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Assured Guaranty: Index To Consolidated Financial Statements

The following excerpt is from the company's SEC filing.

June 30, 2015

Consolidated Balance Sheets (unaudited) as of June 30, 2015 and December 31, 2014

Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014

Consolidated Statement of Shareholder’s Equity (unaudited) for the Six Months Ended June 30, 2015

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014

Notes to Consolidated Financial Statements (unaudited)

Assured Guaranty Corp.

(dollars in millions except per share and share amounts)

Assets

Investment portfolio:

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $2,460 and $1,945)

Short-term investments, at fair value

Other invested assets

Equity method investments in affiliates

Total investment portfolio

Premiums receivable, net of commissions payable

Ceded unearned premium reserve

Reinsurance recoverable on unpaid losses

Salvage and subrogation recoverable

Credit derivative assets

Deferred tax asset, net

Financial guaranty variable interest entities’ assets, at fair value

Other assets

Total assets

Liabilities and shareholder’s equity

Unearned premium reserve

Loss and loss adjustment expense reserve

Reinsurance balances payable, net

Note payable to affiliate

Credit derivative liabilities

Current income tax payable

Financial guaranty variable interest entities’ liabilities with recourse, at fair value

Financial guaranty variable interest entities’ liabilities without recourse, at fair value

Other liabilities

Total liabilities

Commitments and contingencies (See Note 16)

Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding)

Common stock ($720 par value, 500,000 shares authorized; 20,834 shares issued and outstanding)

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income, net of tax of $15 and $34

Total shareholder’s equity

Total liabilities and shareholder’s equity

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

(in millions)

Three Months Ended June 30,

Revenues

Net earned premiums

Net investment income

Net realized investment gains (losses):

Other-than-temporary impairment losses

Less: portion of other-than-temporary impairment loss recognized in other comprehensive income

Net impairment loss

Other net realized investment gains (losses)

Net change in fair value of credit derivatives:

Realized gains (losses) and other settlements

Net unrealized gains (losses)

Fair value gains (losses) on committed capital securities

Fair value gains (losses) on financial guaranty variable interest entities

Bargain purchase gain and settlement of pre-existing relationships, net

Other income (loss)

Total revenues

Expenses

Loss and loss adjustment expenses

Amortization of deferred ceding commissions

Interest expense

Other operating expenses

Total expenses

Income (loss) before income taxes and equity in net earnings of investee

Provision (benefit) for income taxes

Total provision (benefit) for income taxes

Equity in net earnings of investee

Net income (loss)

Unrealized holding gains (losses) arising during the period on:

Investments with no other-than-temporary impairment, net of tax provision (benefit) o

f $(14), $5, $(13) and $18

Investments with other-than-temporary impairment, net of tax provision (benefit) of $1, $0, $0 and $1

Unrealized holding gains (losses) arising during the period, net of tax

Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(2), $0, $5 and $0

Change in net unrealized gains (losses) on investments

Change in cumulative translation adjustment, net of tax provision (benefit) of $2, $1, $(1) and $1

Other comprehensive income (loss)

Comprehensive income (loss)

For the

Paid-in

Capital

Earnings

Accumulated Other Comprehensive Income

Balance at December 31, 2014

Dividends

Other comprehensive loss

Balance at June 30, 2015

Net cash flows provided by (used in) operating activities

Investing activities

Fixed-maturity securities:

Purchases

Maturities

Net sales (purchases) of short-term investments

Net proceeds from paydowns on financial guaranty variable interest entities’ assets

Acquisition of Radian Asset, net of cash acquired

Repayment of notes receivable from affiliate

Net cash flows provided by (used in) investing activities

Financing activities

Dividends paid

Net paydowns of financial guaranty variable interest entities’ liabilities

Net cash flows provided by (used in) financing activities

Effect of foreign exchange rate changes

Increase (decrease) in cash

Cash at beginning of period

Cash at end of period

Supplemental cash flow information

Cash paid (received) during the period for:

Income taxes

Business and Basis of Presentation

Assured Guaranty Corp. (“AGC” and, together with its subsidiaries, the “Company”), a Maryland domiciled insurance company, is an indirect and wholly-owned operating subsidiary of Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty”). AGL is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (“U.S.”) and international public finance (including infrastructure) and structured finance markets.

The Company applies its credit underwriting judgment, risk management skills and capital markets experience to offer financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (“Debt Service”), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the U.K., and also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

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

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company and its consolidated variable interest entities (“VIEs”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements are as of

and cover the three-month period ended

Second Quarter 2015

"), the three-month period ended

June 30, 2014

Second Quarter 2014

"), six-month period ended

Six Months 2015

") and the six-month period ended

Six Months 2014

"). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end balance sheet data was derived from audited financial statements.

The unaudited interim consolidated financial statements include the accounts of AGC and its subsidiaries and its consolidated VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

These unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of AGC included in Exhibit 99.1 in AGL's Form 8-K dated April 1, 2015, filed with the U.S. Securities and Exchange Commission (the “SEC”).

AGC's principal subsidiary is Assured Guaranty (UK) Ltd. (“AGUK”), a company incorporated in the United Kingdom (“U.K.”) as a U.K. insurance company. AGC owns 100% of AGUK's outstanding shares and elected to place AGUK into runoff in 2010. AGC owns 39.3% of the outstanding shares of Municipal Assurance Holdings Inc. ("MAC Holdings"), a Delaware company formed to hold all of the outstanding shares of Municipal Assurance Corp. ("MAC"), a New York domiciled insurance company.

Future Application of Accounting Standards

Consolidation

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve certain areas of consolidation guidance for legal entities such as limited partnerships, limited liability companies, and securitization structures. The ASU will be effective on January 1, 2016. Early adoption is permitted, including adoption in an interim period. The Company does not expect that ASU 2015-02 will have any material effect on its Consolidated Financial Statements.

Acquisition of Radian Asset Assurance Inc.

On April 1, 2015 (“Acquisition Date”), AGC completed the acquisition (“Radian Asset Acquisition”) of all of the issued and outstanding capital stock of financial guaranty insurer Radian Asset Assurance Inc. (“Radian Asset”) for $804.5 million; the cash consideration was paid from AGC's available funds and from the proceeds of a $200 million loan from AGC’s direct parent, AGUS. AGC repaid the loan in full to AGUS on April 14, 2015. Radian Asset was merged with and into AGC, with AGC as the surviving company of the merger. The Radian Asset Acquisition added $13.6 billion to the Company's net par outstanding on April 1, 2015, and is consistent with one of the Company's key business strategies of supplementing its book of business through acquisitions.

Radian Asset Acquisition was accounted for under the acquisition method of accounting which required that the assets and liabilities acquired be recorded at fair value. The Company was required to exercise significant judgment to determine the fair value of the assets it acquired and liabilities it assumed in the Radian Asset Acquisition. The most significant of these determinations related to the valuation of Radian Asset's financial guaranty insurance and credit derivative contracts. On an aggregate basis, Radian Asset’s contractual premiums for financial guaranty contracts were less than the premiums a market participant of similar credit quality would demand to acquire those contracts at the Acquisition Date, particularly for below-investment-grade transactions, resulting in a significant amount of the purchase price being allocated to these contracts. For information on the methodology the Company used to measure the fair value of assets it acquired and liabilities it assumed in the Radian Asset Acquisition, including financial guaranty insurance and credit derivative contracts, please refer to Note 8, Fair Value Measurement.

The fair value of the Company's stand-ready obligation on the Acquisition Date is recorded in unearned premium reserve. At the Acquisition Date, the fair value of each financial guaranty contract acquired was in excess of the expected losses for each contract and therefore no explicit loss reserves were recorded on the Acquisition Date. Instead, loss reserves and loss and loss adjustment expenses ("LAE") will be recorded when the expected losses for each contract exceeds the remaining unearned premium reserve, in accordance with the Company's accounting policy described in the annual consolidated financial statements of the Company. The expected losses acquired by the Company as part of the Radian Asset Acquisition are included in the description of expected losses to be paid under Note 6, Expected Losses to be Paid.

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

The following table shows the net effect of the Radian Asset Acquisition, including the effects of the settlement of pre-existing relationships.

Fair Value of Net Assets Acquired, before Settlement of Pre-existing Relationships

Net effect of Settlement of Pre-existing Relationships

Net Effect of Radian Asset Acquisition

Cash purchase price(1)

Identifiable assets acquired:

Financial guaranty VIE assets

Liabilities assumed:

Unearned premium reserves

Financial guaranty VIE liabilities

Net asset effect of Radian Asset Acquisition

Bargain purchase gain and settlement of pre-existing relationships resulting from Radian Asset Acquisition, after-tax

Bargain purchase gain and settlement of pre-existing relationships resulting from Radian Asset Acquisition, pre-tax

_____________________

The cash purchase price of $804 million was the cash transferred for the acquisition which was allocated as follows: (1) $798 million for the purchase of net assets of $853 million and (ii) the settlement of pre-existing relationships between Radian Asset and AGC at a fair value of $6 million.

Revenue and net income related to Radian Asset from the Acquisition Date through June 30, 2015 included in the consolidated statement of operations were approximately $162 million and $117 million, respectively. For Second Quarter 2015 and Six Months 2015, the Company recognized transaction expenses related to the Radian Asset Acquisition. These expenses primarily consisted of fees paid to the Company's legal and financial advisors and to the Company's independent auditor.

Radian Asset Acquisition-Related Expenses

Professional services

Financial advisory fees

Unaudited Pro Forma Results of Operations

The following unaudited pro forma information presents the combined results of operations of the Company and Radian Asset as if the acquisition had been completed on January 1, 2014, as required under GAAP. The pro forma accounts include the estimated historical results of the Company and Radian Asset and pro forma adjustments primarily comprising the earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships and Radian acquisition related expenses, all net of tax at the applicable statutory rate.

The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2014, nor is it indicative of the results of operations in future periods.

Pro Forma Unaudited Results of Operations

Pro forma revenues

Pro forma net income

Rating Actions

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

In the last several years, Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc. ("Moody's") have changed, multiple times, their financial strength ratings of AGC and AGUK, or changed the outlook on such ratings. The rating agencies' most recent actions and proposals related to AGC and AGUK are:

On March 18, 2014, S&P upgraded the financial strength ratings of AGC and AGUK to AA (stable outlook) from AA- (stable outlook); it most recently affirmed such ratings in a credit analysis issued on June 29, 2015.

On July 2, 2014, Moody's affirmed the A3 ratings of AGC and AGUK but changed the outlook to negative. Moody's adopted changes to its credit methodology for financial guaranty insurance companies on January 20, 2015 and, on February 18, 2015, Moody's published a credit opinion maintaining its existing ratings of AGC and AGUK under that new methodology. In a summary opinion published on June 4, 2015, Moody’s noted that, despite adverse developments in Puerto Rico, Moody’s believed that its current ratings on the financial guarantors remained well positioned.

There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings of AGC and AGUK in the future.

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

Note 7, Financial Guaranty Insurance Losses

Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives

Note 15, Reinsurance and Other Monoline Exposures

Outstanding Exposure

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

Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings.

Structured finance obligations insured by the Company are generally issued by special purpose entities, including VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 10, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and Debt Service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated.

Surveillance Categories

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

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

Credits identified as BIG are subjected to further review to determine the probability of a loss. See Note 6, Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. For surveillance purposes, the Company calculates present value using a constant discount rate of 4.5%. (Risk-free rates are used for calculating the expected loss for financial statement measurement purposes.)

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

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

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

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

Components of Outstanding Exposure

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

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

mitigate the economic effect of insured losses ("loss mitigation securities"). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated) from par and Debt Service outstanding, because it manages such securities as investments and not insurance exposure.

Debt Service Outstanding

Gross Debt Service

Net Debt Service

December 31,

(in millions)

128,582

121,238

62,849

51,064

25,524

24,454

18,832

16,860

Total financial guaranty

154,106

145,692

81,681

67,924

As of

, the Company also had exposure to €12 million of surety reinsurance contracts relating to Spanish housing cooperatives risk.

Financial Guaranty Portfolio by Internal Rating

As of June 30, 2015

Public Finance

Non-U.S.

Structured Finance

Rating Category

Net Par

(dollars in millions)

17,525

20,016

11,738

Total net par outstanding(1) (2)

33,796

15,043

55,621

Excludes $387 million of loss mitigation securities insured and held by the Company as of

, which are primarily in the BIG category.

amounts include $13.6 billion of net par acquired from Radian Asset.

As of December 31, 2014

16,608

18,664

27,793

12,766

45,992

Excludes $415 million of loss mitigation securities insured and held by the Company as of

December 31, 2014

In addition to amounts shown in the tables above, AGC had outstanding commitments to provide guaranties of $126 million for public finance obligations as of

. The expiration dates for the public finance commitments range between July 1, 2015 and February 25, 2017, with $2 million expiring prior to the date of this filing. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Components of BIG Portfolio

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

BIG Net Par Outstanding

Total BIG

U.S. public finance

Non-U.S. public finance

Structured Finance:

First lien U.S. residential mortgage-backed securities ("RMBS"):

Prime first lien

Alt-A first lien

Option ARM

Subprime

Second lien U.S. RMBS:

Closed-end second lien

Home equity lines of credit (“HELOCs”)

Total U.S. RMBS

Triple-X life insurance transactions

Trust preferred securities (“TruPS”)

Other structured finance

Structured finance:

First lien U.S. RMBS:

and Number of Risks

Number of Risks(2)

Description

Insurance(1)

Total BIG

____________________

Includes net par outstanding for VIEs.

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

Exposure to Puerto Rico

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.8 billion net par as of

, all of which are rated BIG. In Second Quarter 2015, the Company's Puerto Rico exposures increased due to the Radian Asset Acquisition, which increased net par by $422 million.

Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits have been covered primarily with the net proceeds of bond issuances, interim financings provided by Government Development Bank for Puerto Rico (“GDB”) and, in some cases, one-time revenue measures or expense adjustment measures. In addition to high debt levels, Puerto Rico faces a challenging economic environment.

In June 2014, the Puerto Rico legislature passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the "Recovery Act") in order to provide a legislative framework for certain public corporations experiencing severe financial stress to restructure their debt, including Puerto Rico Highway and Transportation Authority ("PRHTA") and Puerto Rico Electric Power Authority ("PREPA"). Subsequently, the Commonwealth stated PREPA might need to seek relief under the Recovery Act due to liquidity constraints. Investors in bonds issued by PREPA filed suit in the United States District Court for the District of Puerto Rico challenging the Recovery Act. On February 6, 2015, the U.S. District Court for the District of Puerto Rico ruled the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore void; on July 6, 2015, the U.S. Court of Appeals for the First Circuit upheld that ruling. In addition, the Commonwealth's Resident Commissioner has introduced a bill to the U.S. Congress that, if passed, would enable the Commonwealth to authorize one or more of its public corporations to restructure their debts under chapter 9 of the U.S. Bankruptcy Code if they were to become insolvent. The passage of the Recovery Act, its subsequent invalidation, and the introduction of legislation that would enable the Commonwealth to authorize chapter 9 protection for its public corporations have resulted in uncertainty among investors about the rights of creditors of the Commonwealth and its related authorities and public corporations.

On June 28, 2015, Governor García Padilla of Puerto Rico (the "Governor") publicly stated that the Commonwealth’s public debt, considering the current level of activity, is unpayable and that a comprehensive debt restructuring may be necessary. On June 29, 2015 a report commissioned by the Commonwealth and authored by former World Bank Chief Economist and former Deputy Director of the International Monetary Fund Dr. Anne Krueger and economists Dr. Ranjit Teja and Dr. Andrew Wolfe and calling for debt restructuring of all Puerto Rico bonds was released ("Krueger Report"). The Governor recently formed a task force to prepare a five-year stability plan and start broad debt negotiation discussions.

Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of the GDB, failed to make most of an approximately $58 million debt service payment on August 3, 2015 and to make an approximately $4 million interest payment on September 1, 2015 because the Commonwealth’s legislature did not appropriate funds for payment. The Company does not insure any

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

On September 9, 2015 the Working Group for the Fiscal and Economic Recovery of Puerto Rico (“Working Group”) established by the Governor published its “Puerto Rico Fiscal and Economic Growth Plan” (the “FEGP”). The FEGP projects that the Commonwealth would face a cumulative financing gap of $27.8 billion from fiscal year 2016 to fiscal year 2020 without corrective action. It recommends economic development, structural, fiscal and institutional reform measures that it projects would reduce that gap to $14 billion. The Working Group asserts that the Commonwealth’s debt, including debt with a constitutional priority, is not sustainable. The FEGP includes a recommendation that the Commonwealth’s advisors begin to work on a voluntary exchange offer to its creditors as part of the FEGP. The FEGP does not have the force of law and implementation of its recommendations would require actions by the governments of the Commonwealth and of the United States as well as the cooperation and agreement of various creditors. Any eventual solution to the Commonwealth’s debt issues may differ substantially from that suggested in the FEGP.

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

As of June 30, 2015, the Company insured $74 million net par of PREPA obligations, which was reduced to $73 million by a payment made on July 1, 2015. In August 2014, PREPA entered into forbearance agreements with the GDB, its bank lenders, and bondholders and financial guaranty insurers (including AGM and AGC) that hold or guarantee more than 60% of PREPA's outstanding bonds, in order to address its near-term liquidity issues. Creditors, including AGM and AGC, agreed not to exercise available rights and remedies until March 31, 2015, and the bank lenders agreed to extend the maturity of two revolving lines of credit to the same date. PREPA agreed it would continue to make principal and interest payments on its outstanding bonds, and interest payments on its lines of credit. It also agreed it would develop a five year business plan and a recovery program in respect of its operations; a preliminary business plan was released in December 2014. Subsequently, the parties extended these forbearance agreements several times.

On July 1, 2015, PREPA made full payment of the $416 million of principal and interest due on its bonds, including bonds insured by AGM and AGC. However, that payment was conditioned on and facilitated by AGM and AGC agreeing, also on July 1, to purchase a portion of $131 million of interest-bearing bonds to help replenish certain of the operating funds PREPA used to make the $416 million of principal and interest payments. On July 31, 2015, AGC purchased $186 thousand aggregate principal amount of those bonds.

On September 2, 2015 PREPA announced that on September 1, 2015, it and an ad hoc group of uninsured bondholders (the “Ad Hoc Group”) had reached an agreement on certain economic terms of a recovery plan, subject to certain terms and conditions. Neither AGM nor AGC are parties to that agreement. PREPA also announced on September 2, 2015 that on September 1, 2015, it, the Ad Hoc Group and certain other creditors (including AGM and AGC) extended the forbearance agreements through September 18, 2015, but that National Public Finance Guarantee Corporation, a party to the original forbearance agreements, had not agreed to the extension. AGM and AGC declined to extend the forbearance agreements on the terms offered when they lapsed on September 18, 2015. On September 22, 2015 PREPA announced it and a group of fuel-line lenders had reached an agreement on the economic terms of a recovery plan, subject to certain terms and conditions.

PREPA and its creditors (including AGM and AGC) continue to negotiate the terms of a potential consensual recovery plan. Since the expiration of relevant confidentiality agreements on July 22, 2015, several competing proposals have been made public. There can be no assurance that the negotiations will result in agreement on an actual consensual recovery plan. PREPA, during the pendency of the forbearance agreements, has suspended deposits into its debt service fund.

As of June 30, 2015, the Company insured $482 million net par of PRHTA (Transportation revenue) bonds and $103 million net par of PRHTA (Highway revenue) bonds. In March 2015, legislation was passed in the Commonwealth that, among other things, provided for an increase in oil taxes that would benefit PRHTA, the transfer out of PRHTA of certain deficit-producing transit facilities, and a statutory lien on revenues at PRHTA, subject to certain conditions, including the issuance of at least $1.0 billion of bonds by the Puerto Rico Infrastructure Finance Authority ("PRIFA"). That legislative package would have supported proposals involving the GDB and PRIFA that contemplated PRIFA issuing up to $2.95 billion of bonds and a series of potential actions that would have, among other things, strengthened PRHTA. However, the Governor’s statement in late June 2015 that a comprehensive debt restructuring may be necessary has created uncertainty around this effort, and published reports suggest that there may not be a market for the debt issuance by PRIFA that was contemplated as part of a series of actions that would have strengthened PRHTA. In addition, because certain revenues supporting PRHTA are subject to a prior constitutional claim of the Commonwealth, the increased financial difficulties of the Commonwealth itself has increased the uncertainty regarding the full and timely receipt by PRHTA of such revenues.

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

Gross Par and Gross Debt Service Outstanding

Gross Par Outstanding

Previously Subject to the Voided Recovery Act (1)

Not Previously Subject to the Voided Recovery Act

Total

On February 6, 2015, the U.S. District Court for the District of Puerto Rico ruled that the Recovery Act is preempted by the Federal Bankruptcy Code and is therefore void, and on July 6, 2015, the U.S. Court of Appeals for the First Circuit upheld that ruling.

Total (1) (2)

Exposures Previously Subject to the Voided Recovery Act:

Puerto Rico Aqueduct and Sewer Authority

Puerto Rico Convention Center District Authority

Exposures Not Previously Subject to the Voided Recovery Act:

Commonwealth of Puerto Rico - General Obligation Bonds

Puerto Rico Public Buildings Authority

Puerto Rico Municipal Finance Agency

University of Puerto Rico

Total net exposure to Puerto Rico

In Second Quarter 2015, the Company's Puerto Rico exposures increased due to the Radian Asset Acquisition, which increased net par outstanding by $422 million, of which $22 million was for PREPA and $169 million for PRHTA.

In July 2015, various Puerto Rico issuers made payment on $117 million of par scheduled to be paid; of that amount, $1 million and $9 million of par was paid by PREPA and PRHTA, respectively.

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

Amortization Schedule of Puerto Rico Net Par Outstanding

and Net Debt Service Outstanding

Scheduled Net Par Amortization

Scheduled Net Debt Service Amortization

2015 (July 1 - September 30)

2015 (October 1 - December 31)

2025-2029

2030-2034

2035 -2039

2040 -2044

2045 -2047

Exposure to the Selected European Countries

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

Net Direct Economic Exposure to Selected European Countries(1)

Sovereign and sub-sovereign exposure:

Non-infrastructure public finance (2)

Infrastructure finance

Total sovereign and sub-sovereign exposure

Non-sovereign exposure:

Regulated utilities

RMBS and other structured finance

Total non-sovereign exposure

Total BIG (See Note 6)

While the Company's exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the table.

The exposure shown in the “Non-infrastructure public finance” category is from transactions backed by receivable payments from sub-sovereigns in Italy, Spain and Portugal. Sub-sovereign debt is debt issued by a governmental entity or government backed entity, or supported by such an entity, that is other than direct sovereign debt of the ultimate governing body of the country.

When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies, in which case the Company depends upon geographic information provided by the primary insurer.

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $203 million to Selected European Countries (plus Greece) in transactions with $2.1 billion of net par outstanding. The indirect exposure to credits with a nexus to Greece is $7 million across several highly rated pooled corporate obligations with net par outstanding of $199 million.

Financial Guaranty Insurance Premiums

The portfolio of outstanding exposures discussed in Note 4, Outstanding Exposure, includes financial guaranty contracts that meet the definition of insurance contracts as well as those that meet the definition of a derivative under GAAP. Amounts presented in this note relate only to financial guaranty insurance contracts. See Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives for amounts that relate to CDS.

Net Earned Premiums

Scheduled net earned premiums

Acceleration of net earned premiums

Accretion of discount on net premiums receivable

Net earned premiums(1)

Excludes $0.6 million and $0.4 million for

, respectively, and $0.9 million and $0.7 million for

, respectively, related to consolidated financial guaranty ("FG") VIEs.

Components of Unearned Premium Reserve

Net(1)

Deferred premium revenue

Contra-paid (2)

Excludes $15 million and $11 million of deferred premium revenue related to FG VIEs as of June 30, 2015 and December 31, 2014, respectively.

See Note 7, "Financial Guaranty Insurance Losses– Insurance Contracts' Loss Information" for an explanation of "contra-paid".

Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward

Beginning of period, December 31

Premiums receivable acquired in Radian Asset Acquisition on April 1, 2015

Gross premium written, net of commissions on assumed business

Gross premiums received, net of commissions on assumed business

Adjustments:

Changes in the expected term

Accretion of discount, net of commissions on assumed business

Foreign exchange translation

Consolidation/deconsolidation of FG VIEs

End of period, June 30 (1)

Excludes $14 million and $12 million as of

, respectively, related to consolidated FG VIEs.

Foreign exchange translation relates to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 13% and 11% of installment premiums at

, respectively, are denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound Sterling.

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

Expected Collections of

Financial Guaranty Gross Premiums Receivable,

(Undiscounted)

2015 (July 1 – September 30)

2015 (October 1 – December 31)

2020-2024

After 2034

Total(1)

Excludes expected cash collections on FG VIEs of $18 million.

Scheduled Financial Guaranty Net Earned Premiums

Net deferred premium revenue(1)

Future accretion

Total future net earned premiums

Excludes scheduled net earned premiums on consolidated FG VIEs of $15 million.

Selected Information for Financial Guaranty Policies Paid in Installments

Premiums receivable, net of commission payable

Gross deferred premium revenue

Weighted-average risk-free rate used to discount premiums

Weighted-average period of premiums receivable (in years)

Expected Loss to be Paid

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid for all contracts. Surveillance personnel present analyses related to potential losses to the Company’s loss reserve committees for consideration in estimating the expected loss to be paid. Such analyses include the consideration of various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions and scenarios and the probabilities they assign to those scenarios based on actual developments during the quarter and their view of future performance.

The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances, the Company has no right to cancel such financial guaranties. As a result, the Company's estimate of ultimate losses on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the long duration of most contracts.

The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a quarter, and as a result the Company’s loss estimates may change materially over that same period. Changes over a quarter in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a quarter in the Company’s loss estimates for its RMBS transactions may be influenced by such factors as the level and timing of loan defaults experienced; changes in housing prices; results from the Company’s loss mitigation activities; and other variables. Similarly, changes over a quarter in the Company’s loss estimates for municipal obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. On the other hand, changes over a quarter in the Company’s loss estimates for its tax-supported public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency downgrades that reduce the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors.

The Company does not use traditional actuarial approaches to determine its estimates of expected losses. Actual losses will ultimately depend on future events or transaction performance and may be influenced by many interrelated factors that are difficult to predict. As a result, the Company's current estimates of probable and estimable losses may be subject to considerable volatility and may not reflect the Company's future ultimate claims paid.

The following tables present a roll forward of the present value of net expected loss to be paid for all contracts, whether accounted for as insurance, credit derivatives or FG VIEs, by sector, after the benefit for net expected recoveries for contractual breaches of representations and warranties ("R&W"). The Company used weighted average risk-free rates for U.S. dollar denominated obligations that ranged from 0.0% to 3.37% as of

and 0.0% to 2.95% as of

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Net expected loss to be paid, beginning of period

Net expected loss to be paid on Radian Asset portfolio as of April 1, 2015

Economic loss development due to:

Changes in discount rates

Changes in timing and assumptions

Total economic loss development

Paid losses

Net expected loss to be paid, end of period

Net Expected Loss to be Paid

Roll Forward by Sector

Net Expected

Loss to be Paid (Recovered) as of

March 31, 2015

on Radian Asset portfolio as of

Economic Loss

(Paid)

Recovered

Losses(1)

Net Expected

Paid (Recovered) as of

June 30, 2015(2)

Public Finance:

First lien:

Total first lien

Second lien:

Total second lien

March 31, 2014

June 30, 2014

December 31, 2014(2)

December 31, 2013

Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets. The Company paid $2 million and $1 million in LAE for

, respectively, and $3 million and $2 million in LAE for

Includes expected LAE to be paid of $7 million as of

and $5 million as of

Net Expected Recoveries from

Breaches of R&W Rollforward

Future Net

R&W Benefit as of

March 31, 2015(1)

R&W Benefit of Radian Asset as of

R&W Development

and Accretion of

Discount

During Second Quarter 2015

R&W (Recovered)

During Second Quarter 2015

June 30, 2015(1)

During Second Quarter 2014

During 2015

During 2014

During 2014

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

The following tables present the present value of net expected loss to be paid for all contracts by accounting model, by sector and after the benefit for estimated and contractual recoveries for breaches of R&W.

Net Expected Loss to be Paid (Recovered)

By Accounting Model

FG VIEs(1) and Other

Derivatives(2)

Refer to Note 10, Consolidated Variable Interest Entities.

(2) Refer to Note 9, Financial Guaranty Contracts Accounted for as Credit Derivatives.

The following tables present the net economic loss development for all contracts by accounting model, by sector and after the benefit for estimated and contractual recoveries for breaches of R&W.

Net Economic Loss Development (Benefit)

(1) Refer to Note 10, Consolidated Variable Interest Entities.

Selected U.S. Public Finance Transactions

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.8 billion net par as of June 30, 2015, all of which is rated BIG. For additional information regarding the Company's exposure to general obligations of Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations, please refer to "Exposure to Puerto Rico" in Note 4, Outstanding Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the U.S. Bankruptcy Code became effective. The Company agreed as part of the plan to cancel its $40 million of the City’s lease revenue bonds in exchange for the irrevocable option to take title to the office building that served as collateral for the lease revenue bonds. The Company also receives net rental payments from the office building. The Company no longer reflects the canceled lease revenue bonds as outstanding insured net par, but instead the financial statements reflect an investment in the office building and related lease revenue and expenses. As of

, the office building is carried at approximately $30 million and is reported as part of Other Assets.

The Company has $250 million of net par exposure to the Louisville Arena Authority. The bond proceeds were used to construct the KFC Yum Center, home to the University of Louisville men's and women's basketball teams. Actual revenues available for Debt Service are well below original projections, and under the Company's internal rating scale, the transaction is BIG.

In December 2014, the City of Detroit emerged from bankruptcy under chapter 9 of the U.S. Bankruptcy Code. The Company still expects to make debt service payments on the 15.5% of the City’s unlimited tax general obligation (“UTGO”) that were not exchanged as part of the related settlement. As of

, these bonds had a net par outstanding of $9 million.

As a result of the Radian Asset Acquisition, the Company has approximately $21 million of net par exposure as of

to bonds issued by Parkway East Public Improvement District, which is located in Madison County, Mississippi. The bonds, which are rated BIG, are payable from special assessments on properties within the District, as well as amounts paid under a contribution agreement with the County in which the County covenants that it will provide funds in the event special assessments are not sufficient to make a debt service payment. The special assessments have not been sufficient to pay debt service in full. In earlier years, the County provided funding to cover the balance of the debt service requirement, but the County now claims that the District’s failure to reimburse it within the two years stipulated in the contribution agreement means that the County is not required to provide funding until it is reimbursed. A declaratory judgment action is pending against the District and the County to establish the Company's rights under the contribution agreement. See "Recovery Litigation" below.

The Company also has $4.6 billion of net par exposure to healthcare transactions. The BIG net par outstanding in this sector is $325 million, all of which was acquired as part of the Radian Asset Acquisition.

The Company projects that its total net expected loss across its troubled U.S. public finance credits as of

, which incorporated the likelihood of the outcomes mentioned above, will be

$218 million

, compared with a net expected loss of $54 million as of March 31, 2015. On April 1, 2015, the Radian Asset Acquisition added

$81 million

in net economic losses to be paid for U.S. public finance credits. In addition, economic loss development in

$86 million

which was primarily attributable to Puerto Rico exposures. Economic loss development in

$91 million

, which was also primarily attributable to Puerto Rico exposures.

The Company has insured exposure of approximately $591 million to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued. Although the Company may not experience ultimate loss on a particular transaction, the aggregate amount of the claim payments may be substantial and reimbursement may not occur for an extended time. These transactions generally involve long-term infrastructure projects that were financed by bonds that mature prior to the expiration of the project concession. The Company expects the cash flows from these projects to be sufficient to repay all of the debt over the life of the project concession, but also expects the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay a claim when the debt matures, and then recover its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. However, the recovery of the payments is uncertain and may take from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. The Company estimates total claims for the remaining transaction with significant refinancing risk, assuming no refinancing, and based on certain performance assumptions could be $321 million on a gross basis; such claims would be payable in 2022.

Approach to Projecting Losses in U.S. RMBS

The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS 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.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the...


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