information, benchmark curves, benchmarking of like securities, and sector 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 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 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-maturity investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and are based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value. Short term securities that were obtained as part of loss mitigation efforts and whose prices were determined based on models, where at least one significant model assumption or input is unobservable, are considered to be Level 3 in the fair value hierarchy.

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.

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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.

Prices determined based on models where at least one significant model assumption or input is unobservable, are considered to be Level 3 in the fair value hierarchy. As of September 30, 2015, the Company used models to price 26 fixed-maturity securities and short term investments (which were purchased or obtained for loss mitigation or other risk management purposes), which was 13.4% or $846 million of the Company's fixed-maturity securities and short-term investments at fair value. Certain Level 3 securities were priced with the assistance of an independent third-party. The pricing is based on a discounted cash flow approach using the third-party’s proprietary pricing models. The models use inputs such as projected prepayment speeds;  severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price depreciation/appreciation rates based on macroeconomic forecasts and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the bond including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could materially change the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.

Other Invested Assets

As of September 30, 2015 and December 31, 2014, other invested assets include investments carried and measured at fair value on a recurring basis of $51 million and $94 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. Both of these investments were classified as Level 3. Other invested assets also include fixed-maturity securities classified as trading carried as Level 2.

Other Assets

Committed Capital Securities

The fair value of AGM Committed Preferred Trust Securities (the “AGM CPS”), 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 AGM CPS agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (see Note 15, Notes Payable and Credit Facilities). The AGM CPS are carried at fair value with changes in fair value recorded on the consolidated statement of operations. The estimated current cost of the AGM CPS is based on several factors, including broker-dealer quotes for the outstanding securities, AGM CDS spread, the U.S. dollar forward swap curve, London Interbank Offered Rate ("LIBOR") curve projections and the term the securities are estimated to remain outstanding.

Financial Guaranty Contracts Accounted for as Credit Derivatives

The Company’s credit derivatives consist primarily of insured CDS contracts, and also include interest rate swaps that fall under derivative accounting standards requiring fair value accounting through the statement of operations. The Company does not enter into CDS with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. Such terminations generally are not completed at fair value but instead for an amount that approximates the present value of future premiums.

The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms include the absence of collateral support agreements

53

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. 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 internally developed, proprietary models that use both observable and unobservable market data inputs to derive an estimate of the fair value of the Company's contracts in its principal markets (see "Assumptions and Inputs"). There is no established market where financial guaranty insured credit derivatives are actively traded, 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 premiums the Company expects to receive or pay and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay at the reporting 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. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at September 30, 2015 were such that market prices of the Company’s CDS contracts were not available.

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, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.

Assumptions and Inputs

The various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts are as follows:

•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”);

◦ 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 Debt Service schedules.

The rates used to discount future expected premium cash flows ranged from 0.22% to 2.37% at September 30, 2015 and 0.26% to 2.66% at December 31, 2014.

The Company obtains gross spreads on its 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

54

spreads provided by trustees or obtained from market sources. If observable market credit spreads are not available or reliable for the underlying reference obligations, then market indices are used that most closely resemble the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. These indices are adjusted to reflect the non-standard terms of the Company’s CDS contracts. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders who are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process.

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

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

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

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

Information by Credit Spread Type (1)

	As of September 30, 2015		As of December 31, 2014
Based on actual collateral specific spreads	0.1	%	0.1	%
Based on market indices	99.9	%	99.9	%
Total	100	%	100	%

 ____________________

(1)    Based on par.

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

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 a 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

55

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 AGM. For credit spreads on the Company’s name the Company obtains the quoted price of CDS contracts traded on AGM from market data sources published by third parties. The cost to acquire CDS protection referencing 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 AGM increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGM decreases, the amount of premium the Company retains on a deal generally increases. In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. Given the current market conditions and the Company’s own credit spreads, approximately 15%, 13% and 19% based on number of deals, of the Company's CDS contracts are fair valued using this minimum premium as of September 30, 2015, June 30, 2015 and December 31, 2014, respectively. The percentage of deals that price using the minimum premiums fluctuates due to changes in AGM's credit spreads. In general when AGM's credit spreads narrow, the cost to hedge AGM's name declines and more transactions price above previously established floor levels. Meanwhile, when AGM's credit spreads widen, the cost to hedge AGM'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 AGM hedged by its counterparties, with independent third parties each reporting period. The current level of AGM’s own credit spread has resulted in the bank or deal originator hedging a significant portion of its exposure to AGM. This reduces the amount of contractual cash flows AGM can capture as premium for selling its protection.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor. 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 and taking the present value of such amounts discounted at the corresponding LIBOR over the weighted average remaining life of the contract.

Example

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

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

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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 AGM, when the CDS spread on AGM was 300 basis points (300 basis points × 10% = 30 basis points). Under this scenario the Company receives 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 AGM, when the CDS spread on AGM was 1,760 basis points (1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread. Due to the increased cost to hedge AGM'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.

Strengths and Weaknesses of Model

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

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

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

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

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

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

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

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

• At September 30, 2015 and December 31, 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.

These contracts were classified as Level 3 in the fair value hierarchy because there is a reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company's estimate of the value of non-standard terms and conditions of its credit derivative contracts and amount of protection purchased on 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 9, Consolidated Variable Interest Entities.

The FG VIEs issued securities collateralized by first lien and second lien RMBS. The lowest level input that is significant to the fair value measurement of these assets and liabilities was a Level 3 input (i.e., unobservable), therefore management classified them as Level 3 in the fair value hierarchy. Prices are generally determined with the assistance of an independent third-party, based on a discounted cash flow 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

57

default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; house price depreciation/appreciation rates based on macroeconomic forecasts and, for those liabilities insured by the Company, the benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest, taking into account the timing of the potential default and the Company’s own credit rating. The third-party also utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the third-party, on comparable bonds.

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 generally sensitive to the 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.

Not Carried at Fair Value

Financial Guaranty Insurance Contracts

On a quarterly basis, the Company also discloses the fair value of its outstanding financial guaranty insurance contracts. The fair value of the Company's financial guaranty contracts accounted for as insurance 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. It is based on a 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 includes 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.

Other Invested Assets

Other invested assets primarily consist of a surplus note issued by AGC to AGM and assets acquired in refinancing transactions. The fair value of the surplus note was determined by calculating the effect of changes in U.S. Treasury yield adjusted for a credit factor at the end of each reporting period. The fair value measurement of the surplus note was classified as Level 3.

The fair value of the assets acquired in refinancing transactions was determined by calculating the present value of the expected cash flows. The Company uses a market approach to determine discounted future cash flows using market driven discount rates and a variety of assumptions, including a projection of the LIBOR rate 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.

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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.

Notes Payable

The fair value of the notes payable was determined by calculating the present value of the expected cash flows. The Company uses a market approach to determine discounted future cash flows using market driven discount rates and a variety of assumptions, if applicable, including LIBOR curve projections, prepayment and default assumptions, and AGM CDS spreads. The fair value measurement was classified as Level 3 in the fair value hierarchy.

Financial Instruments Carried at Fair Value

Amounts recorded at fair value in the Company's financial statements are presented in the tables below.

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of September 30, 2015

			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions	$	4,104	$	—	$	4,096	$	8
U.S. government and agencies	64		—		64		—
Corporate securities	525		—		446		79
Mortgage-backed securities:
RMBS	561		—		226		335
Commercial mortgage-backed securities ("CMBS")	214		—		214		—
Asset-backed securities	436		—		62		374
Foreign government securities	192		—		192		—
Total fixed-maturity securities	6,096		—		5,300		796
Short-term investments	202		92		60		50
Other invested assets (1)	56		—		5		51
Credit derivative assets	75		—		—		75
FG VIEs’ assets, at fair value	875		—		—		875
Other assets	22		—		—		22
Total assets carried at fair value	$	7,326	$	92	$	5,365	$	1,869
Liabilities:
Credit derivative liabilities	$	192	$	—	$	—	$	192
FG VIEs’ liabilities with recourse, at fair value	776		—		—		776
FG VIEs’ liabilities without recourse, at fair value	126		—		—		126
Total liabilities carried at fair value	$	1,094	$	—	$	—	$	1,094

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Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of December 31, 2014

			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions	$	4,189	$	—	$	4,181	$	8
U.S. government and agencies	69		—		69		—
Corporate securities	643		—		564		79
Mortgage-backed securities:
RMBS	661		—		262		399
CMBS	266		—		266		—
Asset-backed securities	193		—		98		95
Foreign government securities	191		—		191		—
Total fixed-maturity securities	6,212		—		5,631		581
Short-term investments	377		197		180		—
Other invested assets (1)	99		—		16		83
Credit derivative assets	79		—		—		79
FG VIEs’ assets, at fair value	823		—		—		823
Other assets	17		—		—		17
Total assets carried at fair value	$	7,607	$	197	$	5,827	$	1,583
Liabilities:
Credit derivative liabilities	$	287	$	—	$	—	$	287
FG VIEs’ liabilities with recourse, at fair value	830		—		—		830
FG VIEs’ liabilities without recourse, at fair value	114		—		—		114
Total liabilities carried at fair value	$	1,231	$	—	$	—	$	1,231

____________________

(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis.

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Changes in Level 3 Fair Value Measurements

The table below presents a roll forward of the Company's Level 3 financial instruments carried at fair value on a recurring basis during Third Quarter 2015 and 2014, and Nine Months 2015 and 2014.

Fair Value Level 3 Rollforward

Recurring Basis

Third Quarter 2015

	Fixed-Maturity Securities					Short-Term Investments					Other Invested Assets					FG VIEs’ Assets at Fair Value					Other Assets					Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of June 30, 2015	$	488				$	—				$	76				$	910				$	29				$	(199	)			$	(811	)			$	(128	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	1			(2	)	8			(2	)	4			(2	)	(4		)	(3	)	(7		)	(4	)	87			(6	)	1			(3	)	0			(3	)
Other comprehensive income (loss)	(1		)			(4		)			(4		)			—					—					—					—					—
Purchases	316					52			(7	)	—					—					—					—					—					—
Settlements	(8		)			(6		)			(30		)			(31		)			—					(5		)			34					2
FG VIE consolidations	—					—					—					—					—					—					—					—
Fair value as of September 30, 2015	$	796				$	50				$	46				$	875				$	22				$	(117	)			$	(776	)			$	(126	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2015	$	(2	)			$	(4	)			$	0				$	7				$	(7	)			$	(17	)			$	3				$	0

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Fair Value Level 3 Rollforward

Recurring Basis

Third Quarter 2014

	Fixed-Maturity Securities					Other Invested Assets		FG VIEs’ Assets at Fair Value					Other Assets				Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of June 30, 2014	$	473				$	49	$	846				$	15			$	(215	)			$	(924	)			$	(104	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	(9		)	(2	)	—		27			(3	)	2		(4	)	12			(6	)	23			(3	)	(13		)	(3	)
Other comprehensive income (loss)	18					2		—					—				—					—					—
Purchases	159					25		—					—				—					—					—
Settlements	(9		)			0		(26		)			—				(7		)			27					5
FG VIE consolidations	—					—		—					—				—					—					—
FG VIE deconsolidations	—					—		—					—				—					—					—
Fair value as of September 30, 2014	$	632				$	76	$	847				$	17			$	(210	)			$	(874	)			$	(112	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2014	$	18				$	2	$	37				$	2			$	6				$	22				$	(5	)

Fair Value Level 3 Rollforward

Recurring Basis

Nine Months 2015

	Fixed-Maturity Securities					Short-Term Investments					Other Invested Assets					FG VIEs’ Assets at Fair Value					Other Assets				Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of December 31, 2014	$	581				$	—				$	78				$	823				$	17			$	(208	)			$	(830	)			$	(114	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	19			(2	)	8			(2	)	8			(2	)	33			(3	)	5		(4	)	118			(6	)	90			(3	)	(19		)	(3	)
Other comprehensive income (loss)	(5		)			(4		)			(6		)			—					—				—					—					—
Purchases	324					52			(7	)	—					—					—				—					—					—
Settlements	(123		)			(6		)			(34		)			(85		)			—				(27		)			95					7
FG VIE consolidations	—					—					—					104					—				—					(131		)			—
Fair value as of September 30, 2015	$	796				$	50				$	46				$	875				$	22			$	(117	)			$	(776	)			$	(126	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2015	$	(3	)			$	(4	)			$	(2	)			$	66				$	5			$	(8	)			$	(14	)			$	(9	)

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Fair Value Level 3 Rollforward

Recurring Basis

Nine Months 2014

	Fixed-Maturity Securities					Other Invested Assets		FG VIEs’ Assets at Fair Value					Other Assets					Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of December 31, 2013	$	523				$	2	$	1,691				$	21				$	(228	)			$	(1,275	)			$	(686	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	4			(2	)	—		136			(3	)	(4		)	(4	)	41			(6	)	(63		)	(3	)	(45		)	(3	)
Other comprehensive income (loss)	13					4		—					—					—					—					—
Purchases	159					70		—					—					—					—					—
Settlements	(67		)			—		(328		)			—					(23		)			316					13
FG VIE consolidations	—					—		46					—					—					(25		)			(21		)
FG VIE deconsolidations	—					—		(698		)			—					—					173					627
Fair value as of September 30, 2014	$	632				$	76	$	847				$	17				$	(210	)			$	(874	)			$	(112	)
Change in unrealized gains/(losses) related to financial instruments held as of September 30, 2014	$	10				$	4	$	94				$	(4	)			$	17				$	(18	)			$	(9	)

____________________

(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.

(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)    Includes a non-cash transaction.

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Level 3 Fair Value Disclosures

Quantitative Information About Level 3 Fair Value Inputs

At September 30, 2015

Financial Instrument Description (1)	Fair Value at  September 30, 2015 (in millions)		Significant Unobservable Inputs	Range					Weighted Average as a Percentage of Current Par Outstanding
Assets:
Fixed-maturity securities(2):
Corporate securities	$	79	Yield	20.6%
RMBS	335		CPR	0.3		%	-	7.7%	2.3%
			CDR	3.0		%	-	11.9%	6.0%
			Loss severity	60.0		%	-	100.0%	76.4%
			Yield	4.3		%	-	7.5%	5.6%
Asset-backed securities:
Investor owned utility	99		Cash flow receipts	100%
			Collateral recovery period	3.3 years
			Discount factor	7.0%
Triple-X life insurance transaction	275		Yield	4.3%
Short-term investments	50		Yield	15.0%
Other invested assets(3)	45		Net asset value (per share)	$	906		-	$1,113	$998
FG VIEs’ assets, at fair value	875		CPR	2.0		%	-	7.5%	3.4%
			CDR	1.5		%	-	22.0%	4.9%
			Loss severity	40.0		%	-	100.0%	78.7%
			Yield	3.0		%	-	17.3%	6.6%
Other assets	22		Quotes from third party pricing	$49
			Term (years)	5 years

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Financial Instrument Description (1)	Fair Value at  September 30, 2015 (in millions)		Significant Unobservable Inputs	Range				Weighted Average as a Percentage of Current Par Outstanding
Liabilities:
Credit derivative liabilities, net	(117	)	Hedge cost (in bps)	26.0		-	252.8	32.1
			Bank profit (in bps)	7.1		-	756.8	67.1
			Internal floor (in bps)	7.0		-	100.0	23.0
			Internal credit rating	AAA		-	CCC	AAA
FG VIEs’ liabilities, at fair value	(902	)	CPR	2.0	%	-	7.5%	3.4%
			CDR	1.5	%	-	22.0%	4.9%
			Loss severity	40.0	%	-	100.0%	78.7%
			Yield	3.0	%	-	17.3%	5.4%

___________________

(1) Discounted cash flow is used as valuation technique for all financial instruments.

(2) Excludes obligations of state and political subdivisions investments with fair value of $8 million.

(3) Excludes several investments with fair value of $6 million.

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Quantitative Information About Level 3 Fair Value Inputs

At December 31, 2014

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	$	8	Rate of inflation	1.0		%	-	3.0%	2.0%
			Cash flow receipts	0.5		%	-	22.4%	22.1%
			Yield	4.6%
			Collateral recovery period	1 month			-	9 years	8.4 years
Corporate securities	79		Yield	17.8%
RMBS	399		CPR	0.3		%	-	8.1%	3.1%
			CDR	3.1		%	-	10.6%	5.4%
			Loss severity	52.6		%	-	100.0%	75.7%
			Yield	4.6		%	-	11.7%	6.4%
Asset-backed securities:
Investor owned utility	95		Cash flow receipts	100%
			Collateral recovery period	4 years
			Discount factor	7.0%
Other invested assets	83		Discount for lack of liquidity	20%
			Recovery on delinquent loans	40%
			Default rates	0.0		%	-	7.0%	5.8%
			Loss severity	40.0		%	-	75.0%	68.3%
			Prepayment speeds	5.0		%	-	15.0%	12.3%
			Net asset value (per share)	$	965		-	$1,159	$1,082
FG VIEs’ assets, at fair value	823		CPR	0.3		%	-	7.0%	3.2%
			CDR	1.6		%	-	11.8%	4.4%
			Loss severity	40.0		%	-	100.0%	81.4%
			Yield	2.7		%	-	17.7%	7.9%
Other assets	17		Quotes from third party pricing	$	52		-	$57	$54.5
			Term (years)	5 years

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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	(208	)	Hedge cost (in bps)	21.2		-	243.8	38.6
			Bank profit (in bps)	1.0		-	916.9	48.6
			Internal floor (in bps)	7.0		-	100.0	9.2
			Internal credit rating	AAA		-	CCC	AAA
FG VIEs’ liabilities, at fair value	(944	)	CPR	0.3	%	-	7.0%	3.2%
			CDR	1.6	%	-	11.8%	4.4%
			Loss severity	40.0	%	-	100.0%	81.4%
			Yield	2.7	%	-	17.7%	6.2%

___________________

(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 September 30, 2015				As of December 31, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in millions)
Assets:
Fixed-maturity securities	$	6,096	$	6,096	$	6,212	$	6,212
Short-term investments	202		202		377		377
Other invested assets	361		442		407		491
Credit derivative assets	75		75		79		79
FG VIEs’ assets, at fair value	875		875		823		823
Other assets	97		97		89		89
Liabilities:
Financial guaranty insurance contracts(1)	2,044		3,646		2,325		3,279
Notes payable	15		13		19		16
Credit derivative liabilities	192		192		287		287
FG VIEs’ liabilities with recourse, at fair value	776		776		830		830
FG VIEs’ liabilities without recourse, at fair value	126		126		114		114
Other liabilities	7		7		21		21

____________________

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

8.    Financial Guaranty Contracts Accounted for as Credit Derivatives

Credit Derivatives

The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with GAAP (primarily CDS).

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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.

Credit Derivative Net Par Outstanding by Sector

The estimated remaining weighted average life of credit derivatives was 2.4 years at September 30, 2015 and 2.5 years at December 31, 2014. The components of the Company's credit derivative net par outstanding are presented below.

Credit Derivatives

Subordination and Ratings

	As of September 30, 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
	(dollars in millions)
Pooled corporate obligations:
Collateralized loan obligations/collateralized bond obligations	$	4,594	29.6	%	39.3	%	AAA	$	7,375	29.6	%	33.6	%	AAA
Synthetic investment grade pooled corporate	4,870		21.8		19.4		AAA	7,354		22.3		20.3		AAA
Trust preferred securities collateralized debt obligations ("TruPS CDOs")	5		56.0		92.0		AAA	9		56.0		86.4		AAA
Market value CDOs of corporate obligations	946		17.0		10.5		AAA	946		17.0		20.1		AAA
Total pooled corporate obligations	10,415		24.8		27.4		AAA	15,684		25.5		26.6		AAA
U.S. RMBS:
Subprime first lien	48		—		—		AAA	55		—		—		AAA
Closed-end second lien	54		—		—		BBB+	61		—		—		BBB+
Total U.S. RMBS	102		—		—		AA-	116		—		—		AA-
Other	2,020		—		—		A-	2,393		—		—		A-
Total	$	12,537					AAA	$	18,193					AAA

____________________

(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.

The Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and industries. Most pooled corporate transactions are structured to limit exposure to any given obligor and industry. The majority of the Company’s pooled corporate exposure consists of collateralized loan obligation (“CLO”) or synthetic pooled corporate obligations. Most of these CLOs have an average obligor size of less than 1% of the total transaction and typically restrict the

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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 $2.0 billion of exposure in "Other" CDS contracts as of September 30, 2015 comprises numerous deals typically structured with significant underlying credit enhancement and spread across various asset classes, such as commercial receivables, international RMBS, infrastructure, regulated utilities and consumer receivables.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating

	As of September 30, 2015				As of December 31, 2014
Ratings	Net Par Outstanding		% of Total		Net Par Outstanding		% of Total
	(dollars in millions)
AAA	$	9,523	76.0	%	$	14,471	79.5	%
AA	1,192		9.5		1,843		10.1
A	895		7.1		920		5.1
BBB	804		6.4		830		4.6
BIG	123		1.0		129		0.7
Credit derivative net par outstanding	$	12,537	100.0	%	$	18,193	100.0	%

Fair Value of Credit Derivatives

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

	Third Quarter						Nine Months
	2015			2014			2015			2014
	(in millions)
Realized gains on credit derivatives (1)	$	5		$	7		$	27		$	26
Net credit derivative losses (paid and payable) recovered and recoverable and other settlements	0			(1		)	0			(2		)
Realized gains (losses) and other settlements on credit derivatives	5			6			27			24
Net change in unrealized gains (losses) on credit derivatives:
Pooled corporate obligations	(5		)	2			(25		)	19
U.S. RMBS	0			1			1			1
Other	87			3			115			(3		)
Net change in unrealized gains (losses) on credit derivatives	82			6			91			17
Net change in fair value of credit derivatives	$	87		$	12		$	118		$	41

____________________

(1) Includes realized gain due to terminations of CDS contracts. CDS terminations in Nine Months 2015 also included a payment received from the resolution of a dispute related to a termination of CDS in 2008.

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Net Par and Realized Gain

from Terminations of CDS Contracts

	Third Quarter					Nine Months
	2015			2014		2015		2014
	(in millions)
Net par of terminated CDS contracts	$	369		$	106	$	485	$	565
Realized gain due to termination of CDS contracts	(0.03		)	0.1		10.6		0.7

During Third Quarter 2015, unrealized fair value gains were driven primarily by the termination of a Triple-X life-securitization transaction in the Other sector. These unrealized gains were partially offset by wider implied net spreads in the Company’s pooled corporate CLO sector. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGM’s name, particularly for the one year and five year CDS spreads, as the market cost of AGM’s credit protection 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 AGM, which management refers to as the CDS spread on AGM, decreased the implied spreads that the Company would expect to receive on these transactions increased.

During Nine Months 2015, unrealized fair value gains were generated primarily in the Other sector. The unrealized gains were a result of the termination of a Triple-X life securitization transaction and improvements in the credit rating of one of the Company’s reinsurers. The improvement in credit rating increased the Company’s credit value adjustment for this particular reinsurer, leading to an unrealized mark to market gain on several policies. The unrealized gains were partially offset by unrealized losses in the pooled corporate sector as a result of implied net spreads on these transactions widening during the period. The net spreads widened as a result of declines in pricing on the underlying collateral of the Company’s pooled corporate transactions.

During Third Quarter 2014, unrealized fair value gains were generated primarily in the pooled corporate obligations and Other sectors due to tighter implied net spreads. The tighter implied net spreads were primarily a result of improvements in pricing on the underlying collateral of the Company’s securities as well as the slight increase in the cost to buy protection in AGM’s name, specifically for the one year CDS spread, as the market cost of AGM’s one year credit protection increased slightly during the period. These transactions were pricing at or above their floor levels; therefore when the cost of purchasing CDS protection on AGM increased, the implied spreads that the Company would expect to receive on these transactions decreased.

During Nine Months 2014, unrealized fair value gains were generated primarily in the pooled corporate obligations sector. The unrealized gains were a result of the run-off of outstanding exposure as the transactions in this sector approach maturity, as well as the expiration of several large synthetic high yield pooled corporate transactions. The unrealized gains were partially offset by unrealized losses in the Other sector. The unrealized losses in Other were a result of the decreased cost to buy protection in AGM’s name as the market cost of AGM’s credit protection decreased during the period. The transactions in the Other sector were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased.

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 AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date.

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Five-Year CDS Spread on AGM

Quoted price of CDS contract (in basis points)

	As of September 30, 2015	As of June 30, 2015	As of December 31, 2014	As of September 30, 2014	As of June 30, 2014	As of December 31, 2013
AGM	337	410	325	344	346	525

One-Year CDS Spread on AGM

Quoted price of CDS contract (in basis points)

	As of September 30, 2015	As of June 30, 2015	As of December 31, 2014	As of September 30, 2014	As of June 30, 2014	As of December 31, 2013
AGM	104	125	85	120	115	220

Fair Value of Credit Derivatives Assets (Liabilities)

and Effect of AGM

Credit Spreads

	As of September 30, 2015			As of December 31, 2014
	(in millions)
Fair value of credit derivatives before effect of AGM credit spread	$	(151	)	$	(344	)
Plus: Effect of AGM credit spread	34			136
Net fair value of credit derivatives	$	(117	)	$	(208	)

The fair value of CDS contracts at September 30, 2015, before considering the implications of 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 pooled corporate obligations and a peaker plant securitization. Comparing September 30, 2015 with December 31, 2014, there was a large runoff of par outstanding and terminations of several CDS contracts, which resulted in a gain of approximately $193 million, before taking into account AGM’s credit spreads.

 Management believes that the trading level of AGM’s credit spreads over the past several years has been due to the correlation between AGM’s risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against 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 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, and CLO markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.

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The following table presents the fair value and the present value of expected claim payments or recoveries (i.e. net expected loss to be paid as described in Note 5) for contracts accounted for as derivatives.

Net Fair Value and Expected Losses

of Credit Derivatives by Sector

	Fair Value of Credit Derivative Asset (Liability), net						Expected Loss to be (Paid) Recovered
Asset Type	As of September 30, 2015			As of December 31, 2014			As of September 30, 2015			As of December 31, 2014
	(in millions)
Pooled corporate obligations	$	(16	)	$	10		$	—		$	—
U.S. RMBS	(6		)	(7		)	(4		)	(4		)
Other	(95		)	(211		)	(1		)	(2		)
Total	$	(117	)	$	(208	)	$	(5	)	$	(6	)

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 AGM and on the risks that it assumes.

Effect of Changes in Credit Spread

As of September 30, 2015

Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss) (Pre-Tax)
	(in millions)
100% widening in spreads	$	(211	)	$	(94	)
50% widening in spreads	(164		)	(47		)
25% widening in spreads	(141		)	(24		)
10% widening in spreads	(127		)	(10		)
Base Scenario	(117		)	—
10% narrowing in spreads	(108		)	9
25% narrowing in spreads	(97		)	20
50% narrowing in spreads	(76		)	41

 ____________________

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

9.    Consolidated Variable Interest Entities

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. AGM does not act as the servicer or collateral manager for any VIE obligations that it insures. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate cash flows that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional

72

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.

AGM is not primarily liable for the debt obligations issued by the VIEs it insures and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGM’s creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay Debt Service on VIE liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero at maturity of the VIE debt, except for net premiums received and net claims paid by AGM under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid for FG VIEs is included in Note 5, Expected Loss to be Paid.

As part of the terms of its financial guaranty contracts, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to 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 protective rights that could make the Company the control party have not been triggered, then the VIE is not consolidated. If the Company is deemed no longer to have those protective rights, the transaction is deconsolidated.

Consolidated FG VIEs

Number of FG VIEs Consolidated

	Nine Months
	2015	2014
Beginning of the period, December 31	25	32
Consolidated(1)	1	1
Deconsolidated(1)	—	(6	)
Matured	—	(2	)
End of the period, September 30	26	25

____________________

(1) Net loss on consolidation was $26 million in Nine Months 2015 and net gain on deconsolidation was $102 million in Nine Months 2014, 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 $178 million at September 30, 2015 and $177 million at December 31, 2014. The aggregate unpaid principal of the FG VIEs' assets was approximately $647 million greater than the aggregate fair value at September 30, 2015. The aggregate unpaid principal of the FG VIEs' assets was approximately $670 million greater than the aggregate fair value at December 31, 2014.

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The change in the instrument-specific credit risk of the FG VIEs' assets held as of September 30, 2015 that was recorded in the consolidated statements of operations for Third Quarter 2015 and Nine Months 2015 were gains of $7 million and gains of $4 million, respectively. The change in the instrument-specific credit risk of the FG VIEs' assets, held as of September 30, 2014 that was recorded in the consolidated statements of operations for Third Quarter 2014 and Nine Months 2014 were gains of $75 million and $125 million, respectively. 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 $1,169 million and $1,132 million as of September 30, 2015 and December 31, 2014, respectively. FG VIE liabilities with recourse will mature at various dates ranging from 2025 to 2038. The aggregate unpaid principal balance of the FG VIE liabilities with and without recourse was approximately $620 million greater than the aggregate fair value of the FG VIEs’ liabilities as of September 30, 2015. The aggregate unpaid principal balance was approximately $548 million greater than the aggregate fair value of the FG VIEs’ liabilities as of December 31, 2014.

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

By Type of Collateral

	As of September 30, 2015				As of December 31, 2014
	Assets		Liabilities		Assets		Liabilities
	(in millions)
With recourse:
U.S. RMBS first lien	$	572	$	541	$	498	$	570
U.S. RMBS second lien	171		235		193		260
Total with recourse	743		776		691		830
Without recourse	132		126		132		114
Total	$	875	$	902	$	823	$	944

The consolidation of FG VIEs has a significant effect on net income and shareholder’s equity due to (1) changes in fair value gains (losses) on FG VIE assets and liabilities, (2) the elimination of premiums and losses related to the FG VIE liabilities with recourse and (3) the elimination of investment balances related to the Company’s purchase of 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.

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Effect of Consolidating FG VIEs on Net Income,

Cash Flows From Operating Activities and Shareholder's Equity

	Third Quarter						Nine Months
	2015			2014			2015			2014
	(in millions)
Net earned premiums	$	(5	)	$	(5	)	$	(14	)	$	(26	)
Net investment income	(2		)	(2		)	(6		)	(8		)
Net realized investment gains (losses)	3			(1		)	2			(5		)
Fair value gains (losses) on FG VIEs	3			49			(1		)	220
Other income (loss)	0			0			0			(2		)
Loss and LAE	10			15			17			22
Effect on income before tax	9			56			(2		)	201
Less: tax provision (benefit)	3			20			(1		)	71
Effect on net income (loss)	$	6		$	36		$	(1	)	$	130
Effect on cash flows from operating activities	$	10		$	17		$	41		$	55

	As of September 30, 2015			As of December 31, 2014
	(in millions)
Effect on shareholder’s equity (decrease) increase	$	(27	)	$	(25	)

Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs' assets and liabilities. During Third Quarter 2015, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $3 million. The primary driver of the gain was mark-to-market gains due to price appreciation on the FG VIE assets during the quarter resulting from improvements in the underlying collateral. During Nine Months 2015, the Company recorded a pre-tax net fair value loss on consolidated FG VIE's of $1 million. The primary driver of the loss was a pre-tax loss of $26 million on the consolidation of one new FG VIE which was mostly offset by net mark-to-market gains due to price appreciation on the FG VIE assets resulting from improvements in the underlying collateral.

During Third Quarter 2014, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $49 million. This gain was primarily driven by price appreciation on the Company's FG VIE assets relating to HELOC transactions and principal payments. During Nine Months 2014, the Company recorded a pre-tax net fair value gain of consolidated FG VIEs of $220 million. The primary driver of this gain, $102 million, was a result of the deconsolidation of five VIEs in first quarter 2014. 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.

Non-Consolidated VIEs

As of September 30, 2015 and December 31, 2014 the Company had financial guaranty contracts outstanding for approximately 380 and 430 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, Outstanding Exposure.

10.    Investments and Cash

Net Investment Income 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. Accrued investment income was $75 million and $63 million as of September 30, 2015 and December 31, 2014, respectively.

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Net Investment Income

	Third Quarter					Nine Months
	2015		2014			2015			2014
	(in millions)
Income from fixed-maturity securities managed by third parties	$	47	$	48		$	144		$	139
Income from internally managed securities:
Fixed maturities	12		12			33			39
Other	18		9			32			23
Gross investment income	77		69			209			201
Investment expenses	0		(1		)	(3		)	(3		)
Net investment income	$	77	$	68		$	206		$	198

Net Realized Investment Gains (Losses)

	Third Quarter						Nine Months
	2015			2014			2015			2014
	(in millions)
Gross realized gains on available-for-sale securities	$	2		$	2		$	11		$	6
Gross realized gains on other assets in investment portfolio	0			1			2			8
Gross realized losses on available-for-sale securities	0			0			(2		)	(1		)
Gross realized losses on other assets in investment portfolio	(10		)	(1		)	(11		)	(1		)
Other-than-temporary impairment	(12		)	(20		)	(24		)	(35		)
Net realized investment gains (losses)	$	(20	)	$	(18	)	$	(24	)	$	(23	)

The following table presents the roll-forward of the credit losses of fixed-maturity securities for which the Company has recognized an other-than-temporary-impairment and where the portion of the fair value adjustment related to other factors was recognized in other comprehensive income ("OCI").

Roll Forward of Credit Losses in the Investment Portfolio

	Third Quarter				Nine Months
	2015		2014		2015			2014
	(in millions)
Balance, beginning of period	$	93	$	50	$	104		$	34
Reductions for securities sold during the period	—		—		(17		)	—
Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized	2		3		2			28
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized	1		16		7			6
Other	—		—		—			1
Balance, end of period	$	96	$	69	$	96		$	69

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Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of September 30, 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	65	%	$	3,891	$	217	$	(4	)	$	4,104	$	1		AA
U.S. government and agencies	1		59		5		—			64		—			AA+
Corporate securities	9		520		11		(6		)	525		(3		)	A-
Mortgage-backed securities(4):
RMBS	9		562		13		(14		)	561		(3		)	BBB-
CMBS	3		205		9		—			214		—			AAA
Asset-backed securities	7		434		2		—			436		0			A+
Foreign government securities	3		197		1		(6		)	192		—			AA+
Total fixed-maturity securities	97		5,868		258		(30		)	6,096		(5		)	AA-
Short-term investments	3		206		—		(4		)	202		—			A
Total investment portfolio	100	%	$	6,074	$	258	$	(34	)	$	6,298	$	(5	)	AA-

77

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2014

Investment Category	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)
Fixed-maturity securities:
Obligations of state and political subdivisions	63	%	$	3,928	$	261	$	0		$	4,189	$	1		AA
U.S. government and agencies	1		64		5		0			69		—			AA+
Corporate securities	10		632		15		(4		)	643		(2		)	A-
Mortgage-backed securities(4):
RMBS	10		656		24		(19		)	661		(3		)	BIG
CMBS	4		258		8		0			266		—			AAA
Asset-backed securities	3		191		2		0			193		1			A
Foreign government securities	3		191		3		(3		)	191		—			AA+
Total fixed-maturity securities	94		5,920		318		(26		)	6,212		(3		)	AA-
Short-term investments	6		377		0		0			377		—			AAA
Total investment portfolio	100	%	$	6,297	$	318	$	(26	)	$	6,589	$	(3	)	AA-

____________________

(1) Based on amortized cost.

(2) Accumulated OCI ("AOCI"). See also Note 16, Other Comprehensive Income.

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

(4) Government-agency obligations were approximately 29% of mortgage backed securities as of September 30, 2015 and 24% as of December 31, 2014 based on fair value.

The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories. Securities rated lower than A-/A3 by S&P or Moody’s are not eligible to be purchased for the Company’s portfolio unless acquired for loss mitigation or risk management strategies.

The majority of the investment portfolio is managed by four outside managers. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.

78

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

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

As of September 30, 2015

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	282	$	(4	)	$	3	$	0		$	285	$	(4	)
U.S. government and agencies	—		—			—		—			—		—
Corporate securities	124		(2		)	94		(4		)	218		(6		)
Mortgage-backed securities:
RMBS	131		(1		)	77		(13		)	208		(14		)
CMBS	—		—			—		—			—		—
Asset-backed securities	—		—			—		—			—		—
Foreign government securities	93		(3		)	54		(3		)	147		(6		)
Total	$	630	$	(10	)	$	228	$	(20	)	$	858	$	(30	)
Number of securities (1)			124					26					144
Number of securities with other-than-temporary impairment			2					4					6

79

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

As of December 31, 2014

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(dollars in millions)
Obligations of state and political subdivisions	$	61	$	0		$	7	$	0		$	68	$	0
U.S. government and agencies	2		0			12		0			14		0
Corporate securities	151		(3		)	48		(1		)	199		(4		)
Mortgage-backed securities:
RMBS	172		(3		)	85		(16		)	257		(19		)
CMBS	22		0			—		—			22		0
Asset-backed securities	24		0			—		—			24		0
Foreign government securities	108		(3		)	—		—			108		(3		)
Total	$	540	$	(9	)	$	152	$	(17	)	$	692	$	(26	)
Number of securities			79					34					113
Number of securities with other-than-temporary impairment			3					5					8

___________________

(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 September 30, 2015, four securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2015 was $13 million. The Company has determined that the unrealized losses recorded as of September 30, 2015 are yield related and not the result of other-than-temporary-impairment.

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of September 30, 2015 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Fixed-Maturity Securities

by Contractual Maturity

As of September 30, 2015

	Amortized Cost		Estimated Fair Value
Due within one year	$	109	$	109
Due after one year through five years	907		930
Due after five years through 10 years	1,307		1,374
Due after 10 years	2,778		2,908
Mortgage-backed securities:
RMBS	562		561
CMBS	205		214
Total	$	5,868	$	6,096

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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, placed on deposit to fulfill state licensing requirements, or otherwise restricted in the amount of $33 million and $50 million as of September 30, 2015 and December 31, 2014, respectively, based on fair value. In addition, the total collateral required to be funded into a reinsurance trust account by AGM for the benefit of AGE as of September 30, 2015 and December 31, 2014 was approximately $242 million and $238 million, respectively.  

No material investments of the Company were non-income producing for Nine Months 2015 and Nine Months 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 and surplus note from affiliate). The internally managed portfolio, as defined below, represents approximately 13% and 11% of the investment portfolio, on a fair value basis as of September 30, 2015 and December 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.

One of the Company's strategies for mitigating losses has been to purchase securities it has insured that have expected losses, at discounted prices (assets purchased for loss mitigation purposes). In addition, the Company holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of our financial guaranties (other risk management assets).

Internally Managed Portfolio

Carrying Value

	As of September 30, 2015		As of December 31, 2014
	(in millions)
Assets purchased for loss mitigation and other risk management purposes:
Fixed-maturity securities, at fair value	$	810	$	634
Other invested assets	17		28
Other	45		79
Total	$	872	$	741

11.    Insurance Company Regulatory Requirements

Contingency Reserves

On July 15, 2013, AGM and its wholly-owned subsidiary AGE (together, the "AGM Group"), were notified that the New York State Department of Financial Services ("NYDFS") does not object to the AGM Group reassuming all of the outstanding contingency reserves that they had ceded to Assured Guaranty Re Ltd. ("AG Re") and electing to cease ceding future contingency reserves to AG Re. The insurance regulators permitted the AGM Group to reassume the contingency reserves in increments over three years. In Third Quarter 2015, the AGM Group reassumed its final installment and as of September 30, 2015, the AGM Group had collectively reassumed an aggregate of approximately $255 million.

With respect to the regular, quarterly contributions to contingency reserves required by 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 NYDFS, 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 AGM satisfy the foregoing condition for its applicable line of business.

81

Dividend Restrictions and Capital Requirements

Under New York insurance law, AGM may only pay dividends out of "earned surplus", which is the portion of a company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay 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 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of the 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 2015 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $215 million, of which approximately $52 million is available for distribution in the fourth quarter of 2015.

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.

U.K. company law prohibits AGE from declaring a dividend to its shareholder 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 restriction on dividends. The Company does not expect AGE to distribute any dividends at this time.

Dividends and Surplus Notes

By Insurance Company

	Third Quarter				Nine Months
	2015		2014		2015		2014
	(in millions)
Dividends paid by AGM to AGMH	$	57	$	60	$	163	$	105
Repayment of surplus note by AGM to AGMH	—		25		25		50

12.    Income Taxes

Overview

The Company files its US federal tax return as a part of the consolidated group for Assured Guaranty US Holdings Inc. (“AGUS”), an indirect parent holding company.  Each member of AGUS consolidated tax group is part of a tax sharing agreement and pays or receives its proportionate share of the consolidated federal tax burden for the group as if each company filed on a separate return basis.

Provision for Income Taxes

The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in fair value of its credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pretax income for the full year 2015. A discrete calculation of the provision is calculated for each interim period.

82

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

Effective Tax Rate Reconciliation

	Third Quarter						Nine Months
	2015			2014			2015			2014
	(in millions)
Expected tax provision (benefit) at statutory rate	$	65		$	79		$	169		$	231
Tax-exempt interest	(10		)	(12		)	(31		)	(33		)
Change in liability for uncertain tax position	8			6			8			6
Provision to file true-up	(8		)	(6		)	(8		)	(6		)
Other	(1		)	0			(2		)	2
Total provision (benefit) for income taxes	$	54		$	67		$	136		$	200
Effective tax rate	28.7		%	30.2		%	28.1		%	30.3		%

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

Valuation Allowance

The Company came to the conclusion that it is more likely than not that the 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 GAAP income of the Company, cumulative operating income of Assured Guaranty US Holdings Inc. together with its U.S. subsidiaries 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 2009 - 2012 tax 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. The IRS concluded its field work, without adjustment, with respect to tax years through 2009 for AGMH and subsidiaries while members of the Dexia Holdings Inc. consolidated tax group. The Company's U.K. subsidiary, AGE, is not currently under examination and has open tax years of 2012 forward.

Uncertain Tax Positions

The Company's policy is to recognize interest and penalties related to uncertain tax positions in income tax expense and has accrued $0.4 million for Nine Months 2015 and $0.5 million for 2014. As of September 30, 2015 and December 31, 2014, the Company has accrued $2.7 million and $2.3 million of interest, respectively.

The total amount of unrecognized tax benefits as of September 30, 2015 and December 31, 2014, that would affect the effective tax rate, if recognized, was $18 million and $11 million, respectively.

13.    Reinsurance and Other Monoline Exposures

The Company assumes exposure on insured obligations (“Assumed Business”) and cedes portions of its exposure on obligations it has insured (“Ceded Business”) in exchange for premiums, net of ceding commissions. The Company has historically entered into ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

83

Ceded and Assumed Business

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

AGM is also party to reinsurance agreements as a reinsurer to its affiliated financial guaranty insurance companies.

The Company has assumed business primarily from its affiliate, AGC.  Under this relationship, 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 agreement with AGC is generally subject to termination at the option of the ceding company if the Company fails to meet certain financial and regulatory criteria or to maintain a specified minimum financial strength rating.  Upon termination under these conditions, the Company may be required to return to the ceding company unearned premiums and loss reserves calculated on a statutory basis of accounting, attributable to the reinsurance assumed, after which the Company would be released from liability with respect to the Assumed Business.  Upon the occurrence of the conditions set forth above, whether or not an agreement is terminated, the Company may be obligated to increase the level of ceding commission paid. In 2013, MAC assumed a book of U.S. public finance business from AGM and AGC.

In Nine Months 2015, the Company entered into a commutation agreement to reassume previously ceded U.S. public finance par. In Nine Months 2014, the Company entered into commutation agreements to reassume previously ceded business consisting of approximately $856 million par of almost exclusively U.S. public finance and European (predominantly UK) utility and infrastructure exposures outstanding as of February 28, 2014. For such 2014 reassumptions, the Company received the statutory unearned premium outstanding as of the commutation dates plus, in one case, a commutation premium.

84

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.

Effect of Reinsurance on Statement of Operations

	Third Quarter						Nine Months
	2015			2014			2015			2014
	(in millions)
Premiums Written:
Direct	$	42		$	46		$	75		$	92
Assumed	(1		)	0			(1		)	0
Ceded	(15		)	(19		)	(27		)	(56		)
Net	$	26		$	27		$	47		$	36
Premiums Earned:
Direct	$	152		$	124		$	411		$	360
Assumed	11			7			28			20
Ceded	(46		)	(36		)	(120		)	(106		)
Net	$	117		$	95		$	319		$	274
Loss and LAE:
Direct	$	67		$	(55	)	$	177		$	12
Ceded	(30		)	0			(76		)	(35		)
Net	$	37		$	(55	)	$	101		$	(23	)

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-maturity securities that are wrapped by monolines and whose value may change based on the rating of the monoline. As of September 30, 2015, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $210 million insured by National, $188 million insured by Ambac Assurance Corporation ("Ambac"), $69 million insured by AGC, $275 million insured by the Company's affiliate Assured Guaranty (UK) Ltd., and $31 million insured by other guarantors.

85

Exposure by Reinsurer

	Ratings at		Par Outstanding (1)
	December 01, 2015		As of September 30, 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)
Affiliated Companies: (2)
AGC	A3	AA	$	3,595	$	168	$	20,469
AG Re	WR(3)	AA	57,223		—		—
Affiliated Companies			60,818		168		20,469
Non-Affiliated Companies:
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	WR	WR	4,492		—		30
Tokio Marine & Nichido Fire Insurance Co., Ltd.	Aa3(4)	A+(4)	4,430		—		—
Syncora Guarantee Inc.	WR	WR	3,505		561		—
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+(4)	1,854		—		—
ACA Financial Guaranty Corp.	NR(5)	WR	714		1		—
National (6)	A3	AA-	—		3,688		—
Ambac	WR	WR	—		2,376		—
MBIA	(7)	(7)	—		1,621		—
Financial Guaranty Insurance Co.	WR	WR	—		912		—
Ambac Assurance Corp. Segregated Account	NR	NR	—		93		—
CIFG Assurance North America Inc.	WR	WR	—		38		—
Other	Various	Various	25		—		1
Non-Affiliated Companies			15,020		9,290		31
Total			$	75,838	$	9,458	$	20,500

____________________

(1) Includes par related to insured credit derivatives.

(2) MAC is rated AA+ (stable outlook) from KBRA and of AA (stable outlook) from S&P. Assumed par outstanding includes $20,440 million assumed by MAC from AGC.

(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 also rated AA+ by KBRA.

(7) MBIA includes subsidiaries MBIA Insurance Corp. rated B by S&P and B2 by Moody's and MBIA U.K. Insurance Ltd. rated BB by S&P and Ba2 by Moody’s.

86

Amounts Due (To) From Reinsurers

As of September 30, 2015

	Assumed Premium		Ceded Premium, net of Commissions			Ceded Expected Loss to be Paid
	(in millions)
AGC	$	2	$	(12	)	$	34
AG Re	—		(48		)	86
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	—		(6		)	25
Tokio Marine & Nichido Fire Insurance Co., Ltd.	—		(11		)	56
Syncora Guarantee Inc.	—		(26		)	6
Mitsui Sumitomo Insurance Co. Ltd.	—		(3		)	23
Swiss Reinsurance Co.	—		(2		)	—
Total	$	2	$	(108	)	$	230

Excess of Loss Reinsurance Facility

AGC, AGM and MAC entered into an aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2014. Currently, the facility covers losses occurring from January 1, 2015 through December 31, 2021, subject to the payment of certain additional premium by AGC, AGM and MAC on or before January 1, 2016.  If AGC, AGM and MAC elect not to pay such additional premium, the facility terminates on January 1, 2016; currently, those companies are considering what action to take with respect to the facility. The facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2013, excluding credits that were rated non-investment grade as of December 31, 2013 by Moody’s or S&P or internally by AGC, AGM or MAC 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 facility attaches when AGC’s, AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed $1.5 billion in the aggregate. The facility covers a portion of the next $500 million of losses, with the reinsurers assuming pro rata in the aggregate $450 million of the $500 million of losses and AGC, AGM and MAC jointly retaining the remaining $50 million of losses. The reinsurers are required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. AGC, AGM and MAC paid approximately $19 million of premiums for the term January 1, 2014 through December 31, 2014 and also paid approximately $19 million of premiums for the term January 1, 2015 through December 31, 2015.

14.    Commitments and Contingencies

Leases

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 plans to move its headquarters from 31 West 52^nd Street to this new location during the summer of 2016, as do its U.S. affiliates that share the current headquarters.  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 52^nd Street, which had been scheduled to run until 2026.

87

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 its business, the Company asserts claims in legal proceedings against third parties to recover losses paid in prior periods. For example, as described in the "Recovery Litigation," section of Note 5, Expected Loss to be Paid, AGM has in the past filed complaints against certain sponsors and underwriters of RMBS securities that it had insured, alleging that such persons had breached representations and warranties in the transaction documents, failed to cure or repurchase defective loans and/or violated state securities laws. The amounts, if any, the Company will recover in proceedings to recover losses are uncertain, and recoveries, or failure to obtain recoveries, in any of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year.

Litigation

Proceedings Relating to the Company's Financial Guaranty Business

AGM and AGMH receive subpoenas duces tecum and interrogatories from regulators from time to time.

On September 25, 2013, Wells Fargo Bank, N.A., as trust administrator of the MASTR Adjustable Rate Mortgages Trust 2007-3, filed an interpleader complaint in the U.S. District Court for the Southern District of New York against AGM, among others, relating to the right of AGM to be reimbursed from certain cashflows for principal claims paid 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 December 31, 2014

On November 19, 2012, Lehman Brothers Holdings Inc. (“LBHI”) and Lehman Brothers Special Financing Inc. (“LBSF") commenced an adversary complaint and claim objection in the United States Bankruptcy Court for the Southern District of New York against Credit Protection Trust 283 (“CPT 283”), FSA Administrative Services, LLC, as trustee for CPT 283, and AGM, in connection with CPT 283's termination of a CDS between LBSF and CPT 283. CPT 283 terminated the CDS as a consequence of LBSF failing to make a scheduled payment owed to CPT 283, which termination occurred after LBHI filed for bankruptcy but before LBSF filed for bankruptcy. The CDS provided that CPT 283 was entitled to receive from LBSF a termination payment in that circumstance of approximately $43.8 million (representing the economic equivalent of the future fixed payments CPT 283 would have been entitled to receive from LBSF had the CDS not been terminated), and CPT 283 filed proofs of claim against LBSF and LBHI (as LBSF's credit support provider) for such amount. LBHI and LBSF sought 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. On January 30, 2015, the parties signed an agreement pursuant to which LBHI and LBSF dismissed their litigation related to CPT 283's and CPT 207's CDS terminations and the parties agreed that CPT 283 and CPT 207 have a total allowed claim in bankruptcy against LBSF and LBHI of $20 million.

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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 Assured Guaranty 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 Assured Guaranty did acquire. While Dexia SA and Dexia Crédit Local S.A., jointly and severally, have agreed to indemnify Assured Guaranty against liability arising out of the proceedings described below, 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 the Company.

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

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 an amended complaint. The Corrected Third Consolidated Amended Class Action Complaint, filed on October 9, 2013, lists neither AGM nor AGMH as a named defendant or a co-conspirator. The complaint generally seeks unspecified monetary damages, interest, attorneys’ fees and other costs. The other 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’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. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits. 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. The parties also reported that final settlement with those remaining defendants would resolve the putative class case.

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; one has since been voluntarily dismissed with prejudice, leaving five:

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(f) City of Riverside, California v. Bank of America, N.A.; (g) Los Angeles World Airports v. Bank of America, N.A.; (h) Redevelopment Agency of the City of Stockton v. Bank of America, N.A.; (i) Sacramento Suburban Water District v. Bank of America, N.A.; and (j) County of Tulare, California v. Bank of America, N.A. The MDL 1950 court denied AGM and AGUS’s motions to dismiss these ten complaints in April 2010. Amended complaints were filed in May 2010. 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.

15.    Notes Payable and Credit Facilities

Notes Payable

Notes Payable represents debt issued by VIEs consolidated by AGM to one of the Financial Products Companies that were transferred to Dexia Holdings prior to the acquisition of AGMH. The funds borrowed were used to finance the purchase of the underlying obligations of AGM-insured obligations which had breached triggers allowing AGM to exercise its right to accelerate payment of a claim in order to mitigate loss. The assets purchased are classified as assets acquired in refinancing transactions and recorded in “other invested assets.” The terms of the notes payable match the terms of the assets acquired in refinancing transactions.

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The principal and carrying values of the Company's notes payable are presented in the table below.

Principal and Carrying Amounts of Notes Payable

	As of September 30, 2015				As of December 31, 2014
	Principal		Carrying Value		Principal		Carrying Value
	(in millions)
Notes Payable	$	13	$	15	$	16	$	19

Recourse Credit Facilities

2009 Strip Coverage Facility

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

Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities do not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $1.2 billion as of September 30, 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 policy. It is difficult to determine the probability that AGM will have to pay strip provider claims or the likely aggregate amount of such claims. At September 30, 2015, approximately $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., 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 Company's acquisition of 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 maximum commitment amount to $495 million and agreed with Dexia Crédit Local (NY) that the commitment amount would no longer amortize on a 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. On 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).

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The Strip Coverage Facility’s financial covenants require that AGM and its subsidiaries maintain:

• a maximum debt-to-capital ratio of 30%; and

• a minimum net worth of 75% of consolidated net worth as of July 1, 2009, plus, 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 2, 2009 and ending on June 30, 2014 and (ii) a fraction, the numerator of which is the commitment amount as of the relevant calculation date and the denominator of which is $1 billion.

The Company was in compliance with all financial covenants as of September 30, 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 September 30, 2015, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.

AGM CPS Securities

In June 2003, $200 million of “AGM CPS”, money market preferred trust securities, were issued by trusts created for the primary purpose of issuing the AGM CPS, 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. 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 required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock. The trusts provide AGM access to new capital at its sole discretion through the exercise of the put options. As of September 30, 2015 the put option had not been exercised. The Company does not consider itself to be the primary beneficiary of the trusts. See Note 7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement discussion.

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16.    Other Comprehensive Income

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

Changes in Accumulated Other Comprehensive Income by Component

Third Quarter 2015

	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, June 30, 2015	$	120		$	(3	)	$	117
Other comprehensive income (loss) attributable to AGM before reclassifications	16			(8		)	8
Amounts reclassified from AOCI to:
Net realized investment gains (losses)	8			12			20
Net investment income	(9		)	—			(9		)
Tax (provision) benefit	0			(4		)	(4		)
Total amount reclassified from AOCI, net of tax	(1		)	8			7
Net current period other comprehensive income (loss) attributable to AGM	15			0			15
Balance, September 30, 2015	$	135		$	(3	)	$	132

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Changes in Accumulated Other Comprehensive Income by Component

Third Quarter 2014

	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, June 30, 2014	$	182		$	(20	)	$	162
Other comprehensive income (loss) attributable to AGM before reclassifications	(1		)	(1		)	(2		)
Amounts reclassified from AOCI to:
Net realized investment gains (losses)	(5		)	20			15
Tax (provision) benefit	2			(7		)	(5		)
Total amount reclassified from AOCI, net of tax	(3		)	13			10
Net current period other comprehensive income (loss) attributable to AGM	(4		)	12			8
Balance, September 30, 2014	$	178		$	(8	)	$	170

Changes in Accumulated Other Comprehensive Income by Component

Nine Months 2015

	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2014	$	186		$	(2	)	$	184
Other comprehensive income (loss) attributable to AGM before reclassifications	(49		)	(13		)	(62		)
Amounts reclassified from AOCI to:
Net realized investment gains (losses)	6			18			24
Net investment income	(9		)	—			(9		)
Tax (provision) benefit	1			(6		)	(5		)
Total amount reclassified from AOCI, net of tax	(2		)	12			10
Net current period other comprehensive income (loss) attributable to AGM	(51		)	(1		)	(52		)
Balance, September 30, 2015	$	135		$	(3	)	$	132

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Changes in Accumulated Other Comprehensive Income by Component

Nine Months 2014

	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2013	$	105		$	(19	)	$	86
Other comprehensive income (loss) attributable to AGM before reclassifications	79			(12		)	67
Amounts reclassified from AOCI to:
Net realized investment gains (losses)	(9		)	35			26
Tax (provision) benefit	3			(12		)	(9		)
Total amount reclassified from AOCI, net of tax	(6		)	23			17
Net current period other comprehensive income (loss) attributable to AGM	73			11			84
Balance, September 30, 2014	$	178		$	(8	)	$	170

17. Subsequent Events

Subsequent events have been considered through December 4, 2015, the date on which these financial statements were issued.

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