ASSURED GUARANTY LTD – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

1.6

        Secondary Markets                                 -        0.7       

0.2

        Structured Finance-U.S.                        59.8       30.2       

23.2

        Structured Finance-non-U.S.                     7.2        3.7        1.0         Total PVP                                  $  242.7   $  362.7   $  640.2         Gross Par Written                          $ 16,892   $ 30,759   $ 49,921  

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

The following table presents additional detail with respect to the Company's penetration into the U.S. public finance market.

                              Municipal Market Data(1)                                                  Year Ended December 31,                                  2011                     2010                     2009                                    Number of                Number of                Number of                           Par        issues        Par        issues        Par        issues                                      (dollars in billions, except number of issues) New municipal bonds issued                  $ 285.2         10,176   $ 430.8         13,594   $ 406.8         11,412 Insured by all financial guarantors       15.2          1,228      26.8          1,697      35.4          2,012 Insured by AGC and AGM                        15.2          1,228      26.8          1,697      34.8          2,005 Issued under Build America Bonds program         -              -     117.3          1,567      64.2            784 Insured under Build America Bonds program by AGC and AGM                -              -       4.7            153       1.7             87  

--------------------------------------------------------------------------------

º (1)

º Based on the date the transactions are sold.

    In the fourth quarter 2011, Assured Guaranty took advantage of emerging opportunities in the global infrastructure and structured finance markets. In the international infrastructure sector, the Company closed its first significant transaction in over two years, when it replaced another guarantor on a UK Private Finance Initiative bond issue that had been used to finance the construction and operation of the Worcestershire Royal Hospital. Structured finance PVP also increased in 2011, primarily due to a fourth quarter transaction in which the Company provided regulatory capital relief for a life insurance company.  Results of Operations  Estimates and Assumptions      The Company's consolidated financial statements include amounts that are determined using estimates and assumptions. The actual amounts realized could ultimately be materially different from the amounts currently provided for in the Company's consolidated financial statements. Management believes the most significant items requiring inherently subjective and complex estimates are expected losses, including assumptions for breaches of R&W, fair value estimates, other-than-temporary impairment ("OTTI"), deferred income taxes, and premium revenue recognition.                                         81 

--------------------------------------------------------------------------------

Table of Contents

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

Comparability of Periods Presented

Consolidation of FG VIE

      The adoption of a new consolidation model for VIEs on January 1, 2010 affects comparability for 2011 and 2010 when compared to 2009. On January 1, 2010, 21 FG VIEs were consolidated at fair value. As of December 31, 2011 and 2010, the Company had consolidated 33 and 29 FG VIEs, respectively. In 2011 and 2010, the Company consolidated VIEs when it had both 1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance; and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. 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. 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. Under GAAP, the Company is deemed to be the control party typically when its protective rights give it the power to both terminate and replace the deal servicer.  

Adoption of Revised OTTI Standard

      The Company adopted a GAAP standard on April 1, 2009, which prescribed bifurcation of credit and non-credit related OTTI in realized investment gains (losses) and other comprehensive income ("OCI"), respectively. Prior to April 1, 2009, the entire unrealized loss on OTTI securities was recognized in the consolidated statements of operations. Subsequent to that date, only the credit component of the unrealized loss on OTTI securities was recognized in the consolidated statements of operations. The cumulative effect of this change in accounting of $62.2 million pre-tax ($57.7 million after-tax) reclassification of net losses from retained earnings to accumulated OCI ("AOCI"). See Note 9, Investments, of the Financial Statements and Supplementary Data for the Company's accounting policy on OTTI methodology.  

AGMH Acquisition

      On July 1, 2009 ("Acquisition Date"), the Company, through its wholly-owned subsidiary, AGUS, purchased AGMH (formerly Financial Security Assurance Holdings Ltd, the "AGMH Acquisition") and, indirectly, its subsidiaries (excluding those involved in AGMH's former Financial Products Business, which comprised its GIC business, its medium term notes business and the equity payment agreements associated with AGMH's leveraged lease business, collectively, the "Financial Products Business") from Dexia Holdings, an indirect subsidiary of Dexia SA and certain of its affiliates (together, "Dexia").The principal operating subsidiary acquired was AGM (formerly Financial Securities Assurance Inc.). The acquired companies are collectively referred to as the "Acquired Companies." The AGMH subsidiaries that conducted AGMH's former financial products business (the "Financial Products Companies") were sold to Dexia Holdings prior to the AGMH Acquisition. The total purchase price of $821.9 million was paid in a combination of $546 million in cash and 22.3 million AGL common shares. AGL issued approximately 21.8 million common shares to Dexia, all of which Dexia subsequently sold in a secondary offering that closed in March 2010.      The July 1, 2009 AGMH Acquisition affects the comparability of periods presented because 2009 amounts include only the last six months of activity for AGMH. Due to the significance of the AGMH Acquisition in terms of unearned premiums reserve, and invested assets, the main driver of variances between 2010 and 2009 was the consolidation of AGMH.                                         82

--------------------------------------------------------------------------------

Table of Contents

      Due to the unprecedented credit crisis, the Company acquired AGMH at a significant discount to its book value primarily because the fair value of the obligation associated with its financial guaranty insurance contracts was significantly in excess of the obligation's historical carrying value. The Company recorded the fair value of these contracts based on what a hypothetical similarly rated financial guaranty insurer would have charged for each contract at the Acquisition Date and not the actual cash flows under the insurance contract. This resulted in some AGMH acquired contracts having a significantly higher unearned premium reserve and, consequently, higher premium earnings, compared to the contractual premium cash flows for the contracts. On the Acquisition Date, there were limited financial guaranty contracts being written in the structured finance market, particularly in the U.S. RMBS asset class. Therefore, for certain asset classes, significant judgment was required to determine the estimated fair value of the acquired contracts. The Company determined the fair value of these contracts by taking into account the rating of the insured obligation, expectation of loss, estimated risk premiums, sector and term. For a discussion of significant accounting policies applied to the AGMH Acquisition, the effects of the AGMH Acquisition, and unaudited pro forma results of operations, see Note 3, Business Combinations, of the Financial Statements and Supplementary Data.      The Financial Products Companies' obligations are currently, and at all times in the future required to be, supported by eligible assets in an amount sufficient to allow the Financial Products Companies to meet their obligations. On September 29, 2011, the transaction documents required an analysis of the value of FSA Asset Management LLC ("FSAM") assets versus the GICs obligations and other associated liabilities of the Financial Products Companies. On that day, the required amount of assets exceeded the liabilities, and therefore Dexia was not required to post additional collateral to support its protection arrangements. Assured Guaranty believes the assets owned by the Financial Products Companies are sufficient for them to meet their GIC obligations and other associated liabilities. However, Dexia is required to post additional collateral if there is any shortfall in assets as compared with liabilities in the future.      In addition, as further described under "-Liquidity and Capital Resources-Liquidity Arrangements with respect to AGMH's former Financial Products Business," the Company has entered into various agreements with Dexia pursuant to which Dexia has assumed the credit and liquidity risks associated with AGMH's former financial products business.      The cash portion of the purchase price for the AGMH Acquisition was financed through the sale of 44,275,000 common shares and 3,450,000 equity units in a public offering in June 2009. The equity units initially consist of a forward purchase contract and a 5% undivided beneficial ownership interest in $1,000 principal amount 8.50% senior notes due 2014 issued by AGUS ("8.50% Senior Notes"). For a description of the equity units, see "-Liquidity and Capital Resources-Commitments and Contingencies-Long Term Debt Obligations-Debt Issued by AGUS-8.50% Senior Notes." The net proceeds after underwriting expenses and offering costs for these two offerings totaled approximately $616.5 million.      The Company has agreed with Dexia Holdings to operate the business of AGM in accordance with certain key parameters that will limit the Company's operating and financial flexibility. Such restrictions include, for a three year period following the Acquisition Date; the inability to insure new structured finance obligations, required rating agency confirmation that certain specified actions would not cause any downgrade of AGM, inability to pay dividends, and inability to enter into certain commutation, novation or cutthrough reinsurance agreements over specified amounts.  

Generally, for three years after the closing of the AGMH Acquisition:

º •

º Unless AGM is rated below A1 by Moody's and AA- by S&P, it will only

insure public finance and infrastructure obligations. An exception

          applies in connection with the recapture of business ceded by AGM to a           third party reinsurer under certain circumstances.          º •         º AGM will continue to be domiciled in New York and be treated as a           monoline bond insurer for regulatory purposes.                                         83 

--------------------------------------------------------------------------------

Table of Contents

º •

         º AGM will not take any of the following actions unless it receives           prior rating agency confirmation that such action would not cause any           rating currently assigned to AGM to be downgraded immediately           following such action:               º (a)              º merger;               º (b)              º issuance of debt or other borrowing exceeding $250 million;               º (c)              º issuance of equity or other capital instruments exceeding                $250 million;               º (d)              º entry into new reinsurance arrangements involving more than 10%                of the portfolio as measured by either unearned premium reserve                or net par outstanding; or               º (e)              º any waiver, amendment or modification of any agreement relating                to capital or liquidity support of AGM exceeding $250 million.          º •         º AGM will not repurchase, redeem or pay any dividends in relation to           any class of equity interests, unless:               º (a)              º at such time AGM is rated at least AA- by S&P and Aa3 by Moody's                (if such rating agencies still rate financial guaranty insurers                generally) and the aggregate amount of such dividends in any year                does not exceed 125% of AGMH's debt service for that year; or               º (b)              º AGM receives prior rating agency confirmation that such action                would not cause any rating currently assigned to AGM to be                downgraded immediately following such action.          º •         º AGM will not enter into:               º (a)              º commutation or novation agreements with respect to its insured                public finance portfolio involving a payment by AGM exceeding                $250 million; or               º (b)              º any "cut-through" reinsurance, pledge of collateral security or                similar arrangement involving a payment by AGM whereby the                benefits of reinsurance purchased by AGM or of other assets of                AGM would be available on a preferred or priority basis to a                particular class or subset of policyholders of AGM relative to                the position of Dexia as policyholder upon the default or                insolvency of AGM (whether or not with the consent of any                relevant insurance regulatory authority).      This provision does not limit: collateral arrangements between AGM and its subsidiaries in support of intercompany reinsurance obligations; or statutory deposits or other collateral arrangements required by law in connection with the conduct of business in any jurisdiction; or pledges of recoveries or other amounts to secure repayment of amounts borrowed under AGM's "soft capital" facilities or its strip liquidity facility with DCL. See "-Liquidity and Capital Resources-Liquidity Arrangements with Respect to AGMH's former Financial Products Business-Strip Coverage Facility for the Leveraged Lease Business."      Furthermore, until the date on which (1) a credit rating has been assigned by S&P and Moody's to the GIC issuers (and/or the liabilities of the GIC issuers under the relevant GICs have been separately rated by S&P and Moody's) which is independent of the financial strength rating of AGM, and (2) the principal amount of GICs in relation to which a downgrade of AGM may result in a requirement to post collateral or terminate such GIC, notwithstanding the existence of a separate rating referred to in (1) of at least AA or higher is below $1.0 billion (the "AGM De-Linkage Date"):  

º •

º AGM will restrict its liquidity exposure such that no GIC contracts or

          similar liabilities insured by AGM after the closing shall have terms           that require acceleration, termination or prepayment based on a           downgrade or withdrawal of any rating assigned to AGM's financial

strength, a downgrade of the issuer or obligor under the agreement, or

          a downgrade of any third party; and          º •         º AGM will continue to be rated by each of Moody's and S&P, if such           rating agencies still rate financial guaranty insurers generally.      Notwithstanding the above, all such restrictions will terminate on any date after the AGM De-Linkage Date that the aggregate principal amount or notional amount of exposure of Dexia Holdings and any of its affiliates (excluding the exposures relating to the financial products business) to                                         84

--------------------------------------------------------------------------------

Table of Contents

  any transactions insured by AGM or any of its affiliates prior to November 14, 2008 is less than $1 billion. Breach of any of these restrictions not remedied within 30 days of notice by Dexia Holdings entitles Dexia Holdings to payment of damages, injunctive relief or other remedies available under applicable law.      On June 30, 2009, the States of Belgium and France (the "States") issued a guaranty to FSAM pursuant to which the States guarantee, severally but not jointly, Dexia's payment obligations under a certain guaranteed put contract, subject to certain limitations set forth therein. The FSAM assets referenced in the guaranteed put contract were all sold by October 2011 as part of an asset divestment program that Dexia announced in May 2011. As a result, FSAM is not expected to rely upon the guaranty of the States.      The Financial Products Companies' obligations are currently, and at all times in the future required to be, supported by eligible assets in an amount sufficient to allow the Financial Products Companies to meet their obligations. On September 29, 2011, the transaction documents required an analysis of the value of FSAM assets versus the GIC obligations and other associated liabilities of the Financial Products Companies. On that day, the required amount of assets exceeded the liabilities, and therefore Dexia was not required to post additional collateral to support its protection arrangements. Assured Guaranty believes the assets owned by the Financial Products Companies are sufficient for them to meet their GIC obligations and other associated liabilities. However, Dexia is required to post additional collateral if there is any shortfall in assets as compared with liabilities in the future.  

Consolidated Results of Operations

    Prior to January 1, 2011, the Company managed its business and reported financial information for two principal financial guaranty segments: direct and reinsurance. The chief operating decision maker now manages the operations of the Company at a consolidated level and no longer uses underwriting gain (loss) by segment as an operating metric. Therefore, segment financial information is no longer disclosed.                                         85 

--------------------------------------------------------------------------------

  Table of Contents                          Consolidated Results of Operations                                                              Year Ended December 31,                                                           2011        2010        2009                                                                  (in millions) Revenues: Net earned premiums                                     $   920.1   $ 1,186.7   $  930.4 Net investment income                                       391.0       354.7      259.2 Net realized investment gains (losses)                      (18.0 )      (2.0 )    (32.7 ) Change in fair value of credit derivatives: Realized gains and other settlements                          6.0       153.5      163.6 Net unrealized gains                                        553.7      

(155.1 ) (337.8 )

  Net change in fair value of credit derivatives              559.7        (1.6 )   (174.2 ) Fair value gain (loss) on committed capital securities                                                   35.1         9.2     (122.9 ) Net change in fair value of FG VIEs                        (132.0 )    (273.6 )     (1.2 ) Other income                                                 63.4        40.1       58.5  Total revenues                                            1,819.3     1,313.5      917.1  Expenses: Loss and LAE                                                461.9       412.2      393.8 Amortization of deferred acquisition costs                   30.9        34.1       53.9 AGMH acquisition-related expenses                               -         6.8       92.3 Interest expense                                             99.1        99.6       62.8 Goodwill and settlement of pre-existing relationship            -           -       23.3 Other operating expenses                                    193.0       211.5      174.1  Total expenses                                              784.9       764.2      800.2  Income (loss) before provision for income taxes           1,034.4       549.3      116.9 Provision (benefit) for income taxes                        258.8        

55.6 32.1

  Net income (loss)                                           775.6       493.7       84.8 Less: Noncontrolling interest of VIEs                           -           

- (1.2 )

  Net income (loss) attributable to Assured Guaranty Ltd.                                           $   775.6   $   493.7   $   86.0    Net Earned Premiums      Net earned premiums are recognized over the remaining contractual lives, or in the case of homogeneous pools of insured obligations, the expected remaining lives of financial guaranty insurance contracts.                                         86

--------------------------------------------------------------------------------

  Table of Contents                                 Net Earned Premiums                                                          Year Ended December 31,                                                        2011       2010       2009                                                              (in millions)     Financial guaranty:     Public finance

Scheduled net earned premiums and accretion $ 360.4$ 385.4$ 249.3

    Acceleration of premium earnings(1)                 125.2        91.0  

  171.5      Total public finance                                485.6       476.4     420.8     Structured finance

Scheduled net earned premiums and accretion(2) 432.7 708.9

504.3

    Acceleration of premium earnings(1)                     -        (1.0 )

    2.3      Total structured finance                            432.7       707.9     506.6     Other                                                 1.8         2.4       3.0      Total net earned premiums                         $ 920.1   $ 1,186.7   $ 930.4   

--------------------------------------------------------------------------------

   º (1)    º Reflects the unscheduled refunding or early termination of underlying      insured obligations.     º (2)    º Excludes $74.7 million in 2011 and $47.6 million in 2010 related to      consolidated FG VIEs.      2011 compared with 2010:  Net earned premiums decreased in 2011 compared with 2010, primarily due to the decline in structured finance scheduled net earned premium as the par outstanding declines offset in part by an increase in refundings and accelerations in 2011. Scheduled net earned premiums in 2011 were consistent with the previously disclosed expected amortization of deferred premium revenue. At December 31, 2011, $5.3 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts. Due to the runoff of deferred premium revenue, which includes acquisition accounting adjustments, net earned premiums are expected to decrease each year unless replaced by new business. Beginning January 1, 2010, net earned premiums reported under GAAP exclude the net earned premium related to consolidated FG VIEs. Had the FG VIEs not been consolidated in 2011 and 2010, net earned premiums would have declined 19%.      2010 compared with 2009:  Net earned premiums increased significantly in 2010 compared with 2009, due almost entirely to the inclusion of a full year of AGMH results in 2010 compared to only six months in 2009. The net earned premium contribution from AGMH as a result of the AGMH Acquisition was approximately $1.0 billion for 2010, representing twelve months of activity and $0.6 billion for 2009, representing six months of activity.      Net earned premiums associated with the consolidated FG VIEs in 2010, and therefore eliminated in consolidation, were $47.6 million. AGMH's contribution to net earned premiums of $1.0 billion is already net of the elimination of $46.2 million of AGM's consolidated FG VIEs. In 2009, four FG VIEs were consolidated for only the last six months under consolidation rules in effect at that time; however, the related net earned premiums in 2009 were immaterial.      Excluding AGMH's contribution and FG VIE eliminations, net earned premiums in 2010 compared to 2009 decreased 18.1% due primarily to higher refundings and accelerations in 2009, offset in part by the effect of conforming estimates used to determine inputs to the calculation of the net earned premiums to those used by the Acquired Companies in 2009. Refundings and accelerations, excluding AGMH, were $20.5 million in 2010 compared to $129.7 million in 2009.  

Net Investment Income

    Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets.                                         87

--------------------------------------------------------------------------------

  Table of Contents                                Net Investment Income                                                            Year Ended December 31,                                                        2011         2010        2009                                                                (in millions)  Income from fixed maturity securities              $    399.2   $    359.7 

$ 262.4

  Income from short-term investments                        0.9          3.5         3.2   Gross investment income                                 400.1        363.2       265.6  Investment expenses                                      (9.1 )       (8.5 )      (6.4 )   Net investment income                              $    391.0   $    354.7   $   259.2 

Average fixed and short term maturity balance(1) $ 10,533.7$ 10,348.2

$ 6,875.0

--------------------------------------------------------------------------------

º (1)

º Based on amortized cost.

    2011 compared with 2010:  The increase in net investment income in 2011 compared with 2010 is due to a shift from cash and short term assets to the fixed income portfolio and additional earnings on higher invested asset balances. The pre-tax book yield was 4.00% at December 31, 2011 and 3.72% at December 31, 2010, respectively. Duration at December 31, 2011 was 4.7 years compared to 5.0 years at December 31, 2010.      2010 compared with 2009:  The increase in net investment income in 2010 compared with 2009 is primarily driven by the inclusion of a full year of AGMH in 2010 compared with only six months in 2009. The net investment income contribution from AGMH was $181.5 million in 2010 compared with $91.8 million in 2009. AGMH pre-tax yield was 3.62% as of December 31, 2010, compared to 3.59% as of December 31, 2009. The legacy AGL companies' net investment income increased 3.4% in 2010 due to increased invested assets. The legacy AGL companies' portfolio, pre-tax yield was 3.82% as of December 31, 2010 compared to 3.44% as of December 31, 2009.  

Net Realized Investment Gains (Losses)

      The table below presents the components of net realized investment gains (losses). OTTI included below was primarily attributable to mortgage-backed and asset-backed securities that were acquired for loss mitigation purposes and municipal and corporate securities where we have the intent to sell.                        Net Realized Investment Gains (Losses)                                                               Year Ended December 31,                                                             2011        2010      2009                                                                   (in millions) Realized investment gains (losses) on sales of investments                                                $   26.6    $  25.4   $  13.1 OTTI: Intent to sell                                                 (5.4 )     (4.0 )   (13.4 ) Credit losses on securities                                   (39.2 )    (23.4 )   (32.4 )  OTTl                                                          (44.6 )    (27.4 )   (45.8 )  Net realized investment gains (losses)                     $  (18.0 )  $  (2.0 ) $ (32.7 )                                           88 

--------------------------------------------------------------------------------

Table of Contents

Other Income

      Other income is comprised of recurring income items such as foreign exchange revaluation of premiums receivable, income on assets acquired in refinancing transactions, ancillary fees on financial guaranty policies such as commitment, consent and processing fees as well as other revenue items on financial guaranty insurance and reinsurance contracts such as negotiated settlements and commutation gains on re-assumptions of previously ceded business.                                     Other Income                                                               Year Ended December 31,                                                             2011         2010      2009 Foreign exchange gain (loss) on revaluation of premium receivable                                                 $   (4.8 )   $ (28.9 ) $ 27.1 Commutation gains (losses)                                     32.2        49.8     (1.8 ) R&W settlement benefit                                         22.2           -        - Settlement from previously consolidated FG VIEs                   -           -     29.2 Other                                                          13.8        19.2      4.0  Total other income                                         $   63.4     $  40.1   $ 58.5        In 2011 the R&W settlement benefit recorded in other income represents R&W benefits on transactions where the Company had recovered more than its expected lifetime losses due to a negotiated agreement with the R&W provider. In 2011 and 2010, the Company recognized reinsurance commutation gains. In 2009, AGMH other income was primarily comprised of foreign exchange gain on revaluation of premiums receivable and AGMH's settlement to a previously consolidated FG VIE at a gain of $29.2 million.  Other Operating Expenses 

    Other operating expenses decreased in 2011 due primarily to declines in gross compensation expense, offset in part by lower deferral rates, which were 16% in 2011, 19% in 2010 and 13% in 2009. Deferral rates for policy acquisition costs will be affected after the Company adopts new guidance on January 1, 2012, which specifies that only certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. The after tax effect of this new guidance, on January 1, 2012 retained earnings is estimated to be a decrease of $60 million to $80 million.      Other operating expenses increased in 2010 compared to 2009 mainly due to the addition of other operating expenses of AGMH, which was acquired on July 1, 2009. Since the AGMH Acquisition, management has integrated various systems, processes and profit and cost centers to achieve economies of scale. Compensation is a primary component of other operating expenses and varies primarily based on headcount and performance driven long-term incentive compensation. Headcount as of December 31, 2011, 2010 and 2009 was 321, 347 and 350 employees, respectively.  

Losses in the Insured Portfolio

      The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company's control rights. The following provides a very summarized description of the three accounting models; however, please refer to Notes 5, 7 and 8 of the Financial Statements and Supplementary Data for a full description of the three accounting models: financial guaranty insurance, credit derivatives and consolidated FG VIEs. The three models are as follows:  

º •

         º For contracts accounted for as financial guaranty insurance, loss and           LAE reserve is generally recorded only to the extent and for the           amount that expected losses to be paid (calculated on a present value           probability weighted basis) exceed deferred premium revenue. As a           result, the Company has expected losses to be expensed in future           periods, which represents past or future claim payments that have not           yet been expensed. Expected loss to be paid is important from a           liquidity perspective in that it provides the present value of amounts           that the Company expects                                         89 

--------------------------------------------------------------------------------

Table of Contents

           to pay or recover in future periods. Expected loss to be expensed is           important because it presents the Company's projection of incurred           losses that will be recognized in future periods as deferred premium           revenue amortizes into income on financial guaranty insurance           policies. Both of these measures are discussed below.          º • 

º For contracts accounted for as credit derivatives, the Company records

          the fair value of these contracts on the consolidated balance sheet           with changes in fair value recorded in the consolidated statement of

operations. In periods prior to 2009, when the Company was actively

          writing credit derivatives, they were considered an extension of the           financial guaranty insurance business. The Company's credit           derivatives are not actively traded as are credit derivatives in other           financial services industries. Management expects the fair value gains

and losses to reverse to zero as the contract approaches maturity,

except for economic claim payments. See "-Net Change in Fair Value of

Credit Derivatives." Expected claim payments are considered in the

fair value of each contract and is an important measure for management

          to analyze the net economic loss on credit derivatives. The fair value           recorded on the balance sheet represents a hypothetical exit price

determined using significant Level 3 inputs in an internally developed

          model while the expected loss to be paid uses methodologies and           assumptions consistent with financial guaranty insurance expected           losses to be paid. See Note 6, Fair Value Measurement, of the           Financial Statements and Supplementary Data.          º •         º For consolidated FG VIEs expected loss to be paid is reflected in the           fair value of the FG VIEs liabilities. The Company carries the assets           and liabilities of the FG VIEs at fair value under the fair value

option election. Management assesses credit impairment on consolidated

          FG VIEs in the same manner as other financial guaranty insurance or           credit derivative contracts. The fair value of FG VIEs recorded on the           balance sheet reflects additional factors other than expected loss           such as changes in market spreads and the Company's own credit           spreads. These contracts are not actively traded and therefore           management expects the fair value gains and losses to reverse to zero           as the contract approaches maturity, except for economic claim           payments made by AGC and AGM. Expected loss to be paid for FG VIEs

pursuant to AGC's and AGM's financial guaranty policies is calculated

in a manner consistent with financial guaranty insurance contracts.

    In order to effectively evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes loss information for all policies on a consistent basis. That is, management monitors and assigns ratings and calculates expected losses in the same manner for all its exposures regardless of form or differing accounting models. Management also considers contract specific characteristics that affect the estimates of expected loss. The discussion of expected losses in "-U.S. RMBS Loss Projections", "-U.S. RMBS Loss Mitigation" and "-Other Non-RMBS Losses" below encompasses expected losses on all policies in the insured portfolio, whatever the accounting treatment, while Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data, encompasses policies accounted for as financial guaranty insurance.      Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, and Surveillance personnel are responsible for recommending adjustments to those ratings to reflect changes in transaction credit quality.      Surveillance personnel present analysis related to potential losses to the Company's loss reserve committees for consideration in estimating the expected loss to be paid. Such analysis includes the consideration of various scenarios with potential probabilities assigned to them. Depending upon the nature of the risk, the Company's view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company's view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company's loss reserve committees                                         90

--------------------------------------------------------------------------------

Table of Contents

  review and refresh the estimate of expected loss to be paid each quarter. The Company's estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance as a result of economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management.  

U.S. RMBS Loss Projections

      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 to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. For transactions where the Company projects it will receive recoveries from providers of R&W, it projects the amount of recoveries and either establishes a recovery for claims already paid or reduces its projected claim payments accordingly.      The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the "liquidation rate." Liquidation rates may be derived 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, by first converting the projected near-term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates, then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the liquidation of currently delinquent loans represent defaults of currently 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 repayments, 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 shape of the RMBS loss projection curves used by the Company in both the year end of 2011 and the year end of 2010 assume that the housing and mortgage markets will eventually recover. The Company retained the same general shape of the RMBS loss projection curves at year end 2011 as at year end 2010, reflecting the Company's view, based on its observation of continued elevated levels of early stage delinquencies, that the housing and mortgage market recovery is occurring at a slower than previously expected pace. Over the course of 2011, the Company also made a number of changes to its RMBS loss projection assumptions reflecting that same view of the housing and mortgage markets.      The scenarios the Company used to project RMBS collateral losses for second lien RMBS transactions at year end 2011 were essentially the same as those it used at year end 2010, except that based on its observation of the continued elevated levels of early stage delinquencies, (i) as noted above, the Company retained the same general shape of its RMBS loss projection curves, (ii) the Company increased its base case expected period for reaching the final conditional default rate in 2011; and (iii) the Company adjusted the probability weightings it applied from year-end 2010 to reflect the changes to those scenarios. Taken together, the changes in assumptions between year-end 2010 and                                         91

--------------------------------------------------------------------------------

Table of Contents

2011 had the effect of reflecting a slower recovery in the housing market than had been assumed at the beginning of the year.

      The Company used the same general approach to project RMBS collateral losses for first lien RMBS transactions at year end 2011 as it did at year end 2010, except that (i) as noted above, based on its observation of the continued elevated levels of early stage delinquencies, the Company retained the same general shape of its RMBS loss projection curves; (ii) based on its observation of increased loss severity rates, the Company increased its projected loss severity rates in various of its scenarios; and (iii) based on its observation of liquidation rates, the Company decreased the liquidation rates it applies to non-performing loans (the Company made this change at year-end 2011). Finally, again reflecting continued high levels of early stage delinquencies and increased loss severity rates, the Company added a more stressful scenario at year-end 2011 reflecting an even slower potential recovery in the housing and mortgage markets. Adjusting the probability weightings to include such fifth scenario resulted in the scenario that the Company considers to be its base scenario (and which forms the basis of the description in the following pages) to shift to the scenario that in previous quarters was assumed to be one of the stress scenarios. Taken together, the changes in assumptions between year-end 2010 and 2011 had the effect of (a) reflecting a slower recovery in the housing market than had been assumed at the beginning of the year and (b) for subprime transactions increasing the initial loss severities in most scenarios from 80% to 90% and for other first lien transactions increasing initial loss severities from 60% to 65% and peak loss severities in a stress case from 60% to 75%.      The Company also used generally the same methodology to project the credit received for recoveries in R&W at year-end 2011 as at year-end 2010. The primary difference relates to the execution of the Bank of America Agreement and the inclusion of the terms of the agreement as a potential scenario in transactions not covered by the Bank of America as well as incorporating the projected terms of a potential agreement with another entity. Compared with year-end 2010, the Company calculated R&W credits for two more second lien transactions and 11 more first lien transactions where either it obtained loan files, concluded it had the right to obtain loan files that it had not previously concluded were accessible or anticipates receiving a benefit due to an agreement or potential agreement with an R&W provider.      Further detail regarding the assumptions and variables the Company used to project collateral losses in its U.S. RMBS portfolio may be found in Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data "U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien" and "U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime."  

U.S. RMBS Loss Mitigation

      On April 14, 2011, Assured Guaranty reached a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, "Bank of America"), regarding their liabilities with respect to 29 RMBS transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of R&W and historical loan servicing issues ("Bank of America Agreement"). Of the 29 RMBS transactions, eight are second lien transactions and 21 are first lien transactions. The Bank of America Agreement covers Bank of America-sponsored securitizations that AGM or AGC has insured, as well as certain other securitizations containing concentrations of Countrywide-originated loans that AGM or AGC has insured. The transactions covered by the Bank of America Agreement have a gross par outstanding of $4.4 billion ($4.1 billion net par outstanding) as of December 31, 2011, with 27% of Assured Guaranty's total BIG RMBS net par outstanding covered by the Bank of America Agreement.      Bank of America paid $1,042.7 million in 2011 in respect of covered second lien transactions and is obligated to pay another $57.3 million by March 2012. In consideration of the $1.1 billion, the Company has agreed to release its claims for the repurchase of mortgage loans underlying the eight second lien transactions (i.e. Assured Guaranty will retain the risk of future insured losses without further offset for R&W claims against Bank of America).  

In addition, Bank of America will reimburse Assured Guaranty 80% of claims Assured Guaranty pays on the 21 first lien transactions, until aggregate collateral losses on such RMBS transactions reach

                                       92

--------------------------------------------------------------------------------

Table of Contents

$6.6 billion. The Company accounts for the 80% loss sharing agreement with Bank of America as subrogation. As the Company calculates expected losses for these 21 first lien transactions, such expected losses will be offset by an R&W benefit from Bank of America for 80% of these amounts. As of December 31, 2011, Bank of America had placed approximately $941.2 million of eligible assets in trust in order to collateralize the reimbursement obligation relating to the first lien transactions. The amount of assets required to be posted may increase or decrease from time to time, as determined by rating agency requirements. As of December 31, 2011, the Company's estimate of expected future recoveries for the first lien transactions covered under the Bank of America Agreement was $567.9 million, discounted and gross of reinsurance. As of December 31, 2011, cumulative collateral losses on the 21 first lien RMBS transactions were approximately $2.0 billion. The Company estimates that cumulative projected collateral losses for these first lien transactions will reach $4.9 billion, which will result in estimated gross expected losses to the Company of $709.9 million before considering R&W recoveries from Bank of America, and $142.0 million after considering such R&W recoveries. As of December 31, 2011, the Company had been reimbursed $58.8 million and had invoiced for an additional $6.7 million in claims paid in December with respect to the covered first lien transactions under the Bank of America Agreement.      The benefit for R&W in 2011 reflects higher expected recoveries across all transactions as a result of the Bank of America Agreement. For transactions covered under the Bank of America Agreement, the R&W benefit has been updated to reflect amounts collected and expected to be collected under the terms of the Bank of America Agreement. For transactions with other sponsors of U.S. RMBS, against which the Company is pursuing R&W claims, the Company has increased the benefit for R&W in 2011 to reflect the probability that actual recovery rates may be higher than originally expected. For transactions involving R&W providers other than Bank of America, the Company has continued to review additional loan files and has found breach rates consistent with those in the Bank of America transactions.      The Company believes the Bank of America Agreement was a significant step in the effort to recover U.S. RMBS losses the Company experienced resulting from breaches of R&W. The Company is continuing to pursue other representation and warranty providers for U.S. RMBS transactions it has insured. See "Recovery Litigation" in Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data for a discussion of the litigation proceedings the Company has initiated against other R&W providers.      The Company is in the process of enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. Through December 31, 2011 the Company has caused entities providing R&Ws to pay or agree to pay approximately $2.4 billion in respect of their R&W liabilities. Of this, $1.8 billion are payments made or to be made directly to the Company pursuant to agreements with R&W providers (e.g. the Bank of America Agreement) and approximately $595.8 million are amounts paid (or committed to be paid) into the relevant RMBS transactions pursuant to the transaction documents.      The $1.8 billion of payments made or to be made directly to the Company by R&W providers includes $1.2 billion that has already been received by the Company as well as $631.9 million the Company projects receiving in the future pursuant to such currently existing agreements. Because most of that $631.9 million is projected to be received through loss-sharing arrangements, the exact amount the Company will receive will depend on actual losses experienced by the covered transactions. That $631.9 million is included in the Company's calculated credit for R&W recoveries, described below.      The $595.8 million paid, or committed to be paid, by R&W providers into the relevant RMBS transactions pursuant to the transaction documents flow through the transaction "waterfalls." Because the Company may insure only a portion of the capital structure of a transaction, such payments will not necessarily directly benefit the Company dollar-for-dollar, especially in first lien transactions. However, such payments do reduce collateral pool losses and so usually reduce the Company's expected losses.      Based on this success in pursuing R&W breaches to date, the Company calculates a credit for future R&W recoveries where the R&W were provided by an entity the Company believes to be financially viable and where the Company already has access or believes it will attain access to the underlying mortgage loan files. Where the Company has an agreement or potential agreement with an                                         93

--------------------------------------------------------------------------------

Table of Contents

  R&W provider (e.g., the Bank of America Agreement), that credit is based on the agreement or potential agreement. In second lien RMBS transactions where there is no agreement or advanced discussions, this credit is based on a percentage of actual repurchase rates achieved across those transactions where material repurchases have been made, while in first lien RMBS transactions, where there is no agreement or advanced discussions, this credit is estimated by reducing collateral losses projected by the Company to reflect a percentage of the recoveries the Company believes it will achieve, which factor is derived based on the number of breaches identified to date and incorporated scenarios based on the amounts the Company was able to negotiate under the Bank of America Agreement. The first lien approach is different from the second lien approach because the Company's first lien transactions have multiple tranches and a more complicated method is required to correctly allocate credit to each tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses increases the R&W credit calculated by the Company. Further detail regarding how the Company calculates these credits may be found under "Breaches of Representations and Warranties" in Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data. The net expected losses to be paid includes an R&W credit of $1,649.8 million net of reinsurance. Of this, $598.1 million is the projected benefit of existing agreements with R&W providers.      The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for (a) the collateral losses it projects as described above, (b) assumed voluntary prepayments and (c) recoveries for breaches of R&W as described above. 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 future claims and reimbursements are discounted using a current risk-free rate to arrive at expected loss to be paid. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability-weights them.       Other Non-RMBS Losses      For student loans, the Company is projecting approximately $74.6 million of net expected loss to be paid in these portfolios. In general the losses are due to: (i) the poor credit performance of private student loan collateral; (ii) high interest rates on auction rate securities with respect to which the auctions have failed or (iii) high interest rates on variable rate demand obligations that have been put to the liquidity provider by the holder and are therefore bearing high "bank bond" interest rates. The largest of these losses was approximately $27.5 million and related to a transaction backed by a pool of private student loans ceded to AG Re by another monoline insurer. The guaranteed bonds were issued as auction rate securities that now bear a high rate of interest due to the downgrade of the primary insurer's financial strength rating. Further, the underlying loan collateral has performed below expectations. The decrease of approximately $3.3 million in net expected loss during 2011 is due to favorable commutations achieved by the primary insurer on some transactions partially offset by deterioration in other transactions.      The Company projects losses for trust preferred securities collateralized debt obligations ("TruPS CDOs") by projecting the performance of the asset pools across several scenarios (which it weights) and applying the CDO structures to the resulting cash flows. As of December 31, 2011, the Company has projected net expected losses to be paid for TruPS CDOs of $64.2 million. The decrease of approximately $25.5 million in net expected loss during 2011 was driven primarily by the effect of lower LIBOR rates on the floating rate coupons of certain transactions (which was partially offset by reduction in risk free rates used to discount loss projections).      The Company has insured $2.4 billion of net par in XXX life insurance reserve securitizations based on discrete blocks of individual life insurance business of which $923.0 million is rated BIG. Based on its analysis of the information currently available, including estimates of future investment performance provided by the investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at December 31, 2011, the Company's projected net expected loss to be paid of $131.6 million. The increase of approximately $56.6 million                                         94

--------------------------------------------------------------------------------

Table of Contents

during 2011 is due primarily to deterioration in RMBS investments and a reduction of the risk free rate used to discount loss projections.

      As of December 31, 2011, the Company had exposure to sovereign debt of Greece through financial guarantees of €200.0 million of debt (€165.1 million on a net basis) due in 2037 with a 4.5% fixed coupon and €113.9 million of debt (€52.6 million on a net basis) due in 2057 with a 2.085% inflation-linked coupon. The Hellenic Republic of Greece, as obligor, has been paying interest on such notes on a timely basis. On February 24, 2012, Greece announced the terms of exchange offers and consent solicitations that request the voluntary participation by holders of certain Greek bonds in an exchange that would result in the reduction of 53.5% of the notional amount of such bonds, and request the consent of holders to amendments of the bonds that could be used to effectively impose the same terms on holders that do not voluntarily participate in the exchange. On February 23, 2012, the Greek Parliament enacted legislation that introduces collective action clauses into eligible Greek law governed bonds to permit the terms of such bonds to be amended with the consent of less than all the holders of those bonds. The bonds insured under the financial guarantees were included in the list of Greek bonds covered by the exchange offer and/or consent solicitation. The bonds due in 2037 were issued under Greek law and thus are susceptible to a coercive exchange pursuant to the new legislation that might trigger a claim under the Company's policy. The bonds due in 2057 were issued under English law and already contain a collective action clause that could entail similar results. Greece has stated that its use of collective action clauses will depend on the level of participation in the exchange offer and/or consent solicitation. The Company is currently evaluating the exchange offer and consent solicitation. If Greece does not utilize the collective action clauses, the Company believes the proposal should not trigger claim payments under its financial guarantees. The Company has considered a variety of scenarios in its loss reserve estimation process including the nature of the proposed exchange and the value of the consideration it would receive if it were to participate in the exchange, either voluntarily or involuntarily. The expected loss to be paid was $64.7 million gross of reinsurance and $42.6 million net of reinsurance as of December 31, 2011.      The Company also has expected losses for certain other transactions discussed in Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data, including Jefferson County, a transaction backed by revenues from "yellow pages", and transactions backed by manufactured housing loans.      Net expected loss to be paid in the tables below consists primarily of the present value of future: expected claim payments, expected recoveries of excess spread in the transaction structures, cessions to reinsurers, and expected recoveries for breaches of R&W and other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid presented below, such as delinquency, severity, and discount rates and expected timeframes to recovery in the mortgage market were consistent by sector regardless of the accounting model used.                                         95

--------------------------------------------------------------------------------

   Table of Contents                             Net Expected Loss to be Paid                                                As of December 31, 2011                                                      Total                                                    Financial                         Financial                  Guaranty                         Guaranty                   Insurance          Credit                       Insurance(1)    FG VIEs     and VIEs(1)     Derivatives(2)      Total                                                    (in millions) US RMBS: First lien: Prime first lien       $        1.8   $      -    $        1.8     $            -   $     1.8 Alt-A first lien              130.2        4.7           134.9              159.6       294.5 Option ARM                    128.0       24.9           152.9               57.5       210.4 Subprime                       95.7       44.6           140.3              101.0       241.3  Total first lien              355.7       74.2           429.9              318.1       748.0 Second Lien: Closed-end second lien                          (57.7 )    (21.9 )         (79.6 )             (6.5 )     (86.1 ) Home equity lines of credit ("HELOCs")                    127.9     (159.0 )         (31.1 )                -       (31.1 )  Total second lien              70.2     (180.9 )        (110.7 )             (6.5 )    (117.2 )  Total U.S. RMBS               425.9     (106.7 )         319.2              311.6       630.8 TruPS                          13.2          -            13.2               51.0        64.2 Other structured finance                       239.6          -           239.6              102.5       342.1 Public finance                 66.0          -            66.0                0.9        66.9  Total                  $      744.7   $ (106.7 )  $      638.0     $        466.0   $ 1,104.0                                                   As of December 31, 2010                                                      Total                                                    Financial                        Financial                   Guaranty                         Guaranty                   Insurance          Credit                       Insurance(1)    FG VIEs     and VIEs(1)    

Derivatives(2)      Total                                                   (in millions)  US RMBS:  First lien:  Prime first lien     $         1.4    $     -    $        1.4     $            -   $     1.4  Alt-A first lien             195.7      (11.3 )         184.4              215.4       399.8  Option ARM                   524.2       (0.5 )         523.7              105.1       628.8  Subprime                     230.7      (30.3 )         200.4              110.2       310.6   Total first lien             952.0      (42.1 )         909.9              430.7     1,340.6  Second Lien:  Closed-end second  lien                          52.8        3.8            56.6               30.9        87.5  HELOCs                      (893.2 )     87.5          (805.7 )                -      (805.7 )   Total second lien           (840.4 )     91.3          (749.1 )             30.9      (718.2 )   Total U.S. RMBS              111.6       49.2           160.8              461.6       622.4  TruPS                         (0.6 )        -            (0.6 )             90.9        90.3  Other structured  finance                      159.7          -           159.7              101.5       261.2  Public finance                88.9          -            88.9                  -        88.9   Total                $       359.6    $  49.2    $      408.8     $        654.0   $ 1,062.8   

--------------------------------------------------------------------------------

º (1)

º Refer to Note 5, Financial Guaranty Insurance Contracts, of the Financial

Statements and Supplementary Data for additional information related to the

     accounting for financial guaranty insurance contracts.     º (2)    º Refer to Note 7, Financial Guaranty Contracts Accounted for as Credit      Derivatives, of the Financial Statements and Supplementary Data for      additional information related to the accounting for credit derivative      contracts.                                         96 

--------------------------------------------------------------------------------

Table of Contents

    The following table presents a roll forward of the net expected loss to be paid for the year ended December 31, 2011 before and after consideration of R&W benefits. The amounts presented below do not represent amounts recorded as loss reserves in the consolidated financial statements because of the various accounting models required under GAAP, but instead represent the economic changes in loss estimates for the insured portfolio as a whole, which is how management analyzes the information. Expected losses to be paid are first calculated without consideration of the expected R&W benefit. Then, based on updated loss estimates, loan reviews, executed contractual agreements such as the Bank of America Agreement, and progress made on receiving commitments to put-back defective loans, the expected R&W benefit is updated, which reduces the net amount of expected loss to be paid. Amounts presented are net of cessions to third-party reinsurers.          Net Expected Loss to be Paid, Before Benefit for Recoveries of R&W                            Roll Forward by Sector(1)                    Net Expected Loss        Economic         (Paid)      Net Expected Loss                   to be Paid as of           Loss         Recovered     to be Paid as of                   December 31, 2010     Development(2)      Losses     

December 31, 2011                                                (in millions)  U.S. RMBS:  First lien:  Prime first  lien              $             2.5    $           2.3   $        -     $             4.8  Alt-A first  lien                          548.2              250.4        (96.9 )               701.7  Option ARM                    940.9              514.6       (520.7 )               934.8  Subprime                      337.4               27.6        (22.2 )               342.8   Total first  lien                        1,829.0              794.9       (639.8 )             1,984.1  Second lien:  Closed-end  second lien                   265.7              (46.0 )      (82.0 )               137.7  HELOCs                        198.4              290.3       (329.9 )               158.8   Total second  lien                          464.1              244.3       (411.9 )               296.5   Total U.S.  RMBS                        2,293.1            1,039.2     (1,051.7 )             2,280.6  TruPS                          90.3              (21.0 )       (5.1 )                64.2  Other  structured  finance                       261.2              100.8        (19.9 )               342.1  Public  finance                        88.9               43.3        (65.3 )                66.9   Total             $         2,733.5    $       1,162.3   $ (1,142.0 )   $         2,753.8                                           97 

--------------------------------------------------------------------------------

  Table of Contents          Net Expected Loss to be Paid, Net of Benefit for Recoveries of R&W                            Roll Forward by Sector(1)                Net Expected Loss                           (Paid)        Net

Expected Loss

               to be Paid as of       Economic Loss       Recovered      to 

be Paid as of

               December 31, 2010     Development(2)        Losses        December 31, 2011                                              (in millions) U.S. RMBS: First lien: Prime first lien         $         1.4      $          0.4      $        -         $         1.8 Alt-A first lien                 399.8               (10.6 )         (94.7 )               294.5 Option ARM                 628.8                 7.6          (426.0 )               210.4 Subprime                   310.6               (47.1 )         (22.2 )               241.3  Total first lien               1,340.6               (49.7 )        (542.9 )               748.0 Second lien: Closed-end second lien                        87.5              (100.6 )         (73.0 )               (86.1 ) HELOCs                    (805.7 )             151.0           623.6                 (31.1 )  Total second lien                      (718.2 )              50.4           550.6                (117.2 )  Total U.S. RMBS                       622.4                 0.7             7.7                 630.8 TruPS                       90.3               (21.0 )          (5.1 )                64.2 Other structured finance                    261.2               100.8           (19.9 )               342.1 Public finance                     88.9                43.3           (65.3 )                66.9  Total              $     1,062.8      $        123.8      $    (82.6 )             1,104.0   

--------------------------------------------------------------------------------

º (1)

º Amounts exclude reserves for mortgage business of $1.9 million and

$2.1 million as of December 31, 2011 and December 31, 2010, respectively.

º (2)

º Economic loss development includes the effects of changes in assumptions

     based on observed market trends, changes in discount rates, accretion of      discount and the economic effects of loss mitigation efforts.      Total economic loss development in 2011 was $123.8 million. U.S. RMBS development was a net development of $0.7 million which reflects higher losses in the underlying collateral, largely offset by a higher R&W benefit as a result of the Bank of America Agreement, and additional loan reviews that demonstrate similar breach rates for other counterparties. The net R&W development in 2011 was an increase of $1,038.5 million, which served to offset loss development in U.S. RMBS of $1,039.2 million. Loss development, before the consideration of R&W benefit was a function of several factors including: increasing the assumed period of time for reaching the final conditional default rate, updated probability weightings of its various scenarios, and increased first lien severity. In 2011, the Company probability weighted several possible outcomes and estimated a net expected loss to be paid of $42.6 million ($64.7 million gross of reinsurance). Due to the decline in interest rates in 2011 and the GAAP requirement to update discount rates at each reporting period to the current risk free rates, the economic loss development was negatively affected, although this change does not reflect additional credit deterioration. The remainder of the economic loss development related primarily to increased loss adjustment expense estimates, and changes in other structured finance and public finance loss estimates that are mostly based on transaction-specific facts and circumstances.  

Accounting Treatment of Losses for Transactions Accounted for as Financial Guaranty Insurance

      For transactions accounted for as financial guaranty insurance under GAAP, each transaction's expected loss to be expensed, net of estimated R&W recoveries, is compared with the deferred premium revenue of that transaction. Generally, when the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in the income statement for the amount of such excess. When the Company measures operating income, a non-GAAP financial measure, it calculates the credit derivative and FG VIE losses incurred in a similar manner. Changes in fair value in excess of expected loss that are not indicative of economic deterioration are not included in operating income.  

For financial guaranty contracts accounted for as insurance, the amounts reported in the GAAP financial statements may only reflect a portion of the current period's economic development and may also include a portion of prior-period economic development. The difference between economic loss development and loss and LAE recognized in income is essentially loss development and accretion for

                                       98

--------------------------------------------------------------------------------

Table of Contents

  financial guaranty insurance contracts that is, or was previously, absorbed in unearned premium reserve. Such amounts have not yet been recognized in income. The table below provides a comparison of the pretax reported amounts under both GAAP net income and non-GAAP operating income, and economic loss development by sector.                             Comparison of Loss Measures                          Year Ended December 31, 2011                         Year Ended December 31, 2010                                 Loss Expense                                         Loss Expense                                   Non-GAAP                                             Non-GAAP               Loss and LAE       Operating       Economic Loss     Loss and LAE       Operating       Economic Loss               Reported(1)         Basis(2)        Development      Reported(1)         Basis(2)        Development                                                           (in millions) U.S. RMBS: First lien: Prime first lien     $        0.1      $        0.1    $          0.4     $        0.9      $        0.9    $          1.4 Alt-A first lien             52.5              39.2             (10.6 )           32.6              98.2             108.0 Option ARM            146.5             203.7               7.6            246.6             274.6             157.2 Subprime              (48.1 )           (37.7 )           (47.1 )           69.8             138.5             178.0  Total first lien            151.0             205.3             (49.7 )          349.9             512.2             444.6 Second lien: Closed-end second lien                   (7.8 )           (23.3 )          (100.6 )           (4.9 )             1.7             (68.8 ) HELOCs                152.7             182.7             151.0            (29.5 )           (15.1 )           (86.3 )  Total second lien                  144.9             159.4              50.4            (34.4 )           (13.4 )          (155.1 )  Total U.S. RMBS                  295.9             364.7               0.7            315.5             498.8             289.5 Other structured finance               117.6              99.3              79.8             63.6             154.6             147.5 Public finance                48.4              29.3              43.3             32.9              33.9              10.5  Total                 461.9             493.3             123.8            412.0             687.3             447.5 Other                     -                 -                 -              0.2               0.2                 -  Total          $      461.9      $      493.3    $        123.8     $      412.2      $      687.5    $        447.5   

--------------------------------------------------------------------------------

º (1)

º Represents amounts reported on the consolidated statements of operations in

accordance with GAAP, which include only those policies that are accounted

for as financial guaranty insurance.

º (2)

º Represents reported loss and LAE adjusted to include comparable amounts

     related to FG VIEs and credit derivatives in a manner consistent with the      financial guaranty insurance accounting model. This represents "loss      expense" included in operating income.                                         99 

--------------------------------------------------------------------------------

Table of Contents

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

    Present Value ("PV") of Financial Guaranty Insurance Net Expected Loss to be                                     Expensed                             As of December 31, 2011                                                  Net Expected Loss to be Expensed                                                 In GAAP              In Non-GAAP                                             Reported Income       Operating Income                                                          (in millions) 2012 (January 1 - March 31)                    $        32.1       $            37.1 2012 (April 1 - June 30)                                27.5                    31.8 2012 (July 1 - September 30)                            24.0                    28.1 2012 (October 1 - December 31)                          20.9                    24.7  Subtotal 2012                                          104.5                   121.7 2013                                                    61.0                    80.6 2014                                                    44.0                    63.7 2015                                                    34.9                    53.2 2016                                                    30.9                    46.5 2017-2021                                              135.3                   183.3 2022-2026                                               68.1                    92.6 2027-2031                                               34.4                    62.3 After 2031                                              24.3                    56.2  Total expected PV of net expected loss to be expensed                                            537.4                   760.1 Discount                                               276.1                   321.4  Total future value                             $       813.5       $         1,081.5   

The table below provides a reconciliation of the Company's expected loss to be paid to expected loss to be expensed. See Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data.

                            Financial Guaranty Insurance         Reconciliation of Present Value of Net Expected Loss to be Paid              and Present Value of Net Expected Loss to be Expensed                                                  GAAP                     Non-GAAP                                          Reported Basis(2)        Operating Income Basis                                          As of December 31,         As of December 31,                                           2011         2010         2011           2010                                                           (in millions) Net expected loss to be paid             $   744.7   $  359.6    $     638.0     $   408.8 Contra-paid, net                              73.4      121.3          206.3         241.3 Salvage and subrogation recoverable, net                                          327.1      903.0          585.2         995.2 Loss and LAE reserve, net(1)                (607.8 )   (550.0 )       (669.4 )      (599.5 ) 

Net expected loss to be expensed $ 537.4$ 833.9$ 760.1$ 1,045.8

--------------------------------------------------------------------------------

<p> º (1)

º Represents loss and LAE reserves, net of reinsurance recoverable on unpaid

losses, excluding $1.9 million and $2.1 million in reserves for other

runoff lines of business as of December 31, 2011 and 2010, respectively.

º (2)

º The difference between GAAP reported basis and non-GAAP operating income

basis relates to FG VIEs.

Net Change in Fair Value of Credit Derivatives

Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company's obligation to make loss payments are similar to those

                                      100

--------------------------------------------------------------------------------

Table of Contents

  for financial guaranty insurance contracts and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents, with respect to one or more third-party referenced securities or loans. Financial guaranty contracts accounted for as credit derivatives are primarily comprised of CDS. In general, the Company structures credit derivative transactions such that the circumstances giving rise to the Company's obligation to make loss payments are similar to those for financial guaranty insurance contracts but are governed by ISDA documentation. Until the Company ceased selling credit protection through credit derivative contracts in the beginning of 2009, following the issuance of regulatory guidelines that limited the terms under which the credit protection could be sold, management considered these agreements to be a normal part of its financial guaranty business.      These contracts generally qualify as derivatives under U.S. GAAP, and are reported at fair value, with changes in fair value included in earnings. Fair value is defined as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. The fair value gain or loss is based on estimated market pricing and may not be an indication of ultimate claims. Changes in fair value of credit derivatives occur because of changes in interest rates, credit spreads, credit ratings of the referenced obligations, the Company's credit spread, settlements and other market factors. The unrealized gains (losses) on credit derivatives, excluding expected losses to be paid (which are included in the previous section), is expected to reverse to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early termination that was not anticipated in the expected losses to be paid. Expected losses to be paid in respect of contracts accounted for as credit derivatives are included in the discussion above: "-Losses in the insured portfolio." See also "-Liquidity and Capital Resources-Liquidity Requirements and Sources."      In the event that the Company is able to terminate and does terminate a credit derivative contract prior to maturity, the resulting gain or loss is realized through net change in fair value of credit derivatives. Changes in the fair value of the Company's credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company's statutory claims paying resources, rating agency capital or regulatory capital positions.      The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company's own credit cost based on the price to purchase credit protection on AGC and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. An overall narrowing of spreads generally results in an unrealized gain on credit derivatives for the Company and an overall widening of spreads generally results in an unrealized loss for the Company.      There are typically no quoted prices for its instruments or similar instruments as CDS issued by financial guaranty insurance companies. Financial guaranty contracts do not typically trade in active markets. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to those in the credit derivatives issued by the Company. Therefore, the valuation of the Company's credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. See Note 6, Fair Value Measurement, of the Financial Statements and Supplementary Data.      The fair value of these instruments represents the difference between the present value of remaining contractual premiums charged for the credit protection and the estimated present value of premiums that a comparable financial guarantor would hypothetically charge for the same protection at the balance sheet date. The fair value of these contracts depends on a number of factors including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of the referenced entities, the Company's own credit risk and remaining contractual flows.                                        101

--------------------------------------------------------------------------------

Table of Contents

Contractual cash flows are the most readily observable inputs since they are based on the CDS contractual terms. These variables include:

º •

º net premiums received and receivable on written credit derivative

          contracts,          º •         º net premiums paid and payable on purchased contracts,          º •

º losses paid and payable to credit derivative contract counterparties

          and          º •         º losses recovered and recoverable on purchased contracts.      These models are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past three years and as of December 31, 2010, market prices for the Company's credit derivative contracts were generally not available. Inputs include various market indices, credit spreads, the Company's own credit spread, and estimated contractual payments to estimate the fair value of its credit derivatives.      Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. These terms differ from more standardized credit derivatives sold by companies outside of the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points. Because of these terms and conditions, the fair value of the Company's credit derivatives may not reflect the same prices observed in an actively traded market of CDS that do not contain terms and conditions similar to those observed in the financial guaranty market. The Company'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 Company considers R&W claim recoveries in determining the fair value of its CDS contracts.      Valuation models include the use of management estimates and current market information. Management is also required to make assumptions on how the fair value of credit derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, 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 its fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value, actual experience may differ from the estimates reflected in the Company's consolidated financial statements and the differences may be material.             Net Change in Fair Value of Credit Derivatives Gain (Loss)

                                                              Year Ended December 31,                                                             2011       2010       2009                                                                   (in millions)

Net credit derivative premiums received and receivable $ 184.7$ 206.8$ 168.1 Net ceding commissions (paid and payable) received and receivable

                                                     3.4        

3.5 2.2

  Realized gains on credit derivatives                         188.1      210.3      170.3 Termination losses                                           (22.5 )        -          - Net credit derivative losses (paid and payable) recovered and recoverable                                   (159.6 )    

(56.8 ) (6.7 )

Total realized gains and other settlements on credit derivatives

                                                    6.0      

153.5 163.6 Net unrealized gains (losses) on credit derivatives 553.7 (155.1 ) (337.8 )

  Net change in fair value of credit derivatives            $  559.7   $   

(1.6 ) $ (174.2 )

    Net credit derivative premiums have declined in 2011 compared with 2010 due to the decline in the net par outstanding to $85.0 billion as of December 31, 2011 from $109.8 billion as of                                        102

--------------------------------------------------------------------------------

Table of Contents

December 31, 2010. The Company has terminated $11.5 billion in net par outstanding in 2011, resulting in accelerations of future premiums of $24.7 million. Because the Company no longer anticipates writing new business using a CDS form of execution, premiums are expected to decline in the foreseeable future. In addition, several CMBS CDS contracts were terminated for a payment of $22.5 million in 2011. These contracts had carried high rating agency capital charges prior to termination.      Net Change in Unrealized Gains (Losses) in Credit Derivatives By Sector

                                                              Year Ended December 31, Asset Type                                                  2011       2010       2009                                                                   (in millions)

Pooled corporate obligations: Collateralize loan obligations/Collateralized bond obligations

                                                $  10.4   $    2.1   $  152.3 Synthetic investment grade pooled corporate                   15.6       (1.9 )    (24.0 ) Synthetic high yield pooled corporate                         (1.2 )     10.8      104.7 TruPS CDOs                                                    14.3       59.1      (44.1 ) Market value CDOs of corporate obligations                    (0.3 )     (0.1 )     (0.6 ) CDO of CDOs (corporate)                                          -          

- 6.3

  Total pooled corporate obligations                            38.8       70.0      194.6 U.S. RMBS: Alt-A option ARMs and Alt-A first lien                       299.9     (280.4 )   (429.3 ) Subprime first lien (including net interest margin)           24.0      (10.1 )      4.9 Prime first lien                                              46.9       (8.3 )    (85.2 ) Closed end second lien and HELOCs                             10.5       (2.0 )     11.6  Total U.S. RMBS                                              381.3     (300.8 )   (498.0 ) CMBS                                                          10.4       10.1      (41.1 ) Other(1)                                                     123.2       65.6        6.7  Total                                                      $ 553.7   $ (155.1 ) $ (337.8 )   

--------------------------------------------------------------------------------

º (1)

º "Other" includes all other U.S. and international asset classes, such as

commercial receivables, international infrastructure, international RMBS

      securities, and pooled infrastructure securities.                  Effect of the Company's Credit Spread Change on                   Fair Value of Credit Derivatives Gain (Loss)                                                             Year Ended December 31,                                                             2011            2010                                                                 (in millions) Change in fair value of credit derivatives: Before considering implication of the Company's credit spreads                                           $     (68.6 )   $  

464.2

Resulting from change in the Company's credit spreads 622.3

(619.3 )

  After considering implication of the Company's credit spreads                                                  $     553.7     $     (155.1 )        Management believes that the trading levels of AGC's and AGM's credit spreads are due to the correlation between AGC's and AGM's risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against AGC and AGM as the result of its financial guaranty volume, as well as the overall lack of liquidity in the CDS market. Offsetting the inception to date benefit attributable to AGC's and AGM's credit spread were fair value losses in fixed income security market prices primarily attributable to widening spreads in certain markets as a result of the continued deterioration in credit markets and some credit rating downgrades. 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 most recent vintages of subprime RMBS.                                        103

--------------------------------------------------------------------------------

Table of Contents

    In 2011, U.S. RMBS unrealized fair value gains were generated primarily in the Option ARM, Alt-A, prime first lien and subprime sectors due to tighter implied net spreads. The tighter implied net spreads were primarily a result of the increased cost to buy protection in AGC's name as the market cost of AGC's credit protection increased. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, increased, the implied spreads that the Company would expect to receive on these transactions decreased. The unrealized fair value gain in Other primarily resulted from tighter implied net spreads on a XXX life securitization transaction and a film securitization, which also resulted from the increased cost to buy protection in AGC's name, referenced above. The cost of AGM's credit protection also increased during the year, but did not lead to significant fair value gains, as the majority of AGM policies continue to price at floor levels. Claim payments increased primarily due to payments on transactions that were either restructured or where we obtained collateral.      With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spreads was revised in the first quarter 2011 to reflect 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 effect of this refinement in assumptions was an increase in fair value losses of $260.4 million during the first quarter 2011 and was concentrated in the Alt-A first lien and Option ARM sectors.      In 2010, U.S. RMBS unrealized fair value losses were generated primarily in the Alt-A option ARM and Alt-A first lien sector due to wider implied net spreads. The wider implied net spreads were a result of internal ratings downgrades on several of these Alt-A option ARM and Alt-A first lien policies. The unrealized fair value gain within the TruPS CDO and Other asset classes resulted from tighter implied spreads. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC and AGM increased, which management refers to as the CDS spread on AGC or AGM, the implied spreads that the Company would expect to receive on these transactions decreased. During 2010, AGC's and AGM's spreads widened. However, gains due to the widening of the Company's own CDS spreads were offset by declines in fair value resulting from price changes and the internal downgrades of several U.S. RMBS policies referenced above.      In 2009, AGC's and AGM's credit spreads narrowed, but remained relatively wide compared to pre-2007 levels. Offsetting the benefit attributable to AGC's and AGM's wide credit spread were declines in fixed income security market prices primarily attributable to widening spreads in certain markets as a result of the continued deterioration in credit markets and some credit rating downgrades. The higher credit spreads in the fixed income security market were primarily due to continuing market concerns over the most recent vintages of Subprime RMBS and trust-preferred securities.                                        104

--------------------------------------------------------------------------------

Table of Contents

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

              Net Par Outstanding by Credit Derivative Counterparty                              As of December 31, 2011                                                      (in millions)                 Deutsche Bank AG                    $        9,882                 Barclays Capital                             9,244                 JPMorgan Chase & Co.                         7,660                 Bank of America Corporation                  7,339                 Dexia Bank Belgium                           7,103                 Royal Bank of Scotland Group PLC             6,079                 BNP Paribas Finance Inc.                     5,661                 HSBC Holdings PLC                            4,546                 Other(1)                                    27,533                  Total                               $       85,047                                As of December 31, 2010                                                      (in millions)                 Deutsche Bank AG                    $       11,829                 Bank of America Corporation                 10,642                 JPMorgan Chase & Co.                        10,277                 Barclays Capital                            10,015                 Royal Bank of Scotland Group PLC             8,518                 Dexia Bank                                   8,472                 BNP Paribas Finance Inc.                     6,079                 Other(1)                                    43,939                  Total                               $      109,771   

--------------------------------------------------------------------------------

º (1)

º Each counterparty within the "Other" category represents less than 5% of

the total.

Fair Value Gain (Loss) on Committed Capital Securities

      Committed capital securities ("CCS") consist of committed preferred trust securities which allow AGC and AGM to issue preferred stock to trusts created for the purpose of issuing such securities that invest in high quality investments and selling put options to AGC and AGM in exchange for cash. The fair value of CCS represents the difference between the present value of remaining expected put option premium payments under AGC's CCS (the "AGC CCS Securities") and AGM Committed Preferred Trust Securities (the "AGM CPS Securities") agreements and the value of such estimated payments based upon the quoted price for such premium payments as of the reporting dates (see Note 6, Fair Value Measurement, of the Financial Statements and Supplementary Data). Changes in fair value of this financial instrument are included in the consolidated statement of operations. The significant market inputs used were observable, therefore, the Company classified this fair value measurement as Level 2 prior to the third quarter of 2011. The CCS were transferred to Level 3 on the fair value hierarchy in the third quarter of 2011 because the Company was no longer able to obtain the same level of pricing information as in past quarters.      A driver of fair value gain (loss) on CCS is the CDS spread of AGC and AGM. Generally, widening of these CDS spreads from one period to the next results in gains while tightening results in losses. See "Effect of Company's Credit Spread Change on Fair Value of Credit Derivatives Gain (Loss)" table in "-Net Change in Fair Value of Credit Derivatives" for information on AGC and AGM CDS spreads.                                        105

--------------------------------------------------------------------------------

  Table of Contents          Change in Unrealized Gain (Loss) on Committed Capital Securities                                            Year Ended December 31,                                          2011        2010      2009                                                (in millions)                   AGC CCS Securities    $   20.2     $ 7.1   $  (47.1 )                   AGM CPS Securities        14.9       2.1      (75.8 )                    Total                 $   35.1     $ 9.2   $ (122.9 )   

Amortization of Deferred Acquisition Costs

      Amortization of deferred acquisition costs ("DAC") in 2011 declined compared with 2010 due to the cancellation of certain assumed reinsurance policies in 2010 which reduced ceding commission expense. Amortization of DAC in 2010 included $9.3 million of amortization of AGMH ceding commission income and none of AG Re's amortization of ceding commission expense from the intercompany cession from AGMH. In 2009, amortization of DAC included $10.0 million in AG Re amortization of ceding commission expense related to the first six months of cessions from AGMH (i.e., prior to the AGMH Acquisition). AGMH DAC was written off on July 1, 2009 and therefore AGMH did not contribute a significant amount to the amortization of DAC in 2009.  

AGMH Acquisition-Related Expenses

In 2010, AGMH Acquisition-related expenses were primarily comprised of consulting fees related to integration efforts. In 2009, AGMH Acquisition- related expenses were primarily comprised of severance costs, real estate, legal, consulting and relocation fees.

                        AGMH Acquisition-Related Expenses                                                   Year Ended                                                 December 31,                                                 2010      2009                                                 (in millions)                       Severance costs           $    -   $ 40.4                       Professional services        6.8     32.8                       Office consolidation           -     19.1                        Total                     $  6.8   $ 92.3                                          106 

--------------------------------------------------------------------------------

Table of Contents

Interest Expense

      The following table presents the components of interest expense. Interest expense in 2011 and 2010 includes a full year of interest expense for AGMH debt and 2009 includes only the last six months.                                  Interest Expense                                                            Year Ended December 31,                                                         2011         2010       2009                                                                (in millions)    AGUS:    7.0% Senior Notes                                   $   13.5     $   13.5   $ 13.5    8.50% Senior Notes                                      16.1         16.0      8.3    Series A Enhanced Junior Subordinated Debentures         9.8          9.8      9.8     AGUS total                                              39.4         39.3     31.6    AGMH:    67/8% QUIBS                                              7.2          7.2      3.6    6.25% Notes                                             15.4         15.4      7.7    5.60% Notes                                              6.1          6.1      3.1    Junior Subordinated Debentures                          24.9         24.9     12.4     AGMH total                                              53.6         53.6     26.8    AGM:    Notes Payable                                            6.1          6.7      4.4     AGM total                                                6.1          6.7      4.4     Total                                               $   99.1     $   99.6   $ 62.8   

Goodwill and Settlement of Pre-Existing Relationships

      The Company reassessed the recoverability of goodwill in third quarter 2009 subsequent to the AGMH Acquisition. AGMH had historically been the most significant ceding reinsurance company within the Company's assumed book of business. As a result of the AGMH Acquisition, which significantly diminished the Company's potential near future market for assuming reinsurance, combined with the continued credit crisis, which has adversely affected the fair value of the Company's in-force policies, management determined that the full carrying value of $85.4 million of goodwill on its books prior to the AGMH Acquisition should be written off in third quarter 2009.      In addition, the Company recognized a $232.6 million bargain purchase gain on the AGMH Acquisition and also recorded a charge of $170.5 million to settle pre-existing relationships. The bargain purchase gain represents the excess of the fair value of net assets acquired over the purchase price. As disclosed in Note 3, Business Combinations, of the Financial Statements and Supplementary Data, the Company and AGMH had a pre-existing reinsurance relationship in which the Company assumed financial guaranty risks ceded to it by AGMH. This pre-existing relationship was effectively settled at fair value. The Company determined fair value as the difference between contractual premiums and the Company's estimate of current market premiums.               Goodwill and Settlement of Pre-Existing Relationships                                                           Year Ended                                                       December 31, 2009                                                         (in millions)           Goodwill impairment                          $            85.4           Gain on bargain purchase of AGMH                        (232.6 )           Settlement of pre-existing relationships                 170.5            Total                                        $            23.3                                          107 

--------------------------------------------------------------------------------

Table of Contents

Provision for Income Tax

      Deferred income tax assets and liabilities are established for the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Such temporary differences relate principally to unrealized gains and losses on investments and credit derivatives, FG VIE fair value adjustments, loss and LAE reserve, unearned premium reserve and tax attributes for net operating losses, alternative minimum tax ("AMT") credits and foreign tax credits. As of December 31, 2011 and December 31, 2010, the Company had a net deferred income tax asset of $770.9 million and $1,259.1 million, respectively. As of December 31, 2011, the Company has foreign tax credits carried forward of $30.2 million which expire in 2018 through 2021. As of December 31, 2011, the Company has AMT of $32.0 million which do not expire. Foreign tax credits of $22.3 million are from its acquisition of AGMH. The Internal Revenue Code limits the amounts of foreign tax credits and AMT credits the Company may utilize each year.      For the years ended December 31, 2011, 2010 and 2009, income tax expense was $258.8 million, $55.6 million and $32.1 million and the Company's effective tax rate was 25.0%, 10.1% and 27.5% for the years ended December 31, 2011, 2010 and 2009, respectively. The Company's effective tax rates reflect the proportion of income recognized by each of the Company's operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the U.K. blended marginal corporate tax rate of 26.5%, and no taxes for the Company's Bermuda holding company and subsidiaries. For periods subsequent to April 1, 2011, the U.K. corporation tax rate has been reduced to 26%, for periods prior to April 1, 2011 the U.K. corporation tax rate was 28%, resulting in blended tax rate of 26.5%. Accordingly, the Company's overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. During the year ended December 31, 2010, a net tax benefit of $55.8 million was recorded by the Company due to the filing of an amended tax return which included the AGMH and Subsidiaries tax group. The amended return filed in September 2010 was for a period prior to the AGMH Acquisition and consequently, the Company no longer has a deferred tax asset related to net operating loss or AMT credits associated with the AGMH Acquisition. Instead, the Company has recorded additional deferred tax assets for loss reserves and foreign tax credits and has decreased its liability for uncertain tax positions. The event giving rise to this recognition occurred after the measurement period as defined by acquisition accounting and thus the amount is included in the year ended December 31, 2010 net income. Included in the $55.8 million net tax benefit was a decrease for uncertain tax positions, including interest and penalties, of $9.2 million. In 2009 pre-tax income included the bargain purchase gain on AGMH Acquisition of $232.6 million and expense of $85.4 million related to goodwill impairment, which was the primary reason for the 27.5% effective tax rate.  

Financial Guaranty Variable Interest Entities

      On January 1, 2010, the Company adopted a new accounting standard as required by the Financial Accounting Standards Board that changed how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The new accounting standard requires the Company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a FG VIE. The new accounting standard mandated the accounting changes prescribed by the statement to be recognized by the Company as a cumulative effect adjustment to retained earnings as of January 1, 2010. The cumulative effect of adopting the new accounting standard was a $206.5 million after-tax decrease to the opening retained earnings balance due to the consolidation of 21 FG VIEs at fair value on January 1, 2010. This analysis identifies the primary beneficiary of a FG VIE as the enterprise that has both (1) the power to direct the activities of a FG VIE that most significantly impact the entity's economic performance; and (2) the obligation to absorb losses of the entity that could potentially be significant to the FG VIE or the right to receive benefits from the entity that could potentially be significant to the FG VIE. Under GAAP, the Company is deemed to be the control party typically when its protective rights give it the power to both terminate and replace the deal servicer. Additionally, this new accounting standard requires an ongoing reassessment of whether the Company is the primary beneficiary of a FG VIE.                                        108

--------------------------------------------------------------------------------

Table of Contents

      Pursuant to the new accounting standard, the Company evaluated its power to direct the significant activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. As of December 31, 2011, the Company determined that, based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the VIEs' most significant activities, 33 VIEs required consolidation, compared to 29 VIEs consolidated at December 31, 2010. The following table presents the effects on reported GAAP income resulting from consolidating these FG VIEs and eliminating their related insurance and investment accounting entries and represents a difference between GAAP reported net income and non-GAAP operating income. See "-Non-GAAP Financial Measures-Operating Income" below.                   Effect of Consolidating FG VIEs on Net Income                                                      Year Ended December 31,                                                     2011        2010      2009                                                          (in millions)         Net earned premiums                       $   (74.7 ) $  (47.6 ) $    -         Net investment income                          (8.3 )        -        -         Net realized investment gains (losses)         11.9          -        - 

Net change in fair value of FG VIEs (132.0 ) (273.6 ) (1.2 )

         Loss and LAE                                   92.7       65.9      

-

          Total pretax effect on net income            (110.4 )   (255.3 )   

(1.2 )

         Less: tax provision (benefit)                 (38.7 )    (89.4 )    

-

          Total effect on net income                $   (71.7 ) $ (165.9 ) $ 

(1.2 )

        Net change in fair value of FG VIEs represents the net change in fair value of the consolidated FG VIEs' assets and liabilities that is reported under GAAP. These contracts are not actively traded and therefore management expects the fair value gains and losses to reverse to zero as the contract approaches maturity, except for economic claim payments made by AGC and AGM. During 2011, the Company recorded a net fair value loss on FG VIEs of $132.0 million, which was driven primarily by price deterioration on several HELOC transactions. During the period, long term conditional default rates increased on these transactions, which caused the prices for these HELOCs to decline. The prices for the corresponding liability for these transactions remained relatively consistent with the prior year.  

During 2010, the fair value of FG VIEs' liabilities decreased principally as a result of lengthening duration of the expected payback period of these liabilities due to improved performance of the underlying FG VIEs' assets supporting the cash flows for the FG VIEs' liabilities.

      In 2009, the Company consolidated VIEs for which it determined that it was the primary beneficiary, based on accounting rules in effect at the time. In determining whether the Company was the primary beneficiary prior to 2010, a number of factors were considered, including the design of the entity and the risks the VIE was created to pass along to variable interest holders, the extent of credit risk absorbed by the Company through its insurance contract and the extent to which credit protection provided by other variable interest holders reduces this exposure and the exposure that the Company cedes to third party reinsurers. The criteria for determining whether the Company is the primary beneficiary of a VIE has changed as of January 1, 2010, as described above.      Expected losses to be (recovered) paid in respect of consolidated FG VIEs, which were $(106.7) million as of December 31, 2011 and $49.2 million as of December 31, 2010, are included in the discussion of "-Losses in the Insured Portfolio" above.  Non-GAAP Financial Measures 

    To reflect the key financial measures management analyzes in evaluating the Company's operations and progress towards long-term goals, the Company discusses both measures promulgated in accordance with GAAP and measures not promulgated in accordance with GAAP ("non-GAAP                                        109

--------------------------------------------------------------------------------

Table of Contents

  financial measures"). Although the financial measures identified as non-GAAP should not be considered substitutes for GAAP measures, management considers them key performance indicators and employs them as well as other factors in determining compensation. Non-GAAP financial measures, therefore, provide investors with important information about the key financial measures management utilizes in measuring its business. The primary limitation of non-GAAP financial measures is the potential lack of comparability to those of other companies, which may define non-GAAP measures differently because there is limited literature with respect to such measures. Three of the primary non-GAAP financial measures analyzed by the Company's senior management are: operating income, adjusted book value and PVP.      Assured Guaranty's management and board of directors utilize non-GAAP financial measures in evaluating the Company's financial performance and as a basis for determining senior management incentive compensation. By providing these non-GAAP financial measures, investors, analysts and financial news reporters have access to the same information that management reviews internally. In addition, Assured Guaranty's presentation of non-GAAP financial measures is consistent with how analysts calculate their estimates of Assured Guaranty's financial results in their research reports on Assured Guaranty and with how investors, analysts and the financial news media evaluate Assured Guaranty's financial results.      The following paragraphs define each non-GAAP financial measure and describe why it is useful. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure, if available, is also presented below. Non-GAAP financial measures should not be viewed as substitutes for their most directly comparable GAAP measures.  

Operating Income

     Reconciliation of Net Income (Loss) Attributable to Assured Guaranty Ltd.                               to Operating Income                                                               Year Ended December 31,                                                             2011        2010      2009                                                                   (in millions) Net income (loss) attributable to Assured Guaranty Ltd.    $  775.6   $  493.7   $  86.0 Less after-tax adjustments: Realized gains (losses) on investments                        (20.0 )      1.0     (34.2 ) Non-credit impairment unrealized fair value gains (losses) on credit derivatives                                243.6       13.0     (82.2 ) Fair value gains (losses) on CCS                               22.8        6.0     (79.9 ) Foreign exchange gains (losses) on revaluation of premiums receivable                                            (3.5 )    (24.5 )    23.4 Effect of consolidating FG VIEs                               (71.7 )   (165.9 )       - Goodwill and settlement of pre-existing relationship              -          -     (23.3 )  Operating income                                           $  604.4   $  664.1   $ 282.2        Operating income in 2010 included a $55.8 million tax benefit related to the filing of an amended pre-acquisition tax return of AGMH. (See "-Provision for Income Tax") In 2011, a decrease in net earned premiums and premiums received and receivable on credit derivatives were partially offset by a decrease in loss and LAE and other operating expenses and increased net investment income.      The increase in operating income in 2010 was primarily attributable to the inclusion of 12 months of AGMH compared to six months in 2009, commutation gains and the recording of a tax benefit of $55.8 million in 2010 due to the filing of an amended tax return for a period prior to the AGMH Acquisition, offset in part by higher loss and LAE. Excluding the AGMH Acquisition, the decline in earned premiums in 2010 compared to 2009 relates primarily to lower refundings and accelerations. Net earned premiums and credit derivative revenue from the AGM structured finance book of business will decline as the net par runs off. Loss and LAE in 2010 includes amounts recognized due to the amortization of deferred premium revenue and amounts attributable to loss development principally in the U.S. RMBS and other structured sectors. Operating income in 2009 included additional expense                                        110

--------------------------------------------------------------------------------

Table of Contents

items attributable to the AGMH Acquisition which were $92.3 million in 2009 compared to $6.8 million in 2010, and goodwill and settlement of pre-existing relationships.

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

º 1)

º Elimination of the after-tax realized gains (losses) on the Company's

investments, except for gains and losses on securities classified as

trading. The timing of realized gains and losses, which depends

largely on market credit cycles, can vary considerably across periods.

The timing of sales, is largely subject to the Company's discretion

          and influenced by market opportunities, as well as the Company's tax           and capital profile. Trends in the underlying profitability of the           Company's business can be more clearly identified without the           fluctuating effects of these transactions.          º 2)         º Elimination of the after-tax non-credit impairment unrealized fair           value gains (losses) on credit derivatives, which is the amount in           excess of the present value of the expected estimated economic credit           losses, and non-economic payments. Such fair value adjustments are           heavily affected by, and in part fluctuate with, changes in market           interest rates, credit spreads and other market factors and are not           expected to result in an economic gain or loss. Additionally, such           adjustments present all financial guaranty contracts on a more           consistent basis of accounting, whether or not they are subject to           derivative accounting rules.          º 3)         º Elimination of the after-tax fair value gains (losses) on the           Company's CCS. Such amounts are heavily affected by, and in part           fluctuate with, changes in market interest rates, credit spreads and           other market factors and are not expected to result in an economic           gain or loss.          º 4)         º Elimination of the after-tax foreign exchange gains (losses) on           revaluation of net premium receivables. Long-dated receivables           constitute a significant portion of the net premium receivable balance           and represent the present value of future contractual or expected           collections. Therefore, the current period's foreign exchange           revaluation gains (losses) are not necessarily indicative of the total           foreign exchange gains (losses) that the Company will ultimately           recognize.          º 5)         º Elimination of the effects of consolidating FG VIEs in order to           present all financial guaranty contracts on a more consistent basis of           accounting, whether or not GAAP requires consolidation. GAAP requires           the Company to consolidate certain VIEs that have issued debt           obligations insured by the Company even though the Company does not           own such VIEs.          º 6) 

º Elimination of goodwill and settlement of pre-existing relationship in

order to show the 2009 contribution to operating income of AGMH

without the distorting effects of acquisition accounting adjustments

recorded on the Acquisition Date.

Adjusted Book Value and Operating Shareholders' Equity

    Management also uses adjusted book value to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value is one of the key financial measures used in determining the amount of certain long term compensation to management and employees and used by rating agencies and investors.                                        111

--------------------------------------------------------------------------------

Table of Contents

                       Reconciliation of Shareholders' Equity                              to Adjusted Book Value                                                           As of December 31,                                                    2011                      2010                                             Total      Per Share      Total      Per Share                                                     (dollars in millions, except                                                          per share amounts) Shareholders' equity                      $ 4,718.4    $    25.89   $ 3,733.5    $    20.32 Less after-tax adjustments: Effect of consolidating FG VIEs              (405.2 )       (2.22 )    (371.4 )       (2.02 ) Non-credit impairment unrealized fair value gains (losses) on credit derivatives                                  (498.0 )       (2.74 )    (763.0 )       (4.15 ) Fair value gains (losses) on CCS               35.0          0.19        12.2          0.07 Unrealized gain (loss) on investment portfolio excluding foreign exchange effect                                        318.4          1.75       

101.2 0.55

  Operating shareholders' equity              5,268.2         28.91     4,754.5         25.88 After-tax adjustments: Less: DAC                                     240.9          1.32       248.4          1.35 Plus: Net present value of estimated net future credit derivative revenue          302.3          1.66       424.8          2.31 Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed             3,658.0         20.07     4,058.0         22.08  Adjusted book value                       $ 8,987.6    $    49.32   $ 8,988.9    $    48.92   

    As of December 31, 2011, shareholders' equity increased to $4.7 billion from $3.7 billion at December 31, 2010 due primarily to net income of $775.6 million and unrealized gains on the investment portfolio. Adjusted book value decreased slightly, mainly due to economic loss development which was largely offset by R&W recoveries, and new business. Shares outstanding decreased by 1.5 million due primarily to the repurchase of 2.0 million shares, which was partially offset by the issuance of vested restricted stock awards and units in 2011, which resulted in higher adjusted book value per share despite a slight decline in adjusted book value.      Management believes that operating shareholders' equity is a useful measure because it presents the equity of AGL with all financial guaranty contracts accounted for on a more consistent basis and excludes fair value adjustments that are not expected to result in economic loss. Many investors, analysts and financial news reporters use operating shareholders' equity as the principal financial measure for valuing AGL's current share price or projected share price and also as the basis of their decision to recommend to buy or sell AGL's common shares. Many of the Company's fixed income investors also use operating shareholders' equity to evaluate the Company's capital adequacy. Operating shareholders' equity is the basis of the calculation of adjusted book value (see below). Operating shareholders' equity is defined as shareholders' equity attributable to Assured Guaranty Ltd., as reported under GAAP, adjusted for the following:  

º 1)

º Elimination of the effects of consolidating FG VIEs in order to

           present all financial guaranty contracts on a more consistent basis of           accounting, whether or not GAAP requires consolidation. GAAP requires           the Company to consolidate certain VIEs that have issued debt           obligations insured by the Company even though the Company does not           own such VIEs.          º 2)         º Elimination of the after-tax non-credit impairment unrealized fair           value gains (losses) on credit derivatives, which is the amount in           excess of the present value of the expected estimated economic credit           losses, and non-economic payments. Such fair value adjustments are           heavily affected by, and in part fluctuate with, changes in market           interest rates, credit spreads and other market factors and are not           expected to result in an economic gain or loss.          º 3)         º Elimination of the after-tax fair value gains (losses) on the           Company's CCS. Such amounts are heavily affected by, and in part           fluctuate with, changes in market interest rates, credit spreads and           other market factors and are not expected to result in an economic           gain or loss.                                        112 

--------------------------------------------------------------------------------

   Table of Contents          º 4)         º Elimination of the after-tax unrealized gains (losses) on the           Company's investments that are recorded as a component of AOCI           (excluding foreign exchange revaluation). The AOCI component of the           fair value adjustment on the investment portfolio is not deemed           economic because the Company generally holds these investments to           maturity and therefore should not recognize an economic gain or loss.      Management believes that adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company's in-force premiums and revenues in addition to operating shareholders' equity. The premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. Many investors, analysts and financial news reporters use adjusted book value to evaluate AGL's share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Adjusted book value is operating shareholders' equity, as defined above, further adjusted for the following:  

º 1)

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

º 2)

º Addition of the after-tax net present value of estimated net future

          credit derivative revenue. See below.          º 3)         º Addition of the after-tax value of the unearned premium reserve on           financial guaranty contracts in excess of expected loss to be           expensed, net of reinsurance. This amount represents the expected

future net earned premiums, net of expected losses to be expensed,

which are not reflected in GAAP equity.

Net Present Value of Estimated Net Future Credit Derivative Revenue

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

PVP or Present Value of New Business Production

                  Reconciliation of PVP to Gross Written Premiums                                                               Year Ended December 31,                                                             2011        2010      2009                                                                   (in millions) Total PVP                                                  $  242.7   $  362.7   $ 640.2 Less: PVP of credit derivatives                                   -         

- 2.4

  PVP of financial guaranty insurance                           242.7      362.7     637.8 Less: Financial guaranty installment premium PVP               68.8       

33.2 25.4

  Total: Financial guaranty upfront gross written premiums                                                      173.9      

329.5 612.4 Plus: Financial guaranty installment gross written premiums

                                                      (47.1 )   

(107.2 ) (55.1 )

  Total financial guaranty gross written premiums               126.8      222.3     557.3 Plus: Other gross written premiums                                -          -      (0.9 )  Total gross written premiums                               $  126.8   $  222.3   $ 556.4                                          113 

--------------------------------------------------------------------------------

Table of Contents

    Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as premium supplements and additional installment premium on existing contracts as to which the issuer has the right to call the insured obligation but has not exercised such right, whether in insurance or credit derivative contract form, which GAAP gross premiums written and the net credit derivative premiums received and receivable portion of net realized gains and other settlement on credit derivatives ("Credit Derivative Revenues") do not adequately measure. PVP in respect of insurance and credit derivative contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums, in each case, discounted at 6% (the Company's tax-equivalent pretax investment yield on its investment portfolio). For purposes of the PVP calculation, management discounts estimated future installment premiums on insurance contracts at 6%, while under GAAP, these amounts are discounted at a risk free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual future net earned or written premiums and Credit Derivative Revenues may differ from PVP due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation.  Insured Portfolio      The following tables present the insured portfolio by asset class net of cessions to reinsurers as of December 31, 2011 and 2010. See Note 12, Reinsurance and Other Monoline Exposures, of the Financial Statements and Supplementary Data for information related to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e. credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e. insurance, derivative or VIE accounting).                                        114

--------------------------------------------------------------------------------

   Table of Contents            Net Par Outstanding and Average Internal Rating by Asset Class                                     As of December 31, 2011      As of December 31, 2010                                      Net Par         Avg.         Net Par         Avg. Sector                             Outstanding      Rating      Outstanding      Rating                                                    (dollars in millions) Public finance: U.S.: General obligation                  $    173,061      A+         $    181,799      A+ Tax backed                                78,006      A+               83,403      A+ Municipal utilities                       65,204       A               70,066       A Transportation                            35,396       A               36,973       A Healthcare                                19,495       A               21,592       A Higher education                          15,677      A+               15,687      A+ Housing                                    5,696      AA-               6,562      AA- Infrastructure finance                     4,110      BBB               4,092     BBB+ Investor-owned utilities                   1,124      A-                1,505      A- Other public finance-U.S.                  5,304      A-                5,317      A-  Total public finance-U.S.                403,073      A+              426,996      A+ Non-U.S.: Infrastructure finance                    15,405      BBB              15,973      BBB Regulated utilities                       13,260     BBB+              13,978     BBB+ Pooled infrastructure                      3,130      AA-               3,432      AA Other public finance-non-U.S.              7,251      A+                

7,360 AA-

  Total public finance-non-U.S.             39,046     BBB+              40,743      A-  Total public finance                     442,119       A              467,739       A Structured finance: U.S.: Pooled corporate obligations              51,520      AAA              67,384      AAA RMBS                                      21,567      BB               25,130      BB Financial products(1)                      5,217      AA-               6,831      AA- CMBS and other commercial real estate related exposures                   4,774      AAA               7,084      AAA Consumer receivables                       4,326      AA-               6,073      AA- Insurance securitizations                  1,893      A+                1,584      A+ Commercial receivables                     1,214      BBB               2,139     BBB+ Structured credit                            424      B-                1,729      BBB Other structured finance-U.S.              1,299      A-                  

802 A-

  Total structured finance-U.S.             92,234      AA-             118,756      AA- Non-U.S.: Pooled corporate obligations              17,731      AAA              22,610      AAA Commercial receivables                     1,865      A-                1,729      A- RMBS                                       1,598      AA                3,394      AA+ Structured credit                            979      BBB               1,267      BBB Insurance securitizations                    964     CCC-                 964     CCC- CMBS and other commercial real estate related exposures                     180      AAA                 251      AAA Other structured                                     Super                        Super finance-non-U.S.                             378    Senior                421    Senior  Total structured finance-non-U.S.                          23,695      AA               30,636      AA+  Total structured finance                 115,929      AA-             149,392      AA  Total net par outstanding           $    558,048      A+         $    617,131      A+                                          115 

--------------------------------------------------------------------------------

Table of Contents

      The December 31, 2011 and 2010 amounts above include $59.6 billion and $78.4 billion, respectively, of AGM structured finance net par outstanding. AGM has not insured a mortgage-backed transaction since January 2008 and announced its complete withdrawal from the structured finance market in August 2008. The structured finance transactions that remain in AGM's insured portfolio are of double-A average underlying credit quality, according to the Company's internal rating system. Management expects AGM's structured finance portfolio to run-off rapidly: 22% by year-end 2012, 63% by year end 2014, and 76% by year-end 2016.  

The following tables set forth the Company's net financial guaranty portfolio as of December 31, 2011 and 2010 by internal rating:

                Financial Guaranty Portfolio by Internal Rating                                                                          As 

of December 31, 2011

                       Public Finance            Public Finance           

Structured Finance Structured Finance

                            U.S.                    Non-U.S.                      U.S                       Non-U.S                     Total                      Net Par                   Net Par                   Net Par                     Net Par                     Net Par Rating Category    Outstanding       %       Outstanding       %       Outstanding         %       Outstanding         %       Outstanding       %                                                                          (dollars in millions) Super senior       $          -         - %  $      1,138       2.9 %   $     16,756       18.2 %   $      5,660       23.9 %  $     23,554       4.2 % AAA                       5,074       1.3           1,381       3.5           35,736       38.7           10,231       43.2          52,422       9.4 AA                      139,693      34.6           1,056       2.7           11,079       12.0              976        4.1         152,804      27.4 A                       213,164      52.9          11,744      30.1            4,116        4.5            1,518        6.4         230,542      41.3 BBB                      40,635      10.1          21,399      54.8            5,087        5.5            3,391       14.3          70,512      12.6 BIG                       4,507       1.1           2,328       6.0           19,460       21.1            1,919        8.1          28,214       5.1  Total net par outstanding        $    403,073     100.0 %  $     39,046     100.0 %   $     92,234      100.0 %   $     23,695      100.0 %  $    558,048     100.0 %                                                                             As of December 31, 2010                       Public Finance            Public Finance          

Structured Finance Structured Finance

                           U.S.                    Non-U.S.                     U.S                      Non-U.S                     Total                      Net Par                   Net Par                   Net Par                   Net Par                     Net Par Rating Category    Outstanding       %       Outstanding       %       Outstanding       %       Outstanding         %       Outstanding       %                                                                         (dollars in millions) Super senior       $          -         - %  $      1,420       3.5 %  $     21,837      18.4 %   $      7,882       25.7 %  $     31,139       5.0 % AAA                       5,784       1.4           1,378       3.4          45,067      37.9           13,573       44.3          65,802      10.7 AA                      161,906      37.9           1,330       3.3          17,355      14.6            1,969        6.4         182,560      29.6 A                       214,199      50.2          12,482      30.6           6,396       5.4            1,873        6.1         234,950      38.1 BBB                      41,948       9.8          22,338      54.8           7,543       6.4            4,045       13.2          75,874      12.3 BIG                       3,159       0.7           1,795       4.4          20,558      17.3            1,294        4.3          26,806       4.3 

Total net par outstanding $ 426,996 100.0 % $ 40,743 100.0 % $ 118,756 100.0 % $ 30,636 100.0 % $ 617,131 100.0 %

    The tables below show the Company's ten largest U.S. public finance and U.S. structured finance and non-U.S. exposures direct and reinsurance exposures by revenue source (stated as a percentage of                                        116

--------------------------------------------------------------------------------

Table of Contents

the Company's total U.S. public finance, U.S. structured finance and non-U.S. net par outstanding) as of December 31, 2011:

                      Ten Largest U.S. Public Finance Exposures                             As of December 31, 2011                                                               Percent of Total                                               Net Par      U.S. Public Finance                                             Outstanding    Net Par Outstanding    Rating                                                        (dollars in millions) New Jersey, State of                        $      4,330                    1.1 %   A+ California, State of                               3,479                    0.9    BBB+ New York, City of New York                         3,087                    0.8     AA Massachusetts, Commonwealth of                     2,981                    0.7     AA New York, State of                                 2,707                    0.7    AA- Chicago, City of Illinois                          2,548                    0.6    AA- Puerto Rico, Commonwealth of                       2,323                    0.6    BBB- Miami-Dade County Florida Aviation Authority-Miami International Airport              2,318                    0.6     A Port Authority of New York and New Jersey                                             2,273                    0.6    AA- Los Angeles California Unified School District                                           2,164                    

0.5 AA-

  Total of top ten U.S. public finance exposures                                   $     28,210                    7.1 %                      Ten Largest U.S. Structured Finance Exposures                             As of December 31, 2011                                                        Percent of Total                                                       U.S. Structured                                       Net Par             Finance                                     Outstanding     Net Par Outstanding       Rating                                                   (dollars in millions) Fortress Credit Opportunities I, LP.                              $      1,302                      1.4 %     AA Stone Tower Credit Funding                 1,254                      1.4       AAA Synthetic Investment Grade Pooled Corporate CDO                       1,157                      1.3       AAA Synthetic High Yield Pooled Corporate CDO                                975                      1.1       AAA Deutsche Alt-A Securities Mortgage Loan 2007-2                         779                      0.8       CCC Synthetic Investment Grade                                                     Super Pooled Corporate CDO                         763                      0.8     Senior Synthetic Investment Grade                                                     Super Pooled Corporate CDO                         754                      0.8     Senior Synthetic Investment Grade                                                     Super Pooled Corporate CDO                         742                      0.8     Senior Synthetic High Yield Pooled Corporate CDO                                731                      0.8       AAA Mizuho II Synthetic CDO                      716                      0.8        A  Total of top ten U.S. structured finance exposures                   $      9,173                     10.0 %                                          117 

--------------------------------------------------------------------------------

  Table of Contents                            Ten Largest Non-U.S. Exposures                             As of December 31, 2011                                                            Percent of Total                                        Net Par            Non-U.S. Net Par                                      Outstanding             Outstanding         Rating                                                   (dollars in millions) Quebec Province                     $          2,224                       3.5 %   A+ Sydney Airport Finance Company                 1,553                       2.5    BBB Thames Water Utility Finance PLC                                    1,546                       2.5     A- Fortress Credit Investments I                  1,009                       1.6    AAA Channel Link Enterprises Finance PLC                                      908                       1.4    BBB Southern Gas Networks PLC                        821                       1.3    BBB International AAA Sovereign Debt Synthetic CDO                               821                       1.3    AAA Campania Region-Healthcare receivable                                       740                       1.2     A- Japan Expressway Holding and Debt Repayment Agency                            721                       1.1     AA Societe des Autoroutes du Nord et de l'est de France S.A.                       720                       1.1    BBB+  Total of top ten non-U.S. exposures                           $         11,063                      17.5 %   

Financial Guaranty Portfolio by Geographic Area

The following table sets forth the geographic distribution of the Company's financial guaranty portfolio as of December 31, 2011:

               Geographic Distribution of Financial Guaranty Portfolio                             as of December 31, 2011                                                                Percent of Total                                                 Net Par           Net Par                                               Outstanding       Outstanding                                                    (dollars in millions)       U.S.:       U.S. Public finance:       California                              $     57,815                 10.4 %       New York                                      33,268                  6.0       Pennsylvania                                  30,656                  5.5       Texas                                         29,922                  5.4       Florida                                       25,664                  4.6       Illinois                                      25,645                  4.6       New Jersey                                    17,071                  3.1       Michigan                                      15,832                  2.8       Massachusetts                                 11,390                  2.0       Other states                                 155,810                 27.9 

      Total U.S. Public finance                    403,073                

72.3

      Structured finance (multiple states)          92,234                

16.5        Total U.S.                                   495,307                 88.8       Non-U.S.       United Kingdom                                24,202                  4.3       Australia                                      8,356                  1.5       Canada                                         4,186                  0.8       France                                         4,056                  0.7       Italy                                          2,396                  0.4       Other                                         19,545                  3.5        Total non-U.S.                                62,741                 11.2 

      Total net par outstanding               $    558,048               

100.0 %                                          118 

--------------------------------------------------------------------------------

Table of Contents

Selected European Exposure

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

Economic Exposure to the Selected European Countries

      The Company's economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following tables, both gross and net of ceded reinsurance:              Gross Economic Exposure to Selected European Countries(1)                                December 31, 2011                            Greece     Hungary     Ireland     Italy    Portugal     Spain     Total                                                        (in millions) Sovereign and sub-sovereign exposure: Public finance            $   407    $      -    $      -   $ 1,359    $    139   $   424   $ 2,329 Infrastructure finance          -         481          24       351         102       172     1,130  Sub-total                     407         481          24     1,710         241       596     3,459 Non-sovereign exposure: Regulated utilities             -           -           -       238           -        20       258 RMBS                            -         269         136       585           -         -       990 Commercial receivables          -           1          28        30          16        24        99 Pooled corporate               35           -         279       313          25       618     1,270  Sub-total                      35         270         443     1,166          41       662     2,617  Total                     $   442    $    751    $    467   $ 2,876    $    282   $ 1,258   $ 6,076  Total BIG                 $   407    $    443    $     16   $   262    $    156   $   144   $ 1,428                                          119 

--------------------------------------------------------------------------------

   Table of Contents               Net Economic Exposure to Selected European Countries(1)                                December 31, 2011                            Greece     Hungary     Ireland     Italy    Portugal     Spain     Total                                                        (in millions) Sovereign and sub-sovereign exposure: Public finance            $   282    $      -    $      -   $ 1,011    $    113   $   264   $ 1,670 Infrastructure finance          -         453          24       332         102       169     1,080  Sub-total                     282         453          24     1,343         215       433     2,750  Non-sovereign exposure: Regulated utilities             -           -           -       220           -        20       240 RMBS                            -         257         136       516           -         -       909 Commercial receivables          -           1          28        29          15        23        96 Pooled corporate               34           -         241       289          25       550     1,139  Sub-total                      34         258         405     1,054          40       593     2,384  Total                     $   316    $    711    $    429   $ 2,397    $    255   $ 1,026   $ 5,134  Total BIG                 $   282    $    414    $     15   $   245    $    130   $   141   $ 1,227   

--------------------------------------------------------------------------------

º (1)

º While the Company's exposures are shown in U.S. dollars, the obligations

     the Company insures are in various currencies, including U.S. dollars,      Euros and British pounds sterling. Included in both tables above is      $136.1 million of reinsurance assumed on a 2004 - 2006 pool of Irish      residential mortgages that is part of the Company's legacy mortgage      reinsurance business ($171.6 million remaining, including the Irish

exposure) and so is not included in the Company's exposure tables elsewhere

in this document. One of the residential mortgage-backed securities

included in the table above includes residential mortgages in both Italy

and Germany, and only the portion of the transaction equal to the portion

of the original mortgage pool in Italian mortgages is shown in the tables.

      Included in "Public Finance" in the tables above are $282 million (net of reinsurance) of bonds of the Hellenic Republic of Greece. See "-Results of Operations-Consolidated Results of Operations-Losses in the Insured Portfolio-Other Non-RMBS Losses." The Company has not guaranteed any other sovereign bonds of the Selected European Countries. (The remainder of the "Public Finance Category" is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal.)      The tables above include the par amount of financial guaranty contracts accounted for as derivatives. The Company's credit derivative transactions are governed by ISDA documentation, and the Company is required to make a loss payment on them only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. For those financial guaranty contracts included in the tables above and accounted for as derivatives, the tables below show their fair value, net of reinsurance:       Fair Value Gain (Loss) of Financial Guaranty Contracts Accounted for as                                   Derivatives,         With Exposure to Selected European Countries, Net of Reinsurance                                December 31, 2011                                  Greece     Hungary     Ireland     Italy     Portugal     Spain                                                          (in millions)  Sovereign exposure:  Public finance                   $   -     $     -     $     -    $    -     $      -    $    -  Infrastructure finance               -          (2 )        (1 )      (4 )         (4 )      (1 )   Total sovereign exposure             -          (2 )        (1 )      (4 )         (4 )      (1 )   Non-sovereign exposure:  Regulated utilities                  -           -           -         -            -         -  RMBS                                 -          (2 )         -         -            -         -   Total non-sovereign exposure         -          (2 )         -         -            -         -   Total                            $   -     $    (4 )   $    (1 )  $   (4 )   $     (4 )  $   (1 )                                          120 

--------------------------------------------------------------------------------

Table of Contents

      The Company purchases reinsurance in the ordinary course to cover both its financial guaranty insurance and credit derivative exposures. Aside from this type of coverage the Company does not purchase credit default protection to manage the risk in its financial guaranty business. Rather, the Company has reduced its risks by ceding a portion of its business (including its financial guaranty contracts accounted for as derivatives) to third-party reinsurers that are generally required to pay their proportionate share of claims paid by the Company, and the net amounts shown above are net of such third-party reinsurance (reinsurance of financial guaranty contracts accounted for as derivatives is accounted for as a purchased derivative). See Note 12, Reinsurance and Other Monoline Exposures of the Financial Statements and Supplementary Data.  

Indirect Exposure to Selected European Countries

      The Company has included in the exposure tables above its indirect economic exposure to the Selected European Countries through insurance it provides on (a) pooled corporate and (b) commercial receivables transactions. The Company considers economic exposure to a Selected European Country to be indirect when that exposure relates to only a small portion of an insured transaction that otherwise is not related to that Selected European Country.      The Company's pooled corporate obligations are highly diversified in terms of obligors and, except in the case of TruPS CDOs or transactions backed by perpetual preferred securities ("Perps"), highly diversified in terms of industry. Most pooled corporate obligations are structured to limit exposure to any given obligor and any given non-U.S. country or region. The insured pooled corporate transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim. Some pooled corporate obligations include investments in companies with a nexus to the Selected European Countries.      The Company's commercial receivable transactions included in the exposure tables above are rail car lease transactions and aircraft lease transactions where some of the lessees have a nexus with the Selected European Countries. Like the pooled corporate transactions, the commercial receivable transactions generally benefit from embedded credit enhancement which allows a transaction a certain level of losses in the underlying collateral without causing the Company to pay a claim.      The following table shows the Company's indirect economic exposure (net of reinsurance) to the Selected European Countries in pooled corporate obligations and commercial receivable transactions calculated as the percent of the obligation insured by the Company (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) equal to the percent of the relevant collateral pool reported as having a nexus to the Selected European Countries:                 Net Indirect Exposure to Selected European Countries                                December 31, 2011                             Greece     Hungary     Ireland    Italy    Portugal    Spain     Total                                               (dollars in millions)  Pooled Corporate  $ millions                $    34    $      -    $    241    $ 289    $     25    $ 550   $ 1,139  Average proportion            2.7 %         - %       2.9 %    3.2 %       1.1 %    3.9 %     3.3 %  Commercial Receivables  $ millions                $     -    $      1    $     28    $  29    $     15    $  23   $    96  Average Proportion              - %       4.2 %       9.2 %    3.5 %       2.3 %    2.1 %     3.3 %   Total $ millions          $    34    $      1    $    269    $ 318    $     40    $ 573   $ 1,235        Many primarily U.S. pooled corporate obligations permit investments of up to 10% or 15% (or occasionally 20%) of the pool in non-U.S. (or non-U.S. or -Canadian) collateral. Given the relatively low level of permitted international investments in these transactions and their generally high current credit quality, they are excluded from the table above.                                        121

--------------------------------------------------------------------------------

Table of Contents

Selected European Countries

      The Company follows and analyzes public information regarding developments in countries to which the Company has exposure, including the Selected European Countries, and utilizes this information to evaluate risks in its financial guaranty portfolio. Because the Company guarantees payments under its financial guaranty contracts, its analysis is focused primarily on the risk of payment defaults by these countries or obligors in these countries. However, dramatic developments with respect to the Selected European Countries would also impact the fair value of insurance contracts accounted for as derivatives and with a nexus to those countries.      The Hellenic Republic of Greece, recently downgraded on February 27, 2012 by S&P from "CC" to "SD" (selective default) and rated "Ca" by Moody's, has experienced significant weakening of its economic and fiscal situation over the past three years, which in turn has led to multiple downgrades of its credit rating. The Greek authorities are currently in the process of negotiating a debt restructuring with creditors aimed at reducing public debt to 120% of GDP by 2020. The Steering Committee of the Private-Investor Committee for Greece has stated that the relief measures call for voluntary reductions of 53.5% of the notional amount of Greek sovereign debt held by banks and other private creditors. The Company's exposure to Greece consists of a bilateral guaranty of timely interest and principal on Greek sovereign bonds due in 2037 ($214 million net par bullet maturity bearing a fixed interest rate of 4.5%) and 2057 ($68 million net par bullet maturity bearing interest at an inflation-linked 2.085%). The guaranty covers neither accelerated principal nor voluntary exchanges. The Company rates these exposures below investment grade and has projected expected future losses of $42.6 million on them. See "-Results of Operations-Consolidated Results of Operations-Losses in the Insured Portfolio."      The Republic of Italy was downgraded to "BBB+" from "A" by S&P on January 13, 2012 and is rated "A2" by Moody's. The worsening domestic and global economic climate, high levels of public debt, limited funding availability and pending fiscal consolidation measures have had a negative impact on the Republic of Italy's economic prospects and credit ratings. Yields on Italian debt remain volatile at a time when financing needs are high. The Company's sovereign exposure to Italy depends on payments by Italian governmental sub-sovereigns in connection with infrastructure financings or for services already rendered. The Company internally rates one of the infrastructure transactions ($244 million net par) below investment grade. The Company's non-sovereign Italian exposure is to securities backed by Italian residential mortgages or in one case a government-sponsored water utility. The Company is closely monitoring the ability and willingness of these obligors to make timely payments on their obligations.      The Republic of Hungary, currently rated "BB+" and "Ba1" by S&P and Moody's, respectively, has been negatively impacted over the past five years by constrained fiscal flexibility and external imbalances, including a current account deficit and large, unhedged foreign currency exposures at the household level (since some households took out mortgages denominated in foreign currencies). In October 2008Hungary requested and later received financial assistance from the EU and the International Monetary Fund ("IMF"). Hungary again requested financial assistance in November 2011, which is currently under consideration. The Company's sovereign exposure to Hungarian credits includes infrastructure financings dependent on payments by government agencies. The Company rates one of the infrastructure financings ($414 million net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations. The Company's non-sovereign exposure to Hungary comprises primarily covered mortgage bonds issued by Hungarian banks.      The Kingdom of Spain was downgraded by S&P on January 13, 2012 to "A" from "AA-"and is rated "A1" by Moody's. Spain's financial profile and credit ratings have deteriorated over the past two years, partly as a result of large borrowing needs in the context of a challenging funding environment. The weakening of the country's real estate sector has resulted in the deterioration of the banking system's financial profile, in particular that of the savings and loans. The regional finances are also a source of concern, given the fiscal slippage exhibited by some of the regions. The newly elected Spanish government announced in December that the 2011 budget deficit was at around 8% of GDP in 2011, higher than the target of 6% of GDP. Fiscal consolidation measures are being implemented in an environment of economic contraction and high unemployment. The Company's exposure to Spanish                                        122

--------------------------------------------------------------------------------

Table of Contents

  credits includes infrastructure financings dependent on payments by sub-sovereigns and government agencies, financings dependent on lease and other payments by sub-sovereigns and government agencies, and an issuance by a regulated utility. The Company rates one of the infrastructure financings ($141 million net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations.      The Republic of Portugal was downgraded by S&P on January 13, 2012 to "BB" from "BBB-"and is rated "Ba2" Moody's. Over the past three years, the Republic of Portugal's economy and credit ratings have been adversely affected by fiscal imbalances, high indebtedness and the difficult macroeconomic situation generally facing the countries in the euro area. In order to stabilize its debt position, in April 2011 Portugal requested and subsequently received financial assistance from the EU and the IMF. In return, Portugal agreed to a set of deficit reduction and debt targets. The meeting of these targets will likely represent a significant burden on the Portuguese economy in an environment of decelerating economic activity and volatile bank and sovereign credit markets. The Company's exposure to Portuguese credits includes of infrastructure financings dependent on payments by sub-sovereigns and government agencies and financings dependent on lease payments by sub-sovereigns and government agencies. The Company rates four of these transactions ($130 million aggregate net par) below investment grade. The Company is closely monitoring developments with respect to the ability and willingness of these entities to meet their payment obligations.      The Republic of Ireland, currently rated "BBB+" and "Ba1" by S&P and Moody's, respectively, has been adversely affected over the past three years by the weakening global economic environment and the need to provide wide-ranging support to its banking sector, which resulted in a rapid deterioration of the country's public finances. In November 2010, the Republic of Ireland applied for and subsequently received a financial assistance package from the EU and the IMF. The package included an allocation to support the Irish banking system. Ireland's fiscal consolidation plan is being implemented in the context of a severe economic contraction and restricted availability of credit. The Company's exposure to Irish credits includes exposure in a pool of infrastructure financings dependent on payments by a sub-sovereigns and mortgage reinsurance on a pool of Irish residential mortgages originated in 2004-2006 left from its legacy mortgage reinsurance business. Only $15 million of the Company's exposure to Ireland is to below investment grade, and it is indirect in non-sovereign pooled corporate transactions.  

Identifying Exposure to Selected European Countries

      When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For most exposure this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location as it has, for example, in a residential mortgage backed security backed by residential mortgage loans in both Germany and Italy. The Company may also have exposures to the Selected European Countries in business assumed from other monoline insurance companies. See Note 12, Reinsurance and Other Monoline Exposures of the Financial Statements and Supplementary Data. In the case of Assumed Business, the Company depends upon geographic information provided by the primary insurer.      The Company also has indirect exposure to the Selected European Countries through structured finance transactions backed by pools of corporate obligations or receivables, such as lease payments, with a nexus to such countries. In most instances, the trustees and/or servicers for such transactions provide reports that identify the domicile of the underlying obligors in the pool (and the Company relies on such reports), although occasionally such information is not available to the Company. The Company has reviewed transactions through which it believes it may have indirect exposure to the Selected European Countries that is material to the transaction and included in the tables above the proportion of the insured par equal to the proportion of obligors so identified as being domiciled in a Selected European Country. The Company may also have indirect exposures to Selected European Countries in business assumed from other monoline insurance companies. However, in the case of Assumed Business, the primary insurer generally does not provide information to the Company                                        123

--------------------------------------------------------------------------------

Table of Contents

permitting it to geographically allocate the exposure proportionally to the domicile of the underlying obligors.

Financial Guaranty Portfolio by Issue Size

      The Company seeks broad coverage of the market by insuring and reinsuring small and large issues alike. The following table sets forth the distribution of the Company's portfolio as of December 31, 2011 by original size of the Company's exposure:                        Public Finance Portfolio by Issue Size                                                                       % of Public                                                                        Finance                                        Number of       Net Par         Net Par

Original Par Amount Per Issue Issues Outstanding Outstanding

                                                  (dollars in millions)       Less than $10 million                20,026    $     57,122          

12.9 %

      $10 through $50 million               7,456         134,152          

30.3

      $50 through $100 million              1,403          79,660          

18.0

      $100 million to $200 million            637          74,621          

16.9

      $200 million or greater                 338          96,564          

 21.9        Total                                29,860    $    442,119           100.0 %                        Structured Finance Portfolio by Issue Size                                                                     % of Structured                                                                        Finance                                      Number of       Net Par           Net Par     Original Par Amount Per Issue     Issues       Outstanding       Outstanding                                                  (dollars in millions)     Less than $10 million                   296    $        209                 0.2 %     $10 through $50 million                 611           9,191                 7.9     $50 through $100 million                250          10,869                 9.4     $100 million to $200 million            283          25,176                21.7     $200 million or greater                 286          70,484                60.8      Total                                 1,726    $    115,929               100.0 %   

Significant Risk Management Activities

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. The Company's internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and generally reflect an approach similar to that employed by the rating agencies.      The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company's view of the credit's quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company's insured credit ratings on assumed credits are based on the Company's reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company's credit rating of the transactions are used. For example, the Company models all assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.                                        124 

--------------------------------------------------------------------------------

Table of Contents

      Credits identified as BIG are subjected to further review to determine the probability of a loss (see "-Results of Operations-Consolidated Results of Operations-Losses in the Insured Portfolio" above). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects "lifetime losses" on a transaction when the Company believes there is more than a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it will ultimately have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk free rate is used for recording of reserves for financial statement purposes.) A "liquidity claim" is a claim that the Company expects to be reimbursed within one year.  

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

º •

º BIG Category 1: Below-investment-grade transactions showing sufficient

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

º BIG Category 2: Below-investment-grade transactions for which lifetime

          losses are expected but for which no claims (other than liquidity           claims) have yet been paid.          º •         º BIG Category 3: Below-investment-grade transactions for which lifetime           losses are expected and on which claims (other than liquidity claims)           have been paid. Transactions remain in this category when claims have           been paid and only a recoverable remains.               Net Par Outstanding for Below Investment Grade Credits                    By Category Below-Investment-Grade Credits                                              As of December 31, 2011                          Net Par Outstanding                         Number of Risks(2)                 Financial                                   Financial                  Guaranty         Credit                     Guaranty          Credit Description    Insurance(1)     Derivative      Total      Insurance(1)      Derivative     Total                                              (dollars in millions) BIG: Category 1     $       8,622     $     3,953   $ 12,575              171               40      211 Category 2             4,214           1,781      5,995               71               33      104 Category 3             7,317           2,327      9,644              126               26      152  Total BIG      $      20,153     $     8,061   $ 28,214              368               99      467                                                  As of December 31, 2010                         Net Par Outstanding                         Number of Risks(2)                 Financial                                  Financial                  Guaranty         Credit                    Guaranty          Credit Description    Insurance(1)     Derivative     Total      Insurance(1)      Derivative     Total                                              (dollars in millions) BIG: Category 1     $       5,450    $     3,241   $  8,691              119               31      150 Category 2             5,717          3,457      9,174               98               50      148 Category 3             7,281          1,660      8,941              115               12      127  Total BIG      $      18,448    $     8,358   $ 26,806              332               93      425   

--------------------------------------------------------------------------------

º (1)

º Includes FG VIE net par outstanding of $2,704 million as of December 31,

2011and $2,234 million as of December 31, 2010.

º (2)

º A risk represents the aggregate of the financial guaranty policies that

share the same revenue source for purposes of making Debt Service payments.

                                      125

--------------------------------------------------------------------------------

Table of Contents

Exposure to Residential Mortgage-Backed Securities

      The tables below provide information on the risk ratings and certain other risk characteristics of the Company's financial guaranty insurance and credit derivative RMBS exposures as of December 31, 2011. U.S. RMBS exposures represent 4% of the total net par outstanding and BIG U.S. RMBS represent 52% of total BIG net par outstanding. The tables presented provide information with respect to the underlying performance indicators of this book of business. Please refer to Note 5, Financial Guaranty Insurance Contracts, of the Financial Statements and Supplementary Data for a discussion of expected losses to be paid on U.S. RMBS exposures.      Net par outstanding in the following tables are based on values as of December 31, 2011. All performance information such as pool factor, subordination, cumulative losses and delinquency is based on December 31, 2011 information obtained from Intex, Bloomberg, and/or provided by the trustee and may be subject to restatement or correction.  

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

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

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

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

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

The Company has not insured or reinsured any U.S. RMBS transactions since June 2008.

     Distribution of U.S. RMBS by Internal Rating and Type of Exposure as of                                December 31, 2011                       Closed             Prime      End                                         Subprime       Net         Total Net             First    Second                 Alt-A       Option      First       Interest         Par Ratings:     Lien     Lien      HELOC     First Lien      ARM        Lien   

Margin Outstanding

                                                    (in millions) AAA          $   7   $     0   $   366    $       164   $     -    $   2,064     $      -    $      2,601 AA              21        24       213            158         -        1,705            -           2,122 A                2         1        21             11        39          888            -             962 BBB            133         -        11            340       191          552            -           1,228 BIG            576     1,015     3,279          4,655     2,203        2,902           25          14,655  Total exposures    $ 739   $ 1,040   $ 3,890    $     5,329   $ 2,433    $   8,111     $     25    $     21,567                                          126 

--------------------------------------------------------------------------------

   Table of Contents        Distribution of U.S. RMBS by Year Insured and Type of Exposure as of                                December 31, 2011                             Closed                   Prime      End                                         Subprime       Net         Total Net                   First    Second                 Alt-A       Option     

First Interest Par Year insured: Lien Lien HELOC First Lien ARM Lien Margin Outstanding

                                                           (in millions) 

2004 and prior $ 44$ 1$ 289 $ 117 $ 43 $

 1,512     $      0    $      2,007 2005                 176         -       879            633       116          238            0           2,042 2006                 121       447     1,163            424       556        3,456            0           6,167 2007                 398       591     1,559          2,720     1,626        2,809           25           9,727 2008                   -         -         -          1,434        93           97            -           1,624 

Total exposures $ 739$ 1,040$ 3,890$ 5,329$ 2,433 $

8,111 $ 25$ 21,567

Distribution of U.S. RMBS by Internal Rating and Year Insured as of December 31,

                                      2011                                AAA       AA        A        BBB       BIG 

Year insured: Rated Rated Rated Rated Rated

Total

                                               (dollars in millions) 

2004 and prior $ 1,307$ 86$ 75$ 192$ 347

  $  2,007           2005                  179         -        1       117      1,744      2,042           2006                  832     1,531      842       281      2,681      6,167           2007                  266       371       44       544      8,502      9,727           2008                   17       134        -        93      1,381      1,624 

Total exposures $ 2,601$ 2,122$ 962$ 1,228$ 14,655

  $ 21,567            % of total           12.1 %     9.8 %    4.5 %     5.7 %     67.9 %    100.0 %  

              Distribution of Financial Guaranty Direct U.S. RMBS     Insured January 1, 2005 or Later by Exposure Type, Average Pool Factor,

                                 Subordination,       Cumulative Losses and 60+ Day Delinquencies as of December 31, 2011                               U.S. Prime First Lien                     Net Par                                         Cumulative        60+ Day         Number of Year insured:    Outstanding     Pool Factor     Subordination       Losses 

Delinquencies Transactions

                                                     (dollars in millions) 2005              $       173            40.1 %             5.1 %          1.5 %            10.6 %             6 2006                      121            58.2               8.5            0.1              17.8               1 2007                      398            52.3               8.4            3.9              17.8               1 2008                        -               -                 -              -                 -               -                    $       691            50.3 %             7.6 %          2.7 %            16.0 %             8                              U.S. Closed End Second Lien                     Net Par                                        Cumulative        60+ Day         Number of Year insured:    Outstanding     Pool Factor     Subordination      Losses 

Delinquencies Transactions

                                                     (dollars in millions) 2005             $          -               - %               -             - %               - %             - 2006                      437            15.3                 -          60.7              11.1               2 2007                      591            18.5                 -          66.3              10.5              10 2008                        -               -                 -             -                 -               -                   $      1,028            17.1 %               -          63.9 %            10.8 %            12                                          127 

--------------------------------------------------------------------------------

  Table of Contents                                     U.S. HELOC                     Net Par                                        Cumulative        60+ Day         Number of Year insured:    Outstanding     Pool Factor     Subordination      Losses 

Delinquencies Transactions

                                                     (dollars in millions) 2005             $        827            17.6 %             2.7 %        15.0 %            12.8 %             6 2006                    1,139            28.1               2.5          33.5              10.5               7 2007                    1,559            43.2               3.3          29.4               7.6               9 2008                        -               -                 -             -                 -               -                   $      3,525            32.3 %             2.9 %        27.4 %             9.7 %            22                                 U.S. Alt-A First Lien                     Net Par                                        Cumulative        60+ Day         Number of Year insured:    Outstanding     Pool Factor     Subordination      Losses 

Delinquencies Transactions

                                                     (dollars in millions) 2005             $        631            34.6 %             9.8 %         5.9 %            19.2 %            21 2006                      424            40.1               0.0          17.4              37.7               7 2007                    2,720            51.5               4.7          12.6              33.9              12 2008                    1,434            48.3              22.3          12.5              30.7               5                   $      5,209            47.6 %             9.8 %        12.2 %            31.5 %            45                                    U.S. Option ARMs                     Net Par                                        Cumulative        60+ Day         Number of Year insured:    Outstanding     Pool Factor     Subordination      Losses 

Delinquencies Transactions

                                                     (dollars in millions) 2005             $        107            24.8 %             6.7 %         9.7 %            36.8 %             4 2006                      550            47.9               2.2          14.7              53.9               7 2007                    1,626            51.4               3.5          16.0              40.7              11 2008                       93            54.3              49.2          10.9              37.1               1                   $      2,375            49.5 %             5.1 %        15.2 %            43.4 %            23                                U.S. Subprime First Lien                     Net Par                                        Cumulative        60+ Day         Number of Year insured:    Outstanding     Pool Factor     Subordination      Losses 

Delinquencies Transactions

                                                     (dollars in millions) 2005             $        227            40.1 %            29.4 %         5.4 %            35.3 %             4 2006                    3,449            22.4              61.8          16.3              37.7               4 2007                    2,809            52.5              22.3          18.2              46.9              13 2008                       81            64.9              27.5          12.8              30.3               1                   $      6,565            36.4 %            43.4 %        16.7 %            41.5 %            22                                          128 

--------------------------------------------------------------------------------

Table of Contents

Exposures by Reinsurer

      Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers.      Assumed par outstanding represents the amount of par assumed by the Company from other monolines. Under these relationships, the Company assumes a portion of the ceding company's insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.      In addition to assumed and ceded reinsurance arrangements, the company may also have exposure to some financial guaranty reinsurers (i.e. monolines) in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by other monolines. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed maturity securities that are wrapped by monolines and whose value may decline based on the rating of the monoline. At December 31, 2011, based on fair value, the Company had $770.3 million of fixed maturity securities in its investment portfolio wrapped by National Public Finance Guarantee Corporation, $568.8 million by Ambac and $49.2 million by other guarantors.                                Exposure by Reinsurer                              Ratings at                          February 22, 2012            Par Outstanding as of December 31, 2011                         Moody's       S&P           Ceded           Second-to-Pay                        Reinsurer   Reinsurer         Par             Insured Par       Assumed Par Reinsurer               Rating      Rating      Outstanding(4)       Outstanding       Outstanding                                                    (dollars in millions) Radian(1)                 Ba1         B+         $       19,310     $           50     $           - Tokio Marine & Nichido Fire Insurance Co., Ltd.     Aa1(2)      AA-(2)               16,345                  -               934 American Overseas Reinsurance Company Limited(3)               WR(5)        WR                 11,444                  -                24 Syncora Guarantee Inc.            Ca          WR                  4,222              2,171               217 Mitsui Sumitomo Insurance Co. Ltd.        A1          A+                  2,407                  -                 - ACA Financial Guaranty Corp             NR          WR                    855                 12                 2 Swiss Reinsurance Co.           A1          AA-                   505                  -                 - Ambac                     WR          WR                     87              7,491            22,680 CIFG Assurance North America Inc               WR          WR                     69                258             6,561 MBIA Inc.                 (6)         (6)                    27             11,549            10,422 Financial Guaranty Insurance Co.             WR          WR                      -              3,857             2,138 Other                   Various     Various               1,023              1,992                96  Total                                            $       56,294     $       27,380     $      43,074   

--------------------------------------------------------------------------------

º (1)

º The Company entered into an agreement with Radian on January 24, 2012. See

"-Executive Summary-Business Overview-New Business Development."

º (2)

º The Company has structural collateral agreements satisfying the triple-A

     credit requirement of S&P and/or Moody's.     º (3)    º Formerly RAM Reinsurance Company Ltd.     º (4)

º Includes $5,438 million in ceded par outstanding related to insured credit

      derivatives.                                        129

--------------------------------------------------------------------------------

  Table of Contents     º (5)    º Represents "Withdrawn Rating."     º (6)

º MBIA Inc. includes various subsidiaries which are rated BBB to B by S&P and

      Baa2, B3, WR and NR by Moody's.                 Ceded Par Outstanding by Reinsurer and Credit Rating                             As of December 31, 2011                                                      Internal Credit Rating                             Super Reinsurer                   Senior      AAA        AA         A         BBB        BIG      Total                                                         (in millions) Radian.                     $    93   $   892   $  7,490   $  7,805   $  2,627   $   403   $ 19,310 Tokio Marine & Nichido Fire Insurance Co., Ltd.             361     1,540      4,673      6,037      2,941       793     16,345 American Overseas Reinsurance Company Limited                         265     1,657      4,049      3,262      1,642       569     11,444 Syncora Guarantee Inc.            -         -        287        962      2,330       643      4,222 Mitsui Sumitomo Insurance Co. Ltd.                8       171        825        917        404        82      2,407 ACA Financial Guaranty Corp                              -         -        483        329         43         -        855 Swiss Reinsurance Co.                       9          3        320         98        75        505 Ambac                             -         -          -         87          -         -         87 CIFG Assurance North America Inc.                      -         -          -          -          -        69         69 MBIA Inc.                         -         -         27          -          -         -         27 Other                             -         -        119        819         85         -      1,023  Total                       $   727   $ 4,269   $ 17,956   $ 20,538   $ 10,170   $ 2,634   $ 56,294   

    In accordance with statutory accounting requirements and U.S. insurance laws and regulations, in order for the Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their liabilities to the Company. All of the unauthorized reinsurers in the table above post collateral for the benefit of the Company in an amount equal to at least the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory basis of accounting. CIFG Assurance North America Inc. and Radian are authorized reinsurers. Their collateral equals or exceeds their ceded statutory loss reserves. Collateral may be in the form of letters of credit or trust accounts. The total collateral posted by all non-affiliated reinsurers as of December 31, 2011 is exceeds $1 billion.                                    Second-to-Pay                    Insured Par Outstanding by Internal Rating                            As of December 31, 2011(1)                                   Public Finance                                    Structured Finance                                                                    Super                   AAA      AA         A         BBB       BIG      Senior      AAA       AA        A      BBB     BIG     Total                                                                    (in millions) Radian            $  -   $     -   $     13   $    22   $    14    $     -   $     1   $     -   $   -   $   -   $   -   $     50 Syncora Guarantee Inc.       -        25        384       749       328          -       205       134      12      93     241      2,171 ACA Financial Guaranty Corp        -         8          -         4         -          -  

- - - - - 12 Ambac

                -     1,741      3,453     1,123       335          -        99        69     256      83     332      7,491 CIFG Assurance North America Inc.         -        11         69       133        45          -         -         -       -       -       -        258 MBIA Inc.           66     3,053      4,603     1,893         8          -         -     1,389      54     460      23     11,549 Financial Guaranty Insurance Co         -       154      1,251       570       355        476       728         -     254       8      61      3,857 Other                -         -      1,992         -         -          -         -         -       -       -       -      1,992  Total             $ 66   $ 4,992   $ 11,765   $ 4,494   $ 1,085    $   476 

$ 1,033$ 1,592$ 576$ 644$ 657$ 27,380

--------------------------------------------------------------------------------

   º (1)    º Assured Guaranty's internal rating.                                        130 

--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources

Liquidity Requirements and Sources

AGL and its Holding Company Subsidiaries

      AGL and its holding company subsidiaries' liquidity is largely dependent on its operating results and its access to external financing. Liquidity requirements include the payment of operating expenses, interest on debt of AGUS and AGMH and dividends on common shares. AGL and its holding company subsidiaries may also require liquidity to make periodic capital investments in its operating subsidiaries. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company maintains a balance of its most liquid assets including cash and short term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company also subjects its cash flow projections and its assets to a stress test maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months, including the ability to pay dividends on AGL common shares. See "-Insurance Company Regulatory Restrictions" below for a discussion of dividend restrictions. In addition, under the terms of the purchase agreement under which AGMH was acquired, AGM is subject to a dividend restriction until July 1, 2012.      The Company anticipates that for the next twelve months, amounts paid by AGL's operating subsidiaries as dividends will be a major source of its liquidity. It is possible that in the future, AGL or its subsidiaries may need to seek additional external debt or equity financing in order to meet its obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may be higher than the Company's current level.                         AGL and Holding Company Subsidiaries                           Significant Cash Flow Items                                                            Year Ended December 31,                                                          2011      2010      2009(1)                                                                (in millions)

Net proceeds from issuance of common shares $ - $ - $ 1,022.8

    Net proceeds from issuance of equity units                 -         -   

167.3

    Capital contributions to subsidiaries                      -         -   

(556.7 )

Dividends and return of capital from subsidiaries 166.0 124.0

72.1

    Dividends paid                                         (33.0 )   (33.2 ) 

(22.8 )

    Repurchases of common shares                           (23.3 )   (10.5 )      (3.7 )    Interest paid                                          (84.3 )   (84.3 )     (53.0 )  

--------------------------------------------------------------------------------

º (1)

º Since July 1, 2009, amounts include AGMH.

Insurance Company Subsidiaries

      Liquidity of the insurance company subsidiaries is primarily used to pay (1) operating expenses, (2) claims, including payment obligations in respect of credit derivatives, (3) collateral postings in connection with credit derivatives and reinsurance transactions, (4) reinsurance premiums, (5) dividends to AGUS and AGMH for debt service and dividends to AGL, and (6) where appropriate, to make capital investments in their own subsidiaries. Management believes that its subsidiaries' liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios. The Company intends to hold and has the ability to hold temporarily impaired debt securities until the date of anticipated recovery.      Beyond the next 12 months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, insurance regulations and rating agency capital requirements and general economic conditions.                                        131

--------------------------------------------------------------------------------

Table of Contents

      Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation's original payment schedule or, at the Company's option, may be on an accelerated basis. CDS may provide for acceleration of amounts due upon the occurrence of certain credit events, subject to single-risk limits specified in the insurance laws of the State of New York (the "New York Insurance Law"). These constraints prohibit or limit acceleration of certain claims according to Article 69 of the New York Insurance Law and serve to reduce the Company's liquidity requirements.      The Company also has outstanding exposures to certain infrastructure transactions in its insured portfolio that may expose it to refinancing risk. These transactions were entered into assuming they could be refinanced in the market prior to the expiration of the Company's financial guaranty policy. Due to market dislocation and increased credit spreads the Company may have to participate in these refinancings and then recover its payment from revenues produced by the transaction. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. The projected inflows and outflows are included in the Company's "Financial Guaranty Insurance BIG Transaction Loss Summary" table in Note 5, Financial Guaranty Insurance Contracts.      Payments made in settlement of the Company's obligations arising from its insured portfolio may, and often do, vary significantly from year-to-year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses.                                     Claims Paid                                             Year Ended December 31,                                           2011        2010       2009                                                 (in millions)                  Claims paid, net      $  1,142.0   $ 1,120.8   $ 771.3                  R&W recoveries(1)       (1,059.4 )    (189.1 )   (83.6 )                   Claims paid, net(2)   $     82.6   $   931.7   $ 687.7   

--------------------------------------------------------------------------------

   º (1)    º Includes recoveries under the Bank of America Agreement.     º (2)

º Includes $108.1 million and $143.4 million for consolidated FG VIEs for

2011 and 2010, respectively.

      The terms of the Company's CDS contracts generally are modified from standard CDS contract forms approved by ISDA in order to provide for payments on a scheduled basis and to replicate the terms of a traditional financial guaranty insurance policy. Some contracts the Company enters into as the credit protection seller, however, utilize standard ISDA settlement mechanics of cash settlement (i.e., a process to value the loss of market value of a reference obligation) or physical settlement (i.e., delivery of the reference obligation against payment of principal by the protection seller) in the event of a "credit event," as defined in the relevant contract. Cash settlement or physical settlement generally requires the payment of a larger amount, prior to the maturity of the reference obligation, than would settlement on a "pay-as-you-go" basis, under which the Company would be required to pay scheduled interest shortfalls during the term of the reference obligation and scheduled principal shortfall only at the final maturity of the reference obligation. The Company's CDS contracts also generally provide that if events of default or termination events specified in the CDS documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate the CDS contract prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination.  

Potential acceleration of claims with respect to CDS obligations occur with funded CDOs and synthetic CDOs, as described below:

º •

º Funded CDOs: The Company has credit exposure to the senior tranches of

funded corporate CDOs. The senior tranches are typically rated

triple-A at inception. While the majority of these exposures obligate

the Company to pay only shortfalls in scheduled interest and principal

          at final maturity, in a limited number of cases the Company has agreed           to physical settlement following                                        132 

--------------------------------------------------------------------------------

Table of Contents

           a credit event. In these limited circumstances, the Company has           adhered to internal limits within applicable statutory single risk           constraints. In these transactions, the credit events giving rise to a           payment obligation are (a) the bankruptcy of the special purpose

issuer or (b) the failure by the issuer to make a scheduled payment of

interest or principal pursuant to the referenced senior debt security.

         º •         º Synthetic CDOs: In the case of pooled corporate synthetic CDOs, where           the Company's credit exposure was typically set at "super senior"           levels at inception, the Company is exposed to credit losses of a           synthetic pool of corporate obligors following the exhaustion of a

deductible. In these transactions, losses are typically calculated

using ISDA cash settlement mechanics. As a result, the Company's

exposures to the individual corporate obligors within any synthetic

          transaction are constrained by the New York Insurance Law single risk           limits. In these transactions, the credit events giving rise to a           payment obligation are generally (a) the reference entity's           bankruptcy; (b) failure by the reference entity to pay its debt           obligations; and (c) in certain transactions, the restructuring of the           reference entity's debt obligations. The Company generally would not

be required to make a payment until aggregate credit losses exceed the

designated deductible threshold and only as each incremental default

           occurs. Once the deductible is exhausted, each further credit event           would give rise to cash settlements.                                 Pooled Corporate CDS                            As of December 31, 2011             As of December 31, 2010                      Net Par Outstanding         %       Net Par Outstanding         %                                              (dollars in millions) Funded CDOs            $           43,631           71 %   $           56,779           71 % Synthetic CDOs                     17,442           29                 23,154           29  Total pooled corporate CDS          $           61,073          100 %   $           79,933          100 %   

Insurance Company Regulatory Restrictions

      The insurance company subsidiaries' ability to pay dividends depends, among other things, upon their financial condition, results of operations, cash requirements, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. Dividends paid by a U.S. company to a Bermuda holding company presently are subject to a 30% withholding tax.      Under Maryland's insurance law, AGC may pay dividends out of earned surplus in any twelve-month period in an aggregate amount not exceeding the lesser of (a) 10% of policyholders' surplus or (b) net investment income at the preceding December 31 (including net investment income that has not already been paid out as dividends for the three calendar years prior to the preceding calendar year) without prior approval of the Maryland Commissioner of Insurance. As of December 31, 2011, the amount available for distribution from AGC during 2012 with notice to, but without prior approval of, the Maryland Commissioner was approximately $102.1 million.      Under the New York Insurance Law, AGM may pay dividends out of earned surplus, provided that, together with all dividends declared or distributed by AGM during the preceding 12 months, the dividends do not exceed the lesser of (a) 10% of policyholders' surplus as of its last statement filed with the Superintendent of Insurance of the State of New York (the "New York Superintendent") or (b) adjusted net investment income (net investment income at the preceding December 31 plus net investment income that has not already been paid out as dividends for the three calendar years prior to the preceding calendar year) during this period. Based on AGM's statutory statements for the year ended December 31, 2011, the maximum amount available for payment of dividends by AGM without regulatory approval over the 12 months following December 31, 2011 was approximately $120.9 million. In connection with Assured Guaranty's acquisition of AGMH, Assured Guaranty agreed with Dexia that, until July 1, 2012, AGM will not pay dividends in excess of 125% of AGMH's annual debt service. Until this covenant is no longer in effect, it constitutes a limitation on AGM's ability to pay dividends that is more restrictive than the statutory limitation.                                        133 

--------------------------------------------------------------------------------

Table of Contents

      The amount available at AG Re to pay dividends or make a distribution of contributed surplus in 2012 in compliance with Bermuda law is approximately $845 million. However, any distribution that results in a reduction of 15% ($193.6 million as of December 31, 2011) or more of AG Re's total statutory capital, as set out in its previous years' financial statements, would require the prior approval of the Bermuda Monetary Authority. Dividends are limited by requirements that the subject company must at all times (i) maintain the minimum solvency margin and the Company's applicable enhanced capital requirements required under the Insurance Act of 1978 and (ii) have relevant assets in an amount at least equal to 75% of relevant liabilities, both as defined under the Insurance Act of 1978. AG Re, as a Class 3B insurer, is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files (at least seven days before payment of such dividends) with the Authority an affidavit stating that it will continue to meet the required margins.  Cash Flows                                 Cash Flow Summary                                                             Year Ended December 31,                                                          2011        2010        2009                                                                 (in millions) Net cash flows provided by (used in) operating activities                                            $    675.6   $  129.2   $    279.2 Net cash flows provided by (used in) investing activities                                                 561.3      653.3     (1,397.2 ) Net cash flows provided by (used in) financing activities                                              (1,132.9 )   (717.4 )    1,148.6 Effect of exchange rate changes                              2.1       (0.8 )        1.2 Cash at beginning of period                                108.4       44.1 

12.3

  Total cash at the end of the period                   $    214.5   $  108.4   $     44.1        Operating cash flows in 2011 and 2010 include cash flows from FG VIEs. Claims paid on consolidated FG VIEs are presented in the consolidated cash flow statements as paydowns on FG VIE liabilities in financing activities as opposed to operating activities. Excluding consolidated FG VIEs the increase in operating cash flows was mainly due to the cash proceeds received under the Bank of America Agreement.      Operating cash flows in 2010 include a full year of AGMH activity compared to only six months in 2009 as well as net cash inflows for consolidated VIEs. Excluding consolidated VIEs, the decrease in operating cash flows in 2010 was due primarily to higher outflows for net paid losses, interest, other expenses and taxes, offset in part by premium on financial guaranty and credit derivatives. Interest payments were $91.6 million in 2011 compared to $92.2 million in 2010 and $56.4 million in 2009. Taxes paid were $33.5 million in 2010 compared to $39.2 million in 2010 and $27.8 million in 2009. Net premiums and credit derivative inflows increased in 2010 due to the inclusion of a full year of AGMH activity.      Investing activities were primarily net sales (purchases) of fixed maturity and short-term investment securities. Investing cash flows in 2011 and 2010 include $760.4 million inflow and $424.0 million inflow for FG VIEs, respectively. The 2009 investing cash outflows was due primarily to the cost of the AGMH Acquisition of $546.0 million, net of cash acquired of $87.0 million, purchases of fixed maturity securities with the cash generated from common share and equity units offerings and positive cash flows from operating activities.      Financing activities consisted primarily of paydowns of FG VIEs. Financing cash flows in 2011 and 2010 include $1,053.3 million outflow and $650.9 million outflow for FG VIEs, respectively. Financing inflows in 2009 resulted primarily from net cash proceeds from common share and equity units offerings.      On August 4, 2010, the Company's Board of Directors approved a share repurchase program for up to 2.0 million common shares. In August 2011, the Company paid $23.3 million to repurchase 2.0 million common shares. On November 14, 2011, the Company's Board of Directors approved a new share repurchase program, for up to 5.0 million common shares, to replace the prior program. Share repurchases will take place at management's discretion depending on market conditions. No shares were repurchased in 2011 under the program approved in 2011.                                        134

--------------------------------------------------------------------------------

  Table of Contents  Commitments and Contingencies       Leases      AGL and its subsidiaries are party to various lease agreements. Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed since December 31, 2009. The principal executive offices of AGL and AG Re consist of approximately 8,250 square feet of office space located in Hamilton, Bermuda. The lease for this space expires in April 2015.      The Company's primary lease for the principal place of business of AGM, AGC and its other U.S. based subsidiaries in New York City expires April 2026. In addition, the Company and its subsidiaries lease additional office space under non-cancelable operating leases, which expire at various dates through 2013. Prior to AGMH Acquisition, the Company had entered into a five year lease agreement in New York City, however, as a result of the AGMH Acquisition, the Company decided not to occupy this office space and subleased it to two tenants for total minimum annual payments of approximately $3.7 million until October 2013. The Company wrote off related leasehold improvements and recorded a pre-tax loss on the sublease of $11.7 million in second quarter 2009, which is included in "AGMH acquisition-related expenses" and "other liabilities" in the consolidated statements of operations and balance sheets, respectively. See "-Contractual Obligations" for lease payments due by period.  

Rent expense was $10.7 million in 2011, $11.4 million in 2010 and $10.6 million in 2009.

Long-Term Debt Obligations

The principal and carrying values of the Company's long-term debt issued by AGUS and AGMH were as follows:

                        Principal and Carrying Amounts of Debt                                     As of December 31, 2011       As of December 31, 2010                                                    Carrying                      Carrying                                    Principal        Value        Principal        Value                                                        (in millions) AGUS: 7.0% Senior Notes                 $      200.0     $   197.6    $      200.0     $   197.6 8.50% Senior Notes                       172.5         172.0           172.5         171.0 Series A Enhanced Junior Subordinated Debentures                  150.0         149.9           150.0         149.8  Total AGUS                               522.5         519.5           522.5         518.4 AGMH(1): 67/8% QUIBS                              100.0          67.4           100.0          67.0 6.25% Notes                              230.0         136.0           230.0         135.0 5.60% Notes                              100.0          53.5           100.0          53.0 Junior Subordinated Debentures           300.0         158.2           300.0         152.5  Total AGMH                               730.0         415.1           730.0         407.5  AGM(1): Notes Payable                             97.1         103.7           119.3         127.0  Total AGM                                 97.1         103.7           119.3         127.0  Total                             $    1,349.6     $ 1,038.3    $    1,371.8     $ 1,052.9   

--------------------------------------------------------------------------------

º (1)

º Principal amounts vary from carrying amounts due primarily to acquisition

method fair value adjustments at the Acquisition Date, which are accreted

or amortized into interest expense over the remaining terms of these

obligations.

    AGL fully and unconditionally guarantees the following debt obligations issued by AGUS: (1) 7.0% Senior Notes and (2) 8.50% Senior Notes. AGL also fully and unconditionally guarantees the following AGMH debt obligations: (1) 67/8% Quarterly Income Bonds Securities ("QUIBS"), (2) 6.25% Notes and (3) 5.60% Notes. In addition, AGL guarantees, on a junior subordinated basis, AGUS's                                        135

--------------------------------------------------------------------------------

Table of Contents

Series A, Enhanced Junior Subordinated Debentures and the $300 million of AGMH's outstanding Junior Subordinated Debentures.

Debt Issued by AGUS

    7.0% Senior Notes.  On May 18, 2004, AGUS issued $200.0 million of 7.0% senior notes due 2034 ("7.0% Senior Notes") for net proceeds of $197.3 million. Although the coupon on the Senior Notes is 7.0%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004.      8.50% Senior Notes.  On June 24, 2009, AGL issued 3,450,000 equity units for net proceeds of approximately $166.8 million in a registered public offering. The net proceeds of the offering were used to pay a portion of the consideration for the AGMH Acquisition. Each equity unit consists of (i) a forward purchase contract and (ii) a 5% undivided beneficial ownership interest in $1,000 principal amount 8.50% senior notes due 2014 issued by AGUS. Under the purchase contract, holders are required to purchase, and AGL is required to issue, between 3.8685 and 4.5455 of AGL common shares for $50 no later than June 1, 2012. The actual number of shares purchased will be based on the average closing price of the common shares over a 20-trading day period ending three trading days prior to June 1, 2012. More specifically, if the average closing price per share for the relevant period (the "Applicable Market Value") is equal to or exceeds $12.93, the settlement rate will be 3.8685 shares. If the Applicable Market Value is less than or equal to $11.00, the settlement rate will be 4.5455 shares, and if it is between $11.00 and $12.93, the settlement rate will be equal to the quotient of $50.00 and the Applicable Market Value. The notes are pledged by the holders of the equity units to a collateral agent to secure their obligations under the purchase contracts. Interest on the notes is payable, initially, quarterly at the rate of 8.50% per year. The notes are subject to a mandatory remarketing between December 1, 2011 and May 1, 2012 (or, if not remarketed during such period, during a designated three business day period in May 2012). In the remarketing, the interest rate on the notes will be reset and certain other terms of the notes may be modified, including to extend the maturity date, to change the redemption rights (as long as there will be at least two years between the reset date and any new redemption date) and to add interest deferral provisions. If the notes are not successfully remarketed, the interest rate on the notes will not be reset and holders of all notes will have the right to put their notes to the Company on the purchase contract settlement date at a put price equal to $1,000 per note ($50 per equity unit) plus accrued and unpaid interest. The notes are redeemable at AGUS' option, in whole but not in part, upon the occurrence and continuation of certain events at any time prior to the earlier of the date of a successful remarketing and the purchase contract settlement date. The aggregate redemption amount for the notes is equal to an amount that would permit the collateral agent to purchase a portfolio of U.S. Treasury securities sufficient to pay the principal amount of the notes and all scheduled interest payment dates that occur after the special event redemption date to, and including the purchase contract settlement date; provided that the aggregate redemption amount may not be less than the principal amount of the notes. Other than in connection with certain specified tax events or specified events related to changes in the accounting treatment of the purchase contracts or equity units, the notes may not be redeemed by AGUS prior to June 1, 2014.      Series A Enhanced Junior Subordinated Debentures.  On December 20, 2006, AGUS issued $150.0 million of the Debentures due 2066 for net proceeds of $149.7 million. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month London Interbank Offered Rate ("LIBOR") plus a margin equal to 2.38%. AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to 10 years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date.  

Debt Issued by AGMH

67/8% QUIBS. On December 19, 2001, AGMH issued $100.0 million face amount of 67/8% QUIBS due December 15, 2101, which are callable without premium or penalty.

6.25% Notes. On November 26, 2002, AGMH issued $230.0 million face amount of 6.25% Notes due November 1, 2102, which are callable without premium or penalty in whole or in part.

                                      136

--------------------------------------------------------------------------------

Table of Contents

      5.60% Notes.  On July 31, 2003, AGMH issued $100.0 million face amount of 5.60% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part.      Junior Subordinated Debentures.  On November 22, 2006, AGMH issued $300.0 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.40%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed 10 years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is 20 years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH.      Debt Issued by AGM      Notes Payable represent debt, issued by special purpose entities consolidated by AGM, to the Financial Products Companies transferred to Dexia Holdings prior to the AGMH Acquisition. The funds borrowed were used to finance the purchase of the underlying obligations of AGM-insured obligations which had breached triggers allowing AGM to exercise its right to accelerate payment of a claim in order to mitigate loss. The assets purchased are classified as assets acquired in refinancing transactions and recorded in "other invested assets." The term of the notes payable matches the terms of the assets.       Recourse Credit Facilities      2009 Strip Coverage Facility      In connection with the AGMH Acquisition, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. The liquidity risk to AGM related to the strip policy portion of the leveraged lease business is mitigated by the strip coverage facility described below.      In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.      If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the "strip coverage") from its own sources. AGM issued financial guaranty insurance policies (known as "strip policies") that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.      One event that may lead to an early termination of a lease is the downgrade of AGM, as the strip coverage provider, or the downgrade of the equity payment undertaker within the transaction, in each case, generally to a financial strength rating below double-A. Upon such downgrade, the tax-exempt entity is generally obligated to find a replacement credit enhancer within a specified period of time; failure to find a replacement could result in a lease default, and failure to cure the default within a specified period of time could lead to an early termination of the lease and a demand by the lessor for                                        137

--------------------------------------------------------------------------------

Table of Contents

  a termination payment from the tax-exempt entity. However, even in the event of an early termination of the lease, there would not necessarily be an automatic draw on AGM's policy, as this would only occur to the extent the tax exempt entity does not make the required termination payment.      AIG International Group, Inc. is one entity that has acted as equity payment undertaker in a number of transactions in which AGM acted as strip coverage provider. AIG was downgraded in the third quarter of 2008 and AGM was downgraded by Moody's in the fourth quarter of 2008. As a result of those downgrades, as of December 31, 2011, 45 leveraged lease transactions in which AGM acts as strip coverage provider were breaching either a ratings trigger related to AIG or a ratings trigger related to AGM. For such 45 leveraged lease transactions, if early termination of the leases were to occur 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 $1.0 billion as of December 31, 2011. S&P's downgrade of AGM to AA- in November 2011 did not have an additional impact on the transactions. However, if AGM were downgraded to A+ by S&P or A1 by Moody's, as of December 31, 2011, another 26 leveraged lease transactions in which AGM acts as strip coverage provider would be affected. For such 26 leveraged lease transactions, if early termination of the leases were to occur 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 an additional approximately $992 million as of December 31, 2011. To date, none of the leveraged lease transactions which involve AGM has experienced an early termination due to a lease default and a claim on the AGM guaranty. It is difficult to determine the probability that the Company will have to pay strip provider claims or the likely aggregate amount of such claims. At December 31, 2011, approximately $593 million of cumulative strip par exposure had been terminated on a consensual basis. The consensual terminations have resulted in no claims on AGM.      On July 1, 2009, AGM and DCL, acting through its New York Branch ("Dexia Crédit Local (NY)"), entered into a credit facility (the "Strip Coverage Facility"). Under the Strip Coverage Facility, Dexia Crédit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on AGM strip policies that were outstanding as of November 13, 2008, up to the commitment amount. The commitment amount of the Strip Coverage Facility was $1 billion at closing of the AGMH Acquisition but is scheduled to amortize over time. As of December 31, 2011, the maximum commitment amount of the Strip Coverage Facility has amortized to $980.5 million. It may also be reduced in 2014 to $750 million, if AGM does not have a specified consolidated net worth at that time.      Fundings under this facility are subject to certain conditions precedent, and their repayment is collateralized by a security interest that AGM granted to Dexia Crédit Local (NY) in amounts that AGM recovers-from the tax-exempt entity, or from asset sale proceeds-following its payment of strip policy claims. The Strip Coverage Facility will terminate upon the earliest to occur of an AGM change of control, the reduction of the commitment amount to $0, and January 31, 2042.      The Strip Coverage Facility's financial covenants require that AGM and its subsidiaries maintain a maximum debt-to-capital ratio of 30% and maintain a minimum net worth of 75% of consolidated net worth as of July 1, 2009, plus, starting July 1, 2014, 25% of the aggregate consolidated net income (or loss) for the period beginning July 1, 2009 and ending on June 30, 2014 or, if the commitment amount has been reduced to  as described above, zero. As of December 31, 2011 the Company is in compliance with all financial covenants founder the Strip Coverage Facility.      The Strip Coverage Facility contains restrictions on AGM, including, among other things, in respect of its ability to incur debt, permit liens, pay dividends or make distributions, dissolve or become party to a merger or consolidation. Most of these restrictions are subject to exceptions. The Strip Coverage Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, bankruptcy or insolvency proceedings and cross-default to other debt agreements.  

As of December 31, 2011, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.

                                      138

--------------------------------------------------------------------------------

  Table of Contents      2006 Credit Facility      On November 6, 2006, AGL and certain of its subsidiaries entered into a $300.0 million five-year unsecured revolving credit facility (the "2006 Credit Facility") with a syndicate of banks. Under the 2006 Credit Facility, each of AGC, Assured Guaranty (UK) Ltd., AG Re, Assured Guaranty Re Overseas Ltd. ("AGRO") and AGL was entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower.      The 2006 Credit Facility expired on November 6, 2011. The Company has determined it has sufficient liquidity and has decided not to enter into a new revolving credit facility at this time. The Company had never borrowed under the 2006 Credit Facility.       Limited-Recourse Credit Facilities      AG Re Credit Facility      On July 31, 2007, AG Re entered into a limited recourse credit facility ("AG Re Credit Facility") with a syndicate of banks which provides up to $200.0 million for the payment of losses in respect of the covered portfolio. The AG Re Credit Facility expires in June 2014. The facility can be utilized after AG Re has incurred, during the term of the facility, cumulative municipal losses (net of any recoveries) in excess of the greater of $260 million or the average annual debt service of the covered portfolio multiplied by 4.5%. The obligation to repay loans under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral.  

As of December 31, 2011, no amounts were outstanding under this facility nor have there been any borrowings during the life of this facility.

AGM Credit Facility

      On April 30, 2005, AGM entered into a limited recourse credit facility ("AGM Credit Facility") with a syndicate of international banks which provided up to $297.5 million for the payment of losses in respect of the covered portfolio. AGM terminated the AGM Credit Facility in December 2011. There were no borrowings under the AGM Credit Facility during its life. The AGM Credit Facility has been replaced, effective as of January 1, 2012, with a new $435 million excess of loss reinsurance facility for the benefit of AGM and AGC. See Note 12, Reinsurance and Other Monoline Exposures, of the Financial Statements and Supplementary Data.  

Letters of Credit

      AGC entered into a letter of credit agreement in December 2011 with Bank of New York Mellon totaling approximately $2.9 million in connection with a 2008 lease for office space, which space was subsequently sublet. This agreement replaces a previous letter of credit for $2.9 million with Royal Bank of Scotland which was terminated in December 2011. The previous letter of credit was outstanding as of December 31, 2010 and the current letter of credit was outstanding as of December 31, 2011.       Committed Capital Securities       The AGC CCS Securities      On April 8, 2005, AGC entered into separate agreements (the "Put Agreements") with four custodial trusts (each, a "Custodial Trust") pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50 million of perpetual preferred stock of AGC (the "AGC Preferred Stock").      Each of the Custodial Trusts is a special purpose Delaware statutory trust formed for the purpose of (a) issuing a series of flex AGC CCS Securities representing undivided beneficial interests in the assets of the Custodial Trust; (b) investing the proceeds from the issuance of the AGC CCS Securities or any redemption in full of AGC Preferred Stock in a portfolio of high-grade commercial paper and (in limited cases) U.S. Treasury Securities (the "Eligible Assets"), and (c) entering into the Put                                        139

--------------------------------------------------------------------------------

Table of Contents

Agreement and related agreements. The Custodial Trusts are not consolidated in Assured Guaranty's financial statements.

      Income distributions on the AGC CCS Securities were equal to an annualized rate of one-month LIBOR plus 110 basis points for all periods ending on or before April 8, 2008. For periods after that date, distributions on the AGC CCS Securities were determined pursuant to an auction process. However, on April 7, 2008 the auction process failed. As a result, the annualized rate on the AGC CCS Securities increased to one-month LIBOR plus 250 basis points. When a Custodial Trust holds Eligible Assets, the relevant distribution period is 28 days; when a Custodial Trust holds AGC Preferred Stock, however, the distribution period is 49 days.  

Put Agreements. Pursuant to the Put Agreements, AGC pays a monthly put premium to each Custodial Trust except during any periods when the relevant Custodial Trust holds the AGC Preferred Stock that has been put to it or upon termination of the Put Agreement. This put premium equals the product of:

         º •         º the applicable distribution rate on the AGC CCS Securities for the           relevant period less the excess of (a) the Custodial Trust's stated           return on the Eligible Assets for the period (expressed as an annual           rate) over (b) the expenses of the Custodial Trust for the period           (expressed as an annual rate);          º •

º the aggregate face amount of the AGC CCS Securities of the Custodial

          Trust outstanding on the date the put premium is calculated; and          º •         º the number of days in the distribution period divided by 360.      Upon AGC's exercise of its put option, the relevant Custodial Trust will liquidate its portfolio of Eligible Assets and purchase the AGC Preferred Stock. The Custodial Trust will then hold the AGC Preferred Stock until the earlier of the redemption of the AGC Preferred Stock and the liquidation or dissolution of the Custodial Trust.      The Put Agreements have no scheduled termination date or maturity. However, each Put Agreement will terminate if (subject to certain grace periods) (1) AGC fails to pay the put premium as required, (2) AGC elects to have the AGC Preferred Stock bear a fixed rate dividend (a "Fixed Rate Distribution Event"), (3) AGC fails to pay dividends on the AGC Preferred Stock, or the Custodial Trust's fees and expenses for the related period, (4) AGC fails to pay the redemption price of the AGC Preferred Stock, (5) the face amount of a Custodial Trust'sCCS Securities is less than $20 million, (6) AGC terminates the Put Agreement, or (7) a decree of judicial dissolution of the Custodial Trust is entered. If, as a result of AGC's failure to pay the put premium, the Custodial Trust is liquidated, AGC will be required to pay a termination payment, which will in turn be distributed to the holders of the AGC CCS Securities. The termination payment will be at a rate equal to 1.10% per annum of the amount invested in Eligible Assets calculated from the date of the failure to pay the put premium through the end of the applicable period. As of December 31, 2011 the put option had not been exercised.      AGC Preferred Stock.  The dividend rate on the AGC Preferred Stock is determined pursuant to the same auction process applicable to distributions on the AGC CCS Securities. However, if a Fixed Rate Distribution Event occurs, the distribution rate on the AGC Preferred Stock will be the fixed rate equivalent of one-month LIBOR plus 2.50%. For these purposes, a "Fixed Rate Distribution Event" will occur when AGC Preferred Stock is outstanding, if (subject to certain grace periods): (1) AGC elects to have the AGC Preferred Stock bear dividends at a fixed rate, (2) AGC does not pay dividends on the AGC Preferred Stock for the related distribution period or (3) AGC does pay the fees and expenses of the Custodial Trust for the related distribution period. During the period in which AGC Preferred Stock is held by a Custodial Trust and unless a Fixed Rate Distribution Event has occurred, dividends will be paid every 49 days. Following a Fixed Rate Distribution Event, dividends will be paid every 90 days.      Unless redeemed by AGC, the AGC Preferred Stock will be perpetual. Following exercise of the put option during any Flexed Rate Period, AGC may redeem the AGC Preferred Stock held by a Custodial Trust in whole and not in part on any distribution payment date by paying the Custodial                                        140

--------------------------------------------------------------------------------

Table of Contents

  Trust the liquidation preference amount of the AGC Preferred Stock plus any accrued but unpaid dividends for the then current distribution period. If AGC redeems the AGC Preferred Stock held by a Custodial Trust, the Custodial Trust will reinvest the redemption proceeds in Eligible Assets and AGC will pay the put premium to the Custodial Trust. If the AGC Preferred Stock was distributed to holders of AGC CCS Securities during any Flexed Rate Period then AGC may not redeem the AGC Preferred Stock until the end of the period.      Following exercise of the put option, AGC Preferred Stock held by a Custodial Trust in whole or in part on any distribution payment date by paying the Custodial Trust the liquidation preference amount of the AGC Preferred Stock to be redeemed plus any accrued but unpaid dividends for the then current distribution period. If AGC partially redeems the AGC Preferred Stock held by a Custodial Trust, the redemption proceeds will be distributed pro rata to the holders of the CCS Securities (with a corresponding reduction in the aggregate face amount of AGC CCS Securities). However, AGC must redeem all of the AGC Preferred Stock if, after giving effect to a partial redemption, the aggregate liquidation preference amount of the AGC Preferred Stock held by the Custodial Trust immediately following such redemption would be less than $20 million. If a Fixed Rate Distribution Event occurs, AGC may not redeem the AGC Preferred Stock for two years from the date of the Fixed Rate Distribution Event.  

The AGM CPS Securities

      In June 2003, $200.0 million of AGM CPS Securities, money market preferred trust securities, were issued by trusts created for the primary purpose of issuing the AGM CPS Securities, investing the proceeds in high-quality commercial paper and selling put options to AGM, allowing AGM to issue the trusts noncumulative redeemable perpetual preferred stock (the "AGM Preferred Stock") of AGM in exchange for cash. There are four trusts each with an initial aggregate face amount of $50 million. These trusts hold auctions every 28 days at which time investors submit bid orders to purchase AGM CPS Securities. If AGM were to exercise a put option, the applicable trust would transfer the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, to AGM in exchange for Preferred Stock of AGM. 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 any auction does not attract sufficient clearing bids, however, the auction rate is subject to a maximum rate of 200 basis points above LIBOR for the next succeeding distribution period. Beginning in August 2007, the AGM CPS Securities required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock. The trusts provide AGM access to new capital at its sole discretion through the exercise of the put options. The Company does not consider itself to be the primary beneficiary of the trusts. As of December 31, 2011 the put option had not been exercised.                                        141

--------------------------------------------------------------------------------

  Table of Contents       Contractual Obligations      The following table summarizes the Company's contractual obligations as of December 31, 2011:                                                       As of December 31, 2011                                     Less Than       1-3        3-5       After                                       1 Year       Years      Years     5 Years      Total                                                           (in millions) Long-term debt: 7.0% Senior Notes(1)                 $    14.0   $    28.0   $  28.0   $   443.5   $    513.5 8.50% Senior Notes(1)                     14.7       193.3         -           -        208.0 Series A Enhanced Junior Subordinated Debentures(1)                 9.6        19.2      19.2       629.8        677.8 67/8% QUIBS(1)                             6.9        13.8      13.8       684.5        719.0 6.25% Notes(1)                            14.4        28.8      28.8     1,464.7      1,536.7 5.60% Notes (1)                            5.6        11.2      11.2       584.9        612.9 Junior Subordinated Debentures(1)         19.2        38.4      38.4     1,259.8      1,355.8 Notes Payable(1)                          37.2        40.7      18.3        21.8        118.0 Operating lease obligations(2)            15.7        22.6      15.7        73.9        127.9 Financial guaranty claim payments(3)                            1,508.4       778.2       6.2     1,848.6      4,141.4 Other compensation plans(4)                5.6         3.3       1.6           -         10.5  Total                                $ 1,651.3   $ 1,177.5   $ 181.2   $ 7,011.5   $ 10,021.5   

--------------------------------------------------------------------------------

   º (1)    º Principal and interest. See also Note 15, Long-Term Debt and Credit      Facilities, of the Financial Statements and Supplementary Data.     º (2)

º Operating lease obligations exclude escalations in building operating costs

and real estate taxes.

º (3)

º Financial guaranty claim payments represent undiscounted expected cash

outflows under direct and assumed financial guaranty contracts whether

accounted for as insurance or credit derivatives, including claim payments

     under contracts in consolidated FG VIEs. The amounts presented are not      reduced for cessions under reinsurance contracts. Amounts include any      benefit anticipated from excess spreads within the contracts but do not      reflect any benefit for recoveries under breaches of R&W. 

º (4)

º Except for $4.2 million contractually payable in less than 1 year, certain

obligations included above will be reduced if employees voluntarily

terminate. Amount excludes approximately $30.0 million of liabilities under

various supplemental retirement plans, which are fair valued and payable at

     the time of termination of employment by either employer or employee.      Amount also excludes approximately $19.5 million of liabilities under AGL      2004 long term incentive plan, which are fair valued and payable at the      time of termination of employment by either employer or employee with      change of control. Given the nature of these awards, we are unable to      determine the year in which they will be paid. 

Investment Portfolio

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

Fixed Maturity Securities and Short-Term Investments

      The Company's fixed maturity securities and short-term investments had a duration of 4.7 years as of December 31, 2011, compared with 5.0 years as of December 31, 2010. The Company's fixed maturity securities are designated as available-for-sale. Fixed maturity securities are reported at their fair value, and the change in fair value is reported as part of AOCI except for the credit component of the unrealized loss for securities deemed to be OTTI. If management believes the decline in fair value is "other-than-temporary," the Company writes down the carrying value of the investment and records a realized loss in the consolidated statements of operations for an amount equal to the credit component of the unrealized loss. For additional information, see Note 9, Investments, of the Financial Statements and Supplementary Data.      Fair value of fixed maturity securities is based upon market prices provided by either independent pricing services or, when such prices are not available, by reference to broker or underwriter bid                                        142

--------------------------------------------------------------------------------

Table of Contents

  indications. The Company's fixed maturity and short term portfolio is primarily invested in publicly traded securities. For more information about the Investment Portfolio and a detailed description of the Company's valuation of investments see Note 9, Investments, of the Financial Statements and Supplementary Data.                 Fixed Maturity Securities and Short Term Investments                                 by Security Type                                                     As of December 31, 2011                                                     Gross          Gross                                     Amortized     Unrealized     Unrealized     Estimated                                        Cost          Gain           Loss       Fair Value                                                         (in millions) Fixed maturity securities: U.S. government and agencies        $    850.2    $      72.3    $      (0.1 )  $    922.4 Obligations of state and political subdivisions                 5,097.3          358.6           (0.5 )     5,455.4 Corporate securities                     989.0           51.8           (2.4 )     1,038.4 Mortgage-backed securities(1): RMBS                                   1,454.3           63.9          (90.3 )     1,427.9 CMBS                                     475.6           24.4              -         500.0 Asset-backed securities                  439.5           37.7          (19.1 )       458.1 Foreign government securities            332.6           13.3           

(6.2 ) 339.7

  Total fixed maturity securities        9,638.5          622.0         (118.6 )    10,141.9 Short-term investments                   734.0              -              -         734.0  Total fixed maturity and short-term investments              $ 10,372.5    $     622.0    $    (118.6 )  $ 10,875.9                                                         As of December 31, 2010                                                     Gross          Gross                                     Amortized     Unrealized     Unrealized     Estimated                                        Cost          Gain           Loss       Fair Value                                                         (in millions) Fixed maturity securities: U.S. government and agencies        $  1,000.3    $      48.3    $      (0.4 )  $  1,048.2 Obligations of state and political subdivisions                 4,922.0           99.9          (62.0 )     4,959.9 Corporate securities                     980.1           25.2          (12.8 )       992.5 Mortgage-backed securities(1): RMBS                                   1,158.9           56.5          (44.3 )     1,171.1 CMBS                                     365.7           14.8           (1.4 )       379.1 Asset-backed securities                  498.2            9.9           (5.2 )       502.9 Foreign government securities            349.5            5.3           

(6.2 ) 348.6

  Total fixed maturity securities        9,274.7          259.9         (132.3 )     9,402.3 Short-term investments                 1,055.3            0.3              -       1,055.6  Total fixed maturity and short-term investments              $ 10,330.0    $     260.2    $    (132.3 )  $ 10,457.9   

--------------------------------------------------------------------------------

º (1)

º The Company's total percentage of mortgage-backed securities that were

government-agency obligations was approximately 66% as of December 31, 2011

and 64% as of December 31, 2010. Excluding loss mitigation purchases,

government-agency obligations as a percentage of mortgage-backed securities

were 71% as of December 31, 2011 and 69% as of December 31, 2010.

                                      143

--------------------------------------------------------------------------------

Table of Contents

    The following tables summarize, for all fixed maturity securities in an unrealized loss position as of December 31, 2011 and 2010, 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 December 31, 2011                       Less than 12 months            12 months or more                Total                      Fair         Unrealized       Fair        Unrealized      Fair      Unrealized                      Value           Loss          Value          Loss         Value        Loss                                                 (dollars in millions) U.S. government and agencies       $      3.8      $      (0.1 )  $      -      $         -   $   3.8    $      (0.1 ) Obligations of state and political subdivisions             17.0             (0.0 )      20.6             (0.5 )    37.6           (0.5 ) Corporate securities               79.9             (2.3 )       3.1             (0.1 )    83.0           (2.4 ) Mortgage-backed securities: RMBS                    186.6            (68.2 )      36.5            (22.1 )   223.1          (90.3 ) CMBS                      2.8             (0.0 )         -                -       2.8           (0.0 ) Asset-backed securities                  -                -        25.7            (19.1 )    25.7          (19.1 ) Foreign government securities              141.4             (6.2 )         -                -     141.4           (6.2 )  Total              $    431.5      $     (76.8 )  $   85.9      $     (41.8 ) $ 517.4    $    (118.6 )  Number of securities                                  72                           54                      126  Number of securities with OTTI                                         6                            4                       10                                                      As of December 31, 2010                       Less than 12 months           12 months or more                 Total                       Fair        Unrealized      Fair        Unrealized       Fair       Unrealized                      Value           Loss         Value          Loss          Value         Loss                                                  (dollars in millions) U.S. government and agencies       $      20.5    $      (0.4 )  $      -      $         -   $    20.5    $      (0.4 ) Obligations of state and political subdivisions           1,694.5          (58.9 )      23.5             (3.1 )   1,718.0          (62.0 ) Corporate securities               403.6          (12.8 )         -                -       403.6          (12.8 ) Mortgage-backed securities: RMBS                     143.4          (32.1 )      37.3            (12.2 )     180.7          (44.3 ) CMBS                      92.6           (1.4 )         -                -        92.6           (1.4 ) Asset-backed securities               228.3           (5.1 )       2.3             (0.1 )     230.6           (5.2 ) Foreign government securities               245.3           (6.2 )         -                -       245.3           (6.2 )  Total              $   2,828.2    $    (116.9 )  $   63.1      $     (15.4 ) $ 2,891.3    $    (132.3 )  Number of securities                                405                           18                        423  Number of securities with OTTI                                       10                            3                         13        The $13.7 million decrease in gross unrealized losses was primarily due to a decrease of unrealized losses attributable to municipal securities offset by increases in gross unrealized losses attributable to RMBS and asset-backed securities. Of the securities in an unrealized loss position for 12 months or more as of December 31, 2011, 10 securities had an unrealized loss greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2011 was $40.8 million. The Company has determined that the unrealized losses recorded as of December 31, 2011 are yield related and not the result of other-than-temporary impairments.      Changes in interest rates affect the value of the Company's fixed maturity portfolio. As interest rates fall, the fair value of fixed maturity securities increases and as interest rates rise, the fair value of fixed maturity securities decreases. The Company's portfolio of fixed maturity securities consists                                        144

--------------------------------------------------------------------------------

Table of Contents

  primarily of high-quality, liquid instruments. The Company continues to receive sufficient information to value its investments and has not had to modify its approach due to the current market conditions.  

The amortized cost and estimated fair value of the Company's available-for-sale fixed maturity securities as of December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

         Distribution of Fixed Maturity Securities by Contractual Maturity                                                             As of                                                      December 31, 2011                                                   Amortized     Estimated                                                      Cost      Fair Value                                                        (in millions)           Due within one year                      $   391.3    $    391.1           Due after one year through five years      1,543.0       1,599.6           Due after five years through 10 years      2,372.2       2,592.0           Due after 10 years                         3,402.1       3,631.3           Mortgage-backed securities:           RMBS                                       1,454.3       1,427.9           CMBS                                         475.6         500.0            Total                                    $ 9,638.5    $ 10,141.9        The following table summarizes the ratings distributions of the Company's investment portfolio as of December 31, 2011 and December 31, 2010. Ratings reflect the lower of the Moody's and S&P classifications, except for bonds purchased for loss mitigation or risk management strategies, which use Assured Guaranty's internal ratings classifications.                 Distribution of Fixed Maturity Securities by Rating                                           As of December 31,                        Rating           2011          2010                        AAA                 19.0 %         43.2 %                        AA                  62.6           36.1                        A                   14.5           15.0                        BBB                    -            1.8                        BIG(1)               1.6            2.0                        Not rated(1)         2.3            1.9                         Total                100 %        100.0 %   

--------------------------------------------------------------------------------

º (1)

º Includes securities purchased or obtained as part of loss mitigation or

other risk management strategies of $923.7 million in par with carrying

     value of $378.3 million or 3.7% of fixed maturity securities as of      December 31, 2011 and of $748.7 million in par with carrying value of      $309.1 million or 3.3% of fixed maturity securities as of December 31,      2010.      As of December 31, 2011, the Company's investment portfolio contained 30 securities that were not rated or rated BIG, compared to 37 securities as of December 31, 2010. As of December 31, 2011 and December 31, 2010, the weighted average credit quality of the Company's entire investment portfolio was AA.      The Company purchased securities that it has insured, and for which it has expected losses, in order to mitigate the economic effect of insured losses. These securities were purchased at a discount and are accounted for excluding the effects of the Company's insurance on the securities. As of December 31, 2011, securities purchased for loss mitigation purposes, excluding securities issued by consolidated FG VIEs, had a fair value of $192.3 million representing $701.3 million of gross par outstanding. Under the terms of certain credit derivative contracts, the Company has obtained the                                        145

--------------------------------------------------------------------------------

Table of Contents

  obligations referenced in the transactions and recorded such assets in fixed maturity securities in the consolidated balance sheets. Such amounts totaled $186.0 million, representing $222.4 million in par.      As of December 31, 2011, $1,388.3 million of the Company's fixed maturity securities were guaranteed by third parties. The following table presents the fair value of securities with third-party guaranties by underlying credit rating:                                              As of                                          December 31,                             Rating(1)        2011                                         (in millions)                             AAA          $         2.4                             AA                   809.5                             A                    568.4                             BBB                      -                             BIG                    8.0                              Total        $     1,388.3   

--------------------------------------------------------------------------------

   º (1)    º Ratings are lower of Moody's and S&P.                        Distribution by Third-Party Guarantor                                                                As of                                                            December 31,           Guarantor                                            2011                                                           (in millions)           National Public Finance Guarantee Corporation    $       770.3           Ambac                                                    568.8           CIFG Assurance North America Inc                          24.1           Financial Guaranty Insurance Co                           11.1           Syncora Guarantee Inc                                      9.0           Berkshire Hathaway Assurance Corporation                   5.0            Total                                            $     1,388.3        Short-term investments include securities with maturity dates equal to or less than one year at the time of purchase. The Company's short-term investments consist of money market funds, discounted notes and certain time deposits for foreign cash portfolios. Short-term investments are reported at fair value.      Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts for the benefit of reinsured companies, which amounted to $380.1 million and $365.3 million as of December 31, 2011 and 2010, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $23.9 million and $19.2 million as of December 31, 2011 and December 31, 2010, respectively, for the protection of the policyholders. To provide collateral for a letter of credit, the Company holds a fixed maturity investment in a segregated account which amounted to $3.5 million as of December 31, 2011. There were no fixed maturity investments in a segregated account as of December 31, 2010.      Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on mark-to-market valuations in excess of contractual thresholds. The fair market value of the Company's pledged securities totaled $779.9 million and $765.9 million as of December 31, 2011 and 2010, respectively.  

Other Invested Assets

Assets Acquired in Refinancing Transactions

      The Company has rights under certain of its financial guaranty insurance policies and indentures that allow it to accelerate the insured notes and pay claims under its insurance policies upon the occurrence of predefined events of default. To mitigate financial guaranty insurance losses, the                                        146

--------------------------------------------------------------------------------

Table of Contents

  Company elected to purchase certain outstanding insured obligation or its underlying collateral, primarily franchise loans. Generally, refinancing vehicles reimburse AGM in whole for its claims payments in exchange for assignments of certain of AGM's rights against the trusts. The refinancing vehicles obtained their funds from the proceeds of AGM-insured GICs issued in the ordinary course of business by the Financial Products Companies (See "-Liquidity Arrangements with respect to AGMH's former Financial Products Business-The GIC Business" below). The refinancing vehicles are consolidated with the Company.  

Investment in Portfolio Funding Company LLC I

      In the third quarter of 2010, as part of loss mitigation efforts under a CDS contract insured by the Company, the Company acquired a 50% interest in Portfolio Funding Company LLC I ("PFC"). PFC owns the distribution rights of a motion picture film library. The Company accounts for its interest in PFC as an equity investment. The Company's equity earnings in PFC are included in net change in fair value of credit derivatives, as any proceeds from the investment are used to offset the Company's payments under its CDS contract.  

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

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

The GIC Business

      Until November 2008, AGMH issued, through its financial products business, AGM-insured GICs to municipalities and other market participants. The GICs were issued through AGMH's non-insurance subsidiaries (the "GIC Issuers") FSA Capital Management Services LLC, FSA Capital Markets Services LLC and FSA Capital Markets Services (Caymans) Ltd. In return for an initial payment, each GIC entitles its holder to receive the return of the holder's invested principal plus interest at a specified rate, and to withdraw principal from the GIC as permitted by its terms. AGM insures the GIC Issuer's payment obligations on all GICs issued by the applicable GIC Issuer.      The proceeds of GICs issued by the GIC Issuers were loaned to AGMH's former subsidiary "FSAM pursuant to certain intercompany financing agreements between the GIC Issuers and FSAM (the "Intercompany Financings"). FSAM in turn invested these funds in fixed-income obligations (primarily residential mortgage-backed securities, but also short-term investments, securities issued or guaranteed by U.S. government sponsored agencies, taxable municipal bonds, securities issued by utilities, infrastructure-related securities, collateralized debt obligations, other asset-backed securities and foreign currency denominated securities) that satisfied AGM's investment criteria (the "FSAM assets"). The terms governing FSAM's repayment of GIC proceeds to the GIC Issuers under the Intercompany Financings were intended to match the payment terms under the related GIC. FSAM historically depended in large part on operating cash flow from interest and principal payments on the FSAM assets to provide sufficient liquidity to pay the GICs on a timely basis. FSAM also sought to manage the financial products business liquidity risk through the maintenance of liquid collateral and liquidity agreements. During the course of 2008, AGMH's former financial products business developed significant liquidity shortfalls as a result of a number of factors, including (i) greater-than-anticipated GIC withdrawals and terminations due, for the most part, to redemptions caused by events of default under collateralized debt obligations backed by asset-backed securities and under-collateralized loan obligations; (ii) slower-than-anticipated amortization of residential mortgage-backed securities, which comprised most of the portfolio of FSAM assets; (iii) redemption/collateralization requirements triggered by the downgrade of AGM's financial strength ratings; and (iv) a significant decline in market value of certain of the FSAM assets due to a general market dislocation, leading to many of the FSAM assets becoming illiquid.  

Prior to the completion of the AGMH Acquisition, AGMH sold its ownership interest in the GIC Issuers and FSAM to Dexia Holdings. Even though AGMH no longer owns the GIC Issuers or FSAM,

                                      147

--------------------------------------------------------------------------------</p>

Table of Contents

AGM's guarantees of the GICs remain in place, and must remain in place until each GIC is terminated.

    In connection with the AGMH Acquisition and as further described below, Dexia SA, Dexia Holdings' ultimate parent, and certain of its affiliates have entered into a number of agreements pursuant to which they have guaranteed certain amounts, agreed to lend certain amounts or post liquid collateral, and agreed to provide hedges against interest rate risk to or in respect of AGMH's former financial products business, including the GIC business. The purpose of these agreements is to mitigate the credit, interest rate and liquidity risks described above that are primarily associated with the GIC business and the related AGM guarantees. These agreements include a guaranty jointly and severally issued by Dexia SA and DCL to AGM that guarantees the payment obligations of AGM under its policies related to the GIC business, and an indemnification agreement between AGM, Dexia SA and DCL that protects AGM from other losses arising out of or as a result of the GIC business, as well as the liquidity facilities and the swap agreements described below.      On June 30, 2009, to support the payment obligations of FSAM and the GIC Issuers, each of Dexia SA and DCL entered into two separate ISDA Master Agreements, each with its associated schedule, confirmation and credit support annex (the "Guaranteed Put Contract" and the "Non-Guaranteed Put Contract" respectively, and collectively, the "Dexia Put Contracts"), the economic effect of which is that Dexia SA and DCL jointly and severally guarantee the scheduled payments of interest and principal in relation to each FSAM asset, as well as any failure of Dexia to provide liquidity or liquid collateral under the committed liquidity lending facilities provided by Dexia affiliates. The Dexia Put Contracts referenced separate portfolios of FSAM assets to which assets owned by FSAM as of September 30, 2008 were allocated, with the less-liquid assets and the assets with the lowest mark-to-market values generally being allocated to the Guaranteed Put Contract.      On May 27, 2011, Dexia issued a press release announcing the acceleration of its asset divestment program as part of the financial restructuring of its group. Since such announcement, through December 31, 2011, Dexia has exercised its par call option under the Guaranteed Put Contract, over time, with respect to all of the FSAM assets covered thereby and transferred to FSAM an amount of cash equal to the par value of such assets. As a result, the credit, interest rate and liquidity protection provided by the Guaranteed Put Contract effectively terminated when the last FSAM asset covered thereby was sold.  

Separately, pursuant to the Non-Guaranteed Put Contract, FSAM may put an amount of FSAM assets to Dexia SA and DCL:

          º •         º in exchange for funds in an amount generally equal to the lesser of:               º (a)              º the outstanding principal balance of the GICs and               º (b)              º the shortfall related to (i) the failure of a Dexia party to                provide liquidity or collateral as required under the committed                liquidity lending facilities provided by Dexia affiliates, as                described below (a "Liquidity Default Trigger"), or (ii) the                failure by either Dexia SA or DCL to transfer the required amount                of eligible collateral under the credit support annex of the                Non-Guaranteed Put Contract (a "Collateral Default Trigger"); 

º •

º in exchange for funds in an amount equal to the outstanding principal

amount of an FSAM asset with respect to which any of the following

          events have occurred (an "Asset Default Trigger"):               º (a)              º the issuer of such FSAM asset fails to pay the full amount of the                expected interest when due or to pay the full amount of the                expected principal when due (following expiration of any grace                period) or within five business days following the scheduled due                date,               º (b)              º a writedown or applied loss results in a reduction of the                outstanding principal amount, or               º (c)              º the attribution of a principal deficiency or realized loss                results in a reduction or subordination of the current interest                payable on such FSAM asset;            provided, that Dexia SA and DCL have the right to elect to pay only           the difference between the amount of the expected principal or           interest payment and the amount of the actual principal or                                        148 

--------------------------------------------------------------------------------

Table of Contents

            interest payment, in each case, as such amounts come due, rather than           paying an amount equal to the outstanding principal amount of           applicable FSAM asset; and/or          º •         º in exchange for funds in an amount equal to the lesser of:               º (a)              º the aggregate outstanding principal amount of all FSAM assets and               º (b)              º the aggregate outstanding principal balance of all of the GICs,                upon the occurrence of an insolvency event with respect to                Dexia SA as set forth in the Non-Guaranteed Put Contract (a                "Bankruptcy Trigger").      To secure the Non-Guaranteed Put Contract, Dexia SA and DCL will, pursuant to the credit support annex thereto, post eligible highly liquid collateral having an aggregate value (subject to agreed reductions) equal to at least the excess of (i) the aggregate principal amount of all outstanding GICs over (ii) the aggregate mark-to-market value of FSAM's assets. The agreed-to reductions applicable to the value of FSAM assets range from 98% to 82% percent for obligations backed by the full faith and credit of the United States, sovereign obligations of the United Kingdom, Germany, the Netherlands, France or Belgium, obligations guaranteed by the Federal Deposit Insurance Corporation (FDIC) and for mortgage securities issued or guaranteed by U.S. sponsored agencies, and range from 75% to 0% for the other FSAM assets.      As of December 31, 2011, the aggregate accreted GIC balance was approximately $4.7 billion. As of the same date, with respect to the FSAM assets covered by the Non-Guaranteed Put Contract, the aggregate accreted principal balance was approximately $6.6 billion, the aggregate market value was approximately $6.0 billion and the aggregate market value after agreed reductions was approximately $5.1 billion. Cash and net derivative value constituted another $0.2 billion of assets. Accordingly, as of December 31, 2011, the aggregate fair value (after agreed reductions) of the assets supporting the GIC business exceeded the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the GIC business. Therefore, no posting of collateral was required under the credit support annex applicable to the Non-Guaranteed Put Contract. Under the terms of that credit support annex, the collateral posting is recalculated on a weekly basis according to the formula set forth in the credit support annex, and a collateral posting is required whenever the collateralization levels tested by the formula are not satisfied, subject to a threshold of up to $5 million.      To provide additional support to the GIC Issuers' ability to pay their GIC obligations when due, Dexia affiliates have agreed to assume the risk of loss and support the payment obligations of the GIC Subsidiaries in respect of the GICs and the GIC business by providing liquidity commitments to lend against the FSAM assets. The term of the commitments will generally extend until the GICs have been paid in full. The liquidity commitments comprise (i) an amended and restated revolving credit agreement (the "Liquidity Facility") pursuant to which DCL and Dexia Bank Belgium SA commit to provide funds to FSAM in an amount up to $8.0 billion (approximately $1.6 billion of which was outstanding as of December 31, 2011), and (ii) a master repurchase agreement (the "Repurchase Facility Agreement" and, together with the Liquidity Facility, the "Guaranteed Liquidity Facilities") pursuant to which DCL will provide up to $3.5 billion of funds in exchange for the transfer by FSAM to DCL of FSAM securities that are not eligible to satisfy collateralization obligations of the GIC Issuers under the GICs. As of December 31, 2011, no amounts were outstanding under the Repurchase Facility Agreement. The failure of the Dexia affiliates to perform on the Guaranteed Liquidity Facilities will trigger Dexia SA's and DCL's obligations to purchase FSAM assets under the Non-Guaranteed Put Contract, as described above.      Despite the execution of the Non-Guaranteed Put Contract and the Guaranteed Liquidity Facilities, and the significant portion of FSAM assets comprised of highly liquid securities backed by the full faith and credit of the United States (as of December 31, 2011 approximately 62.1% of the FSAM Assets (measured by aggregate principal balance) was in cash or were obligations backed by the full faith and credit of the United States), AGM remains subject to the risk that Dexia may not make payments or securities available (i) on a timely basis, which is referred to as "liquidity risk," or (ii) at all, which is referred to as "credit risk," because of the risk of default. Even if Dexia has sufficient assets to pay all amounts when due, concerns regarding Dexia's financial condition or willingness to comply with their obligations could cause one or more rating agencies to view negatively the ability or                                        149

--------------------------------------------------------------------------------

Table of Contents

willingness of Dexia and its affiliates to perform under their various agreements and could negatively affect AGM's ratings.

      If Dexia or its affiliates do not fulfill the contractual obligations, the Financial Products Companies may not have the financial ability to pay upon the withdrawal of GIC funds or post collateral or make other payments in respect of the GICs, thereby resulting in claims upon the AGM financial guaranty insurance policies. If AGM is required to pay a claim due to a failure of the GIC Subsidiaries to pay amounts in respect of the GICs, AGM is subject to the risk that the GICs will not be paid from funds received from Dexia before it is required to make payment under its financial guaranty policies or that it will not receive the guaranty payment at all.      One situation in which AGM may be required to pay claims in respect of AGMH's former financial products business if Dexia and its affiliates do not comply with their obligations is if AGM is downgraded. Most of the GICs insured by AGM allow for the withdrawal of GIC funds in the event of a downgrade of AGM, unless the relevant GIC Issuer posts collateral or otherwise enhances its credit. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody's, with no right of the GIC Issuer to avoid such withdrawal by posting collateral or otherwise enhancing its credit. Each GIC contract stipulates the thresholds below which the GIC provider must post eligible collateral along with the types of securities eligible for posting and the collateralization percentage applicable to each security type. These collateralization percentages range from 100% of the GIC balance for cash posted as collateral to, typically, 108% for asset-backed securities. At December 31, 2011, a downgrade of AGM to below AA- by S&P and Aa3 by Moody's (i.e., A+ by S&P and A1 by Moody's) would result in withdrawal of $397.2 million of GIC funds and the need to post collateral on GICs with a balance of $3.7 billion. In the event of such a downgrade, assuming an average margin of 105%, the market value as of December 31, 2011 that the GIC Issuers would be required to post in order to avoid withdrawal of any GIC funds would be $3.9 billion.  

The Medium Term Notes Business

      In connection with the AGMH Acquisition, DCL agreed to fund, on behalf of AGM and Assured Guaranty (Bermuda) Ltd., 100% of all policy claims made under financial guaranty insurance policies issued by AGM and Assured Guaranty (Bermuda) in relation to the medium term notes issuance program of FSA Global Funding Limited. Such agreement is set out in a Separation Agreement, dated as of July 1, 2009, between DCL, AGM, Assured Guaranty (Bermuda), FSA Global Funding and Premier International Funding Co., and in a funding guaranty and a reimbursement guaranty that DCL issued for the benefit of AGM and Assured Guaranty (Bermuda). Under the funding guaranty, DCL guarantees to pay to or on behalf of AGM or Assured Guaranty (Bermuda) amounts equal to the payments required to be made under policies issued by AGM or Assured Guaranty (Bermuda) relating to the medium term notes business. Under the reimbursement guaranty, DCL guarantees to pay reimbursement amounts to AGM or Assured Guaranty (Bermuda) for payments they make following a claim for payment under an obligation insured by a policy they have issued. Notwithstanding DCL's obligation to fund 100% of all policy claims under those policies, AGM and Assured Guaranty (Bermuda) have a separate obligation to remit to DCL a certain percentage (ranging from 0% to 25%) of those policy claims. AGM, the Company and related parties are also protected against losses arising out of or as a result of the medium term note business through an indemnification agreement with DCL.  

Strip Coverage Facility for the Leveraged Lease Business

      Under the Strip Coverage Facility entered into in connection with the AGMH Acquisition, Dexia Credit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on certain AGM strip policies, as described further under "Commitments and Contingencies-Recourse Credit Facilities-2009 Strip Coverage Facility" under this Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations. AGM may request advances under the Strip Coverage Facility without any explicit limit on the number of loan                                        150

--------------------------------------------------------------------------------

Table of Contents

requests, provided that the aggregate principal amount of loans outstanding as of any date may not initially exceed the commitment amount. The commitment amount:

º (a)

º may be reduced at the option of AGM without a premium or penalty; and

º (b)

º will be reduced in the amounts and on the dates described in the Strip

Coverage Facility either in connection with the scheduled amortization

          of the commitment amount or to $750 million if AGM's consolidated net           worth as of June 30, 2014 is less than a specified consolidated net           worth. 

As of December 31, 2011, the maximum commitment amount of the Strip Coverage Facility has amortized to $980.5 million.

As of December 31, 2011, no advances were outstanding under the Strip Coverage Facility.

Dexia Crédit Local (NY)'s commitment to make advances under the Strip Coverage Facility is subject to the satisfaction by AGM of customary conditions precedent, including compliance with certain financial covenants, and will terminate at the earliest of (i) the occurrence of a change of control with respect to AGM, (ii) the reduction of the Commitment Amount to $0 and (iii) January 31, 2042.

                                      151

--------------------------------------------------------------------------------

Table of Contents