AGO-6.30.2012-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012 
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 1, 2012 was 194,067,746 (includes 88,549 unvested restricted shares).

 
 

Table of Contents

ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

ITEM 1.
Financial Statements


1
Table of Contents

Assured Guaranty Ltd.

Consolidated Balance Sheets (unaudited)
 
(dollars in thousands except per share and share amounts)
 
 
As of
June 30, 2012
 
As of
December 31, 2011
Assets
 

 
 

Investment portfolio:
 

 
 

Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,618,789 and $9,638,404)
$
10,207,514

 
$
10,141,850

Short term investments, at fair value
919,784

 
734,046

Other invested assets
194,447

 
222,869

Total investment portfolio
11,321,745

 
11,098,765

Cash
175,347

 
214,544

Premiums receivable, net of ceding commissions payable
964,063

 
1,002,852

Ceded unearned premium reserve
590,781

 
708,872

Deferred acquisition costs
126,755

 
132,418

Reinsurance recoverable on unpaid losses
170,495

 
69,300

Salvage and subrogation recoverable
376,760

 
367,718

Credit derivative assets
429,891

 
468,933

Deferred tax asset, net
815,084

 
803,529

Current income tax receivable
63,192

 
76,430

Financial guaranty variable interest entities’ assets, at fair value
2,725,979

 
2,819,077

Other assets
314,372

 
262,222

Total assets
$
18,074,464

 
$
18,024,660

Liabilities and shareholders’ equity
 

 
 

Unearned premium reserve
$
5,583,380

 
$
5,962,799

Loss and loss adjustment expense reserve
995,217

 
679,011

Reinsurance balances payable, net
186,676

 
170,982

Long-term debt
846,354

 
1,038,302

Credit derivative liabilities
2,095,852

 
1,772,803

Financial guaranty variable interest entities’ liabilities with recourse, at fair value
2,239,067

 
2,396,945

Financial guaranty variable interest entities’ liabilities without recourse, at fair value
1,042,275

 
1,061,497

Other liabilities
361,577

 
290,756

Total liabilities
13,350,398

 
13,373,095

Commitments and contingencies (See Note 12)

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 193,956,481 and 182,235,798 shares issued and outstanding in 2012 and 2011)
1,939

 
1,822

Additional paid-in capital
2,719,988

 
2,569,922

Retained earnings
1,568,397

 
1,707,922

Accumulated other comprehensive income, net of tax of $159,679 and $135,344
429,342

 
367,499

Deferred equity compensation (320,193 shares in 2012 and 2011)
4,400

 
4,400

Total shareholders’ equity
4,724,066

 
4,651,565

Total liabilities and shareholders’ equity
$
18,074,464

 
$
18,024,660

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

 

2
Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Operations (unaudited)
 
(dollars in thousands except per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 

 
 

 
 
 
 
Net earned premiums
$
219,299

 
$
230,068

 
$
412,976

 
$
484,045

Net investment income
101,588

 
102,591

 
199,350

 
200,003

Net realized investment gains (losses):
 

 
 

 
 

 
 

Other-than-temporary impairment losses
(9,042
)
 
(26,818
)
 
(36,386
)
 
(33,765
)
Less: portion of other-than-temporary impairment loss recognized in other comprehensive income
(7,201
)
 
(15,240
)
 
(29,666
)
 
(17,609
)
Other net realized investment gains (losses)
(1,315
)
 
6,488

 
4,880

 
13,872

Net realized investment gains (losses)
(3,156
)
 
(5,090
)
 
(1,840
)
 
(2,284
)
Net change in fair value of credit derivatives:
 

 
 

 
 
 
 
Realized gains (losses) and other settlements
(22,664
)
 
(10,836
)
 
(79,545
)
 
24,591

Net unrealized gains (losses)
283,327

 
(54,059
)
 
(350,431
)
 
(325,695
)
Net change in fair value of credit derivatives
260,663

 
(64,895
)
 
(429,976
)
 
(301,104
)
Fair value gain (loss) on committed capital securities
4,290

 
569

 
(9,614
)
 
1,095

Fair value gains (losses) on financial guaranty variable interest entities
172,356

 
(174,286
)
 
135,754

 
(54,685
)
Other income
4,458

 
27,337

 
95,442

 
68,137

Total revenues
759,498

 
116,294

 
402,092

 
395,207

Expenses


 


 


 


Loss and loss adjustment expenses
122,446

 
123,913

 
369,293

 
98,333

Amortization of deferred acquisition costs
4,526

 
5,810

 
9,939

 
9,472

Interest expense
25,426

 
24,696

 
50,099

 
49,456

Other operating expenses
53,447

 
53,249

 
114,727

 
116,132

Total expenses
205,845

 
207,668

 
544,058

 
273,393

Income (loss) before income taxes
553,653

 
(91,374
)
 
(141,966
)
 
121,814

Provision (benefit) for income taxes
 

 
 

 
 

 
 

Current
(29,132
)
 
9,864

 
396

 
(187,735
)
Deferred
206,237

 
(58,133
)
 
(35,886
)
 
213,398

Total provision (benefit) for income taxes
177,105

 
(48,269
)
 
(35,490
)
 
25,663

Net income (loss)
$
376,548

 
$
(43,105
)
 
$
(106,476
)
 
$
96,151

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
2.02

 
(0.23
)
 
(0.58
)
 
0.52

Diluted
2.01

 
(0.23
)
 
(0.58
)
 
0.51

Dividends per share
0.09

 
0.045

 
0.18

 
0.09

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

3
Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (unaudited)
 
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income (loss)
$
376,548

 
$
(43,105
)
 
$
(106,476
)
 
$
96,151

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

 
 

 
 

 
 

Investments with no other-than-temporary impairment, net of tax provision (benefit) of $8,333, $61,394, $27,382 and $41,762
31,925

 
127,198

 
74,048

 
80,808

Investments with other-than-temporary impairment, net of tax provision (benefit) of $(1,141), $(5,323), $(8,486) and $3,872
(4,321
)
 
(12,389
)
 
(18,057
)
 
8,456

Unrealized holding gains (losses) arising during the period, net of tax
27,604

 
114,809

 
55,991

 
89,264

Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $(3,975), $(1,743), $(5,247), and $(1,571)
(4,637
)
 
(4,227
)
 
(5,493
)
 
(3,198
)
Change in net unrealized gains on investments
32,241

 
119,036

 
61,484

 
92,462

Change in cumulative translation adjustment, net of tax provision (benefit) of $(636), $191, $305 and $860
(1,182
)
 
346

 
568

 
1,589

Change in cash flow hedge, net of tax provision (benefit) of $(57), $(57), $(113) and $(113)
(104
)
 
(104
)
 
(209
)
 
(209
)
Other comprehensive income (loss)
30,955

 
119,278

 
61,843

 
93,842

Comprehensive income (loss)
$
407,503

 
$
76,173

 
$
(44,633
)
 
$
189,993

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

4
Table of Contents

Assured Guaranty Ltd.

Consolidated Statement of Shareholders’ Equity (unaudited)
 
For the Six Months Ended, June 30, 2012
 
(dollars in thousands, except share data)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income
 
Deferred
Equity Compensation
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2011
182,235,798

 
$
1,822

 
$
2,569,922

 
$
1,707,922

 
$
367,499

 
$
4,400

 
$
4,651,565

Net loss
—

 
—

 
—

 
(106,476
)
 
—

 
—

 
(106,476
)
Dividends ($0.18 per share)
—

 
—

 
—

 
(32,878
)
 
—

 
—

 
(32,878
)
Dividends on restricted stock units
—

 
—

 
171

 
(171
)
 
—

 
—

 
—

Common stock issuance, net
13,428,770

 
134

 
172,366

 
—

 
—

 
—

 
172,500

Common stock repurchases
(2,066,759
)
 
(21
)
 
(24,292
)
 
—

 
—

 
—

 
(24,313
)
Share-based compensation and other
358,672

 
4

 
1,821

 
—

 
—

 
—

 
1,825

Other comprehensive income
—

 
—

 
—

 
—

 
61,843

 
—

 
61,843

Balance at June 30, 2012
193,956,481

 
$
1,939

 
$
2,719,988

 
$
1,568,397

 
$
429,342

 
$
4,400

 
$
4,724,066

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


5
Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (unaudited)
 
(in thousands)
 
 
Six Months Ended June 30,
 
2012
 
2011
Net cash flows provided by (used in) operating activities
$
162,138

 
$
631,946

Investing activities
 

 
 

Fixed maturity securities:
 

 
 

Purchases
(923,704
)
 
(1,349,745
)
Sales
525,523

 
685,980

Maturities
514,725

 
325,750

Net sales (purchases) of short-term investments
(108,014
)
 
(49,901
)
Net proceeds from paydowns on financial guaranty variable interest entities’ assets
282,790

 
423,977

Acquisition of MIAC, net of cash acquired
(91,094
)
 
—

Other
73,232

 
8,696

Net cash flows provided by (used in) investing activities
273,458

 
44,757

Financing activities
 

 
 

Proceeds from issuances of common stock
172,500

 
—

Dividends paid
(32,878
)
 
(16,577
)
Repurchases of common stock
(24,313
)
 
—

Share activity under option and incentive plans
(2,209
)
 
(2,652
)
Net paydowns of financial guaranty variable interest entities’ liabilities
(388,576
)
 
(593,294
)
Repayment of long-term debt
(195,668
)
 
(10,294
)
Net cash flows provided by (used in) financing activities
(471,144
)
 
(622,817
)
Effect of exchange rate changes
(3,649
)
 
3,215

Increase (decrease) in cash
(39,197
)
 
57,101

Cash at beginning of period
214,544

 
108,389

Cash at end of period
$
175,347

 
$
165,490

Supplemental cash flow information
 

 
 

Cash paid (received) during the period for:
 

 
 

Income taxes
$
(15,500
)
 
$
89,202

Interest
$
46,787

 
$
45,711

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

6
Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited)
 
June 30, 2012 
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, infrastructure and structured finance markets. The Company has applied its credit underwriting judgment, risk management skills and capital markets experience to offer insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The securities insured by the Company include tax-exempt and taxable obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities that are generally issued by special purpose entities. The Company markets its credit protection products directly to issuers and underwriters of public finance, infrastructure and structured finance securities as well as to investors in such debt obligations. The Company guarantees debt obligations issued in many countries, although its principal focus is on the U.S., Europe and Australia.

Financial guaranty insurance policies provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest ("Debt Service") when due. Upon an obligor’s default on scheduled principal or interest payments due on the obligation, the Company is required under the financial guaranty policy to pay the principal or interest shortfall. The Company has issued financial guaranty insurance policies on both public finance obligations and structured finance obligations. Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the issuers’ taxing powers, tax-supported bonds and revenue bonds and other obligations of states, their political subdivisions and other municipal issuers supported by the issuers’ or obligors’ covenant to impose and collect fees and charges for public services or specific projects. Public finance obligations include obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including government office buildings, toll roads, health care facilities and utilities. Structured finance obligations insured by the Company are generally issued by special purpose entities and backed by pools of assets such as residential or commercial mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. The Company also insures other specialized financial obligations.
 
In the past, the Company had sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives. Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty insurance contracts and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents, with respect to one or more third party referenced securities or loans. Financial guaranty contracts accounted for as credit derivatives are primarily comprised of credit default swaps (“CDS”). The Company’s credit derivative transactions are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation.
 
The Company has not entered into any new CDS in order to sell credit protection since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) also contributed to the decision of the Company not to enter into such new CDS in the foreseeable future. The Company actively pursues opportunities to terminate existing CDS and, in certain cases, has converted existing CDS exposure into a financial guaranty insurance contract. These actions have the effect of reducing future fair value volatility in income and/or reducing rating agency capital charges.
 
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. In January 2012, two of AGL's operating subsidiaries, Assured Guaranty Municipal Corp. (“AGM”) and Assured Guaranty Corp. (“AGC”), entered into a $435 million excess of loss reinsurance facility with third-party reinsurers, which reduced rating agency capital charges. The Company also has been reassuming previously ceded business from reinsurers. In the three-month period ended March 31, 2012 (“First Quarter 2012”), the Company reassumed a total of $19.1 billion in par from two reinsurers. See Note 11, Reinsurance and Other Monoline Exposures.
 

7
Table of Contents

 
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 nationally recognized statistical rating organizations (“NRSROs”) 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 models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.
 
Unless otherwise noted, ratings disclosed herein on Assured Guaranty’s insured portfolio reflect Assured Guaranty’s internal ratings. Assured Guaranty’s ratings scale is similar to that used by the NRSROs; however, the ratings in these financial statements may not be the same as those assigned by any such rating agency. For example, the super senior category, which is not generally used by rating agencies, is used by Assured Guaranty in instances where Assured Guaranty’s AAA-rated exposure on its internal rating scale (which does not take into account Assured Guaranty’s financial guaranty) has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to Assured Guaranty’s exposure or (2) Assured Guaranty’s exposure benefiting from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management’s opinion, causes Assured Guaranty’s attachment point to be materially above the AAA attachment point.
 
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, 2012 and cover the three-month period ended June 30, 2012 ("Second Quarter, 2012"), the three-month period ended June 30, 2011 ("Second Quarter 2011"), the six-month period ended June 30, 2012 ("Six Months 2012") and the six-month period ended June 30, 2011 ("Six Months 2011"). The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
 
The unaudited interim consolidated financial statements include the accounts of AGL and 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. 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, 2011, filed with the U.S. Securities and Exchange Commission (the “SEC”).
 
AGL’s principal insurance company subsidiaries are AGC, domiciled in Maryland; AGM, domiciled in New York; and Assured Guaranty Re Ltd. (“AG Re”), domiciled in Bermuda. In addition, the Company has another U.S. and another Bermuda insurance company subsidiary that participate in a pooling agreement with AGM, two insurance subsidiaries organized in the United Kingdom, and a mortgage insurance company domiciled in New York. On May 31, 2012, the Company completed the purchase of Municipal and Infrastructure Assurance Corporation ("MIAC"), which is domiciled in New York. See Note 2. The Company’s organizational structure includes various holdings companies, two of which—Assured Guaranty US Holdings Inc. (“AGUS”) and Assured Guaranty Municipal Holdings Inc. (“AGMH”)—have public debt outstanding. See Note 13, Long Term Debt and Credit Facilities.

2.
Business Changes, Risks, Uncertainties and Accounting Developments
 
Summarized below are updates of the most significant recent events that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company.

8
Table of Contents

 
Rating Actions
 
Standard and Poor’s Ratings Services (“S&P”) and Moody’s Investors Service, Inc (“Moody’s”) have downgraded the financial strength ratings of all the Company’s insurance subsidiaries over the course of the last several years. On March 20, 2012, Moody’s placed the ratings of AGL and its Subsidiaries, including the insurance financial strength rating of the Company’s insurance subsidiaries, other than the newly acquired MIAC subsidiary, on review for possible downgrade. There can be no assurance that S&P and Moody’s will not take further action on the Company’s ratings. See Note 4, Financial Guaranty Insurance Contracts, Note 6, Financial Guaranty Contracts Accounted for as Credit Derivatives and Note 11, Reinsurance and Other Monoline Exposure for more information regarding the effect of S&P and Moody’s rating actions on the Company. See also Note 13, Long Term Debt and Credit Facilities for a discussion of the impact of a downgrade in the financial strength rating on the Company's insured leveraged lease transactions and Note 12, Commitments and Contingencies for a discussion of the impact of a downgrade in the financial strength rating on guaranteed investment contracts ("GICs") that AGM has insured.   The insurance subsidiaries’ financial strength ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of the Company’s insurance subsidiaries were reduced below current levels, the Company expects it could have adverse effects on its future business opportunities as well as the premiums it could charge for its insurance policies and consequently, a downgrade could harm the Company’s new business production and results of operations in a material respect.
 
Accounting Changes
 
There has recently been significant GAAP rule making activity which has affected the accounting policies and presentation of the Company’s financial information beginning on January 1, 2012, particularly:
 
·                        adoption of new guidance that restricted the types and amounts of financial guaranty insurance acquisition costs that may be deferred. See Note 4, Financial Guaranty Insurance Contracts.
 
·                        adoption of guidance that changed the presentation of other comprehensive income (“OCI”). See “Consolidated Statements of Comprehensive Income.”
 
·                        adoption of guidance requiring additional fair value disclosures. See Note 5, Fair Value Measurement.
 
Deutsche Bank Agreement
 
On May 8, 2012, Assured Guaranty reached a settlement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), resolving claims related to certain residential mortgage-backed securities (“RMBS”) transactions issued, underwritten or sponsored by Deutsche Bank that were insured by Assured Guaranty under financial guaranty insurance policies and to certain RMBS exposures in re-securitization transactions as to which Assured Guaranty provides credit protection through CDS. As part of the settlement agreement (the “Deutsche Bank Agreement”), Assured Guaranty settled its litigation against Deutsche Bank on three RMBS transactions. 
 
Assured Guaranty received a cash payment of $165.6 million from Deutsche Bank upon signing of the Deutsche Bank Agreement, a portion of which partially reimbursed Assured Guaranty for past losses on certain transactions. Assured Guaranty and Deutsche Bank also entered into loss sharing arrangements covering future RMBS related losses, which are described below. Under the Deutsche Bank Agreement, Deutsche Bank AG placed approximately $282.7 million of eligible assets in trust in order to collateralize the obligations of a reinsurance affiliate under the loss-sharing arrangements, and the Deutsche Bank reinsurance affiliate may post additional collateral in the future to satisfy rating agency requirements.
 
The settlement includes eight RMBS transactions (“Covered Transactions”) that Assured Guaranty has insured through financial guaranty insurance policies. The Covered Transactions are backed by first lien and second lien mortgage loans. Under the Deutsche Bank Agreement, the Deutsche Bank reinsurance affiliate will reimburse 80% of Assured Guaranty’s future losses on the Covered Transactions until Assured Guaranty’s aggregate losses (including those to date that are partially reimbursed by the $165.6 million cash payment) reach $318.8 million. Assured Guaranty currently projects that the Covered Transactions will not generate aggregate losses in excess of $318.8 million. In the event aggregate losses exceed $388.8 million, the Deutsche Bank reinsurance affiliate is required to resume reimbursement at the rate of 85% of Assured Guaranty’s losses in excess of $388.8 million until such losses reach $600.0 million. The Covered Transactions represented $567.8 million of gross par outstanding as of June 30, 2012.
 
Certain uninsured tranches (“Uninsured Tranches”) of three of the Covered Transactions are included as collateral in

9
Table of Contents

RMBS re- securitization transactions as to which Assured Guaranty provides credit protection through CDS. Under the Deutsche Bank Agreement, the Deutsche Bank reinsurance affiliate will reimburse losses on the CDS in an amount equal to 60% of losses in these Uninsured Tranches until the aggregate losses in the Uninsured Tranches reach $141.1 million. Assured Guaranty currently projects that the Uninsured Tranches will not generate losses in excess of $141.1 million in the base case scenario. In the event aggregate losses exceed $161.1 million, reimbursement resumes at the rate of 60% until the aggregate losses reach $185.1 million. The Deutsche Bank reinsurance affiliate is required to reimburse any losses in excess of $185.1 million at the rate of 100% until the aggregate losses reach $247.8 million. The Uninsured Tranches represent $329.3 million of par outstanding as of June 30, 2012.
 
Except for the Uninsured Tranches, the settlement does not include Assured Guaranty’s CDS with Deutsche Bank. The parties have agreed to continue efforts to resolve CDS-related claims.

Reinsurance Agreements

As discussed in Note 11, Reinsurance and Other Monoline Exposures, the Company has entered into several agreements with reinsurers, including assumption and re-assumption agreements with Radian Asset Assurance Inc. ("Radian"), a re-assumption agreement with Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio”) and a $435 million excess of loss reinsurance facility.

MIAC Acquisition

On May 31, 2012, the Company purchased 100% of the outstanding common stock of MIAC from Radian for $91.1 million in cash, resulting in $16.0 million in indefinite-lived intangible assets which represents the value of MIAC's licenses. Assets acquired consisted primarily of short-term investments. Investment income earned on these assets was not material for the Six Months 2012. MIAC is licensed to provide financial guaranty insurance and reinsurance in 38 U.S. jurisdictions including the District of Columbia. The acquisition of MIAC enhances the Company's flexibility to respond to changes in the financial guaranty industry.
 
Remarketing of Senior Notes and Redemption of Equity Units

On June 1, 2012, the Company completed the remarketing of the $172.5 million aggregate principal amount of 8.50% Senior Notes issued by AGUS in 2009 that were components of the Company's Equity Units; AGUS purchased all of the Senior Notes in the remarketing at a price of 100% of the aggregate principal amount thereof, and retired all of such notes on June 1, 2012. The proceeds from the remarketing were used to satisfy the obligations of the holders of the Equity Units to purchase AGL common shares pursuant to the forward purchase contracts that were also components of the Equity Units. Accordingly, on June 1, 2012, AGL issued 3.8924 common shares to holders of each $50 Equity Unit, which represented a settlement rate of 3.8685 common shares plus certain anti-dilution adjustments, or an aggregate of 13,428,770 common shares. The Equity Units ceased to exist when the forward purchase contracts were settled on June 1, 2012.

3.
Outstanding Exposure
 
The Company’s financial guaranty contracts are written in different forms, 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 portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third-party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Some of these VIEs are consolidated as described in Note 7, Consolidation of Variable Interest Entities. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs whether or not they are consolidated.
 

10
Table of Contents

Debt Service Outstanding
 
 
Gross Debt Service
Outstanding
 
Net Debt Service
Outstanding
 
June 30,
2012
 
December 31,
2011
 
June 30,
2012
 
December 31,
2011
 
(in millions)
Public finance
$
767,155

 
$
798,471

 
$
719,301

 
$
716,890

Structured finance
123,437

 
137,661

 
115,787

 
128,775

Total financial guaranty
$
890,592

 
$
936,132

 
$
835,088

 
$
845,665

 
In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance in force was approximately $148 million as of June 30, 2012. The net mortgage guaranty insurance in force comprises $133 million covering loans originated in Ireland and $15 million covering loans originated in the UK.
 
Financial Guaranty Portfolio by Internal Rating
 
 
 
As of June 30, 2012
 
 
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)
Super senior
 
$
—

 
—
%
 
$
1,109

 
2.8
%
 
$
15,157

 
18.2
%
 
$
4,777

 
22.9
%
 
$
21,043

 
3.8
%
AAA
 
4,771

 
1.2

 
1,388

 
3.6

 
32,947

 
39.5

 
9,225

 
44.2

 
48,331

 
8.7

AA
 
136,709

 
33.3

 
998

 
2.6

 
10,416

 
12.5

 
889

 
4.3

 
149,012

 
27.0

A
 
220,154

 
53.7

 
10,657

 
27.5

 
4,692

 
5.6

 
1,352

 
6.5

 
236,855

 
42.8

BBB
 
43,836

 
10.7

 
22,102

 
57.0

 
4,201

 
5.0

 
2,740

 
13.1

 
72,879

 
13.2

Below-investment-grade (“BIG”)
 
4,407

 
1.1

 
2,515

 
6.5

 
16,017

 
19.2

 
1,875

 
9.0

 
24,814

 
4.5

Total net par outstanding
 
$
409,877

 
100.0
%
 
$
38,769

 
100.0
%
 
$
83,430

 
100.0
%
 
$
20,858

 
100.0
%
 
$
552,934

 
100.0
%
 
 
 
As of December 31, 2011
 
 
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)
Super senior
 
$
—

 
—
%
 
$
1,138

 
2.9
%
 
$
16,756

 
18.2
%
 
$
5,660

 
23.9
%
 
$
23,554

 
4.2
%
AAA
 
5,074

 
1.3

 
1,381

 
3.5

 
35,736

 
38.7

 
10,231

 
43.2

 
52,422

 
9.4

AA
 
139,693

 
34.6

 
1,056

 
2.7

 
12,575

 
13.6

 
976

 
4.1

 
154,300

 
27.7

A
 
213,164

 
52.9

 
11,744

 
30.1

 
4,115

 
4.5

 
1,518

 
6.4

 
230,541

 
41.3

BBB
 
40,635

 
10.1

 
21,399

 
54.8

 
5,044

 
5.5

 
3,391

 
14.3

 
70,469

 
12.6

BIG
 
4,507

 
1.1

 
2,328

 
6.0

 
18,008

 
19.5

 
1,919

 
8.1

 
26,762

 
4.8

Total net par outstanding
 
$
403,073

 
100.0
%
 
$
39,046

 
100.0
%
 
$
92,234

 
100.0
%
 
$
23,695

 
100.0
%
 
$
558,048

 
100.0
%
 
In First Quarter 2012, the Company reclassified to AA 80% of the net par outstanding of those first lien transactions that are covered by the Bank of America Agreement (see Note 4, Financial Guaranty Insurance Contracts) and that the Company otherwise internally rated below AA. The Company reclassified those amounts as AA exposure due to the eligible assets that Bank of America has placed into trust in order to collateralize its reimbursement obligation relating to such first lien transactions. This reclassification resulted in a decrease in BIG net par outstanding as of December 31, 2011 of $1,452 million from that previously reported.
 
In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of

11
Table of Contents

$1.8 billion for structured finance and $0.5 billion for public finance obligations at June 30, 2012. 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, 2012 and February 25, 2017, with $0.2 billion expiring prior to December 31, 2012. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.
 
Economic Exposure to the Selected European Countries
 
Several European countries are experiencing significant economic, fiscal and/or political strains such that the likelihood of default on obligations with a nexus to those countries may be higher than the Company anticipated when such factors did not exist. The Company is closely monitoring its exposures in European countries where it believes heightened uncertainties exist, specifically, Greece, Hungary, Ireland, Italy, Portugal and Spain (the “Selected European Countries”). Published reports have identified countries that may be experiencing reduced demand for their sovereign debt in the current environment. The Company selected these European countries based on these reports and its view that their credit fundamentals are deteriorating. 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 Economic Exposure to Selected European Countries(1)
June 30, 2012
 
 
Greece(2)
 
Hungary
 
Ireland
 
Italy
 
Portugal
 
Spain
 
Total
 
(in millions)
Sovereign and sub-sovereign exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

Public finance
$
276

 
$
—

 
$
—

 
$
977

 
$
110

 
$
257

 
$
1,620

Infrastructure finance
—

 
430

 
23

 
322

 
99

 
165

 
1,039

Sub-total
276

 
430

 
23

 
1,299

 
209

 
422

 
2,659

Non-sovereign exposure:
 

 
 

 
 

 
 

 
 

 
 

 
 

Regulated utilities
—

 
—

 
—

 
222

 
—

 
12

 
234

RMBS
—

 
215

 
133

 
489

 
—

 
—

 
837

Commercial receivables
—

 
1

 
19

 
26

 
14

 
18

 
78

Pooled corporate
31

 
—

 
208

 
227

 
14

 
492

 
972

Sub-total
31

 
216

 
360

 
964

 
28

 
522

 
2,121

Total
$
307

 
$
646

 
$
383

 
$
2,263

 
$
237

 
$
944

 
$
4,780

Total BIG
$
276

 
$
516

 
$
8

 
$
238

 
$
127

 
$
391

 
$
1,556

 ____________________
(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. Included in the table above is $133 million of reinsurance assumed on a 2004 - 2006 pool of Irish residential mortgages that is part of the Company’s remaining legacy mortgage reinsurance business. One of the residential mortgage-backed securities included in the table above includes residential mortgages in both Italy and Germany, and only the portion of the transaction equal to the portion of the original mortgage pool in Italian mortgages is shown in the table.
(2)                             As of June 30, 2012, the Company had established a full limit loss on this exposure. The Company accelerated claims under its financial guaranty on the July payment date with respect to the 2057 bonds and intends to accelerate claims on or after the September payment date with respect to the 2037 bonds.
 
The Company has not guaranteed any sovereign bonds of the Selected European Countries except Greece (see Note 4, Financial Guaranty Insurance Contracts). The remainder of the “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.
 

12
Table of Contents

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.
 
The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. The Company models most assumed 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 4, Financial Guaranty Insurance Contracts). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects “lifetime losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it ultimately will have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk-free rate is used for recording of reserves for financial statement purposes.)
 
Intense monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The three BIG categories are:
 
·                  BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.
 
·                  BIG Category 2: Below-investment-grade transactions for which lifetime 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 lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.
 

 

13
Table of Contents


Financial Guaranty Exposures
(Insurance and Credit Derivative Form)
 
 
As of June 30, 2012
 
BIG Net Par Outstanding
 
Net Par Outstanding
 
BIG Net Par as
a % of Net Par Outstanding
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
First lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
76

 
$
430

 
$
3

 
$
509

 
$
690

 
0.1
%
Alt-A first lien
436

 
2,039

 
1,374

 
3,849

 
4,939

 
0.7

Option ARM
61

 
471

 
827

 
1,359

 
1,991

 
0.3

Subprime
218

 
1,276

 
864

 
2,358

 
7,754

 
0.4

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Closed end second lien
—

 
450

 
419

 
869

 
997

 
0.2

Home equity lines of credit (“HELOCs”)
394

 
—

 
2,587

 
2,981

 
3,521

 
0.5

Total U.S. RMBS
1,185

 
4,666

 
6,074

 
11,925

 
19,892

 
2.2

Trust preferred securities (“TruPS”)
2,071

 
—

 
952

 
3,023

 
6,006

 
0.5

Other structured finance
1,261

 
459

 
1,224

 
2,944

 
78,390

 
0.5

U.S. public finance
3,285

 
407

 
715

 
4,407

 
409,877

 
0.8

Non-U.S. public finance (1)
2,239

 
276

 
—

 
2,515

 
38,769

 
0.5

Total
$
10,041

 
$
5,808

 
$
8,965

 
$
24,814

 
$
552,934

 
4.5
%
 
 
As of December 31, 2011
 
BIG Net Par Outstanding
 
Net Par Outstanding
 
BIG Net Par as
a % of Net Par Outstanding
 
BIG 1
 
BIG 2
 
BIG 3
 
Total BIG
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
First lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Prime first lien
$
77

 
$
465

 
$
—

 
$
542

 
$
739

 
0.1
%
Alt-A first lien
1,695

 
1,028

 
1,540

 
4,263

 
5,329

 
0.8

Option ARM
25

 
689

 
882

 
1,596

 
2,433

 
0.3

Subprime (including net interest margin securities)
795

 
1,200

 
513

 
2,508

 
8,136

 
0.4

Second lien U.S. RMBS:
 

 
 

 
 

 
 

 
 

 
 

Closed end second lien
—

 
495

 
520

 
1,015

 
1,040

 
0.2

HELOCs
421

 
—

 
2,858

 
3,279

 
3,890

 
0.6

Total U.S. RMBS
3,013

 
3,877

 
6,313

 
13,203

 
21,567

 
2.4

TruPS
2,501

 
—

 
951

 
3,452

 
6,334

 
0.6

Other structured finance
1,295

 
548

 
1,429

 
3,272

 
88,028

 
0.6

U.S. public finance
3,395

 
274

 
838

 
4,507

 
403,073

 
0.8

Non-U.S. public finance (1)
2,046

 
282

 
—

 
2,328

 
39,046

 
0.4

Total
$
12,250

 
$
4,981

 
$
9,531

 
$
26,762

 
$
558,048

 
4.8
%
_____________________
(1)    Includes $276 million and $282 million in net par as of June 30, 2012 and December 31, 2011, respectively, for bonds of the Hellenic Republic of Greece, a portion of which was accelerated in July 2012 and a portion of which the Company intends to accelerate on or after September 2012. See Note 4, Financial Guaranty Insurance Contracts.
 

14
Table of Contents

Below-Investment-Grade Credits
By Category
 
 
 
As of June 30, 2012
 
 
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
 
$
7,467

 
$
2,574

 
$
10,041

 
164

 
35

 
199

Category 2
 
3,353

 
2,455

 
5,808

 
79

 
34

 
113

Category 3
 
6,894

 
2,071

 
8,965

 
132

 
25

 
157

Total BIG
 
$
17,714

 
$
7,100

 
$
24,814

 
375

 
94

 
469

 
 
 
As of December 31, 2011
 
 
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
 
$
8,297

 
$
3,953

 
$
12,250

 
171

 
40

 
211

Category 2
 
3,458

 
1,523

 
4,981

 
71

 
33

 
104

Category 3
 
7,204

 
2,327

 
9,531

 
126

 
26

 
152

Total BIG
 
$
18,959

 
$
7,803

 
$
26,762

 
368

 
99

 
467

_____________________
(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.
 
4.
Financial Guaranty Insurance Contracts
 
Change in accounting for deferred acquisition costs
 
In October 2010, the Financial Accounting Standards Board adopted Accounting Standards Update (“Update”) No. 2010-26. This guidance was effective January 1, 2012, with retrospective application. The Update specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include direct costs of contract acquisition that result directly from and are essential to the contract transaction. These costs include expenses such as ceding commissions and the cost of underwriting personnel. Management uses its judgment in determining the type and amount of cost to be deferred. The Company conducts an annual study to determine which operating costs vary with, and are directly related to, the acquisition of new business, and therefore qualify for deferral. Ceding commission income on business ceded to third party reinsurers reduces policy acquisition costs and is deferred. Costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs are charged to expense as incurred.
 
Expected losses, loss adjustment expenses (“LAE”) and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of deferred acquisition costs. When an insured issue is retired early, the remaining related deferred acquisition cost is expensed at that time. Ceding commission expense and income associated with future installment premiums on assumed and ceded business, respectively, are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to net premium receivable or reinsurance balances payable.
 
As of January 1, 2011, the effect of retrospective application of the new guidance was a reduction to deferred

15
Table of Contents

acquisition costs of $94.4 million and a reduction to retained earnings of $64.0 million.
 
Effect of Retrospective Application of New Deferred Acquisition Cost Guidance
On Consolidated Statements of Operations
 
 
As Reported
Second Quarter 2011
 
Retroactive Application Adjustment
 
As Revised Second Quarter 2011
 
(in millions except per share amounts)
Amortization of deferred acquisition costs
$
9.5

 
$
(3.7
)
 
$
5.8

Other operating expenses
48.5

 
4.7

 
53.2

Net income (loss)
(42.6
)
 
(0.5
)
 
(43.1
)
Earnings per share:
 

 
 
 
 

Basic
$
(0.23
)
 
$
—

 
$
(0.23
)
Diluted
(0.23
)
 
—

 
(0.23
)
 
 
As Reported
Six Months 2011
 
Retroactive Application Adjustment
 
As Revised Six Months 2011
 
(in millions except per share amounts)
Amortization of deferred acquisition costs
$
16.9

 
$
(7.4
)
 
$
9.5

Other operating expenses
105.3

 
10.7

 
116.0

Net income (loss)
98.0

 
(1.8
)
 
96.2

Earnings per share:
 

 
 
 
 

Basic
0.53

 
(0.01
)
 
0.52

Diluted
0.52

 
(0.01
)
 
0.51


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 derivative contracts. Amounts presented in this note relate to financial guaranty insurance contracts. Tables presented herein also present reconciliations to financial statement line items for other less significant types of insurance.
 
Net Earned Premiums
 
 
Second Quarter
 
Six Months
 
2012
 
2011
 
2012
 
2011
 
(in millions)
Scheduled net earned premiums
$
144.7

 
$
202.7

 
$
296.7

 
$
417.6

Acceleration of premium earnings
68.2

 
21.0

 
104.8

 
50.6

Accretion of discount on net premiums receivable
6.3

 
5.8

 
11.0

 
14.8

Total financial guaranty
219.2

 
229.5

 
412.5

 
483.0

Other
0.1

 
0.5

 
0.5

 
1.0

Total net earned premiums(1)
$
219.3

 
$
230.0

 
$
413.0

 
$
484.0

 ___________________
(1)                                  Excludes $15.5 million and $18.3 million in Second Quarter 2012 and 2011, respectively, and $32.5 million and $37.4 million for the Six Months 2012 and 2011, respectively, related to consolidated FG VIEs.
 

16
Table of Contents

Gross Premium Receivable, Net of Ceding Commissions Roll Forward
 
 
Six Months
 
2012
 
2011
 
(in millions)
Balance beginning of period
$
1,002.9

 
$
1,167.6

Premium written, net
102.7

 
102.9

Premium payments received, net
(166.5
)
 
(151.7
)
Adjustments to the premium receivable:
 
 
 
Changes in the expected term of financial guaranty insurance contracts
18.8

 
(91.1
)
Accretion of discount
13.4

 
16.4

Foreign exchange translation
(0.5
)
 
22.8

Consolidation of FG VIEs
(5.4
)
 
(9.9
)
Other adjustments
(1.3
)
 
2.5

Balance, end of period (1)
$
964.1

 
$
1,059.5

____________________
(1)                                  Excludes $31.7 million and $31.7 million as of June 30, 2012 and 2011, 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 49%, 47% and 51% of installment premiums at June 30, 2012, December 31, 2011 and June 30, 2011, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro and British Pound Sterling.
 
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 Ceding Commissions (Undiscounted)
 
 
June 30, 2012
 
(in millions)
2012 (July 1 – September 30)
$
48.4

2012 (October 1 – December 31)
50.0

2013
106.6

2014
93.3

2015
83.3

2016
77.3

2017-2021
305.6

2022-2026
206.6

2027-2031
152.2

After 2031
187.6

Total(1)
$
1,310.9

 ____________________
(1)                                  Excludes expected cash collections on FG VIEs of $37.8 million.
 

17
Table of Contents

Components of Unearned Premium Reserve
 
 
As of June 30, 2012
 
As of December 31, 2011
 
Gross
 
Ceded
 
Net(1)
 
Gross
 
Ceded
 
Net(1)
 
(in millions)
Deferred premium revenue
$
5,698.6

 
$
610.6

 
$
5,088.0

 
$
6,046.3

 
$
727.4

 
$
5,318.9

Contra-paid
(123.1
)
 
(19.8
)
 
(103.3
)
 
(92.2
)
 
(18.8
)
 
(73.4
)
Total financial guaranty
5,575.5

 
590.8

 
4,984.7

 
5,954.1

 
708.6

 
5,245.5

Other
7.9

 
0.0

 
7.9

 
8.7

 
0.3

 
8.4

Total
$
5,583.4

 
$
590.8

 
$
4,992.6

 
$
5,962.8

 
$
708.9

 
$
5,253.9

 ____________________
(1)                              Total net unearned premium reserve excludes $255.5 million and $274.2 million related to FG VIEs as of June 30, 2012 and December 31, 2011, respectively.
 
The following table provides a schedule of the expected timing of the income statement recognition of pre-tax financial guaranty insurance net deferred premium revenue and the present value of net expected losses to be expensed. The amount and timing of actual premium earnings and 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. A loss and LAE reserve is only recorded for the amount by which net expected loss to be expensed exceeds deferred premium revenue determined on a contract-by-contract basis. This table excludes amounts related to consolidated FG VIEs.
 
Expected Timing of Premium and Loss Recognition
 
 
As of June 30, 2012
 
Scheduled
Net Earned
Premium
 
Net Expected
Loss to be
Expensed
 
Net
 
(in millions)
2012 (July 1–September 30)
$
137.9

 
$
16.2

 
$
121.7

2012 (October 1–December 31)
131.0

 
14.9

 
116.1

Subtotal 2012
268.9

 
31.1

 
237.8

2013
472.9

 
61.0

 
411.9

2014
434.7

 
48.6

 
386.1

2015
384.6

 
38.0

 
346.6

2016
349.1

 
33.7

 
315.4

2017 - 2021
1,325.7

 
142.1

 
1,183.6

2022 - 2026
834.5

 
78.5

 
756.0

2027 - 2031
505.6

 
39.5

 
466.1

After 2031
512.0

 
30.7

 
481.3

Total present value basis(1)(2)
5,088.0

 
503.2

 
4,584.8

Discount
279.6

 
275.6

 
4.0

Total future value
$
5,367.6

 
$
778.8

 
$
4,588.8

 ____________________
(1)                                  Balances represent discounted amounts.
 
(2)                                  Consolidation of FG VIEs resulted in reductions of $381.4 million in future scheduled net earned premium and $196.8 million in net expected loss to be expensed.
 

18
Table of Contents

Selected Information for Policies Paid in Installments
 
 
As of
June 30, 2012
 
As of December 31, 2011
 
(dollars in millions)
Premiums receivable, net of ceding commission payable
$
964.1

 
$
1,002.9

Gross deferred premium revenue
2,013.1

 
2,192.6

Weighted-average risk-free rate used to discount premiums
3.6
%
 
3.4
%
Weighted-average period of premiums receivable (in years)
10.0

 
9.8

 
Loss Estimation Process
 
The Company’s loss reserve committees estimate expected loss to be paid. Surveillance personnel present analyses related to potential losses to the Company’s loss reserve committees for consideration in estimating the expected loss to be paid. Such analyses include the consideration of various scenarios with potential probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments and sector-driven loss severity assumptions or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company’s loss reserve committees review and refresh the estimate of expected loss to be paid each quarter. The Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance as a result of economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management.
 
The following table presents a roll forward of the present value of net expected loss to be paid for financial guaranty insurance contracts by sector. Net expected loss to be paid is the estimate of the present value of future claim payments, net of reinsurance and net of salvage and subrogation, which includes the present value benefit of estimated recoveries for breaches of representations and warranties (“R&W”). The Company used weighted average risk-free rates for U.S. dollar denominated obligations, which ranged from 0.0% to 3.04% as of June 30, 2012 and 0.0% to 3.27% as of December 31, 2011.
 

19
Table of Contents


Present Value of Net Expected Loss to be Paid
Roll Forward by Sector(1)
 
Net Expected
Loss to be
Paid as of
March 31, 2012
 
Economic Loss
Development(2)
 
(Paid)
Recovered
Losses(3)
 
Net Expected
Loss to be
Paid as of
June 30, 2012(4)
 
(in millions)
U.S. RMBS:
 

 
 

 
 

 
 

First lien:
 

 
 

 
 

 
 

Prime first lien
$
2.2

 
$
0.7

 
$
—

 
$
2.9

Alt-A first lien
116.9

 
22.8

 
52.4

 
192.1

Option ARM
75.3

 
0.7

 
(112.3
)
 
(36.3
)
Subprime
150.4

 
10.6

 
(1.6
)
 
159.4

Total first lien
344.8

 
34.8

 
(61.5
)
 
318.1

Second lien:
 

 
 

 
 

 
 

Closed-end second lien
(89.7
)
 
(2.6
)
 
75.9

 
(16.4
)
HELOCs
(42.5
)
 
14.8

 
(36.0
)
 
(63.7
)
Total second lien
(132.2
)
 
12.2

 
39.9

 
(80.1
)
Total U.S. RMBS
212.6

 
47.0

 
(21.6
)
 
238.0

TruPS
8.5

 
(1.8
)
 
(0.2
)
 
6.5

Other structured finance
196.8

 
30.9

 
(6.6
)
 
221.1

U.S. public finance
32.7

 
35.5

 
(9.8
)
 
58.4

Non-U.S. public finance
301.8

 
(15.0
)
 
15.7

 
302.5

Total financial guaranty
752.4

 
96.6

 
(22.5
)
 
826.5

Other
1.9

 
(6.0
)
 
—

 
(4.1
)
            Total
$
754.3

 
$
90.6