8-K 2014 Q2 AGM FS

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) — September 9, 2014

ASSURED GUARANTY LTD.

(Exact name of registrant as specified in its charter)




Bermuda	001-32141	98-0429991
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

Assured Guaranty Ltd.

30 Woodbourne Avenue

Hamilton HM 08 Bermuda

(Address of principal executive offices)

Registrant’s telephone number, including area code: (441) 279-5700

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d‑2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e‑4(c))



Item 2.02	Results of Operations and Financial Condition On September 9, 2014, Assured Guaranty Ltd. ("AGL") made available in the Investor Information section of its website the June 30, 2014 Consolidated Financial Statements of its subsidiary Assured Guaranty Municipal Corp. The June 30, 2014 Consolidated Financial Statements of Assured Guaranty Municipal Corp. are attached hereto as Exhibit 99.1.

Item 9.01	Financial Statements and Exhibits. (d) Exhibits
Exhibit Number	Description
99.1	Assured Guaranty Municipal Corp. June 30, 2014 Consolidated Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ASSURED GUARANTY LTD.

By: /s/ Robert A. Bailenson

Name: Robert A. Bailenson

Title: Chief Financial Officer

DATE: September 9, 2014

EXHIBIT INDEX



Exhibit Number	Description
99.1	Assured Guaranty Municipal Corp. June 30, 2014 Consolidated Financial Statements

GAAP AGM 2Q 2014 FS

Exhibit 99.1

Assured Guaranty Municipal Corp.

Consolidated Financial Statements

(Unaudited)

June 30, 2014

ASSURED GUARANTY MUNICIPAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	Page
Consolidated Balance Sheets (unaudited) as of June 30, 2014 and December 31, 2013	1
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2014 and 2013	2
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2014 and 2013	3
Consolidated Statement of Shareholder’s Equity (unaudited) for the Six Months Ended June 30, 2014	4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2014 and 2013	5
Notes to Consolidated Financial Statements (unaudited)	6

Assured Guaranty Municipal Corp.

Consolidated Balance Sheets (Unaudited)

(dollars in millions except per share and share amounts)



	As of June 30, 2014		As of December 31, 2013
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $5,731 and $5,394)	$	5,989	$	5,522
Short-term investments, at fair value	486		667
Other invested assets (includes Surplus Note from affiliate of $300 and $300)	407		406
Total investment portfolio	6,882		6,595
Cash	58		53
Premiums receivable, net of commissions payable	566		578
Ceded unearned premium reserve	1,021		1,047
Reinsurance recoverable on unpaid losses	102		66
Salvage and subrogation recoverable	223		140
Credit derivative assets	91		98
Deferred tax asset, net	197		331
Financial guaranty variable interest entities’ assets, at fair value	846		1,691
Other assets	159		190
Total assets	$	10,145	$	10,789
Liabilities and shareholder's equity
Unearned premium reserve	$	3,500	$	3,652
Loss and loss adjustment expense reserve	401		273
Reinsurance balances payable, net	233		217
Notes payable	31		39
Credit derivative liabilities	306		326
Current income tax payable	98		114
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	924		1,275
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	104		686
Other liabilities	382		366
Total liabilities	5,979		6,948
Commitments and contingencies (See Note 14)
Preferred stock ($1,000 par value, 5,000.1 shares authorized; 0 shares issued and outstanding)	—		—
Common stock ($45,455 par value, 330 shares authorized; issued and outstanding)	15		15
Additional paid-in capital	1,026		1,051
Retained earnings	2,644		2,400
Accumulated other comprehensive income, net of tax of $93 and $45	162		86
Total shareholder's equity attributable to Assured Guaranty Municipal Corp.	3,847		3,552
Noncontrolling interest	319		289
Total shareholder's equity	4,166		3,841
Total liabilities and shareholder's equity	$	10,145	$	10,789

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

Assured Guaranty Municipal Corp.

Consolidated Statements of Operations (Unaudited)

(in millions)



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues
Net earned premiums	$	93		$	109		$	179		$	285
Net investment income	61			56			130			112
Net realized investment gains (losses):
Other-than-temporary impairment losses	(27		)	(13		)	(27		)	(14		)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income	(16		)	(10		)	(12		)	(7		)
Net impairment loss	(11		)	(3		)	(15		)	(7		)
Other net realized investment gains (losses)	3			1			10			(3		)
Net realized investment gains (losses)	(8		)	(2		)	(5		)	(10		)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements	10			18			18			29
Net unrealized gains (losses)	44			45			11			(22		)
Net change in fair value of credit derivatives	54			63			29			7
Fair value gains (losses) on committed capital securities	(2		)	(1		)	(6		)	(4		)
Fair value gains (losses) on financial guaranty variable interest entities	25			147			171			222
Other income (loss)	8			(9		)	24			(25		)
Total revenues	231			363			522			587
Expenses
Loss and loss adjustment expenses	28			33			32			4
Amortization of deferred ceding commissions	(3		)	(19		)	(5		)	(22		)
Interest expense	0			2			1			3
Other operating expenses	27			25			57			55
Total expenses	52			41			85			40
Income (loss) before income taxes	179			322			437			547
Provision (benefit) for income taxes:
Current	27			17			47			81
Deferred	26			86			86			92
Total provision (benefit) for income taxes	53			103			133			173
Net income (loss)	126			219			304			374
Less: Noncontrolling interest	7			—			15			—
Net income (loss) attributable to Assured Guaranty Municipal Corp.	$	119		$	219		$	289		$	374

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

Assured Guaranty Municipal Corp.

Consolidated Statements of Comprehensive Income (Unaudited)

(in millions)



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net income (loss)	$	126		$	219		$	304		$	374
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $21, $(43), $49 and $(55)	43			(81		)	95			(103		)
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(8), $(5), $(5) and $(16)	(15		)	(11		)	(11		)	(30		)
Unrealized holding gains (losses) arising during the period, net of tax	28			(92		)	84			(133		)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(4), $(1), $(4) and $(4)	(6		)	(3		)	(7		)	(8		)
Other comprehensive income (loss)	34			(89		)	91			(125		)
Comprehensive income (loss)	160			130			395			249
Less: Comprehensive income (loss) attributable to noncontrolling interest	15			—			30			—
Comprehensive income (loss) of Assured Guaranty Municipal Corp.	$	145		$	130		$	365		$	249

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

Assured Guaranty Municipal Corp.

Consolidated Statement of Shareholder’s Equity (Unaudited)

For the Six Months Ended June 30, 2014

(dollars in millions, except share data)



	Common Shares Outstanding	Common Stock Par Value		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholder's Equity Attributable to Assured Guaranty Municipal Corp.			Noncontrolling Interest		Total Shareholder's Equity
Balance at December 31, 2013	330	$	15	$	1,051		$	2,400		$	86	$	3,552		$	289	$	3,841
Net income	—	—		—			289			—		289			15		304
Dividends	—	—		—			(45		)	—		(45		)	—		(45		)
Other comprehensive income	—	—		—			—			76		76			15		91
Repayment of Surplus Notes	—	—		(25		)	—			—		(25		)	—		(25		)
Balance at June 30, 2014	330	$	15	$	1,026		$	2,644		$	162	$	3,847		$	319	$	4,166

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

Assured Guaranty Municipal Corp.

Consolidated Statements of Cash Flows (Unaudited)

(in millions)



	Six Months Ended June 30,
	2014			2013
Net cash flows provided by (used in) operating activities	$	155		$	271
Investing activities
Fixed-maturity securities:
Purchases	(583		)	(426		)
Sales	93			44
Maturities	196			186
Net sales (purchases) of short-term investments	203			(150		)
Proceeds from paydowns on financial guaranty variable interest entities’ assets	302			402
Other investments	12			12
Net cash flows provided by (used in) investing activities	223			68
Financing activities
Dividends paid	(45		)	(38		)
Repayment of notes payable	(7		)	(13		)
Paydowns of financial guaranty variable interest entities' liabilities	(297		)	(244		)
Return of Surplus Notes	(25		)	(25		)
Net cash flows provided by (used in) financing activities	(374		)	(320		)
Effect of exchange rate changes	1			(3		)
Increase (decrease) in cash	5			16
Cash at beginning of period	53			47
Cash at end of period	$	58		$	63
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes	$	64		$	23
Interest	$	1		$	3

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

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014

1. Business and Basis of Presentation

Business

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

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

In the past, the Company had sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps ("CDS"). Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty insurance contracts. The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation.

The Company has not entered into any new CDS in order to sell credit protection since 2008. In addition, regulatory guidelines issued in 2009 that limited the terms under which such protection could be sold, and 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 financial guaranty variable interest entities (“FG VIEs”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements are as of June 30, 2014 and cover the three-month period ended June 30, 2014 (“Second Quarter 2014”), the three-month period ended June 30, 2013 (“Second Quarter 2013”), the six-month period ended June 30, 2014 ("Six Months 2014") and the six-month period ended June 30, 2013 ("Six Months 2013"). 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 AGM, its direct and indirect subsidiaries (collectively, the “Subsidiaries”), and its consolidated FG VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

These unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of AGM included in Exhibit 99.1 in AGL's Form 8-K dated March 31, 2014, filed with the U.S. Securities and Exchange Commission (the “SEC”).

AGM's direct and indirect subsidiaries are as follows:

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


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


•	Municipal Assurance Corp. ("MAC"), domiciled in New York and 100% owned by MAC Holdings.

2. Rating Actions

Rating Actions

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

In the last several years, Standard & Poor's Ratings Services ("S&P") and Moody’s Investor Services, Inc. ("Moody's") have changed, multiple times, their financial strength ratings of the Company's insurance subsidiaries, or changed the outlook on such ratings.


•	On March 18, 2014, S&P upgraded the financial strength ratings of AGM, AGE and MAC to AA (stable outlook) from AA- (stable outlook); it affirmed such ratings in a credit analysis issued on July 2, 2014.


•	The most recent rating action of Moody's Investors Service, Inc. ("Moody's") was on July 2, 2014, when it affirmed the ratings of AGM and AGE.

•

On July 15, 2014, Moody’s issued a “Request for Comment” on proposed changes to its credit rating methodology for financial guaranty insurance companies. While Moody’s noted that if changes to the credit rating methodology were adopted as proposed, Moody's does not expect to change outstanding ratings that it has assigned, there can be no assurance that the proposed changes will be adopted as proposed or that, even if they are, Moody’s would not change its ratings on AGM or AGE.


•	The most recent rating action of Kroll Bond Rating Agency was on August 4, 2014, when it affirmed MAC's AA+ (stable outlook) financial strength rating.

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

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


•	Note 6, Financial Guaranty Insurance Losses


•	Note 13, Reinsurance and Other Monoline Exposures


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

3. Outstanding Exposure

The Company's financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its insured portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third-party and affiliated reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including variable interest entities ("VIEs"). Some of these VIEs are consolidated as described in Note 9, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and Debt Service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated.

The Company has issued financial guaranty insurance policies on public finance obligations and, prior to mid-2008, structured finance obligations. Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, health care facilities and government office buildings. Structured finance obligations insured by the Company are generally issued by special purpose entities and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations.

Surveillance Categories

The Company segregates its insured portfolio into investment grade and below-investment-grade ("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 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 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. The Company models most assumed residential mortgage-backed security ("RMBS") credits with par above $1 million, as well as certain RMBS credits below that amount.

Credits identified as BIG are subjected to further review to determine the probability of a loss. See Note 5, Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for calculating the expected loss for financial statement 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 over 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 Assured Guaranty's insured portfolio reflect Assured Guaranty's 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.

Debt Service Outstanding



	Gross Debt Service Outstanding				Net Debt Service Outstanding
	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
	(in millions)
Public finance	$	504,663	$	522,777	$	373,150	$	386,897
Structured finance	44,602		48,250		39,288		42,354
Total financial guaranty	$	549,265	$	571,027	$	412,438	$	429,251

Financial Guaranty Portfolio by Internal Rating

As of June 30, 2014



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S.				Structured Finance Non-U.S.				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	3,395	1.6	%	$	531	2.3	%	$	17,114	64.5	%	$	4,329	75.6	%	$	25,369	9.3	%
AA	69,106		31.7	%	388		1.7	%	5,417		20.4	%	336		5.9	%	75,247		27.5	%
A	117,576		53.8	%	5,835		25.6	%	196		0.7	%	139		2.4	%	123,746		45.3	%
BBB	24,635		11.3	%	14,826		65.2	%	253		1.0	%	302		5.3	%	40,016		14.7	%
BIG	3,460		1.6	%	1,175		5.2	%	3,556		13.4	%	620		10.8	%	8,811		3.2	%
Total net par outstanding (excluding loss mitigation bonds)	$	218,172	100.0	%	$	22,755	100.0	%	$	26,536	100.0	%	$	5,726	100.0	%	$	273,189	100.0	%
Loss Mitigation Bonds	—				—				603				—				603
Net Par Outstanding (including loss mitigation bonds)	$	218,172			$	22,755			$	27,139			$	5,726			$	273,792

Financial Guaranty Portfolio by Internal Rating

As of December 31, 2013



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S.				Structured Finance Non-U.S.				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,012	1.8	%	$	524	2.4	%	$	20,283	66.7	%	$	5,551	78.0	%	$	30,370	10.6	%
AA	74,478		32.7	%	378		1.8	%	5,718		18.8	%	343		4.8	%	80,917		28.2	%
A	123,389		54.2	%	5,611		25.8	%	198		0.7	%	193		2.8	%	129,391		45.1	%
BBB	22,091		9.7	%	14,025		64.6	%	382		1.2	%	397		5.6	%	36,895		12.9	%
BIG	3,648		1.6	%	1,171		5.4	%	3,836		12.6	%	629		8.8	%	9,284		3.2	%
Total net par outstanding (excluding loss mitigation bonds)	$	227,618	100.0	%	$	21,709	100.0	%	$	30,417	100.0	%	$	7,113	100.0	%	$	286,857	100.0	%
Loss Mitigation Bonds	—				—				627				—				627
Net Par Outstanding (including loss mitigation bonds)	$	227,618			$	21,709			$	31,044			$	7,113			$	287,484

In accordance with the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and therefore are included in the investment portfolio. Such amounts are still included in the financial guaranty insured portfolio (excluding loss mitigation bonds), and totaled $164 million and $194 million in gross par outstanding as of June 30, 2014 and December 31, 2013, respectively.

In addition to amounts shown in the tables above, at June 30, 2014, AGM had outstanding commitments to provide guaranties of $42 million for structured finance and $418 million for public finance obligations, of which up to $138 million can be used together with AGC, an affiliate of the Company. The structured finance commitments include the unfunded component of pooled corporate and other transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between July 1, 2014 and February 25, 2017, with $294 million expiring prior to December 31, 2014. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty's request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Components of BIG Portfolio

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of June 30, 2014



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
	(in millions)
First lien U.S. RMBS:
Prime first lien	$	—	$	—	$	—	$	—	$	61	—	%
Alt-A first lien	—		248		430		678		859		0.2
Option ARM	12		—		124		136		297		0.0
Subprime	49		626		599		1,274		2,751		0.5
Second lien U.S. RMBS:
Closed-end second lien	21		19		42		82		193		0.0
Home equity lines of credit ("HELOCs")	1,135		—		18		1,153		1,370		0.4
Total U.S. RMBS	1,217		893		1,213		3,323		5,531		1.1
Trust preferred securities ("TruPS")	—		—		—		—		45		—
Other structured finance	741		112		—		853		26,686		0.3
U.S. public finance	2,872		481		107		3,460		218,172		1.3
Non-U.S. public finance	1,175		—		—		1,175		22,755		0.5
Total	$	6,005	$	1,486	$	1,320	$	8,811	$	273,189	3.2	%

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of December 31, 2013



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
	(in millions)
First lien U.S. RMBS:
Prime first lien	$	—	$	—	$	—	$	—	$	66	—	%
Alt-A first lien	—		259		450		709		900		0.2
Option ARM	7		—		141		148		359		0.1
Subprime	49		708		555		1,312		2,853		0.4
Second lien U.S. RMBS:
Closed-end second lien	8		20		57		85		204		0.0
HELOCs	1,239		—		102		1,341		1,703		0.5
Total U.S. RMBS	1,303		987		1,305		3,595		6,085		1.2
TruPS	—		—		—		—		56		—
Other structured finance	752		118		—		870		31,389		0.3
U.S. public finance	3,535		—		113		3,648		227,618		1.3
Non-U.S. public finance	780		391		—		1,171		21,709		0.4
Total	$	6,370	$	1,496	$	1,418	$	9,284	$	286,857	3.2	%

BIG Net Par Outstanding

and Number of Risks

As of June 30, 2014



	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	5,725	$	280	$	6,005	88	8	96
Category 2	1,486		—		1,486		20	—	20
Category 3	1,320		0		1,320		34	6	40
Total BIG	$	8,531	$	280	$	8,811	142	14	156

BIG Net Par Outstanding

and Number of Risks

As of December 31, 2013



	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	6,095	$	275	$	6,370	91	8	99
Category 2	1,496		—		1,496		23	—	23
Category 3	1,403		15		1,418		33	7	40
Total BIG	$	8,994	$	290	$	9,284	147	15	162

____________________


(1)	Includes net par outstanding for FG VIEs.


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

Direct Economic 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 believes heightened uncertainties exist are: Hungary, Ireland, 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 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)

As of June 30, 2014



	Hungary		Italy		Portugal		Spain		Total
	(in millions)
Sovereign and sub-sovereign exposure:
Non-infrastructure public finance (2)	$	—	$	829	$	89	$	223	$	1,141
Infrastructure finance	302		9		—		148		459
Sub-total	302		838		89		371		1,600
Non-sovereign exposure:
Regulated utilities	—		141		—		—		141
RMBS	206		290		—		—		496
Sub-total	206		431		—		—		637
Total	$	508	$	1,269	$	89	$	371	$	2,237
Total BIG (See Note 5)	$	508	$	—	$	89	$	371	$	968

____________________

(1)

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


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

When the Company directly insures an obligation, it assigns the obligation to a geographic location or locations based on its view of the geographic location of the risk. For direct exposure this can be a relatively straight-forward determination as, for example, a debt issue supported by availability payments for a toll road in a particular country. The Company may also assign portions of a risk to more than one geographic location. The Company may also have direct exposures to the Selected European Countries in business assumed from unaffiliated monoline insurance companies. In the case of assumed business for direct exposures, the Company depends upon geographic information provided by the primary insurer.

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate transactions. The Company considers economic exposure to a selected European Country to be indirect when the exposure relates to only a small portion of an insured transaction that otherwise is not related to a Selected European Country. Total net indirect exposure to Selected European Countries in non-sovereign pooled corporate is $145 million, based on the proportion of the insured par equal to the proportion of obligors identified as being domiciled in a Selected European Country.

Exposure to Puerto Rico

Puerto Rico has experienced significant general fund budget deficits in recent years. These deficits have been covered primarily with the net proceeds of bond issuances, with interim financings provided by Government Development Bank for Puerto Rico (“GDB”) and, in some cases, with onetime 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. In its Quarterly Report dated as of July 17, 2014, the Commonwealth stated the Puerto Rico Electric Power Authority (“PREPA”) may need to seek relief under the Recovery Act due to liquidity constraints. In the same report, the Commonwealth disclosed PREPA utilized approximately $42 million on deposit in its reserve account in order

to pay debt service due on its bonds on July 1, 2014. Investors in bonds issued by PREPA have filed suit in the United States District Court for the District of Puerto Rico asserting the Recovery Act violates the U.S. Constitution. On August 14, 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 those who have challenged the constitutionality of the Recovery Act, 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, and would develop a five year business plan and a recovery program in respect of its operations.

Following the enactment of the Recovery Act, S&P, Moody’s and Fitch Ratings lowered the credit rating of the Commonwealth’s bonds and the ratings on certain of Puerto Rico’s public corporations. The Commonwealth disclosed its liquidity has been adversely affected by rating agency downgrades and by the limited market access for its debt. The Commonwealth 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. The Commonwealth has also noted it is committed to addressing its fiscal and economic challenges and to repaying the general obligation debt of the Commonwealth and the debt of GDB and the public corporations that are not eligible to seek relief under the Recovery Act.

Puerto Rico

Gross Par and Gross Debt Service Outstanding

As of June 30, 2014



	Gross Par Outstanding		Gross Debt Service Outstanding
	(in millions)
Subject to the terms of the Recovery Act	$	1,927	$	2,957
Not subject to the terms of the Recovery Act	2,342		3,855
Total	$	4,269	$	6,812

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

Puerto Rico

Net Par Outstanding



	As of June 30, 2014			As of December 31, 2013
	Total (1)		Internal Rating	Total		Internal Rating
	(in millions)
Exposures subject to the terms of the Recovery Act:
Puerto Rico Highways and Transportation Authority (Transportation revenue) ("Primary policies")	$	236	BB-	$	236	BB-
Puerto Rico Highways and Transportation Authority (Transportation revenue) ("Second-to-pay policies") (2)	80		AA	80		AA
Total	316		BB+	316		BB+
PREPA	481		B-	488		BB-
Puerto Rico Highways and Transportation Authority (Highway revenue)	216		BB	216		BB
Puerto Rico Public Finance Corporation	—		—	44		B
Total	1,013			1,064

Exposures not subject to the terms of the Recovery Act:
Commonwealth of Puerto Rico - General Obligation Bonds	758		BB	871		BB
Puerto Rico Municipal Finance Authority	252		BB-	252		BB-
Puerto Rico Sales Tax Financing Corporation	261		BBB	261		A-
Puerto Rico Public Buildings Authority	32		BB	32		BB
Total	1,303			1,416
Total net exposure to Puerto Rico	$	2,316		$	2,480

__________________


(1)	In July 2014, various Puerto Rico issuers made payment on $49 million of par scheduled to be paid; of that amount, $17 million of par was paid by PREPA.


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

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

Amortization Schedule of Puerto Rico BIG Net Par Outstanding

and BIG Net Debt Service Outstanding

As of June 30, 2014



	Scheduled BIG Net Par Amortization						Scheduled BIG Net Debt Service Amortization
	Subject to the Terms of the Recovery Act		Not Subject to the Terms of the Recovery Act		Total		Subject to the Terms of the Recovery Act		Not Subject to the Terms of the Recovery Act		Total
	(in millions)
2014 (July 1 - December 31)	$	32	$	44	$	76	$	55	$	72	$	127	(1)
2015	72		66		138		116		116		232
2016	51		72		123		91		118		209
2017	29		75		104		67		118		185
2018	23		42		65		59		82		141
2019	34		59		93		68		97		165
2020	46		52		98		79		85		164
2021	34		13		47		64		46		110
2022	30		25		55		58		58		116
2023	70		11		81		97		42		139
2024 - 2028	244		182		426		338		310		648
2029 - 2033	198		174		372		239		264		503
2034 - 2036	70		227		297		76		250		326
Total	$	933	$	1,042	$	1,975	$	1,407	$	1,658	$	3,065

__________________


(1)	In July 2014, various Puerto Rico issuers made scheduled par payments of $49 million plus interest. Of that amount $17 million of par related to PREPA.


4.	Financial Guaranty Insurance Premiums

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

Net Earned Premiums



	Second Quarter				Six Months
	2014		2013		2014		2013
	(in millions)
Scheduled net earned premiums	$	72	$	79	$	144	$	166
Acceleration of net earned premiums	18		27		29		113
Accretion of discount on net premiums receivable	3		3		6		6
Net earned premiums(1)	$	93	$	109	$	179	$	285

____________________


(1)	Excludes $4 million and $14 million for Second Quarter 2014 and 2013, respectively, and $21 million and $32 million for Six Months 2014 and 2013, respectively, related to consolidated FG VIEs.

Components of Unearned Premium Reserve



	As of June 30, 2014									As of December 31, 2013
	Gross			Ceded			Net(1)			Gross			Ceded			Net(1)
	(in millions)
Deferred premium revenue	$	3,548		$	1,037		$	2,511		$	3,709		$	1,071		$	2,638
Contra-paid	(48		)	(16		)	(32		)	(57		)	(24		)	(33		)
Unearned premium reserve	$	3,500		$	1,021		$	2,479		$	3,652		$	1,047		$	2,605

____________________


(1)	Excludes $123 million and $177 million of deferred premium revenue, and $47 million and $55 million of contra-paid related to FG VIEs as of June 30, 2014 and December 31, 2013, respectively.

Gross Premium Receivable,

Net of Commissions on Assumed Business

Roll Forward



	Six Months
	2014			2013
	(in millions)
Beginning of period, December 31	$	578		$	653
Gross premium written, net of commissions on assumed business	48			37
Gross premiums received, net of commissions on assumed business	(76		)	(81		)
Adjustments:
Changes in the expected term	(2		)	(1		)
Accretion of discount, net of commissions on assumed business	9			9
Foreign exchange translation	9			(24		)
Other adjustments	0			0
End of period, June 30 (1)	$	566		$	593

____________________


(1)	Excludes $7 million and $9 million as of June 30, 2014 and June 30, 2013, respectively, related to consolidated FG VIEs.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 71% and 67% of installment premiums at June 30, 2014 and December 31, 2013, 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

Gross Premiums Receivable,

Net of Commissions on Assumed Business

(Undiscounted)



	As of June 30, 2014
	(in millions)
2014 (July 1- September 30)	$	19
2014 (October 1 - December 31)	23
2015	64
2016	58
2017	54
2018	48
2019-2023	190
2024-2028	120
2029-2033	88
After 2033	100
Total (1)	$	764

____________________


(1)	Excludes expected cash collections on FG VIEs of $8 million.

Scheduled Net Earned Premiums



	As of June 30, 2014
	(in millions)
2014 (July 1- September 30)	$	70
2014 (October 1 - December 31)	67
2015	241
2016	222
2017	193
2018	174
2019-2023	658
2024-2028	408
2029-2033	243
After 2033	235
Total present value basis(1)	2,511
Discount	128
Total future value	$	2,639

____________________


(1)	Excludes scheduled net earned premiums on consolidated FG VIEs of $123 million.

Selected Information for Policies Paid in Installments



	As of June 30, 2014			As of December 31, 2013
	(dollars in millions)
Premiums receivable, net of commission payable	$	566		$	578
Gross deferred premium revenue	1,222			1,278
Weighted-average risk-free rate used to discount premiums	3.6		%	3.6		%
Weighted-average period of premiums receivable (in years)	9.7			9.8

5. Expected Loss to be Paid

The following table presents 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 3.78% as of June 30, 2014 and 0.0% to 4.44% as of December 31, 2013.

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Second Quarter 2014



	Net Expected Loss to be Paid as of March 31, 2014 (2)			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of June 30, 2014(2)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	183		$	6		$	(6	)	$	183
Option ARM	(17		)	(14		)	2			(29		)
Subprime	212			3			41			256
Total first lien	378			(5		)	37			410
Second lien:
Closed-end second lien	(13		)	(6		)	2			(17		)
HELOCs	(100		)	(23		)	15			(108		)
Total second lien	(113		)	(29		)	17			(125		)
Total U.S. RMBS	265			(34		)	54			285
Other structured finance	27			(2		)	—			25
U.S. public finance	63			47			(8		)	102
Non-U.S. public finance	43			(4		)	—			39
Total	$	398		$	7		$	46		$	451

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Second Quarter 2013



	Net Expected Loss to be Paid as of March 31, 2013			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of June 30, 2013
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	146		$	(2	)	$	(11	)	$	133
Option ARM	(317		)	14			295			(8		)
Subprime	175			19			(7		)	187
Total first lien	4			31			277			312
Second lien:
Closed-end second lien	(31		)	7			1			(23		)
HELOCs	(129		)	(12		)	68			(73		)
Total second lien	(160		)	(5		)	69			(96		)
Total U.S. RMBS	(156		)	26			346			216
Other structured finance	29			(5		)	—			24
U.S. public finance	(59		)	15			(3		)	(47		)
Non-U.S. public finance	44			3			—			47
Total	$	(142	)	$	39		$	343		$	240

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Six Months 2014



	Net Expected Loss to be Paid as of December 31, 2013			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of June 30, 2014(2)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	183		$	11		$	(11	)	$	183
Option ARM	(4		)	(25		)	—			(29		)
Subprime	222			(7		)	41			256
Total first lien	401			(21		)	30			410
Second lien:
Closed end second lien	(20		)	—			3			(17		)
HELOCs	(108		)	(20		)	20			(108		)
Total second lien	(128		)	(20		)	23			(125		)
Total U.S. RMBS	273			(41		)	53			285
Other structured finance	27			(2		)	—			25
U.S. public finance	61			51			(10		)	102
Non-U.S. public finance	42			(3		)	—			39
Total	$	403		$	5		$	43		$	451

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Six Months 2013



	Net Expected Loss to be Paid as of December 31, 2012			Economic Loss Development			(Paid) Recovered Losses(1)			Net Expected Loss to be Paid as of June 30, 2013
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	149		$	1		$	(17	)	$	133
Option ARM	(142		)	(120		)	254			(8		)
Subprime	162			33			(8		)	187
Total first lien	169			(86		)	229			312
Second lien:
Closed end second lien	(49		)	8			18			(23		)
HELOCs	(128		)	(10		)	65			(73		)
Total second lien	(177		)	(2		)	83			(96		)
Total U.S. RMBS	(8		)	(88		)	312			216
Other structured finance	28			(3		)	(1		)	24
U.S. public finance	(58		)	30			(19		)	(47		)
Non-U.S. public finance	38			9			0			47
Total	$	0		$	(52	)	$	292		$	240

____________________


(1)	Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets.


(2)	Includes expected loss adjustment expenses ("LAE") to be paid of $14 million as of June 30, 2014 and $15 million as of December 31, 2013. The Company paid $5 million and $12 million in LAE for Second Quarter 2014 and 2013, respectively, and $8 million and $20 million in LAE for Six Months 2014 and 2013, respectively .

Net Expected Recoveries from

Breaches of R&W Rollforward

Second Quarter 2014



	Future Net R&W Benefit as of March 31, 2014		R&W Development and Accretion of Discount During Second Quarter 2014		R&W (Recovered) During Second Quarter 2014			Future Net R&W Benefit as of June 30, 2014(1)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	77	$	3	$	(1	)	$	79
Option ARM	78		3		(16		)	65
Subprime	144		1		(48		)	97
Total first lien	299		7		(65		)	241
Second lien:
Closed-end second lien	81		1		(2		)	80
HELOC	49		8		(8		)	49
Total second lien	130		9		(10		)	129
Total	$	429	$	16	$	(75	)	$	370

____________________


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

Net Expected Recoveries from

Breaches of R&W Rollforward

Second Quarter 2013



	Future Net R&W Benefit at March 31, 2013		R&W Development and Accretion of Discount During Second Quarter 2013			R&W (Recovered) During Second Quarter 2013			Future Net R&W Benefit at June 30, 2013
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	130	$	—		$	(5	)	$	125
Option ARM	581		13			(399		)	195
Subprime	112		(5		)	—			107
Total first lien	823		8			(404		)	427
Second lien:
Closed-end second lien	88		—			(2		)	86
HELOC	136		27			(102		)	61
Total second lien	224		27			(104		)	147
Total	$	1,047	$	35		$	(508	)	$	574

Net Expected Recoveries from

Breaches of R&W Rollforward

Six Months 2014



	Future Net R&W Benefit as of December 31, 2013		R&W Development and Accretion of Discount During 2014		R&W (Recovered) During 2014			Future Net R&W Benefit as of June 30, 2014(1)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	78	$	4	(3		)	$	79
Option ARM	98		8		(41		)	65
Subprime	117		28		(48		)	97
Total first lien	293		40		(92		)	241
Second lien:
Closed-end second lien	82		—		(2		)	80
HELOC	45		13		(9		)	49
Total second lien	127		13		(11		)	129
Total	$	420	$	53	$	(103	)	$	370

____________________


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

Net Expected Recoveries from

Breaches of R&W Rollforward

Six Months 2013



	Future Net R&W Benefit as of December 31, 2012		R&W Development and Accretion of Discount During 2013			R&W (Recovered) During 2013			Future Net R&W Benefit as of June 30, 2013
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	132	$	—		(7		)	$	125
Option ARM	481		162			(448		)	195
Subprime	107		—			—			107
Total first lien	720		162			(455		)	427
Second lien:
Closed-end second lien	115		(9		)	(20		)	86
HELOC	125		44			(108		)	61
Total second lien	240		35			(128		)	147
Total	$	960	$	197		$	(583	)	$	574

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

By Accounting Model

As of June 30, 2014



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives			Total
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	162		$	21		$	—		$	183
Option ARM	(29		)	—			—			(29		)
Subprime	180			76			—			256
Total first lien	313			97			—			410
Second lien:
Closed-end second lien	(33		)	20			(4		)	(17		)
HELOCs	(92		)	(16		)	—			(108		)
Total second lien	(125		)	4			(4		)	(125		)
Total U.S. RMBS	188			101			(4		)	285
Other structured finance	21			—			4			25
U.S. public finance	102			—			—			102
Non-U.S. public finance	39			—			—			39
Total	$	350		$	101		$	0		$	451

Net Expected Loss to be Paid

By Accounting Model

As of December 31, 2013



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives			Total
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	164		$	19		$	—		$	183
Option ARM	(3		)	(1		)	—			(4		)
Subprime	141			81			—			222
Total first lien	302			99			—			401
Second lien:
Closed-end second lien	(36		)	18			(2		)	(20		)
HELOCs	(33		)	(75		)	—			(108		)
Total second lien	(69		)	(57		)	(2		)	(128		)
Total U.S. RMBS	233			42			(2		)	273
Other structured finance	22			—			5			27
U.S. public finance	61			—			—			61
Non-U.S. public finance	42			—			—			42
Total	$	358		$	42		$	3		$	403

___________________


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

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

By Accounting Model

Second Quarter 2014



	Financial Guaranty Insurance			FG VIEs(1)		Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	4		$	2	$	—		$	6
Option ARM	(14		)	—		—			(14		)
Subprime	1			2		—			3
Total first lien	(9		)	4		—			(5		)
Second lien:
Closed-end second lien	(1		)	1		(6		)	(6		)
HELOCs	(24		)	1		—			(23		)
Total second lien	(25		)	2		(6		)	(29		)
Total U.S. RMBS	(34		)	6		(6		)	(34		)
Other structured finance	(1		)	—		(1		)	(2		)
U.S. public finance	47			—		—			47
Non-U.S. public finance	(4		)	—		—			(4		)
Total	$	8		$	6	$	(7	)	$	7

Net Economic Loss Development

By Accounting Model

Second Quarter 2013



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	(4	)	$	1		$	1		$	(2	)
Option ARM	8			5			1			14
Subprime	4			16			(1		)	19
Total first lien	8			22			1			31
Second lien:
Closed-end second lien	(5		)	2			10			7
HELOCs	10			(22		)	—			(12		)
Total second lien	5			(20		)	10			(5		)
Total U.S. RMBS	13			2			11			26
Other structured finance	(3		)	—			(2		)	(5		)
U.S. public finance	15			—			—			15
Non-U.S. public finance	3			—			—			3
Total	$	28		$	2		$	9		$	39

Net Economic Loss Development

By Accounting Model

Six Months 2014



	Financial Guaranty Insurance			FG VIEs(1)		Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	9		$	2	$	—		$	11
Option ARM	(26		)	1		—			(25		)
Subprime	(8		)	1		—			(7		)
Total first lien	(25		)	4		—			(21		)
Second lien:
Closed end second lien	(1		)	3		(2		)	—
HELOCs	(79		)	59		—			(20		)
Total second lien	(80		)	62		(2		)	(20		)
Total U.S. RMBS	(105		)	66		(2		)	(41		)
Other structured finance	(1		)	—		(1		)	(2		)
U.S. public finance	51			—		—			51
Non-U.S. public finance	(3		)	—		—			(3		)
Total	$	(58	)	$	66	$	(3	)	$	5

Net Economic Loss Development

By Accounting Model

Six Months 2013



	Financial Guaranty Insurance			FG VIEs(1)			Credit Derivatives(2)			Total
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	—		$	1		$	—		$	1
Option ARM	(87		)	(33		)	—			(120		)
Subprime	14			20			(1		)	33
Total first lien	(73		)	(12		)	(1		)	(86		)
Second lien:
Closed end second lien	(2		)	—			10			8
HELOCs	7			(18		)	1			(10		)
Total second lien	5			(18		)	11			(2		)
Total U.S. RMBS	(68		)	(30		)	10			(88		)
Other structured finance	(3		)	—			—			(3		)
U.S. public finance	30			—			—			30
Non-U.S. public finance	9			—			—			9
Total	$	(32	)	$	(30	)	$	10		$	(52	)

___________________

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

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

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 next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates ("CDR"), then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A conditional default rate is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding

amount of the whole pool of loans (or “collateral pool balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.

In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on its experience to date. The assumptions and variables the Company used to project collateral losses in its U.S. RMBS portfolio are interrelated, difficult to predict and subject to considerable volatility. If actual experience differs from the Company’s assumptions, the losses incurred could be materially different from the estimate. The Company continues to update its evaluation of these exposures as new information becomes available.

The Company is in the process of enforcing claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. The Company calculates a credit from the RMBS issuer for such recoveries where the R&W were provided by an entity the Company believes to be financially viable and where the Company already has access. Where the Company has an agreement with an R&W provider (e.g., the Bank of America Agreement, the Deutsche Bank Agreement or the UBS Agreement) or where it is in advanced discussions on a potential agreement, that credit is based on the agreement or potential agreement. Where the Company does not have an agreement with the R&W provider but the Company believes the R&W provider to be economically viable, the Company estimates what portion of its past and projected future claims it believes will be reimbursed by that provider.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above, assumed voluntary prepayments and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

The ultimate performance of the Company’s RMBS transactions remains highly uncertain, may differ from the Company's projections and may be subject to considerable volatility due to the influence of many factors, including the level and timing of loan defaults, changes in housing prices, results from the Company’s loss mitigation activities and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust its RMBS loss projection assumptions and scenarios based on actual performance and management’s view of future performance.

Second Quarter 2014 U.S. RMBS Loss Projections

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will continue improving. Each quarter the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the quarter of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and, for first liens, loss severity) as well as the residential property market and economy in general. To the extent it observes changes, it makes a judgment as whether those changes are normal fluctuations or part of a trend. Based on such observations the Company chose to use the same general assumptions to project RMBS losses as of June 30, 2014 as it used as of March 31, 2014 and December 31, 2013.

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

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that have been modified in the previous 12 months or are delinquent or in foreclosure or that have been foreclosed and so the RMBS issuer owns the underlying real estate). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. The following table shows liquidation assumptions for various non-performing categories.

First Lien Liquidation Rates



	June 30, 2014	March 31, 2014	December 31, 2013
Current Loans Modified in Previous 12 Months
Alt-A	35%	35%	35%
Option ARM	35	35	35
Subprime	35	35	35
30 - 59 Days Delinquent
Alt-A	50	50	50
Option ARM	50	50	50
Subprime	45	45	45
60 - 89 Days Delinquent
Alt-A	60	60	60
Option ARM	65	65	65
Subprime	50	50	50
90 + Days Delinquent
Alt-A	75	75	75
Option ARM	70	70	70
Subprime	60	60	60
Bankruptcy
Alt-A	60	60	60
Option ARM	60	60	60
Subprime	55	55	55
Foreclosure
Alt-A	85	85	85
Option ARM	80	80	80
Subprime	70	70	70
Real Estate Owned
All	100	100	100

While the Company uses liquidation rates as described above to project defaults of non-performing loans (including current loans modified within the last 12 months), it projects defaults on presently current loans by applying a CDR trend. The start of that CDR trend is based on the defaults the Company projects will emerge from currently nonperforming loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.

In the base case, after the initial 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were modified in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36 month period represent defaults attributable to borrowers that are currently performing.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historic high levels, and the Company is assuming in the base case that these high levels generally will continue for another 18 months, except that in the case of subprime loans, the Company assumes the 90% loss severity rate will continue for another nine months then drop to 80% for nine more months, in each case before following the ramp described below. The Company determines its initial loss severity based on actual recent experience. The Company’s initial loss severity assumptions for June 30, 2014 were the same as it used for March 31, 2014 and December 31, 2013. The Company

then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 month period, declining to 40% in the base case over 2.5 years.

The following table shows the range of key assumptions used in the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 first lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS(1)



	As of June 30, 2014	As of March 31, 2014	As of December 31, 2013
Alt-A First Lien
Plateau CDR	4.5% - 16.8%	4.3% - 18.4%	5.1% - 18.4%
Intermediate CDR	0.9% - 3.4%	0.9% - 3.7%	1.0% - 3.7%
Period until intermediate CDR	48 months	48 months	48 months
Final CDR	0.2% - 0.8%	0.2% - 0.9%	0.3% - 0.9%
Initial loss severity	65%	65%	65%
Initial conditional prepayment rate ("CPR")	1.0% - 14.9%	0.9% - 18.4%	0.0% - 18.4%
Final CPR	15%	15%	15%
Option ARM
Plateau CDR	5.0% - 15.8%	4.6% - 16.8%	4.9% - 16.8%
Intermediate CDR	1.0% - 3.2%	0.9% - 3.4%	1.0% - 3.4%
Period until intermediate CDR	48 months	48 months	48 months
Final CDR	0.2% - 0.8%	0.2% - 0.8%	0.2% - 0.8%
Initial loss severity	65%	65%	65%
Initial CPR	1.7% - 7.3%	1.6% - 8.9%	1.2% - 10.4%
Final CPR	15%	15%	15%
Subprime
Plateau CDR	7.0% - 16.5%	7.3% - 16.3%	7.2% - 16.2%
Intermediate CDR	1.4% - 3.3%	1.5% - 3.3%	1.4% - 3.2%
Period until intermediate CDR	48 months	48 months	48 months
Final CDR	0.4% - 0.8%	0.4% - 0.8%	0.4% - 0.8%
Initial loss severity	90%	90%	90%
Initial CPR	0.0% - 7.1%	0.0% - 7.1%	0.0% - 8.0%
Final CPR	15%	15%	15%

____________________

(1) Represents variables for most heavily weighted scenario (the “base case”).

The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary CPR follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant. These assumptions are the same as those the Company used for March 31, 2014 and December 31, 2013.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the initial conditional default rate. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios (including its base case) as of June 30, 2014. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of June 30, 2014 as it used as of March 31, 2014 and December 31, 2013,

increasing and decreasing the periods of stress from those used in the base case. In a somewhat more stressful environment than that of the base case, where the conditional default rate plateau was extended six months (to be 42 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over 4.5 rather than 2.5 years (and subprime loss severities were assumed to recover only to 60%), expected loss to be paid would increase from current projections by approximately $14 million for Alt-A first liens, $6 million for Option ARM and $67 million for subprime transactions. In an even more stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the conditional default rate was assumed to occur over 15 months and other assumptions were the same as the other stress scenario, expected loss to be paid would increase from current projections by approximately $36 million for Alt-A first liens, $14 million for Option ARM and $98 million for subprime transactions.

The Company also considered two scenarios where the recovery was faster than in its base case. In a scenario with a somewhat less stressful environment than the base case, where conditional default rate recovery was somewhat less gradual and the initial subprime loss severity rate was assumed to be 80% for 18 months and was assumed to recover to 40% over 2.5 years, expected loss to be paid would increase from current projections by approximately $2 million for Alt-A first lien and would decrease by $8 million for Option ARM and $22 million for subprime transactions. In an even less stressful scenario where the conditional default rate plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, (including an initial ramp-down of the conditional default rate over nine months), expected loss to be paid would decrease from current projections by approximately $11 million for Alt-A first lien, $18 million for Option ARM and $64 million for subprime transactions.

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

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

The following table shows the range of key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 second lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

Second Lien RMBS(1)



HELOC key assumptions	As of June 30, 2014	As of March 31,2014	As of December 31, 2013
Plateau CDR	2.2% - 9.1%	1.9% - 7.3%	2.3% - 7.7%
Final CDR trended down to	0.6% - 3.2%	0.4% - 3.2%	0.4% - 3.2%
Period until final CDR	34 months	34 months	34 months
Initial CPR	2.4% - 13.4%	2.3% - 16.3%	2.7% - 17.9%
Final CPR	10%	10%	10%
Loss severity	98%	98%	98%



Closed-end second lien key assumptions	As of June 30, 2014	As of March 31, 2014	As of December 31, 2013
Plateau CDR	6.3% - 14.9%	7.8% - 15.5%	7.5% - 15.1%
Final CDR trended down to	3.5% - 8.6%	3.5% - 8.6%	3.5% - 8.6%
Period until final CDR	34 months	34 months	34 months
Initial CPR	2.6% - 10.4%	3.8% - 12.8%	3.1% - 9.4%
Final CPR	10%	10%	10%
Loss severity	98%	98%	98%

_________________


(1)	Represents variables for most heavily weighted scenario (the “base case”).

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. Most second lien transactions report the amount of loans in five

monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected representative transactions and then applying an average of the preceding twelve months’ liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a CDR. The first four months’ CDR is calculated by applying the liquidation rates to the current period past due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the CDR is calculated using the average 30-59 day past due balances for the prior three months, adjusted as necessary to reflect one-time service events. The fifth month CDR is then used as the basis for the plateau period that follows the embedded five months of losses.

For the base case scenario, the CDR (the “plateau CDR”) was held constant for one month. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprising five months of delinquent data, a one month plateau period and 28 months of decrease to the steady state CDR the same as of March 31, 2014 and December 31, 2013. When a second lien loan defaults, there is generally a very low recovery. Based on current expectations of future performance, the Company assumes that it will only recover 2% of the collateral, the same as of March 31, 2014 and December 31, 2013.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, the current CPR (based on experience of the most recent three quarters) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant. The final CPR is assumed to be 10% for both HELOC and closed-end second lien transactions. This level is much higher than current rates for most transactions, but lower than the historical average, which reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the CPR at March 31, 2014 and December 31, 2013. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, the loss severity, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percentage of current outstanding advances). These variables have been relatively stable over the past several quarters and in the relevant ranges have less impact on the projection results than the variables discussed above. However, in a number of HELOC transactions the servicers have been modifying poorly performing loans from floating to fixed rates, and, as a result, rising interest rates would negatively impact the excess spread available from these modified loans to support the transactions. The Company incorporated these modifications in its assumptions.

In estimating expected losses, the Company modeled and probability weighted three possible CDR curves applicable to the period preceding the return to the long-term steady state CDR using the same approaches and weightings as it did as of March 31, 2014 and December 31, 2013. The Company believes that the level of the elevated CDR and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer. The Company continues to evaluate the assumptions affecting its modeling results.

The Company’s base case assumed a one month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. Increasing the CDR plateau to four months and increasing the ramp-down by five months to 33-months (for a total stress period of 42 months) would increase the expected loss by approximately $14 million for HELOC transactions and $1 million for closed-end second lien transactions. On the other hand, keeping the CDR plateau at one month but decreasing the length of the CDR ramp-down to 18 months (for a total stress period of 24 months) would decrease the expected loss by approximately $13 million for HELOC transactions and $1 million for closed-end second lien transactions.

Breaches of Representations and Warranties

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these R&W provisions. The

Company has pursued breaches of R&W on a loan-by-loan basis or in cases where a provider of R&W refused to honor its repurchase obligations, the Company sometimes chose to initiate litigation. See “Recovery Litigation” below. The Company's success in pursuing these strategies permitted the Company to enter into agreements with R&W providers under which those providers made payments to the Company, agreed to make payments to the Company in the future, and / or repurchased loans from the transactions, all in return for releases of related liability by the Company. Such agreements provide the Company with many of the benefits of pursuing the R&W claims on a loan by loan basis or through litigation, but without the related expense and uncertainty. The Company continues to pursue these strategies against R&W providers with which it does not yet have agreements.

Through June 30, 2014 the Company has caused entities providing R&Ws to pay or agree to pay approximately $3.0 billion (gross of reinsurance) in respect of their R&W liabilities for transactions in which the Company has provided insurance.

R&W Payments (Gross of Reinsurance)

As of June 30, 2014



	(in millions)
Agreement amounts already received	$	2,315
Agreement amounts projected to be received in the future	248
Repurchase amounts paid into the relevant RMBS prior to settlement (1)	396
Total R&W payments, gross of reinsurance	$	2,959

____________________

(1)

These amounts were paid into the relevant RMBS transactions (rather than to the Company as in most settlements) and distributed in accordance with the priority of payments set out in the relevant transaction documents. Because the Company may insure only a portion of the capital structure of a transaction, such payments will not necessarily directly benefit the Company dollar-for-dollar, especially in first lien transactions.

Based on this success, the Company has included in its net expected loss estimates as of June 30, 2014 an estimated net benefit related to breaches of R&W of $370 million, which includes $235 million from agreements with R&W providers and $135 million in transactions where the Company does not yet have such an agreement, all net of reinsurance.

Representations and Warranties Agreements (1)



	Agreement Date	Current Net Par Covered		Receipts to June 30, 2014 (net of reinsurance)		Estimated Future Receipts (net of reinsurance)		Eligible Assets Held in Trust (gross of reinsurance)
	(in millions)
Bank of America - First Lien	April 2011	$	638	$	453	$	114	$	519	(2	)
Bank of America - Second Lien	April 2011	896		744		NA		NA
Deutsche Bank	May 2012	434		92		61		66		(3	)
UBS	May 2013	523		420		18		129		(4	)
Others	Various	1,009		390		42		—
Total		$	3,500	$	2,099	$	235	$	714

____________________


(1)	This table relates to past and projected future recoveries under R&W and related agreements. Excluded from this table is $135 million of future net recoveries the Company projects receiving from R&W counterparties in transactions with $257 million of net par outstanding as of June 30, 2014 not covered by current agreements.


(2)	Of the $519 million in trust, $135 million collateralizes Bank of America's reimbursement obligations in respect of AGM-insured transactions, and $384 million is available to either AGM or AGC, as required.


(3)	Of the $66 million in trust, $63 million collateralizes Deutsche Bank's reimbursement obligations in respect of AGM-insured transactions, and $3 million is available to either AGM or AGC, as required.


(4)	The entire $129 million in trust collateralizes UBS' reimbursement obligations in respect of AGM-insured transactions.

The Company's agreements with the counterparties specifically named in the table above required an initial payment to the Company to reimburse it for past claims as well as an obligation to reimburse it for a portion of future claims. The named counterparties placed eligible assets in trust to collateralize their future reimbursement obligations, and the amount of collateral they are required to post may be increased or decreased from time to time as determined by rating agency requirements. Reimbursement payments under these agreements are made either monthly or quarterly and have been made timely. With respect to the reimbursement for future claims:

•

Bank of America. Under Assured Guaranty's agreement with Bank of America Corporation and certain of its subsidiaries (“Bank of America”), Bank of America agreed to reimburse Assured Guaranty for 80% of claims on the first lien transactions covered by the agreement that Assured Guaranty pays in the future, until the aggregate lifetime collateral losses (not insurance losses or claims) on those transactions reach $6.6 billion. As of June 30, 2014, aggregate lifetime collateral losses on those transactions was $4.0 billion ($3.7 billion for AGM and $0.3 billion for AGC), and Assured Guaranty was projecting in its base case that such collateral losses would eventually reach $5.1 billion ($4.7 billion for AGM and $0.4 billion for AGC).

•

Deutsche Bank. Under Assured Guaranty's agreement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), Deutsche Bank agreed to reimburse Assured Guaranty for certain claims it pays in the future on eight first and second lien transactions, including 80% of claims it pays on those transactions until the aggregate lifetime claims (before reimbursement) reach $319 million. As of June 30, 2014, Assured Guaranty was projecting in its base case that such aggregate lifetime claims would remain below $319 million. In the event aggregate lifetime claims paid exceed $389 million, Deutsche Bank must reimburse Assured Guaranty for 85% of such claims paid (in excess of $389 million) until such claims paid reach $600 million.

•

UBS. On May 6, 2013, Assured Guaranty entered into an agreement with UBS Real Estate Securities Inc. and affiliates ("UBS") and a third party resolving Assured Guaranty’s claims and liabilities related to specified RMBS transactions that were issued, underwritten or sponsored by UBS and insured by AGM or AGC under financial guaranty insurance policies. Under the agreement, UBS agreed to reimburse AGM for 85% of future losses on three first lien RMBS transactions.

In addition to the agreements mentioned above, the Company entered into several other agreements with other R&W providers over the past several years. The results of those settlements have been included in the changes in the benefit for R&W in the appropriate reporting periods.

The Company calculated an expected recovery of $135 million from breaches of R&W in transactions not covered by agreements with $257 million of net par outstanding as of June 30, 2014. The Company did not incorporate any gain contingencies from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to such contractual R&W is uncertain and subject to a number of factors including the counterparty’s ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company’s estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W not already covered by agreements, the Company considered the creditworthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches across those transactions where material repurchases have been made and the potential amount of time until the recovery is realized. The calculation of expected recovery from breaches of such contractual R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing limited recoveries. These scenarios were probability weighted in order to determine the recovery incorporated into the Company’s estimate of expected losses. This approach was used for both loans that had already defaulted and those assumed to default in the future. The Company adjusts the calculation of its expected recovery from breaches of R&W based on changing facts and circumstances with respect to each counterparty and transaction.

The Company uses the same RMBS projection scenarios and weightings to project its future R&W benefit as it uses to project RMBS losses on its portfolio. To the extent the Company increases its loss projections, the R&W benefit (whether pursuant to an R&W agreement or not) generally will also increase, subject to the agreement limits and thresholds described above. Similarly, to the extent the Company decreases its loss projections, the R&W benefit (whether pursuant to an R&W agreement or not) generally will also decrease, subject to the agreement limits and thresholds described above.

U.S. RMBS Risks with R&W Benefit



	Number of Risks(1) as of		Debt Service as of
	June 30, 2014	December 31, 2013	June 30, 2014		December 31, 2013
	(dollars in millions)
Alt-A first lien	8	8	$	590	$	612
Option ARM	7	6	212		273
Subprime	4	5	658		985
Closed-end second lien	2	1	63		65
HELOC	2	4	70		318
Total	23	24	$	1,593	$	2,253

____________________________


(1)	A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making Debt Service payments. This table shows the full future Debt Service (not just the amount of Debt Service expected to be reimbursed) for risks with projected future R&W benefit, whether pursuant to an agreement or not.

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

Components of R&W Development



	Second Quarter					Six Months
	2014			2013		2014			2013
	(in millions)
Inclusion or removal of deals with breaches of R&W during period	$	—		$	6	$	—		$	6
Change in recovery assumptions as the result of recovery success	16			5		27			16
Estimated increase (decrease) in defaults that will result in additional (lower) breaches	(2		)	15		(6		)	24
Settlements and anticipated settlements	—			5		28			145
Accretion of discount on balance	2			4		4			6
Total	$	16		$	35	$	53		$	197

Manufactured Housing

The Company insures a total of $172 million net par of securities backed by manufactured housing loans, of which $106 million is rated BIG. The Company has expected loss to be paid of $19 million as of June 30, 2014. The economic loss development during the Second Quarter 2014 was not significant and was approximately $0.4 million during Six Months 2014.

Selected U.S. Public Finance Transactions

Many U.S. municipalities and related entities continue to be under increased pressure, and a few have filed for protection under the U.S. Bankruptcy Code, entered into state processes designed to help municipalities in fiscal distress or otherwise indicated they may consider not meeting their obligations to make timely payments on their debts. Given some of these developments, and the circumstances surrounding each instance, the ultimate outcome cannot be certain and may lead to an increase in defaults on some of the Company's insured public finance obligations. The Company will continue to analyze developments in each of these matters closely. The municipalities whose obligations the Company has insured that have filed for protection under Chapter 9 of the U.S Bankruptcy Code and have not been resolved are: Detroit, Michigan and Stockton, California.

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $2.3 billion net par. The Company rates $2.0 billion net par of that amount 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 3, Outstanding Exposure.

The Company has net par exposure to the City of Detroit, Michigan of $1.5 billion as of June 30, 2014. On July 18, 2013, the City of Detroit filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. The City has filed a proposed plan of adjustment and disclosure statement with the Bankruptcy Court.

•

As of June 30, 2014, the Company had net par exposure to $701 million of sewer revenue bonds and $729 million of water revenue bonds, both of which had an average internal rating of BBB. Both the sewer and water systems provide services to areas that extend beyond the city limits, and the bonds are secured by a lien on "special revenues". In September 2014, the City issued new series of sewer and water revenue bonds to finance (i) the purchase of outstanding sewer and water revenue bonds offered and accepted under a tender offer commenced by the City and (ii) the refunding of certain other sewer revenue and revenue refunding bonds. As a result of that transaction, approximately $546 million of AGM's combined $1.4 billion net par exposure to the sewer and water revenue bonds was purchased in the tender offer or refunded, and AGM insured approximately $841 million gross par of the new sewer and water revenue bonds. Under the City's amended plan of adjustment, the impairment of all outstanding sewer and water revenue bonds (even those not purchased pursuant to the tender offer or refunded) is removed, including those provisions which provide for the impairment of interest rates and call protection on such bonds.

•

The Company has net par exposure of $44 million to the City's general obligation bonds, which are secured by a pledge of the unlimited tax, full faith, credit and resources of the City, and the specific ad valorem taxes approved by the voters solely to pay debt service on the general obligation bonds. The Company rates this exposure BIG. On April 9, 2014, the City and the Company reached a tentative settlement with respect to the treatment of the unlimited tax general obligation bonds insured by the Company. The agreement provides for the confirmation of both the secured status of such general obligation bonds and the existence of a valid lien on the City’s pledged property tax revenues, a finding that such revenues constitute “special revenues” under the U.S. Bankruptcy Code, and the provision of additional security for such general obligation bonds in the form of a statutory lien on, and intercept of, the City’s distributable state aid. After giving effect to post-petition payments made by Assured Guaranty on such general obligation bonds, the settlement results in a minimum ultimate recovery of approximately 74% on such general obligation bonds. The settlement is subject to confirmation of a plan of adjustment.

On June 28, 2012, the City of Stockton, California filed for bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code. AGM's net exposure to the City's general fund is $63 million, consisting of pension obligation bonds. AGC had exposure to lease revenue bonds; as of June 30, 2014, AGC owned all of such bonds and held them in its investment portfolio. On October 3, 2013, AGM and AGC reached a tentative settlement with the City regarding the treatment of the bonds insured by AGM and AGC in the City's proposed plan of adjustment. Under the terms of the settlement, AGM will be entitled to certain fixed payments and certain variable payments contingent on the City's revenue growth and AGC will continue to receive net revenues from an office building and an option to take title to that building. The settlement is subject to a number of conditions, including a sales tax increase (which was approved by voters on November 5, 2013), confirmation of a plan of adjustment that implements the terms of the settlement and definitive documentation. Pursuant to an order of the Bankruptcy Court, the City held a vote of its creditors on its proposed plan of adjustment; all but one of the classes polled voted to accept the plan. The court proceeding to determine whether to confirm the plan of adjustment began in May 2014 and is scheduled to continue through October 2014. The Company expects the plan to be confirmed and implemented at the end of 2014.

The Company projects that its total future expected net loss across its troubled U.S. public finance credits as of June 30, 2014 will be $102 million compared with a net expected loss of $63 million as of March 31, 2014 and $61 million as of December 31, 2013. Economic loss development in Second Quarter 2014 was $47 million, which was primarily attributable to certain Puerto Rico exposures. Economic loss development in Six Months 2014 was approximately $51 million, which was also primarily attributable to Puerto Rico in addition to development on Detroit exposures.

Certain Selected European Country Transactions

The Company insures and reinsures credits with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the regions also to default. The Company's gross exposure to these Spanish and Portuguese credits is €429 million and €79 million, respectively and exposure net of reinsurance for Spanish and Portuguese credits is €271 million and €65 million, respectively. The Company rates most of these issuers in the BB category due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities and covered mortgage bonds issued by Hungarian banks. The Company's gross exposure to these Hungarian credits is $613 million and its exposure net of reinsurance is $508 million, all of which is rated BIG. The Company estimated net expected losses of $41 million related to these Spanish, Portuguese and Hungarian credits. The positive economic loss development during both the Second Quarter 2014 and Six Months 2014 was approximately $1 million.

Infrastructure Finance

The Company has insured exposure of approximately $2.9 billion to infrastructure transactions with refinancing risk as to which the Company may need to make claim payments that it did not anticipate paying when the policies were issued. 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, if at all. 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 expected the cash flows from these projects to be sufficient to repay all of the debt over the life of the project concession, but also expected the debt to be refinanced in the market at or prior to its maturity. If the issuer is unable to refinance the debt due to market conditions, the Company may have to pay a claim when the debt matures, and then recover its payment from cash flows produced by the project in the future. The Company generally projects that in most scenarios it will be fully reimbursed for such payments. However, the recovery of the payments is uncertain and may take from 10 to 35 years, depending on the transaction and the performance of the underlying collateral. The Company estimates total claims for the two largest transactions with significant refinancing risk, assuming no refinancing and based on certain performance assumptions could be $1.6 billion on a gross basis; such claims would be payable from 2017 through 2022.

Recovery Litigation

RMBS Transactions

As of the date of this filing, AGM has lawsuits pending against providers of representations and warranties in U.S. RMBS transactions insured by them, seeking damages. In all the lawsuits, AGM has alleged breaches of R&W in respect of the underlying loans in the transactions, and failure to cure or repurchase defective loans identified by AGM to such persons.


•	Deutsche Bank: AGM has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp. in the Supreme Court of the State of New York on the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1 second lien transaction.

•

Credit Suisse: AGM and its affiliate AGC have sued DLJ Mortgage Capital, Inc. (“DLJ”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”) on first lien U.S. RMBS transactions insured by them. On May 6, 2014, the Appellate Division, First Department unanimously reversed certain aspects of the partial dismissal by the Supreme Court of the State of New York of certain claims for relief by holding as a matter of law that AGM’s and AGC’s remedies for breach of R&W are not limited to the repurchase remedy. AGM and AGC filed an amended complaint against DLJ and Credit Suisse (and added Credit Suisse First Boston Mortgage Securities Corp. as a defendant), asserting claims of fraud and material misrepresentation in the inducement of an insurance contract, in addition to their existing breach of contract claims.

On July 3, 2014, the Supreme Court of the State of New York issued decisions in both cases that the court noted were intended to be read together. In the Deutsche Bank action, Deutsche Bank had filed a motion to dismiss certain of AGM’s claims as well as a motion for partial summary judgment against AGM. The decision provides that AGM continues to have claims for a breach of contract cause of action, which the court deems to consist of a claim for recovery of the portion of AGM’s paid claims attributable to all loans that breached R&W, not solely for claims attributable to loans that AGM had demanded that Deutsche Bank repurchase prior to the litigation. The court also held that sampling and expert evidence could be used to calculate damages, and that AGM could recover its reasonable litigation costs and expenses. In the Credit Suisse action, the court granted the defendants’ motion to dismiss certain of AGM’s and AGC’s fraud claims and all of the claims against Credit Suisse First Boston Mortgage Securities Corp., along with the remaining fraud claims and claims of material misrepresentation in the

inducement of an insurance contract. On July 10, 2014, AGM and AGC filed a notice of appeal of the court’s dismissal action. AGM and AGC continue to have claims for breach of R&W and breach of DLJ’s repurchase obligations.

On March 26, 2013, AGM had filed a lawsuit against RBS Securities Inc., RBS Financial Products Inc. and Financial Asset Securities Corp. (collectively, “RBS”) in the United States District Court for the Southern District of New York on the Soundview Home Loan Trust 2007-WMC1 transaction, alleging that RBS made fraudulent misrepresentations to AGM regarding the quality of the underlying mortgage loans in the transaction and that RBS's misrepresentations induced AGM into issuing a financial guaranty insurance policy in respect of the Class II-A-1 certificates issued in the transaction. AGM has resolved its claims against RBS and the lawsuit has been dismissed.

6. Financial Guaranty Insurance Losses

Insurance Contracts' Loss Information

The following table provides balance sheet information on loss and LAE reserves and salvage and subrogation recoverable, net of reinsurance.

Loss and LAE Reserve and Salvage and Subrogation Recoverable

Net of Reinsurance

Insurance Contracts



	As of June 30, 2014									As of December 31, 2013
	Loss and LAE Reserve, net			Salvage and Subrogation Recoverable, net			Net Reserve (Recoverable)			Loss and LAE Reserve, net			Salvage and Subrogation Recoverable, net			Net Reserve (Recoverable)
	(in millions)
U.S. RMBS:
First lien:
Alt-A first lien	$	74		$	—		$	74		$	63		$	—		$	63
Option ARM	14			58			(44		)	17			41			(24		)
Subprime	177			3			174			137			1			136
First lien	265			61			204			217			42			175
Second lien:
Closed-end second lien	—			42			(42		)	—			45			(45		)
HELOC	—			113			(113		)	—			113			(113		)
Second lien	—			155			(155		)	—			158			(158		)
Total U.S. RMBS	265			216			49			217			200			17
Other structured finance	19			—			19			20			—			20
U.S. public finance	77			—			77			35			—			35
Non-U.S. public finance	25			—			25			24			—			24
Subtotal	386			216			170			296			200			96
Effect of consolidating FG VIEs	(87		)	(16		)	(71		)	(89		)	(85		)	(4		)
Total (1)	$	299		$	200		$	99		$	207		$	115		$	92

____________________

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

The following table reconciles the reported gross and ceded reserve and salvage and subrogation amount to the financial guaranty net reserves (salvage) in the financial guaranty BIG transaction loss summary tables.

Components of Net Reserves (Salvage)

Insurance Contracts



	As of June 30, 2014			As of December 31, 2013
	(in millions)
Loss and LAE reserve	$	401		$	273
Reinsurance recoverable on unpaid losses	(102		)	(66		)
Loss and LAE reserve, net	299			207
Salvage and subrogation recoverable	(223		)	(140		)
Salvage and subrogation payable(1)	23			25
Salvage and subrogation recoverable, net	(200		)	(115		)
Financial guaranty net reserves (salvage)	$	99		$	92

____________________


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

Balance Sheet Classification of

Net Expected Recoveries for Breaches of R&W

Insurance Contracts



	As of June 30, 2014						As of December 31, 2013
	For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs		Reported on Balance Sheet (1)		For all Financial Guaranty Insurance Contracts		Effect of Consolidating FG VIEs			Reported on Balance Sheet (1)
	(in millions)
Salvage and subrogation recoverable, net	$	96	$	—	$	96	$	102	$	(49	)	$	53
Loss and LAE reserve, net	239		—		239		272		—			272

____________________


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

The table below provides a reconciliation of net expected loss to be paid to net expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid which represent the payments that have been made but have not yet been expensed, (2) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (having the effect of reducing net expected loss to be paid by the amount of the previously paid claim and the expected recovery), but will have no future income effect (because the previously paid claims and the corresponding recovery of those claims will offset in income in future periods), and (3) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Net Expected Loss to be Paid and

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts



	As of June 30, 2014
	(in millions)
Net expected loss to be paid	$	451
Less: net expected loss to be paid for FG VIEs	101
Total	350
Contra-paid, net	32
Salvage and subrogation recoverable, net of reinsurance	200
Loss and LAE reserve, net of reinsurance	(299		)
Net expected loss to be expensed (Present value)(1)	$	283

____________________

(1) Excludes $77 million as of June 30, 2014 related to consolidated FG VIEs.

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

Net Expected Loss to be Expensed

Insurance Contracts



	As of June 30, 2014
	(in millions)
2014 (July 1- September 30)	$	9
2014 (October 1 - December 31)	8
2015	33
2016	30
2017	25
2018	22
2019-2023	75
2024-2028	41
2029-2033	25
After 2033	15
Net expected loss to be expensed (present value)(1)	283
Discount	149
Total future value	$	432

____________________


(1)	Consolidation of FG VIEs resulted in reductions of $77 million in net expected loss to be expensed on a present value basis.

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

Loss and LAE

Reported on the

Consolidated Statements of Operations



	Second Quarter						Six Months
	2014			2013			2014			2013
	(in millions)
Structured Finance:
U.S. RMBS:
First lien:
Alt-A first lien	$	7		$	0		$	13		$	8
Option ARM	(11		)	21			(20		)	(64		)
Subprime	7			23			(1		)	32
First lien	3			44			(8		)	(24		)
Second lien:
Closed-end second lien	(1		)	0			(1		)	19
HELOC	(10		)	0			(2		)	7
Second lien	(11		)	0			(3		)	26
Total U.S. RMBS	(8		)	44			(11		)	2
Other structured finance	(1		)	(3		)	0			(3		)
Structured finance	(9		)	41			(11		)	(1		)
Public Finance:
U.S. public finance	46			15			50			23
Non-U.S. public finance	(1		)	(1		)	0			(2		)
Public finance	45			14			50			21
Loss and LAE on insurance contracts before FG VIE consolidation	36			55			39			20
Effect of consolidating FG VIEs	(8		)	(22		)	(7		)	(16		)
Loss and LAE	$	28		$	33		$	32		$	4

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

Financial Guaranty Insurance

BIG Transaction Loss Summary

As of June 30, 2014



	BIG Categories
	BIG 1						BIG 2						BIG 3						Total BIG, Net			Effect of Consolidating VIEs
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net			Effect of Consolidating VIEs			Total
	(dollars in millions)
Number of risks(1)	88			(82		)	20			(20		)	34			(34		)	142			—			142
Remaining weighted-average contract period (in years)	8.3			8.2			7.7			9.0			8.3			9.5			8.1			—			8.1
Outstanding exposure:																						—
Principal	$	9,457		$	(3,732	)	$	1,986		$	(500	)	$	1,536		$	(216	)	$	8,531		$	—		$	8,531
Interest	4,100			(1,601		)	768			(206		)	698			(101		)	3,658			—			3,658
Total(2)	$	13,557		$	(5,333	)	$	2,754		$	(706	)	$	2,234		$	(317	)	$	12,189		$	—		$	12,189
Expected cash outflows (inflows)	$	1,559		$	(675	)	$	608		$	(86	)	$	1,059		$	(96	)	$	2,369		$	(299	)	$	2,070
Potential recoveries
Undiscounted R&W	(88		)	3			(79		)	4			(283		)	16			(427		)	—			(427		)
Other(3)	(1,581		)	653			(165		)	6			(254		)	37			(1,304		)	160			(1,144		)
Total potential recoveries	(1,669		)	656			(244		)	10			(537		)	53			(1,731		)	160			(1,571		)
Subtotal	(110		)	(19		)	364			(76		)	522			(43		)	638			(139		)	499
Discount	21			(1		)	(80		)	15			(143		)	1			(187		)	38			(149		)
Present value of expected cash flows	$	(89	)	$	(20	)	$	284		$	(61	)	$	379		$	(42	)	$	451		$	(101	)	$	350
Deferred premium revenue	$	415		$	(118	)	$	131		$	(10	)	$	238		$	(30	)	$	626		$	(119	)	$	507
Reserves (salvage)(4)	$	(144	)	$	1		$	185		$	(52	)	$	208		$	(28	)	$	170		$	(71	)	$	99

Financial Guaranty Insurance

BIG Transaction Loss Summary

As of December 31, 2013



	BIG Categories
	BIG 1						BIG 2						BIG 3						Total BIG, Net			Effect of Consolidating VIEs
	Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net			Effect of Consolidating VIEs			Total
	(dollars in millions)
Number of risks(1)	91			(84		)	23			(23		)	33			(33		)	147			—			147
Remaining weighted-average contract period (in years)	9.0			8.8			5.6			5.0			8.0			9.1			8.3			—			8.3
Outstanding exposure:
Principal	$	10,298		$	(4,203	)	$	1,693		$	(197	)	$	1,644		$	(241	)	$	8,994		$	—		$	8,994
Interest	4,762			(1,914		)	541			(53		)	714			(107		)	3,943			—			3,943
Total(2)	$	15,060		$	(6,117	)	$	2,234		$	(250	)	$	2,358		$	(348	)	$	12,937		$	—		$	12,937
Expected cash outflows (inflows)	$	1,557		$	(711	)	$	909		$	(51	)	$	1,013		$	(86	)	$	2,631		$	(573	)	$	2,058
Potential recoveries
Undiscounted R&W	(38		)	1			(199		)	9			(301		)	16			(512		)	38			(474		)
Other(3)	(1,571		)	684			(454		)	26			(275		)	26			(1,564		)	457			(1,107		)
Total potential recoveries	(1,609		)	685			(653		)	35			(576		)	42			(2,076		)	495			(1,581		)
Subtotal	(52		)	(26		)	256			(16		)	437			(44		)	555			(78		)	477
Discount	17			0			(64		)	3			(106		)	(5		)	(155		)	36			(119		)
Present value of expected cash flows	$	(35	)	$	(26	)	$	192		$	(13	)	$	331		$	(49	)	$	400		$	(42	)	$	358
Deferred premium revenue	$	446		$	(128	)	$	153		$	(10	)	$	270		$	(34	)	$	697		$	(172	)	$	525
Reserves (salvage)(4)	$	(98	)	$	0		$	76		$	(6	)	$	159		$	(35	)	$	96		$	(4	)	$	92

____________________


(1)	The ceded number of risks represents the number of risks for which the Company ceded a portion of its exposure.


(2)	Includes BIG amounts related to FG VIEs.


(3)	Includes excess spread and draws on HELOCs.


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

Ratings Impact on Financial Guaranty Business

A downgrade of the Company may result in increased claims under financial guaranties issued by the Company, if the insured obligors were unable to pay.

For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. Under the swaps, AGM insures periodic payments owed by the municipal obligors to the bank counterparties. Under certain of the swaps, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties. If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the

municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy. At AGM's current financial strength ratings, if the conditions giving rise to the obligation of AGM to make a termination payment under the swap termination policies were all satisfied, then AGM could pay claims in an amount not exceeding approximately $104 million in respect of such termination payments. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding approximately $286 million in respect of such termination payments.

As another example, with respect to variable rate demand obligations ("VRDOs") for which a bank has agreed to provide a liquidity facility, a downgrade of AGM may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to AGM or AGC under its financial guaranty policy. As of June 30, 2014, AGM had insured approximately $5.8 billion net par of VRDOs, of which approximately $0.2 billion of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. Most of the guaranteed investment contracts ("GICs") insured by AGM allow the GIC holder to terminate the GIC and withdraw the funds in the event of a downgrade of AGM below A3 or A-, with no right of the GIC issuer to avoid such withdrawal by posting collateral or otherwise enhancing its credit. Each GIC contract stipulates the thresholds below which the GIC issuer must post eligible collateral, along with the types of securities eligible for posting and the collateralization percentage applicable to each security type. These collateralization percentages range from 100% of the GIC balance for cash posted as collateral to, typically, 108% for asset-backed securities. If the entire aggregate accreted GIC balance of approximately $2.5 billion as of June 30, 2014 were terminated, the assets of the GIC issuers (which had an aggregate accreted principal of approximately $3.8 billion and an aggregate market value of approximately $3.7 billion) would be sufficient to fund the withdrawal of the GIC funds.

7. Fair Value Measurement

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

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

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During Six Months 2014, no changes were made to the Company’s valuation models that had or are expected to have, a material impact on the Company’s consolidated balance sheets or statements of operations and comprehensive income.

The Company’s methods for calculating fair value produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

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

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

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

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

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

Measured and Carried at Fair Value

Fixed-Maturity Securities and Short-term Investments

The fair value of bonds in the investment portfolio is generally based on prices received from third party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value measurements using their pricing models, which include available relevant market information, benchmark curves, benchmarking of like securities and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, the valuation of fixed-maturity investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and are based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.

Prices determined based on models where at least one significant model assumption or input is unobservable, are considered to be Level 3 in the fair value hierarchy. As of June 30, 2014, the Company used models to price 25 fixed-maturity securities, which was 7% or $473 million of the Company's fixed-maturity securities and short-term investments at fair value. Certain Level 3 securities were priced with the assistance of an independent third-party. The pricing is based on a discounted cash flow approach using the third-party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price depreciation/appreciation rates based on macroeconomic forecasts and recent trading

activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the bond including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could materially change the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.

Other Invested Assets

Other invested assets include investments carried and measured at fair value on a recurring basis of $82 million, and include primarily fixed-maturity securities classified as trading and investments in two vehicles that invest in the global property catastrophe risk market.

Other Assets

Committed Capital Securities

The fair value of committed capital securities ("CCS"), which is recorded in “other assets” on the consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGM Committed Preferred Trust Securities (the “AGM CPS”) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security (see Note 15, Notes Payable and Credit Facilities). The AGM CPS are carried at fair value with changes in fair value recorded on the consolidated statement of operations. The estimated current cost of the Company’s CCS is based on several factors, including broker-dealer quotes for the outstanding securities, the U.S. dollar forward swap curve, London Interbank Offered Rate ("LIBOR") curve projections and the term the securities are estimated to remain outstanding.

Financial Guaranty Contracts Accounted for as Credit Derivatives

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

The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells or purchases for credit protection purposes, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts.

Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs to derive an estimate of the fair value of the Company's contracts in its principal markets (see "Assumptions and Inputs"). There is no established market where financial guaranty insured credit derivatives are actively traded, therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s deals to establish historical price points in the hypothetical market that are used in the fair value calculation. These contracts are classified as Level 3 in the fair value hierarchy since there is reliance on at least one unobservable input deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and of the Company’s current credit standing.

The Company’s models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely and relevant market information.

The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive or pay and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge or pay at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk

and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at June 30, 2014 were such that market prices of the Company’s CDS contracts were not available.

Management considers factors such as current prices charged for similar agreements, when available, performance of underlying assets, life of the instrument, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.

Assumptions and Inputs

Listed below are various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts.

· Gross spread.

· The allocation of gross spread among:


•	the profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction (“bank profit”);


•	premiums paid to the Company for the Company’s credit protection provided (“net spread”); and


•	the cost of CDS protection purchased by the originator to hedge their counterparty credit risk exposure to the Company (“hedge cost”).

· The weighted average life which is based on Debt Service schedules.


·	The rates used to discount future expected premium cash flows ranged from 0.20% to 3.26% at June 30, 2014 and 0.21% to 3.80% at December 31, 2013.

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

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

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

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

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

· Credit spreads interpolated based upon market indices.

· Credit spreads provided by the counterparty of the CDS.

· Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

Information by Credit Spread Type (1)



	As of June 30, 2014		As of December 31, 2013
Based on actual collateral specific spreads	0.1	%	0.1	%
Based on market indices	99.9	%	99.9	%
Total	100	%	100	%

____________________

(1) Based on par.

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

The Company interpolates a curve based on the historical relationship between the premium the Company receives when a credit derivative is closed to the daily closing price of the market index related to the specific asset class and rating of the deal. This curve indicates expected credit spreads at each indicative level on the related market index. For transactions with unique terms or characteristics where no price quotes are available, management extrapolates credit spreads based on a similar transaction for which the Company has received a spread quote from one of the first three sources within the Company’s spread hierarchy. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transactions’ current spread. Counterparties determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. These quotes are validated by cross-referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness.

The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its deals. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGM. For credit spreads on the Company’s name the Company obtains the quoted price of CDS contracts traded on AGM from market data sources published by third parties. The cost to acquire CDS protection referencing AGM affects the amount of spread on CDS deals that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGM increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGM decreases, the amount of premium the Company retains on a deal generally increases. In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. Given the current market conditions and the

Company’s own credit spreads, approximately 38%, 32% and 83%, based on number of deals, of the Company's CDS contracts are fair valued using this minimum premium as of June 30, 2014, March 31, 2014 and December 31, 2013, respectively. The percentage of deals that price using the minimum premiums has declined since December 31, 2013 due to AGM's credit spreads narrowing as a result of the S&P upgrades in March 2014. As a result of this, the cost to hedge AGM's name has declined significantly causing more transactions to price above previously established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGM hedged by its counterparties, with independent third parties each reporting period. The current level of AGM’s own credit spread has resulted in the bank or deal originator hedging a significant portion of its exposure to AGM. This reduces the amount of contractual cash flows AGM can capture as premium for selling its protection.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.

A fair value resulting in a credit derivative asset on protection sold is the result of contractual cash inflows on in-force deals in excess of what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would be able to realize a gain representing the difference between the higher contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts and taking the present value of such amounts.

Example

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



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

In Scenario 1, the gross spread is 185 basis points. The bank or deal originator captures 115 basis points of the original gross spread and hedges 10% of its exposure to AGM, when the CDS spread on AGM was 300 basis points (300 basis points × 10% = 30 basis points). Under this scenario the Company receives premium of 40 basis points, or 22% of the gross spread.

In Scenario 2, the gross spread is 500 basis points. The bank or deal originator captures 50 basis points of the original gross spread and hedges 25% of its exposure to AGM, when the CDS spread on AGM was 1,760 basis points (1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread. Due to the increased cost to hedge AGM's name, the amount of profit the bank would expect to receive, and the premium the Company would expect to receive decline significantly.

In this example, the contractual cash flows (the Company premium received per annum above) exceed the amount a market participant would require the Company to pay in today's market to accept its obligations under the CDS contract, thus resulting in an asset. This credit derivative asset is equal to the difference in premium rates discounted at the corresponding LIBOR over the weighted average remaining life of the contract multiplied by the par outstanding as of the reporting period.

Strengths and Weaknesses of Model

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

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

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

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

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

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

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

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

· At June 30, 2014 and December 31, 2013, the markets for the inputs to the model were highly illiquid, which impacts their reliability.

· Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.

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

Fair Value Option on FG VIEs' Assets and Liabilities

The Company elected the fair value option for all the FG VIEs' assets and liabilities. See Note 9, Consolidated Variable Interest Entities.

The FG VIEs issued securities collateralized by first lien and second lien RMBS. The lowest level input that is significant to the fair value measurement of these assets and liabilities was a Level 3 input (i.e. unobservable), therefore management classified them as Level 3 in the fair value hierarchy. Prices are generally determined with the assistance of an independent third-party. The pricing is based on a discounted cash flow approach and the third-party’s proprietary pricing models. The models to price the FG VIEs’ liabilities used, where appropriate, inputs such as estimated prepayment speeds; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; house price depreciation/appreciation rates based on macroeconomic forecasts and, for those liabilities insured by the Company, the benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest, taking into account the timing of the potential default and the Company’s own credit rating. The third-party also utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the third-party, on comparable bonds.

The fair value of the Company’s FG VIE assets is generally sensitive to changes related to estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could materially change the market value of the FG VIE’s assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIE asset is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically leads to a decrease in the fair value of FG VIE assets,

while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets. These factors also directly impact the fair value of the Company’s FG VIE liabilities.

The fair value of the Company’s FG VIE liabilities is also generally sensitive to changes relating to estimated prepayment speeds; market values of the underlying assets; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts. In addition, the Company’s FG VIE liabilities with recourse are also sensitive to changes in the Company’s implied credit worthiness. Significant changes to any of these inputs could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit from the Company’s insurance policy guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE that is insured by the Company. In general, extending the timing of expected loss payments by the Company into the future typically leads to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIE liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically leads to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIE liabilities with recourse.

Not Carried at Fair Value

Financial Guaranty Insurance Contracts

The fair value of the Company’s financial guaranty contracts accounted for as insurance was based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. This amount was based on the pricing assumptions management has observed for portfolio transfers that have occurred in the financial guaranty market and included adjustments to the carrying value of unearned premium reserve for stressed losses, ceding commissions and return on capital. The significant inputs were not readily observable. The Company accordingly classified this fair value measurement as Level 3.

Other Invested Assets

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

The fair value of the assets acquired in refinancing transactions, was determined by calculating the present value of the expected cash flows. The Company uses a market approach to determine discounted future cash flows using market driven discount rates and a variety of assumptions, including a projection of the LIBOR rate and prepayment and default assumptions. The fair value measurement was classified as Level 3 in the fair value hierarchy because there is a reliance on significant unobservable inputs to the valuation model, including the discount rates, prepayment and default assumptions, loss severity and recovery on delinquent loans.

Other Assets and Other Liabilities

The Company’s other assets and other liabilities consist predominantly of accrued interest, receivables for securities sold and payables for securities purchased, the carrying values of which approximate fair value.

Notes Payable

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

Financial Instruments Carried at Fair Value

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

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of June 30, 2014



			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions	$	4,009	$	—	$	4,001	$	8
U.S. government and agencies	70		—		70		—
Corporate securities	680		—		574		106
Mortgage-backed securities:
RMBS	465		—		227		238
Commercial mortgage-backed securities ("CMBS")	282		—		282		—
Asset-backed securities	284		—		163		121
Foreign government securities	199		—		199		—
Total fixed-maturity securities	5,989		—		5,516		473
Short-term investments	486		391		95		—
Other invested assets (1)	89		—		33		56
Credit derivative assets	91		—		—		91
FG VIEs’ assets, at fair value	846		—		—		846
Other assets	15		—		—		15
Total assets carried at fair value	$	7,516	$	391	$	5,644	$	1,481
Liabilities:
Credit derivative liabilities	$	306	—		—		$	306
FG VIEs’ liabilities with recourse, at fair value	924		—		—		924
FG VIEs’ liabilities without recourse, at fair value	104		—		—		104
Total liabilities carried at fair value	$	1,334	$	—	$	—	$	1,334

Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of December 31, 2013



			Fair Value Hierarchy
	Fair Value		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions	$	3,690	$	—	$	3,682	$	8
U.S. government and agencies	69		—		69		—
Corporate securities	629		—		493		136
Mortgage-backed securities:
RMBS	438		—		200		238
CMBS	210		—		210		—
Asset-backed securities	300		—		159		141
Foreign government securities	186		—		186		—
Total fixed-maturity securities	5,522		—		4,999		523
Short-term investments	667		411		256		—
Other invested assets (1)	86		—		78		8
Credit derivative assets	98		—		—		98
FG VIEs’ assets, at fair value	1,691		—		—		1,691
Other assets	21		—		—		21
Total assets carried at fair value	$	8,085	$	411	$	5,333	$	2,341
Liabilities:
Credit derivative liabilities	$	326	$	—	$	—	$	326
FG VIEs’ liabilities with recourse, at fair value	1,275		—		—		1,275
FG VIEs’ liabilities without recourse, at fair value	686		—		—		686
Total liabilities carried at fair value	$	2,287	$	—	$	—	$	2,287

____________________


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

Changes in Level 3 Fair Value Measurements

The table below presents a roll forward of the Company's Level 3 financial instruments carried at fair value on a recurring basis during Second Quarter 2014 and 2013 and Six Months 2014 and 2013.

Fair Value Level 3 Rollforward

Recurring Basis

Second Quarter 2014



	Fixed-Maturity Securities
	Obligations of State and Political Subdivisions				Corporate Securities					RMBS					Asset- Backed Securities					Other Invested Assets		FG VIEs’ Assets at Fair Value					Other Assets					Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of March 31, 2014	$	8			$	138				$	239				$	120				$	48	$	817				$	17				$	(259	)			$	(902	)			$	(81	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0		(2	)	(7		)	(2	)	5			(2	)	2			(2	)	—		34			(3	)	(2		)	(4	)	54			(6	)	(23		)	(3	)	(27		)	(3	)
Other comprehensive income (loss)	0				(25		)			5					0					1		—					—					—					—					—
Purchases	—				—					—					—					—		—					—					—					—					—
Settlements	0				—					(11		)			(1		)			0		(26		)			—					(10		)			26					—
FG VIE consolidations	—				—					—					—					—		46					—					—					(25		)			(21		)
FG VIE deconsolidations	—				—					—					—					—		(25		)			—					—					—					25
Fair value as of June 30, 2014	$	8			$	106				$	238				$	121				$	49	$	846				$	15				$	(215	)			$	(924	)			$	(104	)
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2014	$	0			$	(25	)			$	5				$	0				$	1	$	36				$	(2	)			$	44				$	(23	)			$	6

Fair Value Level 3 Rollforward

Recurring Basis

Second Quarter 2013



	Fixed-Maturity Securities
	Obligations of State and Political Subdivisions				RMBS					Asset- Backed Securities					Other Invested Assets					FG VIEs’ Assets at Fair Value					Other Assets					Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of March 31, 2013	$	11			$	188				$	225				$	1				$	1,948				$	11				$	(351	)			$	(1,566	)			$	(708	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0		(2	)	5			(2	)	3			(2	)	(1		)	(7	)	299			(3	)	(1		)	(4	)	63			(6	)	(59		)	(3	)	(90		)	(3	)
Other comprehensive income (loss)	0				(3		)			(1		)			2					—					—					—					—					—
Purchases	—				47					—					—					—					—					—					—					—
Settlements	0				(11		)			(1		)			—					(285		)			—					(22		)			68					33
FG VIE deconsolidations	—				—					—					—					(178		)			—					—					135					48
Fair value as of June 30, 2013	$	11			$	226				$	226				$	2				$	1,784				$	10				$	(310	)			$	(1,422	)			$	(717	)
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2013	$	0			$	(2	)			$	(1	)			$	2				$	171				$	(1	)			$	47				$	(60	)			$	(96	)

Fair Value Level 3 Rollforward

Recurring Basis

Six Months 2014



	Fixed-Maturity Securities
	Obligations of State and Political Subdivisions				Corporate Securities					RMBS					Asset- Backed Securities					Other Invested Assets		FG VIEs’ Assets at Fair Value					Other Assets					Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of December 31, 2013	$	8			$	136				$	238				$	141				$	2	$	1,691				$	21				$	(228	)			$	(1,275	)			$	(686	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0		(2	)	(4		)	(2	)	8			(2	)	9			(2	)	—		109			(3	)	(6		)	(4	)	29			(6	)	(86		)	(3	)	(32		)	(3	)
Other comprehensive income (loss)	0				(21		)			14					2					2		—					—					—					—					—
Purchases	—				—					—					—					45		—					—					—					—					—
Settlements	0				(5		)			(22		)			(31		)			0		(302		)			—					(16		)			289					8
FG VIE consolidations	—				—					—					—					—		46					—					—					(25		)			(21		)
FG VIE deconsolidations	—				—					0					—					—		(698		)			—					—					173					627
Fair value as of June 30, 2014	$	8			$	106				$	238				$	121				$	49	$	846				$	15				$	(215	)			$	(924	)			$	(104	)
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2014	$	0			$	(21	)			$	13				$	2				$	2	$	57				$	(6	)			$	11				$	(40	)			$	(4	)

Fair Value Level 3 Rollforward

Recurring Basis

Six Months 2013



	Fixed Maturity Securities
	Obligations of State and Political Subdivisions					RMBS					Asset- Backed Securities					Other Invested Assets					FG VIEs’ Assets at Fair Value					Other Assets					Credit Derivative Asset (Liability), net(5)					FG VIEs' Liabilities with Recourse, at Fair Value					FG VIEs’ Liabilities without Recourse, at Fair Value
	(in millions)
Fair value as of December 31, 2012	$	12				$	184				$	249				$	1				$	1,870				$	14				$	(283	)			$	(1,605	)			$	(678	)
Total pretax realized and unrealized gains/(losses) recorded in:(1)
Net income (loss)	0			(2	)	10			(2	)	7			(2	)	(1		)	(7	)	446			(3	)	(4		)	(4	)	7			(6	)	(110		)	(3	)	(124		)	(3	)
Other comprehensive income (loss)	0					4					(27		)			2					—					—					—					—					—
Purchases	—					50					—					—					—					—					—					—					—
Settlements	(1		)			(22		)			(3		)			—					(402		)			—					(34		)			170					74
FG VIE consolidations	—					—					—					—					48					—					—					(12		)			(37		)
FG VIE deconsolidations	—					—					—					—					(178		)			—					—					135					48
Fair value as of June 30, 2013	$	11				$	226				$	226				$	2				$	1,784				$	10				$	(310	)			$	(1,422	)			$	(717	)
Change in unrealized gains/(losses) related to financial instruments held as of June 30, 2013	$	0				$	5				$	(26	)			$	2				$	288				$	(4	)			$	(21	)			$	(108	)			$	(142	)

____________________


(1)	Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3.


(2)	Included in net realized investment gains (losses) and net investment income.


(3)	Included in fair value gains (losses) on FG VIEs.


(4)	Recorded in fair value gains (losses) on CCS.


(5)	Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure.


(6)	Reported in net change in fair value of credit derivatives.

(7) Reported in other income.

Level 3 Fair Value Disclosures

Quantitative Information About Level 3 Fair Value Inputs

At June 30, 2014



Financial Instrument Description	Fair Value at June 30, 2014(in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Assets:
Fixed-maturity securities:
Obligations of state and political subdivisions	$	8	Discounted	Rate of inflation	1.0		%	-	3.0%
			cash flow	Cash flow receipts	0.5		%	-	21.9%
				Yield	4.6%
				Collateral recovery period	1 month			-	9 years

Corporate securities	106		Discounted	Yield	11.5%
Corporate securities	106		cash flow

RMBS	238		Discounted	CPR	0.3		%	-	16.4%
			cash flow	CDR	4.5		%	-	18.0%
				Severity	40.0		%	-	108.9%
				Yield	2.6		%	-	7.6%
Asset-backed securities:
Investor owned utility	121		Discounted cash flow	Liquidation value (in millions)		$178		-	$284
				Years to liquidation	0 years			-	2.5 years
				Collateral recovery period	6 months			-	5.5 years
				Discount factor	7.0%

Other invested assets	56		Discounted cash flow	Discount for lack of liquidity	10.0		%	-	20.0%
				Recovery on delinquent loans	20.0		%	-	60.0%
				Default rates	0.0		%	-	10.0%
				Loss severity	40.0		%	-	90.0%
				Prepayment speeds	5.0		%	-	15.0%
				Net asset value (per share)	$	1,029		-	$1,038

FG VIEs’ assets, at fair value	846		Discounted	CPR	0.0		%	-	8.1%
			cash flow	CDR	0.7		%	-	20.2%
				Loss severity	20.3		%	-	149.0%
				Yield	3.3		%	-	8.7%



Financial Instrument Description	Fair Value at June 30, 2014 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Other assets	15		Discounted cash flow	Quotes from third party pricing	$52		-	$62
Other assets			Discounted cash flow	Term (years)	5 years

Liabilities:
Credit derivative liabilities, net	(215	)	Discounted	Hedge cost (in bps)	28.8		-	345.5
			cash flow	Bank profit (in bps)	1.0		-	1,453.5
				Internal floor (in bps)	7.0		-	100.0
				Internal credit rating	AAA		-	CCC


FG VIEs’ liabilities, at fair value	(1,028	)	Discounted	CPR	0.0	%	-	8.1%
			cash flow	CDR	0.7	%	-	20.2%
				Loss severity	20.3	%	-	149.0%
				Yield	3.3	%	-	8.7%

Quantitative Information About Level 3 Fair Value Inputs

At December 31, 2013



Financial Instrument Description	Fair Value at December 31, 2013 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Assets:
Fixed-maturity securities:
Obligations of state and political subdivisions	$	8	Discounted	Rate of inflation	1.0		%	-	3.0%
			cash flow	Cash flow receipts	0.5		%	-	19.3%
				Discount rates	4.6%
				Collateral recovery period	1 month			-	10 years

Corporate	136		Discounted	Yield	8.3%
Corporate	136		cash flow

RMBS	238		Discounted	CPR	1.0		%	-	9.1%
			cash flow	CDR	5.0		%	-	25.8%
				Severity	48.1		%	-	101.8%
				Yield	2.5		%	-	7.8%
Asset-backed securities:
Investor owned utility	141		Discounted cash flow	Liquidation value (in millions)		$195		-	$245
				Years to liquidation	0 years			-	3 years
				Discount factor	15.3%
				Collateral recovery period	12 months			-	6 years

Other invested assets	8		Discounted cash flow	Discount for lack of liquidity	10.0		%	-	20.0%
				Recovery on delinquent loans	20.0		%	-	60.0%
				Default rates	1.0		%	-	10.0%
				Loss severity	40.0		%	-	90.0%
				Prepayment speeds	6.0		%	-	15.0%

FG VIEs’ assets, at fair value	1,691		Discounted	CPR	0.3		%	-	9.7%
			cash flow	CDR	3.0		%	-	25.8%
				Loss severity	37.5		%	-	101.5%
				Yield	3.5		%	-	9.2%



Financial Instrument Description	Fair Value at December 31, 2013 (in millions)		Valuation Technique	Significant Unobservable Inputs	Range
Other assets	21		Discounted cash flow	Quotes from third party pricing	$47		-	$52
Other assets	21		Discounted cash flow	Term (years)	5 years

Liabilities:
Credit derivative liabilities, net	(228	)	Discounted	Hedge cost (in bps)	55.0		-	525.0
			cash flow	Bank profit (in bps)	1.0		-	1,418.5
				Internal floor (in bps)	7.0		-	100.0
				Internal credit rating	AAA		-	CCC

FG VIEs’ liabilities, at fair value	(1,961	)	Discounted	CPR	0.3	%	-	9.7%
			cash flow	CDR	3.0	%	-	25.8%
				Loss severity	37.5	%	-	101.5%
				Yield	3.5	%	-	9.2%

The carrying amount and estimated fair value of the Company's financial instruments are presented in the following table.

Fair Value of Financial Instruments



	As of June 30, 2014				As of December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in millions)
Assets:
Fixed-maturity securities	$	5,989	$	5,989	$	5,522	$	5,522
Short-term investments	486		486		667		667
Other invested assets	406		466		405		442
Credit derivative assets	91		91		98		98
FG VIEs’ assets, at fair value	846		846		1,691		1,691
Other assets	104		104		82		82
Liabilities:
Financial guaranty insurance contracts(1)	2,224		3,772		2,312		2,481
Notes payable	31		29		39		38
Credit derivative liabilities	306		306		326		326
FG VIEs’ liabilities with recourse, at fair value	924		924		1,275		1,275
FG VIEs’ liabilities without recourse, at fair value	104		104		686		686
Other liabilities	77		77		16		16

____________________


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

8. Financial Guaranty Contracts Accounted for as Credit Derivatives

Credit Derivatives

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

Credit derivative transactions are governed by ISDA documentation and have different characteristics from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor became bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. The Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

Credit Derivative Net Par Outstanding by Sector

The estimated remaining weighted average life of credit derivatives was 2.2 years at June 30, 2014 and 2.3 years at December 31, 2013. The components of the Company's credit derivative net par outstanding are presented below.

Credit Derivatives

Subordination and Ratings



	As of June 30, 2014						As of December 31, 2013
Asset Type	Net Par Outstanding		Original Subordination (1)	Current Subordination (1)		Weighted Average Credit Rating	Net Par Outstanding		Original Subordination (1)		Current Subordination (1)		Weighted Average Credit Rating
	(dollars in millions)
Pooled corporate obligations:
Collateralized loan obligations/collateralized bond obligations	$	9,277	29.5%	32.1	%	AAA	$	11,250	29.4	%	30.2	%	AAA
Synthetic investment grade pooled corporate	9,160		21.1	19.7		AAA	9,186		21.1		19.5		AAA
Synthetic high yield pooled corporate	977		47.0	40.6		AAA	2,684		47.2		41.1		AAA
Trust preferred securities collateralized debt obligations ("TruPS CDOs")	9		56.0	85.9		AAA	16		56.0		85.1		AAA
Market value CDOs of corporate obligations	946		17.0	32.7		AAA	1,184		17.0		27.5		AAA
Total pooled corporate obligations	20,369		26.0	27.0		AAA	24,320		27.6		27.3		AAA
U.S. RMBS:
Subprime first lien	59		—	—		AAA	64		—		—		AAA
Closed-end second lien	67		—	—		A	73		—		—		A
Total U.S. RMBS	126		—	—		AA	137		—		—		AA
Other	2,838		—	—		A-	2,871		—		—		A-
Total	$	23,333				AAA	$	27,328					AAA

____________________


(1)	Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

The Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and industries. Most pooled corporate transactions are structured to limit exposure to any given obligor and industry. The majority of the

Company’s pooled corporate exposure consists of collateralized loan obligation (“CLO”) or synthetic pooled corporate obligations. Most of these CLOs have an average obligor size of less than 1% of the total transaction and typically restrict the maximum exposure to any one industry to approximately 10%. The Company’s exposure also benefits from embedded credit enhancement in the transactions which allows a transaction to sustain a certain level of losses in the underlying collateral, further insulating the Company from industry specific concentrations of credit risk on these deals.

The $2.8 billion of exposure in "Other" CDS contracts as of June 30, 2014 comprises numerous deals typically structured with significant underlying credit enhancement and spread across various asset classes, such as commercial receivables, international RMBS, infrastructure, regulated utilities and consumer receivables. Of the total net par outstanding in the "Other" sector, $0.3 billion is rated BIG.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating



	As of June 30, 2014				As of December 31, 2013
Ratings	Net Par Outstanding		% of Total		Net Par Outstanding		% of Total
	(dollars in millions)
AAA	$	19,044	81.6	%	$	23,200	84.9	%
AA	1,898		8.1		1,858		6.8
A	933		4.1		899		3.2
BBB	1,178		5.0		1,081		4.0
BIG	280		1.2		290		1.1
Credit derivative net par outstanding	$	23,333	100.0	%	$	27,328	100.0	%

Fair Value of Credit Derivatives

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



	Second Quarter					Six Months
	2014		2013			2014			2013
	(in millions)
Realized gains (losses) and other settlements on credit derivatives:
Realized gains on credit derivatives (1)	$	10	$	19		$	19		$	31
Net credit derivative losses (paid and payable) recovered and recoverable	0		(1		)	(1		)	(2		)
Realized gains (losses) and other settlements on credit derivatives	10		18			18			29
Net change in unrealized gains (losses) on credit derivatives:
Pooled corporate obligations	31		2			17			(28		)
U.S. RMBS	0		—			0			(2		)
Other (2)	13		43			(6		)	8
Net change in unrealized gains (losses) on credit derivatives (3)	44		45			11			(22		)
Net change in fair value of credit derivatives	$	54	$	63		$	29		$	7

____________________


(1)	Includes accelerations due to terminations of CDS contracts of $0.4 million and $9 million related to net par of $0.2 billion and $1.4 billion for Second Quarter 2014 and Second Quarter 2013, respectively, and $0.6 million and $10 million related to net par of $0.5 billion and $2.4 billion for Six Months 2014 and Six Months 2013, respectively.


(2)	“Other” includes all other U.S. and international asset classes, such as commercial receivables, international infrastructure, international RMBS securities, and pooled infrastructure securities.


(3)	Except for net estimated credit impairments (i.e., net expected loss to be paid as discussed in Note 5), the unrealized gains and losses on credit derivatives are expected to reduce to zero as the exposure approaches its maturity date. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

During Second Quarter 2014, unrealized fair value gains were generated primarily in the pooled corporate obligations and Other sectors due to tighter implied net spreads. The tighter implied net spreads were primarily a result of the increased cost to buy protection in AGM’s name, particularly for the one year CDS spread, as the market cost of AGM’s credit protection increased during the period. These transactions were pricing at or above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGM, which management refers to as the CDS spread on AGM, increased the implied spreads that the Company would expect to receive on these transactions decreased.

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

During Second Quarter 2013, unrealized fair value gains were driven primarily by the price improvement on a XXX life securitization transaction in the Other sector. The cost of AGM's 5 Year and 1 Year credit protection also changed during Second Quarter 2013, but did not lead to significant fair value losses, as the policies which represent the majority of the Company's current outstanding exposure continue to price at previous established floor level.

During Six Months 2013, the cost to buy protection on AGM's name declined. This led to unrealized fair value losses which were generated primarily in the high yield and investment grade synthetic pooled corporate sectors. The wider implied net spreads were primarily a result of the decreased cost to buy protection in AGM's name as the market cost of AGM's credit decreased significantly during the period. Several transactions were pricing above their floor levels; therefore when the cost of purchasing CDS protection on AGM decreased, the implied spreads that the Company would expect to receive on these transactions increased. Six Months 2013 changes in fair value of credit derivatives in the Other category includes a $17 million loss for guaranteed interest rate swaps identified during 2013.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date.

Five-Year CDS Spread on AGM

Quoted price of CDS contract (in basis points)



	As of June 30, 2014	As of March 31, 2014	As of December 31, 2013	As of June 30, 2013	As of March 31, 2013	As of December 31, 2012
AGM	346	305	525	365	380	536

One-Year CDS Spread on AGM

Quoted price of CDS contract (in basis points)



	As of June 30, 2014	As of March 31, 2014	As of December 31, 2013	As of June 30, 2013	As of March 31, 2013	As of December 31, 2012
AGM	115	70	220	72	60	257

Fair Value of Credit Derivatives Assets (Liabilities)

and Effect of AGM

Credit Spreads



	As of June 30, 2014			As of December 31, 2013
	(in millions)
Fair value of credit derivatives before effect of AGM credit spread	$	(341	)	$	(438	)
Plus: Effect of AGM credit spread	126			210
Net fair value of credit derivatives	$	(215	)	$	(228	)

The fair value of CDS contracts at June 30, 2014, before considering the implications of AGM’s credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets and ratings downgrades. The asset classes that remain most affected are pooled corporate securities and a XXX life securitization transaction. Comparing June 30, 2014 with December 31, 2013, there was a narrowing of spreads primarily related to pooled corporate obligations and a XXX life securitization transaction. This narrowing of spreads combined with the run-off of par outstanding and termination of CDS transactions, resulted in a gain of approximately $97 million, before taking into account AGM’s credit spreads.

Management believes that the trading level of AGM’s credit spreads over the past several years has been due to the correlation between AGM’s risk profile and the current risk profile of the broader financial markets and to increased demand for credit protection against AGM as the result of its financial guaranty volume, as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGM’s credit spread were higher credit spreads in the fixed income security markets. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high yield CDO, and CLO markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.

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

Net Fair Value and Expected Losses

of Credit Derivatives by Sector



	Fair Value of Credit Derivative Asset (Liability), net						Expected Loss to be (Paid) Recovered (1)
Asset Type	As of June 30, 2014			As of December 31, 2013			As of June 30, 2014			As of December 31, 2013
	(in millions)
Pooled corporate obligations	$	15		$	(2	)	$	—		$	—
U.S. RMBS	(9		)	(9		)	4			2
Other	(221		)	(217		)	(4		)	(5		)
Total	$	(215	)	$	(228	)	$	0		$	(3	)

____________________


(1)	There was no R&W benefit on credit derivatives as of June 30, 2014 and December 31, 2013.

Sensitivity to Changes in Credit Spread

The following table summarizes the estimated change in fair values on the net balance of the Company's credit derivative positions assuming immediate parallel shifts in credit spreads on AGM and on the risks that it assumes.

Effect of Changes in Credit Spread

As of June 30, 2014



Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss) (Pre-Tax)
	(in millions)
100% widening in spreads	$	(369	)	$	(154	)
50% widening in spreads	(292		)	(77		)
25% widening in spreads	(254		)	(39		)
10% widening in spreads	(231		)	(16		)
Base Scenario	(215		)	—
10% narrowing in spreads	(205		)	10
25% narrowing in spreads	(188		)	27
50% narrowing in spreads	(162		)	53

____________________


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

9. Consolidated Variable Interest Entities

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. AGM does not sponsor any VIEs when underwriting third party financial guaranty insurance or credit derivative transactions, nor has it acted as the servicer or collateral manager for any VIE obligations that it insures. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate cash flows that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional

credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

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

As part of the terms of its financial guaranty contracts, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The Company obtains protective rights under its insurance contracts that give the Company additional controls over a VIE if there is either deterioration of deal performance or in the financial health of the deal servicer. The Company is deemed to be the control party for certain VIEs under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. If the protective rights that could make the Company the control party have not been triggered, then the VIE is not consolidated. If the Company is deemed no longer to have those protective rights, the transaction is deconsolidated. As of June 30, 2014 and December 31, 2013 the Company had issued financial guaranty contracts for approximately 415 and 440 VIEs, respectively, that it did not consolidate.

Consolidated FG VIEs

Number of FG VIE's Consolidated



	Six Months
	2014		2013
Beginning of period, December 31	32		25
Consolidated(1)	1		11
Deconsolidated(1)	(6	)	(2	)
Matured	(2	)	(1	)
End of period, June 30	25		33

____________________


(1)	Net gain on deconsolidation was $102 million in Six Months 2014, and a net loss on consolidation and deconsolidation was $7 million in Six Months 2013 and recorded in “fair value gains (losses) on FG VIEs” in the consolidated statement of operations.

The total unpaid principal balance for the FG VIEs' assets that were over 90 days or more past due was approximately $190 million at June 30, 2014 and $549 million at December 31, 2013. The aggregate unpaid principal of the FG VIEs' assets was approximately $722 million greater than the aggregate fair value at June 30, 2014, excluding the effect of R&W settlements. The aggregate unpaid principal of the FG VIEs' assets was approximately $1,490 million greater than the aggregate fair value at December 31, 2013, excluding the effect of R&W settlements. The change in the instrument-specific credit risk of the FG VIEs' assets that was recorded in the consolidated statements of operations for Second Quarter 2014 and Six Months 2014 were gains of $28 million and $50 million, respectively. The change in the instrument-specific credit risk of the FG VIEs' assets, held as of June 30, 2014 and June 30, 2013 respectively, that was recorded in the consolidated statements of operations for Second Quarter 2013 and Six Months 2013 were gains of $71 million and $123 million, respectively.

The unpaid principal for FG VIE liabilities with recourse was $1,200 million and $1,634 million as of June 30, 2014 and December 31, 2013, respectively. FG VIE liabilities with recourse will mature at various dates ranging from 2025 to 2038. The aggregate unpaid principal balance was approximately $540 million greater than the aggregate fair value of the FG VIEs’ liabilities as of June 30, 2014. The aggregate unpaid principal balance was approximately $1,211 million greater than the aggregate fair value of the FG VIEs' liabilities as of December 31, 2013.

The table below shows the carrying value of the consolidated FG VIEs' assets and liabilities in the consolidated financial statements, segregated by the types of assets that collateralize their respective debt obligations.

Consolidated FG VIEs

By Type of Collateral



	As of June 30, 2014				As of December 31, 2013
	Assets		Liabilities		Assets		Liabilities
	(in millions)
With recourse:
U.S. RMBS first lien	$	530	$	622	$	576	$	730
U.S. RMBS second lien	200		302		394		545
Total with recourse	730		924		970		1,275
Without recourse	116		104		721		686
Total	$	846	$	1,028	$	1,691	$	1,961

The consolidation of FG VIEs has a significant effect on net income and shareholder’s equity due to (1) changes in fair value gains (losses) on FG VIE assets and liabilities, (2) the elimination of premiums and losses related to the AGM FG VIE liabilities with recourse and (3) the elimination of investment balances related to the Company’s purchase of AGM insured FG VIE debt. Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are considered intercompany transactions and therefore eliminated. Such eliminations are included in the table below to present the full effect of consolidating FG VIEs.

Effect of Consolidating FG VIEs on Net Income,

Cash Flows From Operating Activities and Shareholder's Equity



	Second Quarter						Six Months
	2014			2013			2014			2013
	(in millions)
Net earned premiums	$	(4	)	$	(14	)	$	(21	)	$	(32	)
Net investment income	(3		)	(3		)	(6		)	(6		)
Net realized investment gains (losses)	(5		)	0			(4		)	1
Fair value gains (losses) on FG VIEs	25			147			171			222
Other income	0			—			(2		)	—
Loss and LAE	8			22			7			16
Effect on net income before tax provision	21			152			145			201
Less: tax provision (benefit)	8			53			51			70
Effect on net income (loss)	$	13		$	99		$	94		$	131

Effect on cash flows from operating activities	$	46		$	(165	)	$	38		$	(146	)



	As of June 30, 2014			As of December 31, 2013
	(in millions)
Effect on shareholder’s equity (decrease) increase	$	(65	)	$	(148	)

Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs' assets and liabilities. During Second Quarter 2014, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $25 million. The primary driver of this gain was price appreciation on the Company's FG VIE assets during the quarter resulting from improvements in the underlying collateral, as well as large principal paydowns made on the Company's FG VIEs. During

Six Months 2014, the Company recorded a pre-tax net fair value gain of consolidated FG VIEs of $171 million. The primary driver of this gain, $102 million, was a result of the deconsolidation of five VIEs in first quarter 2014. There was an additional gain of $37 million resulting from the Company exercising its option to accelerate two second lien RMBS VIEs. These two VIEs were treated as maturities during the period.

For Second Quarter 2013, the Company recorded a pre-tax fair value gain on FG VIEs of $147 million. The primary driver of this gain was a $149 million fair value gain as a result of R&W benefits recognized during the quarter on policies relating to Flagstar and UBS. This was also the primary driver of the $222 million pre-tax fair value gain of consolidated FG VIEs during Six Months 2013. The additional gain of $64 million for Six Months 2013 was also a result of an R&W benefit related to the Flagstar policies referenced above. During Second Quarter 2013, the Company signed an agreement that resulted in the deconsolidation of two FG VIEs.

Non-Consolidated VIEs

To date, the Company's analyses have indicated that it does not have a controlling financial interest in any other VIEs and, as a result, they are not consolidated in the consolidated financial statements. The Company's exposure provided through its financial guaranties with respect to debt obligations of special purpose entities is included within net par outstanding in Note 3, Outstanding Exposure.

10. Investments and Cash

Net Investment Income and Realized Gains (Losses)

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Accrued investment income was $69 million and $60 million as of June 30, 2014 and December 31, 2013, respectively.

Net Investment Income



	Second Quarter						Six Months
	2014			2013			2014			2013
	(in millions)
Income from fixed-maturity securities managed by third parties	$	46		$	39		$	91		$	78
Income from internally managed securities:
Fixed maturities	11			12			27			24
Other invested assets	5			6			14			12
Gross investment income	62			57			132			114
Investment expenses	(1		)	(1		)	(2		)	(2		)
Net investment income	$	61		$	56		$	130		$	112

Net Realized Investment Gains (Losses)



	Second Quarter						Six Months
	2014			2013			2014			2013
	(in millions)
Gross realized gains on available-for-sale securities	$	1		$	1		$	4		$	1
Gross realized gains on other assets in investment portfolio	2			2			7			4
Gross realized losses on available-for-sale securities	0			0			(1		)	(5		)
Gross realized losses on other assets in investment portfolio	0			(2		)	0			(3		)
Other-than-temporary impairment	(11		)	(3		)	(15		)	(7		)
Net realized investment gains (losses)	$	(8	)	$	(2	)	$	(5	)	$	(10	)

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

Roll Forward of Credit Losses in the Investment Portfolio



	Second Quarter				Six Months
	2014		2013		2014		2013
	(in millions)
Balance, beginning of period	$	38	$	40	$	34	$	36
Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized	9		—		9		1
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized	2		1		6		4
Other	1		—		1		—
Balance, end of period	$	50	$	41	$	50	$	41

Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of June 30, 2014



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI(2) Gain (Loss) on Securities with Other-Than-Temporary Impairment			Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	61	%	$	3,774	$	237	$	(2	)	$	4,009	$	1		AA
U.S. government and agencies	1		65		5		0			70		—			AA+
Corporate securities	11		678		21		(19		)	680		(17		)	A
Mortgage-backed securities(4):
RMBS	8		471		17		(23		)	465		(15		)	BBB
CMBS	4		275		7		—			282		—			AAA
Asset-backed securities	4		281		3		0			284		1			A
Foreign government securities	3		187		12		—			199		—			AA+
Total fixed-maturity securities	92		5,731		302		(44		)	5,989		(30		)	AA-
Short-term investments	8		486		0		0			486		—			AAA
Total investment portfolio	100	%	$	6,217	$	302	$	(44	)	$	6,475	$	(30	)	AA-

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2013



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with Other-Than-Temporary Impairment			Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	59	%	$	3,557	$	153	$	(20	)	$	3,690	$	0		AA
U.S. government and agencies	1		66		4		(1		)	69		—			AA+
Corporate securities	10		624		13		(8		)	629		—			A-
Mortgage-backed securities(4):
RMBS	8		463		12		(37		)	438		(28		)	BBB-
CMBS	3		209		3		(2		)	210		—			AAA
Asset-backed securities	5		298		3		(1		)	300		(2		)	A
Foreign government securities	3		177		9		0			186		—			AA+
Total fixed-maturity securities	89		5,394		197		(69		)	5,522		(30		)	AA-
Short-term investments	11		667		0		0			667		—			AAA
Total investment portfolio	100	%	$	6,061	$	197	$	(69	)	$	6,189	$	(30	)	AA-

____________________


(1)	Based on amortized cost.


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


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


(4)	Government-agency obligations were approximately 26% of mortgage backed securities as of June 30, 2014 and 26% as of December 31, 2013 based on fair value.

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

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

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

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

As of June 30, 2014



	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
Obligations of state and political subdivisions	$	39	$	0		$	80	$	(2	)	$	119	$	(2	)
U.S. government and agencies	—		—			12		0			12		0
Corporate securities	118		(17		)	63		(2		)	181		(19		)
Mortgage-backed securities:
RMBS	11		0			164		(23		)	175		(23		)
CMBS	—		—			—		—			—		—
Asset-backed securities	2		0			—		—			2		0
Foreign government securities	—		—			—		—			—		—
Total	$	170	$	(17	)	$	319	$	(27	)	$	489	$	(44	)
Number of securities			28					60					88
Number of securities with other-than-temporary impairment			1					9					10

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

As of December 31, 2013



	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
Obligations of state and political subdivisions	$	705	$	(20	)	$	1	$	0		$	706	$	(20	)
U.S. government and agencies	11		(1		)	—		—			11		(1		)
Corporate securities	231		(8		)	2		0			233		(8		)
Mortgage-backed securities:
RMBS	81		(4		)	155		(33		)	236		(37		)
CMBS	91		(2		)	—		—			91		(2		)
Asset-backed securities	151		(1		)	—		—			151		(1		)
Foreign government securities	12		0			1		0			13		0
Total	$	1,282	$	(36	)	$	159	$	(33	)	$	1,441	$	(69	)
Number of securities			280					20					300
Number of securities with other-than-temporary impairment			7					10					17

Of the securities in an unrealized loss position for 12 months or more as of June 30, 2014, seven securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2014 was $18 million. The Company has determined that the unrealized losses recorded as of June 30, 2014 are yield related and not the result of other-than-temporary-impairment.

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of June 30, 2014 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 June 30, 2014



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	62	$	64
Due after one year through five years	1,109		1,153
Due after five years through 10 years	1,450		1,535
Due after 10 years	2,364		2,490
Mortgage-backed securities:
RMBS	471		465
CMBS	275		282
Total	$	5,731	$	5,989

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 $38 million and $21 million as of June 30, 2014 and December 31, 2013, respectively, based on fair value. In addition, to fulfill state licensing requirements, the Company has placed on deposit eligible securities of $12 million and $11 million as of June 30, 2014 and December 31, 2013, respectively, based on fair value.

No material investments of the Company were non-income producing for Six Months 2014, and 2013, respectively.

Internally Managed Portfolio

The investment portfolio tables shown above include both assets managed externally and internally. In the table below, more detailed information is provided for the component of the total investment portfolio that is internally managed (excluding short-term investments). The internally managed portfolio, as defined below, represents approximately 9% and 10% of the investment portfolio, on a fair value basis, as of June 30, 2014 and December 31, 2013, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an attractive investment opportunity (the "trading portfolio").

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

Additional detail about the types and amounts of securities acquired by the Company for loss mitigation, other risk management and in the trading portfolio is set forth in the table below.

Internally Managed Portfolio

Carrying Value



	As of June 30, 2014		As of December 31, 2013
	(in millions)
Assets purchased for loss mitigation purposes:
Fixed-maturity securities:
RMBS	$	233	$	233
Other invested assets	24		47
Other risk management assets:
Fixed-maturity securities	293		321
Other	63		12
Trading portfolio (other invested assets)	19		47
Total	$	632	$	660

11. Insurance Company Regulatory Requirements

Contingency Reserves

On July 15, 2013, AGM and its wholly-owned subsidiary, AGE (together, the "AGM Group"), were notified that the New York State Department of Financial Services ("NYSDFS") does not object to the AGM Group reassuming contingency reserves that they had ceded to Assured Guaranty Re Ltd. ("AG Re") and electing to cease ceding future contingency reserves to AG Re under the following circumstances:


•	The AGM Group may reassume 33% of a contingency reserve base of approximately $250 million (the “NY Contingency Reserve Base”) in 2013, after July 16, 2013, the date on which the transactions for the capitalization of MAC were completed (the “Closing Date”).


•	The AGM Group may reassume 50% of the NY Contingency Reserve Base in 2014, no earlier than the one year anniversary of the Closing Date, with the prior approval of the NYSDFS.


•	The AGM Group may reassume the remaining 17% of the NY Contingency Reserve Base in 2015, no earlier than the two year anniversary of the Closing Date, with the prior approval of the NYSDFS.

The reassumption of the contingency reserves has the effect of increasing contingency reserves by the amount reassumed and decreasing policyholders' surplus by the same amount; there would be no impact on the statutory or rating agency capital as a result of the reassumption. The reassumption of contingency reserves would permit the release of amounts from the AG Re trust accounts securing AG Re's reinsurance of the AGM Group.

In the third quarter of 2013, AGM reassumed 33% of its contingency reserve bases, which permitted the release of approximately $53 million of assets from the AG Re trust accounts securing AG Re's reinsurance of AGM, after adjusting for increases in the amounts required to be held in such accounts due to changes in asset values.

In August 2014, AGM received approval to reassume approximately $110 million, which constitutes 50% of its contingency reserve bases. AGM expects to complete such reassumptions by the end of the third quarter of 2014, which will permit the release of additional assets from the AG Re trust accounts securing AG Re's reinsurance of AGM.

Dividend Restrictions and Capital Requirements

Under New York insurance law, AGM may only pay dividends out of "earned surplus", which is the portion of a company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM may pay dividends without the prior approval of the NYSDFS that, together with all dividends declared or distributed by it during the preceding 12 months, does not exceed the lesser of 10% of its policyholders' surplus (as of the last annual or quarterly statement filed with the New York Superintendent of Financial Services ("New York Superintendent")) or 100% of its adjusted net investment income during that period. The aggregate

amount available for AGM to distribute as dividends in the next twelve months without regulatory approval is estimated to be approximately $174 million.

MAC is subject to the same dividend limitations described above for AGM. The Company does not currently anticipate that MAC will distribute any dividends.

U.K. company law prohibits AGE from declaring a dividend to its shareholder unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer's ability to declare a dividend, the Prudential Regulation Authority's capital requirements may in practice act as a restriction on dividends. The Company does not expect AGE to distribute any dividends at this time.

Dividends and Surplus Notes

By Insurance Company



	Second Quarter				Six Months
	2014		2013		2014		2013
	(in millions)
Dividends paid by AGM to AGMH	$	45	$	38	$	45	$	38
Repayment of surplus note by AGM to AGMH	—		—		25		25

12. Income Taxes

Provision for Income Taxes

In conjunction with AGL's purchase of AGMH on July 1, 2009, AGM and its insurance company subsidiaries have joined the consolidated federal tax group of Assured Guaranty US Holdings Inc. ("AGUS"), an indirect parent holding company of AGM. A new tax sharing agreement was entered into effective July 1, 2009, subsequently amended to include MAC, whereby each company in the AGUS consolidated tax group pays or receives its proportionate share of the consolidated federal tax burden for the group as if each company filed on a separate return basis with current period credit for net losses. Beginning on May 31, 2012, MAC also joined the AGUS consolidated tax group.

The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in fair value of its credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pretax income for the full year 2014. A discrete calculation of the provision is calculated for each interim period.

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

Effective Tax Rate Reconciliation



	Second Quarter						Six Months
	2014			2013			2014			2013
	(in millions)
Expected tax provision (benefit) at statutory rate	$	62		$	113		$	152		$	192
Tax-exempt interest	(11		)	(10		)	(21		)	(20		)
Other	2			—			2			1
Total provision (benefit) for income taxes	$	53		$	103		$	133		$	173
Effective tax rate	29.3		%	32.0		%	30.3		%	31.6		%

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

Valuation Allowance

The Company came to the conclusion that it is more likely than not that its net deferred tax asset will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative GAAP income of the Company, cumulative operating income Assured Guaranty US Holdings Inc. together with its U.S. subsidiaries has earned over the last three years, and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with this deferred tax asset. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.

13. Reinsurance and Other Monoline Exposures

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

Ceded and Assumed Business

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

AGM has assumed business primarily from its affiliate, AGC. Under this relationship, AGM assumes a portion of the ceding company’s insured risk in exchange for a premium. AGM may be exposed to risk in this portfolio in that AGM 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. AGM’s agreement with AGC is generally subject to termination at the option of the ceding company if AGM fails to meet certain financial and regulatory criteria or to maintain a specified minimum financial strength rating. Upon termination under these conditions, AGM may be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis of accounting, attributable to the reinsurance assumed, after which AGM would be released from liability with respect to the Assumed Business. Upon the occurrence of the conditions set forth above, whether or not an agreement is terminated, AGM may be obligated to increase the level of ceding commission paid.

In Six Months 2014, the Company entered into commutation agreements to reassume previously ceded business consisting of approximately $856 million par of almost exclusively U.S. public finance and European (predominantly UK) utility and infrastructure exposures outstanding as of February 28, 2014. For such reassumptions, the Company received the statutory unearned premium outstanding as of the commutation dates plus, in one case, a commutation premium. There were no commutations in Six Months 2013.

AGM is also party to reinsurance agreements as a reinsurer to its affiliated financial guaranty insurance companies. In 2013, MAC assumed a book of U.S. public finance business from AGM and AGC.

The following table presents the components of premiums and losses reported in the consolidated statement of operations and the contribution of the Company's Assumed and Ceded Businesses.

Effect of Reinsurance on Statement of Operations



	Second Quarter						Six Months
	2014			2013			2014			2013
	(in millions)
Premiums Written:
Direct	$	15		$	18		$	46		$	35
Ceded	(6		)	(7		)	(37		)	(13		)
Net	$	9		$	11		$	9		$	22
Premiums Earned:
Direct	$	123		152			$	236		$	381
Assumed	6			—			13			—
Ceded	(36		)	(43		)	(70		)	(96		)
Net	$	93		$	109		$	179		$	285
Loss and LAE:
Direct	$	63		$	46		$	67		$	31
Ceded	(35		)	(13		)	(35		)	(27		)
Net	$	28		$	33		$	32		$	4

Reinsurer Exposure

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 June 30, 2014, based on fair value, the Company had fixed-maturity securities in its investment portfolio consisting of $383 million insured by National Public Finance Guarantee Corporation, $364 million insured by Ambac Assurance Corporation ("Ambac"), $84 million insured by AGC, and $30 million insured by other guarantors.

Exposure by Reinsurer



	Ratings at September 8, 2014		Par Outstanding as of June 30, 2014
Reinsurer	Moody’s Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(1)		Second-to-Pay Insured Par Outstanding		Assumed Par Outstanding
	(dollars in millions)
Affiliated Companies: (2)
AGC	A3	AA	$	—	$	502	$	22,871
AG Re	Baa1	AA	60,535		—		—
Affiliated Companies			60,535		502		22,871
Non-Affiliated Companies:
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	WR (4)	WR	6,334		—		30
Tokio Marine & Nichido Fire Insurance Co., Ltd. ("Tokio")	Aa3 (3)	AA-	6,034		—		—
Radian Asset Assurance Inc.	Ba1	B+	4,537		20		—
Syncora Guarantee Inc.	WR	WR	4,198		674		—
Mitsui Sumitomo Insurance Co. Ltd.	A1	A+	2,112		—		—
ACA Financial Guaranty Corp.	NR (6)	WR	801		3		—
Federal Insurance Company	Aa2	AA	382		—		—
Swiss Reinsurance Co.	Aa3	AA-	344		—		—
Security Life of Denver Insurance Company	A3	A-	239				—
CIFG	WR	WR	—		57		—
MBIA Inc.	(5)	(5)	—		7,348		—
Ambac (5)	WR	WR	—		2,991		—
Financial Guaranty Insurance Co.	WR	WR	—		1,077		—
Other	Various	Various	—		—		1
Non-Affiliated Companies			24,981		12,170		31
Total			$	85,516	$	12,672	$	22,902

____________________


(1)	Includes $2,545 million in ceded par outstanding related to insured credit derivatives.


(2)	MAC is rated AA+ (stable outlook) from Kroll Bond Rating Agency and of AA (stable outlook) from S&P. Assumed par outstanding includes $22,840 million assumed by MAC from AGC.


(3)	The Company has structural collateral agreements satisfying the triple-A credit requirement of S&P and/or Moody’s.


(4)	Represents “Withdrawn Rating.”


(5)	MBIA Inc. includes various subsidiaries which are rated AA- and B by S&P and A3, Ba2 and B2 by Moody’s. Ambac includes policies in their general and segregated account.


(6)	Represents “Not Rated.”

Amounts Due (To) From Reinsurers

As of June 30, 2014



	Assumed Premium, net of Commissions		Ceded Premium, net of Commissions			Ceded Expected Loss and LAE
	(in millions)
AGC	$	3	$	—		$	—
AG Re	—		(61		)	53
American Overseas Reinsurance Company Limited (f/k/a Ram Re)	—		(8		)	7
Federal Insurance Company	—		(17		)	—
Mitsui Sumitomo Insurance Co. Ltd.	—		(3		)	9
Radian Asset Assurance Inc.	—		(17		)	17
Security Life of Denver Insurance Company	—		(9		)	—
Swiss Reinsurance Co.	—		(3		)	4
Syncora Guarantee Inc.	—		(38		)	2
Tokio	—		(18		)	31
Other	—		(17		)	—
Total	$	3	$	(191	)	$	123

Excess of Loss Reinsurance Facility

AGC, AGM and MAC entered into an aggregate excess of loss reinsurance facility with a number of reinsurers, effective as of January 1, 2014. The facility covers losses occurring either from January 1, 2014 through December 31, 2021, or January 1, 2015 through December 31, 2022, at the option of AGC, AGM and MAC. It terminates on January 1, 2016, unless AGC, AGM and MAC choose to extend it. The facility covers certain U.S. public finance credits insured or reinsured by AGC, AGM and MAC as of September 30, 2013, excluding credits that were rated non-investment grade as of December 31, 2013 by Moody’s or S&P or internally by AGC, AGM or MAC and is subject to certain per credit limits. Among the credits excluded are those associated with the Commonwealth of Puerto Rico and its related authorities and public corporations. The facility attaches when AGC’s, AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed $1.5 billion in the aggregate. The facility covers a portion of the next $500 million of losses, with the reinsurers assuming pro rata in the aggregate $450 million of the $500 million of losses and AGC, AGM and MAC jointly retaining the remaining $50 million of losses. The reinsurers are required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurers their share of recoveries relating to losses during the coverage period in the covered portfolio. The Company has paid approximately $17 million of premiums during 2014 for the term January 1, 2014 through December 31, 2014 and deposited approximately $17 million of securities into trust accounts for the benefit of the reinsurers to be used to pay the premium for January 1, 2015 through December 31, 2015.

14. Commitments and Contingencies

Legal Proceedings

Litigation

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

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

litigation and regulatory matters on a quarterly, and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

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

Proceedings Relating to the Company's Financial Guaranty Business

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

Beginning in July 2008, AGM and various other financial guarantors were named in complaints filed in the Superior Court for the State of California, City and County of San Francisco by a number of plaintiffs. Subsequently, plaintiffs' counsel filed amended complaints against AGM and AGC and added additional plaintiffs. These complaints alleged that the financial guaranty insurer defendants (i) participated in a conspiracy in violation of California's antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance, (ii) participated in risky financial transactions in other lines of business that damaged each insurer's financial condition (thereby undermining the value of each of their guaranties), and (iii) failed to adequately disclose the impact of those transactions on their financial condition. In addition to their antitrust claims, various plaintiffs asserted claims for breach of the covenant of good faith and fair dealing, fraud, unjust enrichment, negligence, and negligent misrepresentation. At hearings held in July and October 2011 relating to AGM, AGC and the other defendants' demurrer, the court overruled the demurrer on the following claims: breach of contract, violation of California's antitrust statute and of its unfair business practices law, and fraud. The remaining claims were dismissed. On December 2, 2011, AGM, AGC and the other bond insurer defendants filed an anti-SLAPP ("Strategic Lawsuit Against Public Participation") motion to strike the complaints under California's Code of Civil Procedure. On July 9, 2013, the court entered its order denying in part and granting in part the bond insurers' motion to strike. As a result of the order, the causes of action that remain against AGM and AGC are: claims of breach of contract and fraud, brought by the City of San Jose, the City of Stockton, East Bay Municipal Utility District and Sacramento Suburban Water District, relating to the failure to disclose the impact of risky financial transactions on their financial condition; and a claim of breach of the unfair business practices law brought by The Jewish Community Center of San Francisco. On September 9, 2013, plaintiffs filed an appeal of the anti-SLAPP ruling on the California antitrust statute. On September 30, 2013, AGC, AGM and the other bond insurer defendants filed a notice of cross-appeal. On July 7, 2014, the bond insurer defendants, as cross-appellants, filed their opening brief in the Court of Appeal of the State of California First Appellate District, Division 2. The complaints generally seek unspecified monetary damages, interest, attorneys' fees, costs and other expenses. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from these lawsuits.

On November 19, 2012, Lehman Brothers Holdings Inc. (“LBHI”) and Lehman Brothers Special Financing Inc. (“LBSF") commenced an adversary complaint and claim objection in the United States Bankruptcy Court for the Southern District of New York against Credit Protection Trust 283 (“CPT 283”), FSA Administrative Services, LLC, as trustee for CPT 283, and AGM, in connection with CPT 283's termination of a CDS between LBSF and CPT 283. CPT 283 terminated the CDS as a consequence of LBSF failing to make a scheduled payment owed to CPT 283, which termination occurred after LBHI filed for bankruptcy but before LBSF filed for bankruptcy. The CDS provided that CPT 283 was entitled to receive from LBSF a termination payment in that circumstance of approximately $43.8 million (representing the economic equivalent of the future fixed payments CPT 283 would have been entitled to receive from LBSF had the CDS not been terminated), and CPT 283 filed proofs of claim against LBSF and LBHI (as LBSF's credit support provider) for such amount. LBHI and LBSF seek to disallow and expunge (as impermissible and unenforceable penalties) CPT 283's proofs of claim against LBHI and LBSF and recover approximately $67.3 million, which LBHI and LBSF allege was the mark-to-market value of the CDS to LBSF (less unpaid amounts) on the day CPT 283 terminated the CDS, plus interest, attorney's fees, costs and other expenses. On the same day, LBHI and LBSF also commenced an adversary complaint and claim objection against Credit Protection Trust 207 (“CPT 207”), FSA Administrative Services, LLC, as trustee for CPT 207, and AGM, in connection with CPT 207's termination of a CDS between LBSF and CPT 207. Similarly, the CDS provided that CPT 207 was entitled to receive from LBSF a termination payment in that circumstance of $492,555. LBHI and LBSF seek to disallow and expunge CPT 207's proofs of claim against LBHI and LBSF and recover approximately $1.5 million. AGM believes the terminations of the CDS and the calculation of the termination payment amounts were consistent with the terms of the ISDA master agreements between the parties. The Company cannot reasonably estimate the possible loss, if any, that may arise from this lawsuit.

On September 25, 2013, Wells Fargo Bank, N.A., as trust administrator, filed an interpleader complaint in the U.S. District Court for the Southern District of New York against AGM, among others, relating to the right of AGM to be reimbursed from certain cashflows for principal claims paid on insured certificates issued in the MASTR Adjustable Rate Mortgages Trust 2007-3 securitization. The Company estimates that an adverse outcome to the interpleader proceeding could increase losses on the transaction by approximately $10 - $20 million, net of expected settlement payments and reinsurance in force.

Proceedings Related to AGMH's Former Financial Products Business

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

Governmental Investigations into Former Financial Products Business

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


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


•	AGM received a subpoena from the Securities and Exchange Commission ("SEC") in November 2006 related to an ongoing industry-wide investigation concerning the bidding of municipal GICs and other municipal derivatives.

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

In July 2010, a former employee of AGM who had been involved in AGMH's former Financial Products Business was indicted along with two other persons with whom he had worked at Financial Guaranty Insurance Company. Such former employee and the other two persons were convicted on fraud conspiracy counts. After appeal, their convictions were reversed by a three-judge panel of the U.S. Court of Appeals for the Second Circuit in November 2013. In January 2014, the Department of Justice petitioned the U.S. Court of Appeals for the Second Circuit for a panel rehearing and a rehearing en banc of the appeal; the motions were denied on August 15, 2014.

Lawsuits Relating to Former Financial Products Business

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

Five of these cases named both AGMH and AGM: (a) Hinds County, Mississippi v. Wachovia Bank, N.A.; (b) Fairfax County, Virginia v. Wachovia Bank, N.A.; (c) Central Bucks School District, Pennsylvania v. Wachovia Bank, N.A.; (d) Mayor and City Council of Baltimore, Maryland v. Wachovia Bank, N.A.; and (e) Washington County, Tennessee v. Wachovia Bank, N.A. In April 2009, the MDL 1950 court granted the defendants’ motion to dismiss on the federal claims, but granted leave for the plaintiffs to file an amended complaint. The Corrected Third Consolidated Amended Class Action Complaint, filed on October 9, 2013, lists neither AGM nor AGMH as a named defendant or a co-conspirator. The complaints in these lawsuits

generally seek unspecified monetary damages, interest, attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.

Four of the cases named AGMH (but not AGM) and also alleged that the defendants violated California state antitrust law and common law by engaging in illegal bid-rigging and market allocation, thereby depriving the cities or municipalities of competition in the awarding of GICs and ultimately resulting in the cities paying higher fees for these products: (f) City of Oakland, California v. AIG Financial Products Corp.; (g) County of Alameda, California v. AIG Financial Products Corp.; (h) City of Fresno, California v. AIG Financial Products Corp.; and (i) Fresno County Financing Authority v. AIG Financial Products Corp. When the four plaintiffs filed a consolidated complaint in September 2009, the plaintiffs did not name AGMH as a defendant. However, the complaint does describe some of AGMH’s and AGM’s activities. The consolidated complaint generally seeks unspecified monetary damages, interest, attorneys’ fees and other costs. In April 2010, the MDL 1950 court granted in part and denied in part the named defendants’ motions to dismiss this consolidated complaint.

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

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

The MDL 1950 court denied AGM and AGUS’s motions to dismiss these 11 complaints in April 2010. Amended complaints were filed in May 2010. On October 29, 2010, AGM and AGUS were voluntarily dismissed with prejudice from the Sacramento Municipal Utility District case only. The complaints in these lawsuits generally seek or sought unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from the remaining lawsuits.

In May 2010, AGM and AGUS, among other defendants, were named in five additional non-class action cases filed in federal court in California: (a) City of Richmond, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); (b) City of Redwood City, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); (c) Redevelopment Agency of the City and County of San Francisco, California v. Bank of America, N.A. (filed on May 21, 2010, N.D. California); (d) East Bay Municipal Utility District, California v. Bank of America, N.A. (filed on May 18, 2010, N.D. California); and (e) City of San Jose and the San Jose Redevelopment Agency, California v. Bank of America, N.A (filed on May 18, 2010, N.D. California). These cases have also been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings. In September 2010, AGM and AGUS, among other defendants, were named in a sixth additional non-class action filed in federal court in New York, but which alleges violation of New York’s Donnelly Act in addition to federal antitrust law: Active Retirement Community, Inc. d/b/a Jefferson’s Ferry v. Bank of America, N.A. (filed on September 21, 2010, E.D. New York), which has also been transferred to the Southern District of New York and consolidated with MDL 1950 for pretrial proceedings. In December 2010, AGM and AGUS, among other defendants, were named in a seventh additional non-class action filed in federal court in the Central District of California, Los Angeles Unified School District v. Bank of America, N.A., and in an eighth additional non-class action filed in federal court in the Southern District of New York, Kendal on Hudson, Inc. v. Bank of America, N.A. These cases also have been consolidated with MDL 1950 for pretrial proceedings. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees, costs and other expenses. The Company cannot reasonably estimate the possible loss, if any, or range of loss that may arise from these lawsuits.

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

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

15. Notes Payable and Credit Facilities

Notes Payable

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

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

Principal and Carrying Amounts of Notes Payable



	As of June 30, 2014				As of December 31, 2013
	Principal		Carrying Value		Principal		Carrying Value
	(in millions)
Notes Payable	$	27	$	31	$	34	$	38

Recourse Credit Facilities

2009 Strip Coverage Facility

In connection with the acquisition of AGMH and its subsidiaries from Dexia Holdings Inc., AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. The liquidity risk to AGM related to the strip policy portion of the leveraged lease business is mitigated by the strip coverage facility described below.

In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.

If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as 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.

Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities do not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $1.3 billion as of June 30, 2014. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. It is difficult to

determine the probability that AGM will have to pay strip provider claims or the likely aggregate amount of such claims. At June 30, 2014, approximately $1.4 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM.

On July 1, 2009, AGM and Dexia Crédit Local S.A., acting through its New York Branch (“Dexia Crédit Local (NY)”), entered into a credit facility (the “Strip Coverage Facility”). Under the Strip Coverage Facility, Dexia Crédit Local (NY) agreed to make loans to AGM to finance all draws made by lessors on AGM strip policies that were outstanding as of November 13, 2008, up to the commitment amount. The commitment amount of the Strip Coverage Facility was $1 billion at closing of the Company's acquisition of AGMH. AGM has reduced the maximum commitment amount from time to time, after taking into account its experience with its exposure to leveraged lease transactions. Most recently, as of June 30, 2014, AGM reduced the maximum commitment amount to $495 million and agreed with Dexia Crédit Local (NY) that the commitment amount would no longer amortize on a scheduled monthly basis.

Fundings under this facility are subject to certain conditions precedent, and their repayment is collateralized by a security interest that AGM granted to Dexia Crédit Local (NY) in amounts that AGM recovers—from the tax-exempt entity, or from asset sale proceeds—following its payment of strip policy claims. On June 30, 2014, AGM and Dexia Crédit Local (NY) agreed to shorten the duration of the facility. Accordingly, the Strip Coverage Facility will terminate upon the earliest to occur of an AGM change of control, the reduction of the commitment amount to $0 in accordance with the terms of the facility, and June 30, 2024 (rather than 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

•

a minimum net worth of 75% of consolidated net worth as of July 1, 2009, plus, beginning June 30, 2015 and on each anniversary of such date, an amount equal to the product of (i) 25% of the aggregate consolidated net income (or loss) for the period beginning July 2, 2009 and ending on June 30, 2014 and (ii) a fraction, the numerator of which is the commitment amount as of the relevant calculation date and the denominator of which is $1 billion.

The Company was in compliance with all financial covenants as of June 30, 2014.

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 June 30, 2014, no amounts were outstanding under this facility, nor have there been any borrowings during the life of this facility.

AGM CPS Securities

In June 2003, $200 million of “AGM CPS”, money market preferred trust securities, were issued by trusts created for the primary purpose of issuing the AGM CPS, investing the proceeds in high-quality commercial paper and selling put options to AGM, allowing AGM to issue the trusts non-cumulative redeemable perpetual preferred stock (the “AGM Preferred Stock”) of AGM in exchange for cash. There are four trusts, each with an initial aggregate face amount of $50 million. These trusts hold auctions every 28 days, at which time investors submit bid orders to purchase AGM CPS. If AGM were to exercise a put option, the applicable trust would transfer the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, to AGM in exchange for AGM Preferred Stock. AGM pays a floating put premium to the trusts, which represents the difference between the commercial paper yield and the winning auction rate (plus all fees and expenses of the trust). If an auction does not attract sufficient clearing bids, however, the auction rate is subject to a maximum rate of one-month LIBOR plus 200 basis points for the next succeeding distribution period. Beginning in August 2007, the AGM CPS Securities required the maximum rate for each of the relevant trusts. AGM continues to have the ability to exercise its put option and cause the related trusts to purchase AGM Preferred Stock. The trusts provide AGM access to new capital at its sole discretion through the exercise of the put options. As of June 30, 2014 the put option had not been exercised. The Company does not consider itself to be the primary beneficiary of the trusts. See Note 7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement discussion.

16. Other Comprehensive Income

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

Changes in Accumulated Other Comprehensive Income by Component

Second Quarter 2014



	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, March 31, 2014	$	148		$	(12	)	$	136
Other comprehensive income (loss) attributable to AGM before reclassifications	35			(15		)	20
Amounts reclassified from AOCI to:
Other net realized investment gains (losses)	(1		)	11			10
Tax (provision) benefit	0			(4		)	(4		)
Total amounts reclassified from AOCI, net of tax	(1		)	7			6
Net current period other comprehensive income (loss) attributable to AGM	34			(8		)	26
Balance, June 30, 2014	$	182		$	(20	)	$	162

Changes in Accumulated Other Comprehensive Income by Component

Second Quarter 2013



	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, March 31, 2013	$	204		$	(8	)	$	196
Other comprehensive income (loss) attributable to AGM before reclassifications	(81		)	(11		)	(92		)
Amounts reclassified from AOCI to:
Other net realized investment gains (losses)	—			4			4
Tax (provision) benefit	—			(1		)	(1		)
Total amounts reclassified from AOCI, net of tax	—			3			3
Net current period other comprehensive income (loss) attributable to AGM	(81		)	(8		)	(89		)
Balance, June 30, 2013	$	123		$	(16	)	$	107

Changes in Accumulated Other Comprehensive Income by Component

Six Months 2014



	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2013	$	105		$	(19	)	$	86
Other comprehensive income (loss) attributable to AGM before reclassifications	80			(11		)	69
Amounts reclassified from AOCI to:
Other net realized investment gains (losses)	(4		)	15			11
Tax (provision) benefit	1			(5		)	(4		)
Total amounts reclassified from AOCI, net of tax	(3		)	10			7
Net current period other comprehensive income (loss)	77			(1		)	76
Balance, June 30, 2014	$	182		$	(20	)	$	162

Changes in Accumulated Other Comprehensive Income by Component

Six Months 2013



	Net Unrealized Gains (Losses) on Investments with no Other-Than-Temporary Impairment			Net Unrealized Gains (Losses) on Investments with Other-Than-Temporary Impairment			Total Accumulated Other Comprehensive Income
	(in millions)
Balance, December 31, 2012	$	226		$	6		$	232
Other comprehensive income (loss) attributable to AGM before reclassifications	(103		)	(30		)	(133		)
Amounts reclassified from AOCI to:
Other net realized investment gains (losses)	0			12			12
Tax (provision) benefit	0			(4		)	(4		)
Total amounts reclassified from AOCI, net of tax	0			8			8
Net current period other comprehensive income (loss)	(103		)	(22		)	(125		)
Balance, June 30, 2013	$	123		$	(16	)	$	107


17.	Subsequent Events

Subsequent events have been considered through September 9, 2014, the date on which these financial statements were issued.