UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934
			For the Quarterly Period Ended June 30, 2007
			OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

transition Period from                                  to                                 

Commission File No. 001-32141

ASSURED GUARANTY LTD.

(Exact name of registrant as specified in its charter)

 

 

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.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x

Accelerated filer  o

Non-accelerated filer  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 x

The number of registrant’s Common Shares ($0.01 par value) outstanding as of August 1, 2007 was 67,836,354.

ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q

			Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Consolidated Balance Sheets (unaudited) as of June 30, 2007 and December 31, 2006	3
		Consolidated Statements of Operations and Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2007 and 2006	4
		Consolidated Statements of Shareholders’ Equity (unaudited) for Six Months Ended June 30, 2007	5
		Consolidated Statements of Cash Flows (unaudited) for Six Months Ended June 30, 2007 and 2006	6
		Notes to Consolidated Financial Statements (unaudited)	7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.		Controls and Procedures	65
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	66
Item 1A.		Risk Factors	66
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 6.		Exhibits	66

 

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Assured Guaranty Ltd.
Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)
(Unaudited)

		June 30, 2007			December 31, 2006
Assets
Fixed maturity securities, at fair value (amortized cost: $2,419,652 in 2007 and $2,286,373 in 2006)		$	2,422,614		$	2,331,071
Short-term investments, at cost which approximates fair value		63,151			134,064
Total investments		2,485,765			2,465,135
Cash and cash equivalents		23,743			4,785
Accrued investment income		25,771			24,195
Deferred acquisition costs		224,813			217,029
Prepaid reinsurance premiums		11,010			7,500
Reinsurance recoverable on ceded losses		10,444			10,889
Premiums receivable		38,708			41,565
Goodwill		85,417			85,417
Unrealized gains on derivative financial instruments		37,168			52,596
Other assets		29,652			26,229
Total assets		$	2,972,491		$	2,935,340
Liabilities and shareholders’ equity
Liabilities
Unearned premium reserves		$	693,385		$	644,496
Reserves for losses and loss adjustment expenses		108,813			120,600
Profit commissions payable		17,886			35,994
Reinsurance balances payable		2,846			7,199
Current income taxes payable		—			7,196
Deferred income taxes		17,479			39,906
Funds held by Company under reinsurance contracts		25,029			21,412
Unrealized losses on derivative financial instruments		18,196			6,687
Senior Notes		197,391			197,375
Series A Enhanced Junior Subordinated Debentures		149,723			149,708
Liability for tax basis step-up adjustment		10,453			14,990
Other liabilities		36,507			39,016
Total liabilities		1,277,708			1,284,579
Commitments and contingencies
Shareholders’ equity
Common stock ($0.01 par value, 500,000,000 shares authorized; 67,836,065 and 67,534,024 shares issued and outstanding in 2007 and 2006)		678			675
Additional paid-in capital		719,297			711,256
Retained earnings		965,803			896,947
Accumulated other comprehensive income		9,005			41,883
Total shareholders’ equity		1,694,783			1,650,761
Total liabilities and shareholders’ equity		$	2,972,491		$	2,935,340

 

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

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Assured Guaranty Ltd.
Consolidated Statements of Operations and Comprehensive Income
(in thousands of U.S. dollars except per share amounts)
(Unaudited)

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Revenues
Gross written premiums		$	88,830		$	111,484		$	161,370		$	166,868
Ceded premiums		(3,901		)	(1,139		)	(8,059		)	(5,739		)
Net written premiums		84,929			110,345			153,311			161,129
Increase in net unearned premium reserves		(30,688		)	(62,161		)	(45,200		)	(64,890		)
Net earned premiums		54,241			48,184			108,111			96,239
Net investment income		30,860			27,255			62,342			53,493
Net realized investment losses		(1,540		)	(1,005		)	(1,819		)	(2,011		)
Unrealized (losses) gains on derivative financial instruments		(17,223		)	5,713			(26,937		)	5,742
Other income		—			23			—			23
Total revenues		66,338			80,170			141,697			153,486
Expenses
Loss and loss adjustment expenses		(9,101		)	(6,513		)	(13,830		)	(6,895		)
Profit commission expense		869			1,697			2,482			3,005
Acquisition costs		10,930			11,308			21,741			22,093
Other operating expenses		18,831			15,615			39,534			32,765
Interest expense		5,820			3,367			11,853			6,742
Other expense		651			692			1,252			1,306
Total expenses		28,000			26,166			63,032			59,016
Income before provision for income taxes		38,338			54,004			78,665			94,470
Provision for income taxes
Current		1,452			6,165			5,123			8,808
Deferred		4,081			3,325			1,786			6,266
Total provision for income taxes		5,533			9,490			6,909			15,074
Net income		32,805			44,514			71,756			79,396
Other comprehensive loss, net of taxes
Unrealized holding losses on fixed maturity securities arising during the year		(33,858		)	(18,852		)	(34,543		)	(43,079		)
Reclassification adjustment for realized losses included in net income		1,268			779			1,489			1,437
Change in net unrealized gains on fixed maturity securities		(32,590		)	(18,073		)	(33,054		)	(41,642		)
Change in cumulative translation adjustment		356			814			385			981
Cash flow hedge		(104		)	(104		)	(209		)	(209		)
Other comprehensive loss, net of taxes		(32,338		)	(17,363		)	(32,878		)	(40,870		)
Comprehensive income		$	467		$	27,151		$	38,878		$	38,526
Earnings per share:
Basic		$	0.48		$	0.60		$	1.06		$	1.08
Diluted		$	0.47		$	0.60		$	1.04		$	1.06
Dividends per share		$	0.04		$	0.035		$	0.08		$	0.07

 

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

 

4

 

Assured Guaranty Ltd.
Consolidated Statements of Shareholders’ Equity
For Six Months Ended June 30, 2007
(in thousands of U.S. dollars except per share amounts)
(Unaudited)

 

		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
Balance, December 31, 2006		$	675		$	711,256		$	896,947		$	41,883		$	1,650,761
Cumulative effect of FIN 48 adoption		—			—			2,629			—			2,629
Net income		—			—			71,756			—			71,756
Dividends ($0.08 per share)		—			—			(5,529		)	—			(5,529		)
Common stock repurchases		—			(523		)	—			—			(523		)
Shares cancelled to pay withholding taxes		(1		)	(3,923		)	—			—			(3,924		)
Stock options exercised		1			1,142			—			—			1,143
Tax benefit for stock options exercised		—			137			—			—			137
Shares issued under ESPP		—			322			—			—			322
Share-based compensation and other		3			10,886			—			—			10,889
Change in cash flow hedge, net of tax of $(113)		—			—			—			(209		)	(209		)
Change in cumulative translation adjustment		—			—			—			385			385
Unrealized loss on fixed maturity securities, net of tax of $(8,682)		—			—			—			(33,054		)	(33,054		)
Balance, June 30, 2007		$	678		$	719,297		$	965,803		$	9,005		$	1,694,783

 

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

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Assured Guaranty Ltd.
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(Unaudited)

		Six Months Ended June 30,
		2007			2006
Operating activities
Net income		$	71,756		$	79,396
Adjustments to reconcile net income to net cash flows provided by operating activities:
Non-cash interest and operating expenses		11,562			7,825
Net amortization of premium on fixed maturity securities		1,426			2,916
Provision for deferred income taxes		1,786			6,266
Net realized investment losses		1,819			2,011
Change in unrealized losses (gains) on derivative financial instruments		26,937			(5,742		)
Change in deferred acquisition costs		(7,784		)	(11,865		)
Change in accrued investment income		(1,576		)	23
Change in premiums receivable		2,857			(9,171		)
Change in prepaid reinsurance premiums		(3,510		)	36
Change in unearned premium reserves		48,889			64,781
Change in reserves for losses and loss adjustment expenses, net		(14,734		)	(7,841		)
Change in profit commissions payable		(18,108		)	(23,377		)
Change in funds held by Company under reinsurance contracts		3,617			1,153
Change in current income taxes		(7,327		)	(4,639		)
Change in liability for tax basis step-up adjustment		(4,537		)	(373		)
Other		(21,531		)	(10,783		)
Net cash flows provided by operating activities		91,542			90,616
Investing activities
Fixed maturity securities:
Purchases		(591,468		)	(434,471		)
Sales		443,976			433,607
Maturities		11,999			14,295
Sales (purchases) of short-term investments, net		71,399			(55,019		)
Net cash flows used in investing activities		(64,094		)	(41,588		)
Financing activities
Dividends paid		(5,523		)	(5,253		)
Share activity under option and incentive plans		(2,664		)	(2,310		)
Tax benefit from employee stock options		137			—
Debt issue costs		(425		)	—
Repurchases of common stock		(523		)	(17,190		)
Repayment of notes assumed during formation transactions		—			(2,000		)
Net cash flows used in financing activities		(8,998		)	(26,753		)
Effect of exchange rate changes		508			732
Increase in cash and cash equivalents		18,958			23,007
Cash and cash equivalents at beginning of period		4,785			6,190
Cash and cash equivalents at end of period		$	23,743		$	29,197
Supplementary cash flow information
Cash paid during the period for:
Income taxes		$	16,451		$	13,440
Interest		$	11,877		$	7,081

 

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

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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)

1.  Business and Organization

Assured Guaranty Ltd. (the “Company”) is a Bermuda-based holding company which provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance and mortgage markets. Credit enhancement products are financial guarantees or other types of support, including credit derivatives, that improve the credit of underlying debt obligations. Assured Guaranty Ltd. applies its credit expertise, risk management skills and capital markets experience to develop insurance, reinsurance and derivative products that meet the credit enhancement needs of its customers. Under a reinsurance agreement, the reinsurer, in consideration of a premium paid to it, agrees to indemnify another insurer, called the ceding company, for part or all of the liability of the ceding company under one or more insurance policies that the ceding company has issued. A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying security. Assured Guaranty Ltd. markets its products directly to and through financial institutions, serving the U.S. and international markets. Assured Guaranty Ltd.’s financial results include four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. These segments are further discussed in Note 10.

Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. A loss event occurs upon existing or anticipated credit deterioration, while a payment under a policy occurs when the insured obligation defaults. This requires the Company to pay the required principal and interest when due in accordance with the underlying contract. The principal types of obligations covered by the Company’s financial guaranty direct and financial guaranty assumed reinsurance businesses are structured finance obligations and public finance obligations. Because both businesses involve similar risks, the Company analyzes and monitors its financial guaranty direct portfolio and financial guaranty assumed reinsurance portfolio on a unified process and procedure basis.

Mortgage guaranty insurance is a specialized class of credit insurance that provides protection to mortgage lending institutions against the default of borrowers on mortgage loans that, at the time of the advance, had a loan to value in excess of a specified ratio. Reinsurance in the mortgage guaranty insurance industry is used to increase the insurance capacity of the ceding company, to assist the ceding company in meeting applicable regulatory and rating agency requirements, to augment the financial strength of the ceding company, and to manage the ceding company’s risk profile. The Company provides mortgage guaranty protection on an excess of loss basis.

 The Company has participated in several lines of business that are reflected in its historical financial statements but that the Company exited in connection with its 2004 initial public offering (“IPO”).

2.  Basis of Presentation

The unaudited interim consolidated financial statements, which include the accounts of the Company, have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the Company’s financial condition, results of operations and cash flows for the periods presented.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. These unaudited interim consolidated financial statements cover the three-month period ended June 30, 2007 (“Second Quarter 2007”), the three-month period ended June 30, 2006 (“Second Quarter 2006”), the six-month period ended June 30, 2007 (“Six Months 2007”) and the six-month period ended June 30, 2006 (“Six Months 2006”). Operating results for the three- and six-

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month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for a full year.  Certain items in the prior year unaudited interim consolidated financial statements have been reclassified to conform with the current period 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, 2006, filed with the Securities and Exchange Commission.

Certain of the Company’s subsidiaries are subject to U.S. and U.K. income tax. The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards (“FAS”) FAS No. 109, “Accounting for Income Taxes”. The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its derivative financial instruments.  A discrete calculation of the provision is calculated for each interim period.

3.  Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies to other accounting pronouncements that require or permit fair value measurements, since the FASB had previously concluded in those accounting pronouncements that fair value is the relevant measure. Accordingly, FAS 157 does not require any new fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company plans to adopt FAS 157 at the beginning of 2008. The Company is currently evaluating the impact, if any, that FAS 157 will have on its results of operations or financial position.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“FAS 159”). FAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, FAS 159 specifies that all subsequent changes in fair value for that instrument shall be reported in unrealized (losses) gains on derivative financial instruments in the Statement of Operations and Comprehensive Income. FAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Earlier adoption of FAS 159 is permitted, but we do not intend to early adopt.  The Company is currently evaluating the impact, if any, that  FAS 159 will have on its results of operations or financial position.

In April 2007, the FASB Staff issued FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”), which permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. FSP FIN 39-1 will not affect our results of operations or financial position, though it may affect the balance sheet classification of certain assets and liabilities.

4.  Analysis of premiums written, premiums earned and loss and loss adjustment expenses

In order to limit its exposure on assumed risks, the Company at the time of the IPO entered into certain proportional and non-proportional retrocessional agreements with other insurance companies, primarily subsidiaries of ACE Limited (“ACE”), the Company’s former parent, to cede a portion of the risk underwritten by the Company, prior to the IPO. In addition, the Company enters into reinsurance agreements with non-affiliated companies to limit its exposure to risk on an on-going basis.

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In the event that any or all of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. Direct, assumed, and ceded amounts were as follows:

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
		(in thousands of U.S. dollars)
Premiums Written
Direct		$	62,729		$	68,418		$	112,249		$	98,666
Assumed		26,101			43,066			49,121			68,202
Ceded		(3,901)			(1,139)			(8,059)			(5,739)
Net		$	84,929		$	110,345		$	153,311		$	161,129
Premiums Earned
Direct		$	29,321		$	21,887		$	58,811		$	43,115
Assumed		27,269			28,475			53,802			59,003
Ceded		(2,349)			(2,178)			(4,502)			(5,879)
Net		$	54,241		$	48,184		$	108,111		$	96,239
Loss and Loss Adjustment Expenses
Direct		$	1,729		$	(12,644)		$	1,815		$	(15,675)
Assumed		(10,989)			7,250			(15,962)			10,542
Ceded		159			(1,119)			317			(1,762)
Net		$	(9,101)		$	(6,513)		$	(13,830)		$	(6,895)

 

Total net written premiums for Second Quarter 2007 and Six Months 2007 were $84.9 million and $153.3 million, respectively, compared with $110.3 million and $161.1 million for Second Quarter 2006 and Six Months 2006, respectively.

Direct written premiums decreased  $5.7 million in  Second Quarter 2007 compared with Second Quarter 2006  primarily attributable to  our international business,  which generated $19.9 million of direct written premium in Second Quarter 2007 compared with $41.0 million during Second Quarter 2006.   Partially offsetting this reduced international business premium was a $13.4 million increase in U.S. premium, primarily from our upfront public finance and installment structured finance business, as we continue to  execute our direct business strategy.  Direct written premiums  increased $13.6 million in Six Months 2007 compared with Six Months 2006 primarily due to a $18.3 million increase in U.S. generated business, mainly from our upfront public finance and installment structured finance business, as we continue to  execute our direct business strategy.  Partially offsetting this increase was a reduction of our international business to $31.7 million in Six Months 2007, compared with $41.0 million for Six Months 2006.

Assumed written premiums decreased to $26.1 million in Second Quarter 2007 compared with  $43.1 million in Second Quarter 2006 due primarily to a $14.7 million reduction in upfront treaty and facultative cessions from our cedants due to the non-renewal of certain treaties in 2006 and 2004.

Total net premiums earned for Second Quarter 2007 were $54.2 million compared with $48.2 million for Second Quarter 2006, while net premiums earned for Six Months 2007 were $108.1 million compared with $96.2 million for Six Months 2006.

Direct earned premiums increased $7.4 million,  to $29.3 million for Second Quarter 2007 compared with $21.9 million for Second Quarter 2006, reflecting the continued execution of our direct business strategy. Direct earned premiums increased $15.7 million,  to $58.8 million for Six Months 2007 compared with $43.1 million for Second Quarter 2006 for the same reason as above, but also our direct earned premiums for Six Months 2007 included $1.7 million of public finance refundings.   Six Months 2006 did not have any direct earned premiums from

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public finance refundings.  Public finance refundings reflect the unscheduled pre-payment or refundings of underlying municipal bonds.

Assumed premiums earned decreased  $5.2 million in  Six Months 2007 compared with Six Months 2006  due to the non-renewal of certain treaties in 2006 and 2004.

Total loss and loss adjustment expenses (“LAE”) were $(9.1) million and $(6.5) million for Second Quarter 2007 and Second Quarter 2006 , respectively. Direct loss and LAE  for Second Quarter 2007 included $1.7 million of case reserve additions for two transactions written prior to our IPO, while Second Quarter 2006 included  a $10.1 million loss recovery from business which was exited in connection with the IPO.

Second Quarter 2007 assumed loss and LAE was $(11.0) million principally due to a  portfolio reserve release associated with the restructuring of a European infrastructure transaction. Second Quarter 2006 assumed loss and LAE was $7.3 million principally due to increased loss reserves of $3.8 million related to a ratings downgrade of a European infrastructure  transaction and $1.6 million related to the ratings downgrade of various credits.

Total loss and LAE were $(13.8) million and $(6.9) million for Six Months 2007 and Six Months 2006, respectively.

In addition to Second Quarter 2007 activity, assumed loss and LAE for Six Months 2007 includes reserve releases  related to aircraft-related transactions.  In addition to Second Quarter 2006 activity, assumed loss and LAE for Six Months 2006 also contained a $2.5 million case reserve addition due to a U.S. public infrastructure transaction.

Reinsurance recoverable on ceded losses and LAE as of June 30, 2007 and December 31, 2006 were $10.4 million and $10.9 million, respectively and are all related to our other segment. Of these amounts, $10.4 million and $10.8 million, respectively, relate to reinsurance agreements with ACE.

5.  Commitments and Contingencies

Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on the Company’s results of operations or liquidity in a particular quarter or fiscal year.

In the ordinary course of their respective businesses, certain of the Company’s subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. The amounts, if any, the Company will recover in these proceedings are uncertain, although recoveries in any one or more of these proceedings during any quarter or fiscal year could be material to the Company’s results of operations in that particular quarter or fiscal year.

The Company is party to reinsurance agreements with all of the major monoline primary financial guaranty insurance companies. The Company’s facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary or (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all statutory unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements after which the Company would be released from liability with respect to the ceded business. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated,

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the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.

6.  Long-Term Debt and Credit Facilities

The Company’s unaudited interim consolidated financial statements  include long-term debt, used to fund the Company’s insurance operations, and related interest expense, as described below.

Senior Notes

Assured Guaranty US Holdings Inc. (“AGUS”), a subsidiary of the Company, issued $200.0 million of 7.0% Senior Notes due 2034 for net proceeds of $197.3 million. The proceeds of the offering were used to repay substantially all of a $200.0 million promissory note issued to a subsidiary of ACE in April 2004 as part of the IPO related formation transactions. The coupon on the Senior Notes is 7.0%, however, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004. The Company recorded interest expense of $3.3 million, including $0.2 million of amortized gain on the cash flow hedge, for both Second Quarter 2007 and Second Quarter 2006. The Company recorded interest expense of $6.7 million, including $0.3 million of amortized gain on the cash flow hedge, for both Six Months 2007 and Six Months 2006. These Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd.

Series A Enhanced Junior Subordinated Debentures

On December 20, 2006, AGUS issued $150.0 million of Series A Enhanced Junior Subordinated Debentures (the “Debentures”) due 2066 for net proceeds of $149.7 million. The proceeds of the offering were used to repurchase 5,692,599 of Assured Guaranty Ltd.’s common shares from ACE Bermuda Insurance Ltd., a subsidiary of ACE. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to 3 month LIBOR plus a margin equal to 2.38%. AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date. The Company recorded interest expense of $2.5 million and $4.9 million for Second Quarter 2007 and Six Months 2007, respectively. These Debentures are guaranteed on a junior subordinated basis by Assured Guaranty Ltd.

Credit Facilities

$300.0 million Credit Facility

On November 6, 2006, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $300.0 million five-year unsecured revolving credit facility (the “$300.0 million credit facility”) with a syndicate of banks. Under the $300.0 million credit facility, each of Assured Guaranty Corp. (“AGC”), Assured Guaranty (UK) Ltd. (“AG (UK)”), Assured Guaranty Re Ltd. (“AG Re”), Assured Guaranty Re Overseas Ltd. (“AGRO”) and Assured Guaranty Ltd. are entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower.

Of the $300.0 million available to be borrowed, no more than $100.0 million may be borrowed by Assured Guaranty Ltd., AG Re or AGRO, individually or in the aggregate, and no more than $20.0 million may be borrowed by AG (UK). The stated amount of all outstanding letters of credit and the amount of all unpaid drawings in respect of all letters of credit cannot, in the aggregate, exceed $100.0 million.

The $300.0 million credit facility also provides that Assured Guaranty Ltd. may request that the commitment of the banks be increased an additional $100.0 million up to a maximum aggregate amount of $400.0 million. Any such incremental commitment increase is subject to certain conditions provided in the agreement and must be for at least $25.0 million.

The proceeds of the loans and letters of credit are to be used for the working capital and other general corporate purposes of the borrowers and to support reinsurance transactions.

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At the closing of the $300.0 million credit facility, (i) AGC guaranteed the obligations of AG (UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AG Re and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of AGC and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of AGC and AG (UK) under such facility, (iii) Assured Guaranty Overseas US Holdings Inc., guaranteed the obligations of Assured Guaranty Ltd., AG Re and AGRO under such facility and (iv) Each of AG Re and AGRO guarantees the other as well as Assured Guaranty Ltd.

The $300.0 million credit facility’s financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of seventy-five percent (75%) of the Consolidated Net Worth of Assured Guaranty Ltd. as of the most recent fiscal quarter of Assured Guaranty Ltd. prior to November 6, 2006 and (b) maintain a maximum debt-to-capital ratio of 30%. In addition, the $300.0 million credit facility requires that AGC maintain qualified statutory capital of at least 75% of its statutory capital as of the fiscal quarter prior to November 6, 2006. Furthermore, the $300.0 million credit facility contains restrictions on Assured Guaranty Ltd. and its subsidiaries, including, among other things, in respect of their ability to incur debt, permit liens, become liable in respect of guaranties, make loans or investments, pay dividends or make distributions, dissolve or become party to a merger, consolidation or acquisition, dispose of assets or enter into affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. The $300.0 million credit facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements. A default by one borrower will give rise to a right of the lenders to terminate the facility and accelerate all amounts then outstanding. As of June 30, 2007 and December 31, 2006, Assured Guaranty was in compliance with all of those financial covenants.

As of June 30, 2007 and December 31, 2006, no amounts were outstanding under this facility nor have there been any borrowings under this facility.

Letters of Credit for a total aggregate stated amount of approximately $64.2 million and $19.6 million, remain outstanding as of June 30, 2007 and December 31, 2006, respectively.

Non-Recourse Credit Facilities

AG Re Credit Facility

On July 31, 2007 AG Re entered into a non-recourse credit facility (“AG Re Credit Facility”) with a syndicate of banks which provides up to $200.0 million to satisfy certain reinsurance agreements and obligations. The AG Re Credit Facility expires in July 2014.

AG Re’s failure to comply with certain covenants under the AG Re Credit Facility could, subject to grace periods in the case of certain covenants, result in an event of default. This could require AG Re to repay potential outstanding borrowings in an accelerated manner.

AGC Credit Facility

AGC is also party to a non-recourse credit facility (“AGC Credit Facility”) with a syndicate of banks which provides up to $175.0 million specifically designed to provide rating agency qualified capital to further support AGC’s claims paying resources. The AGC Credit Facility expires in December 2010. As of June 30, 2007 and December 31, 2006, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility.

AGC’s failure to comply with certain covenants under the AGC Credit Facility could, subject to grace periods in the case of certain covenants, result in an event of default. This could require AGC to repay any outstanding borrowings in an accelerated manner.

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The AGC Credit Facility was terminated on July 31, 2007 and replaced by the AG Re Credit Facility discussed above.

Committed Capital Securities

On April 8, 2005, AGC entered into four separate agreements with four different unaffiliated custodial trusts pursuant to which AGC may, at its option, cause each of the custodial trusts to purchase up to $50.0 million of perpetual preferred stock of AGC. The custodial trusts were created as a vehicle for providing capital support to AGC by allowing AGC to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, AGC would receive $200.0 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose including the payment of claims. The put options have not been exercised through June 30, 2007. Initially, all of the CCS Securities were issued to a special purpose pass-through trust (the “Pass-Through Trust”). The Pass-Through Trust is a statutory trust organized under the Delaware Statutory Trust Act formed for the purposes of (i) issuing $200,000,000 of Pass-Through Trust Securities to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended, (ii) investing the proceeds from the sale of the Pass-Through Trust Securities in, and holding, the CCS Securities issued by the Custodial Trusts and (iii) entering into related agreements. Neither the Pass-Through Trust nor the Custodial Trusts are consolidated in Assured Guaranty Ltd.’s financial statements.

During both Second Quarter 2007 and Second Quarter 2006, and Six Months 2007 and Six Months 2006, AGC incurred $0.7 million and $1.3 million, respectively, of put option premiums which are an on-going expense. These expenses are presented in the Company’s unaudited interim consolidated statements of operations and comprehensive income under other expense.

7. Share-Based Compensation

Share-based compensation expense in Second Quarter 2007 and Second Quarter 2006 was $3.9 million ($3.2 million after tax) and $3.1 million ($2.5 million after tax), respectively. Share-based compensation expense in Six Months 2007 and Six Months 2006 was $9.5 million ($7.8 million after tax) and $6.3 million ($5.2 million after tax), respectively.  The effect of share-based compensation on both basic and diluted earnings per share for Second Quarter 2007 was $0.05.  The effect of share-based compensation on basic and diluted earnings per share for Six Months 2007 was $0.12 and $0.11, respectively. The effect on basic and diluted earnings per share for Second Quarter 2006 and Six Months 2006 was $0.03 and $0.07, respectively. Second Quarter 2007 and Six Months 2007 expense included $1.1 million and $3.7 million, respectively, for stock award grants to retirement-eligible employees. Second Quarter 2006 and Six Months 2006 expense included $0.5 million and $1.2 million, respectively, for stock award grants to retirement-eligible employees.

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8. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”):

9.  Income Taxes

Adoption of FIN 48

The Company’s Bermuda subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law.  The Company’s U.S. and U.K. subsidiaries are subject to income taxes imposed by U.S. and U.K. authorities and file applicable tax returns.  In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code to be taxed as a U.S. domestic corporation.

The U.S. Internal Revenue Service (“IRS”) has completed audits of all of the Company’s U.S. subsidiaries’ federal income tax returns for taxable years though 2001.  The IRS is currently reviewing tax years 2002 through 2004 for Assured Guaranty Overseas US Holdings Inc. and subsidiaries, which includes Assured Guaranty Overseas US Holdings Inc., AGRO, Assured Guaranty Mortgage Insurance Company and AG Intermediary Inc.  In addition the IRS is reviewing AGUS for tax years 2002 through the date of the IPO.  AGUS includes Assured Guaranty US Holdings Inc., AGC and AG Financial Products and were part of the consolidated tax return of a subsidiary of ACE, for years prior to the IPO. The Company is indemnified by ACE for any potential tax liability associated with the tax examination of AGUS as it relates to years prior to the IPO.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007.  As a result of the adoption of FIN 48, the Company reduced its liability for unrecognized tax benefits and increased retained earnings by $2.6 million.  The total liability for unrecognized tax benefits as of January 1, 2007 was $12.9 million.  This entire amount, if recognized, would affect the effective tax rate.

Subsequent to the adoption of FIN 48, the IRS published final regulations on the treatment of consolidated losses.  As a result of these regulations the utilization of certain capital losses is no longer at a level that would require recording an associated liability for an uncertain tax position.  As such, the Company decreased its liability for unrecognized tax benefits and its provision for income taxes $4.1 million during the period ended March 31,2007.  The total liability for unrecognized tax benefits as of June 30, 2007 is $8.8 million, and is included in other liabilities on the balance sheet.

The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.  As of the date of adoption, the Company has accrued $2.7 million in interest and penalties.

Liability For Tax Basis Step-Up Adjustment

In connection with the IPO, the Company and ACE Financial Services Inc. (“AFS”), a subsidiary of ACE, entered into a tax allocation agreement, whereby the Company and AFS made a “Section 338 (h)(10)” election that has the effect of increasing the tax basis of certain affected subsidiaries’ tangible and intangible assets to fair value.

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Future tax benefits that the Company derives from the election will be payable to AFS when realized by the Company.

As a result of the election, the Company has adjusted its net deferred tax liability to reflect the new tax basis of the Company’s affected assets. The additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company. Any tax benefit realized by the Company will be paid to AFS. Such tax benefits will generally be calculated by comparing the Company’s affected subsidiaries’ actual taxes to the taxes that would have been owed by those subsidiaries had the increase in basis not occurred. After a 15 year period, to the extent there remains an unrealized tax benefit, the Company and AFS will negotiate a settlement of the unrealized benefit based on the expected realization at that time.

The Company initially recorded a $49.0 million reduction of its existing deferred tax liability, based on an estimate of the ultimate resolution of the Section 338(h)(10) election. Under the tax allocation agreement, the Company estimated that, as of the IPO date, it was obligated to pay $20.9 million to AFS and accordingly established this amount as a liability. The initial difference, which is attributable to the change in the tax basis of certain liabilities for which there is no associated step-up in the tax basis of its assets and no amounts due to AFS, resulted in an increase to additional paid-in capital of $28.1 million. The Company has paid ACE and correspondingly reduced its liability by $4.5 million and $0.4 million in Six Months 2007 and Six Months 2006, respectively.

10.  Segment Reporting

The Company has four principal business segments: (1) financial guaranty direct, which includes transactions whereby the Company provides an unconditional and irrevocable guaranty that indemnifies the holder of a financial obligation against non-payment of principal and interest when due, and could take the form of a credit derivative; (2) financial guaranty reinsurance, which includes agreements whereby the Company is a reinsurer and agrees to indemnify a primary insurance company against part or all of the loss which the latter may sustain under a policy it has issued; (3) mortgage guaranty, which includes mortgage guaranty insurance and reinsurance whereby the Company provides protection against the default of borrowers on mortgage loans; and (4) other, which includes lines of business in which the Company is no longer active.

The Company does not segregate assets and liabilities at a segment level since management reviews and controls these assets and liabilities on a consolidated basis. The Company allocates operating expenses to each segment based on a comprehensive cost study. During 2006, the Company implemented a new operating expense allocation methodology to more closely allocate expenses to the individual operating segments. This new methodology was based on a comprehensive study and is based on departmental time estimates and headcount. Management uses underwriting gains and losses as the primary measure of each segment’s financial performance.

The following tables summarize the components of underwriting gain for each reporting segment:

		Three Months Ended June 30, 2007
		Financial Guaranty Direct			Financial Guaranty Reinsurance			Mortgage Guaranty			Other			Total
		(in millions of U.S. dollars)
Gross written premiums		$	62.7		$	25.5		$	0.5		$	0.1		$	88.8
Net written premiums		59.0			25.5			0.5			—			84.9
Net earned premiums		28.3			23.7			2.3			—			54.2
Loss and loss adjustment expenses		1.7			(11.0		)	0.1			—			(9.1		)
Profit commission expense		—			0.5			0.4			—			0.9
Acquisition costs		2.3			8.6			—			—			10.9
Other operating expenses		14.5			3.9			0.5			—			18.8
Underwriting gain		$	9.8		$	21.7		$	1.3		$	—		$	32.7

 

 

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		Three Months Ended June 30, 2006
		Financial Guaranty Direct			Financial Guaranty Reinsurance			Mortgage Guaranty			Other			Total
		(in millions of U.S. dollars)
Gross written premiums		$	68.4		$	41.7		$	1.2		$	0.1		$	111.5
Net written premiums		67.8			41.3			1.2			—			110.3
Net earned premiums		21.2			23.1			3.7			—			48.2
Loss and loss adjustment expenses		(2.5		)	5.7			0.4			(10.1		)	(6.5		)
Profit commission expense		—			1.0			0.7			—			1.7
Acquisition costs		2.3			8.5			0.3			—			11.3
Other operating expenses		12.0			3.4			0.3			—			15.6
Underwriting gain		$	9.4		$	4.6		$	2.0		$	10.1		$	26.1

 

		Six Months Ended June 30, 2007
		Financial Guaranty Direct			Financial Guaranty Reinsurance			Mortgage Guaranty			Other			Total
		(in millions of U.S. dollars)
Gross written premiums		$	112.2		$	44.2		$	1.5		$	3.4		$	161.4
Net written premiums		107.9			44.0			1.5			—			153.3
Net earned premiums		57.1			45.6			5.4			—			108.1
Loss and loss adjustment expenses		2.9			(15.8		)	0.2			(1.3		)	(13.8		)
Profit commission expense		—			1.4			1.1			—			2.5
Acquisition costs		5.3			16.3			0.2			—			21.7
Other operating expenses		30.4			8.3			0.8			—			39.5
Underwriting gain		$	18.5		$	35.3		$	3.1		$	1.3		$	58.1

 

		Six Months Ended June 30, 2006
		Financial Guaranty Direct			Financial Guaranty Reinsurance			Mortgage Guaranty			Other			Total
		(in millions of U.S. dollars)
Gross written premiums		$	98.6		$	60.5		$	3.8		$	3.9		$	166.9
Net written premiums		97.5			59.8			3.8			—			161.1
Net earned premiums		41.9			46.4			7.9			—			96.2
Loss and loss adjustment expenses		(4.3		)	8.5			0.2			(11.3		)	(6.9		)
Profit commission expense		—			1.4			1.6			—			3.0
Acquisition costs		4.2			17.2			0.6			—			22.1
Other operating expenses		25.4			6.8			0.6			—			32.8
Underwriting gain		$	16.6		$	12.6		$	4.8		$	11.3		$	45.2

 

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The following is a reconciliation of total underwriting gain to income before provision for income taxes for the periods ended:

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
		(in millions of U.S. dollars)
Total underwriting gain		$	32.7		$	26.1		$	58.1		$	45.2
Net investment income		30.9			27.3			62.3			53.5
Net realized investment losses		(1.5		)	(1.0		)	(1.8		)	(2.0		)
Unrealized (losses) gains on derivative financial instruments		(17.2		)	5.7			(26.9		)	5.7
Other income		—			—			—			—
Interest expense		(5.8		)	(3.4		)	(11.9		)	(6.7		)
Other expense		(0.7		)	(0.7		)	(1.3		)	(1.3		)
Income before provision for income taxes		$	38.3		$	54.0		$	78.7		$	94.5

 

The following table provides the lines of businesses from which each of the Company’s segments derive their net earned premiums:

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
		(in millions of U.S. dollars)
Financial guaranty direct:
Public finance		$	2.8		$	1.4		$	7.0		$	2.7
Structured finance		25.5			19.8			50.1			39.2
Total		28.3			21.2			57.1			41.9
Financial guaranty reinsurance:
Public finance		16.9			14.4			32.9			30.0
Structured finance		6.8			8.7			12.7			16.4
Total		23.7			23.1			45.6			46.4
Mortgage guaranty:
Mortgage guaranty		2.3			3.7			5.4			7.9
Total net earned premiums		$	54.2		$	48.2		$	108.1		$	96.2

 

The other segment had an underwriting gain of $10.1 million for Second Quarter 2006, and $1.3 million and $11.3 million for Six Months 2007 and Six Months 2006, respectively, as loss recoveries were recorded in all periods. The other segment did not record an underwriting gain (loss) during Second Quarter 2007.

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11. Subsidiary Information

The following tables present the unaudited condensed consolidated financial information for Assured Guaranty Ltd., Assured Guaranty US Holdings Inc., of which AGC is a subsidiary and other subsidiaries of Assured Guaranty Ltd. as of June 30, 2007 and December 31, 2006 and for the three and six months ended June 30, 2007 and 2006.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2007

(in thousands of U. S. dollars)

 

		Assured Guaranty Ltd. (Parent Company)			Assured Guaranty US Holdings Inc.			AG Re and Other Subsidiaries			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)
Assets
Total investments and cash		$	178		$	1,265,676		$	1,243,654		$	—		$	2,509,508
Investment in subsidiaries		1,696,606			—			—			(1,696,606		)	—
Deferred acquisition costs		—			74,623			150,190			—			224,813
Reinsurance recoverable		—			9,061			4,273			(2,890		)	10,444
Goodwill		—			85,417			—			—			85,417
Premiums receivable		—			26,423			27,352			(15,067		)	38,708
Other		7,337			150,082			48,290			(102,108		)	103,601
Total assets		$	1,704,121		$	1,611,282		$	1,473,759		$	(1,816,671	)	$	2,972,491
Liabilities and shareholders’ equity
Liabilities
Unearned premium reserves		$	—		$	307,408		$	464,740		$	(78,763	)	$	693,385
Reserves for losses and loss adjustment expenses		—			48,836			62,867			(2,890		)	108,813
Profit commissions payable		—			3,193			14,693			—			17,886
Deferred income taxes		—			33,901			(16,422)			—			17,479
Senior Notes		—			197,391			—			—			197,391
Series A Enhanced Junior Subordinated Debentures		—			149,723			—			—			149,723
Other		9,338			74,316			47,789			(38,412		)	93,031
Total liabilities		9,338			814,768			573,667			(120,065		)	1,277,708
Total shareholders’ equity		1,694,783			796,514			900,092			(1,696,606		)	1,694,783
Total liabilities and shareholders’ equity		$	1,704,121		$	1,611,282		$	1,473,759		$	(1,816,671	)	$	2,972,491

 

 

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