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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
ý
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2016
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition Period from              to               
Commission File No. 001-32141 
ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter) 
Bermuda
 
98-0429991
(State or other jurisdiction
 
(I.R.S. employer
of incorporation)
 
identification no.)
 
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
(Address of principal executive offices)
(441) 279-5700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x
The number of registrant’s Common Shares ($0.01 par value) outstanding as of August 2, 2016 was 132,122,615 (includes 58,858 unvested restricted shares).
 

Table of Contents


ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I.    FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Assured Guaranty Ltd.

Consolidated Balance Sheets (unaudited)
 
(dollars in millions except per share and share amounts) 

 
As of
June 30, 2016
 
As of
December 31, 2015
Assets
 

 
 

Investment portfolio:
 

 
 

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $9,401 and $10,275)
$
9,960

 
$
10,627

Short-term investments, at fair value
585

 
396

Other invested assets
170

 
169

Total investment portfolio
10,715

 
11,192

Cash
190

 
166

Premiums receivable, net of commissions payable
623

 
693

Ceded unearned premium reserve
228

 
232

Deferred acquisition costs
110

 
114

Reinsurance recoverable on unpaid losses
82

 
69

Salvage and subrogation recoverable
323

 
126

Credit derivative assets
36

 
81

Deferred tax asset, net
235

 
276

Current income tax receivable
—

 
40

Financial guaranty variable interest entities’ assets, at fair value
814

 
1,261

Funds restricted for CIFG acquisition
451

 
—

Other assets
285

 
294

Total assets
$
14,092

 
$
14,544

Liabilities and shareholders’ equity
 

 
 

Unearned premium reserve
$
3,617

 
$
3,996

Loss and loss adjustment expense reserve
1,268

 
1,067

Reinsurance balances payable, net
56

 
51

Long-term debt
1,303

 
1,300

Credit derivative liabilities
432

 
446

Current income tax payable
19

 
—

Financial guaranty variable interest entities’ liabilities with recourse, at fair value
790

 
1,225

Financial guaranty variable interest entities’ liabilities without recourse, at fair value
115

 
124

Other liabilities
242

 
272

Total liabilities
7,842

 
8,481

Commitments and contingencies (See Note 14)

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 132,814,422 and 137,928,552 shares issued and outstanding)
1

 
1

Additional paid-in capital
1,213

 
1,342

Retained earnings
4,648

 
4,478

Accumulated other comprehensive income, net of tax of $147 and $104
383

 
237

Deferred equity compensation (320,193 and 320,193 shares)
5

 
5

Total shareholders’ equity
6,250

 
6,063

Total liabilities and shareholders’ equity
$
14,092

 
$
14,544

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

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Assured Guaranty Ltd.

Consolidated Statements of Operations (unaudited)
 
(dollars in millions except per share amounts)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
214

 
$
219

 
$
397

 
$
361

Net investment income
98

 
98

 
197

 
199

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(8
)
 
(11
)
 
(28
)
 
(16
)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income
(3
)
 
1

 
(7
)
 
3

Net impairment loss
(5
)
 
(12
)
 
(21
)
 
(19
)
Other net realized investment gains (losses)
15

 
3

 
18

 
26

Net realized investment gains (losses)
10

 
(9
)
 
(3
)
 
7

Net change in fair value of credit derivatives:
 
 
 
 
 
 
 
Realized gains (losses) and other settlements
24

 
8

 
32

 
29

Net unrealized gains (losses)
39

 
82

 
(29
)
 
185

Net change in fair value of credit derivatives
63

 
90

 
3

 
214

Fair value gains (losses) on committed capital securities
(11
)
 
23

 
(27
)
 
25

Fair value gains (losses) on financial guaranty variable interest entities
4

 
5

 
22

 
(2
)
Bargain purchase gain and settlement of pre-existing relationships
—

 
214

 
—

 
214

Other income (loss)
18

 
55

 
52

 
46

Total revenues
396

 
695

 
641

 
1,064

Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses
102

 
188

 
192

 
206

Amortization of deferred acquisition costs
5

 
6

 
9

 
10

Interest expense
25

 
26

 
51

 
51

Other operating expenses
63

 
66

 
123

 
122

Total expenses
195

 
286

 
375

 
389

Income (loss) before income taxes
201

 
409

 
266

 
675

Provision (benefit) for income taxes
 
 
 
 
 
 
 
Current
32

 
24

 
62

 
37

Deferred
23

 
88

 
(1
)
 
140

Total provision (benefit) for income taxes
55

 
112

 
61

 
177

Net income (loss)
$
146

 
$
297

 
$
205

 
$
498

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.09

 
$
1.97

 
$
1.52

 
$
3.25

Diluted
$
1.09

 
$
1.96

 
$
1.51

 
$
3.23

Dividends per share
$
0.13

 
$
0.12

 
$
0.26

 
$
0.24

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

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Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (unaudited)
 
(in millions)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
146

 
$
297

 
$
205

 
$
498

Unrealized holding gains (losses) arising during the period on:
 
 
 
 
 
 
 
Investments with no other-than-temporary impairment, net of tax provision (benefit) of $31, $(54), $62 and $(53)
84

 
(136
)
 
179

 
(118
)
Investments with other-than-temporary impairment, net of tax provision (benefit) of $(3), $(1), $(13) and $(3)
(6
)
 
(6
)
 
(23
)
 
(8
)
Unrealized holding gains (losses) arising during the period, net of tax
78

 
(142
)
 
156

 
(126
)
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $4, $(4), $0 and $2
5

 
(5
)
 
(1
)
 
5

Change in net unrealized gains on investments
73

 
(137
)
 
157

 
(131
)
Other, net of tax provision
(9
)
 
6

 
(11
)
 
0

Other comprehensive income (loss)
$
64

 
$
(131
)
 
$
146

 
$
(131
)
Comprehensive income (loss)
$
210

 
$
166

 
$
351

 
$
367

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

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Assured Guaranty Ltd.

Consolidated Statement of Shareholders’ Equity (unaudited)
 
For the Six Months Ended June 30, 2016
 
(dollars in millions, except share data)

 
Common Shares Outstanding
 
 
Common Stock Par Value
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income
 
Deferred
Equity Compensation
 
Total
Shareholders’ Equity
Balance at December 31, 2015
137,928,552

 
 
$
1

 
$
1,342

 
$
4,478

 
$
237

 
$
5

 
$
6,063

Net income
—

 
 
—

 
—

 
205

 
—

 
—

 
205

Dividends ($0.26 per share)
—

 
 
—

 
—

 
(35
)
 
—

 
—

 
(35
)
Common stock repurchases
(5,370,402
)
 
 
0

 
(135
)
 
—

 
—

 
—

 
(135
)
Share-based compensation and other
256,272

 
 
0

 
6

 
—

 
—

 
—

 
6

Other comprehensive income
—

 
 
—

 
—

 
—

 
146

 
—

 
146

Balance at June 30, 2016
132,814,422

 
 
$
1

 
$
1,213

 
$
4,648

 
$
383

 
$
5

 
$
6,250

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

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Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)
 
(in millions)
 
 
Six Months Ended June 30,
 
2016
 
2015
Net cash flows provided by (used in) operating activities
$
(47
)
 
$
105

Investing activities
 

 
 

Fixed-maturity securities:
 

 
 

Purchases
(510
)
 
(1,172
)
Sales
739

 
1,381

Maturities
645

 
411

Net sales (purchases) of short-term investments
(190
)
 
382

Net proceeds from paydowns on financial guaranty variable interest entities’ assets
556

 
70

Acquisition of Radian Asset, net of cash acquired
—

 
(800
)
Cash restricted for CIFG acquisition (see Note 2)
(451
)
 
—

Other
(12
)
 
27

Net cash flows provided by (used in) investing activities
777

 
299

Financing activities
 

 
 

Dividends paid
(35
)

(37
)
Repurchases of common stock
(135
)

(285
)
Share activity under option and incentive plans
(1
)
 
(2
)
Net paydowns of financial guaranty variable interest entities’ liabilities
(531
)
 
(78
)
Repayment of long-term debt
(1
)
 
(2
)
Net cash flows provided by (used in) financing activities
(703
)
 
(404
)
Effect of foreign exchange rate changes
(3
)
 
0

Increase (decrease) in cash
24

 
0

Cash at beginning of period
166

 
75

Cash at end of period
$
190

 
$
75

Supplemental cash flow information
 

 
 

Cash paid (received) during the period for:
 

 
 

Income taxes
$
1

 
$
51

Interest
$
48

 
$
48


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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (unaudited)
 
June 30, 2016

1.
Business and Basis of Presentation
 
Business
 
Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”) is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (“U.S.”) and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience to offer financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (“debt service”), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom ("U.K."), and also guarantees obligations issued in other countries and regions, including Australia and Western Europe.

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

Basis of Presentation
 
The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments that are of a normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the Company and its consolidated variable interest entities (“VIEs”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements are as of June 30, 2016 and cover the three-month period ended June 30, 2016 ("Second Quarter 2016"), the three-month period ended June 30, 2015 ("Second Quarter 2015"), the six-month period ended June 30, 2016 ("Six Months 2016") and the six-month period ended June 30, 2015 ("Six Months 2015"). 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 AGL, its direct and indirect subsidiaries (collectively, the “Subsidiaries”), and its consolidated VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. Certain prior year balances have been reclassified to conform to the current year's presentation.
 
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in AGL’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the U.S. Securities and Exchange Commission (the “SEC”).


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The Company's principal insurance company subsidiaries are:

•
Assured Guaranty Municipal Corp. ("AGM"), domiciled in New York;
•
Municipal Assurance Corp. ("MAC"), domiciled in New York;
•
Assured Guaranty Corp. ("AGC"), domiciled in Maryland;
•
Assured Guaranty (Europe) Ltd. ("AGE"), organized in the United Kingdom; and
•
Assured Guaranty Re Ltd. (“AG Re”), domiciled in Bermuda.

The Company’s organizational structure includes various holding companies, two of which - Assured Guaranty US Holdings Inc. (“AGUS”) and Assured Guaranty Municipal Holdings Inc. (“AGMH”) - have public debt outstanding. See Note 15, Long-Term Debt and Credit Facilities and Note 18, Subsidiary Information.

Future Application of Accounting Standards

Credit Losses on Financial Instruments

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The amendments in this ASU are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will use forward-looking information to better inform their credit loss estimates as a result of the ASU. While many of the loss estimation techniques applied today will still be permitted, the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization’s portfolio. 

In addition, the ASU amends the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration. The ASU makes targeted improvements to the existing “other than temporary” impairment model for certain available-for-sale debt securities to eliminate the concept of “other than temporary” from that model. Accordingly, the ASU states that an entity must use an allowance approach, must limit the allowance to an amount at which the security’s fair value is less than its amortized cost basis, may not consider the length of time fair value has been less than amortized cost, and may not consider recoveries in fair value after the balance sheet date when assessing whether a credit loss exists. For purchased financial assets with credit deterioration, the ASU requires an entity’s method for measuring credit losses to be consistent with its method for measuring expected losses for originated and purchased non-credit-deteriorated assets.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For most debt instruments, entities will be required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted.  The changes to the impairment model for available-for-sale securities and changes to purchased financial assets with credit deterioration are to be applied prospectively.  For the Company, this would be as of January 1, 2020.  Early adoption is permitted for fiscal years, and interim periods with those fiscal years, beginning after December 15, 2018.  The Company is currently evaluating the effect on its Consolidated Financial Statements of adopting this ASU.

Share-Based Payments

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur.  The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted.  The Company is currently evaluating the effect on its Consolidated Financial Statements of adopting this ASU.


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2.
Acquisitions

Consistent with one of its key business strategies of supplementing its book of business through acquisitions, the Company has acquired two financial guaranty companies since January 1, 2015.

CIFG Holding Inc.
    
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFG Holding Inc., the parent of financial guaranty insurer CIFG Assurance North America, Inc. ("CIFG") (the "CIFG Acquisition"), in accordance with the agreement announced on April 13, 2016. AGC transferred $450.6 million in cash to a paying agent on June 30, 2016, in anticipation of closing; the Company recorded this transaction as funds restricted for the CIFG Acquisition on the consolidated balance sheet as of June 30, 2016. AGC caused the acquisition to be consummated on July 1, 2016 and merged CIFG with and into AGC, with AGC as the surviving company, on July 5, 2016. The CIFG Acquisition added $4.4 billion of net par insured on July 1, 2016.

The Company is in the process of allocating the purchase price to the assets acquired and liabilities assumed and conforming accounting policies but has not yet completed the acquisition date balance sheet. The Company intends to include this information in its third quarter 2016 Form 10-Q.
    
Radian Asset Assurance Inc.

On April 1, 2015, AGC completed the acquisition (“Radian Asset Acquisition”) of all of the issued and outstanding capital stock of financial guaranty insurer Radian Asset Assurance Inc. (“Radian Asset”) for $804.5 million. Radian Asset was merged with and into AGC, with AGC as the surviving company of the merger. The Radian Asset Acquisition added $13.6 billion to the Company's net par outstanding on April 1, 2015.

Please refer to Note 2, Acquisition of Radian Asset Assurance Inc., in Part II, Item 8. “Financial Statements and Supplementary Data” of AGL’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information on the acquisition of Radian Asset, including the purchase price and the allocation of the purchase price to net assets acquired and the resulting bargain purchase gain and the gains on settlement of pre-existing relationships.

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

The Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. For example, the Kroll Bond Rating Agency ("KBRA") ratings were first assigned to MAC in 2013 and to AGM in 2014 and the A.M. Best Company, Inc. ("Best") rating was first assigned to Assured Guaranty Re Overseas Ltd. ("AGRO") in 2015, while a Moody's Investors Service, Inc. ("Moody's") rating was never requested for MAC and was dropped from AG Re and AGRO in 2015.

In the last several years, Standard & Poor's Ratings Services ("S&P") and Moody's have changed, multiple times, their financial strength ratings of AGL's insurance subsidiaries, or changed the outlook on such ratings. More recently, KBRA and Best have assigned financial strength ratings to some of AGL's insurance subsidiaries. The rating agencies' most recent actions related to AGL's insurance subsidiaries are:

•
On July 27, 2016, S&P affirmed the AA (stable) financial strength ratings of AGL's insurance subsidiaries.


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•
On July 8, 2016 and December 10, 2015, KBRA affirmed the AA+ (stable outlook) financial strength ratings of MAC and AGM, respectively.

•
On May 27, 2016, Best affirmed the A+ (stable) financial strength rating, which is their second highest rating, of AGRO.

•
On December 8, 2015, Moody's published credit opinions maintaining its existing insurance financial strength ratings of A2 (stable outlook) on AGM and AGE and A3 (negative outlook) on AGC and AGC's subsidiary Assured Guaranty (UK) Ltd. ("AGUK"). Effective April 8, 2015, at the Company's request, Moody’s withdrew the financial strength ratings it had assigned to AG Re and AGRO.

There can be no assurance that any of the rating agencies will not take negative action on their financial strength ratings of AGL's insurance subsidiaries in the future.

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

•
Note 6, Financial Guaranty Insurance
•
Note 8, Financial Guaranty Contracts Accounted for as Credit Derivatives
•
Note 13, Reinsurance and Other Monoline Exposures
•
Note 15, Long-Term Debt and Credit Facilities

4.
Outstanding Exposure
 
The Company’s financial guaranty contracts are written in either insurance or credit derivative form, but collectively are considered financial guaranty contracts. The Company seeks to limit its exposure to losses by underwriting obligations that it views as investment grade at inception, although, as part of its loss mitigation strategy for existing troubled credits, it may underwrite new issuances that it views as below-investment-grade ("BIG"). The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, requires rigorous subordination or collateralization requirements. Reinsurance may be used in order to reduce net exposure to certain insured transactions.

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

Structured finance obligations insured by the Company are generally issued by special purpose entities, including VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 9, Consolidated Variable Interest Entities. Unless otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on VIEs whether or not they are consolidated.

Surveillance Categories
 
The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that the Company's internal credit ratings focus on future performance rather than lifetime performance.
 
The Company monitors its investment grade credits to determine whether any need to be internally downgraded to BIG and refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s credit ratings on assumed credits

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are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used.
 
Credits identified as BIG are subjected to further review to determine the probability of a loss. See Note 5, Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. For surveillance purposes, the Company calculates present value using a constant discount rate of 4% or 5% depending on the insurance subsidiary. (Risk-free rates are used for calculating the expected loss for financial statement measurement purposes.)
 
More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims in the future of that transaction than it will have reimbursed. The three BIG categories are:
 
•
BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
 
•
BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims, which are claims that the Company expects to be reimbursed within one year) have yet been paid.
 
•
BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Components of Outstanding Exposure

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

The Company purchases securities that it has insured, and for which it has expected losses to be paid, in order to
mitigate the economic effect of insured losses ("loss mitigation securities"). The Company excludes amounts attributable to loss mitigation securities (unless otherwise indicated) from par and debt service outstanding, because it manages such securities as investments and not insurance exposure. The following table presents the gross and net debt service for all financial guaranty contracts.

Financial Guaranty
Debt Service Outstanding

 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
 
(in millions)
Public finance
$
473,991

 
$
515,494

 
$
455,056

 
$
494,426

Structured finance
34,814

 
43,976

 
33,306

 
41,915

Total financial guaranty
$
508,805

 
$
559,470

 
$
488,362

 
$
536,341


In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $104 million as of June 30, 2016 and $102 million as of December 31, 2015, related to loans originated in Ireland. The increase in the net mortgage guaranty insurance debt service is due to exchange rate fluctuations.


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Financial Guaranty Portfolio by Internal Rating
As of June 30, 2016

 
 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 
Total
Rating
Category
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
 
(dollars in millions)
AAA
 
$
2,376

 
0.9
%
 
$
695

 
2.5
%
 
$
11,362

 
44.4
%
 
$
1,628

 
40.1
%
 
$
16,061

 
4.9
%
AA
 
59,310

 
21.8

 
1,775

 
6.3

 
6,719

 
26.3

 
149

 
3.7

 
67,953

 
20.6

A
 
142,028

 
52.2

 
6,440

 
22.9

 
2,008

 
7.9

 
457

 
11.2

 
150,933

 
45.7

BBB
 
60,132

 
22.1

 
17,840

 
63.4

 
920

 
3.6

 
1,235

 
30.4

 
80,127

 
24.3

BIG
 
8,268

 
3.0

 
1,378

 
4.9

 
4,553

 
17.8

 
591

 
14.6

 
14,790

 
4.5

Total net par outstanding (1)
 
$
272,114

 
100.0
%
 
$
28,128

 
100.0
%
 
$
25,562

 
100.0
%
 
$
4,060

 
100.0
%
 
$
329,864

 
100.0
%
_____________________
(1)
Excludes $1.4 billion of loss mitigation securities insured and held by the Company as of June 30, 2016, which are primarily BIG.


Financial Guaranty Portfolio by Internal Rating
As of December 31, 2015 

 
 
Public Finance
U.S.
 
Public Finance
Non-U.S.
 
Structured Finance
U.S
 
Structured Finance
Non-U.S
 
Total
Rating
Category
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
Net Par
Outstanding
 
%
 
 
(dollars in millions)
AAA
 
$
3,053

 
1.1
%
 
$
709

 
2.4
%
 
$
14,366

 
45.2
%
 
$
2,709

 
50.6
%
 
$
20,837

 
5.8
%
AA
 
69,274

 
23.7

 
2,017

 
6.8

 
7,934

 
25.0

 
177

 
3.3

 
79,402

 
22.1

A
 
157,440

 
53.9

 
6,765

 
22.9

 
2,486

 
7.8

 
555

 
10.3

 
167,246

 
46.7

BBB
 
54,315

 
18.6

 
18,708

 
63.2

 
1,515

 
4.8

 
1,365

 
25.5

 
75,903

 
21.2

BIG
 
7,784

 
2.7

 
1,378

 
4.7

 
5,469

 
17.2

 
552

 
10.3

 
15,183

 
4.2

Total net par outstanding (1)
 
$
291,866

 
100.0
%
 
$
29,577

 
100.0
%
 
$
31,770

 
100.0
%
 
$
5,358

 
100.0
%
 
$
358,571

 
100.0
%
_____________________
(1)
Excludes $1.5 billion of loss mitigation securities insured and held by the Company as of December 31, 2015, which are primarily BIG.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $117 million for public finance obligations as of June 30, 2016. The expiration dates for the public finance commitments range between July 1, 2016 and February 25, 2017, with $53 million expiring prior to the date of this filing. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.


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Components of BIG Portfolio

Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of June 30, 2016

 
BIG Net Par Outstanding
 
Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
U.S. public finance (1)
$
4,902

 
$
3,191

 
$
175

 
$
8,268

 
$
272,114

Non-U.S. public finance
863

 
515

 
—

 
1,378

 
28,128

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

 
 

 
 

 
 

 
 

Prime first lien
21

 
83

 
20

 
124

 
237

Alt-A first lien
120

 
42

 
459

 
621

 
1,090

Option ARM
27

 
6

 
63

 
96

 
186

Subprime
128

 
210

 
882

 
1,220

 
3,193

Second lien U.S. RMBS
22

 
73

 
1,271

 
1,366

 
1,376

Total U.S. RMBS
318

 
414

 
2,695

 
3,427

 
6,082

Triple-X life insurance transactions
—

 
—

 
216

 
216

 
2,189

Trust preferred securities (“TruPS”)
436

 
127

 
—

 
563

 
3,255

Student loans
—

 
68

 
42

 
110

 
1,645

Other structured finance
537

 
254

 
37

 
828

 
16,451

Total
$
7,056

 
$
4,569

 
$
3,165

 
$
14,790

 
$
329,864


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Components of BIG Net Par Outstanding
(Insurance and Credit Derivative Form)
As of December 31, 2015

 
BIG Net Par Outstanding
 
Net Par
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
Outstanding
 
 
 
 
 
(in millions)
 
 
 
 
U.S. public finance
$
4,765

 
$
2,883

 
$
136

 
$
7,784

 
$
291,866

Non-U.S. public finance
875

 
503

 
—

 
1,378

 
29,577

Structured finance:
 
 
 
 
 
 
 
 
 
First lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

Prime first lien
225

 
34

 
25

 
284

 
445

Alt-A first lien
119

 
73

 
601

 
793

 
1,353

Option ARM
39

 
12

 
90

 
141

 
252

Subprime
146

 
228

 
930

 
1,304

 
3,457

Second lien U.S. RMBS
491

 
50

 
910

 
1,451

 
1,560

Total U.S. RMBS
1,020

 
397

 
2,556

 
3,973

 
7,067

Triple-X life insurance transactions
—

 
—

 
216

 
216

 
2,750

TruPS
679

 
127

 
—

 
806

 
4,379

Student loans
12

 
68

 
83

 
163

 
1,818

Other structured finance
672

 
151

 
40

 
863

 
21,114

Total
$
8,023

 
$
4,129

 
$
3,031

 
$
15,183

 
$
358,571

_____________________
(1)
Subsequent to June 30, 2016, and as a result of its July 1, 2016 Puerto Rico claim payments, the Company downgraded from BIG 1 to BIG 3 $1,803 million net par outstanding of financial guaranty insurance across two risks.
.


BIG Net Par Outstanding
and Number of Risks
As of June 30, 2016

 
 
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 (3)
 
$
6,546

 
$
510

 
$
7,056

 
198

 
10

 
208

Category 2
 
4,119

 
450

 
4,569

 
76

 
5

 
81

Category 3 (3)
 
3,039

 
126

 
3,165

 
131

 
12

 
143

Total BIG
 
$
13,704

 
$
1,086

 
$
14,790

 
405

 
27

 
432




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 BIG Net Par Outstanding
and Number of Risks
As of December 31, 2015

 
 
Net Par Outstanding
 
Number of Risks(2)
Description
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
Financial
Guaranty
Insurance(1)
 
Credit
Derivative
 
Total
 
 
(dollars in millions)
BIG:
 
 

 
 

 
 

 
 

 
 

 
 

Category 1
 
$
7,019

 
$
1,004

 
$
8,023

 
202

 
12

 
214

Category 2
 
3,655

 
474

 
4,129

 
85

 
8

 
93

Category 3
 
2,900

 
131

 
3,031

 
132

 
12

 
144

Total BIG
 
$
13,574

 
$
1,609

 
$
15,183

 
419

 
32

 
451

_____________________
(1)    Includes net par outstanding for 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.

(3)
Subsequent to June 30, 2016, and as a result of its July 1, 2016 Puerto Rico claim payments, the Company downgraded from BIG 1 to BIG 3 $1,803 million net par outstanding of financial guaranty insurance across two risks.
         

Exposure to Puerto Rico
    
The Company has insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (“Puerto Rico” or the “Commonwealth”) and various obligations of its related authorities and public corporations aggregating $5.1 billion net par as of June 30, 2016, all of which are rated BIG.

Puerto Rico has experienced significant general fund budget deficits in recent years. In addition to high debt levels, Puerto Rico faces a challenging economic environment; the economy has declined nearly every year since 2007, while the population has shrunk every year since 2006 as residents have emigrated.

On June 28, 2015, Governor García Padilla of Puerto Rico (the "Governor") publicly stated that the Commonwealth’s public debt, considering the current level of economic activity, was unpayable and that a comprehensive debt restructuring might be necessary.

On November 30, 2015 and December 8, 2015, the Governor issued executive orders (“Clawback Orders”) directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company to retain or transfer certain taxes pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA"), Puerto Rico Infrastructure Financing Authority ("PRIFA"), and Puerto Rico Convention Center District Authority ("PRCCDA"). On January 7, 2016, the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico, asserting that this attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief. The Puerto Rico credits insured by the Company subject to the Clawback Orders are shown in the table “Puerto Rico Net Par Outstanding” below.

On January 1, 2016, PRIFA defaulted on payment of a portion of the interest due on its bonds on that date, resulting in a claim on the Company for those PRIFA bonds the Company insures. There have been additional payment defaults on this and other Puerto Rico credits since then, including, on July 1, 2016, a default on the payment of the Commonwealth’s general obligation bonds. The Company has now paid claims on several Puerto Rico credits as shown in the table “Puerto Rico Net Par Outstanding” below.

On April 6, 2016, the Governor signed into law the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act (the “Moratorium Act”). The Moratorium Act purportedly empowers the Governor to declare, entity by entity, states of emergencies and moratoriums on debt service payments on obligations of the Commonwealth and its related authorities and public corporations, as well as instituting a stay against related litigation, among other things. The Governor has used the

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authority of the Moratorium Act to take a number of actions related to issuers of obligations the Company insures. National Public Finance Guarantee Corp. (another financial guarantor), holders of the Commonwealth general obligation bonds and certain Puerto Rico residents have filed suits to invalidate the Moratorium Act, and on July 21, 2016, the Company filed a motion and form of complaint in the U.S. District Court for the District of Puerto Rico seeking relief from the stay of litigation imposed by the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to seek a declaration that the Moratorium Act is preempted by Federal bankruptcy law.

On June 13, 2016, the Supreme Court of the United States affirmed rulings of lower courts finding that the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which was enacted by Puerto Rico in June 2014 in order to provide a legislative framework for certain public corporations experiencing severe financial stress to restructure their debt, was preempted by the U.S. Bankruptcy Code and therefore void.

On June 30, 2016, PROMESA was signed into law by the President of the United States. PROMESA establishes a seven-member federal financial oversight board (“Oversight Board”) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. PROMESA provides a legal framework under which the debt of the Commonwealth and its related authorities and public corporations may be voluntarily restructured, and grants the Oversight Board the sole authority to file restructuring petitions in a federal court to restructure the debt of the Commonwealth and its related authorities and public corporations if voluntary negotiations fail, provided that any such restructuring must be in accordance with an Oversight Board approved fiscal plan that respects the liens and priorities provided under Puerto Rico law. PROMESA also appears to preempt at least portions of the Moratorium Act and appears to stay debt-related litigation, possibly including the Company’s litigation regarding the Clawback Orders. Members of the Oversight Board have yet to be named.

The final shape, timing and validity of responses to Puerto Rico’s distress eventually enacted or implemented under the auspices of PROMESA and the Oversight Board or otherwise, and the impact of any such responses on obligations insured by the Company, is uncertain.

The Company groups its Puerto Rico exposure into three categories:

•
Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.

•
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures. As a Constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year.  The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to clawback revenues supporting debt insured by the Company. As noted above, the Company sued various Puerto Rico governmental officials in the United States District Court, District of Puerto Rico asserting that Puerto Rico's recent attempt to “claw back” pledged taxes is unconstitutional, and demanding declaratory and injunctive relief.

•
Other Public Corporations. The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.

Constitutionally Guaranteed

General Obligation. As of June 30, 2016, the Company had $1,615 million insured net par outstanding of the general obligations of Puerto Rico, which are supported by the good faith, credit and taxing power of the Commonwealth. On July 1, 2016, despite the requirements of Article VI of its Constitution but pursuant to an executive order issued by the Governor under the Moratorium Act, the Commonwealth defaulted on most of the debt service payment due that day, and the Company made its first claim payments on these bonds.

Puerto Rico Public Buildings Authority (“PBA”). As of June 30, 2016, the Company had $188 million insured net par outstanding of PBA bonds, which are supported by a pledge of the rents due under leases of government facilities to departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power. On July 1, 2016, despite the requirements of Article VI of its Constitution but pursuant to an executive order issued by the Governor under the Moratorium

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Act, the PBA defaulted on most of the debt service payment due that day, and the Company made its first claim payments on these bonds.

Public Corporations - Certain Revenues Potentially Subject to Clawback

PRHTA. As of June 30, 2016, the Company had $910 million insured net par outstanding of PRHTA (Transportation revenue) bonds and $369 million insured net par of PRHTA (Highways revenue) bonds. The transportation revenue bonds are secured by a subordinate gross pledge of gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on up to $120 million annually of taxes on crude oil, unfinished oil and derivative products. The highways revenue bonds are secured by a gross pledge of gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls. The Clawback Orders cover Commonwealth-derived taxes that are allocated to PRHTA. The Company believes that such sources represented a substantial majority of PRHTA’s revenues in 2015. The PRHTA bonds are subject to executive orders issued pursuant to the Moratorium Act. As noted above, the Company filed a motion and form of complaint in the U.S. District Court for the District of Puerto Rico seeking relief from the PROMESA stay to seek a declaration that the Moratorium Act is preempted by Federal bankruptcy law and that certain gubernatorial executive orders diverting PRHTA pledged toll revenues (which are not subject to the Clawback Orders) are preempted by PROMESA and violate the U.S. Constitution, and also seeking damages and injunctive relief. There were sufficient funds in the PRHTA bond accounts to make the July 1, 2016, PRHTA debt service payments guaranteed by the Company, and those payments were made in full.

PRCCDA. As of June 30, 2016, the Company had $164 million insured net par outstanding of PRCCDA bonds, which are secured by certain hotel tax revenues. These revenues are sensitive to the level of economic activity in the area and are subject to the Clawback Orders, and the bonds are subject to an executive order issued pursuant to the Moratorium Act. There were sufficient funds in the PRCCDA bond accounts to make the July 1, 2016 PRCCDA bond payments guaranteed by the Company, and those payments were made in full.

PRIFA. As of June 30, 2016, the Company had $18 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to Puerto Rico of federal excise taxes paid on rum. These revenues are subject to the Clawback Orders and the bonds are subject to an executive order issued pursuant to the Moratorium Act. The Company made its first claim payment on PRIFA bonds in January 2016, and has continued to make claim payments on PRIFA bonds.

Other Public Corporations

Puerto Rico Electric Power Authority ("PREPA"). As of June 30, 2016, the Company had $744 million insured net par outstanding of PREPA obligations, which are payable from a pledge of net revenues of the electric system.

On December 24, 2015, AGM and AGC entered into a Restructuring Support Agreement (“RSA”) with PREPA, an ad hoc group of uninsured bondholders and a group of fuel-line lenders that would, subject to certain conditions, result in, among other things, modernization of the utility and a restructuring of current debt. Upon finalization of the contemplated restructuring transaction, insured PREPA revenue bonds (with no reduction to par or stated interest rate or extension of maturity) will be supported by securitization bonds issued by a special purpose corporation and secured by a transition charge assessed on ratepayers. To facilitate the securitization transaction and in exchange for a market premium, Assured Guaranty will issue surety insurance policies in an aggregate amount not expected to exceed $113 million ($14 million for AGC and $99 million for AGM) to support a portion of the reserve fund for the securitization bonds. Certain of the creditors also agreed, subject to certain conditions, to participate in a bridge financing, which was closed in two tranches on May 19, 2016 and June 22, 2016. AGM's and AGC's share of the bridge financing was approximately $15 million ($2 million for AGC and $13 million for AGM). Legislation meeting the requirements of the RSA was enacted on February 16, 2016, and a transition charge to be paid by PREPA rate payers for debt service on the securitization bonds as contemplated by the RSA was approved by the Puerto Rico Energy Commission on June 20, 2016. The closing of the restructuring transaction and the issuance of the surety bonds are subject to certain conditions, including execution of acceptable documentation and legal opinions.

On July 1, 2016, PREPA made full payment of the $41 million of principal and interest due on PREPA revenue bonds insured by AGM and AGC. That payment was funded in part by AGM’s purchase of $26 million of PREPA bonds maturing in 2020. Upon finalization of the RSA, these new PREPA revenue bonds will be supported by securitization bonds contemplated by the RSA. In early 2016, PREPA repaid in full the $74 million in aggregate principal amount of PREPA revenue bonds purchased by AGM and AGC in July 2015 to replenish some of the operating funds PREPA used to make the July 2015 payments on the PREPA revenue bonds insured by AGM and AGC.

There can be no assurance that the conditions in the RSA will be met or that, if the conditions are met, the RSA's other provisions, including those related to the insured PREPA revenue bonds, will be implemented. In addition, the impact of

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PROMESA and the Moratorium Act or any attempt to exercise the power purportedly granted by the Moratorium Act on the implementation of the RSA is uncertain. PREPA, during the pendency of the agreements, has suspended deposits into its debt service fund.

Puerto Rico Aqueduct and Sewer Authority (“PRASA”). As of June 30, 2016, the Company had $388 million of insured net par outstanding to PRASA bonds, which are secured by the gross revenues of the water and sewer system. On September 15, 2015, PRASA entered into a settlement with the U.S.Department of Justice and the U.S. Environmental Protection Agency that requires it to spend $1.6 billion to upgrade and improve its sewer system island-wide. According to a material event notice PRASA filed on March 4, 2016, PRASA owed its contractors $140 million. The PRASA Revitalization Act, which establishes a securitization mechanism that could facilitate debt issuance, was signed into law on July 13, 2016. While certain bonds benefiting from a guarantee by the Commonwealth are subject to an executive order issued under the Moratorium Act, bonds insured by the Company are not subject to that order. There were sufficient funds in the PRASA bond accounts to make the July 1, 2016, PRASA bond payments guaranteed by the Company, and those payments were made in full.
    
Municipal Finance Agency ("MFA"). As of June 30, 2016, the Company had $387 million net par outstanding of bonds issued by MFA secured by a pledge of local property tax revenues. There were sufficient funds in the MFA bond accounts to make the July 1, 2016 MFA bond payments guaranteed by the Company, and those payments were made in full.

Puerto Rico Sales Tax Financing Corporation (“COFINA”). As of June 30, 2016, the Company had $270 million insured net par outstanding of junior COFINA bonds, which are secured primarily by a second lien on certain sales and use taxes. There were no debt service payments due on July 1, 2016 on Company-insured COFINA bonds, and, as of the date of this filing, all payments on Company-insured COFINA bonds had been made.

University of Puerto Rico (“U of PR”). As of June 30, 2016, the Company had $1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the University, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds. The U of PR bonds are subject to an executive order issued under the Moratorium Act. There were no debt service payments due on July 1, 2016 on Company-insured U of PR bonds, and, as of the date of this filing, all payments on Company-insured U of PR bonds had been made.

All Puerto Rico exposures are internally rated triple-C or below. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

Puerto Rico
Gross Par and Gross Debt Service Outstanding

 
Gross Par Outstanding
 
Gross Debt Service Outstanding
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
 
(in millions)
Exposure to Puerto Rico
$
5,756

 
$
5,755

 
$
9,483

 
$
9,632




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Puerto Rico
Net Par Outstanding

 
As of
June 30, 2016
 
As of
December 31, 2015
 
(in millions)
Commonwealth Constitutionally Guaranteed
 
 
 
Commonwealth of Puerto Rico - General Obligation Bonds (1)
$
1,615

 
$
1,615

Puerto Rico Public Buildings Authority (1)
188

 
188

Public Corporations - Certain Revenues Potentially Subject to Clawback
 
 
 
PRHTA (Transportation revenue)
910

 
909

PRHTA (Highways revenue)
369

 
370

PRCCDA
164

 
164

PRIFA (1)
18

 
18

Other Public Corporations
 
 
 
PREPA
744

 
744

PRASA
388

 
388

MFA
387

 
387

COFINA
270

 
269

U of PR
1

 
1

Total net exposure to Puerto Rico
$
5,054

 
$
5,053

____________________
(1)
As of the date of this filing, the Company has paid claims on these credits.


18
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The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.
     
Amortization Schedule of Puerto Rico Net Par Outstanding
and Net Debt Service Outstanding
As of June 30, 2016

 
Scheduled Net Par Amortization
 
Scheduled Net Debt Service Amortization
 
(in millions)
2016 (July 1 – September 30)
$
302

 
$
428

2016 (October 1 – December 31)
0

 
2

2017
222

 
463

2018
179

 
410

2019
204

 
424

2020
270

 
482

2021
125

 
323

2022
115

 
305

2023
150

 
338

2024
174

 
352

2025
196

 
366

2026-2030
943

 
1,633

2031-2035
1,131

 
1,599

2036-2040
579

 
780

2041-2045
296

 
380

2046-2047
168

 
181

Total
$
5,054

 
$
8,466



Exposure to Selected European Countries

The European countries where the Company has exposure and believes heightened uncertainties exist are: Hungary, Italy, Portugal, Spain and Turkey (collectively, the “Selected European Countries”). The Company added Turkey to its list of Selected European Countries as of June 30, 2016, as a result of the recent political turmoil in the country. The Company’s direct economic exposure to the Selected European Countries (based on par for financial guaranty contracts and notional amount for financial guaranty contracts accounted for as derivatives) is shown in the following table, net of ceded reinsurance.

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Table of Contents

Net Direct Economic Exposure to Selected European Countries(1)
As of June 30, 2016

 
Hungary
 
Italy
 
Portugal
 
Spain
 
Turkey
 
Total
 
(in millions)
Sub-sovereign exposure(2)
$
265

 
$
793

 
$
80

 
$
366

 
$
—

 
$
1,504

Non-sovereign exposure(3)
174

 
432

 
—

 
—

 
204

 
810

Total
$
439

 
$
1,225

 
$
80

 
$
366

 
$
204

 
$
2,314

Total BIG (See Note 5)
$
369

 
$
—

 
$
80

 
$
366

 
$
—

 
$
815

____________________
(1)
While the Company’s exposures are shown in U.S. dollars, the obligations the Company insures are in various currencies, primarily Euros.
 
(2)
Sub-sovereign exposure in Selected European Countries includes transactions backed by receivables from or supported by sub-sovereigns, which are governmental or government-backed entities other than the ultimate governing body of the country.

(3)
Non-sovereign exposure in Selected European Countries includes debt of regulated utilities, RMBS and diversified payment rights ("DPR") securitizations.

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on pooled corporate and commercial receivables transactions. The Company calculates indirect exposure to a country by multiplying the par amount of a transaction insured by the Company times the percent of the relevant collateral pool reported as having a nexus to the country. On that basis, the Company has calculated exposure of $203 million to Selected European Countries (plus Greece) in transactions with $3.5 billion of net par outstanding. The indirect exposure to credits with a nexus to Greece is $4 million across several highly rated pooled corporate obligations with net par outstanding of $192 million.

The $204 million net insured par exposure in Turkey is to DPR securitizations sponsored by a major Turkish bank. These DPR securitizations were established outside of Turkey and involve payment orders in U.S. dollars, pounds sterling and Euros from persons outside of Turkey to beneficiaries in Turkey who are customers of the sponsoring bank. The sponsoring bank's correspondent banks have agreed to remit all such payments to a trustee-controlled account outside Turkey, where debt service payments for the DPR securitization are given priority over payments to the sponsoring bank.

5.
Expected Loss to be Paid
 
Loss Estimation Process

This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio, regardless of the accounting model. The Company’s loss reserve committees estimate expected loss to be paid for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments.

The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances, the Company has no right to cancel such financial guaranties. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a quarter, and as a result the Company’s loss estimates may change materially over that same period.

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

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considerable volatility and may not reflect the Company's ultimate claims paid. For information on the Company's loss estimation process, please refer to Note 5, Expected Losses to be Paid, of Part II, Item 8, Financial Statements and Supplementary Data in AGL's Annual Report on Form 10-K for the year ended December 31, 2015.

The following tables present a roll forward of the present value of net expected loss to be paid for all contracts, whether accounted for as insurance, credit derivatives or financial guaranty ("FG") VIEs, by sector, after the benefit for expected recoveries for breaches of representations and warranties ("R&W") and other expected recoveries. The Company used weighted average risk-free rates for U.S. dollar denominated obligations that ranged from 0.0% to 2.46% as of June 30, 2016 and 0.0% to 3.25% as of December 31, 2015.

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward

 
Second Quarter
 
Six Months
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Net expected loss to be paid, beginning of period
$
1,337

 
$
1,154

 
$
1,391

 
$
1,169

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

 
190

 
—

 
190

Economic loss development due to:
 
 
 
 
 
 
 
Accretion of discount
6

 
7

 
15

 
14

Changes in discount rates
45

 
(47
)
 
108

 
(40
)
Changes in timing and assumptions
(29
)
 
232

 
(42
)
 
215

Total economic loss development
22

 
192

 
81

 
189

Paid losses
(33
)
 
(26
)
 
(146
)
 
(38
)
Net expected loss to be paid, end of period
$
1,326

 
$
1,510

 
$
1,326

 
$
1,510






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Table of Contents

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
Second Quarter 2016

 
Net Expected
Loss to be
Paid 
(Recovered)
as of
March 31, 2016
 
Economic Loss
Development
 
(Paid)
Recovered
Losses (1)
 
Net Expected
Loss to be
Paid 
(Recovered)
as of
June 30, 2016 (2)
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
864

 
$
111

 
$
(12
)
 
$
963

Non-U.S. public finance
39

 
(2
)
 
—

 
37

Public Finance
903

 
109

 
(12
)
 
1,000

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

Prime first lien
(1
)
 
0

 
4

 
3

Alt-A first lien
36

 
(38
)
 
(94
)
 
(96
)
Option ARM
(47
)
 
(10
)
 
1

 
(56
)
Subprime
240

 
(26
)
 
13

 
227

Total first lien
228

 
(74
)
 
(76
)
 
78

Second lien
65

 
(7
)
 
56

 
114

Total U.S. RMBS
293

 
(81
)
 
(20
)
 
192

Triple-X life insurance transactions
102

 
(2
)
 
0

 
100

Student loans
32

 
(1
)
 
0

 
31

Other structured finance
7

 
(3
)
 
(1
)
 
3

Structured Finance
434

 
(87
)
 
(21
)
 
326

Total
$
1,337

 
$
22

 
$
(33
)
 
$
1,326




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Table of Contents

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
Second Quarter 2015

 
Net Expected
Loss to be
Paid 
(Recovered)
as of
March 31, 2015
 
Net Expected
Loss to be
Paid 
(Recovered)
on Radian Asset portfolio as of
April 1, 2015
 
Economic Loss
Development
 
(Paid)
Recovered
Losses (1)
 
Net Expected
Loss to be
Paid 
(Recovered)
as of
June 30, 2015
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
 
 
U.S. public finance
$
310

 
$
81

 
$
226

 
$
(4
)
 
$
613

Non-U.S public finance
42

 
4

 
(2
)
 
—

 
44

Public Finance
352

 
85

 
224

 
(4
)
 
657

Structured Finance:
 
 
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

 
 

Prime first lien
3

 
—

 
(1
)
 
(1
)
 
1

Alt-A first lien
289

 
7

 
(16
)
 
(15
)
 
265

Option ARM
(16
)
 
0

 
(3
)
 
1

 
(18
)
Subprime
293

 
(4
)
 
(6
)
 
(10
)
 
273

Total first lien
569

 
3

 
(26
)
 
(25
)
 
521

Second lien
1

 
1

 
(6
)
 
7

 
3

Total U.S. RMBS
570

 
4

 
(32
)
 
(18
)
 
524

Triple-X life insurance transactions
165

 
—

 
2

 
(2
)
 
165

Student loans
62

 
—

 
1

 
(5
)
 
58

Other structured finance
5

 
101

 
(3
)
 
3

 
106

Structured Finance
802

 
105

 
(32
)
 
(22
)
 
853

Total
$
1,154

 
$
190

 
$
192

 
$
(26
)
 
$
1,510


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Table of Contents

Net Expected Loss to be Paid
After Net Expected Recoveries for Breaches of R&W
Roll Forward by Sector
Six Months 2016

 
Net Expected
Loss to be
Paid 
(Recovered)
as of
December 31, 2015 (2)
 
Economic Loss
Development
 
(Paid)
Recovered
Losses (1)
 
Net Expected
Loss to be
Paid 
(Recovered)
as of
June 30, 2016 (2)
 
(in millions)
Public Finance:
 
 
 
 
 
 
 
U.S. public finance
$
771

 
$
209

 
$
(17
)
 
$
963

Non-U.S. public finance
38

 
(1
)
 
—

 
37

Public Finance
809

 
208

 
(17
)
 
1,000

Structured Finance:
 
 
 
 
 
 
 
U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

Prime first lien
(2
)
 
0

 
5

 
3

Alt-A first lien
127

 
(54
)
 
(169
)
 
(96
)
Option ARM
(28
)
 
(31
)
 
3

 
(56
)
Subprime
251

 
(25
)
 
1

 
227

Total first lien
348

 
(110
)
 
(160
)
 
78

Second lien
61

 
(2
)
 
55

 
114

Total U.S. RMBS
409