ASSURED GUARANTY LTD - FORM 8-K - EX-99.4 - EXHIBIT 99.4

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8-K - 8-K - ASSURED GUARANTY LTD	a2199860z8-k.htm
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Exhibit 99.4

Assured Guaranty Corp.

Consolidated Financial Statements

(Unaudited)

Index

June 30, 2010

		Page(s)

Financial Statements
Consolidated Balance Sheets (unaudited) as of June 30, 2010 and December 31, 2009			2
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009			3
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009			4
Consolidated Statement of Shareholder's Equity (unaudited) for the Six Months Ended June 30, 2010			5
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009			6
Notes to Consolidated Financial Statements (unaudited)			7 - 77

Assured Guaranty Corp.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands except per share and share amounts)

			June 30, 2010		December 31, 2009

Assets
Investment portfolio:
	Fixed maturity securities, available-for-sale, at fair value (amortized cost of $2,296,082 and $2,002,706)		$	2,363,170	$	2,045,211
	Short-term investments, at fair value			389,929		802,567

		Total investment portfolio		2,753,099		2,847,778
Cash				27,068		2,470
Premiums receivable, net of ceding commissions payable				333,072		351,468
Ceded unearned premium reserve				423,627		435,268
Deferred acquisition costs				51,243		45,162
Reinsurance recoverable on unpaid losses				56,910		50,706
Credit derivative assets				285,353		251,992
Committed capital securities, at fair value				11,305		3,987
Deferred tax asset, net				181,706		241,796
Salvage and subrogation recoverable				213,923		169,917
Financial guaranty variable interest entities' assets				392,357		—
Other assets				116,795		99,266

	Total assets		$	4,846,458	$	4,499,810

Liabilities and shareholder's equity
Unearned premium reserves			$	1,423,933	$	1,451,576
Loss and loss adjustment expense reserve				196,208		191,211
Note payable to affiliate				300,000		300,000
Credit derivative liabilities				879,828		1,076,726
Reinsurance balances payable, net				150,023		165,892
Financial guaranty variable interest entities' liabilities with recourse				433,347		—
Financial guaranty variable interest entities' liabilities without recourse				12,529		—
Other liabilities				120,906		88,188

	Total liabilities		$	3,516,774	$	3,273,593

Commitments and contingencies
Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding in 2010 and 2009)				—		—
Common stock ($720.00 par value, 500,000 shares authorized; 20,834 shares issued and outstanding in 2010 and 2009)				15,000		15,000
Additional paid-in capital				1,037,059		1,037,059
Retained earnings				246,453		153,738
Accumulated other comprehensive income (loss), net of deferred tax provision (benefit) of $16,786 and $10,999				31,172		20,420

	Total shareholder's equity			1,329,684		1,226,217

	Total liabilities and shareholder's equity		$	4,846,458	$	4,499,810

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

Assured Guaranty Corp.

Consolidated Statements of Operations (Unaudited)

(in thousands)

			Three Months Ended June 30,						Six Months Ended June 30,

			2010			2009			2010			2009
Revenues
Net earned premiums			$	25,138		$	26,666		$	54,628		$	94,391
Net investment income				23,796			19,713			43,355			39,014
Net realized investment gains (losses):
	Other-than-temporary impairment ("OTTI") losses			(400	)		(5,163	)		(400	)		(7,672	)
	Less: portion of OTTI loss recognized in other comprehensive income			—			(3,403	)		—			(3,403	)
	Other net realized investment gains (losses)			7			7,116			2,848			9,863

		Net realized investment gains (losses)		(393	)		5,356			2,448			5,594
Net change in fair value of credit derivatives:
	Realized gains (losses) and other settlements			23,862			22,004			17,182			44,973
	Net unrealized gains (losses)			7,256			(225,010	)		216,712			(248,033	)

		Net change in fair value of credit derivatives		31,118			(203,006	)		233,894			(203,060	)
Fair value gain (loss) on committed capital securities				5,897			(60,570	)		7,318			(40,904	)
Financial guaranty variable interest entities' revenues				27,435			—			54,483			—
Other income				(2,952	)		481			(5,114	)		1,133

	Total Revenues			110,039			(211,360	)		391,012			(103,832	)

Expenses
Loss and loss adjustment expenses				3,721			46,427			38,245			67,809
Amortization of deferred acquisition costs				1,536			3,099			5,680			2,756
Interest expense				3,750			—			7,500			—
Financial guaranty variable interest entities' expenses				35,889			—			51,423			—
Other operating expenses				19,035			32,198			46,662			48,789

	Total Expenses			63,931			81,724			149,510			119,354

Income (loss) before income taxes				46,108			(293,084	)		241,502			(223,186	)
Provision (benefit) for income taxes
	Current			19,965			(4,851	)		3,150			13,144
	Deferred			(6,457	)		(103,532	)		75,738			(101,002	)

Total provision (benefit) for income taxes				13,508			(108,383	)		78,888			(87,858	)

Net income (loss)			$	32,600		$	(184,701	)	$	162,614		$	(135,328	)

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

Assured Guaranty Corp.

Consolidated Statement of Comprehensive Income (Unaudited)

(in thousands)

			Three Months Ended June 30,						Six Months Ended June 30,

			2010			2009			2010			2009
Net income(loss)			$	32,600		$	(184,701	)	$	162,614		$	(135,328	)
	Unrealized holding gains (losses) arising during the period on:
		Investments with no OTTI, net of deferred income tax provision (benefit) of $5,568, $8,205, $9,443 and $12,097		10,503			15,241			17,541			22,466
		Investments with OTTI, net of deferred income tax provision (benefit) of $0, $(1,191), $0 and $(1,191)		—			(2,212	)		—			(2,212	)

	Unrealized holding gains (losses) during the period, net of tax			10,503			13,029			17,541			20,254
	Less: reclassification adjustment for gains (losses) included in net income (loss), net of deferred income tax provision (benefit) of $(137), $1,875, $857 and $1,958			(256	)		3,481			1,591			3,636

	Change in net unrealized gains on investments			10,759			9,548			15,950			16,618
	Change in cumulative translation adjustment			(1,430	)		6,174			(5,198	)		(2,159	)

	Other comprehensive income (loss)			9,329			15,722			10,752			14,459

Comprehensive income (loss)			$	41,929		$	(168,979	)	$	173,366		$	(120,869	)

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

Assured Guaranty Corp.

Consolidated Statement of Shareholder's Equity (Unaudited)

For the Six Months Ended June 30, 2010

(in thousands)

	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholder's Equity

Balance, December 31, 2009	$	—	$	15,000	$	1,037,059	$	153,738		$	20,420		$	1,226,217
Cumulative effect of accounting change—consolidation of variable interest entities effective January 1, 2010 (Note 7)		—		—		—		(39,898	)		—			(39,898	)

Balance, January 1, 2010		—		15,000		1,037,059		113,840			20,420			1,186,319
Net income		—		—		—		162,614			—			162,614
Dividends		—		—		—		(30,001	)		—			(30,001	)
Change in cumulative translation adjustment, net of tax of $(2,799)		—		—		—		—			(5,198	)		(5,198	)
Unrealized gain on investments, net of tax of $8,586		—		—		—		—			15,950			15,950

Balance, June 30, 2010	$	—	$	15,000	$	1,037,059	$	246,453		$	31,172		$	1,329,684

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

Assured Guaranty Corp.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

			Six Months Ended June 30,

			2010			2009
Net cash flows provided by (used in) operating activities			$	(82,363	)	$	170,791

Investing activities
	Fixed maturity securities:
		Purchases		(507,535	)		(543,322	)
		Sales		146,946			387,149
		Maturities		89,501			—
	Net sales (purchases) of short-term investments, net			412,871			(9,122	)
	Proceeds from financial guaranty variable interest entities' assets			6,053			—

Net cash flows provided by (used in) investing activities				147,836			(165,295	)

Financing activities
	Dividends paid			(30,001	)		(10,709	)
	Paydown of financial guaranty variable interest entities' liabilities			(10,774	)		—

Net cash flows provided by (used in) financing activities				(40,775	)		(10,709	)
Effect of exchange rate changes				(100	)		211

Increase (decrease) in cash				24,598			(5,002	)
Cash at beginning of period				2,470			7,823

Cash at end of period			$	27,068		$	2,821

Supplemental cash flow information
Cash paid during the period for:
	Income taxes		$	—		$	6,992
	Claims, net of reinsurance recoverable		$	111,611		$	109,344

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

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2010

1. Business and Organization

Assured Guaranty Corp. ("AGC" and, together with its subsidiaries, the "Company") is a Maryland domiciled insurance company which commenced operations in January 1988. It is licensed to conduct financial guaranty insurance business in all fifty states of the United States ("U.S."), the District of Columbia and Puerto Rico. The Company's principal product is a guaranty of scheduled principal and interest payments when due on: debt securities issued by governmental entities such as U.S. state or municipal authorities; obligations issued for international infrastructure projects; and asset-backed securities ("ABS") issued by special purpose entities ("SPEs"). AGC's ultimate parent is Assured Guaranty Ltd. ("AGL" and, together with its subsidiaries, "Assured Guaranty"), a Bermuda-based insurance holding company that provides, through its operating subsidiaries, credit protection products to the public finance, infrastructure and structured finance markets in the U.S. as well as internationally. AGC owns 100% of Assured Guaranty (UK) Ltd. ("AGUK"), a company incorporated in the United Kingdom ("U.K.") as a U.K. insurance company and which is also authorized to operate in various countries throughout the European Economic Area.

On July 1, 2009 (the "Acquisition Date"), Assured Guaranty acquired Financial Security Assurance Holdings Ltd. (renamed Assured Guaranty Municipal Holdings Inc. and, together with its subsidiaries acquired by Assured Guaranty, is referred to as "AGMH") and most of its subsidiaries, including Assured Guaranty Municipal Corp. ("AGM"), from Dexia Holdings Inc. ("Dexia Holdings") (the "AGMH Acquisition"). AGM is a New York domiciled financial guaranty insurance company and the principal operating subsidiary of AGMH. AGMH's financial guaranty insurance subsidiaries participate in the same markets and issue financial guaranty contracts similar to those issued by AGC.

Segments

The Company's business includes two principal segments: financial guaranty direct and financial guaranty reinsurance. The financial guaranty direct and reinsurance segments include financial guaranties of residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS"). The segments are 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 17.

Importance of Financial Strength Ratings

Debt obligations guaranteed by AGC and its subsidiary AGUK are generally awarded debt credit ratings that are the same rating as the financial strength rating of AGC or AGUK, as the case may be. Investors in products insured by AGC or AGUK frequently rely on rating agency ratings because they influence the trading value of securities and form the basis for many institutions' investment guidelines as well as individuals' bond purchase decisions. Therefore, AGC and AGUK manage their businesses 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 sometimes 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 AGC's and AGUK's products) and change frequently.

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

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 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. More recently, 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, and its capital adequacy, profitability and financial flexibility.

The rating agencies have developed and published rating guidelines for rating financial guaranty insurers. 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.

Financial strength ratings reflect only the views of the respective rating agencies and are subject to continuous review and revision or withdrawal at any time. There can be no assurance that rating agencies will not take action on AGC's or AGUK's ratings, including downgrading such ratings. Each of AGC's and AGUK's business and its financial condition have been and will continue to be subject to risk of the global financial and economic conditions that could materially and negatively affect the demand for its products, the amount of losses incurred on transactions it guarantees, and its financial strength ratings.

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and, in the opinion of management, reflect all adjustments, 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 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 three-month period ended June 30, 2010 ("Second Quarter 2010"), the three-month period ended June 30, 2009 ("Second Quarter 2009), the six-month period ended June 30, 2010 ("Six Months 2010") and the six-month period ended June 30, 2009 ("Six Months 2009). Results of operations for the Second Quarter and Six Months ended June 30, 2010 and 2009 are not necessarily indicative of the results that may be expected for a full year. In addition, 2010 financial statements include the effects of consolidating certain financial guaranty variable interest entities ("VIEs") (See Note 7).

Intercompany accounts and transactions have been eliminated. Certain prior year balances have been reclassified to conform to the current year's presentation.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

2. Summary of Significant Accounting Policies (Continued)

These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included as Exhibit 99.1 in AGL's Form 8-K dated August 6, 2010, filed with the U.S. Securities and Exchange Commission (the "SEC").

AGC and AGUK are subject to U.S. and U.K. income tax, respectively. The 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 credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year of 2010. A discrete calculation of the provision is calculated for each interim period.

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, there can be no assurance 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.

3. Outstanding Exposure

The Company's insurance policies and credit derivative contracts (which, although written in different forms, collectively are considered financial guaranty contracts), typically guarantee the scheduled payments of principal and interest on public finance and structured finance obligations. The gross amount of in force exposure (principal and interest) was $250.4 billion at June 30, 2010 and $259.9 billion at December 31, 2009. The net amount of in force exposure (principal and interest), which deducts amounts ceded to third party reinsurers, was $179.9 billion at June 30, 2010 and $186.6 billion at December 31, 2009.

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, as well as through reinsurance.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

3. Outstanding Exposure (Continued)

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

Summary of Public Finance Insured Portfolio

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Types of Issues			June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
			(in millions)
U.S.:
	General obligation		$	36,479	$	35,616	$	10,545	$	10,316	$	25,934	$	25,300
	Tax backed			16,055		16,409		4,067		4,114		11,988		12,295
	Municipal utilities			12,553		12,825		3,260		3,288		9,293		9,537
	Transportation			9,020		8,928		2,082		2,030		6,938		6,898
	Healthcare			8,013		8,366		2,703		2,873		5,310		5,493
	Higher education			4,547		4,846		1,262		1,346		3,285		3,500
	Infrastructure finance			1,430		1,735		474		554		956		1,181
	Investor-owned utilities			737		749		79		61		658		688
	Housing			432		468		99		102		333		366
	Other public finance—U.S.			2,446		2,583		681		718		1,765		1,865

		Total public finance—U.S.		91,712		92,525		25,252		25,402		66,460		67,123
Non-U.S.:
	Pooled infrastructure			4,267		4,684		1,989		2,169		2,278		2,515
	Infrastructure finance			1,715		1,926		490		545		1,225		1,381
	Regulated utilities			2,344		2,533		1,292		1,375		1,052		1,158
	Other public finance—non-U.S.			451		636		40		115		411		521

		Total public finance—non-U.S.		8,777		9,779		3,811		4,204		4,966		5,575

	Total public finance obligations		$	100,489	$	102,304	$	29,063	$	29,606	$	71,426	$	72,698

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

3. Outstanding Exposure (Continued)

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

Summary of Structured Finance Insured Portfolio

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Types of Collateral			June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
			(in millions)
U.S.:
	Pooled corporate obligations		$	29,048	$	30,699	$	7,248	$	7,819	$	21,800	$	22,880
	RMBS and home equity			13,533		14,683		3,197		3,471		10,336		11,212
	CMBS			6,987		7,100		1,325		1,333		5,662		5,767
	Consumer receivables			2,944		3,662		493		674		2,451		2,988
	Structured credit			2,048		2,173		802		793		1,246		1,380
	Commercial receivables			1,407		1,359		341		339		1,066		1,020
	Insurance securitizations			1,100		1,100		845		845		255		255
	Other structured finance—U.S.			143		669		24		125		119		544

		Total structured finance—U.S.		57,210		61,445		14,275		15,399		42,935		46,046
Non-U.S.:
	Pooled corporate obligations			8,715		9,887		2,312		2,646		6,403		7,241
	RMBS and home equity			3,097		3,558		1,012		1,120		2,085		2,438
	Commercial receivables			918		1,089		301		355		617		734
	Structured credit			787		870		289		345		498		525
	CMBS			417		469		98		110		319		359
	Insurance securitizations			923		923		644		645		279		278
	Other structured finance—non-U.S.			3		220		—		71		3		149

		Total structured finance—non-U.S.		14,860		17,016		4,656		5,292		10,204		11,724

	Total structured finance obligations		$	72,070	$	78,461	$	18,931	$	20,691	$	53,139	$	57,770

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

3. Outstanding Exposure (Continued)

The following table sets forth the net financial guaranty par outstanding by rating:

		June 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		$	11,307		9.1	%	$	15,902		12.2	%
AAA			22,257		17.9			20,026		15.3
AA			16,179		13.0			17,918		13.7
A			47,261		37.9			48,129		36.9
BBB			19,080		15.3			20,266		15.5
Below investment grade ("BIG") (See Note 4)			8,481		6.8			8,227		6.4

	Total exposures	$	124,565		100.0	%	$	130,468		100.0	%

(1): Represents the Company's internal rating. The Company's ratings scale is similar to that used by the nationally recognized rating agencies; however, the ratings in the above table may not be the same as ratings assigned by any nationally recognized rating agency. The super senior category, which is not generally used by rating agencies, is used by the Company in instances where the Company's triple-A-rated exposure has additional credit enhancement due to either (1) the existence of another security rated triple-A that is subordinated to the Company's exposure or (2) the Company's exposure benefiting from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management's opinion, causes the Company's attachment point to be materially above the triple-A attachment point.

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 nonpayment 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 June 30, 2010 and December 31, 2009 and included in the Company's financial guaranty exposure in the tables above was $44.8 billion and $48.2 billion, respectively. See Note 6.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guarantees of $5.7 billion for structured finance and $0.1 million for public finance transactions at June 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 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.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Significant Risk Management Activities

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 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 the Company's litigation proceedings.

In Second Quarter 2010, AGC filed lawsuits against a sponsor of a U.S. RMBS transaction it had insured, alleging breaches of representations and warranties both in respect of the underlying loans in the transaction and the accuracy of the information provided to AGC, and failure to cure or repurchase defective loans identified by AGC to such sponsors.

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 credits include all credits internally rated lower than 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, but may not necessarily be the same as ratings assigned by any rating agency.

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 reserve committee.

Below Investment Grade Surveillance Categories

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:

•: BIG Category 1: Below investment grade transactions showing sufficient deterioration to make material losses possible, but for which no losses have been incurred. Non-investment grade transactions on which liquidity claims have been paid are in this category.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Significant Risk Management Activities (Continued)

•: BIG Category 2: Below investment grade transactions for which expected losses have been established but for which no unreimbursed claims have yet been paid.
•: BIG Category 3: Below investment grade transactions for which expected losses have been established and on which unreimbursed claims have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

Financial Guaranty Exposures
(Insurance and Credit Derivative Form)

			June 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		$	18	$	517	$	—	$	535	$	599
	Alt-A First Lien			360		2,191		94		2,645		3,773
	Alt-A Options ARM			—		841		—		841		1,041
	Subprime			12		583		35		630		4,104
Second Lien U.S. RMBS:
	Closed end second lien ("CES")			95		38		76		209		242
	Home equity lines of credit ("HELOC")			4		—		544		548		577

		Total U.S. RMBS		489		4,170		749		5,408		10,336
Other structured finance				789		444		1,013		2,246		42,803
Public finance				508		88		231		827		71,426

		Total	$	1,786	$	4,702	$	1,993	$	8,481	$	124,565

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Significant Risk Management Activities (Continued)

			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		$	467	$	25	$	—	$	492	$	643
	Alt-A First Lien			447		1,894		96		2,437		4,162
	Alt-A Options ARM			142		788		—		930		1,142
	Subprime			43		597		—		640		4,334
Second Lien U.S. RMBS:
	CES			102		39		95		236		273
	HELOC			—		—		621		621		658

		Total U.S. RMBS		1,201		3,343		812		5,356		11,212
Other structured finance				342		836		974		2,152		46,558
Public finance				345		67		307		719		72,698

		Total	$	1,888	$	4,246	$	2,093	$	8,227	$	130,468

5. Financial Guaranty Contracts Accounted for as Insurance

The following tables provide information for contracts accounted for as financial guaranty insurance contracts:

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

		June 30, 2010(1)

		(in thousands)
2010 (July 1 - September 30)		$	19,228
2010 (October 1 - December 31)			12,284
2011			42,347
2012			35,731
2013			31,676
2014			25,161
2015 - 2019			101,659
2020 - 2024			67,214
2025 - 2029			42,630
After 2029			46,500

	Total expected collections	$	424,430

(1): Represents nominal amounts expected to be collected.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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

Gross Premium Receivable, Net of Ceding Commissions Payable Roll Forward

			(in thousands)

Premium receivable, net at December 31, 2009			$	351,468
	Cumulative effect of change in accounting principle			(9,245	)

	Premium receivable, net at January 1, 2010			342,223
	Premium written, net			43,973
	Premium payments received, net			(58,461	)
	Adjustments to the premium receivable:
		Changes in the expected term of financial guaranty insurance contracts		7,856
		Accretion of the premium receivable discount		5,420
		Foreign exchange rate changes		(7,310	)
		Other adjustments		(843	)

Premium receivable, net at June 30, 2010			$	332,858

The $7.3 million loss due to foreign exchange rate changes relates to installment premium receivable denominated in currencies other than the U.S. dollar. Approximately 7% of the Company's installment premiums at June 30, 2010 are denominated in currencies other than the U.S. dollar, primarily in Australian Dollars, British Pound Sterling ("GBP") and Euros. 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

Selected Information for Policies Paid in Installments

	June 30, 2010

	(dollars in thousands)
Premiums receivable, net of ceding commission payable	$	332,858
Deferred premium revenue		340,303
Weighted-average risk-free rate to discount premiums		3.1	%
Weighted-average period of premiums receivable (in years)		8.7

The following table presents the components of net premiums earned.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

Net Earned Premiums(1)

		Second Quarter				Six Months

		2010		2009		2010		2009
		(in thousands)
Scheduled net earned premiums		$	21,997	$	23,531	$	47,654	$	47,176
Acceleration of premium earnings(2)			1,356		1,583		3,488		44,160
Accretion of discount on premium receivable			1,736		1,493		3,389		2,938

	Total net earned premium	$	25,089	$	26,607	$	54,531	$	94,274

(1): Excludes $0.1 million and $0 million in net earned premium related to the Other segment for the Second Quarter 2010 and 2009, respectively, and $0.1 million and $0 million for the Six Months 2010 and 2009, respectively.
(2): Reflects the unscheduled pre-payment or refundings of underlying insured obligations.

The following table provides a schedule of how the Company's financial guaranty net deferred premium revenue and PV of expected losses are expected to run off in the consolidated statement of operations:

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

		As of June 30, 2010

		Scheduled Net Earned Premium		Expected Loss and LAE(1)		Net
		(in thousands)
2010 (July 1 - September 30)		$	19,476	$	454	$	19,022
2010 (October 1 - December 31)			19,285		439		18,846
2011			79,629		1,584		78,045
2012			71,634		1,337		70,297
2013			66,695		1,130		65,565
2014			61,083		994		60,089
2015 - 2019			253,048		4,318		248,730
2020 - 2024			180,581		2,425		178,156
2025 - 2029			120,927		1,790		119,137
After 2029			127,948		2,415		125,533

	Total present value basis(2)(3)		1,000,306		16,886		983,420
Discount			65,269		77,178		(11,909	)

	Total future value	$	1,065,575	$	94,064	$	971,511

(1): These amounts reflect the Company's estimate as of June 30, 2010 of expected losses to be expensed and are not included in loss and loss adjustment expense ("LAE") reserve because these losses are less than deferred premium revenue determined on a contract-by-contract basis.
(2): Balances represent discounted amounts.
(3): The effect of consolidating VIEs resulted in a reduction of $174.7 million in scheduled net earned premium and $90.6 million to expected loss and LAE.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

The following table presents a roll forward of the net expected loss and LAE net of salvage and subrogation recoverable since December 31, 2009 by sector.

Financial Guaranty Insurance
Present Value of Net Expected Loss and Loss Adjustment Payments
Roll Forward By Sector(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 June 30, 2010

				(in thousands)
U.S. RMBS:
	First Lien:
		Prime First lien		$	—		$	208		$	6		$	202
		Alt-A First lien			20,614			5,117			(859	)		26,590
		Alt-A Options ARM			17,399			18,287			164			35,522
		Subprime			16,914			7,576			533			23,957

			Total First Lien		54,927			31,188			(156	)		86,271
	Second Lien:
		CES			17,390			(3,042	)		17,988			(3,640	)
		HELOC			(107,493	)		14,232			39,475			(132,736	)

			Total Second Lien		(90,103	)		11,190			57,463			(136,376	)

Total U.S. RMBS					(35,176	)		42,378			57,307			(50,105	)
Other structured finance					19,676			5,008			377			24,307
Public finance					55,798			(6,854	)		25,658			23,286

			Subtotal(1)		40,298			40,532			83,342			(2,512	)
Effect of consolidating VIEs					91			(111	)		(4,183	)		4,163

			Total	$	40,389		$	40,421		$	79,159		$	1,651

(1): Excludes $1.1 million and $2.2 million of expected losses related to the Other segment recorded in loss reserves on the consolidated balance sheet as of June 30, 2010 and December 31, 2009, respectively.

The amount of "expected loss to be paid" differs from "expected PV net loss to be expensed" due primarily to amounts of expected loss included in unearned premium. Gross and ceded unearned premium reserve represents the stand ready obligation under GAAP. Loss reserves are recorded at the time, and for the amount of, expected losses in excess of unearned premium reserve on a contract by contract basis. Loss expense is recognized in the consolidated statements of operations only when present value of future expected losses exceeds unearned premium reserve.

The Company's estimate of ultimate losses 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.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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 representations and warranties 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 June 30, 2010 and December 31, 2009:

Financial Guaranty Insurance BIG Transaction Loss Summary
June 30, 2010

			BIG Categories

			BIG 1			BIG 2		BIG 3			Total BIG			Effect of Consolidating VIEs(2)			Total
			(dollars in millions)
Number of risks				21			96		31			148			—			148
Remaining weighted-average contract period (in years)				13.5			6.7		15.7			12.5			—			12.5
Gross insured contractual payments outstanding:
	Principal		$	1,055		$	1,412	$	2,220		$	4,687		$	—		$	4,687
	Interest			543			382		596			1,521			—			1,521

		Total	$	1,598		$	1,794	$	2,816		$	6,208		$	—		$	6,208

Gross expected cash outflows for loss and LAE			$	57.9		$	236.4	$	813.4		$	1,107.7		$	(57.8	)	$	1,049.9
Less:
	Gross potential recoveries(1)			67.4			60.6		799.9			927.9			(67.4	)		860.5
	Discount			(5.6	)		70.9		114.1			179.4			5.4			184.8

Present value of expected cash flows for loss and LAE			$	(3.9	)	$	104.9	$	(100.6	)	$	0.4		$	4.2		$	4.6

Deferred premium revenue			$	10.0		$	13.1	$	24.8		$	47.9		$	(1.9	)	$	46.0
Gross reserves (salvage) for loss and LAE reported in the balance sheet			$	(4.1	)	$	93.4	$	(112.3	)	$	(23.0	)	$	4.2		$	(18.8	)
Reinsurance recoverable (payable)			$	(1.0	)	$	13.6	$	(16.6	)	$	(4.0	)	$	—		$	(4.0	)

(1): Includes estimated future recoveries for breaches of representations and warranties as well as excess spread and draws on HELOCs.
(2): The Company does not eliminate principal and interest outstanding from its disclosures in order to reflect the full net par outstanding for all financial guaranty insurance contracts, regardless of the accounting model applied.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

Financial Guaranty BIG Transaction Loss Summary
December 31, 2009

			BIG Categories

			BIG 1			BIG 2		BIG 3			Total
			(dollars in millions)
Number of risks				31			88		10			129
Remaining weighted-average contract period (in years)				11.1			4.5		12.9			9.5
Insured contractual payments outstanding:
	Principal		$	639		$	1,070	$	1,328		$	3,037
	Interest			259			188		389			836

		Total	$	898		$	1,258	$	1,717		$	3,873

Gross expected cash outflows for loss and LAE			$	—		$	177.3	$	700.3		$	877.6
Less:
	Gross potential recoveries(1)			0.1			33.5		592.9			626.5
	Discount, net			—			68.3		136.2			204.5

Present value of expected cash flows for loss and LAE			$	(0.1	)	$	75.5	$	(28.8	)	$	46.6

Deferred premium revenue			$	2.6		$	5.1	$	26.7		$	34.4
Gross reserves (salvage) for loss and LAE reported in the balance sheet			$	(0.3	)	$	69.7	$	(50.3	)	$	19.1
Reinsurance recoverable (payable)			$	—		$	10.7	$	(17.6	)	$	(6.9	)

(1): Includes estimated future recoveries for breaches of representations and warranties as well as excess spread and draws on HELOCs.

The Company used weighted-average risk free rates ranging from 0% to 4.81% and 0.07% to 5.21% to discount expected losses as of June 30, 2010 and December 31, 2009, respectively.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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

Loss and Loss Adjustment Expense Reserves, Net of Reinsurance

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

					(in thousands)
First Lien:
	Prime First lien				$	122	$	—
	Alt-A First lien					25,131		19,781
	Alt-A Options ARM					34,262		16,560
	Subprime					22,215		16,162

		Total First Lien				81,730		52,503
Second Lien:
	CES					3,703		16,706
	HELOC					3,900		5,415

		Total Second Lien				7,603		22,121

		Total U.S. RMBS				89,333		74,624
Other structured finance						21,009		15,745
Public Finance						28,956		50,136

Total financial guaranty						139,298		140,505
Other						—		—

			Subtotal			139,298		140,505
Effects of consolidating VIEs						—		—

				Total	$	139,298	$	140,505

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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

Summary of Recoverables Recorded as Salvage and Subrogation

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

				(in thousands)
U.S. RMBS:
	Second Lien:
		CES		$	13,961		$	91
		HELOC			193,964			168,359

			Total Second Lien		207,925			168,450

Total U.S. RMBS					207,925			168,450
Other structured finance					824			993
Public Finance					9,337			474

			Total		218,086			169,917
Less: Ceded recoverable(1)					59,771			55,384

			Net recoverable		158,315			114,533
Effect of consolidating VIEs					(4,163	)		—

			Total net recoverable	$	154,152		$	114,533

(1): Recorded in "reinsurance balances payable, net" on the consolidated balance sheets.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

Loss and Loss Adjustment Expenses (Recoveries)
By Type

				Second Quarter						Six Months

				2010			2009			2010			2009
				(in thousands)
Financial Guaranty:
U.S. RMBS:
	First Lien:
		Prime First lien		$	(15	)	$	—		$	16		$	—
		Alt-A First lien			3,795			1,689			4,588			3,175
		Alt-A Options ARM			7,652			6,856			17,838			7,532
		Subprime			(515	)		3,862			6,542			4,659

			Total First Lien		10,917			12,407			28,984			15,366
	Second Lien:
		CES			(10,207	)		20,423			(6,411	)		27,865
		HELOC			8,483			7,391			14,245			9,931

			Total Second Lien		(1,724	)		27,814			7,834			37,796

Total U.S. RMBS					9,193			40,221			36,818			53,162
Other structured finance					4,775			(3,215	)		5,847			(3,247	)
Public Finance					(10,227	)		9,421			(4,400	)		17,894

	Subtotal				3,741			46,427			38,265			67,809
Effect of consolidating VIEs					(20	)		—			(20	)		—

	Total loss and LAE			$	3,721		$	46,427		$	38,245		$	67,809

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

Net Losses Paid on Financial Guaranty Insurance and Reinsurance Contracts

				Second Quarter					Six Months

				2010			2009		2010			2009
				(in thousands)
U.S. RMBS:
	First Lien:
		Prime First lien		$	6		$	—	$	6		$	—
		Alt-A First lien			—			—		(859	)		—
		Alt-A Options ARM			164			—		164			—
		Subprime			317			258		533			542

			Total First Lien		487			258		(156	)		542
	Second Lien:
		CES			9,418			20,358		17,988			29,080
		HELOC			18,572			38,421		39,475			66,525

			Total Second Lien		27,990			58,779		57,463			95,605

Total U.S. RMBS					28,477			59,037		57,307			96,147
Other structured finance					128			364		377			(206	)
Public Finance					6,477			6,396		25,658			13,403

	Subtotal				35,082			65,797		83,342			109,344
Effect of consolidating VIEs					(4,183	)		—		(4,183	)		—

	Total			$	30,899		$	65,797	$	79,159		$	109,344

Loss Reserving

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 representations and warranties to purchase ineligible loans out of these transactions. Most of the Company's expected loss and LAE reserves 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. Based on information observed during the quarter (particularly early stage delinquencies), the Company determined that it may be witnessing the beginning of an improvement in the housing and mortgage markets. The Company also formed a view that any improvement in the second lien loan markets may be more gradual than it had assumed in its prior projection scenarios for second liens. As a result, the Company adjusted from prior quarters the assumptions and probability weightings of its loss projection scenarios to reflect those views. These changes were made with respect to how scenarios were run in the first quarter of 2010. The scenarios used in the first quarter of 2010, with the exception of an adjustment to the subprime severity, were the same as those employed at year-end 2009.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

U.S. Second Lien RMBS: HELOCs and CES

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.

The performance of the Company's HELOC and CES exposures 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 benefitted 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 representations and warranties. Expected losses are also a function of the structure of the transaction, the voluntary prepayment rate, typically also referred 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 June 30, 2010, March 31, 2010 and December 31, 2009:

Key Assumptions in Base Case Expected Loss Estimates
Second Lien RMBS(1)

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

Plateau conditional default rate ("CDR")	11.2% - 20.1%	14.0 - 23.8%	14.8 - 32.3%
Final CDR trended down to	0.5% - 3.2%	0.5 - 2.2%	0.5 - 2.2%
Expected Period until Final CDR	24 months	21 months	21 months
Initial CPR	1.0% - 20.1%	0.4 - 3.7%	4.8 - 14.9%
Final CPR	10%	10.0%	10.0%
Loss Severity	95%	95%	95%
Future Repurchase of Ineligible Loans	$184.2 million	$189.2 million	$193.4 million
Initial Draw Rate	0.2% - 6.9%	0.4 - 0.5%	0.4 - 0.7%

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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

Plateau CDR	8.0% - 28.0%	31.5 - 36.4%	34.0 - 44.2%
Final CDR Rate trended down to	2.9% - 8.1%	2.9 - 8.1%	3.5 - 8.1%
Expected Period until Final CDR achieved	24 months	21 months	21 months
Initial CPR	0.8% - 10.1%	1.6 - 8.4%	0.8 - 2.4%
Final CPR	10%	10.0%	10.0%
Loss Severity	95%	95%	95%
Future Repurchase of Ineligible Loans	$61.7 million	$63.1 million	$64.2 million

(1): Represents assumptions for most heavily weighted scenario (the "base case").

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 third, fourth and fifth month are then expressed as CDR, and the average of those CDRs is then used as the basis for calculating defaults after the fifth month. In the base scenario, this CDR (the "plateau CDR") is held constant for one month. During First Quarter 2010, the base scenario's plateau was 4 months; the change for Second Quarter 2010 reflects an improvement in the mortgage and real estate markets. 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. During First Quarter 2010, the base scenario's ramp was 12 months, the change this quarter was implemented to reflect that the recovery may take longer than the Company had previously anticipated. 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.

Breaches of Representations and Warranties—Second Lien U.S. RMBS: As mentioned above, performance of the collateral underlying certain 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 June 30, 2010, the Company had performed a detailed review of approximately 7,800 files, representing nearly $600 million in outstanding par of defaulted second lien loans underlying insured transactions, and identified a material number of defaulted loans that breach representations and warranties 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. As of June 30, 2010, following negotiation with the sellers and originators of the

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

breaching loans, the Company had reached agreement to have $75 million of the second lien loans repurchased and has included in its net expected loss estimates for second liens as of June 30, 2010 an estimated benefit from repurchases of $246.0 million of second lien loans, of which $184.2 million relates to HELOCs and the remainder to CES. The amount the Company ultimately recovers related to contractual representations and warranties 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 representations and warranties and, potentially, negotiated settlements or litigation. 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 representations and warranties the Company considered: the credit worthiness of the provider of representations and warranties, the number of breaches found on defaulted loans, the success rate resolving these breaches with the provider of the representations and warranties and the potential amount of time until the recovery is realized. This calculation involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of representations and warranties, 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. Recoveries were limited to amounts paid or expected to be paid out by the Company.

The rate at which the principal amount of 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 ramping to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 10% for both HELOC and CES transactions. This level is generally 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 Quarter 2010 and the three months ended December 31, 2009.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, loss severities (assumed to be 95%) 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 0.1% to 1.0%.

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.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

In prior quarters the Company's base case assumed a 4 month CDR plateau and a 12 month CDR ramp down, reflecting the Company's belief that the primary variable relating to the Company's reserve assumption was when an improvement in the mortgage markets would begin. In prior quarters it also modeled a 1 month CDR plateau and a 7 month CDR plateau. Consistent with the Company's current belief that an improvement in the mortgage market may be beginning but that any recovery may be more gradual than had previously been anticipated, this quarter's base case assumed a 1 month 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 $10.9 million for HELOC transactions and $2.0 million for CES transactions. On the other hand, keeping the CDR plateau at 1 month but decreasing the length of the CDR ramp down back to last quarter's 12 month assumption would decrease the expected loss from those taken by approximately $12.3 million for HELOC transactions and $2.0 million for CES transactions.

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

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 that 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, 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 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 June 30, 2010 and March 31, 2010. The liquidation rate is a standard

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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 over two years.



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 days - 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

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. In the First Quarter 2010, the CDR plateau was held constant for 3 months before it was assumed to begin improving, which reflects the Company's view that an improvement in the real estate and mortgage market may be beginning. 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 highs and the

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

Company is assuming that these historical highs 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 June 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 June 30, 2010, March 31, 2010 and December 31, 2009:

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

		June 30, 2010	March 31, 2010	December 31, 2009

Alt-A First Lien
	Plateau CDR	2.2% - 19.9%	2.0% - 19.1%	1.5% - 19.6%
	Intermediate CDR	0.3% - 3.0%	0.3% - 2.9%	0.2% - 2.9%
	Final CDR	0.1% - 1.0%	0.1% - 1.0%	0.1% - 1.0%
	Initial Loss Severity	60%	60%	60%
	Future Repurchases of Ineligible Loans	$9.9 million	$9.5 million	$8.8 million
	Initial CPR	0.0% - 16.2%	2.7% - 27.9%	0.0% - 20.5%
	Final CPR	10%	10%	10%
Alt-A Option ARM
	Plateau CDR	12.5% - 26.5%	15.3% - 23.3%	14.4% - 21.9%
	Intermediate CDR	1.9% - 4.0%	2.3% - 3.5%	2.2% - 3.3%
	Final CDR	0.6% - 1.3%	0.8% - 1.2%	0.7% - 1.1%
	Initial Loss Severity	60%	60%	60%
	Future Repurchases of Ineligible Loans	$16.3 million	$15.9 million	$16.3 million
	Initial CPR	0.8% - 2.7%	0.0% - 2.3%	0.3% - 1.4%
	Final CPR	10%	10%	10%
Subprime
	Plateau CDR	8.4% - 12.4%	7.8% - 12.8%	7.1% - 12.1%
	Intermediate CDR	1.3% - 1.9%	1.2% - 1.9%	1.1% - 1.8%
	Final CDR	0.4% - 0.6%	0.4% - 0.6%	0.4% - 0.6%
	Initial Loss Severity	75%	75%	70%
	Future Repurchases of Ineligible Loans	$0	$0	$0
	Initial CPR	1.8% - 10.2%	0.9% - 12.5%	0.5% - 12.0%
	Final CPR	10%	10%	10%

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

The rate at which the principal amount of loans 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 ramping over 12 months to the final CPR, which is assumed to be either 10% or 15% depending on the scenario run.

Breaches of Representations and Warranties—First Lien U.S. RMBS: As mentioned above, performance of the collateral underlying certain 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 June 30, 2010, the Company had performed a detailed review of approximately 1,000 files representing nearly $520 million in outstanding par of defaulted first lien loans underlying insured transactions, and identified a material number of defaulted loans that breach representations and warranties regarding the characteristics of the loans. 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 June 30, 2010, the Company had reached agreement to have $4.4 million of first lien loans repurchased. The Company has included in its net expected loss estimates for first liens as of June 30, 2010 an estimated benefit from repurchases of $26.6 million, of which $16.3 million relates to Option ARMs, $9.9 million to Alt-A first liens and $0.4 million to prime transactions. The amount the Company will ultimately recover related to contractual representations and warranties 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 representations and warranties 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 representations and warranties, the Company considered the credit worthiness of the provider of representations and warranties, the number of breaches found on defaulted loans, the success rate in resolving these breaches with the provider of the representations and warranty and the potential amount of time until the recovery is realized. This calculation involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of representations and warranties 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 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 establishing its reserves, 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

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

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 $1.0 million for Alt-A first liens, $8.0 million for Option ARMs, $2.4 million for subprime and $0.0 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 $5.2 million for Alt-A first liens, $22.6 million for Option ARMs, $8.4 million for subprime and $0.3 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 $3.7 million for Alt-A first liens, $12.5 million for Option ARMs, $3.1 million for subprime and $0.1 million for prime transactions.

"XXX" Life Insurance Transactions

AGC and AGUK have insured $428.2 million 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 AGC and AGUK are 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 AGC and AGUK 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.

AGC's and AGUK's $428.2 million in net par of XXX Life Insurance transactions include $248.2 million rated BIG by the Company as of June 30, 2010 and corresponded to two transactions. These two BIG 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, projected credit impairments on the invested assets and performance of the blocks of life insurance business at June 30, 2010, AGC's and AGUK's gross expected loss, prior to reinsurance or netting of unearned premium, for the two BIG XXX insurance transactions was $63.3 million and their net reserve was $13.6 million.

On December 19, 2008, AGUK sued J.P. Morgan Investment Management Inc. ("JPMIM"), the investment manager in one of the transactions, which relates to Orkney Re II p.l.c. ("Orkney Re II") 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 AGUK on a motion to dismiss filed by JPMIM. Oral argument on the AGUK's appeal was heard before the Appellate Division on May 26, 2010.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Financial Guaranty Contracts Accounted for as Insurance (Continued)

Public Finance Transactions

Within the public finance category, $827.2 million was rated BIG with the largest BIG exposure being a public finance transaction for sewer service in Jefferson County, Alabama. AGC's total exposure to this transaction is approximately $190.2 million of net par. AGC has made debt service payments during the year and expects to make additional payments in the near term. AGC is continuing its risk remediation efforts for this exposure.

Other Sectors and Transactions

The Company continues to closely monitor other sectors and individual financial guaranty insurance transactions it feels warrant the additional attention, including, as of June 30, 2010, its commercial mortgage exposure of $256.6 million of net par, its trust preferred securities ("TruPS") collateralized debt obligations ("CDOs") exposure of $688.9 million, and its U.S. health care exposure of $5.3 billion of net par.

6. Credit Derivatives

Certain financial guaranty contracts written in credit derivative form, principally in the form of insured credit default swap ("CDS") contracts, have been deemed to meet the definition of a derivative under GAAP, which requires that an entity recognize as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value with changes in fair value recorded in consolidated statements of operations. GAAP requires companies to recognize freestanding or embedded derivatives relating to beneficial interests in securitized financial instruments.

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 International Swaps and Derivatives Association, Inc. ("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.

Some of the Company's CDS have rating triggers that allow certain CDS counterparties to terminate in the case of downgrades. If certain of its credit derivative contracts were terminated, the Company could be required to make a termination payment as determined under the relevant documentation, although under certain documents, the Company may have the right to cure the

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

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. As of June 30, 2010 and December 31, 2009, if AGC's ratings were downgraded to levels between BBB or Baa2 and BB+ or Ba1, certain CDS counterparties could terminate certain CDS contracts covering approximately $5.9 billion and $6.0 billion, of par insured, respectively. 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 Company's ratings decline. Under other contracts, the Company has negotiated caps such that the posting requirement cannot exceed a certain amount. As of June 30, 2010, without giving effect to thresholds that apply under current ratings, the amount of par that is subject to collateral posting is approximately $18.9 billion, for which the Company has posted approximately $636.9 million of collateral. Counterparties have agreed that for approximately $17.6 billion of that $18.9 billion, the maximum amount that the Company could be required to post at current ratings is $425 million, which amount is included in the $636.9 million posted as of June 30, 2010. If AGC were downgraded to A+ by Standard & Poor's Rating Services ("S&P") or A3 by Moody's Investors Service, Inc. ("Moody's"), that maximum amount would be $475 million. 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.

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.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

The following table disaggregates realized gains and other settlements on credit derivatives into its component parts for the Second Quarter 2010 and 2009 and Six Months 2010 and 2009:

Realized Gains and Other Settlements on Credit Derivatives

		Second Quarter				Six Months

		2010		2009		2010			2009
		(in thousands)
Net credit derivative premiums received and receivable		$	18,943	$	19,970	$	37,662		$	40,720
Ceding commissions received and receivable (paid and payable), net			1,920		2,034		3,917			4,253

	Realized gains on credit derivatives		20,863		22,004		41,579			44,973
Net credit derivative losses (paid and payable) recovered and recoverable			2,999		—		(24,397	)		—

	Total realized gains and other settlements on credit derivatives	$	23,862	$	22,004	$	17,182		$	44,973

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, claim payments, 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 will 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.

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 structure 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. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

balance sheet date. Generally, a widening of the CDS prices traded on AGC 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 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.

Effect of Company's Credit Spread on Credit Derivatives Fair Value

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

		(dollars in millions)
Quoted price of CDS contract (in basis points)			1,010			634
Fair value of CDS contracts:
	Before considering implication of the Company's credit spreads	$	(2,862.1	)	$	(2,630.2	)
	After considering implication of the Company's credit spreads	$	(594.5	)	$	(824.7	)

As of June 30, 2010, AGC's credit spreads remained relatively wide compared to pre-2007 levels, as did general market spreads. The $2.9 billion liability as of June 30, 2010, which represents the fair value of CDS contracts before considering the implications of AGC'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 the more recent vintages of Subprime RMBS and Alt-A deals, as well as trust- preferred securities. When looking at June 30, 2010, compared to December 31, 2009, there was a widening of market prices relating to Alt-A transactions as a result of underlying credit deterioration. This resulted in a loss of approximately $231.9 million before taking into account AGC's credit spreads.

Management believes that the trading level of AGC's credit spread is due to the correlation between AGC's risk profile and that experienced currently by the broader financial markets and increased demand for credit protection against AGC as the result of its direct segment financial guarantee volume as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGC'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 recent lack of liquidity in the high yield CDOs and collateralized loan obligation ("CLOs") markets as well as continuing market concerns over the most recent vintages of subprime RMBS and CMBS.

The estimated remaining weighted average life of credit derivative was 7.6 years at June 30, 2010 and 8.0 years at December 31, 2009.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

The components of the Company's net par outstanding as of June 30, 2010 and December 31, 2009 are:

Net Par Outstanding on Credit Derivatives

			As of June 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		35.5	%		31.4	%	$	16,531	AAA		35.4	%		30.2	%	$	17,312	AAA
		Synthetic investment grade pooled corporate		30.0			30.1			702	AAA		30.0			29.4			1,647	AAA
		TruPS CDOs		46.7			33.6			4,400	BB+		46.5			36.9			4,566	BB+
		Market value CDOs of corporate obligations		38.5			38.6			3,143	AAA		38.8			39.0			3,002	AAA

	Total pooled corporate obligations			37.7			32.7			24,776	AA+		37.4			32.3			26,527	AA+
	U.S. RMBS:
		Alt-A Option ARMs and Alt-A First Lien		20.1			19.7			3,871	B+		20.3			22.0			4,320	BB
		Subprime First Lien		27.5			57.6			3,596	A+		27.6			52.4			3,782	A+
		Prime First Lien		10.9			10.4			437	B		10.9			11.1			467	BB
		CES and HELOCs		0.0			18.9			12	AA		0.0			19.2			13	AA

	Total U.S. RMBS			22.8			36.1			7,916	BBB-		22.9			34.6			8,582	BBB
	CMBS			28.7			29.2			5,724	AAA		28.5			30.9			5,844	AAA
	Other			—			—			6,427	AA		—			—			7,255	AA

Total									$	44,843	AA							$	48,208	AA

(1): Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.
(2): Based on the Company's internal rating, The Company's rating scale is similar to that used by the nationally recognized rating agencies; however, the ratings in the above table may not be the same as ratings assigned by any nationally recognized rating agency.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

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

Change in Unrealized Gain (Loss) on Credit Derivatives

		Second Quarter						Six Months

Asset Type		2010			2009			2010			2009
		(in millions)
Pooled corporate obligations:
	CLOs/CBOs	$	2.0		$	1.2		$	3.0		$	(61.2	)
	Synthetic investment grade pooled corporate		0.7			1.3			(0.1	)		2.9
	TruPS CDOs		28.5			(60.8	)		51.8			0.3
	Market value CDOs of corporate obligations		(0.1	)		(0.3	)		0.1			(6.1	)
	Commercial Real Estate		—			0.1			—			(1.7	)
	CDO of CDOs (corporate)		—			0.5			—			(0.2	)

Total pooled corporate obligations			31.1			(58.0	)		54.8			(66.0	)
U.S. RMBS:
	Alt-A Option ARMs and Alt-A First Lien		8.3			(160.2	)		123.6			(200.4	)
	Subprime First lien		0.3			0.5			0.9			(2.8	)
	Prime first lien		4.5			(18.6	)		16.4			(60.1	)
	CES and HELOCs		—			—			—			—

Total U.S. RMBS			13.1			(178.3	)		140.9			(263.3	)
CMBS			0.3			0.7			8.3			(24.5	)
Other(1)			(37.2	)		10.6			12.8			105.8

Total		$	7.3		$	(225.0	)	$	216.8		$	(248.0	)

(1): "Other" includes all other U.S. and international asset classes, such as commercial receivables, international infrastructure, international RMBS and home equity securities, and pooled infrastructure securities.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

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 $2.3 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 $4.1 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 and home equity securities, infrastructure, regulated utilities and consumer receivables.

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

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

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 Second Quarter 2010 and Six Months 2010:

U.S. Residential Mortgage-Backed Securities

Vintage					Net Par Outstanding (in millions)		Weighted Average Credit Rating(2)	Second Quarter 2010 Unrealized Gain (Loss) (in millions)			Six Months 2010 Unrealized Gain (Loss) (in millions)

2004 and Prior	6.1	%	19.4	%	$	130	A+	$	(0.1	)	$	0.2
2005	26.8		58.9			2,592	AA-		(0.1	)		1.3
2006	28.5		50.5			1,340	BBB		(3.4	)		0.9
2007	19.1		17.1			3,854	B		16.7			138.5
2008	—		—			—	—		—			—
2009	—		—			—	—		—			—
2010	—		—			—	—		—			—

Total	22.8	%	36.1	%	$	7,916	BBB-	$	13.1		$	140.9

(1): Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.
(2): Based on the Company's internal rating. The Company's rating scale is similar to that used by the nationally recognized rating agencies; however, the ratings in the above table may not be the same as ratings assigned by any nationally recognized rating agency.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

6. Credit Derivatives (Continued)

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 Second Quarter 2010 and Six Months 2010:

Commercial Mortgage-Backed Securities

Vintage					Net Par Outstanding (in millions)		Weighted Average Credit Rating(2)	Second Quarter 2010 Unrealized Gain (Loss) (in millions)			Six Months 2010 Unrealized Gain (Loss) (in millions)

2004 and Prior	28.5	%	43.8	%	$	579	AAA	$	—		$	0.2
2005	17.6		25.0			513	AAA		(0.1	)		0.2
2006	26.4		25.3			3,438	AAA		0.5			4.3
2007	41.1		37.5			1,194	AAA		(0.1	)		3.6
2008	—		—			—	—		—			—
2009	—		—			—	—		—			—
2010	—		—			—	—		—			—

Total	28.7	%	29.2	%	$	5,724	AAA	$	0.3		$	8.3

(1): Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.
(2): Based on the Company's internal rating. The Company's rating scale is similar to that used by the nationally recognized rating agencies; however, the ratings in the above table may not be the same as ratings assigned by any nationally recognized rating agency.

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 on the risks that it assumes:

	As of June 30, 2010

Credit Spreads	Estimated Net Fair Value (Pre-Tax)			Estimated Pre-Tax Change in Gain /(Loss)
	(in millions)
100% widening in spreads	$	(1,586.3	)	$	(991.8	)
50% widening in spreads		(1,090.4	)		(495.9	)
25% widening in spreads		(842.5	)		(248.0	)
10% widening in spreads		(693.7	)		(99.2	)
Base Scenario		(594.5	)		—
10% narrowing in spreads		(525.8	)		68.7
25% narrowing in spreads		(422.7	)		171.8
50% narrowing in spreads		(260.6	)		333.9

(1): Includes the effects of spreads on both the underlying asset classes and the Company's own credit spread.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

7. Consolidation of Variable Interest Entities

The Company has exposure to VIEs through the issuance of financial guaranty insurance contracts that typically ensure the timely payment of principal and interest to the holders of VIE debt. As part of the terms of its insurance contracts, at the outset of a contract the Company obtains certain protective rights over the control of a VIE based upon the occurrence of certain trigger events, such as deal performance or servicer or collateral manager financial health. At deal inception, the Company typically is not deemed to be have control of a VIE, however, once a trigger event occurs the Company's control of the VIE typically increases.

Under accounting rules previously in effect, the Company determined whether it was the primary beneficiary (i.e., the variable interest holder required to consolidate a VIE) of a VIE by first performing a qualitative analysis of the VIE that includes, among other factors, its capital structure, contractual terms, which variable interests create or absorb variability, related party relationships and the design of the VIE. The Company performed a quantitative analysis when qualitative analysis was not conclusive.

The accounting guidance effective January 1, 2010, requires the Company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both 1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance; and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Additionally, this guidance requires an ongoing reassessment of whether the Company is the primary beneficiary of a VIE.

Pursuant to the new accounting guidance, the Company evaluated its power to direct the significant activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. The Company determined that it is the primary beneficiary of three VIEs based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the VIEs' most significant activities. The Company is not primarily liable for the debt obligations issued by the VIEs and would only be required to make payments on these debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. The Company's creditors do not have any rights with regard to the assets of the VIEs.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

7. Consolidation of Variable Interest Entities (Continued)

The table below shows the carrying value of the consolidated VIE assets and liabilities in the Company's unaudited interim consolidated financial statements, segregated by the types of assets held by VIEs that collateralize their respective debt obligations:

Consolidated VIEs

		As of June 30, 2010

		Assets		Liabilities
		(in thousands)
Alt-A Second liens		$	98,552	$	152,071
Life insurance			293,805		293,805

	Total	$	392,357	$	445,876

The table below shows the revenues and expenses of the consolidated VIEs:

			Second Quarter 2010			Six Months 2010

			(in thousands)
Revenues:
Financial guaranty variable interest entities' revenues:
	Interest income		$	4,949		$	10,450
	Net realized and unrealized gains (losses) on assets			22,486			44,033

		Financial guaranty variable interest entities' revenues	$	27,435		$	54,483

Expenses:
Financial guaranty variable interest entities' expenses:
	Interest expense		$	1,961		$	4,323
	Net realized and unrealized losses (gains) on liabilities with recourse			33,750			47,164
	Net realized and unrealized (gains) losses on liabilities without recourse			(2,145	)		(5,526	)
	Other expenses			2,323			5,462

		Financial guaranty variable interest entities' expenses	$	35,889		$	51,423

The financial reports of the consolidated VIEs are prepared by outside parties and are not available within the time constraints that the Company requires to ensure the financial accuracy of the operating results. As such, the financial results of the three VIEs are consolidated on a one quarter lag.

The new accounting guidance mandates the accounting changes prescribed by the statement to be recognized by the Company as a cumulative effect adjustment to retained earnings as of January 1, 2010. The cumulative effect of adopting the new accounting guidance was a $39.9 million after-tax

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

7. Consolidation of Variable Interest Entities (Continued)

decrease to the opening retained earnings balance due to the consolidation of three VIEs at fair value. The impact of adopting the new accounting guidance on the Company's balance sheet was as follows:

	As of December 31, 2009		Transition Adjustment			As of January 1, 2010

	(in thousands)
Assets:
Premiums receivable, net of ceding commission payable	$	351,468	$	(9,245	)	$	342,223
Deferred tax asset, net		241,796		21,484			263,280
Financial guaranty variable interest entities' assets		—		348,324			348,324
Total assets		4,499,810		360,563			4,860,373
Liabilities and shareholder's equity:
Unearned premium reserves		1,451,576		(7,959	)		1,443,617
Loss and loss adjustment expense reserve		191,211		91			191,302
Financial guaranty variable interest entities' liabilities with recourse		—		390,274			390,274
Financial guaranty variable interest entities' liabilities without recourse		—		18,055			18,055
Total liabilities		3,273,593		400,461			3,674,054
Retained earnings		153,738		(39,898	)		113,840
Total shareholder's equity		1,226,217		(39,898	)		1,186,319
Total liabilities and shareholder's equity	$	4,499,810		360,563		$	4,860,373

Non-Consolidated VIEs

To date, the results of qualitative and quantitative analyses have indicated that the Company does not have a majority of the variability in any other VIE and, as a result, are not consolidated in the Company's unaudited interim consolidated financial statements. The Company's exposure provided through its financial guaranties with respect to debt obligations of non-consolidated SPEs is included within net par outstanding in Note 3.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

8. Fair Value of Financial Instruments

The carrying amount and estimated fair value of financial instruments are presented in the following table:

Fair Value of Financial Instruments

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

		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(in thousands)
Assets:
	Fixed maturity securities	$	2,363,170	$	2,363,170	$	2,045,211	$	2,045,211
	Short-term investments		389,929		389,929		802,567		802,567
	Credit derivative assets		285,353		285,353		251,992		251,992
	Committed capital securities, at fair value		11,305		11,305		3,987		3,987
	Financial guaranty VIE assets		392,357		392,357		—		—
Liabilities:
	Financial guaranty insurance contracts(1)		742,632		933,074		801,320		1,061,330
	Note payable to affiliate		300,000		340,280		300,000		300,000
	Credit derivative liabilities		879,828		879,828		1,076,726		1,076,726
	Financial guaranty VIE liabilities with recourse		433,347		433,347		—		—
	Financial guaranty VIE liabilities without recourse		12,529		12,529		—		—

(1): Includes the balance sheet amounts related to financial guaranty insurance contract premiums and losses, net of reinsurance.

Background

Fair value framework defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on the market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e. the most advantageous market).

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

8. Fair Value of Financial Instruments (Continued)

The fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company estimates of market assumptions. In accordance with GAAP, the fair value hierarchy prioritizes model inputs into three broad levels as follows, with level 1 being the highest and level 3 the lowest:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.

Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

An asset or liability's categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

Financial Instruments Carried at Fair Value

Amounts recorded at fair value in the Company's financial statements are included in the tables below.

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

8. Fair Value of Financial Instruments (Continued)

Fair Value Hierarchy of Financial Instruments
As of June 30, 2010

						Fair Value Hierarchy

				Fair Value		Level 1		Level 2		Level 3
				(in millions)
Assets:
Investment portfolio, available-for-sale:
	Fixed maturity securities:
		U.S. government and agencies		$	466.4	$	—	$	466.4	$	—
		Obligations of state and political subdivisions			1,282.7		—		1,282.7		—
		Corporate securities			221.6		—		221.6		—
		Mortgage-backed securities:
			RMBS		140.9		—		105.0		35.9
			CMBS		77.7		—		77.7		—
		Asset-backed securities			86.6		—		86.6		—
		Foreign government securities			87.3		—		87.3		—

			Total fixed maturity securities		2,363.2		—		2,327.3		35.9
	Short-term investments				389.9		148.4		241.5		—
	Credit derivative assets				285.3		—		—		285.3
	Committed capital securities, at fair value				11.3		—		11.3		—
	Financial guaranty VIE assets				392.4		—		—		392.4

		Total assets		$	3,442.1	$	148.4	$	2,580.1	$	713.6

Liabilities:
	Credit derivative liabilities			$	879.8	$	—	$	—	$	879.8
	Financial guaranty VIE liabilities with recourse				433.3		—		—		433.3
	Financial guaranty VIE liabilities without recourse				12.5		—		—		12.5

		Total liabilities		$	1,325.6	$	—	$	—	$	1,325.6

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

8. Fair Value of Financial Instruments (Continued)

The fair value of bonds in the Investment Portfolio is generally based on quoted market prices received from third party pricing services or alternative pricing sources with reasonable levels of price transparency. Such quotes generally consider a variety of factors, including recent trades of the same and similar securities. If quoted market prices are not available, the valuation is based on pricing models that use dealer price quotations, price activity for traded securities with similar attributes and other relevant market factors as inputs, including security type, rating, vintage, tenor and its position in the capital structure of the issuer. The Company considers securities prices from pricing services, index providers or broker-dealers to be Level 2 in the fair value hierarchy. Prices determined based upon model processes are considered to be Level 3 in the fair value hierarchy. The Company used model processes to price five fixed maturity securities as of June 30, 2010 and these securities were classified as Level 3.

Broker-dealer quotations obtained to price securities are generally considered to be indicative and are nonactionable (i.e. non-binding).

The Company did not make any internal adjustments to prices provided by its third party pricing service.

The fair value of committed capital securities CCS represents the difference between the present value of remaining expected put option premium payments under AGC's CCS (the "AGC CCS Securities") agreements and the value of such estimated payments based upon the quoted price for such premium payments as of the reporting dates. See Note 15. Changes in fair value of this financial instrument are included in the consolidated statements of operations. The significant market inputs used are observable, therefore, the Company classified this fair value measurement as Level 2.

The Company's credit derivatives consist primarily of insured CDS contracts. The Company does not typically exit its credit derivative contracts, and there are no quoted prices for its instruments or for similar instruments. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to the credit derivative contracts issued by the Company. Therefore, the valuation of credit derivative contracts requires the use of models that contain significant, unobservable inputs. The Company accordingly believes the credit derivative valuations are in Level 3 in the fair value hierarchy.

The fair value of the Company's credit derivative contracts represents the difference between the present value of remaining expected net premiums the Company receives or pays for the credit protection and the estimated present value of premiums that a comparable credit-worthy financial guarantor would hypothetically charge or pay the Company for the same protection at the balance sheet date. The fair value of the Company's credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company's own credit risk and remaining contractual cash flows.

Market conditions at June 30, 2010 were such that market prices of the Company's CDS contracts were not generally available. Since market prices were not available, the Company used proprietary valuation models that used both unobservable and observable market data inputs such as various market indices, credit spreads, the Company's own credit spread, and estimated contractual payments to estimate the fair value of its credit derivatives. These models are primarily developed internally based on market conventions for similar transactions.

Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. These terms differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells or purchases for credit protection purposes, except under specific circumstances such as novations upon exiting a line of business. Because of these terms and conditions, the fair value of the Company's credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain

terms and conditions similar to those observed in the financial guaranty market. The Company's models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely and relevant market information.

Valuation models include management estimates and current market information. Management is also required to make assumptions on how the fair value of credit derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, performance of underlying assets, life of the instrument and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine the fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these credit derivative products, actual experience may differ from the estimates reflected in the Company's unaudited interim consolidated financial statements and the differences may be material.

Listed below are various inputs and assumptions that are key to the establishment of the Company's fair value for CDS contracts.

The key assumptions used in the Company's internally developed model include the following:

The premium the Company receives is referred to as the "net spread." The Company's own credit risk is factored into the determination of net spread based on the impact of changes in the quoted

market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS deals that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGC decreases, the amount of premium the Company retains on a deal generally increases. In the Company's valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts.

The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts. To the extent available, actual transactions executed in the accounting period are used to validate the model results and to explain the correlation between various market indices and indicative CDS market prices.

The Company's fair value model inputs are gross spread, credit spreads on risks assumed and credit spreads on the Company's name.

Gross spread is an input into the Company's fair value model that is used to ultimately determine the net spread a comparable financial guarantor would charge the Company to transfer risk at the reporting date. The Company's estimate of the fair value adjustment represents the difference between the estimated present value of premiums that a comparable financial guarantor would accept to assume the risk from the Company on the current reporting date, on terms identical to the original contracts written by the Company and the contractual premium for each individual credit derivative contract. This is an observable input that the Company obtains for deals it has closed or bid on in the market place.

The Company obtains credit spreads on risks assumed from market data sources published by third parties (e.g. dealer spread tables for the collateral similar to assets within the Company's transactions) as well as collateral-specific spreads provided by trustees or obtained from market sources. If observable market credit spreads are not available or reliable for the underlying reference obligations, then market indices are used that most closely resembles the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. As discussed previously, these indices are adjusted to reflect the non-standard terms of the Company's CDS contracts. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders whom are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process.

For credit spreads on the Company's name the Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties.

The following is an example of how changes in gross spreads, the Company's own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.

In Scenario 1, the gross spread is 185 basis points. The bank or deal originator captures 115 basis points of the original gross spread and hedges 10% of its exposure to AGC, when the CDS spread on AGC was 300 basis points (300 basis points × 10% = 30 basis points). Under this scenario the Company received premium of 40 basis points, or 22% of the gross spread.

In Scenario 2, the gross spread is 500 basis points. The bank or deal originator captures 50 basis points of the original gross spread and hedges 25% of its exposure to AGC, when the CDS spread on AGC was 1,760 basis points (1,760 basis points × 25% = 440 basis points). Under this scenario the Company would receive premium of 10 basis points, or 2% of the gross spread.

In this example, the contractual cash flows (the Company premium received per annum above) exceed the amount a market participant would require the Company to pay in today's market to accept its obligations under the CDS contract, thus resulting in an asset. This credit derivative asset is equal to the difference in premium rate discounted at the corresponding LIBOR over the weighted average remaining life of the contract. The expected future cash flows for the Company's credit derivatives were discounted at rates ranging from 1.0% to 3.6% at June 30, 2010. The expected future cash flows for the Company's credit derivatives were discounted at rates ranging from 1.0% to 4.5% at December 31, 2009.

The Company corroborates the assumptions in its fair value model, including the amount of exposure to AGC hedged by its counterparties, with independent third parties each reporting period. The current level of AGC's own credit spread has resulted in the bank or deal originator hedging a significant portion of its exposure to AGC. This reduces the amount of contractual cash flows AGC can capture for selling its protection.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that contractual terms of financial guaranty insurance contracts typically do not require the posting of collateral by the guarantor. The widening of a financial

guarantor's own credit spread increases the cost to buy credit protection on the guarantor, thereby reducing the amount of premium the guarantor can capture out of the gross spread on the deal. The extent of the hedge depends on the types of instruments insured and the current market conditions.

A credit derivative asset is the result of contractual cash flows on in-force deals in excess of what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the current reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would be able to realize an asset representing the difference between the higher contractual premiums to which it is entitled and the current market premiums for a similar contract.

Management does not believe there is an established market where financial guaranty insured credit derivatives are actively traded. The terms of the protection under an insured financial guaranty credit derivative do not, except for certain rare circumstances, allow the Company to exit its contracts. Management has determined that the exit market for the Company's credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company's deals to establish historical price points in the hypothetical market that are used in the fair value calculation.

The following spread hierarchy is utilized in determining which source of spread to use, with the rule being to use CDS spreads where available. If not available, the Company either interpolates or extrapolates CDS spreads based on similar transactions or market indices.

Over time the data inputs can change as new sources become available or existing sources are discontinued or are no longer considered to be the most appropriate. It is the Company's objective to move to higher levels on the hierarchy whenever possible, but it is sometimes necessary to move to lower priority inputs because of discontinued data sources or management's assessment that the higher priority inputs are no longer considered to be representative of market spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.

The Company interpolates a curve based on the historical relationship between premium the Company receives when a financial guaranty contract written in CDS form is closed to the daily closing price of the market index related to the specific asset class and rating of the deal. This curve indicates expected credit spreads at each indicative level on the related market index. For specific transactions where no price quotes are available and credit spreads need to be extrapolated, an alternative transaction for which the Company has received a spread quote from one of the first three sources within the Company's spread hierarchy is chosen. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transactions current spread. Counterparties determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. These quotes are validated by cross-referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness. In addition, management compares the relative change experienced on published market indices for a specific asset class for reasonableness and accuracy.

The Company's credit derivative valuation model, like any financial model, has certain strengths and weaknesses.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of June 30, 2010 and December 31, 2009, these contracts are classified as Level 3 in the fair value hierarchy since there is reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company's estimate of the value of the non-standard terms and conditions of its credit derivative contracts and of the Company's current credit standing.

The Company elected the Fair Value Option for financial guaranty VIE assets and liabilities upon adopting the new accounting guidance on accounting for VIEs (see Note 7).

The Company's financial guaranty VIEs issued securities collateralized by Alt-A second lien RMBS and other receivables. As the lowest level input that is significant to the fair value measurement of these securities in its entirety was a Level 3 input, we classified all such securities as Level 3 in the fair value hierarchy. The securities were priced with the assistance of an independent third-party using a discounted cash flow approach and the third- party's proprietary pricing models. The models to price the VIEs liabilities used, where appropriate, inputs such as estimated prepayment speeds; losses; recoveries; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); discount rates implied by market prices for similar securities; house price depreciation/appreciation rates based on macroeconomic forecasts and benefit from the Company's insurance policy guaranteeing the timely payment of principal and interest for the VIE tranches insured by the Company. Those VIE liabilities insured by the Company are considered to be with recourse, since the Company guarantees the payment of principal and interest regardless of the performance of the related VIE assets.

The Company is not primarily liable for the debt obligations issued by the VIEs and would only be required to make payments on these debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. The Company's creditors do not have any rights with regard to the assets of the VIEs.

The Company determined the fair value of the VIE assets using a similar methodology as described above with the exception that there was no benefit assigned to the value of the Company's financial guarantee, since the Company does not guarantee the performance of the underlying assets of the VIE.

Changes in fair value of the financial guaranty VIE assets and liabilities are included in the consolidated statement of operations. Interest income on VIE assets is recognized when received and recorded in "variable interest entities' revenues" in the consolidated statements of operations. Except for credit impairment, the unrealized fair value adjustments related to the consolidated VIEs will reverse to zero over the terms of these financial instruments.

The total unpaid principal balance for the VIE assets that were over 90 days or more past due was approximately $16.1 million. The change in the instrument-specific credit risk of the VIE assets was a gain of approximately $1.3 million and $37.0 million for the Second Quarter 2010 and Six Months 2010, respectively. The difference between the aggregate unpaid principal and aggregate fair value of the VIE liabilities was approximately $215.5 million at June 30, 2010.

The table below presents a rollforward of the Company's financial instruments whose fair value included significant unobservable inputs (Level 3) during the Second Quarter and Six Months 2010 and 2009. There were no significant transfers between Level 1 and Level 2 financial assets during the period.

				Second Quarter 2010

				Total Pre-tax Realized/ Unrealized Gains/(Losses)(1) Recorded in:														Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at June 30, 2010
	Fair Value at March 31, 2010			Net Income (Loss)			Other Comprehensive Income (Loss)			Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2010
	(in thousands)
Investment portfolio	$	31,445		$	3,762	(2)	$	(8,101	)	$	124		$	8,673	$	35,903		$	(8,101	)
Financial guaranty VIE assets		369,871			27,435	(3)		—			(4,949	)		—		392,357			25,009
Credit derivative asset (liability), net(4)		(614,012	)		31,118	(5)		—			(11,581	)		—		(594,475	)		24,052
Financial guaranty VIE liabilities with recourse		(403,688	)		(35,953	)(3)		—			6,294			—		(433,347	)		37,525
Financial guaranty VIE liabilities without recourse		(14,674	)		64	(3)		—			2,081			—		(12,529	)		(2,144	)

				Second Quarter 2009

																	Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at June 30, 2009
				Total Pre-tax Realized/ Unrealized Gains/(Losses)(1) Recorded in:
	Fair Value at March 31, 2009								Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2009
	Fair Value at March 31, 2009			Net Income (Loss)			Other Comprehensive Income (Loss)		Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2009
	(in thousands)
Credit derivative asset (liability), net(5)	$	(369,951	)	$	(203,006	)(5)	$	—	$	(7,086	)	$	—	$	(580,043	)	$	(275,065	)

										Six Months 2010

										Total Pre-tax Realized/ Unrealized Gains/(Losses)(1) Recorded in:														Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at June 30, 2010
	Fair Value at December 31, 2009			Adoption of New Accounting Guidance			Fair Value at January 1, 2010			Net Income (Loss)			Other Comprehensive Income (Loss)			Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2010
	(in thousands)
Investment portfolio	$	—		$	—		$	—		$	3,666	(2)	$	(7,422	)	$	2,558		$	37,101	$	35,903		$	(7,422	)
Financial guaranty VIE assets		—			348,324			348,324			54,483	(3)		—			(10,450	)		—		392,357			56,886
Credit derivative asset (liability), net(4)		(824,734	)		—			(824,734	)		233,894	(5)		—			(3,635	)		—		(594,475	)		22,656
Financial guaranty VIE liabilities with recourse		—			(390,274	)		(390,274	)		(52,431	)(3)		—			9,358			—		(433,347	)		18,958
Financial guaranty VIE liabilities without recourse		—			(18,055	)		(18,055	)		1,008	(3)		—			4,518			—		(12,529	)		(4,927	)

				Six Months 2009

																	Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at June 30, 2009
				Total Pre-tax Realized/ Unrealized Gains/(Losses)(1) Recorded in:
	Fair Value at December 31, 2008								Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2009
	Fair Value at December 31, 2008			Net Income (Loss)			Other Comprehensive Income (Loss)		Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2009
	(in thousands)
Credit derivative asset (liability), net(5)	$	(341,546	)	$	(203,060	)(5)	$	—	$	(35,437	)	$	—	$	(580,043	)	$	(247,883	)

		As of June 30, 2010

		Amortized Cost		Estimated Fair Value
		(in thousands)
Due within one year		$	9,986	$	10,216
Due after one year through five years			725,496		746,481
Due after five years through ten years			312,993		333,209
Due after ten years			1,022,137		1,054,646
Mortgage-backed securities:
	RMBS		151,253		140,886
	CMBS		74,217		77,732

Total		$	2,296,082	$	2,363,170

	Scenario 1					Scenario 2

	bps		% of Total			bps		% of Total
Original gross spread/cash bond price (in bps)		185					500
Bank profit (in bps)		115		62	%		50		10	%
Hedge cost (in bps)		30		16			440		88
The Company premium received per annum (in bps)		40		22			10		2



Based on actual collateral specific spreads	9	%	9	%
Based on market indices	81	%	81	%
Provided by the CDS counterparty	10	%	10	%

Total	100	%	100	%

			As of June 30, 2010

Investments Category			Percent of Total(1)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI gain (loss) on Securities with OTTI(2)		Weighted Average of Credit Quality
						(dollars in thousands)
Fixed maturity securities
	U.S. government and agencies			17	%	$	446,044	$	20,379	$	—		$	466,423	$	—	AAA
	Obligations of state and political subdivisions			46			1,240,781		44,976		(3,040	)		1,282,717		—	AA
	Corporate securities			8			215,922		6,776		(1,145	)		221,553		—	A+
	Mortgage-backed securities(2):
		RMBS		6			151,253		2,005		(12,372	)		140,886		291	A
		CMBS		2			74,217		3,567		(52	)		77,732		—	AA+
	Asset-backed securities			3			85,736		901		(19	)		86,618		—	AAA
	Foreign government securities			3			82,129		5,112		—			87,241		—	AA+

		Total fixed maturity securities		85			2,296,082		83,716		(16,628	)		2,363,170		291	AA
Short-term investments				15			389,929		—		—			389,929		—	AAA

		Total investment portfolio		100	%	$	2,686,011	$	83,716	$	(16,628	)	$	2,753,099	$	291	AA+

		As of June 30, 2010

		Less than 12 months					12 months or more					Total
		Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
		(dollars in millions)
U.S. government and agencies		$	—	$	—		$	—	$	—		$	—	$	—
Obligations of state and political subdivisions			244.2		(1.6	)		38.2		(1.3	)		282.4		(2.9	)
Corporate securities			31.8		(1.1	)		1.5		(0.1	)		33.3		(1.2	)
Mortgage-backed securities:
	RMBS		46.1		(12.4	)		—		—			46.1		(12.4	)
	CMBS		6.0		(0.1	)		—		—			6.0		(0.1	)
Asset-backed securities			28.3		(0.0	)		—		—			28.3		(0.0	)
Foreign government securities			—		—			—		—			—		—

	Total	$	356.4	$	(15.2	)	$	39.7	$	(1.4	)	$	396.1	$	(16.6	)

	Number of securities				60					7					67

	Number of securities with OTTI				—					—					—

			Ratings at July 31, 2010

			Ratings at July 31, 2010				Ceded Par Outstanding as a % of Total
Reinsurer			Moody's Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding		Ceded Par Outstanding as a % of Total
			(dollars in millions)
Affiliated Companies(1)			A1	AA	$	44,409		92.5	%
Non-Affiliated Companies:
	RAM Reinsurance Co. Ltd.		WR(2)	WR(2)		3,091		6.4
	Radian Asset Assurance Inc. ("Radian")		Ba1	BB-		176		0.4
	MBIA Insurance Corporation		B3	BB+		171		0.4
	Ambac Assurance Corporation		Caa2	R		109		0.2
	Other		Various	Various		38		0.1

Non-Affiliated Companies						3,585		7.5

		Total			$	47,994		100.0	%

		Credit Rating

Reinsurer		Super Senior		AAA		AA		A		BBB		BIG		Total
		(in millions)
Affiliated Companies		$	2,894	$	6,131	$	6,252	$	18,927	$	7,182	$	3,023	$	44,409
RAM Reinsurance Co. Ltd.			336		1,390		152		516		417		280		3,091
Radian			—		—		—		176		—		—		176
MBIA Insurance Corporation			—		—		171		—		—		—		171
Ambac Assurance Corporation			—		—		—		109		—		—		109
Other			—		—		1		—		37		—		38

	Total	$	3,230	$	7,521	$	6,576	$	19,728	$	7,636	$	3,303	$	47,994

	As of June 30, 2010

	Insured Portfolios								Assumed Premium Receivable net of Commissions
	Assumed Par Outstanding		Second-to-Pay Insured Par Outstanding		Ceded Par Outstanding		Investment Portfolio		Assumed Premium Receivable net of Commissions		Expected Loss and LAE
	(in millions)
Affiliated Companies	$	—	$	42	$	44,409	$	97.6	$	—	$	—
RAM Reinsurance Co. Ltd.		—		—		3,091		—		—		—
Radian		—		1		176		—		—		—
MBIA Insurance Corporation		7,857		2,005		171		159.5		0.5		16.9
CIFG		5,995		109		—		—		9.5		—
Ambac Assurance Corporation		2,660		2,296		109		151.0		14.9		8.4
Financial Guaranty Insurance Company		648		1,581		—		5.5		—		17.6
Syncora Guarantee Inc. ("Syncora")		19		900		—		—		—		1.5
ACA Financial Guaranty Corporation		2		1		37		—		—		—
Multiple owner		—		1,487		—		—		—		—

Total	$	17,181		8,422	$	47,993	$	413.6	$	24.9	$	44.4

	Second Quarter 2010

	Financial Guaranty Direct			Financial Guaranty Reinsurance			Other		Underwriting Gain (Loss)			Consolidation of VIEs			Total
	(in millions)
Net earned premiums	$	21.0		$	4.7		$	0.1	$	25.8		$	(0.7	)	$	25.1
Realized gains on credit derivatives(1)		20.9			—			—		20.9			—			20.9
Other income		(0.4	)		—			—		(0.4	)		—			(0.4	)
Loss and loss adjustment (expenses) recoveries		(8.9	)		5.2			—		(3.7	)		0.0			(3.7	)
Incurred losses on credit derivatives		0.5			(0.1	)		—		0.4			—			0.4
Amortization of deferred acquisition costs		1.9			(3.5	)				(1.6	)		—			(1.6	)
Other operating expenses		(14.9	)		(0.9	)		—		(15.8	)		—			(15.8	)

Underwriting gain (loss)	$	20.1		$	5.4		$	0.1	$	25.6

ASSURED GUARANTY LTD - FORM 8-K - EX-99.4 - EXHIBIT 99.4 - August 13, 2010

Attached files