Edgar Filing: ASSURED GUARANTY LTD

Use these links to rapidly review the document
TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)
ý		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
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 (State or other jurisdiction of incorporation)		98-0429991 (I.R.S. employer 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 ý 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 ý 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 ý		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of registrant's Common Shares ($0.01 par value) outstanding as of October 29, 2010 was 183,743,989 (excludes 191,653 unvested restricted shares).

Table of Contents

ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q

		Page

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets (unaudited) as of September 30, 2010 and December 31, 2009	1
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2010 and 2009	2
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2010 and 2009	3
	Consolidated Statements of Shareholders' Equity (unaudited) for Nine Months ended September 30, 2010	4
	Consolidated Statements of Cash Flows (unaudited) for Nine Months Ended September 30, 2010	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	108
	Forward-Looking Statements	108
	Website Information	109
	Executive Summary	109
	Importance of Financial Strength Ratings	117
	AGMH Acquisition	119
	Insured Portfolio Profile	122
	Results of Operations	128
	Exposure to Residential Mortgage Backed Securities	156
	Summary of Relationships with Monolines	161
	Non-GAAP Financial Measures	163
	Liquidity and Capital Resources	166
Item 3.	Market Risk	187
Item 4.	Controls and Procedures	189
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	190
Item 1A.	Risk Factors	194
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	196
Item 6.	Exhibits	196

Table of Contents

Assured Guaranty Ltd.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands except per share and share amounts)

			September 30, 2010		December 31, 2009

Assets
Investment portfolio:
	Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,318,407 and $8,943,909)		$	9,775,835	$	9,139,900
	Short term investments, at fair value			907,663		1,668,279

		Total investment portfolio		10,683,498		10,808,179
Assets acquired in refinancing transactions				133,228		152,411
Cash				87,400		44,133
Premiums receivable, net of ceding commissions payable				1,322,486		1,418,232
Ceded unearned premium reserve				897,211		1,080,466
Deferred acquisition costs				251,177		241,961
Reinsurance recoverable on unpaid losses				18,084		14,122
Credit derivative assets				475,638		492,531
Committed capital securities, at fair value				15,307		9,537
Deferred tax asset, net				842,123		1,158,205
Salvage and subrogation recoverable				824,772		420,238
Financial guaranty variable interest entities' assets				2,296,729		762,303
Other assets				523,475		200,375

	Total assets		$	18,371,128	$	16,802,693

Liabilities and shareholders' equity
Unearned premium reserve			$	7,374,769	$	8,400,152
Loss and loss adjustment expense reserve ("LAE")				467,017		289,470
Long-term debt				923,769		917,362
Notes payable				132,107		149,051
Credit derivative liabilities				2,180,697		2,034,634
Reinsurance balances payable, net				259,308		215,239
Financial guaranty variable interest entities' liabilities with recourse				2,225,687		762,652
Financial guaranty variable interest entities' liabilities without recourse				236,903		—
Other liabilities				381,648		513,974

	Total liabilities			14,181,905		13,282,534

Commitments and contingencies
Common stock ($0.01 par value, 500,000,000 shares authorized; 183,743,833 and 184,162,896 shares issued and outstanding in 2010 and 2009)				1,837		1,842
Additional paid-in capital				2,583,196		2,584,983
Retained earnings				1,264,660		789,869
Accumulated other comprehensive income, net of deferred tax provision (benefit) of $123,650 and $58,551				337,530		141,814
Deferred equity compensation (181,818 shares)				2,000		2,000

	Total shareholders' equity attributable to Assured Guaranty Ltd.			4,189,223		3,520,508
Noncontrolling interest of financial guaranty variable interest entities				—		(349	)

	Total shareholders' equity			4,189,223		3,520,159

	Total liabilities and shareholders' equity		$	18,371,128	$	16,802,693

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands except per share amounts)

				Three Months Ended September 30,						Nine Months Ended September 30,

				2010			2009			2010			2009
Revenues
	Net earned premiums			$	288,767		$	329,970		$	900,437		$	557,050
	Net investment income				85,615			84,742			260,788			171,643
	Net realized investment gains (losses):
		Other-than-temporary impairment ("OTTI") losses			(5,719	)		(13,321	)		(24,248	)		(68,233	)
		Less: portion of OTTI loss recognized in other comprehensive income			(1,189	)		(5,287	)		(1,850	)		(26,920	)
		Other net realized investment gains (losses)			2,156			1,937			20,999			13,218

			Net realized investment gains (losses)		(2,374	)		(6,097	)		(1,399	)		(28,095	)
	Net change in fair value of credit derivatives:
		Realized gains and other settlements			52,498			71,691			117,554			120,086
		Net unrealized gains (losses)			(284,935	)		(205,336	)		2,278			(432,638	)

			Net change in fair value of credit derivatives		(232,437	)		(133,645	)		119,832			(312,552	)
	Fair value gain (loss) on committed capital securities				(5,548	)		(53,057	)		5,770			(93,961	)
	Financial guaranty variable interest entities' revenues				76,523			4,881			61,578			4,881
	Other income				33,682			57,005			7,357			58,399

		Total Revenues			244,228			283,799			1,354,363			357,365

Expenses
	Loss and loss adjustment expenses				109,166			133,325			310,823			251,109
	Amortization of deferred acquisition costs				8,023			1,308			23,132			41,277
	Assured Guaranty Municipal Holdings Inc. ("AGMH") acquisition-related expenses				—			51,333			6,772			80,179
	Interest expense				24,886			25,190			74,851			37,495
	Goodwill and settlement of pre-existing relationship				—			23,341			—			23,341
	Financial guaranty variable interest entities' expenses				(126,650	)		10,152			(131,482	)		10,152
	Other operating expenses				52,139			67,236			162,179			123,121

		Total expenses			67,564			311,885			446,275			566,674

Income (loss) before income taxes					176,664			(28,086	)		908,088			(209,309	)
Provision (benefit) for income taxes
	Current				(191,867	)		67,116			(185,998	)		68,817
	Deferred				187,674			(54,901	)		387,716			(153,310	)

		Total provision (benefit) for income taxes			(4,193	)		12,215			201,718			(84,493	)

Net income (loss)					180,857			(40,301	)		706,370			(124,816	)
Less: Noncontrolling interest of variable interest entities					—			(5,271	)		—			(5,271	)

Net income (loss) attributable to Assured Guaranty Ltd.				$	180,857		$	(35,030	)	$	706,370		$	(119,545	)

Earnings per share:
		Basic		$	0.98		$	(0.22	)	$	3.83		$	(1.05	)
		Diluted		$	0.96		$	(0.22	)	$	3.73		$	(1.05	)
Dividends per share				$	0.045		$	0.045		$	0.135		$	0.135

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,

	2010			2009			2010			2009
Net income (loss)	$	180,857		$	(40,301	)	$	706,370		$	(124,816	)
Unrealized holding gains (losses) during the period, net of tax of $64,025, $90,686, $62,428 and $103,951		139,638			205,383			197,035			235,380
Less: reclassification adjustment for gains (losses) included in net income (loss), net of deferred income tax provision (benefit) of $(1,118), $(136), $(2,556) and $2,055		(1,256	)		(5,961	)		1,157			(30,150	)

Change in net unrealized gains on investments		140,894			211,344			195,878			265,530
Change in cumulative translation adjustment		5,411			613			152			(1,390	)
Change in cash flow hedge		(105	)		(105	)		(314	)		(314	)

Other comprehensive income (loss)		146,200			211,852			195,716			263,826

Comprehensive income (loss)		327,057			171,551			902,086			139,010
Less: Comprehensive income (loss) attributable to noncontrolling interest of variable interest entities		—			(5,223	)		—			(5,223	)

Comprehensive income (loss) of Assured Guaranty Ltd.	$	327,057		$	176,774		$	902,086		$	144,233

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statement of Shareholders' Equity (Unaudited)

For the Nine Months Ended September 30, 2010

(dollars in thousands, except share data)

																					Noncontrolling Interest of Financial Guaranty Consolidated Variable Interest Entities

																		Total Shareholders' Equity Attributable to Assured Guaranty Ltd.
	Common Stock												Accumulated Other Comprehensive Income
	Common Stock						Additional Paid-in Capital			Retained Earnings						Deferred Equity Compensation								Total Shareholders' Equity
	Shares			Amount			Additional Paid-in Capital			Retained Earnings						Deferred Equity Compensation								Total Shareholders' Equity
Balance, December 31, 2009		184,162,896		$	1,842		$	2,584,983		$	789,869		$	141,814		$	2,000	$	3,520,508		$	(349	)	$	3,520,159
Cumulative effect of accounting change—consolidation of variable interest entities effective January 1, 2010 (Note 8)		—			—			—			(206,540	)		—			—		(206,540	)		349			(206,191	)

Balance, January 1, 2010		184,162,896			1,842			2,584,983			583,329			141,814			2,000		3,313,968			—			3,313,968
Net income		—			—			—			706,370			—			—		706,370			—			706,370
Dividends on common stock ($0.135 per share)		—			—			—			(24,889	)		—			—		(24,889	)		—			(24,889	)
Dividends on restricted stock units		—			—			150			(150	)		—			—		—			—			—
Common stock repurchases		(707,350	)		(7	)		(10,450	)		—			—			—		(10,457	)		—			(10,457	)
Share-based compensation and other		288,287			2			8,513			—			—			—		8,515			—			8,515
Change in cumulative translation adjustment, net of tax provision (benefit) of $284		—			—			—			—			152			—		152			—			152
Change in cash flow hedge, net of tax provision (benefit) of $(169)		—			—			—			—			(314	)		—		(314	)		—			(314	)
Investments with no OTTI, net of deferred income tax provision (benefit) of $61,421		—			—			—			—			183,386			—		183,386			—			183,386
Investments with OTTI, net of deferred income tax provision (benefit) of $1,007		—			—			—			—			13,649			—		13,649			—			13,649
Less: reclassification adjustment for gains (losses) included in net income (loss), net of deferred income tax provision (benefit) of $(2,556)		—			—			—			—			1,157			—		1,157			—			1,157

Balance, September 30, 2010		183,743,833		$	1,837		$	2,583,196		$	1,264,660		$	337,530		$	2,000	$	4,189,223		$	—		$	4,189,223

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

Table of Contents

Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

			Nine Months Ended September 30,

			2010			2009
Net cash flows provided by (used in) operating activities			$	(139,994	)	$	293,579

Investing activities
	Fixed maturity securities:
		Purchases		(1,928,744	)		(1,301,684	)
		Sales		835,716			1,258,372
		Maturities		729,559			80,773
	Net sales (purchases) of short-term investments			759,937			(220,825	)
	Net proceeds from financial guaranty variable interest entities' assets			323,626			—
	Cash paid to acquire AGMH, net of cash acquired			—			(458,998	)
	Other			15,718			8,017

Net cash flows provided by (used in) investing activities				735,812			(634,345	)

Financing activities
	Net proceeds from issuance of common stock			—			448,340
	Net proceeds from issuance of equity units			—			167,972
	Dividends paid			(24,889	)		(15,267	)
	Repurchases of common stock			(10,457	)		(3,676	)
	Share activity under option and incentive plans			(2,323	)		(840	)
	Net paydowns of financial guaranty variable interest entities' liabilities			(497,296	)		—
	Repayment of notes payable			(16,090	)		(8,331	)

Net cash flows provided by (used in) financing activities				(551,055	)		588,198
Effect of exchange rate changes				(1,496	)		747

Increase in cash				43,267			248,179
Cash at beginning of period				44,133			12,305

Cash at end of period			$	87,400		$	260,484

Supplemental cash flow information
Cash paid (received) during the period for:
	Income taxes		$	138,073		$	6,603
	Interest		$	57,121		$	22,980

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

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2010

1. Business and Organization

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 applies its credit underwriting expertise, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products. The Company's primary product is a guaranty of principal and interest payments on debt securities. These securities include municipal finance obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued for international infrastructure projects; and asset-backed securities ("ABS") issued by special purpose entities ("SPEs"). 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. and European markets.

On July 1, 2009 (the "Acquisition Date"), the Company acquired Financial Security Assurance Holdings Ltd. (renamed Assured Guaranty Municipal Holdings Inc., "AGMH"), and AGMH's subsidiaries, from Dexia Holdings, Inc. ("Dexia Holdings"). AGMH's principal insurance subsidiary is Financial Security Assurance Inc. (renamed Assured Guaranty Municipal Corp., "AGM"). As discussed further in Note 2, the acquisition of AGMH (the "AGMH Acquisition") did not include the acquisition of AGMH's former financial products business, which was comprised of its guaranteed investment contracts ("GICs") business, its medium term notes ("MTNs") business and the equity payment agreements associated with AGMH's leveraged lease business (the "Financial Products Business").

AGL's principal operating subsidiaries are Assured Guaranty Corp. ("AGC"), AGM and Assured Guaranty Re Ltd. ("AG Re"). The Company is a leading provider of financial guaranty credit protection products. This achievement resulted from a combination of factors, including AGL's acquisition of AGMH in 2009, the Company's ability to achieve and maintain high investment-grade financial strength ratings, and the significant financial distress faced by many of the Company's competitors since 2007, which has impaired their ability to underwrite new business.

Since July 1, 2009, when the AGMH Acquisition closed, the Company has conducted its financial guaranty business on a direct basis from two distinct platforms. AGM focuses exclusively on the U.S. public finance and global infrastructure business. AGM ceased underwriting structured finance business in September 2008. The second company, AGC, underwrites global structured finance obligations as well as U.S. public finance and global infrastructure obligations. Neither company currently underwrites U.S. residential mortgage backed securities ("RMBS").

AGC directly owns Assured Guaranty (UK) Ltd. ("AGUK") and AGM indirectly, through its subsidiary Assured Guaranty Municipal Insurance Company (formerly FSA Insurance Company), owns Assured Guaranty (Europe) Ltd. (formerly Financial Security Assurance (U.K.) Limited, "AGE"). AGUK and AGE are insurance companies organized and authorized in the United Kingdom ("U.K.") to transact the following classes of insurance: class 14 (credit), class 15 (suretyship) and class 16 (miscellaneous financial loss). The Company's management has been in discussions with the Financial Services Authority (the "UK FSA") relating to AGUK's and AGE's large reinsurance exposures to their respective parents, AGC and AGM, and with respect to certain AGUK guaranteed transactions. AGUK's board of directors has determined that it is not necessary to maintain both companies to write

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

1. Business and Organization (Continued)

new business. Accordingly, Assured Guaranty has elected to place AGUK into run-off and has filed a run-off plan with the UK FSA. Instead, the Company will utilize AGE as the entity from which to write business in the European Economic Area. Management has agreed with the UK FSA that any new business written by AGE will be guaranteed using a co-insurance structure pursuant to which AGE will co-insure municipal and infrastructure transactions with AGM, and structured finance transactions with AGC. AGE's financial guarantee will guarantee approximately 5 to 7% of the total exposure, and AGM's or AGC's financial guarantee will guarantee the remaining exposure under the transaction. AGM or AGC will also issue a second-to-pay insurance policy to cover AGE's financial guarantee.

The global financial markets experienced volatility and disruption over the past several years including depressed home prices and increased foreclosures, falling equity market values, rising unemployment, declining business and consumer confidence and the risk of increased inflation, which have precipitated an economic slowdown. While there have been signs of a recovery as seen by stabilizing unemployment and home prices as well as rising equity markets, management cannot assure you that volatility and disruption will not return to these markets in the near term. These conditions may adversely affect the Company's future profitability, financial position, investment portfolio, cash flow, statutory capital, financial strength ratings and stock price. Additionally, future legislative, regulatory or judicial changes in the jurisdictions regulating the Company may adversely affect its ability to pursue its current mix of business, materially impacting its financial results.

Segments

The Company's business includes two principal segments: financial guaranty direct and financial guaranty reinsurance. Financial guaranties of RMBS and commercial mortgage-backed securities ("CMBS") are included in both the financial guaranty direct and reinsurance segments. The Company's mortgage guaranty insurance business, which used to be a segment and has had no new activity in recent years, and other lines of business that were 100% ceded upon Assured Guaranty's initial public offering ("IPO") in 2004, are shown as "other." Each segment is reported net of business ceded to external reinsurers. The financial guaranty segments include contracts accounted for as both insurance and credit derivatives. These segments are further discussed in Note 19.

Importance of Financial Strength Ratings

Debt obligations guaranteed by AGL's insurance company subsidiaries are generally awarded debt credit ratings that are the same rating as the financial strength rating of the AGL subsidiary that has guaranteed that obligation. Investors in products insured by AGC or AGM frequently rely on rating agency ratings because 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, preferably the highest that an agency will assign. However, the models used by rating agencies 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.

Historically, insurance financial strength ratings reflect an insurer's ability to pay under its insurance policies and contracts in accordance with their terms. The rating is not specific to any

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

1. Business and Organization (Continued)

particular policy or contract. Insurance financial strength ratings do not refer to an insurer's ability to meet non-insurance obligations and are not a recommendation to purchase any policy or contract issued by an insurer or to buy, hold, or sell any security insured by an insurer. The ratings also reflect qualitative factors with respect to such things as the insurer's business strategy and franchise value, the anticipated future demand for its product, the composition of its portfolio, as well as its capital adequacy, profitability and financial flexibility.

The rating agencies have developed and published methodologies for rating financial guaranty and mortgage guaranty insurers and reinsurers. The insurance financial strength ratings assigned by the rating agencies are based upon factors relevant to policyholders and are not directed toward the protection of investors in AGL's common shares. The rating criteria used by the rating agencies in establishing these ratings include consideration of the sufficiency of capital resources to meet projected growth (as well as access to such additional capital as may be necessary to continue to meet applicable capital adequacy standards), a company's overall financial strength, and demonstrated management expertise in financial guaranty and traditional reinsurance, credit analysis, systems development, marketing, capital markets and investment operations. Ratings reflect only the views of the respective rating agencies and are subject to continuous review and revision or withdrawal at any time.

On October 25, 2010, Standard &Poor's Ratings Services ("S&P") lowered the counterparty credit and insurer financial strength ratings on AGC, AGM and their respective insurance subsidiaries to AA+ from AAA and changed its outlook on such entities from negative to stable. In changing the outlook of AGC, AGM and their respective insurance subsidiaries from negative to stable, S&P noted in its Research Update the Company's strong capitalization, largely investment-grade book of insured par and strong business position. According to S&P, an S&P rating outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years) and stable means that a rating is not likely to change during that period. S&P noted in its Research Update that if the Company were to report meaningful statutory losses, it would lower the ratings or revise the outlook to negative.

2. AGMH Acquisition

On the Acquisition Date, AGL, through its wholly owned subsidiary Assured Guaranty US Holdings Inc. ("AGUS"), purchased AGMH and, indirectly, its subsidiaries (excluding those involved in AGMH's former Financial Products Business) from Dexia Holdings. The acquired companies are collectively referred to as the "Acquired Companies." The AGMH subsidiaries that conducted AGMH's former Financial Products Business (the "Financial Products Companies") were sold to Dexia Holdings prior to the AGMH Acquisition. In connection with the AGMH Acquisition, Dexia Holdings agreed to assume the risks in respect of the Financial Products Business and AGM agreed to retain the risks relating to the debt and strip policy portions of such business. Accordingly, the Company has entered into various agreements with Dexia SA and certain of its affiliates (together, "Dexia") in order to transfer to Dexia the credit risks and, as discussed further in Note 16, the liquidity risks associated with AGMH's former Financial Products Business.

The Company is indemnified against exposure to AGMH's former financial products segment through guaranties issued by Dexia. In addition, the Company is protected from exposure to AGMH's GIC business through guaranties issued by the French and Belgian governments. Furthermore, to

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

2. AGMH Acquisition (Continued)

support the payment obligations of the Financial Products Companies, Dexia SA and its affiliate Dexia Crédit Local S.A. ("DCL") have entered into two separate International Swaps and Derivative Association, Inc. ("ISDA") Master Agreements, each with its associated schedule, confirmation and credit support annex (the "Guaranteed Put Contract" and the "Non-Guaranteed Put Contract" respectively, and collectively, the "Dexia Put Contracts"), pursuant to which Dexia SA and DCL jointly and severally guarantee the scheduled payments of interest and principal in relation to each asset of FSA Asset Management LLC ("FSAM"), which is one of the Financial Products Companies, as well as any failure of Dexia to provide liquidity or liquid collateral under certain liquidity facilities.

AGMH is now a wholly owned subsidiary of AGUS, and therefore the Company's financial statements subsequent to the Acquisition Date include the activities of the Acquired Companies.

The purchase price paid by the Company was $546.0 million in cash and 22.3 million common shares of AGL with an Acquisition Date fair value of $275.9 million, for a total purchase price of $821.9 million.

At the closing of the AGMH Acquisition, Dexia Holdings owned approximately 14.0% of AGL's issued common shares. Effective August 13, 2009, Dexia Holdings transferred such AGL common shares to Dexia SA, acting through its French branch. On March 16, 2010, Dexia SA sold all of such AGL common shares in a secondary public offering.

The AGMH Acquisition was accounted for under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Accordingly, the Company recorded the identifiable assets acquired and liabilities assumed at their fair value at the Acquisition Date. In many cases, determining the fair value of acquired assets and liabilities assumed required the Company to exercise significant judgment. The most significant of these determinations related to the valuation of the acquired financial guaranty direct and ceded contracts.

The fair value of a financial guaranty direct contract is the estimated premium that a similarly rated hypothetical financial guarantor would demand to assume each policy. The methodology for determining such value takes into account the rating of the insured obligation, expectation of loss, sector and term. On January 1, 2009, new accounting guidance became effective for financial guaranty insurance which requires a Company to recognize loss reserves only to the extent expected losses exceed deferred premium revenue. As the fair value of the deferred premium revenue exceeded the Company's estimate of expected loss for each contract, no loss reserves were recorded at July 1, 2009 for the Acquired Companies' contracts.

Based on the Company's assumptions, the fair value of the Acquired Companies' deferred premium revenue on its insurance contracts was $7.3 billion at July 1, 2009, an amount approximately $1.7 billion greater than the Acquired Companies' gross unearned premium and loss reserves (i.e. "gross stand ready obligations") at June 30, 2009. This indicates that the amounts of the Acquired Companies' contractual premiums were less than the premiums a market participant of similar credit quality would demand to acquire those contracts at the Acquisition Date. The fair value of the Acquired Companies' ceded contracts at July 1, 2009 was an asset of $1.7 billion and recorded in ceded unearned premium reserve. The fair value of the ceded contracts is in part derived from the fair value of the related insurance contracts with an adjustment for the credit quality of each reinsurer.

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

2. AGMH Acquisition (Continued)

For AGMH's long-term debt, the fair value was based upon quoted market prices available from third-party brokers as of the Acquisition Date. The fair value of this debt was approximately $0.3 billion lower than its carrying value immediately prior to the AGMH Acquisition. This discount is being amortized into interest expense over the estimated remaining life of the debt.

Additionally, other acquisition accounting adjustments included (1) the write off of the Acquired Companies' deferred acquisition cost ("DAC") and (2) the consolidation of certain financial guaranty variable interest entities ("VIEs") in which the combined variable interest of the Acquired Companies and AG Re resulted in the Company being the primary beneficiary. Effective January 1, 2010, the Company deconsolidated these financial guaranty VIEs in accordance with new GAAP guidance as discussed in Note 8.

The resulting bargain purchase gain was recorded within "Goodwill and settlement of pre-existing relationship" in the Company's consolidated statements of operations at the Acquisition Date. The bargain purchase resulted from the unprecedented credit crisis, which resulted in a significant decline in AGMH's franchise value due to material insured losses, ratings downgrades and significant losses at Dexia. Dexia required government intervention in its affairs, resulting in motivation to sell AGMH, and with the absence of potential purchasers of AGMH due to the financial crisis, the Company was able to negotiate a bargain purchase price. The initial difference between the purchase price of $821.9 million and AGMH's recorded net assets of $2.1 billion was reduced significantly by the recognition of additional liabilities related to AGMH's insured portfolio on a fair value basis as required by acquisition accounting.

The Company and the Acquired Companies had a pre-existing reinsurance relationship. Under GAAP, this pre-existing relationship must be effectively settled at fair value. The loss relating to this pre-existing relationship resulted from the effective settlement of reinsurance contracts at fair value and the write-off of previously recorded assets and liabilities relating to this relationship recorded in the Company's historical accounts. The Company determined fair value as the difference between contractual premiums and the Company's estimate of current market premiums. The loss related to the contract settlement results from contractual premiums that were less than the Company's estimate of what a market participant would demand currently, estimated in a manner similar to how the value of the Acquired Companies' insurance policies were valued, as well as related acquisition costs.

Pro Forma Condensed Combined Statement of Operations

The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and the Acquired Companies. The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2009, nor is it indicative of the results of operations in future periods.

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

2. AGMH Acquisition (Continued)

Pro Forma Unaudited Results of Operations

	Nine Months 2009

	Revenues		Net Income (Loss) Attributable to Assured Guaranty Ltd.			Net Income (Loss) per Basic Share
	(in millions, except per share amounts)
Assured Guaranty as reported	$	357.4	$	(119.5	)	$	(1.05	)
Pro forma combined		1,775.4		658.5			4.20

Goodwill Impairment Analysis

In accordance with GAAP, the Company does not amortize goodwill, but instead performs an impairment test annually or more frequently should circumstances warrant. The impairment test evaluates goodwill for recoverability by comparing the fair value of the Company's direct and reinsurance lines of business to their carrying value. If fair value is greater than carrying value then goodwill is deemed to be recoverable and there is no impairment. If fair value is less than carrying value then goodwill is deemed to be impaired and written down to an amount such that the fair value of the reporting unit is equal to the carrying value, but not less than $0. As part of the impairment test of goodwill, there are inherent assumptions and estimates used by management in developing discounted future cash flows related to the Company's direct and reinsurance lines of business that are subject to change based on future events.

The Company reassessed the recoverability of goodwill in the three-months ended September 30, 2009 ("Third Quarter 2009") subsequent to the AGMH Acquisition, which provided the Company's largest assumed book of business prior to the acquisition. As a result of the AGMH Acquisition, which significantly diminished the Company's potential near future market for assuming reinsurance, combined with the continued credit crisis, which has adversely affected the fair value of the Company's in-force policies, management determined that the full carrying value of $85.4 million of goodwill on its books prior to the AGMH Acquisition should be written off in the Third Quarter 2009. This charge does not have any adverse effect on the Company's debt agreements or its overall compliance with the covenants of its debt agreements.

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

2. AGMH Acquisition (Continued)

AGMH Acquisition-Related Expenses

AGMH Acquisition-related expenses for the three-month period ended September 30, 2010 ("Third Quarter 2010") and Third Quarter 2009, the nine-month period ended September 30, 2010 ("Nine Months 2010") and the nine-month period ended September 30, 2009 ("Nine Months 2009) are as follows:

		Third Quarter				Nine Months

		2010		2009		2010		2009
		(in millions)
Severance costs		$	—	$	37.2	$	—	$	37.2
Professional services			—		13.6		6.8		27.7
Office consolidation			—		0.5		—		15.3

	Total	$	—	$	51.3	$	6.8	$	80.2

3. Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with GAAP and, in the opinion of management, reflect all adjustments which are of a normal recurring nature, necessary for a fair statement of the Company's financial condition, results of operations and cash flows for the periods presented. The year-end 2009 balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 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 cover the Third Quarter 2010, Third Quarter 2009, Nine Months 2010 and Nine Months 2009. Results of operations for the Third Quarter and Nine Months 2010 and 2009 are not necessarily indicative of the results that may be expected for a full year. The Third Quarter 2010 and Nine Months 2010 financial statements include the effects of the Company's common share and equity units offerings that took place in December 2009. The effects of the AGMH Acquisition are included in periods since the Acquisition Date. In addition, financial statements for periods between July 1, 2009 and December 31, 2009 include the effects of consolidating certain financial guaranty VIEs where the Company was deemed to be the primary beneficiary. Effective January 1, 2010, new GAAP requirements resulted in the deconsolidation of these VIEs and the consolidation of certain other VIEs based on control rights. (See Note 8).

Intercompany accounts and transactions between and among AGL and its subsidiaries have been eliminated as well as transactions between the insurance company subsidiaries and their consolidated VIEs. 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 Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, filed with the U.S. Securities and Exchange Commission (the "SEC").

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

3. Basis of Presentation (Continued)

In October 2010, the Financial Accounting Standards Board ("FASB") adopted Accounting Standards Update ("Update") No. 2010-26. This amendment in the Update specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. 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 should be charged to expense as incurred. The amendment in the Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in this Update will be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. Early adoption is permitted, but only at the beginning of an entity's annual reporting period. The Company is currently evaluating the impact the amendment in the Update will have on its consolidated financial statements.

4. Outstanding Exposure

The Company's insurance policies and credit derivative contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest ("debt service") on public finance and structured finance obligations. Outstanding par and debt service amounts are presented below, including outstanding exposures on VIEs whether or not they are consolidated.

Debt Service Outstanding

		Gross Debt Service Outstanding				Net Debt Service Outstanding

		September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
		(in millions)
Public finance		$	859,643	$	880,933	$	761,896	$	761,301
Structured finance			191,691		214,104		179,613		196,964

	Total	$	1,051,334	$	1,095,037	$	941,509	$	958,265

The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade ("IG") at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also utilizes reinsurance by ceding business to third-party reinsurers.

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

4. Outstanding Exposure (Continued)

The following tables present par outstanding by type of issue for public finance obligations, or by collateral for structured finance obligations, and by the Company's internal rating.

Summary of Public Finance Insured Portfolio
By Type of Issue

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Types of Issues			September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
			(in millions)
U.S.:
	General obligation		$	199,355	$	201,264	$	17,629	$	22,880	$	181,726	$	178,384
	Tax backed			92,976		94,825		9,363		11,796		83,613		83,029
	Municipal utilities			75,847		77,872		5,911		8,294		69,936		69,578
	Transportation			42,094		42,540		5,877		7,243		36,217		35,297
	Healthcare			27,019		28,214		5,124		6,205		21,895		22,009
	Higher education			16,093		16,399		1,001		1,267		15,092		15,132
	Housing			7,521		9,623		794		1,099		6,727		8,524
	Infrastructure finance			4,931		4,530		895		977		4,036		3,553
	Investor-owned utilities			1,599		1,694		2		4		1,597		1,690
	Other public finance—U.S.			5,853		6,002		108		120		5,745		5,882

		Total public finance—U.S.		473,288		482,963		46,704		59,885		426,584		423,078
Non-U.S.:
	Infrastructure finance			19,284		19,404		3,052		3,060		16,232		16,344
	Regulated utilities			18,857		18,979		4,827		5,128		14,030		13,851
	Pooled infrastructure			4,639		4,684		272		280		4,367		4,404
	Other public finance—non-U.S.			9,797		10,485		2,301		2,309		7,496		8,176

		Total public finance—non-U.S.		52,577		53,552		10,452		10,777		42,125		42,775

Total public finance obligations			$	525,865	$	536,515	$	57,156	$	70,662	$	468,709	$	465,853

Table of Contents

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

September 30, 2010

4. Outstanding Exposure (Continued)

The par outstanding of insured obligations in the structured finance portfolio includes the following amounts by type of collateral:

The Company may purchase securities that it has insured, and for which it has expected losses, in order to economically mitigate insured losses. These securities are purchased at trading discounts. As of September 30, 2010, securities purchased for loss mitigation purposes had a fair value of $150.1 million representing $484.6 million of gross par outstanding. In addition, under the terms of certain credit derivative contracts, the Company has obtained the underlying collateral of transactions and recorded it in invested assets in the consolidated balance sheets. Such amounts totaled $190.0 million, representing $274.4 million in gross par outstanding.

As part of its financial guaranty business, the Company enters into credit derivative transactions. In such transactions, the buyer of protection pays the seller of protection a periodic fee in fixed basis points on a notional amount. In return, the seller makes a contingent payment to the buyer if one or more defined credit events occurs with respect to one or more third party referenced securities or loans. A credit event may be a non-payment event such as a failure to pay, bankruptcy, or restructuring, as negotiated by the parties to the credit derivative transaction. The total notional amount of insured credit derivative exposure outstanding which is accounted for at fair value as of September 30, 2010 and December 31, 2009 and included in the Company's financial guaranty exposure in the tables above was $116.0 billion and $122.4 billion, respectively. See Note 7.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $5.5 billion for structured finance and $3.6 billion for public finance commitments

at September 30, 2010. The structured finance commitments include the unfunded component of and delayed draws on pooled corporate transactions. Public finance commitments are typically short term and relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between October 1, 2010 through February 1, 2019, with $3.2 billion expiring prior to December 31, 2011. All 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.

Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio, including exposures in both financial guaranty insurance and credit derivative form. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, and Surveillance personnel are responsible for recommending adjustments to those ratings to reflect changes in transaction credit quality.

Work-out personnel are responsible for managing work-out and loss mitigation situations. They develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the Company's litigation proceedings.

Since the onset of the financial crisis, the Company has shifted personnel to loss mitigation and work-out activities and hired new personnel to augment its efforts. Although the Company's loss mitigation efforts may extend to any transaction it has identified as having loss potential, much of the recent activity has been focused on RMBS.

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide representations and warranties ("R&W"), that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these requirements. The Company uses internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W. If a provider of R&W refuses to honor its repurchase obligations, the Company may chose to initiate litigation. See "Recovery Litigation" in Note 6 below.

The quality of servicing of the mortgage loans underlying an RMBS transaction influences collateral performance and ultimately the amount (if any) of the Company's insured losses. The Company has established a group to mitigate RMBS losses by influencing mortgage servicing, including causing the transfer of servicing or establishing special servicing.

In the fall of 2010, several large RMBS servicers suspended foreclosures because of allegations of a widespread failure to comply with foreclosure procedures and faulty loan documentation. These issues are being investigated by various state attorney general offices throughout the U.S. The suspension of foreclosures and subsequent investigation will lead to additional servicing costs and

expenses, including without limitation, increased advances by the servicers for principal and interest, taxes, insurance and legal costs. The Company is increasing its monitoring efforts to ensure that the servicers comply with their obligations under servicing contracts, including bearing the losses and expenses incurred as a result of this issue. These same foreclosure issues are expected to impact the timing of losses to RMBS transactions that the Company has insured, which may impact the speed at which various classes of RMBS securities amortize, and so could impact the size of losses ultimately paid by the Company. The Company expects these issues to take some time to resolve.

The Company may also employ other strategies as appropriate to avoid or mitigate losses in U.S. RMBS or other areas.

The Company segregates its insured portfolio into IG 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 the Company's internal assessment of the likelihood of default. The Company's 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 IG credits to determine whether any new credits need to be internally downgraded to BIG. Quarterly procedures include qualitative and quantitative analysis of the Company's insured portfolio to identify potential new BIG credits. The Company refreshes its internal credit ratings on individual credits in 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. Credits identified through this process as BIG are subjected to further review by Surveillance personnel to determine the various probabilities of a loss. Surveillance personnel present analysis related to potential loss scenarios to the Company's loss reserve committee.

Within the BIG category, the Company assigns each credit to one of three surveillance categories. Intense monitoring and intervention is employed for all BIG categories, with internal credit ratings reviewed quarterly:

The following table provides information for contracts accounted for as financial guaranty insurance contracts:

Expected Collections of Gross Premiums Receivable,
Net of Ceding Commissions Payable

The following table provides a reconciliation of the beginning and ending balances of gross premium receivable net of ceding commission payable.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 41% of the Company's installment premiums at September 30, 2010 are denominated in currencies other than the U.S. dollar, primarily in Euro and British Pound Sterling ("GBP"). Premium receivable is revalued to the spot rate at the end of each reporting period with the change reflected in either (1) other income in the consolidated statements of operations for premium receivable recorded by subsidiaries using the U.S. dollar as its functional currency or (2) other comprehensive income ("OCI") as a cumulative translation adjustment for premium receivables recorded by subsidiaries using a functional currency other than the U.S. dollar.

The unearned premium reserve is comprised of deferred premium revenue net of claim payments that are not expected to be recovered and have not yet been recorded through the consolidated statements of operations. Paid losses are expensed when total expected loss (i.e. claim payments plus future expected loss) exceed deferred premium revenue on a contract.

The following table provides a schedule of how the Company's financial guaranty insurance net deferred premium revenue and PV of expected losses are expected to run off in the consolidated statement of operations, pre-tax. This table excludes amounts related to consolidated VIEs.

Expected Financial Guaranty Insurance Scheduled Net Earned Premiums and
Net Loss to be Expensed

The following table presents a rollforward of the present value of net expected loss and LAE to be paid from January 1, 2010 by sector.

Financial Guaranty Insurance
Present Value of Net Expected Loss and LAE to be paid
Roll Forward by Sector(1)

Expected loss and LAE to be paid in the table above represents the present value of losses to be paid net of expected salvage and subrogation and reinsurance cessions. The amount of expected loss to be paid in the table above differs from net expected loss and LAE in the previous table due primarily to amounts paid that have not yet been expensed and amounts expensed not yet paid. Loss and LAE is recognized in the consolidated statements of operations when the sum of claim payments not yet expensed, plus the present value of future expected losses exceeds deferred premium revenue on a contract by contract basis.

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 due to changing economic, fiscal and financial market variability over the long duration of most contracts.

The determination of expected loss is an inherently subjective process involving numerous estimates, assumptions and judgments by management. The Company's estimates of expected losses on RMBS transactions takes into account expected recoveries from sellers and originators of the underlying residential mortgages due to breaches in the originator's R&W regarding the loans transferred to the RMBS transaction.

The following table provides information on financial guaranty insurance and reinsurance contracts categorized as BIG as of September 30, 2010 and December 31, 2009:

The Company used weighted-average risk free rates ranging from 0% to 4.51% and 0.07% to 5.21% to discount expected losses as of September 30, 2010 and December 31, 2009, respectively.

The following table provides information on loss and LAE reserves net of reinsurance on the consolidated balance sheets.

The following table provides information on salvage and subrogation recoverable on financial guaranty insurance and reinsurance contracts recorded as an asset on the consolidated balance sheets.

In accordance with the Company's standard practices, the Company evaluated the most current available information as part of its loss estimation process, including trends in delinquencies and charge-offs on the underlying loans and its experience in requiring providers of R&W to purchase ineligible loans out of these transactions. Most of the Company's expected loss and LAE and paid losses relate to U.S. RMBS. As has been widely reported in the press, unprecedented levels of delinquencies and defaults have negatively impacted the mortgage market, especially U.S. RMBS issued in the period from 2005 through 2007. The Company observed some improvement in roll rates (the rates at which loans transition from one stage of delinquency to the next and, ultimately, default) over the quarter, particularly in second lien transactions. Consequently, some of the initial plateau conditional default rates ("CDR") used by the Company to project losses were generally lower this quarter than last quarter. Unfortunately, early stage delinquencies did not trend down as much as the Company had hoped, so the Company retained the shape of the curves and probability weightings used last quarter. By doing this, the Company essentially assumed the recovery in the housing and mortgage markets would be delayed by another three months. Changes were made with respect to how scenarios were run in the second quarter 2010 as compared to March 31, 2010, to reflect the Company's view

that it might have been witnessing the beginning of an improvement in the housing and mortgage markets. The scenarios used in first quarter of 2010, with the exception of an adjustment to the subprime severity, were the same as those employed at year-end 2009.

The Company insures two types of second lien RMBS: those secured by HELOCs and those secured by CES mortgages. HELOCs are revolving lines of credit generally secured by a second lien on a one to four family home. A mortgage for a fixed amount secured by a second lien on a one to four family home is generally referred to as a CES. The Company has material exposure to second lien mortgage loans originated and serviced by a number of parties, but the Company's most significant second lien exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America Corporation.

The delinquency performance of HELOC and CES exposures included in transactions insured by the Company began to deteriorate in 2007, and such transactions, particularly those originated in the period from 2005 through 2007, continue to perform below the Company's original underwriting expectations. While insured securities benefit from structural protections within the transactions designed to absorb collateral losses in excess of previous historical high levels, in many second lien RMBS projected losses now exceed those structural protections.

The Company believes the primary variables impacting its expected losses in second lien RMBS transactions are the amount and timing of future losses in the collateral pool supporting the transactions and the amount of loans repurchased for breaches of R&W. Expected losses are also a function of the structure of the transaction, the voluntary prepayment rate, typically also referred to as conditional prepayment rate ("CPR") of the collateral: the interest rate environment; and assumptions about the draw rate and loss severity. These variables are: interrelated, difficult to predict and subject to considerable volatility. If actual experience differs from the Company's assumptions, the losses incurred could be materially different from the estimate. The Company continues to update its evaluation of these exposures as new information becomes available.

The following table shows the Company's key assumptions used in its calculation of estimated expected losses for these types of policies as of September, 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009:

For second lien transactions, the Company calculates expected losses in the following fashion: A loan is generally "charged off" by the securitization's servicer once the loan is 180 days past due and therefore the Company's projections assume that a loss is charged off once it is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected transactions and then applying those liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months are then expressed as CDR, and the average of those CDRs is then used as the basis for calculating defaults after the fifth month. As was the case last quarter, in the base scenario, this CDR (the "plateau CDR") is held constant for one month. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. In the base scenario, the time over which the CDR trends down to its final CDR is eighteen months. Therefore, in the base case scenario, the total time from the current period to the end of the ramp (when the long-term steady CDR is reached) is 24 months. The long-term steady state CDRs are calculated as the constant conditional default rates that would have

yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally very low recovery. Based on current expectations of future performance, the Company reduced its loss recovery assumption to 2% from 5% (thus increasing its severity from 95% to 98%) in Third Quarter 2010.

The rate at which the principal amount of a loan is prepaid may impact both the amount of losses projected (which is a function of the CDR and the loan balance over time) as well as the amount of excess spread (which is the excess of the interest paid by the borrowers on the underlying loan over the amount of interest and expenses owed on the insured obligations). In the base case, the current CPR is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant. The final CPR is assumed to be 10% for both HELOC and CES transactions. This level is much higher than current rates, but lower than the historical average, which reflects the Company's continued uncertainty about performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the CPR in both the first and second quarter of 2010 and fourth quarter of 2009.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percent of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to the final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 3.9%.

In estimating expected losses, the Company modeled and probability weighted three possible CDR curves applicable to the period preceding the return to the long-term steady state CDR. Given that draw rates have been reduced to levels below the historical average and that loss severities in these products have been higher than anticipated at inception, the Company believes that the level of the elevated CDR and the length of time it will persist is the primary driver behind the likely amount of losses the collateral will suffer (before considering the effects of repurchases of ineligible loans). The Company continues to evaluate the assumptions affecting its modeling results.

As in the case of second quarter of 2010, the Company's base case assumed a one month CDR plateau and an 18 month ramp down. Increasing the CDR plateau to 4 months and keeping the ramp down at 18 months would increase the expected loss by approximately $125.5 million for HELOC transactions and $12.7 million for CES transactions. On the other hand, keeping the CDR plateau at one month but decreasing the length of the CDR ramp down back to the 12 month assumption for second quarter of 2010 would decrease the expected loss from those taken by approximately $89.7 million for HELOC transactions and $10.3 million for CES transactions.

First lien RMBS are generally categorized in accordance with the characteristics of the first lien mortgage loans on one to four family homes supporting the transactions. The collateral supporting "Subprime RMBS" transactions is comprised of first-lien residential mortgage loans made to subprime borrowers. A "subprime borrower" is one considered to be a higher risk credit based on credit scores or other risk characteristics. Another type of RMBS transaction is generally referred to as "Alt-A

RMBS." The collateral supporting such transactions is comprised of first-lien residential mortgage loans made to "prime" quality borrowers who lack certain ancillary characteristics that would make them prime. When more than 66% of the loans originally included in the pool are mortgage loans with an option to make a minimum payment that has the potential to negatively amortize the loan (i.e., increase the amount of principal owed), the transaction is referred to as an "Option ARM." Finally, transactions may be primarily composed of loans made to prime borrowers.

The performance of the Company's first lien RMBS exposures began to deteriorate in 2007 and such transactions, particularly those originated in the period from 2005 through 2007 and continue to perform below the Company's original underwriting expectations. The Company currently projects first lien collateral losses many times those expected at the time of underwriting. While insured securities benefitted from structural protections within the transactions designed to absorb some of the collateral losses, in many first lien RMBS transactions, projected losses exceed those structural protections.

The majority of projected losses in first lien RMBS transactions are expected to come from mortgage loans that are delinquent or in foreclosure. An increase in delinquent and foreclosed loans beyond those delinquent and foreclosed last quarter is 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 delinquency categories. The following table shows the Company's liquidation assumptions for various delinquency categories as of September 30, 2010 and June 30, 2010. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will

default within a specified time period. The Company projects these liquidations to occur over two years.

Losses are also projected on first lien RMBS that are presently current loans. The Company projects these losses by applying a CDR trend. The start of that CDR trend is based on the defaults the Company projected would emerge from currently delinquent and foreclosed loans. The total amount of expected defaults from these loans is then translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 24 months, would be sufficient to produce approximately the amount of losses that were calculated to emerge from the various delinquency categories. In the base case, each transaction's CDR is projected to improve over 12 months to an intermediate CDR (calculated as 15% of its CDR plateau); that intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. Under the Company's methodology, defaults projected to occur in the first 24 months represent defaults that can be attributed to loans that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 24 month period represent defaults attributable to borrowers that are currently performing.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historical high levels and

the Company is assuming that these historical high levels will continue for another year. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in September 2011, and in the base scenario decline over two years to 40%.

The following table shows the Company's key assumptions used in its calculation of expected losses for these types of policies as of September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009:

Key Assumptions in Base Case Expected Loss Estimates of First Lien RMBS Transactions

The rate at which the principal amount of a loan is prepaid may impact both the amount of losses projected (since that amount is a function of the CDR 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 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 either 10% or 15% depending on the scenario run. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant.

The ultimate performance of the Company's first lien RMBS transactions remains highly uncertain and may be subject to considerable volatility due to the influence of many factors, including the level and timing of loan defaults, changes in housing prices and other variables. The Company will continue to monitor the performance of its RMBS exposures and will adjust the risk ratings of those transactions based on actual performance and management's estimates of future performance.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast an economic recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the current CDR. The Company also stressed CPRs and the speed of recovery of loss severity rates. In a somewhat more stressful environment than that of the base case, where the CDR recovery was more gradual and the final CPR was 15% rather than 10%, the Company's expected losses would increase by approximately $11.3 million for Alt-A first liens, $92.9 million for Option ARMs, $16.7 million for subprime and $0.1 million for prime transactions. In an even more stressful scenario where the CDR plateau was extended 3 months (to be 27 months long) before the same more gradual CDR recovery and loss severities were assumed to recover over 4 rather than 2 years (and subprime loss severities were assumed to recover only to 55%), the Company's expected losses would increase by approximately $40.1 million for Alt-A first liens, $193.9 million for Option ARMs, $117.6 million for subprime and $0.6 million for prime transactions. The Company also considered a scenario where the recovery was faster than in its base case. In this scenario, where the CDR plateau was 3 months shorter (21 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced, the Company's expected losses would decrease by approximately $26.9 million for Alt-A first liens, $92.0 million for Option ARMs, $33.9 million for subprime and $0.5 million for prime transactions.

Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company's original expectations. The Company has employed several loan file diligence firms and law firms as well as devoting internal resources to review the mortgage files surrounding many of the defaulted loans. As of September 30, 2010, the Company had performed a detailed review of approximately 28,400 second lien and 7,600 first lien defaulted loan files, representing nearly $2.2 billion in second lien and $3.1 billion in first lien outstanding par of defaulted loans underlying insured transactions, and identified a material number of defaulted loans that breach R&W regarding the characteristics of the loans such as misrepresentation of income or occupation, undisclosed debt and non-compliance with underwriting guidelines at loan origination. The Company continues to review new files as new loans default and as new loan files are made available to it. Following negotiation with the sellers and originators of the breaching loans, as of September 30, 2010, the Company had reached agreement for such sellers and originators to repurchase $280 million of second lien and $110 million of first lien loans. The $280 million for second lien loans represents 2,788 loans and the $110 million for first lien loans represents 285 loans. These are viewed as a recovery on paid losses for second liens and a reduction of expected loss estimates in first lien transactions and, accordingly, have no effect on the Company's exposure. These amounts reflect the negotiated agreements and not legal settlements. See "Recovery Litigation" below for a description of the legal proceedings the Company has commenced.

The Company has included in its net expected loss estimates as of September 30, 2010 an estimated benefit from repurchases of $1.3 billion. The amount of benefit recorded as a reduction of expected losses was calculated by extrapolating each transaction's breach rate on defaulted obligations to projected defaults. For second lien loans, the Company has performed sampling to validate this assumption. The Company did not incorporate any gain contingencies or damages from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the credit worthiness of the provider of R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches with the provider of the R&W and the potential amount of time until the recovery is realized.

The calculation of expected recovery from breaches of R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing very limited recoveries. These scenarios were probability weighted in order to determine the recovery incorporated into the Company's reserve estimate. This approach was used for both loans that had already defaulted and those assumed to default in the future. In all cases, recoveries were limited to amounts paid or expected to be paid by the Company.

The following table represents the Company's total estimated recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures. The Company had $1.3 billion of estimated recoveries from ineligible loans as of September 30, 2010, of which $0.7 billion is reported in salvage and subrogation recoverable, $0.4 billion is netted in loss and LAE reserves and $0.2 billion is netted in unearned premium reserve.

Rollforward of Estimated Benefit from Recoveries of Representation and Warranty Breaches, Net of Reinsurance

The $265.2 million R&W development and accretion of discount during the year in the above table primarily resulted from an increase in loan file reviews, increased success rates in putting back loans, and increased projected defaults on loans with breaches of R&W. The Company assumes that recoveries on HELOC and CES loans will occur in two to four years from the balance sheet date depending on the scenarios and that recoveries on Alt-A, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions.

The Company has insured $2.1 billion of net par in "XXX" life insurance reserve securitization transactions based on discrete blocks of individual life insurance business. In these transactions the monies raised by the sale of the bonds 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 order for the Company to incur an ultimate net loss on these transactions, adverse experience on the underlying block of life insurance policies and/or credit losses in the investment portfolio would need to exceed the level of credit enhancement built into the transaction structures. In particular, such credit losses in the investment portfolio could be realized in the event that circumstances arise resulting in the early liquidation of assets at a time when their market value is less than their intrinsic value.

The Company's $2.1 billion in net par of XXX life insurance transactions includes, as of September 30, 2010, a total of $882.5 million of Class A-2 Floating Rate Notes issued by Ballantyne Re p.l.c and Series A-1 Floating Rate Notes issued by Orkney Re II p.l.c ("Orkney Re II"). The Company has rated the Ballantyne Re and Orkney Re II notes BIG. The Ballantyne Re and Orkney Re II XXX transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the current investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at September 30, 2010, the Company's gross expected loss, prior to reinsurance or netting of unearned premium, for its two BIG XXX insurance transactions was $74.6 million and its net reserve was $57.9 million.

The Company has insured $458.2 billion of public finance transactions across a number of different sectors. Within that category, $4.3 billion is rated BIG, and the company is projecting $66.1 million of expected losses across the portfolio.

A significant portion of these losses $23.9 million are expected in relation to seven student loan transactions with $487.4 million of net par outstanding. The largest of these losses $18.0 million relates to a transaction backed by a pool of government-guaranteed student loans ceded to AG Re by another monoline insurer. The guaranteed bonds were issued as variable rate demand obligations that have since been "put" to the bank liquidity providers and now bear a high rate of interest. The Company has estimated its losses based upon a weighting of potential outcomes.

The Company has also projected estimated losses of $19.1 million on its total net par outstanding of $512 million on Jefferson County Alabama Sewer Authority exposure. This estimate is based

primarily on the Company's view of how much debt the Authority should be able to support under certain probability-weighted scenarios.

The Company has $166.0 million of net par exposure to the city of Harrisburg, Pennsylvania, of which $95.3 million is BIG. The Company has paid $0.8 million in net claims to date, and expects a full recovery.

The Company continues to closely monitor other sectors and individual financial guaranty insurance transactions it feels warrant the additional attention, including, as of September 30, 2010, its commercial mortgage exposure of $925.2 million of net par, its trust preferred securities ("TruPS") collateralized debt obligations ("CDOs") exposure of $1.1 billion, its insurance on a financing of 78 train sets (one train set being composed of eight cars) for an Australian commuter railway for $583 million net par and its U.S. health care exposure of $21.7 billion of net par.

As of the date of this filing, the Company has filed lawsuits with regard to four second lien U.S. RMBS transactions insured by the Company, alleging breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to the Company, and failure to cure or repurchase defective loans identified by the Company to such persons. These transactions consist of the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1, the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL2 and the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL3 transactions (in each of which the Company has sued DB Structured Products, Inc. and its affiliate ACE Securities Corp.) and the SACO I Trust 2005-GP1 transaction (in which the Company has sued JPMorgan Chase & Co.'s affiliate EMC Mortgage Corporation).

The Company has also filed a lawsuit against UBS Securities LLC and Deutsche Bank Securities, Inc., as underwriters, as well as several named and unnamed control persons of IndyMac Bank, FSB and related IndyMac entities, with regard to two U.S. RMBS transactions that the Company had insured, alleging violations of state securities laws and breach of contract, among other claims. One of these transactions (referred to as IndyMac Home Equity Loan Trust 2007-H1) is a second lien transaction and the other (referred to as IndyMac IMSC Mortgage Loan Trust 2007-HOA-1) is a first lien transaction.

On December 19, 2008, the Company sued J.P. Morgan Investment Management Inc. ("JPMIM"), the investment manager in the Orkney Re II transaction, in New York Supreme Court ("Court") alleging that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II. On January 28, 2010 the Court ruled against the Company on a motion to dismiss filed by JPMIM. Oral argument on the Company's appeal was heard before the Appellate Division on May 26, 2010.

During the three months ended June 30, 2010, the Company sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, "JPMorgan"), the underwriter of debt issued by Jefferson County, in New York Supreme Court alleging that JPMorgan induced the Company to issue its insurance policies in respect of such debt through material and fraudulent misrepresentations and

omissions, including concealing that it had secured its position as underwriter and swap provider through bribes to Jefferson County commissioners and others. The Company has made debt service payments during the year and expects to make additional payments in the near term. The Company is continuing its risk remediation efforts for this exposure.

In Third Quarter 2010, the Company, together with TD Bank, National Association, and Manufacturers and Traders Trust Company filed a complaint in the Court of Common Pleas in the Supreme Court of Pennsylvania against The Harrisburg Authority (the "Authority"), The City of Harrisburg, Pennsylvania (the "City"), and the Treasurer of the City in connection with certain Resource Recovery Facility bonds and notes issued by the Authority, alleging, among other claims, breach of contract by both the Authority and the City, and seeking remedies including an order compelling the Authority to pay all unpaid and past due principal and interest and to charge and collect sufficient rates, rental and other charges adequate to carry out its pledge of revenues and receipts; an order compelling the City to budget for, impose and collect taxes and revenues sufficient to satisfy its obligations; and the appointment of a receiver for the Authority.

Certain financial guaranty contracts written in credit derivative form, principally in the form of insured CDS contracts, have been deemed to meet the definition of a derivative under GAAP, which requires that an entity recognize the fair value of derivatives as either assets or liabilities in the consolidated balance sheet with changes in fair value recorded in the consolidated statements of operations.

In general, the Company structures credit derivative transactions such that the circumstances giving rise to the Company's obligation to make loss payments are similar to those for financial guaranty contracts written in insurance form and only occurs as losses are realized on the underlying reference obligation. Nonetheless, credit derivative transactions are governed by ISDA documentation and operate differently from financial guaranty contracts written in insurance form. For example, the Company's control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty contract written in insurance form. In addition, while the Company's exposure under credit derivatives, like the Company's exposure under financial guaranty contracts written in insurance form, has been generally for as long as the reference obligation remains outstanding, unlike financial guaranty contracts, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination.

Realized gains and other settlements on credit derivatives include credit derivative premiums received and receivable for credit protection the Company has sold under its insured CDS contracts, premiums paid and payable for credit protection the Company has purchased, contractual claims paid

and payable and received and receivable related to insured credit events under these contracts, ceding commissions (expense) income and realized gains or losses related to their early termination.

The following table disaggregates realized gains and other settlements on credit derivatives into its component parts:

The components of the Company's change in unrealized gains (losses) on credit derivatives are as follows:

Net unrealized gains (losses) on credit derivatives represent the adjustments for changes in fair value in excess of realized gains and other settlements that are recorded in each reporting period. Changes in unrealized gains and losses on credit derivatives are reflected in the consolidated statements of operations. Fair value of credit derivatives is reflected as either net assets or net liabilities determined on a contract by contract basis in the Company's consolidated balance sheets. Unrealized gains and losses resulting from changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, credit ratings of the referenced entities, realized gains and other settlements, and the issuing company's own credit rating, credit spreads and other market factors. Except for estimated credit impairments, the unrealized gains and losses on credit derivatives is expected to reduce to zero as the exposure approaches its maturity date.

The Company determines the fair value of its credit derivative contracts primarily through modeling that uses various inputs to derive an estimate of the value of the Company's contracts in principal markets. Inputs include expected contractual life and credit spreads, based on observable market indices and on recent pricing for similar contracts. Credit spreads capture the impact of recovery rates and performance of underlying assets, among other factors, on these contracts. The Company's pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company's own credit spread affects the pricing of its deals. If credit spreads of the underlying obligations change, the fair value of the related credit derivative changes. Market liquidity could also impact valuations of the underlying obligations.

In the Third Quarter 2010, U.S RMBS unrealized fair value losses were generated primarily in the Alt-A option ARM and Alt-A first lien sector due to wider implied net spreads. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing credit default swap ("CDS") protection on AGC and AGM declined, which management refers to as the CDS spread on AGC or AGM, the implied spreads that the Company would expect to receive on these transactions increased. The unrealized fair value loss within the TruPS CDO and Other asset classes resulted from wider implied spreads. The loss in Other was primarily attributable to a XXX life securitization transaction. In the Nine Months 2010, the Company recorded a small unrealized fair value gain. During this period, AGC's and AGM's spreads widened. Declines in fair value before considering the Company's own credit were offset by gains due to the widening of the Company's own CDS spread.

Third Quarter 2009 unrealized fair value losses were generated primarily by wider implied spreads on Alt-A Option ARMs and Alt-A first lien transactions included in the U.S. RMBS sector, as well as a U.S. infrastructure transaction, a XXX life insurance securitization and a film securitization, included in the Other sector. Nine Months 2009 unrealized fair value losses were generated primarily by wider implied spreads in the U.S RMBS sector, in particular Alt-A Option ARMs and Alt-A first lien transactions.

With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company's own credit cost based on the price to purchase credit protection on AGC and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC and AGM has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. An overall narrowing of spreads generally results in an unrealized gain on credit derivatives for the Company and an overall widening of spreads generally results in an unrealized loss for the Company.

As of September 30, 2010, AGC's and AGM's credit spreads remained relatively wide compared to pre-2007 levels, as did general market spreads. The $5.4 billion liability as of September 30, 2010, which represents the fair value of CDS contracts before considering the implications of AGC's and AGM's credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets, and ratings downgrades. The asset classes that remain most affected are recent vintages of Subprime RMBS and Alt-A deals, as well as trust-preferred securities. When looking at September 30, 2010 compared to December 31, 2009, there was tightening of general market spreads as well as a run-off in net par outstanding, resulting in a gain of approximately $404.8 million before taking into account AGC or AGM's credit spreads.

Management believes that the trading level of AGC's and AGM's credit spreads are due to the correlation between AGC's and AGM's risk profile and that experienced currently by the broader financial markets and increased demand for credit protection against AGC and AGM as the result of its direct segment financial guaranty volume as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGC's and AGM's credit spread were declines in fixed income security market prices primarily attributable to widening spreads in certain markets as a result of the continued deterioration in credit markets and some credit rating downgrades. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the high yield CDO and collateralized loan obligation ("CLO") markets as well as continuing market concerns over the most recent vintages of subprime RMBS and CMBS.

Some of the Company's CDS have rating triggers that allow the CDS counterparty to terminate in the case of a rating downgrade. If the ratings of certain of the Company's insurance subsidiaries were reduced below certain levels and the Company's counterparty elected to terminate the CDS, the Company could be required to make a termination payment on certain of its credit derivative contracts, as determined under the relevant documentation. Under certain documents, the Company may have the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a third party guaranty of the obligations of the Company. In November 2010, the Company and one of its CDS counterparties amended the ISDA master agreement between them to eliminate the additional termination event that would be triggered in the event of a rating downgrade of AGC and to amend AGC's collateral posting requirement

discussed below. The Company now has three remaining ISDA master agreements under which the applicable counterparty could elect to terminate transactions upon a rating downgrade of AGC: if AGC's ratings were downgraded to BBB- or Baa3, $100 million in par insured could be terminated by one counterparty; and if AGC's ratings were downgraded to BB+ or Ba1, approximately $2.9 billion in par insured could be terminated by the other two counterparties. As of the date of this filing, none of AG Re, Assured Guaranty Re Overseas Ltd. ("AGRO") or AGM had any material CDS exposure subject to termination based on its rating. The Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with the Company. These payments could have a material adverse effect on the Company's liquidity and financial condition.

Under a limited number of other CDS contracts, the Company may be required to post eligible securities as collateral—generally cash or U.S. government or agency securities. For certain of such contracts, this requirement is based on a mark-to-market valuation, as determined under the relevant documentation, in excess of contractual thresholds that decline or are eliminated if the ratings of certain of the Company's insurance subsidiaries decline. Under other contracts, the Company has negotiated caps such that the posting requirement cannot exceed a certain amount. After giving effect to the November 2010 amendment of an ISDA master agreement discussed above and without giving effect to thresholds that apply at current ratings, the amount of par that is subject to collateral posting is approximately $19.0 billion, for which the Company has agreed to post approximately $753.2 million of collateral. The Company may be required to post additional collateral from time to time, depending on its ratings and on the market values of the transactions subject to the collateral posting. Counterparties have agreed that for approximately $18.3 billion of that $19.0 billion, the maximum amount that the Company could be required to post is capped at $635 million at current rating levels (which amount is included in the $753.2 million as to which the Company has agreed to post). Such cap increases by $50 million to $685 million in the event AGC's ratings are downgraded to A+ or A3.

The following table summarizes the estimated change in fair values on the net balance of the Company's credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both assume:


	As of September 30, 2010
Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)		Estimated Change in Gain/(Loss) (Pre-Tax)
	(in millions)
100% widening in spreads	$	(3,721.2	)	$	(2,016.1	)
50% widening in spreads		(2,722.4	)		(1,017.3	)
25% widening in spreads		(2,217.6	)		(512.5	)
10% widening in spreads		(1,913.2	)		(208.1	)
Base Scenario		(1,705.1	)		—
10% narrowing in spreads		(1,562.8	)		142.3
25% narrowing in spreads		(1,346.0	)		359.1
50% narrowing in spreads		(990.0	)		715.1

The estimated remaining weighted average life of credit derivatives was 5.6 years at September 30, 2010 and 6.0 years at December 31, 2009. The components of the Company's credit derivative net par outstanding as of September 30, 2010 and December 31, 2009 are:

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

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

The Company's TruPS CDO asset pools are generally less diversified by obligors and industries than the typical CLO asset pool. Also, the underlying collateral in TruPS CDOs consists primarily of subordinated debt instruments such as TruPS CDOs issued by banks, real estate investment trusts ("REITs") and insurance companies, while CLOs typically contain primarily senior secured obligations. Finally, TruPS CDOs typically contain interest rate hedges that may complicate the cash flows. However, to mitigate these risks TruPS CDOs were typically structured with higher levels of embedded credit enhancement than typical CLOs.

The Company's exposure to "Other" CDS contracts is also highly diversified. It includes $4.3 billion of exposure to four pooled infrastructure transactions comprised of diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels. The remaining $10.4 billion of exposure in "Other" CDS contracts is comprised of numerous deals typically structured with significant underlying credit enhancement and spread across various asset classes, such as commercial receivables, international RMBS securities, infrastructure, regulated utilities and consumer receivables. The following table summarizes net par outstanding by rating of the Company's direct credit derivatives as of September 30, 2010 and December 31, 2009.

The following tables present additional details about the Company's unrealized gain or loss on credit derivatives associated with U.S. RMBS by vintage for the Third Quarter 2010 and Nine Months 2010:

The following table presents additional details about the Company's unrealized gain or loss on credit derivatives associated with CMBS transactions by vintage for the Third Quarter 2010 and Nine Months 2010:

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Types of Collateral			September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
			(in millions)
U.S.:
	Pooled corporate obligations		$	75,131	$	82,622	$	4,455	$	8,289	$	70,676	$	74,333
	RMBS			27,655		31,033		1,640		1,857		26,015		29,176
	Financial products(1)			7,712		10,251		—		—		7,712		10,251
	CMBS and other commercial real estate related exposures			7,297		7,463		53		53		7,244		7,410
	Consumer receivables			7,062		9,314		322		441		6,740		8,873
	Structured credit			2,660		2,738		126		131		2,534		2,607
	Commercial receivables			2,289		2,485		3		3		2,286		2,482
	Insurance securitizations			1,731		1,731		80		80		1,651		1,651
	Other structured finance—U.S.			2,005		2,754		1,184		1,236		821		1,518

		Total structured finance—U.S.		133,542		150,391		7,863		12,090		125,679		138,301
Non-U.S.:
	Pooled corporate obligations			25,843		27,743		2,434		3,046		23,409		24,697
	RMBS			5,061		5,623		372		396		4,689		5,227
	Commercial receivables			1,830		1,908		36		36		1,794		1,872
	Structured credit			1,918		2,285		134		216		1,784		2,069
	Insurance securitizations			995		995		15		14		980		981
	CMBS and other commercial real estate related exposures			649		752		—		—		649		752
	Other structured finance—non-U.S.			451		717		72		47		379		670

		Total structured finance—non-U.S.		36,747		40,023		3,063		3,755		33,684		36,268

Total structured finance obligations			$	170,289	$	190,414	$	10,926	$	15,845	$	159,363	$	174,569

		September 30, 2010					December 31, 2009

Ratings(1)		Net Par Outstanding		% of Net Par Outstanding			Net Par Outstanding		% of Net Par Outstanding
		(dollars in millions)
Super senior		$	34,568		5.5	%	$	43,353		6.8	%
AAA			69,302		11.0			59,786		9.3
AA			186,374		29.7			196,859		30.7
A			234,254		37.3			233,200		36.4
BBB			76,589		12.2			82,059		12.8
Below investment grade ("BIG") (See Note 5)			26,985		4.3			25,165		4.0

	Total exposures	$	628,072		100.0	%	$	640,422		100.0	%

				September 30, 2010

				BIG Net Par Outstanding
				BIG Net Par Outstanding								Total Net Par Outstanding
				BIG 1		BIG 2		BIG 3		Total BIG		Total Net Par Outstanding
				(in millions)
First Lien U.S. RMBS:
	Prime first lien			$	79	$	577	$	—	$	656	$	885
	Alt-A first lien				548		3,706		483		4,737		6,274
	Alt-A option ARM				342		1,977		706		3,025		3,402
	Subprime (including net interest margin securities ("NIMs"))				60		2,880		100		3,040		9,289
Second Lien U.S. RMBS:
	Closed end second lien ("CES")				105		515		523		1,143		1,180
	Home equity lines of credit ("HELOC")				395		2		3,835		4,232		4,985

		Total U.S. RMBS			1,529		9,657		5,647		16,833		26,015
Other structured finance					2,150		1,029		2,236		5,415		133,348
Public finance					3,363		762		612		4,737		468,709

			Total	$	7,042	$	11,448	$	8,495	$	26,985	$	628,072

				December 31, 2009

				BIG Net Par Outstanding
				BIG Net Par Outstanding								Total Net Par Outstanding
				BIG 1		BIG 2		BIG 3		Total BIG		Total Net Par Outstanding
				(in millions)
First Lien U.S. RMBS:
	Prime first lien			$	564	$	51	$	—	$	615	$	985
	Alt-A first lien				752		3,698		173		4,623		7,108
	Alt-A option ARM				629		2,811		—		3,440		3,882
	Subprime (including NIMs securities)				985		1,648		55		2,688		9,956
Second Lien U.S. RMBS:
	CES				123		628		509		1,260		1,305
	HELOCs				13		113		4,372		4,498		5,940

		Total U.S. RMBS			3,066		8,949		5,109		17,124		29,176
Other structured finance					1,211		967		2,093		4,271		145,393
Public finance					2,361		723		687		3,771		465,853

			Total	$	6,638	$	10,639	$	7,889	$	25,166	$	640,422

		September 30, 2010(1)

		(in millions)
2010 (October 1 - December 31)		$	111.5
2011			140.0
2012			122.3
2013			110.9
2014			99.4
2015 - 2019			413.5
2020 - 2024			300.2
2025 - 2029			218.3
After 2029			269.7

	Total expected collections	$	1,785.8

			Nine Months 2010

			(in millions)
Premium receivable, net at December 31, 2009			$	1,418.2
	Cumulative effect of change in accounting principle			(19.0	)

	Premium receivable, net at January 1, 2010			1,399.2
	Premium written, net			253.9
	Premium payments received, net			(356.3	)
	Adjustments to the premium receivable:
		Changes in the expected term of financial guaranty insurance contracts		13.2
		Accretion of the discount		35.1
		Foreign exchange rate changes		(24.2	)
		Other adjustments		1.6

Premium receivable, net at September 30, 2010(1)			$	1,322.5

		As of September 30, 2010									As of December 31, 2009

		Gross Unearned Premium Reserve			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve			Gross Unearned Premium Reserve			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve
		(in millions)
Deferred premium revenue		$	7,575.4		$	925.3		$	6,650.1		$	8,536.7		$	1,095.6		$	7,441.1
Claim payments			(211.6	)		(28.1	)		(183.5	)		(149.2	)		(15.1	)		(134.1	)

Total financial guaranty			7,363.8			897.2			6,466.6			8,387.5			1,080.5		$	7,307.0
Other			11.0			—			11.0			12.7			—			12.7

	Total	$	7,374.8		$	897.2		$	6,477.6		$	8,400.2		$	1,080.5		$	7,319.7

		As of September 30, 2010

		Scheduled Net Earned Premium		Net Expected Loss and LAE(1)		Net
		(in millions)
2010 (October 1 - December 31)		$	233.9	$	79.6	$	154.3
2011			748.7		192.9		555.8
2012			593.2		116.5		476.7
2013			512.9		89.8		423.1
2014			458.5		77.7		380.8
2015 - 2019			1,687.1		245.9		1,441.2
2020 - 2024			1,046.5		123.1		923.4
2025 - 2029			650.4		72.0		578.4
After 2029			718.9		72.8		646.1

	Total present value basis(2)(3)		6,650.1		1,070.3		5,579.8
Discount			405.2		579.9		(174.7	)

	Total future value	$	7,055.3	$	1,650.2	$	5,405.1

				Expected Loss to be Paid as of January 1, 2010			Loss Development and Accretion of Discount			Less: Paid Losses		Expected Loss to be Paid as of September 30, 2010

				(in millions)
U.S. RMBS:
	First lien:
		Prime first lien		$	—		$	0.9		$	—	$	0.9
		Alt-A first lien			204.4			24.1			43.1		185.4
		Alt-A option ARM			545.2			102.8			103.4		544.6
		Subprime			77.5			79.0			3.0		153.5

			Total first lien		827.1			206.8			149.5		884.4
	Second lien:
		CES			199.3			(35.3	)		60.0		104.0
		HELOCs			(232.9	)		53.2			445.3		(625.0	)

			Total second lien		(33.6	)		17.9			505.3		(521.0	)

Total U.S. RMBS					793.5			224.7			654.8		363.4
Other structured finance					102.6			53.5			7.5		148.6
Public finance					130.9			(7.7	)		57.1		66.1

			Total(1)	$	1,027.0		$	270.5		$	719.4	$	578.1

HELOC Key Variables	September 30, 2010	June 30, 2010	March 31, 2010	December 31, 2009

Plateau CDR	4.6 - 25.2%	8.3 - 27.5%	11.5 - 38.0%	10.7 - 40.0%
Final CDR trended down to	0.5 - 3.2%	0.5 - 3.2%	0.5 - 3.2%	0.5 - 3.2%
Expected period until final CDR	24 months	24 months	21 months	21 months
Initial CPR	0.5 - 18.4%	0.9 - 20.1%	0.4 - 13.4%	1.9 - 14.9%
Final CPR	10%	10%	10%	10%
Loss severity	98%	95%	95%	95%
Initial draw rate	0.0 - 4.6%	0.2 - 6.9%	0.2 - 4.8%	0.1 - 2.0%

CES Key Variables	September 30, 2010	June 30, 2010	March 31, 2010	December 31, 2009

Plateau CDR	6.7 - 27.3%	8.0 - 28.0%	7.4 - 32.7%	21.5 - 44.2%
Final CDR rate trended down to	2.9 - 8.1%	2.9 - 8.1%	2.9 - 8.1%	3.3 - 8.1%
Expected period until final CDR achieved	24 months	24 months	21 months	21 months
Initial CPR	1.0 - 11.8%	0.8 - 10.1%	1.6 - 8.4%	0.8 - 3.6%
Final CPR	10%	10%	10%	10%
Loss severity	98%	95%	95%	95%



30 - 59 Days Delinquent
	Alt-A first lien	50	%	50	%
	Alt-A option ARM	50		50
	Subprime	45		45
60 - 89 Days Delinquent
	Alt-A first lien	65		65
	Alt-A option ARM	65		65
	Subprime	65		65
90 - Bankruptcy
	Alt-A first lien	75		75
	Alt-A option ARM	75		75
	Subprime	70		70
Foreclosure
	Alt-A first lien	85		85
	Alt-A option ARM	85		85
	Subprime	85		85
Real Estate Owned
	Alt-A first lien	100		100
	Alt-A option ARM	100		100
	Subprime	100		100

		September 30, 2010	June 30, 2010	March 31, 2010	As of December 31, 2009

Alt-A First Lien
	Plateau CDR	2.2% - 42.2%	2.2% - 40.6%	2.0% - 34.4%	1.5% - 35.7%
	Intermediate CDR	0.4% - 7.1%	0.3% - 6.1%	0.3% - 5.2%	0.2% - 5.4%
	Final CDR	0.1% - 2.1%	0.1% - 2.0%	0.1% - 1.7%	0.1% - 1.8%
	Initial loss severity	60%	60%	60%	60%
	Initial CPR	0.0% - 28.5%	0.0% - 16.2%	0.0% - 27.9%	0.0% - 20.5%
	Final CPR	10%	10%	10%	10%
Alt-A option ARM
	Plateau CDR	12.2% - 31.7%	12.5% - 29.9%	15.1% - 27.4%	13.5% - 27.0%
	Intermediate CDR	1.8% - 4.8%	1.9% - 4.5%	2.3% - 4.1%	2.0% - 4.1%
	Final CDR	0.6% - 1.6%	0.6% - 1.5%	0.8% - 1.4%	0.7% - 1.4%
	Initial loss severity	60%	60%	60%	60%
	Initial CPR	0.0% - 10.4%	0.0% - 9.3%	0.0% - 12.3%	0.0% - 3.5%
	Final CPR	10%	10%	10%	10%
Subprime
	Plateau CDR	7.1% - 33.3%	8.4% - 34.4%	7.8% - 30.4%	7.1% - 29.5%
	Intermediate CDR	1.1% - 5.0%	1.3% - 5.2%	1.2% - 4.6%	1.1% - 4.4%
	Final CDR	0.4% - 1.7%	0.4% - 1.7%	0.4% - 1.5%	0.4% - 1.5%
	Initial loss severity	75%	75%	75%	70%
	Initial CPR	0.0% - 15.4%	0.0% - 12.0%	0.0% - 12.5%	0.0% - 12.0%
	Final CPR	10%	10%	10%	10%

		# of Insurance Policies as of September 30, 2010 with R&W Benefit Recorded		Outstanding Principal and Interest of Policies with R&W Benefit Recorded as of September 30, 2010		Future Net R&W Benefit at December 31, 2009		R&W Development and Accretion of Discount during Year		R&W Recovered During 2010(1)		Future Net R&W Benefit at September 30, 2010

		(dollars in millions)
Prime First Lien			1	$	58.5	$	—	$	1.0	$	—	$	1.0
Alt-A First Lien			17		1,964.2		64.2		19.8		—		84.0
Alt-A Options ARM			10		2,083.3		203.7		86.8		42.5		248.0
Subprime			—		—		—		—		—		—
CES			3		312.9		76.5		59.5		—		136.0
HELOC			11		3,618.9		828.7		98.1		88.9		837.9

	Total		42	$	8,037.8	$	1,173.1	$	265.2	$	131.4	$	1,306.9

			Third Quarter						Nine Months

Asset Type			2010			2009			2010			2009
			(in millions)
Financial Guaranty Direct:
	Pooled corporate obligations:
		CLOs/CBOs	$	(1.4	)	$	23.9		$	1.9		$	(51.9	)
		Synthetic investment grade pooled corporate		0.3			(21.6	)		(3.7	)		(18.7	)
		Synthetic high yield pooled corporate		(2.9	)		24.0			11.6			24.0
		TruPS CDOs		(11.6	)		(32.3	)		53.6			(32.7	)
		Market value CDOs of corporate obligations		(0.4	)		(0.8	)		(0.1	)		(8.1	)
		CDO of CDOs (corporate)		—			6.6			—			6.4

	Total pooled corporate obligations			(16.0	)		(0.2	)		63.3			(81.0	)
	U.S. RMBS:
		Alt-A Option ARMs and Alt-A first lien		(205.1	)		(50.2	)		(44.6	)		(296.1	)
		Subprime first lien (including NIMs)		(8.1	)		(25.9	)		(7.2	)		(22.2	)
		Prime first lien		(17.2	)		(4.2	)		2.2			(74.9	)
		CES and HELOCs		1.6			8.4			(4.3	)		8.4

	Total U.S. RMBS			(228.8	)		(71.9	)		(53.9	)		(384.8	)
	CMBS			0.4			0.1			10.2			(31.9	)
	Other(1)			(40.4	)		(104.9	)		(17.0	)		81.6

Total Financial Guaranty Direct				(284.8	)		(176.9	)		2.6			(416.1	)
Financial Guaranty Reinsurance				(0.1	)		(28.4	)		(0.3	)		(16.5	)

Total			$	(284.9	)	$	(205.3	)	$	2.3		$	(432.6	)

			BIG Categories

			BIG 1			BIG 2		BIG 3			Total BIG(1)			Effect of Consolidating VIEs			Total
			(dollars in millions)
Number of risks(2)				86			152		96			334			—			334
Remaining weighted-average contract period (in years)				12.6			9.1		7.9			9.5			—			9.5
Gross insured contractual payments outstanding:
	Principal		$	5,143.1		$	7,278.3	$	7,735.7		$	20,157.1			—		$	20,157.1
	Interest			3,197.5			3,408.9		2,071.7			8,678.1			—			8,678.1

		Total	$	8,340.6		$	10,687.2	$	9,807.4		$	28,835.2		$	—		$	28,835.2

Gross expected cash outflows for loss and LAE			$	576.2		$	1,919.5	$	2,242.4		$	4,738.1		$	(227.5	)	$	4,510.6
Less:
	Gross potential recoveries(3)			570.2			546.2		2,394.1			3,510.5			(220.8	)		3,289.7
	Discount			55.8			481.5		107.2			644.5			(37.2	)		607.3

Present value of expected cash outflows (inflows) for loss and LAE			$	(49.8	)	$	891.8	$	(258.9	)	$	583.1		$	30.5		$	613.6

Deferred premium revenue			$	56.6		$	788.8	$	1,096.1		$	1,941.5		$	(185.9	)	$	1,755.6
Gross reserves (salvage) for loss and LAE reported in the balance sheet(4)			$	(65.9	)	$	316.4	$	(666.2	)	$	(415.7	)	$	54.3		$	(361.4	)
Reinsurance recoverable (payable)(5)			$	(7.3	)	$	2.6	$	(75.9	)	$	(80.6	)	$	—		$	(80.6	)

		As of September 30, 2010			As of December 31, 2009

		(dollars in millions)
Quoted price of CDS contract (in basis points):
	AGC		893			634
	AGM		645			541
Fair value of CDS contracts:
	Before considering implication of the Company's credit spreads	$	(5,426.0	)	$	(5,830.8	)
	After considering implication of the Company's credit spreads	$	(1,705.1	)	$	(1,542.1	)

			As of September 30, 2010										As of December 31, 2009

Asset Type			Original Subordination(1)			Current Subordination(1)			Net Par Outstanding		Weighted Average Credit Rating(2)		Original Subordination(1)			Current Subordination(1)			Net Par Outstanding		Weighted Average Credit Rating(2)
			(dollars in millions)
Financial Guaranty Direct:
	Pooled corporate obligations:
		CLOs/CBOs		32.1	%		29.7	%	$	47,307		AAA		31.1	%		27.4	%	$	49,447		AAA
		Synthetic IG pooled corporate(3)		19.2			17.7			15,038		AAA		19.2			17.7			14,652		AAA
		Synthetic high yield pooled corporate		38.1			33.3			9,537		AAA		36.7			34.4			11,040		AAA
		TruPS CDOs		46.6			33.3			5,816		BB+		46.6			37.3			6,041		BBB-
		Market value CDOs of corporate obligations		35.6			38.7			4,980		AAA		32.1			36.9			5,401		AAA

	Total pooled corporate obligations			31.7			28.7			82,678		AAA		30.9			27.9			86,581		AAA
	U.S. RMBS:
		Alt-A option ARMs and Alt-A first lien		20.0			18.1			4,859		B+		20.3			22.0			5,662		BB
		Subprime first lien (including NIMs)		27.5			57.2			4,625		A+		27.6			52.4			4,970		A+
		Prime first lien		10.9			10.4			498		B		10.9			11.1			560		BB
		CES and HELOCs		—			18.7			87		B		—			19.2			111		B

	Total U.S. RMBS			22.9			35.4			10,069		BBB-		22.9			34.6			11,303		BBB
	CMBS			29.6			32.0			6,967		AAA		28.5			30.9			7,191		AAA
	Other			—			—			14,699		AA-		—			—			15,700		AA-

Total Financial Guaranty Direct										114,413		AA+								120,775		AA+
Financial Guaranty Reinsurance										1,621		AA-								1,642		AA-

Total									$	116,034		AA+							$	122,417		AA+

		September 30, 2010					December 31, 2009

Ratings (1)		Net Par Outstanding		% of Total			Net Par Outstanding		% of Total
		(dollars in millions)
Super Senior		$	32,861		28.7	%	$	41,307		34.2	%
AAA			51,547		45.1			40,065		33.2
AA			8,392		7.3			14,613		12.1
A			6,585		5.8			8,255		6.8
BBB			6,673		5.8			9,076		7.5
BIG			8,355		7.3			7,459		6.2

	Total direct credit derivative net par outstanding	$	114,413		100.0	%	$	120,775		100.0	%

Vintage						Net Par Outstanding (in millions)			Third Quarter 2010 Unrealized Gain (Loss) (in millions)			Nine Months 2010 Unrealized Gain (Loss) (in millions)

2004 and Prior		6.1	%	19.4	%	$	161	A	$	(0.5	)	$	(0.2	)
2005		26.9		61.9			3,170	AA-		(1.9	)		(0.2	)
2006		28.3		43.2			1,662	BBB		(9.1	)		(8.0	)
2007		18.9		15.9			5,076	B		(217.3	)		(45.5	)
2008		—		—			—	—		—			—
2009		—		—			—	—		—			—
2010		—		—			—	—		—			—

	Total	22.9	%	35.4	%	$	10,069	BBB-	$	(228.8	)	$	(53.9	)