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 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

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

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

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			(112		)	(105		)	192
Triple-X life insurance transactions	99			2			(1		)	100
Student loans	54			(15		)	(8		)	31
Other structured finance	20			(2		)	(15		)	3
Structured Finance	582			(127		)	(129		)	326
Total	$	1,391		$	81		$	(146	)	$	1,326

Net Expected Loss to be Paid

After Net Expected Recoveries for Breaches of R&W

Roll Forward by Sector

Six Months 2015



	Net Expected Loss to be Paid (Recovered) as of December 31, 2014			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	$	303		$	81		$	235		$	(6	)	$	613
Non-U.S. public finance	45			4			(5		)	—			44
Public Finance	348			85			230			(6		)	657
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	4			—			(1		)	(2		)	1
Alt-A first lien	304			7			(21		)	(25		)	265
Option ARM	(16		)	0			1			(3		)	(18		)
Subprime	303			(4		)	(7		)	(19		)	273
Total first lien	595			3			(28		)	(49		)	521
Second lien	(11		)	1			0			13			3
Total U.S. RMBS	584			4			(28		)	(36		)	524
Triple-X life insurance transactions	161			—			7			(3		)	165
Student loans	68			—			(5		)	(5		)	58
Other structured finance	8			101			(15		)	12			106
Structured Finance	821			105			(41		)	(32		)	853
Total	$	1,169		$	190		$	189		$	(38	)	$	1,510

____________________

(1)

Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on paid losses included in other assets. The Company paid $7 million and $5 million in loss adjustment expenses ("LAE") for Second Quarter 2016 and 2015, respectively, and $9 million and $9 million in LAE for Six Months 2016 and 2015, respectively.


(2)	Includes expected LAE to be paid of $8 million as of June 30, 2016 and $12 million as of December 31, 2015.

Future Net R&W Recoverable (Payable)(1)



	As of June 30, 2016			As of December 31, 2015
	(in millions)
U.S. RMBS:
First lien	$	(90	)	$	0
Second lien	32			79
Total	$	(58	)	$	79

____________________

(1)

The Company’s agreements with R&W providers generally provide that, as the Company makes claim payments, the R&W providers reimburse it for those claims; if the Company later receives reimbursement through the transaction (for example, from excess spread), the Company repays the R&W providers. See the section “Breaches of Representations and Warranties” for information about the R&W agreements and eligible assets held in trust with respect to such agreements. When the Company projects receiving more reimbursements in the future than it projects paying in claims on transactions covered by R&W settlement agreements, the Company will have a net R&W payable.

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

Net Expected Loss to be Paid (Recovered)

By Accounting Model

As of June 30, 2016



	Financial Guaranty Insurance			FG VIEs(1) and Other		Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	963		$	—	$	0		$	963
Non-U.S. public finance	37			—		—			37
Public Finance	1,000			—		0			1,000
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	3			—		—			3
Alt-A first lien	(115		)	20		(1		)	(96		)
Option ARM	(51		)	—		(5		)	(56		)
Subprime	145			50		32			227
Total first lien	(18		)	70		26			78
Second lien	68			43		3			114
Total U.S. RMBS	50			113		29			192
Triple-X life insurance transactions	89			—		11			100
Student loans	31			—		—			31
Other structured finance	38			1		(36		)	3
Structured Finance	208			114		4			326
Total	$	1,208		$	114	$	4		$	1,326

Net Expected Loss to be Paid (Recovered)

By Accounting Model

As of December 31, 2015



	Financial Guaranty Insurance			FG VIEs(1) and Other		Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	771		$	—	$	0		$	771
Non-U.S. public finance	38			—		—			38
Public Finance	809			—		0			809
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	2			—		(4		)	(2		)
Alt-A first lien	110			17		0			127
Option ARM	(27		)	—		(1		)	(28		)
Subprime	153			59		39			251
Total first lien	238			76		34			348
Second lien	13			44		4			61
Total U.S. RMBS	251			120		38			409
Triple-X life insurance transactions	88			—		11			99
Student loans	54			—		—			54
Other structured finance	37			16		(33		)	20
Structured Finance	430			136		16			582
Total	$	1,239		$	136	$	16		$	1,391

___________________

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

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

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

Net Economic Loss Development (Benefit)

By Accounting Model

Second Quarter 2016



	Financial Guaranty Insurance			FG VIEs(1) and Other			Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	111		$	—		$	—		$	111
Non-U.S. public finance	(2		)	—			—			(2		)
Public Finance	109			—			—			109
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	0			—			0			0
Alt-A first lien	(39		)	2			(1		)	(38		)
Option ARM	(9		)	—			(1		)	(10		)
Subprime	(17		)	(2		)	(7		)	(26		)
Total first lien	(65		)	0			(9		)	(74		)
Second lien	(1		)	(6		)	0			(7		)
Total U.S. RMBS	(66		)	(6		)	(9		)	(81		)
Triple-X life insurance transactions	(1		)	—			(1		)	(2		)
Student loans	(1		)	—			—			(1		)
Other structured finance	(1		)	(1		)	(1		)	(3		)
Structured Finance	(69		)	(7		)	(11		)	(87		)
Total	$	40		$	(7	)	$	(11	)	$	22

Net Economic Loss Development (Benefit)

By Accounting Model

Second Quarter 2015



	Financial Guaranty Insurance			FG VIEs(1) and Other			Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	232		$	—		$	(6	)	$	226
Non-U.S. public finance	(2		)	—			—			(2		)
Public Finance	230			—			(6		)	224
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	(1		)	—			—			(1		)
Alt-A first lien	(12		)	(1		)	(3		)	(16		)
Option ARM	(4		)	—			1			(3		)
Subprime	—			(1		)	(5		)	(6		)
Total first lien	(17		)	(2		)	(7		)	(26		)
Second lien	(7		)	—			1			(6		)
Total U.S. RMBS	(24		)	(2		)	(6		)	(32		)
Triple-X life insurance transactions	1			—			1			2
Student loans	1			—			—			1
Other structured finance	(1		)	1			(3		)	(3		)
Structured Finance	(23		)	(1		)	(8		)	(32		)
Total	$	207		$	(1	)	$	(14	)	$	192

Net Economic Loss Development (Benefit)

By Accounting Model

Six Months 2016



	Financial Guaranty Insurance			FG VIEs(1) and Other			Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	209		$	—		$	—		$	209
Non-U.S. public finance	(1		)	—			—			(1		)
Public Finance	208			—			—			208
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	0			—			0			0
Alt-A first lien	(56		)	3			(1		)	(54		)
Option ARM	(28		)	—			(3		)	(31		)
Subprime	(14		)	(2		)	(9		)	(25		)
Total first lien	(98		)	1			(13		)	(110		)
Second lien	1			(3		)	0			(2		)
Total U.S. RMBS	(97		)	(2		)	(13		)	(112		)
Triple-X life insurance transactions	2			—			0			2
Student loans	(15		)	—			—			(15		)
Other structured finance	3			(1		)	(4		)	(2		)
Structured Finance	(107		)	(3		)	(17		)	(127		)
Total	$	101		$	(3	)	$	(17	)	$	81

Net Economic Loss Development (Benefit)

By Accounting Model

Six Months 2015



	Financial Guaranty Insurance			FG VIEs(1) and Other			Credit Derivatives(2)			Total
	(in millions)
Public Finance:
U.S. public finance	$	241		$	—		$	(6	)	$	235
Non-U.S. public finance	(5		)	—			—			(5		)
Public Finance	236			—			(6		)	230
Structured Finance:
U.S. RMBS:
First lien:
Prime first lien	0			—			(1		)	(1		)
Alt-A first lien	(10		)	(1		)	(10		)	(21		)
Option ARM	(3		)	—			4			1
Subprime	(4		)	3			(6		)	(7		)
Total first lien	(17		)	2			(13		)	(28		)
Second lien	1			(1		)	—			—
Total U.S. RMBS	(16		)	1			(13		)	(28		)
Triple-X life insurance transactions	5			—			2			7
Student loans	(5		)	—			—			(5		)
Other structured finance	(1		)	—			(14		)	(15		)
Structured Finance	(17		)	1			(25		)	(41		)
Total	$	219		$	1		$	(31	)	$	189

_________________

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

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

Selected U.S. Public Finance Transactions

The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $5.1 billion net par as of June 30, 2016, all of which are BIG. For additional information regarding the Company's exposure to general obligations of Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations, please refer to "Exposure to Puerto Rico" in Note 4, Outstanding Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the U.S. Bankruptcy Code became effective. As of June 30, 2016, the Company’s net par subject to the plan consists of $115 million of pension obligation bonds. As part of the plan settlement, the City will repay the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City's revenue growth.

The Company has approximately $20 million of net par exposure as of June 30, 2016 to bonds issued by Parkway East Public Improvement District, which is located in Madison County, Mississippi. The bonds, which are rated BIG, are payable from special assessments on properties within the District, as well as amounts paid under a contribution agreement with the County in which the County covenants that it will provide funds in the event special assessments are not sufficient to make a debt service payment. The special assessments have not been sufficient to pay debt service in full. In earlier years, the County provided funding to cover the balance of the debt service requirement, but the County now claims that the District’s failure to reimburse it within the two years stipulated in the contribution agreement means that the County is not required to provide funding until it is reimbursed. On April 27, 2016, the court granted the Company's motion for summary judgment in a declaratory judgment action, agreeing with the Company's interpretation of the County's obligations under the contribution agreement. See "Recovery Litigation" below.

The Company also has $13.6 billion of net par exposure to healthcare transactions. The BIG net par outstanding in this sector is $303 million.

The Company projects that its total net expected loss across its troubled U.S. public finance credits as of June 30, 2016, which incorporated the likelihood of the various outcomes, will be $963 million, compared with a net expected loss of $771 million as of December 31, 2015. Economic loss development in Second Quarter 2016 and Six Months 2016 was $111 million and $209 million, respectively, which was primarily attributable to Puerto Rico exposures.

Certain Selected European Country Sub-Sovereign Transactions

The Company insures and reinsures credits with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the sub-sovereigns also to default. The Company's exposure net of reinsurance to these Spanish and Portuguese credits is $366 million and $80 million, respectively. The Company rates most of these issuers in the BB category due to the financial condition of Spain and Portugal and their dependence on the sovereign. The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental entities. The Company's exposure net of reinsurance to these Hungarian credits is $265 million, all of which is rated BIG. The Company estimated net expected losses of $34 million related to these Spanish, Portuguese and Hungarian credits. The economic benefit of approximately $2 million during Second Quarter 2016 and approximately $1 million during Six Months 2016 was primarily related to changes in the exchange rate between the Euro and U.S. Dollar.

Approach to Projecting Losses in U.S. RMBS

The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any R&W agreements to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates.

Second Quarter 2016 U.S. RMBS Loss Projections

Based on its observation during the period of the performance of its insured transactions (including early stage delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general, the Company chose to use the same general assumptions to project RMBS losses as of June 30, 2016 as it used as of December 31, 2015, but increased severities for specific vintages of Alt-A first lien and Option ARM transactions, decreased liquidation rates for certain vintages of subprime and increased liquidation rates for second lien transactions based on observed data.

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

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or in the past twelve months have been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews the most recent twelve months of this data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing categories.

First Lien Liquidation Rates



	June 30, 2016	March 31, 2016	December 31, 2015
Current Loans Modified in the Previous 12 Months
Alt A and Prime	25%	25%	25%
Option ARM	25	25	25
Subprime	25	25	25
Current Loans Delinquent in the Previous 12 Months
Alt A and Prime	25	25	25
Option ARM	25	25	25
Subprime	25	25	25
30 – 59 Days Delinquent
Alt A and Prime	35	35	35
Option ARM	40	40	40
Subprime	45	45	45
60 – 89 Days Delinquent
Alt A and Prime	45	45	45
Option ARM	50	50	50
Subprime	50	55	55
90+ Days Delinquent
Alt A and Prime	55	55	55
Option ARM	60	60	60
Subprime	55	60	60
Bankruptcy
Alt A and Prime	45	45	45
Option ARM	50	50	50
Subprime	40	40	40
Foreclosure
Alt A and Prime	65	65	65
Option ARM	70	70	70
Subprime	65	70	70
Real Estate Owned
All	100	100	100

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

In the base case, after the initial 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. In the base case, the Company assumes the final CDR will be reached 7 years after the initial 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were modified or delinquent in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36 month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historically high levels, and the Company is assuming in the base case that these high levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. As a result, as of March 31, 2016, the Company updated severities for specific vintages of Alt-A first lien and subprime transactions based on observed data and as of June 30, 2016 the Company updated severities again for certain vintages of Alt-A, as well as Option ARM. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 month period, declining to 40% in the base case over 2.5 years.

The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 first lien U.S. RMBS.

Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS(1)



	As of June 30, 2016					As of March 31, 2016					As of December 31, 2015
	Range				Weighted Average	Range				Weighted Average	Range				Weighted Average
Alt-A First Lien
Plateau CDR	0.9	%	-	27.0%	6.1%	0.9	%	-	27.8%	6.4%	1.7	%	–	26.4%	6.4%
Intermediate CDR	0.2	%	-	5.4%	1.2%	0.2	%	-	5.6%	1.3%	0.3	%	–	5.3%	1.3%
Period until intermediate CDR	48 months					48 months					48 months
Final CDR	0.0	%	-	1.3%	0.3%	0.0	%	-	1.4%	0.3%	0.1	%	–	1.3%	0.3%
Initial loss severity:
2005 and prior	60.0%					60.0%					60.0%
2006	80.0%					80.0%					70.0%
2007	70.0%					65.0%					65.0%
Initial conditional prepayment rate ("CPR")	3.5	%	-	29.3%	11.0%	2.7	%	-	31.6%	11.8%	2.7	%	–	32.5%	11.5%
Final CPR(2)	15%					15%					15%
Option ARM
Plateau CDR	3.2	%	-	10.1%	7.4%	3.4	%	-	10.6%	7.8%	3.5	%	–	10.3%	7.8%
Intermediate CDR	0.6	%	-	2.0%	1.5%	0.7	%	-	2.1%	1.6%	0.7	%	–	2.1%	1.6%
Period until intermediate CDR	48 months					48 months					48 months
Final CDR	0.2	%	-	0.5%	0.3%	0.2	%	-	0.5%	0.4%	0.2	%	–	0.5%	0.4%
Initial loss severity:
2005 and prior	60.0%					60.0%					60.0%
2006	70.0%					70.0%					70.0%
2007	75.0%					65.0%					65.0%
Initial CPR	2.0	%	-	13.2%	5.7%	2.0	%	-	13.7%	5.5%	1.5	%	–	10.9%	5.1%
Final CPR(2)	15%					15%					15%
Subprime
Plateau CDR	4.4	%	-	12.7%	8.5%	4.2	%	-	14.4%	9.4%	4.7	%	–	13.2%	9.5%
Intermediate CDR	0.9	%	-	2.5%	1.7%	0.8	%	-	2.9%	1.9%	0.9	%	–	2.6%	1.9%
Period until intermediate CDR	48 months					48 months					48 months
Final CDR	0.2	%	-	0.6%	0.4%	0.2	%	-	0.7%	0.4%	0.2	%	–	0.7%	0.4%
Initial loss severity:
2005 and prior	80.0%					80.0%					75.0%
2006	90.0%					90.0%					90.0%
2007	90.0%					90.0%					90.0%
Initial CPR	0.6	%	-	11.3%	4.9%	0.3	%	-	9.2%	4.2%	0.0	%	–	10.1%	3.6%
Final CPR(2)	15%					15%					15%

____________________

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


(2)	For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.

The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary CPR follows a similar pattern to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for March 31, 2016 and December 31, 2015.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the initial CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of June 30, 2016. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of June 30, 2016 as it used as of March 31, 2016 and December 31, 2015, increasing and decreasing the periods of stress from those used in the base case.

In a somewhat more stressful environment than that of the base case, where the CDR plateau was extended six months (to be 42 months long) before the same more gradual CDR recovery and loss severities were assumed to recover over 4.5 rather than 2.5 years (and subprime loss severities were assumed to recover only to 60% and Option ARM and Alt A loss severities to only 45%), expected loss to be paid would increase from current projections by approximately $13 million for Alt-A first liens, $7 million for Option ARM, $43 million for subprime and $0.1 million for prime transactions.

In an even more stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 15 months and other assumptions were the same as the other stress scenario, expected loss to be paid would increase from current projections by approximately $33 million for Alt-A first liens, $14 million for Option ARM, $59 million for subprime and $0.4 million for prime transactions.

In a scenario with a somewhat less stressful environment than the base case, where CDR recovery was somewhat less gradual, expected loss to be paid would decrease from current projections by approximately $6 million for Alt-A first liens, $21 million for Option ARM, $10 million for subprime and $17 thousand for prime transactions.

In an even less stressful scenario where the CDR plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over nine months), expected loss to be paid would decrease from current projections by approximately $18 million for Alt-A first liens, $32 million for Option ARM, $35 million for subprime and $0.1 million for prime transactions.

U.S. Second Lien RMBS Loss Projections

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

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six months by calculating current representative liquidation rates. A liquidation rate is the percent of loans in a given cohort (in this instance, delinquency category) that ultimately default. Similar to first liens, the Company then calculates a CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau CDR period that follows the embedded five months of losses. Liquidation rates assumed as of June 30, 2016 were from 25% to 100%, which were the same as of March 31, 2016. Liquidation rates assumed as of December 31, 2015 were from 10% to 100%.

For the base case scenario, the CDR (the “plateau CDR”) was held constant for six months. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, comprising five months of delinquent data, a one month plateau period and 28 months of decrease to the steady state CDR, the same as of March 31, 2016 and December 31, 2015.

HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment, and so increase the borrower's aggregate monthly payment. Some of the HELOC loans underlying the Company's insured HELOC transactions have reached their principal amortization period. The Company has observed that the increase in monthly payments occurring when a loan reaches its principal amortization period, even if mitigated by borrower relief offered by the servicer, is associated with increased borrower defaults. Thus, most of the Company's HELOC projections incorporate an assumption that a percentage of loans reaching their amortization periods will default around the time of the payment increase. These projected defaults are in addition to those generated using the CDR curve as described above. This assumption is similar to the one used as of March 31, 2016 and December 31, 2015. For June 30, 2016 the Company used the same general approach as of March 31, 2016 and December 31, 2015.

When a second lien loan defaults, there is generally a very low recovery. The Company had assumed as of June 30, 2016 that it will generally recover only 2% of the collateral defaulting in the future and declining additional amounts of post-default receipts on previously defaulted collateral. This is the same assumption used as of March 31, 2016 and December 31, 2015.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien transactions, which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is generally consistent with how the Company modeled the CPR as of March 31, 2016 and December 31, 2015. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices. These variables have been relatively stable and in the relevant ranges have less impact on the projection results than the variables discussed above. However, in a number of HELOC transactions the servicers have been modifying poorly performing loans from floating to fixed rates, and, as a result, rising interest rates would negatively impact the excess spread available from these modified loans to support the transactions. The Company incorporated these modifications in its assumptions.

In estimating expected losses, the Company modeled and probability weighted five possible CDR curves applicable to the period preceding the return to the long-term steady state CDR. The Company used five scenarios at June 30, 2016 and December 31, 2015. The Company believes that the level of the elevated CDR and the length of time it will persist, the ultimate prepayment rate, and the amount of additional defaults because of the expiry of the interest only period, are the primary drivers behind the likely amount of losses the collateral will suffer. The Company continues to evaluate the assumptions affecting its modeling results.

Most of the Company's projected second lien RMBS losses are from HELOC transactions. The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 HELOCs.

Key Assumptions in Base Case Expected Loss Estimates

HELOCs (1)



	As of June 30, 2016					As of March 31, 2016					As of December 31, 2015
	Range				Weighted Average	Range				Weighted Average	Range				Weighted Average
Plateau CDR	2.5	%	–	26.3%	12.6%	5.3	%	–	26.1%	11.9%	4.9	%	–	23.5%	10.3%
Final CDR trended down to	0.5	%	–	3.2%	1.2%	0.5	%	–	3.2%	1.2%	0.5	%	–	3.2%	1.2%
Period until final CDR	34 months					34 months					34 months
Initial CPR	11.0	%	–	15.4%	11.1%	11.0	%	–	14.9%	11.1%	10.9%
Final CPR(2)	10.0	%	–	15.4%	13.3%	10.0	%	–	15.0%	13.3%	10.0	%	–	15.0%	13.3%
Loss severity	98.0%					98.0%					98.0%

____________________


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


(2)	For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.

The Company’s base case assumed a six month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. Increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months), and doubling the defaults relating to the end of the interest only period would increase the expected loss by approximately $49 million for HELOC transactions. On the other hand, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by approximately $30 million for HELOC transactions.

Breaches of Representations and Warranties

The Company entered into agreements with R&W providers under which those providers made payments to the Company, agreed to make payments to the Company in the future, and / or repurchased loans from the transactions, all in return for releases of related liability by the Company.

As of June 30, 2016, the Company had a net R&W payable of $58 million to R&W counterparties, compared to an R&W recoverable of $79 million as of December 31, 2015. The decrease represents improvements in underlying collateral performance and the termination of the Deutsche Bank agreement described below. The Company’s agreements with providers of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers. When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company will have a net R&W payable. Most of the amount projected to be received pursuant to agreements with R&W providers benefits from eligible assets placed in trusts to collateralize the R&W provider’s future reimbursement obligation, with the amount of such collateral subject to increase or decrease from time to time as determined by rating agency requirements. Currently the Company has agreements with two counterparties where a future reimbursement obligation is collateralized by eligible assets held in trust:

•

Bank of America. Under the Company's agreement with Bank of America Corporation and certain of its subsidiaries (“Bank of America”), Bank of America agreed to reimburse the Company for 80% of claims on the first lien transactions covered by the agreement that the Company pays in the future, until the aggregate lifetime collateral losses (not insurance losses or claims) on those transactions reach $6.6 billion. As of June 30, 2016 aggregate lifetime collateral losses on those transactions was $4.5 billion, and the Company was projecting in its base case that such collateral losses would eventually reach $5.2 billion. Bank of America's reimbursement obligation is secured by $577 million of collateral held in trust for the Company's benefit.


•	UBS. Under the Company’s agreement with UBS Real Estate Securities Inc. and affiliates (“UBS”), UBS agreed to reimburse the Company for 85% of future losses on three first lien RMBS transactions, and such reimbursement obligation is secured by $44 million of collateral held in trust for the Company's benefit.

Under the Company's previous agreement with Deutsche Bank AG and certain of its affiliates (collectively, “Deutsche Bank”), Deutsche Bank agreed to reimburse the Company for certain claims it pays in the future on eight first and second lien transactions, including 80% of claims it pays on those transactions until the aggregate lifetime claims (before reimbursement) reach $319 million. In May 2016, Deutsche Bank's reimbursement obligations under the May 2012 agreement were terminated in return for cash payments to the Company.

The Company uses the same RMBS projection scenarios and weightings to project its future R&W benefit as it uses to project RMBS losses on its portfolio. To the extent the Company increases its loss projections, the R&W benefit generally will also increase, subject to the agreement limits and thresholds described above. Similarly, to the extent the Company decreases its loss projections, the R&W benefit generally will also decrease, subject to the agreement limits and thresholds described above.

Triple-X Life Insurance Transactions

The Company had $2.2 billion of net par exposure to Triple-X life insurance transactions as of June 30, 2016. Two of these transactions, with $216 million of net par outstanding, are rated BIG. The Triple-X life insurance transactions are based on discrete blocks of individual life insurance business. In older vintage Triple-X life insurance transactions, which include the two BIG-rated transactions, the amounts raised by the sale of the notes insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers. In the case of the two BIG-rated transactions, material amounts of their assets were invested in U.S. RMBS. Based on its analysis of the information currently available, including estimates of future investment performance, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at June 30, 2016, the Company’s projected net expected loss to be paid is $100 million. The economic benefit during Second Quarter 2016 was approximately $2 million, which was due primarily to changes in interest rates and updates to the projected asset cash flows. The economic loss development during Six Months 2016 was approximately $2 million, which was due primarily to changes in discount rates and updates to the projected life insurance cash flows.

Student Loan Transactions

The Company has insured or reinsured $1.6 billion net par of student loan securitizations issued by private issuers and that it classifies as structured finance. Of this amount, $110 million is rated BIG. The Company is projecting approximately $31 million of net expected loss to be paid on these transactions. In general, the losses are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The economic benefit during Second Quarter 2016 was approximately $1 million, which was driven primarily by changes in interest rates. The economic benefit during Six Months 2016 was approximately $15 million, which was driven primarily by the commutation of certain assumed student loan exposures earlier in the year.

TruPS and other structured finance

The Company's TruPS sector has BIG par of $563 million and all other structured finance BIG par totaled $828 million, comprising primarily transactions backed by perpetual preferred securities, commercial receivables and manufactured housing loans. The Company has expected loss to be paid of $3 million for TruPS and other structured finance transactions as of June 30, 2016. The economic benefit during Second Quarter 2016 was $3 million, which was attributable primarily to improved performance of various credits. The economic benefit during Six Months 2016 was $2 million, which was attributable primarily to improved performance of various credits.

Recovery Litigation

Public Finance Transactions

On January 7, 2016, AGM, AGC and Ambac Assurance Corporation (“Ambac”) commenced an action for declaratory judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico to invalidate the executive orders issued by the Governor on November 30, 2015 and December 8, 2015 directing that the Secretary of the Treasury of the Commonwealth of Puerto Rico and the Puerto Rico Tourism Company retain or transfer (in other words, "claw back") certain taxes and revenues pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation Authority, the Puerto Rico Convention Center District Authority and the Puerto Rico Infrastructure Financing Authority. The action is still in its early stages.

On July 21, 2016, AGC and AGM filed a motion and form of complaint in the U.S. District Court for the District of Puerto Rico seeking relief from the stay provided by PROMESA. Upon a grant of relief from the PROMESA stay, the lawsuit further seeks 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) are preempted by PROMESA and violate the U.S. Constitution. Additionally, it seeks damages for the value of the PRHTA toll revenues diverted and injunctive relief prohibiting the defendants from taking any further action under these executive orders.

On November 1, 2013, Radian Asset commenced a declaratory judgment action in the U.S. District Court for the Southern District of Mississippi against Madison County, Mississippi and the Parkway East Public Improvement District to establish its rights under a contribution agreement from the County supporting certain special assessment bonds issued by the District and insured by Radian Asset (now AGC). As of June 30, 2016, $20 million of such bonds were outstanding. The County maintained that its payment obligation is limited to two years of annual debt service, while AGC contended the County’s obligations under the contribution agreement continue so long as the bonds remain outstanding. On April 27, 2016, the Court granted AGC's motion for summary judgment, agreeing with AGC's interpretation of the County's obligations. On May 11, 2016, the County filed a notice of appeal of that ruling to the United States Court for the Fifth Circuit.

Triple-X Life Insurance Transactions

In December 2008 AGUK filed an action in the Supreme Court of the State of New York against J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager for a triple-X life insurance transaction, Orkney Re II plc ("Orkney"), involving securities guaranteed by AGUK. The action alleges that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the Orkney investments. After AGUK’s claims were dismissed with prejudice in January 2010, AGUK was successful in its subsequent motions and appeals and, as of December 2011, all of AGUK’s claims for breaches of fiduciary duty, gross negligence and contract were reinstated in full. On January 22, 2016, AGUK filed a motion for partial summary judgment with respect to one of its claims for breach of contract relating to a failure to invest in compliance with the Delaware insurance code. Discovery was completed on February 22, 2016, and oral argument on the motion for partial summary judgment is scheduled for August 2016.

RMBS Transactions

On February 5, 2009, U.S. Bank National Association, as indenture trustee ("U.S. Bank”), CIFG, as insurer of the Class Ac Notes, and Syncora Guarantee Inc. ("Syncora"), as insurer of the Class Ax Notes, filed a complaint in the Supreme Court of the State of New York against GreenPoint Mortgage Funding, Inc. ("GreenPoint") alleging GreenPoint breached its representations and warranties with respect to the underlying mortgage loans in the GreenPoint Mortgage Funding Trust 2006-HE1 transaction. On March 3, 2010, the court dismissed CIFG's and Syncora’s causes of action on standing grounds. On December 16, 2013, GreenPoint moved to dismiss the remaining claims of U.S. Bank on the grounds that it too lacked standing. U.S. Bank cross-moved for partial summary judgment striking GreenPoint’s defense that U.S. Bank lacked standing to directly pursue claims against GreenPoint. On January 28, 2016, the court denied GreenPoint’s motion for summary judgment and granted U.S. Bank’s cross-motion for partial summary judgment, finding that as a matter of law U.S. Bank has standing to directly assert claims against GreenPoint. On February 26, 2016, GreenPoint filed a notice of appeal of that decision but to date has not perfected its appeal.

On November 26, 2012, CIFG filed a complaint in the Supreme Court of the State of New York against JP Morgan Securities LLC ("JP Morgan") for material misrepresentation in the inducement of insurance and common law fraud, alleging that JP Morgan fraudulently induced CIFG to insure $400 million of securities issued by ACA ABS CDO 2006-2 Ltd. and $325 million of securities issued by Libertas Preferred Funding II, Ltd. On June 26, 2015, the Court dismissed with prejudice CIFG’s material misrepresentation in the inducement of insurance claim and dismissed without prejudice CIFG’s common law fraud claim. On September 24, 2015, the Court denied CIFG’s motion to amend but allowed CIFG to re-plead a cause of action for common law fraud. On November 20, 2015, CIFG filed a motion for leave to amend its complaint to re-plead common law fraud. On April 29, 2016, CIFG filed an appeal to reverse the Court’s decision dismissing CIFG’s material misrepresentation in the inducement of insurance claim.

On January 15, 2013, CIFG filed a complaint in the Supreme Court of the State of New York against Goldman, Sachs & Co. ("Goldman") for material misrepresentation in the inducement of insurance and common law fraud, alleging that Goldman fraudulently induced CIFG to insure $325 million of Class A-1 Notes (the “Class A-1 Notes”) and to purchase $10 million of Class A-2 Notes (the “Class A-2 Notes”) issued by Fortius II Funding, Ltd. CDO. CIFG and Goldman agreed to separately arbitrate the issue of liability with respect to CIFG’s purchase of the Class A-2 Notes, and on February 4, 2015, an arbitration panel awarded CIFG $2.5 million in damages. On September 11, 2015, CIFG filed an amended complaint to allege that the arbitration award collaterally estopped Goldman from disputing its liability for fraudulent inducement in respect of the Class A-1 Notes. On July 7, 2016, the Court heard oral argument on (i) the motion of AGC (as successor to CIFG) for partial summary judgment on the issue of Goldman’s liability for material misrepresentation in the inducement of insurance and fraud with respect to the Class A-1 Notes policy and (ii) Goldman’s motion to dismiss AGC’s amended complaint.