Outstanding Exposure

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

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

Surveillance Categories

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

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s credit ratings on assumed credits are based on the Company’s reviews of low-rated credits or credits in volatile sectors, unless such information is not available, in which case, the ceding company’s credit rating of the transactions are used. The Company models the performance of many of its structured finance transactions as part of its periodic internal credit rating review of them. The Company models most assumed residential mortgage-backed security ("RMBS") credits with par above $1 million, as well as certain RMBS credits below that amount.

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

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


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


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


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

Components of Outstanding Exposure

Unless otherwise noted, ratings disclosed herein on 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.

Debt Service Outstanding



	Gross Debt Service Outstanding				Net Debt Service Outstanding
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
	(in millions)
Public finance	$	639,981	$	650,924	$	601,433	$	610,011
Structured finance	81,195		86,456		75,535		80,524
Total financial guaranty	$	721,176	$	737,380	$	676,968	$	690,535

In addition to the amounts shown in the table above, the Company’s net mortgage guaranty insurance debt service was approximately $153 million as of March 31, 2014. The net mortgage guaranty insurance in force constitutes assumed excess of loss business written between 2004 and 2006 and comprises $145 million covering loans originated in Ireland and $8 million covering loans originated in the U.K.

Financial Guaranty Portfolio by Internal Rating

As of March 31, 2014



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,658	1.3	%	$	1,020	2.9	%	$	29,868	53.9	%	$	8,856	68.2	%	$	44,402	9.9	%
AA	104,577		30.2		427		1.2		9,396		17.0		570		4.4		114,970		25.6
A	187,433		54.1		9,595		27.6		2,340		4.2		661		5.1		200,029		44.4
BBB	40,783		11.8		22,173		63.7		3,496		6.3		1,829		14.1		68,281		15.2
BIG	8,977		2.6		1,611		4.6		10,293		18.6		1,062		8.2		21,943		4.9
Total net par outstanding (excluding loss mitigation bonds)	$	346,428	100.0	%	$	34,826	100.0	%	$	55,393	100.0	%	$	12,978	100.0	%	$	449,625	100.0	%
Loss Mitigation Bonds	32				—				1,204				—				1,236
Net Par Outstanding (including loss mitigation bonds)	$	346,460			$	34,826			$	56,597			$	12,978			$	450,861

Financial Guaranty Portfolio by Internal Rating

As of December 31, 2013



	Public Finance U.S.				Public Finance Non-U.S.				Structured Finance U.S				Structured Finance Non-U.S				Total
Rating Category	Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%		Net Par Outstanding		%
	(dollars in millions)
AAA	$	4,998	1.4	%	$	1,016	3.0	%	$	32,317	54.9	%	$	9,684	69.1	%	$	48,015	10.5	%
AA	107,503		30.5		422		1.2		9,431		16.0		577		4.1		117,933		25.7
A	192,841		54.8		9,453		27.9		2,580		4.4		742		5.3		205,616		44.8
BBB	37,745		10.7		21,499		63.2		3,815		6.4		1,946		13.9		65,005		14.1
BIG	9,094		2.6		1,608		4.7		10,764		18.3		1,072		7.6		22,538		4.9
Total net par outstanding (excluding loss mitigation bonds)	$	352,181	100.0	%	$	33,998	100.0	%	$	58,907	100.0	%	$	14,021	100.0	%	$	459,107	100.0	%
Loss Mitigation Bonds	32				—				1,163				—				1,195
Net Par Outstanding (including loss mitigation bonds)	$	352,213			$	33,998			$	60,070			$	14,021			$	460,302

In accordance with the terms of certain credit derivative contracts, the referenced obligations in such contracts have been delivered to the Company and therefore are included in the investment portfolio. Such amounts are still included in the financial guaranty insured portfolio, and totaled $165 million and $195 million in gross par outstanding as of March 31, 2014 and December 31, 2013, respectively.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $577 million for structured finance and $330 million for public finance obligations at March 31, 2014. 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 April 15, 2014 and February 25, 2017, with $206 million expiring prior to December 31, 2014. The commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Components of BIG Portfolio

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of March 31, 2014



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	77	$	289	$	29	$	395	$	528	0.1	%
Alt-A first lien	703		787		1,223		2,713		3,478		0.6
Option ARM	66		59		440		565		877		0.1
Subprime	227		860		769		1,856		5,921		0.4
Second lien U.S. RMBS:
Closed-end second lien	8		19		116		143		239		0.0
Home equity lines of credit (“HELOCs”)	1,480		19		235		1,734		1,982		0.4
Total U.S. RMBS	2,561		2,033		2,812		7,406		13,025		1.6
Trust preferred securities (“TruPS”)	1,235		343		—		1,578		4,826		0.4
Other structured finance	1,348		304		719		2,371		50,520		0.5
U.S. public finance	8,117		419		441		8,977		346,428		2.0
Non-U.S. public finance	989		622		—		1,611		34,826		0.4
Total	$	14,250	$	3,721	$	3,972	$	21,943	$	449,625	4.9	%

Components of BIG Net Par Outstanding

(Insurance and Credit Derivative Form)

As of December 31, 2013



	BIG Net Par Outstanding								Net Par		BIG Net Par as a % of Total Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding		Outstanding
					(in millions)
First lien U.S. RMBS:
Prime first lien	$	52	$	321	$	30	$	403	$	541	0.1	%
Alt-A first lien	656		1,137		935		2,728		3,590		0.6
Option ARM	71		60		467		598		937		0.1
Subprime	297		908		740		1,945		6,130		0.4
Second lien U.S. RMBS:
Closed-end second lien	8		20		118		146		244		0.0
HELOCs	1,499		20		378		1,897		2,279		0.4
Total U.S. RMBS	2,583		2,466		2,668		7,717		13,721		1.6
TruPS	1,587		135		—		1,722		4,970		0.4
Other structured finance	1,367		309		721		2,397		54,237		0.5
U.S. public finance	8,205		440		449		9,094		352,181		2.0
Non-U.S. public finance	1,009		599		—		1,608		33,998		0.4
Total	$	14,751	$	3,949	$	3,838	$	22,538	$	459,107	4.9	%

BIG Net Par Outstanding

and Number of Risks

As of March 31, 2014



	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	12,242	$	2,008	$	14,250	193	24	217
Category 2	2,253		1,468		3,721		80	21	101
Category 3	2,872		1,100		3,972		109	27	136
Total BIG	$	17,367	$	4,576	$	21,943	382	72	454

BIG Net Par Outstanding

and Number of Risks

As of December 31, 2013



	Net Par Outstanding						Number of Risks(2)
Description	Financial Guaranty Insurance(1)		Credit Derivative		Total		Financial Guaranty Insurance(1)	Credit Derivative	Total
	(dollars in millions)
BIG:
Category 1	$	12,391	$	2,360	$	14,751	185	25	210
Category 2	2,323		1,626		3,949		80	21	101
Category 3	3,031		807		3,838		119	27	146
Total BIG	$	17,745	$	4,793	$	22,538	384	73	457

_____________________

(1) Includes net par outstanding for FG VIEs.


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

Direct Economic Exposure to the Selected European Countries

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

Net Direct Economic Exposure to Selected European Countries(1)

As of March 31, 2014



	Hungary (2)		Ireland		Italy		Portugal (2)		Spain (2)		Total

Sovereign and sub-sovereign exposure:
Non-infrastructure public finance (3)	$	—	$	—	$	1,026	$	98	$	274	$	1,398
Infrastructure finance	370		—		18		12		156		556
Sub-total	370		—		1,044		110		430		1,954
Non-sovereign exposure:
Regulated utilities	—		—		235		—		—		235
RMBS	217		145		312		—		—		674
Sub-total	217		145		547		—		—		909
Total	$	587	$	145	$	1,591	$	110	$	430	$	2,863
Total BIG	$	587	$	—	$	—	$	110	$	429	$	1,126

____________________

(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 and Euros. Included in the table above is $145 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)	See Note 5, Expected Loss to be Paid.


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

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

The Company has excluded from the exposure tables above its indirect economic exposure to the Selected European Countries through policies it provides on (a) pooled corporate and (b) commercial receivables transactions. The Company considers economic exposure to a selected European Country to be indirect when the exposure relates to only a small portion of an insured transaction that otherwise is not related to a Selected European Country. The Company has reviewed transactions through which it believes it may have indirect exposure to the Selected European Countries that is material to the transaction and calculated total net indirect exposure to Selected European Counties in non-sovereign pooled corporate and non-sovereign commercial receivables to be $710 million and $89 million, respectively, based on the proportion of the insured par equal to the proportion of obligors identified as being domiciled in a Selected European Country.

Exposure to Puerto Rico

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.3 billion net par. The Company rates $5.1 billion net par of that amount BIG. The following table shows estimated amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured and rated BIG by the Company. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. The column labeled “Estimated BIG Net Debt Service Amortization” shows the total amount of principal and interest due in the period indicated and represents the maximum net amount the Company would be required to pay on BIG Puerto Rico exposures in a given period, assuming the obligors paid nothing on all of those obligations in that period.

Amortization Schedule of BIG Net Par Outstanding

and BIG Net Debt Service Outstanding of Puerto Rico

As of March 31, 2014



	Estimated BIG Net Par Amortization		Estimated BIG Net Debt Service Amortization
	(in millions)
2014 (April 1 - June 30)	$	—	$	64
2014 (July 1 - September 30)	254		315
2014 (October 1 - December 31)	—		61
2015	364		601
2016	289		509
2017	208		415
2018	159		358
2019-2023	884		1,718
2024-2028	937		1,566
2029-2033	697		1,125
After 2033	1,281		1,574
Total	$	5,073	$	8,306

Recent announcements and actions by the Governor and his administration indicate officials of the Commonwealth are focused on measures to help Puerto Rico operate within its financial resources and maintain its access to the capital markets. All Puerto Rico credits insured by the Company are current on their debt service payments. Neither Puerto Rico nor its related authorities and public corporations are eligible debtors under Chapter 9 of the U.S. Bankruptcy Code. However, Puerto Rico faces high debt levels, a declining population and an economy that has been in recession since 2006. Puerto Rico has been operating with a structural budget deficit in recent years, and its two largest pension funds are significantly underfunded.