ASSURED GUARANTY LTD - FORM 8-K - EX-99.1

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Exhibit 99.1

Assured Guaranty Corp.

Index to Consolidated Financial Statements

December 31, 2010, 2009 and 2008

		Page(s)

Report of Independent Registered Public Accounting Firm			1
Consolidated Balance Sheets as of December 31, 2010 and 2009			2
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008			3
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008			4
Consolidated Statements of Shareholder's Equity for the years ended December 31, 2010, 2009 and 2008			5
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008			6
Notes to Consolidated Financial Statements			7-116

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of Assured Guaranty Corp.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of shareholder's equity and of cash flows present fairly, in all material respects, the financial position of Assured Guaranty Corp. and its subsidiary (the "Company") at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for variable interest entities effective January 1, 2010, for other-than-temporary impairments of debt securities classified as available-for-sale effective April 1, 2009, and for financial guaranty insurance contracts effective January 1, 2009.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP New York, New York April 8, 2011

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Assured Guaranty Corp.

Consolidated Balance Sheets

(dollars in thousands except per share and share amounts)

			As of December 31,

			2010		2009
Assets
Investment portfolio:
	Fixed maturity securities, available-for-sale, at fair value (amortized cost of $2,467,801 and $2,002,706)		$	2,488,920	$	2,045,211
	Short-term investments, at fair value			235,665		802,567
	Other invested assets			12,500		—

		Total investment portfolio		2,737,085		2,847,778
Cash				16,601		2,470
Premiums receivable, net of ceding commissions payable				269,560		351,468
Ceded unearned premium reserve				388,598		435,268
Deferred acquisition costs				57,882		45,162
Reinsurance recoverable on unpaid losses				68,120		50,706
Salvage and subrogation recoverable				183,955		169,917
Credit derivative assets				399,517		251,992
Deferred tax asset, net				342,587		241,796
Current income tax receivable				38,275		60,146
Financial guaranty variable interest entities' assets, at fair value				965,998		—
Other assets				74,678		43,107

	Total assets		$	5,542,856	$	4,499,810

Liabilities and shareholder's equity
Unearned premium reserve			$	1,323,138	$	1,451,576
Loss and loss adjustment expense reserve				231,130		191,211
Reinsurance balances payable, net				121,585		165,892
Note payable to affiliate				300,000		300,000
Credit derivative liabilities				1,360,369		1,076,726
Financial guaranty variable interest entities' liabilities with recourse, at fair value				523,478		—
Financial guaranty variable interest entities' liabilities without recourse, at fair value				495,720		—
Other liabilities				113,350		88,188

	Total liabilities			4,468,770		3,273,593

Commitments and contingencies
Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding)				—		—
Common stock ($720.00 par value, 500,000 shares authorized; 20,834 shares issued and outstanding)				15,000		15,000
Additional paid-in capital				1,037,087		1,037,059
Retained earnings				15,897		153,738
Accumulated other comprehensive income (loss), net of deferred tax provision (benefit) of $3,285 and $10,999				6,102		20,420

	Total shareholder's equity			1,074,086		1,226,217

	Total liabilities and shareholder's equity		$	5,542,856	$	4,499,810

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

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Assured Guaranty Corp.

Consolidated Statements of Operations

(in thousands)

			Year Ended December 31,

			2010			2009			2008
Revenues
Net earned premiums			$	106,737		$	138,738		$	91,998
Net investment income				88,069			76,616			73,167
Net realized investment gains (losses):
	Other-than-temporary impairment losses			(942	)		(12,433	)		(14,974	)
	Less: portion of other-than-temporary impairment loss recognized in other comprehensive income			—			(4,988	)		—
	Other net realized investment gains (losses)			3,318			10,434			313

		Net realized investment gains (losses)		2,376			2,989			(14,661	)
Net change in fair value of credit derivatives:
	Realized gains and other settlements			73,709			85,321			87,908
	Net unrealized gains (losses)			(151,226	)		(481,381	)		126,027

		Net change in fair value of credit derivatives		(77,517	)		(396,060	)		213,935
Fair value gain (loss) on committed capital securities				7,136			(47,075	)		42,746
Net change in financial guaranty variable interest entities				11,185			—			—
Other income (loss)				(4,793	)		5,362			648

	Total Revenues			133,193			(219,430	)		407,833

Expenses
Loss and loss adjustment expenses				111,216			192,967			149,479
Amortization of deferred acquisition costs				16,208			6,701			18,567
Interest expense				15,000			542			—
Goodwill impairment				—			85,417			—
Other operating expenses				84,077			86,821			54,944

	Total Expenses			226,501			372,448			222,990

Income (loss) before income taxes				(93,308	)		(591,878	)		184,843
Provision (benefit) for income taxes
	Current			26,277			(27,671	)		6,787
	Deferred			(71,645	)		(157,593	)		43,228

Total provision (benefit) for income taxes				(45,368	)		(185,264	)		50,015

Net income (loss)			$	(47,940	)	$	(406,614	)	$	134,828

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

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Assured Guaranty Corp.

Consolidated Statements of Comprehensive Income

(in thousands)

		Year Ended December 31,

		2010			2009			2008
Net income (loss)		$	(47,940	)	$	(406,614	)	$	134,828
	Unrealized holding gains (losses) arising during the period, net of tax provision (benefit) of $(6,776), $22,762 and $(23,173)		(12,579	)		42,268			(43,039	)
	Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $832, $1,046 and $(5,131)		1,544			1,943			(9,530	)

	Change in net unrealized gains on investments		(14,123	)		40,325			(33,509	)
	Change in cumulative translation adjustment, net of tax provision (benefit) of $(106), $(787) and $(3,194)		(195	)		(3,192	)		(5,982	)

	Other comprehensive income (loss)		(14,318	)		37,133			(39,491	)

Comprehensive income (loss)		$	(62,258	)	$	(369,481	)	$	95,337

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

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Assured Guaranty Corp.

Consolidated Statement of Shareholder's Equity

Years Ended December 31, 2010, 2009 and 2008

(in thousands)

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

Balance, December 31, 2007		$	—	$	15,000	$	380,359		$	443,292		$	28,544		$	867,195

Net income			—		—		—			134,828			—			134,828
Dividends			—		—		—			(16,522	)		—			(16,522	)
Capital contribution			—		—		100,000			—			—			100,000
Tax benefit for stock options exercised			—		—		16			—			—			16
Change in cumulative translation adjustment			—		—		—			—			(5,982	)		(5,982	)
Change in unrealized gains (losses) on:
	Investments with no other-than-temporary impairment		—		—		—			—			(43,039	)		(43,039	)
	Less: reclassification adjustment for gains (losses) included in net income (loss)		—		—		—			—			(9,530	)		(9,530	)

Balance, December 31, 2008			—		15,000		480,375			561,598			(10,947	)		1,046,026
Cumulative effect a change in accounting for financial guaranty contracts effective January 1, 2009			—		—		—			9,801			—			9,801

Balance at the beginning of the year, adjusted			—		15,000		480,375			571,399			(10,947	)		1,055,827
Cumulative effect a change in accounting for other-than-temporary impairments effective April 1, 2009			—		—		—			5,766			(5,766	)		—
Net loss			—		—		—			(406,614	)		—			(406,614	)
Dividends			—		—		—			(16,813	)		—			(16,813	)
Capital contribution			—		—		556,700			—			—			556,700
Tax benefit for stock options exercised			—		—		(16	)		—			—			(16	)
Change in cumulative translation adjustment			—		—		—			—			(3,192	)		(3,192	)
Change in unrealized gains (losses) on:
	Investments with no other-than-temporary impairment		—		—		—			—			43,387			43,387
	Investments with other-than-temporary impairment		—		—		—			—			(1,119	)		(1,119	)
	Less: reclassification adjustment for gains (losses) included in net income (loss)		—		—		—			—			1,943			1,943

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 8)			—		—		—			(39,898	)		—			(39,898	)

Balance, January 1, 2010			—		15,000		1,037,059			113,840			20,420			1,186,319
Net loss			—		—		—			(47,940	)		—			(47,940	)
Dividends			—		—		—			(50,003	)		—			(50,003	)
Tax benefit for stock options exercised							28			—						28
Change in cumulative translation adjustment			—		—		—			—			(195	)		(195	)
Change in unrealized gains (losses) on:
	Investments with no other-than-temporary impairment		—		—		—			—			(15,909	)		(15,909	)
	Investments with other-than-temporary impairment		—		—		—			—			3,330			3,330
	Less: reclassification adjustment for gains (losses) included in net income (loss)		—		—		—			—			1,544			1,544

Balance, December 31, 2010		$	—	$	15,000	$	1,037,087		$	15,897		$	6,102		$	1,074,086

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

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Assured Guaranty Corp.

Consolidated Statements of Cash Flows

(in thousands)

			Years Ended December 31,

			2010			2009			2008
Operating activities
Net income (loss)			$	(47,940	)	$	(406,614	)	$	134,828
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
	Non-cash interest and operating expenses			7,758			8,230			10,344
	Net amortization of premium on fixed maturity securities			7,061			526			1,997
	Provision (benefit) for deferred income taxes			(71,645	)		(157,593	)		43,228
	Net realized investment losses (gains)			(2,376	)		(2,989	)		14,661
	Net unrealized losses (gains) on credit derivatives			151,226			481,381			(126,027	)
	Fair value loss (gain) on committed capital securities			(7,136	)		47,075			(42,746	)
	Goodwill impairment			—			85,417			—
	Change in deferred acquisition costs			(12,720	)		8,668			(79	)
	Change in premiums receivable, net			124,687			19,810			7,322
	Change in ceded unearned premium reserve			46,670			(100,310	)		(109,142	)
	Change in unearned premium reserve			(120,479	)		375,606			361,201
	Change in loss and loss adjustment expense reserve, net			(87,955	)		(15,735	)		12,238
	Change in current income taxes			21,899			(42,780	)		(19,500	)
	Other changes in credit derivatives assets and liabilities, net			(15,108	)		1,807			(1,737	)
	Change in financial guaranty variable interest entities' assets and liabilities, net			24,646			—			—
	Other			(19,639	)		7,543			(8,823	)

Net cash flows provided by (used in) operating activities				(1,051	)		310,042			277,765

Investing activities
	Fixed maturity securities:
		Purchases		(877,599	)		(1,064,693	)		(495,798	)
		Sales		245,125			594,009			207,167
		Maturities		161,913			7,785			—
	Net sales (purchases) of short-term investments, net			567,221			(692,541	)		(65,845	)
	Net proceeds from paydowns on financial guaranty variable interest entities' assets			13,770			—			—

Net cash flows provided by (used in) investing activities				110,430			(1,155,440	)		(354,476	)

Financing activities
	Capital contribution			—			556,700			100,000
	Dividends paid			(50,003	)		(16,813	)		(16,522	)
	Issuance of notes payable to affiliate			—			300,000			—
	Net paydowns of financial guaranty variable interest entities' liabilities			(45,221	)		—			—
	Other			28			(16	)		16

Net cash flows provided by (used in) financing activities				(95,196	)		839,871			83,494
Effect of exchange rate changes				(52	)		174			(745	)

Increase (decrease) in cash				14,131			(5,353	)		6,038
Cash at beginning of year				2,470			7,823			1,785

Cash at end of year			$	16,601		$	2,470		$	7,823

Supplemental cash flow information
Cash paid (received) during the period for:
	Income taxes		$	(6,824	)	$	6,759		$	23,336
	Interest		$	15,542		$	—		$	—

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

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements

December 31, 2010, 2009 and 2008

1. Business and Basis of Presentation

Business

Assured Guaranty Corp. ("AGC" and, together with its subsidiary, the "Company"), a Maryland domiciled insurance company, is an indirect and wholly-owned subsidiary of Assured Guaranty Ltd. ("AGL" and together with its subsidiaries "Assured Guaranty"). AGL is a Bermuda-based insurance holding company that provides, through its operating subsidiaries, credit protection products to the U.S. and international public finance, infrastructure and structured finance markets in the U.S. as well as internationally. 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. AGC owns 100% of Assured Guaranty (U.K.) Ltd. ("AGUK"), a company incorporated in the United Kingdom ("U.K.") as a U.K. insurance company which AGC has elected to place into runoff. The Company has applied its credit underwriting judgment, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products that protect holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The securities insured by the Company include taxable and tax-exempt obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities issued by special purpose entities. The Company's business segments are comprised of two principal segments based on whether the contracts were written on a direct or assumed basis. The Company also enters into ceded reinsurance agreements to provide greater business diversification and reduce the net potential loss from large risks; however, ceded contracts do not relieve the Company of its obligations.

Financial guaranty contracts accounted for as insurance provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company's obligation to make loss payments are similar to those for financial guaranty contracts accounted for as insurance and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents with respect to one or more third party referenced securities or loans. Credit derivatives are comprised of credit default swaps ("CDS"). 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 accounted for as insurance but are governed by International Swaps and Derivative Association, Inc. ("ISDA") documentation and operate differently from financial guaranty accounted for as insurance.

Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the issuers' taxing powers, tax-supported bonds and revenue bonds and other obligations of states, their political subdivisions and other municipal issuers supported by the issuers' or obligors' covenant to impose and collect fees and charges for public services or specific projects. Public finance obligations include obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including government office buildings, toll roads, health care facilities and utilities. Structured finance obligations insured by the Company are generally backed by pools of assets such as residential or commercial mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value and issued by special

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

1. Business and Basis of Presentation (Continued)

purpose entities. The Company currently does not underwrite any new U.S. residential mortgage backed security ("RMBS") transactions. See Note 3 for outstanding U.S. RMBS exposures.

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. Investors in products insured by AGC or AGUK frequently rely on ratings published by nationally recognized statistical rating organizations ("NRSROs") because such ratings 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 NRSROs will assign. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company's products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.

Basis of Presentation

The 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 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.

The consolidated financial statements include the accounts of AGC and its subsidiary, AGUK. The consolidated financial statements also include the accounts of certain variable interest entities ("VIEs") subsidiaries. AGC and AGUK do not have any equity interest in such VIEs, however, under GAAP rules effective January 1, 2010, AGC was deemed to have certain control rights requiring consolidation. See Note 8. Intercompany accounts and transactions between AGC and its subsidiary have been eliminated as well as transactions between AGC and its consolidated VIEs. Certain prior year balances have been reclassified to conform to the current year's presentation.

Significant Accounting Policies

The Company revalues assets, liabilities, revenue and expenses denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates. Gains and losses relating to translating functional currency financial statements for U.S. GAAP reporting are included in accumulated other comprehensive income (loss) within shareholder's equity. Gains and losses relating to nonfunctional currency transactions are reported in the consolidated statement of operations.

Cash is defined as cash on hand and demand deposits.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

1. Business and Basis of Presentation (Continued)

The following table identifies the Company's most significant accounting policies and the note references where a detailed description of each policy can be found.

Significant Accounting Policies


Premium revenue recognition on financial guaranty contracts accounted for as insurance		Note 4
Loss and loss adjustment expense on financial guaranty contracts accounted for as insurance		Note 4
Policy acquisition costs		Note 4
Fair value measurement		Note 6
Credit derivatives		Note 7
VIEs		Note 8
Investments		Note 9
Income Taxes		Note 11
Employee benefit plans		Note 16
Segments		Note 17

2. Business Changes, Risks, Uncertainties and Accounting Developments

Summarized below are the most significant events over the past three years that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company. In addition to global market and economic factors and business developments, changes in accounting standards may also affect the comparability of financial information between periods.

Market Conditions

Volatility and disruption in the global financial markets over the past three years including depressed home prices increased foreclosures, lower equity market values, high unemployment, reduced business and consumer confidence and the risk of increased inflation, have precipitated an economic slowdown. While there have been signs of a recovery as seen by stabilizing unemployment and rising equity markets, management cannot assure that volatility and disruption will not return to these markets in the near term. The Company's business and its financial condition will continue to be subject to the risk of 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. These conditions may adversely affect the Company's future profitability, financial position, investment portfolio, cash flow, statutory capital and financial strength ratings.

The economic crisis caused many state and local governments that issue some of the obligations the Company insures to experience significant budget deficits and revenue collection shortfalls that require them to significantly raise taxes and/or cut spending in order to satisfy their obligations. While the U.S. government has provided some financial support to state and local governments, significant budgetary pressures remain. If the issuers of the obligations in the Company's public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its public finance obligations, which would materially and adversely affect its business,

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

2. Business Changes, Risks, Uncertainties and Accounting Developments (Continued)

financial condition and results of operations. 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.

NRSRO Rating Actions

The NRSROs have downgraded the insurance financial strength ratings of AGC and AGUK over the course of the last several years from their previous triple-A levels. There can be no assurance that NRSROs will not take further action on the Company's ratings. See Note 4, Note 7 and Note 12 for more information regarding the effect of NRSRO rating actions on the credit derivative business and the financial guaranty direct and assumed reinsurance business of the Company. On January 24, 2011, Standard and Poor's Rating Services ("S&P") released a publication entitled "Request for Comment: Bond Insurance Criteria," in which it requested comments on proposed changes to its bond insurance ratings criteria. In the Request for Comment, S&P noted that it could lower its financial strength ratings on existing investment-grade bond insurers (which include AGC and AGUK) by one or more rating categories if the proposed bond insurance ratings criteria are adopted, unless those bond insurers raise additional capital or reduce risk. The effect of this change in criteria, if adopted, and of the potential downgrade of the Company's financial strength ratings on the Company's financial condition and prospects is uncertain at this time.

The Company believes that these rating agency actions and proposals, including the uncertainty caused by the release of S&P's Request for Comment, have reduced the Company's new business opportunities and have also affected the value of the Company's product to issuers and investors. AGC's and AGUK's financial strength ratings are an important competitive factor in the financial guaranty insurance and reinsurance markets. If the financial strength or financial enhancement ratings of AGC and AGUK were reduced below current levels, the Company expects it would have further adverse effects on its future business opportunities as well as the premiums it could charge for its insurance policies and consequently, a downgrade could harm the Company's new business production, results of operations and financial condition.

Accounting Changes

Over the past three years there has been significant GAAP rule making activity which has significantly affected the accounting policies and presentation of the Company's financial information. All of these pronouncements have a significant effect on the comparability of the periods presented herein. The most significant changes are listed below in order of occurrence:

•: The adoption of a new financial guaranty accounting model on January 1, 2009 affected the premium revenue recognition and loss recognition policies. The most significant change was that loss and loss adjustment expense ("LAE") is recognized only to the extent that it exceeds unearned premium reserve. See Note 4.
•: The adoption of new other-than-temporary impairment ("OTTI") guidance on April 1, 2009 requires the bifurcation of credit losses which are recorded in income and non credit losses which are recorded in other comprehensive income ("OCI"). See Note 9.
•: The adoption of a new VIE consolidation standard on January 1, 2010 resulted in the consolidation of entities of our insured transactions. See Note 8.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure

The Company's insurance policies and credit derivative contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest ("Debt Service") on public finance and structured finance obligations. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also utilizes reinsurance by ceding business to third-party and affiliated reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Based on accounting standards in effect during any given reporting period, some of these VIEs are consolidated as described in Note 8. Outstanding par and Debt Service amounts are presented below, including outstanding exposures on VIEs whether or not they are consolidated.

Debt Service Outstanding

		Gross Debt Service Outstanding				Net Debt Service Outstanding

		December 31, 2010		December 31, 2009		December 31, 2010		December 31, 2009
		(in millions)
Public Finance		$	165,397	$	174,301	$	117,061	$	123,669
Structured Finance			73,069		85,566		53,986		62,937

	Total	$	238,466	$	259,867	$	171,047	$	186,606

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

Summary of Public Finance and Structured Finance Insured Portfolio

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Sector			December 31, 2010		December 31, 2009		December 31, 2010		December 31, 2009		December 31, 2010		December 31, 2009
			(in millions)
Public finance:
U.S.:
	General obligation		$	35,514	$	35,616	$	10,233	$	10,316	$	25,281	$	25,300
	Tax backed			15,829		16,409		4,038		4,114		11,791		12,295
	Municipal utilities			12,157		12,825		3,155		3,288		9,002		9,537
	Transportation			8,531		8,928		1,993		2,030		6,538		6,898
	Healthcare			7,620		8,366		2,585		2,873		5,035		5,493
	Higher education			4,768		4,846		1,321		1,346		3,447		3,500
	Infrastructure finance			1,437		1,735		475		554		962		1,181
	Investor-owned utilities			649		749		72		61		577		688
	Housing			329		468		83		102		246		366
	Other public finance—U.S.			2,373		2,583		672		718		1,701		1,865

		Total public finance—U.S.		89,207		92,525		24,627		25,402		64,580		67,123
Non-U.S.:
	Pooled infrastructure			3,656		4,684		1,807		2,169		1,849		2,515
	Infrastructure finance			1,713		1,926		521		545		1,192		1,381
	Regulated utilities			2,501		2,533		1,431		1,375		1,070		1,158
	Other public finance—non-U.S.			132		636		40		115		92		521

		Total public finance—non-U.S.		8,002		9,779		3,799		4,204		4,203		5,575

	Total public finance obligations		$	97,209	$	102,304	$	28,426	$	29,606	$	68,783	$	72,698

	Structured finance:
U.S.:
	Pooled corporate obligations		$	27,963	$	30,699	$	7,092	$	7,819	$	20,871	$	22,880
	RMBS			12,576		14,683		2,866		3,471		9,710		11,212
	Commercial Mortgage-Backed Securities ("CMBS") and other commercial real estate exposures			6,779		7,100		1,312		1,333		5,467		5,767
	Consumer receivables			2,945		3,662		662		674		2,283		2,988
	Commercial receivables			1,395		1,359		341		339		1,054		1,020
	Structured credit			1,250		2,173		334		793		916		1,380
	Insurance securitizations			1,025		1,100		782		845		243		255
	Other structured finance—U.S.			142		669		25		125		117		544

	Total structured finance—U.S.			54,075		61,445		13,414		15,399		40,661		46,046
Non-U.S.:
	Pooled corporate obligations			9,299		9,887		2,469		2,646		6,830		7,241
	RMBS			1,963		3,558		723		1,120		1,240		2,438
	Commercial receivables			859		1,089		299		355		560		734
	Structured credit			655		870		291		345		364		525
	Insurance securitizations			923		923		644		645		279		278
	CMBS and other commercial real estate exposures			251		469		63		110		188		359
	Other structured finance—non-U.S.			3		220		—		71		3		149

	Total structured finance—non-U.S.			13,953		17,016		4,489		5,292		9,464		11,724

	Total structured finance obligations			68,028		78,461		17,903		20,691		50,125		57,770

	Total		$	165,237	$	180,765	$	46,329	$	50,297	$	118,908	$	130,468

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

Financial Guaranty Portfolio by Internal Rating

		As of December 31, 2010

		Public Finance U.S.					Public Finance Non-U.S.					Structured Finance U.S					Structured Finance Non-U.S					Total
Rating Category(1)		Net Par Outstanding		%			Net Par Outstanding		%			Net Par Outstanding		%			Net Par Outstanding		%			Net Par Outstanding		%
		(dollars in millions)
Super senior		$	—		—	%	$	955		22.7	%	$	6,919		17.0	%	$	2,313		24.4	%	$	10,187		8.6	%
AAA			126		0.2			13		0.3			16,143		39.7			4,666		49.3			20,948		17.6
AA			11,240		17.4			257		6.1			3,326		8.2			434		4.6			15,257		12.8
A			41,849		64.8			1,368		32.6			2,966		7.3			266		2.8			46,449		39.1
BBB			10,565		16.4			1,409		33.5			3,627		8.9			1,230		13.0			16,831		14.2
Below investment grade ("BIG")			800		1.2			201		4.8			7,680		18.9			555		5.9			9,236		7.7

	Total net par outstanding	$	64,580		100.0	%	$	4,203		100.0	%	$	40,661		100.0	%	$	9,464		100.0	%	$	118,908		100.0	%

		As of December 31, 2009

		Public Finance U.S.					Public Finance Non-U.S.					Structured Finance U.S					Structured Finance Non-U.S					Total
Rating Category(1)		Net Par Outstanding		%			Net Par Outstanding		%			Net Par Outstanding		%			Net Par Outstanding		%			Net Par Outstanding		%
		(dollars in millions)
Super senior		$	—		—	%	$	1,587		28.5	%	$	9,976		21.7	%	$	4,339		37.0	%	$	15,902		12.2	%
AAA			667		1.0			—		—			14,961		32.5			4,398		37.5			20,026		15.3
AA			12,328		18.4			354		6.3			4,691		10.2			545		4.6			17,918		13.7
A			42,809		63.8			1,808		32.4			3,001		6.5			511		4.4			48,129		36.9
BBB			10,705		15.9			1,721		30.9			6,188		13.4			1,652		14.1			20,266		15.5
BIG			614		0.9			105		1.9			7,229		15.7			279		2.4			8,227		6.4

	Total net par outstanding	$	67,123		100.0	%	$	5,575		100.0	%	$	46,046		100.0	%	$	11,724		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 NRSROs; however, the ratings in the above table may not be the same as ratings assigned by any such 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 on its internal rating scale 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 incur 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.

Actual maturities of insured obligations could differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. The

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

expected maturities for structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.

Expected Amortization of
Net Par Outstanding of Financial Guaranty Insured Obligations

		December 31, 2010

Terms to Maturity		Public Finance		Structured Finance		Total
		(in millions)
0 to 5 years		$	10,584	$	33,208	$	43,792
5 to 10 years			14,615		3,446		18,061
10 to 15 years			11,404		688		12,092
15 to 20 years			19,308		3,289		22,597
20 years and above			12,872		9,494		22,366

	Total net par outstanding	$	68,783	$	50,125	$	118,908

In addition to amounts shown in the tables above, at December 31, 2010 AGC had outstanding commitments to provide guaranties of $3.2 billion for structured finance transactions and, together with affiliate Assured Guaranty Municipal Corp. ("AGM") up to $853 million for public finance transactions. The structured finance commitments include the unfunded component of and delayed draws on pooled corporate transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range from January 1, 2011 through February 1, 2019. Up to $366.2 million of public finance commitments will expire by December 31, 2011. All the commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled by the person to which the commitment was issued. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

The Company seeks to maintain a diversified portfolio of insured public finance obligations designed to spread its risk across a number of geographic areas. The following table sets forth those

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

states in which municipalities located therein issued an aggregate of 1.5% or more of the Company's net par amount outstanding of insured public finance securities:

Geographic Distribution of Financial Guaranty Portfolio

				December 31, 2010

				Number of Risks		Net Par Amount Outstanding		Percent of Total Net Par Amount Outstanding			Ceded Par Amount Outstanding
				(dollars in millions)
U.S.:
U.S. Public finance:
	California				566	$	7,633		6.4	%	$	2,523
	Texas				617		6,488		5.5			2,340
	New York				431		4,973		4.2			1,995
	Pennsylvania				470		4,715		4.0			1,828
	Florida				287		4,587		3.9			1,716
	Illinois				366		3,593		3.0			1,345
	New Jersey				228		2,665		2.2			1,117
	Puerto Rico				20		1,998		1.7			835
	Alabama				130		1,970		1.7			679
	Other states				2,372		25,958		21.8			10,249

		Total U.S. Public finance			5,487		64,580		54.4			24,627
	Structured finance (multiple states)				805		40,661		34.2			13,414

		Total U.S.			6,292		105,241		88.6			38,041
Non-U.S.:
	United Kingdom				68		6,227		5.2			5,047
	Australia				18		1,058		0.9			678
	Cayman Islands				1		734		0.6			292
	Turkey				7		222		0.2			160
	Other				57		5,426		4.5			2,111

			Total non-U.S.		151		13,667		11.4			8,288

Total					6,443	$	118,908		100.0	%	$	46,329

Significant Risk Management Activities

The Risk Oversight and Audit Committees of the Board of Directors of AGL oversee risk management policies and procedures. With input from the board committees, specific risk policies and limits are set by the Portfolio Risk Management Committee, which includes members of senior management and senior Credit and Surveillance officers at the Company.

Risk Management and Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio, including exposures in both financial guaranty direct and financial guaranty reinsurance segments. The primary objective of the surveillance process is to monitor trends

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

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. Risk Management and Surveillance personnel are also responsible for managing work-out and loss situations when necessary.

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

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

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide representations and warranties ("R&W"), that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these requirements. The Company uses internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W. If a provider of R&W refuses to honor its repurchase obligations, the Company may choose to initiate litigation. See "Recovery Litigation" in Note 4 below.

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

In the fall of 2010, several large RMBS servicers suspended foreclosures because of allegations of a widespread failure to comply with foreclosure procedures and faulty loan documentation. These issues are being investigated by various state attorney general offices throughout the U.S. The suspension of foreclosures and subsequent investigation will lead to additional servicing costs and expenses, including without limitation, increased advances by the servicers for principal and interest, taxes, insurance and legal costs. The Company is increasing its monitoring efforts to ensure that the servicers comply with their obligations under servicing contracts, including bearing the losses and expenses incurred as a result of this issue. These same foreclosure issues are expected to impact the timing of losses to RMBS transactions that the Company has insured, which may impact the speed at which various classes of RMBS securities amortize, and so could impact the size of losses ultimately paid by the Company. The Company expects these issues to take some time to resolve.

The Company may also employ other strategies as appropriate to avoid or mitigate losses in U.S. RMBS or other areas. For example, the Company may pursue litigation or enter into other arrangements to alleviate all or a portion of certain risks.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

Surveillance Categories

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company's internal credit ratings are based on the Company's internal assessment of the likelihood of default. The Company's internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies.

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or annual cycles based on the Company's view of the credit's quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company's insured credit ratings on assumed credits are based in large part on the ceding company's credit rating although to the extent information is available, the Company will conduct an independent review of low rated credits or credits in volatile sectors. For example, the Company models all assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 4 "Loss estimation process"). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects "lifetime losses" on a transaction when the Company believes there is more than a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it will ultimately have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk free rate is used for recording of reserves for financial statement purposes.) A "liquidity claim" is a claim that the Company expects to be reimbursed within one year.

Intense monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly:

•: BIG Category 1: Below investment grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.
•: BIG Category 2: Below investment grade transactions for which lifetime losses are expected but for which no claims (other than liquidity claims) have yet been paid.
•: BIG Category 3: Below investment grade transactions for which lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

In 2010 the Company revised the definitions of the three BIG surveillance categories to more closely track the Company's view of whether a transaction is expected to experience a loss, without regard to whether the probability weighted expected loss exceeded the unearned premium reserve. See Note 4 for further explanation of accounting policy. The revisions do not impact whether a transaction

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

would be considered BIG or whether reserves are established for a transaction or the amount of any such reserves, but only the distribution within the BIG surveillance categories. While the revisions resulted in a number of transactions moving between BIG categories, the revisions had a relatively small impact on the totals in each category.

Financial Guaranty Exposures
(Insurance and Credit Derivative Form)

			December 31, 2010

			BIG Net Par Outstanding
			BIG 1		BIG 2		BIG 3		Total BIG		Net Par Outstanding		BIG Par as a % of Net Par Outstanding
			(in millions)
First lien U.S. RMBS:
	Prime first lien		$	55	$	432	$	—	$	487	$	549		0.4	%
	Alt-A first lien			687		1,864		—		2,551		3,584		2.2	%
	Alt-A option ARM			20		734		—		754		960		0.6	%
	Subprime			41		550		36		627		3,869		0.5	%
Second lien U.S. RMBS:
	Closed end second lien			—		37		163		200		228		0.2	%
	Home equity lines of credit ("HELOCs")			3		—		489		492		520		0.4	%

		Total U.S. RMBS		806		3,617		688		5,111		9,710		4.3	%
Other structured finance				1,904		24		1,196		3,124		40,415		2.6	%
Public finance				702		48		251		1,001		68,783		0.8	%

		Total	$	3,412	$	3,689	$	2,135	$	9,236	$	118,908		7.7	%

			December 31, 2009

			BIG Net Par Outstanding
			BIG 1		BIG 2		BIG 3		Total BIG		Net Par Outstanding		BIG Par as a % of Net Par Outstanding
			(in millions)
First lien U.S. RMBS:
	Prime first lien		$	467	$	25	$	—	$	492	$	643		0.4	%
	Alt-A first lien			447		1,894		96		2,437		4,162		1.9	%
	Alt-A option ARM			142		788		—		930		1,142		0.7	%
	Subprime			43		597		—		640		4,334		0.5	%
Second lien U.S. RMBS:
	Closed end second lien			102		39		95		236		273		0.2	%
	HELOC			—		—		621		621		658		0.5	%

		Total U.S. RMBS		1,201		3,343		812		5,356		11,212		4.2	%
Other structured finance				342		836		974		2,152		46,558		1.6	%
Public finance				345		67		307		719		72,698		0.6	%

		Total	$	1,888	$	4,246	$	2,093	$	8,227	$	130,468		6.4	%

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

3. Outstanding Exposure (Continued)

Net Par Outstanding for Below Investment Grade Credits

		As of December 31, 2010

Description		Net Par Outstanding Financial Guaranty Insurance		% of Total Net Par Outstanding			Net Par Outstanding Credit Derivatives		% of Total Net Par Outstanding			Net Par Outstanding Total		% of Total Net Par Outstanding			Number of Credits in Category
		(dollars in millions)
BIG:
	Category 1	$	1,181		1.0	%	$	2,231		1.8	%	$	3,412		2.8	%		91
	Category 2		993		0.8			2,696		2.3			3,689		3.1			86
	Category 3		1,170		1.0			965		0.8			2,135		1.8			55

Total BIG		$	3,344		2.8	%	$	5,892		4.9	%	$	9,236		7.7	%		232

		As of December 31, 2009

Description		Net Par Outstanding Financial Guaranty Insurance		% of Total Net Par Outstanding			Net Par Outstanding Credit Derivatives		% of Total Net Par Outstanding			Net Par Outstanding Total		% of Total Net Par Outstanding			Number of Credits in Category
		(dollars in millions)
BIG:
	Category 1	$	639		0.5	%	$	1,249		1.0	%	$	1,888		1.5	%		42
	Category 2		1,070		0.8			3,176		2.5			4,246		3.3			124
	Category 3		1,328		1.0			765		0.6			2,093		1.6			16

Total BIG		$	3,037		2.3	%	$	5,190		4.1	%	$	8,227		6.4			182

4. Financial Guaranty Contracts Accounted for as Insurance

Accounting Policies

Premium Revenue Recognition

Premiums are received either upfront at inception or in installments over the life of the contract. Accounting policies for financial guaranty contracts accounted for as insurance are consistent whether the contract was written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty or acquired in a business combination. The Financial Accounting Standards Board ("FASB") issued an authoritative standard, effective January 1, 2009, that changed premium revenue recognition and loss recognition for contracts accounted for as financial guaranty insurance. Contracts accounted for as credit derivatives are excluded from this standard.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

The amount of unearned premium reserve at contract inception is determined as follows:

•: The amount of cash received for upfront premium financial guaranty insurance contracts originally underwritten by the Company.
•: The present value of either (1) contractual premiums due or (2) premiums expected to be collected over the life of the contract for installment premium financial guaranty insurance contracts originally underwritten by the Company. The contractual term is used unless the obligations underlying the financial guaranty contract represent homogeneous pools of assets for which prepayments are contractually prepayable, the amount of prepayments are probable, and the timing and amount of prepayments can be reasonably estimated. The Company adjusts prepayment assumptions when those assumptions change and recognizes a prospective change in premium revenues as a result. When the Company adjusts prepayment assumptions, an adjustment is recorded to the unearned premium reserve, and a corresponding adjustment to the premium receivable.
•: The fair value at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract at that date and not the actual cash flows under the insurance contract for contracts acquired in a business combination.

The Company recognizes unearned premium reserve as earned premium over the contractual period or expected period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease in the unearned premium reserve is recorded. The amount of insurance protection provided is a function of the insured principal amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given reporting period is a constant rate calculated based on the relationship between the insured principal amounts outstanding in the reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When the issuer of an insured financial obligation retires the insured financial obligation before its maturity, the financial guaranty insurance contract on the retired financial obligation is extinguished. The Company immediately recognizes any nonrefundable unearned premium reserve related to that contract as premium revenue.

In the Company's assumed businesses, the Company estimates the ultimate written and earned premiums to be received from a ceding company at the end of each quarter and the end of each year. A portion of the premiums must be estimated because some of the Company's ceding companies report premium data between 30 and 90 days after the end of the reporting period. Earned premium reported in the Company's consolidated statements of operations are based upon reports received from ceding companies supplemented by the Company's own estimates of premium for which ceding company reports have not yet been received. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined.

Unearned premium reserve ceded to reinsurers is recorded as an asset called "ceded unearned premium reserve." The corresponding income statement recognition is included with the direct and assumed business in "net earned premiums".

Prior to January 1, 2009, upfront premiums were earned in proportion to the expiration of the amount at risk. Each installment premium was earned ratably over its installment period, generally one year or less. Premium earnings under both the upfront and installment revenue recognition methods

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

were based upon and were in proportion to the principal amount guaranteed and therefore resulted in higher premium earnings during periods where guaranteed principal was higher. For insured bonds for which the par value outstanding was declining during the insurance period, upfront premium earnings were greater in the earlier periods, thereby matching revenue recognition with the underlying risk. The premiums were allocated in accordance with the principal amortization schedule of the related bond issuance and were earned ratably over the amortization period. When an insured issuance was retired early, was called by the issuer, or was in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the remaining unearned premium reserves were earned at that time. Unearned premium reserve represented the portion of premiums written that were applicable to the unexpired amount at risk of insured bonds. On contracts where premiums were paid in installments, only the currently due installment was recorded in the financial statements.

Loss and Loss Adjustment Expense Reserve

Under financial guaranty insurance accounting, unearned premium reserve and loss and LAE reserves represent the Company's combined stand-ready obligation. At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. Loss and LAE reserves are only recorded when expected losses to be paid exceed the unearned premium reserve on a contract by contract basis.

"Expected loss to be paid" represents the Company's discounted expected future cash outflows for claim payments, net of expected salvage and subrogation expected to be recovered. See "—Salvage and Subrogation" below.

The "expected loss to be paid" is equal to the present value of expected future net cash outflows to be paid under the contract discounted using the current risk-free rate. That current risk-free rate is based on the remaining period of the contract used in the premium revenue recognition calculation (i.e., the contractual or expected period, as applicable). The Company updates the discount rate each quarter and reports the effect of such changes in loss development. Expected net cash outflows (cash outflows, expected to be paid to the holder of the insured financial obligation, net of potential recoveries, excluding reinsurance) are probability-weighted cash flows that reflect the likelihood of all possible outcomes. The Company estimates the expected net cash outflows using management's assumptions about the likelihood of all possible outcomes based on all information available to it. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company's risk-management activities.

Prior to January 1, 2009, "loss reserves" included case reserves and portfolio reserves. Gross case reserves were established when there was significant credit deterioration on specific insured obligations and the obligations were in default or default was probable, not necessarily upon non-payment of principal or interest by an insured. Gross case reserves represented the present value of expected future loss payments and LAE, net of estimated recoveries, but before considering ceded reinsurance. This reserving method was different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish incurred but not reported reserves for the difference between actuarially estimated ultimate losses and recorded case reserves. Financial guaranty insurance case reserves and related salvage and subrogation, if any,

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

were discounted at the taxable equivalent yield on the Company's investment portfolio, which was approximately 6%, during 2008.

The Company recorded a portfolio reserve for its financial guaranty business prior to 2009. Portfolio reserves were established with respect to the portion of the Company's business for which case reserves were not established. Portfolio reserves were not established based on a specific event. Instead, they were calculated by aggregating the portfolio reserve calculated for each individual transaction. Individual transaction reserves were calculated on a quarterly basis by multiplying the par in-force by the product of the ultimate loss and earning factors without regard to discounting. The ultimate loss factor was defined as the frequency of loss multiplied by the severity of loss, where the frequency was defined as the probability of default for each individual issue. The earning factor was inception to date earned premium divided by the estimated ultimate written premium for each transaction. The probability of default was estimated from rating agency data and was based on the transaction's credit rating, industry sector and time until maturity. The severity was defined as the complement of recovery/salvage rates gathered by the rating agencies of defaulting issues and was based on the industry sector. Portfolio reserves were recorded gross of reinsurance. The Company did not cede any amounts under these reinsurance contracts, as the Company's recorded portfolio reserves did not exceed the Company's contractual retentions, required by said contracts.

The Company recorded an incurred loss that was reflected in the consolidated statements of operations upon the establishment of portfolio reserves. When the Company initially recorded a case reserve, the Company reclassified the corresponding portfolio reserve already recorded for that credit within the consolidated balance sheets. The difference between the initially recorded case reserve and the reclassified portfolio reserve was recorded as a charge in the Company's consolidated statements of operations. Any subsequent change in portfolio reserves or the initial case reserves was recorded quarterly as a charge or credit in the Company's consolidated statements of operations in the period such estimates changed.

Salvage and Subrogation Recoverable

When the Company becomes entitled to the cash flow from the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment or estimated recoveries from disputed claim payments on contractual grounds, it reduces the "expected loss to be paid" on the contract. Such reduction in expected to be paid can result in one of the following:

•: a reduction in the corresponding loss and LAE reserve with a benefit to the income statement,
•: no entity if expected loss to be paid is not in excess of unearned premium reserve
•: the recording of a salvage asset with a benefit to the income statement if the expected loss is in a net cash inflow position at the reporting date.

To the extent that the estimated amount of recoveries increases or decreases, due to changes in facts and circumstances, including the examination of additional loan files and our experience in recovering loans put back to the originator, the Company would recognize a benefit or expense consistent with the manner it records changes in the expected recovery of all other claim payments.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Policy Acquisition Costs

Costs that vary with and are directly related to the production of new financial guaranty contracts accounted for as insurance are deferred and amortized in relation to earned premiums. These costs include direct and indirect expenses such as ceding commissions, and the cost of underwriting and marketing personnel. Management uses its judgment in determining the type and amount of cost to be deferred. The Company conducts an annual study to determine which operating costs vary with, and are directly related to, the acquisition of new business, and therefore qualify for deferral. Ceding commission income on business ceded to reinsurers reduce policy acquisition costs and are deferred. Expected losses, LAE and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of deferred acquisition cost ("DAC"). When an insured issue is retired early, the remaining related DAC is expensed at that time. Beginning January 1, 2009, ceding commission expense and income associated with future installment premiums on assumed and ceded business, respectively, are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to net premium receivable or payable.

In October 2010, the FASB adopted Accounting Standards Update ("Update") No. 2010-26. This amendment in the Update specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. Costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs should be charged to expense as incurred. The amendment in the Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Retrospective application to all prior periods presented upon the date of adoption is permitted, but not required. The Company is currently considering whether to adopt retrospectively and is evaluating the impact the amendment in the Update will have on its consolidated financial statements in 2012.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Adoption of Financial Guaranty Accounting Standard

The following table presents the effect of adopting the new financial guaranty accounting standard on January 1, 2009 on the Company's consolidated balance sheet. The new financial guaranty accounting standard changed the premium revenue and loss recognition methodologies.

	December 31, 2008 As reported		Transition Adjustment			January 1, 2009

	(in millions)
ASSETS:
Deferred acquisition costs	$	79.0	$	(25.2	)	$	53.8
Ceded unearned premium reserve		206.5		128.5			335.0
Reinsurance recoverable on ceded losses		22.0		10.0			32.0
Premiums receivable, net of ceding commissions payable		12.4		360.5			372.9
Deferred tax asset, net		110.3		(5.2	)		105.1
Salvage recoverable		70.9		5.8			76.7
Total assets		2,454.5		474.4			2,928.9
LIABILITIES AND SHAREHOLDER'S EQUITY:
Unearned premium reserves	$	708.0	$	368.0		$	1,076.0
Loss and LAE reserve		133.7		4.2			137.9
Reinsurance balances payable, net		23.7		92.4			116.1
Total liabilities		1,408.4		464.6			1,873.0
Retained earnings		561.6		9.8			571.4
Total shareholder's equity		1,046.0		9.8			1,055.8
Total liabilities and shareholder's equity		2,454.5		474.4			2,928.9

A summary of the effects on the consolidated balance sheet amounts above is as follows:

•: DAC is decreased to reflect commissions on future installment premiums related to ceded reinsurance policies.
•: Premium receivable, net of ceding commissions payable increased to reflect the recording of the net present value of future installment premiums discounted at a risk-free rate. Reinsurance balances payable increased correspondingly for those amounts ceded to reinsurers.
•: Unearned premium reserves increased to reflect the recording of the net present value of future installment premiums discounted at a risk-free rate and the change in the premium earnings methodology to the effective yield method prescribed by the new standard. Ceded unearned premium reserve increased correspondingly for those amounts ceded to reinsurers.
•: Loss and LAE reserve increased to reflect the increase in case reserves partially offset by the release of the Company's portfolio reserves on fundamentally sound credits. Case reserves are now calculated based on probability weighted cash flows discounted at a risk free rate instead of based on a single case best estimate reserve discounted based on the after-tax investment yield

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

of the Company's investment portfolio (at 6%). Reinsurance recoverable on ceded losses increased correspondingly. Salvage recoverable increased to reflect the change in discount rates.

•: Deferred tax asset decreased to reflect the deferred tax effect of the above items.
•: Retained earnings as of January 1, 2009 increased to reflect the net effect of the above adjustments.

Financial Guaranty Insurance Premiums and Losses

The following tables present net premium earned, premium receivable activity, expected collections of future premiums and expected future earnings on the existing book of business. The tables below provide the expected timing of premium revenue recognition before accretion and the expected timing of loss and LAE recognition, before accretion. Actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations and counterparty collectability issues. The amount and timing of actual premium earnings and loss expense may differ from the estimates shown below due to factors such as refundings, accelerations, future commutations, and updates to loss estimates.

Net Earned Premiums

		Year Ended December 31,

		2010		2009		2008
		(in millions)
Scheduled net earned premiums		$	95.9	$	78.7	$	77.6
Acceleration of premium earnings(1)			4.3		53.8		14.4
Accretion of discount on net premiums receivable			6.4		6.2		—

	Total financial guaranty		106.6		138.7		92.0
Other			0.1		—		—

	Total net earned premiums(2)	$	106.7	$	138.7	$	92.0

(1): Reflects the unscheduled refundings of underlying insured obligations.
(2): Excludes $1.4 million in 2010 related to consolidated VIEs.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Gross Premium Receivable, Net of Ceding Commissions Roll Forward

		Year Ended December 31,

		2010			2009
		(in millions)
Gross premium receivable, net of ceding commissions payable:
Balance, beginning of period		$	351.4		$	12.4
Change in accounting			(9.2	)		360.5

Balance beginning of the period, adjusted			342.2			372.9
Premium written, net			76.2			594.0
Premium payments received, net			(99.5	)		(601.5	)
Adjustments to the premium receivable:
	Changes in the expected term of financial guaranty insurance contracts		(54.0	)		(29.3	)
	Accretion of the discount		10.0			9.3
	Foreign exchange translation		(3.5	)		6.8
	Other adjustments		(1.8	)		(0.8	)

Balance, end of period(1)		$	269.6		$	351.4

(1): Includes premiums receivable of $0.2 million and $0.0 million as of December 31, 2010 and 2009, respectively, for the other segment.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 12% and 19% of the Company's installment premiums at December 31, 2010 and 2009, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro, British Pound Sterling and Australian dollars.

For premiums received in installments, the Company records premiums receivable as the present value of premiums due or expected to be collected over the life of the contracts. Installment premiums typically related to structured finance deals, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the deal. Premium payments to the Company are typically made from deal cash flows that are senior to payments made to the deal noteholders. Updates are made periodically to the amount of installment premiums due or expected to be collected when the Company believes there are significant changes to recorded amounts. The offset to any change in premiums receivable is a corresponding change to unearned premium reserve. When these installment premiums are related to assumed reinsurance amounts, the Company also assesses the credit quality and liquidity of the Company that the premiums are assumed from as well as the impact of any potential regulatory constraints to determine the collectability of such amounts. The Company had no premiums receivable amounts that it considers to be uncollectible as of December 31, 2010.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Expected Collections of Gross Premiums Receivable,
Net of Ceding Commissions

		December 31, 2010(1)

		(in millions)
Gross premium collections expected:
2011 (January 1 - March 31)		$	18.9
2011 (April 1 - June 30)			10.2
2011 (July 1 - September 30)			9.6
2011 (October 1 - December 31)			8.8
2012			35.1
2013			29.3
2014			24.1
2015			22.0
2016 - 2020			79.4
2021 - 2025			47.1
2026 - 2030			28.7
After 2030			32.2

	Total gross expected collections	$	345.4

(1): Represents undiscounted amounts expected to be collected and excludes the other segment.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

The following table provides a schedule of the expected timing of the income statement recognition of financial guaranty insurance net unearned premium reserve and PV of net expected losses, pre-tax. This table excludes amounts related to consolidated VIEs.

Expected Timing of Financial Guaranty Insurance
Premium and Loss Recognition

		As of December 31, 2010

		Scheduled Net Earned Premium		Net Expected Loss to be Expensed(1)		Net
		(in millions)
2011 (January 1 - March 31)		$	17.9	$	0.5	$	17.4
2011 (April 1 - June 30)			19.7		0.5		19.2
2011 (July 1 - September 30)			19.7		0.5		19.2
2011 (October 1 - December 31)			18.4		0.4		18.0
2012			71.5		1.7		69.8
2013			66.5		1.5		65.0
2014			60.8		1.3		59.5
2015			56.9		1.1		55.8
2016 - 2020			229.4		4.2		225.2
2021 - 2025			160.5		2.1		158.4
2026 - 2030			105.6		1.6		104.0
After 2030			107.6		2.0		105.6

	Total present value basis(2)(3)		934.5		17.4		917.1
Discount			55.1		125.3		(70.2	)

	Total future value	$	989.6	$	142.7	$	846.9

(1): These amounts reflect the Company's estimate as of December 31, 2010 of expected losses to be expensed and are not included in loss and LAE reserve because loss and LAE reserves are only recorded to the extent expected loss exceeds unearned premium reserve determined on a contract-by-contract basis.
(2): Balances represent discounted amounts.
(3): The effect of consolidating financial guaranty VIEs resulted in a reduction of $8.1 million in future scheduled net earned premium and $0.8 million in net expected loss to be expensed, excluding accretion of discount.

Selected Information for Policies Paid in Installments

	As of December 31,

	2010		2009
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	269.6	$	351.4
Gross unearned premium reserve		269.1		344.4
Weighted-average risk-free rate to discount premiums		2.9		3.1
Weighted-average period of premiums receivable (in years)		8.3		9.1

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Rollforward of Deferred Acquisition Costs

			Year Ended December 31,

			2010			2009			2008
			(in millions)
Balance, beginning of period			$	45.2		$	79.0		$	78.9
Change in accounting				—			(25.2	)		—
Costs deferred during the period:
	Ceded and assumed commissions			0.3			(31.2	)		(37.6	)
	Premium taxes			4.3			14.2			14.0
	Compensation and other acquisition costs			25.2			25.7			31.8

		Total		29.8			8.7			8.2
Costs amortized during the period				(16.2	)		(6.7	)		(18.6	)
Foreign exchange translation				(0.9	)		(10.4	)		9.6
Other				—			(0.2	)		0.9

		Balance, end of period	$	57.9		$	45.2		$	79.0

Loss Estimation Process

The Company's loss reserve committees estimate expected losses. Surveillance personnel present analysis related to potential losses to the Company's loss reserve committees for consideration in estimating the expected loss of the Company. Such analysis includes the consideration of various scenarios with potential probabilities assigned to them. Depending upon the nature of the risk, the Company's view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit ratings assessments and sector-driven loss severity assumptions, judgmental assessment or (in the case of its reinsurance segment) loss estimates provided by ceding insurers. The Company's loss reserve committees review and refresh the Company's expected loss estimates each quarter. The Company's estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance due to changing economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss is an inherently subjective process involving numerous estimates, assumptions and judgments by management.

The following table presents a rollforward of the present value of net expected loss and LAE to be paid by sector. Expected loss to be paid is the Company's estimate of the present value of future claim

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

payments, net of reinsurance and net of salvage and subrogation which includes the present value benefit of estimated recoveries for breaches of R&W.

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

				Expected Loss to be Paid as of December 31, 2009			Development and Accretion of Discount		Less: Paid Losses			Expected Loss to be Paid as of December 31, 2010

				(in millions)
U.S. RMBS:
	First lien:
		Prime first lien		$	—		$	0.8	$	—		$	0.8
		Alt-A first lien			20.6			7.4		(0.8	)		28.8
		Alt-A option ARM			17.4			32.5		0.3			49.6
		Subprime			16.9			12.8		0.9			28.8

			Total first lien		54.9			53.5		0.4			108.0
	Second lien:
		Closed end second lien			17.4			16.1		39.8			(6.3	)
		HELOC			(107.5	)		50.2		61.0			(118.3	)

			Total second lien		(90.1	)		66.3		100.8			(124.6	)

Total U.S. RMBS					(35.2	)		119.8		101.2			(16.6	)
Other structured finance					19.7			10.3		2.5			27.5
Public finance					55.8			20.3		28.8			47.3

			Total	$	40.3		$	150.4	$	132.5		$	58.2

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

			Loss and LAE Reserve as of December 31, 2008			Change in Accounting(2)			Expected loss to be Paid at January 1, 2009			Development and Accretion of Discount		Less: Paid Losses		Expected Loss to be Paid as of December 31, 2009

			(in millions)
First lien
	Prime first lien		$	1.3		$	(1.3	)	$	—		$	—	$	—	$	—
	Alt-A first lien			3.1			5.1			8.2			13.3		0.9		20.6
	Alt-A option ARM			2.2			7.1			9.3			8.1		—		17.4
	Subprime			12.9			(5.7	)		7.2			10.7		1.0		16.9

		Total first lien		19.5			5.2			24.7			32.1		1.9		54.9
Second lien
	Closed end second lien			32.1			—			32.1			38.4		53.1		17.4
	HELOCs			(36.7	)		(9.1	)		(45.8	)		70.0		131.7		(107.5	)

		Total second lien		(4.6	)		(9.1	)		(13.7	)		108.4		184.8		(90.1	)

Total U.S. RMBS				14.9			(3.9	)		11.0			140.5		186.7		(35.2	)
Other structured finance				15.6			0.3			15.9			6.4		2.6		19.7
Public Finance				18.9			2.9			21.8			49.9		15.9		55.8

Total			$	49.4		$	(0.7	)	$	48.7		$	196.8	$	205.2	$	40.3

(1): Amounts include all expected payments whether or not the insured transaction VIE is consolidated. There were no expected losses in the other segment as of December 31, 2010 and December 31, 2009.
(2): Change in accounting for financial guaranty contracts related to the adoption of a new financial guaranty insurance accounting standard effective January 1, 2009.

The Company's expected LAE for mitigating claim liabilities were $4.9 million and $4.2 million as of December 31, 2010 and 2009, respectively. The Company used weighted-average risk free rates ranging from 0% to 5.34% and 0.07% to 5.21% to discount expected losses as of December 31, 2010 and 2009, respectively.

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Reconciliation of Net Expected Loss to be Paid and Net Expected Loss to be Expensed

		As of December 31, 2010

		(in millions)
Net expected loss to be paid		$	58.2
Less: net expected loss to be paid for financial guaranty VIEs			9.4

	Total		48.8
Salvage and subrogation recoverable, net(1)			131.6
Loss and LAE reserve, net			(163.0	)

Net expected loss to be expensed(2)		$	17.4

(1): Represents gross salvage and subrogation amounts of $184.0 million net of ceded amounts of $52.4 million which is recorded in reinsurance balances payable.
(2): Excludes $0.8 million as of December 31, 2010 related to consolidated financial guaranty VIEs.

The Company's Approach to Projecting Losses in U.S. RMBS

The Company projects losses in U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS to the projected performance of the collateral over time. The resulting projection of any projected claim payments or reimbursements is then discounted to a present value using a risk free rate. For transactions where the Company projects it will receive recoveries from providers of R&W, the projected amount of recoveries is included in the projected cash flows from the collateral. The Company runs, and probability-weights, several sets of assumptions (scenarios) regarding potential mortgage collateral performance.

The further behind a mortgage borrower falls in payments, the more likely it is that he or she will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the "liquidation rate". Liquidation rates may be derived from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

Mortgage borrowers that are a single payment or less behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how much of the currently performing loans will default and when by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates, then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

liquidation of currently delinquent loans represent defaults of currently performing loans. A conditional default rate is the outstanding principal amount of loans defaulting in a given month divided by the remaining outstanding amount of the whole pool of loans (or "collateral pool balance"). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal repayments, and defaults.

In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector based on experience to date. Further detail regarding the assumptions and variables the Company used to project collateral losses in its U.S. RMBS portfolio may be found below in the sections "U.S. Second Lien RMBS Loss Projections: HELOCs and Closed-End Second Lien" and "U.S. First Lien RMBS Loss Projections: Alt-A, Option ARM, Subprime and Prime".

The Company is in the process of enforcing, on behalf of RMBS issuers, claims for breaches of R&W regarding the characteristics of the loans included in the collateral pools. The Company calculates a credit to the RMBS issuer for such recoveries where the R&W were provided by an entity the Company believes to be financially viable and where the Company already has access or believes it will attain access to the underlying mortgage loan files. In second liens this credit is based on a factor of actual repurchase rates achieved, while in first liens this credit is estimated by reducing collateral losses projected by the Company to reflect a factor of the recoveries the Company believes it will achieve based on breaches identified to date. The first lien approach is different than the second lien approach because of the Company's first lien transactions have multiple tranches and a more complicated method is required to correctly allocate credit to each tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses increases the representation and warranty credit calculated by the Company for the RMBS issuer. Further detail regarding how the Company calculates these credits may be found under "Breaches of Representations and Warranties" below.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for (a) the collateral losses it projects as described above, (b) assumed voluntary prepayments and (c) recoveries for breaches of R&W as described above. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction's collateral pool to project the Company's future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted to a present value using a risk free rate and compared to the unearned premium reserve for that transaction. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

Year-End 2010 U.S. RMBS Loss Projections

The Company's RMBS projection methodology assumes that the housing and mortgage markets will eventually recover. So, to the extent it retains the shape of the curves and probability weightings

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

used in the previous quarter, the Company essentially assumes the recovery in the housing and mortgage markets will be delayed by another three months.

The scenarios used to project RMBS collateral losses in first quarter of 2010, with the exception of an increase to the subprime loss severity, were the same as those employed at year-end 2009. In the second quarter 2010 the Company changed how scenarios were run as compared to the first quarter 2010 to reflect the Company's view that it was observing the beginning of an improvement in the housing and mortgage markets. In the third and fourth quarters 2010 early stage delinquencies did not trend down as much as the Company had anticipated in the second quarter, so the Company adjusted its curves to reflect the observed early stage delinquencies. Additionally, in the fourth quarter 2010, due to the Company's concerns about the timing and strength of any recovery in the mortgage and housing markets, the probability weightings were adjusted to reflect a somewhat more pessimistic view. Also in the fourth quarter 2010 the Company increased its initial subprime loss severity assumption to reflect recent experience. Taken together, the changes in the assumptions between year-end 2009 and 2010 had the effect of (a) reflecting a slower recovery in the housing market than had been assumed at the beginning of the year and (b) increasing the assumed initial loss severities for subprime transactions from 70% to 80%.

The methodology the Company used to project RMBS losses prior to AGL's acquisition of Assured Guaranty Municipal Holdings Inc. ("AGMH") on July 1, 2009 ("AGMH Acquisition") was somewhat different than the current methodology. For the third quarter 2009 the Company adopted a methodology to project RMBS losses that was based on a combination of the approaches used by the Company and AGMH prior to the AGMH Acquisition. For this reason, the results are not directly comparable. However, that Company's second lien methodology utilized many of the same assumptions as those used at year-end 2009 and year-end 2010, so the year-end 2008 second lien assumptions are provided below for comparative purposes.

The Company also used generally the same methodology to project the credit received by the RMBS issuers for recoveries on R&W at year-end 2010 as it used at year-end 2009. Other than the impact of the increase in projected collateral defaults on the calculation of the credit, the primary difference relates to the population of transactions the Company included in its R&W credits. The Company added credit for one first lien transaction where it believes it has a right to receive loan files. The Company also refined some of the assumptions in the calculation of the amount of the credit to reflect actual experience. The R&W benefit at year-end 2008 related primarily to two second lien transactions.

U.S. Second Lien RMBS Loss Projections: HELOCs and Closed End Second Lien

The Company insures two types of second lien RMBS: those secured by HELOCs and those secured by closed end second lien 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 closed end second lien. Both first lien RMBS and second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority of the collateral. 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

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America Corporation.

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

The Company believes the primary variables impacting its expected losses in second lien RMBS transactions are the amount and timing of future losses in the collateral pool supporting the transactions and the amount of loans repurchased for breaches of R&W. Expected losses are also a function of the structure of the transaction, the voluntary prepayment rate (typically also referred to as conditional prepayment rate 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 the Company's direct vintage 2004 - 2008 second lien U.S. RMBS as of December 31, 2010, December 31, 2009 and December 31, 2008:

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

HELOC Key Variables	As of December 31, 2010	As of December 31, 2009	As of December 31, 2008

Plateau conditional default rate	10.0 - 19.4%	14.8 - 32.3%	19.0 - 21.0%
Final conditional default rate trended down to	0.5 - 2.2%	0.5 - 2.2%	1.0%
Expected period until final conditional default rate	24 months	21 months	15 months
Initial conditional prepayment rate	3.9 - 17.5%	4.8 - 14.9%	7.0 - 8.0%
Final conditional prepayment rate	10%	10.0%	7.0 - 8.0%
Loss severity	98%	95%	100%
Initial draw rate	0.0 - 0.5%	0.4 - 0.7%	1.0 - 2.0%

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Closed End Second Lien Key Variables	As of December 31, 2010	As of December 31, 2009	As of December 31, 2008

Plateau conditional default rate	7.3 - 27.1%	34.0 - 44.2%	34.0 - 36.0%
Final conditional default rate trended down to	2.9 - 8.1%	3.5 - 8.1%	3.4 - 3.6%
Expected period until final conditional default rate achieved	24 months	21 months	24 months
Initial conditional prepayment rate	1.3 - 9.7%	0.8 - 2.4%	7.0%
Final conditional prepayment rate	10%	10.0%	7.0%
Loss Severity	98%	95%	100%

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

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally "charged off" (treated as defaulted) by the securitization's servicer once the loan is 180 days past due. 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 representative transactions and then applying an average of the preceding 12 months' liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the first through fifth months is expressed as a conditional default rate. The first four months' conditional default rate is calculated by applying the liquidation rates to the current period past due balances (i.e., the 150-179 day balance is liquidated in the first projected month, the 120-149 day balance is liquidated in the second projected month, the 90-119 day balance is liquidated in the third projected month and the 60-89 day balance is liquidated in the fourth projected month). For the fifth month the conditional default rate is calculated using the average 30-59 day past due balances for the prior three months. The fifth month is then used as the basis for the plateau period that follows the embedded five months of losses.

As of December 31, 2010, in the base scenario, the conditional default rate (the "plateau conditional default rate") was held constant for one month. (At year-end 2009 the plateau default rate was held constant for four months.) Once the plateau period has ended, the conditional default rate is assumed to gradually trend down in uniform increments to its final long-term steady state conditional default rate. In the base scenario the time over which the conditional default rate trends down to its final conditional default rate is eighteen months (compared to twelve months at year-end 2009). Therefore, the total stress period for second lien transactions would be twenty-four months which is comprised of: five months of delinquent data, a one month plateau period and an eighteen month decrease to the steady state conditional default rate. This is three months longer than the 21 months used at year-end 2009. The long-term steady state conditional default rates are calculated as the constant conditional default rates that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally very low recovery. Based on current expectations of future performance, the Company reduced its loss recovery assumption to 2% from 5% (thus increasing its severity from 95% to 98%) in the third quarter of 2010.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

4. 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 (which is a function of the conditional default rate 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 conditional prepayment rate is assumed to continue until the end of the plateau before gradually increasing to the final conditional prepayment rate over the same period the conditional default rate decreases. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant. The final conditional prepayment rate is assumed to be 10% for both HELOC and closed end second lien transactions. This level is much higher than current rates, but lower than the historical average, which reflects the Company's continued uncertainty about performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the conditional prepayment rate at year-end 2009. To the extent that prepayments differ from projected levels it could materially change the Company's projected excess spread.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percent of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to the final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 0.5%.

In estimating expected losses, the Company modeled and probability weighted three possible conditional default rate curves applicable to the period preceding the return to the long-term steady state conditional default rate. 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 conditional default rate 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.

At year-end 2010, the Company's base case assumed a one month conditional default rate plateau and an 18 month ramp down. Increasing the conditional default rate plateau to 4 months and keeping the ramp down at 18 months would increase the expected loss by approximately $7.7 million for HELOC transactions and $18.3 million for closed end second lien transactions. On the other hand, keeping the conditional default rate plateau at one month but decreasing the length of the conditional default rate ramp down to the 12 month assumption used at year-end 2009 would decrease the expected loss by approximately $10.4 million for HELOC transactions and $4.2 million for closed end second lien transactions.

U.S. First Lien RMBS Loss Projections: 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

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

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

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 transactions, projected losses exceed those structural protections.

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent, in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). An increase in non-performing loans beyond that projected in the previous period 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 the various delinquency categories. The Company arrived at its liquidation rates based on data in loan performance and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The following table shows the Company's liquidation assumptions for various delinquency categories as of December 31, 2010 and 2009. The liquidation rate is a standard industry

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations to occur over two years.



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

While the Company uses liquidation rates as described above to project defaults of non-performing loans, it projects defaults on presently current loans by applying a conditional default rate trend. The start of that conditional default rate trend is based on the defaults the Company projects will emerge from currently nonperforming loans. The total amount of expected defaults from the nonperforming loans is translated into a constant conditional default rate (i.e., the conditional default rate plateau), which, if applied for each of the next 24 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The conditional default rate thus calculated individually on the collateral pool for each RMBS is then used as the starting point for the conditional default rate curve used to project defaults of the presently performing loans.

In the base case, each transaction's conditional default rate is projected to improve over 12 months to an intermediate conditional default rate (calculated as 15% of its conditional default rate plateau); that intermediate conditional default rate is held constant for 36 months and then trails off in steps to a final conditional default rate of 5% of the conditional default rate plateau. Under the Company's methodology, defaults projected to occur in the first 24 months represent defaults that can be attributed to loans that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected conditional default rate trend after the first 24 month period represent defaults attributable to borrowers that are currently performing.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historical high levels and the Company is assuming that these historical high levels will continue for another year. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in December 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 the Company's direct vintage 2004 - 2008 first lien U.S. RMBS as of December 31, 2010 and December 31, 2009. The Company was not projecting any losses for first lien RMBS deals as of December 31, 2008.

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

		As of December 31, 2010	As of December 31, 2009

Alt-A First Lien
	Plateau conditional default rate	2.6% - 16.7%	1.5% - 19.6%
	Intermediate conditional default rate	0.4% - 2.5%	0.2% - 2.9%
	Final conditional default rate	0.1% - 0.8%	0.1% - 1.0%
	Initial loss severity	60%	60%
	Initial conditional prepayment rate	0.0% - 36.5%	0.0% - 20.5%
	Final conditional prepayment rate	10%	10%
Alt-A option ARM
	Plateau conditional default rate	11.7 - 32.3%	14.4% - 21.9%
	Intermediate conditional default rate	1.8% - 4.8%	2.2% - 3.3%
	Final conditional default rate	0.6% - 1.6%	0.7% - 1.1%
	Initial loss severity	60%	60%
	Initial conditional prepayment rate	1.0% - 17.7%	0.3% - 1.4%
	Final conditional prepayment rate	10%	10%
Subprime
	Plateau conditional default rate	9.0% - 13.6%	7.1% - 12.1%
	Intermediate conditional default rate	1.3% - 2.0%	1.1% - 1.8%
	Final conditional default rate	0.4% - 0.7%	0.4% - 0.6%
	Initial loss severity	80%	70%
	Initial conditional prepayment rate	1.2% - 13.5%	0.5% - 12.0%
	Final conditional prepayment rate	10%	10%

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 conditional default rate 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 conditional prepayment rate follows a similar pattern to that of the conditional

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final conditional prepayment rate, which is assumed to be either 10% or 15% depending on the scenario run. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant.

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

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed conditional prepayment rates and the speed of recovery of loss severity rates. In a somewhat more stressful environment than that of the base case, where the conditional default rate recovery was more gradual and the final conditional prepayment rate was 15% rather than 10%, the Company's expected losses would increase by approximately $0.9 million for Alt-A first liens, $3.7 million for Option ARMs, $2.0 million for subprime and $0.1 million for prime transactions. In an even more stressful scenario where the conditional default rate plateau was extended 3 months (to be 27 months long) before the same more gradual conditional default rate 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 $4.5 million for Alt-A first liens, $14.6 million for Option ARMs, $9.6 million for subprime and $0.4 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 conditional default rate plateau was 3 months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, the Company's expected losses would decrease by approximately $3.3 million for Alt-A first liens, $10.3 million for Option ARMs, $2.4 million for subprime and $0.3 million for prime transactions.

Breaches of Representations and Warranties

The Company is pursuing reimbursements for breaches of R&W regarding loan characteristics. Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company's original expectations. The Company has employed several loan file diligence firms and law firms as well as devoted internal resources to review the mortgage files surrounding many of the defaulted loans. As of December 31, 2010, the Company had performed a detailed review of approximately 12,000 second lien and 3,400 first lien defaulted loan files, representing nearly $0.9 billion in second lien and $1.4 billion in first lien outstanding par of defaulted loans underlying insured transactions. The Company identified approximately 11,000 second lien transaction loan files and approximately 2,900 first lien transaction loan files that breached one or more R&W regarding the characteristics of the loans such as misrepresentation of income or employment of

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

the borrower, occupancy, 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. The Company generally obtains the loan files from the originators or servicers (including master servicers). In some cases the Company requests loan files via the trustee, which then requests the loan files from the originators and/or servicers. On second lien loans, the Company requests loan files for all charged-off loans. On first lien loans, the Company requests loan files for all severely (60+ days) delinquent loans and all liquidated loans. Recently, the Company started requesting loan files for all the loans (both performing and non-performing) in certain deals to limit the number of requests for additional loan files as the transactions season and loans charge-off, become 60+ days delinquent or are liquidated. (The Company takes no credit for R&W breaches on loans that are expected to continue to perform.) Following negotiations with the providers of the R&W, as of December 31, 2010, the Company had reached agreement for providers to repurchase $103 million of second lien and $67 million of first lien loans. The $103 million for second lien loans represents the calculated repurchase price for 1,006 loans and the $67 million for first lien loans represents the calculated repurchase price for 151 loans. The repurchase proceeds are paid to the RMBS transactions and distributed in accordance with the payment priorities set out in the transaction agreements, so the proceeds are not necessarily allocated to the Company on a dollar-for-dollar basis. Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company's exposure. These amounts reflect payments made pursuant to the negotiated transaction agreements and not payments made pursuant to legal settlements. See "Recovery Litigation" below for a description of the related legal proceedings the Company has commenced.

The Company has included in its net expected loss estimates as of December 31, 2010 an estimated benefit from repurchases of $254.5 million. The amount of benefit recorded as a reduction of expected losses was calculated by extrapolating each transaction's breach rate on defaulted loans to projected defaults. The Company did not incorporate any gain contingencies or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the credit worthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches with the provider of the R&W and the potential amount of time until the recovery is realized.

The calculation of expected recovery from breaches of R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing very limited recoveries. The Company did not include any recoveries related to breaches of R&W in amounts greater than the losses it expected to pay under any given cash flow scenario. 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

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

already defaulted and those assumed to default in the future. In all cases, recoveries were limited to amounts paid or expected to be paid by the Company.

The following table represents the Company's total estimated recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures. The Company had $254.5 million of estimated recoveries from ineligible loans as of December 31, 2010, of which $136.9 million is reported in salvage and subrogation recoverable, $114.4 million is netted in loss and LAE reserves and $3.2 million is netted in unearned premium reserve. The Company had $282.7 million of estimated recoveries from ineligible loans as of December 31, 2009, of which $113.0 million was reported in salvage and subrogation recoverable, $166.9 million is netted in loss and LAE reserves and $2.8 million is included within the Company's unearned premium reserve portion of its stand-ready obligation reported on the Company's consolidated balance sheet.

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

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

		(dollars in millions)
Prime first lien			1	$	28.6	$	—	$	0.6		$	—	$	0.6
Alt-A first lien			6		353.3		8.8		1.3			—		10.1
Alt-A option ARM			1		67.9		16.3		13.6			15.6		14.3
Subprime			—		—		—		—			—		—
Closed end second lien			2		156.5		64.2		2.8			—		67.0
HELOC			3		492.3		193.4		(2.9	)		28.0		162.5

	Total		13	$	1,098.6	$	282.7	$	15.4		$	43.6	$	254.5

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

		# of Insurance Policies as of December 31, 2009 with R&W Benefit Recorded		Outstanding Principal and Interest of Policies with R&W Benefit Recorded as of December 31, 2009		Future Net R&W Benefit at December 31, 2008		R&W Development and Accretion of Discount during Year		R&W Recovered During 2009(1)		Future Net R&W Benefit at December 31, 2009

		(dollars in millions)
Prime first lien			—	$	—	$	—	$	—	$	—	$	—
Alt-A first lien			6		312.8		—		8.8		—		8.8
Alt-A option ARM			1		81.3		—		16.3		—		16.3
Subprime			—		—		—		—		—		—
Closed end second lien			2		187.9		—		64.2		—		64.2
HELOC			3		606.3		32.7		185.9		25.2		193.4

	Total		12	$	1,188.3	$	32.7	$	275.2	$	25.2	$	282.7

(1): Includes gross amounts recovered of $63.5 million.

The following table provides a breakdown of the development and accretion amount in the rollforward of estimated recoveries associated with alleged breaches R&W:

		As of December 31, 2010

		(in millions)
Inclusion of new deals with breaches of R&W during period		$	0.6
Change in recovery assumptions as the result of additional file review and recovery success			18.3
Estimated increase in defaults that will result in additional breaches			(4.5	)
Accretion of discount on balance			1.0

	Total	$	15.4

The $15.4 million R&W development and accretion of discount during 2010 in the above table primarily resulted from an increase in loan file reviews, increased success rates in putting back loans, and increased projected defaults on loans with breaches of R&W. This development primarily can be broken down into changes in calculation inputs, changes in the timing and amounts of defaults and the inclusion of additional deals during the year for which the Company expects to obtain these benefits. The Company has reflected one additional transaction during 2010 which resulted in approximately $0.6 million of the development. The remainder of the development primarily relates to changes in assumptions and additional projected defaults. The accretion of discount was not a primary driver of the development. Changes in assumptions generally relate to an increase in loan file reviews and increased success rates in putting back loans. The Company assumes in the base case that recoveries on HELOC and closed end second lien loans will occur in two to four years from the balance sheet date depending on the scenarios and that recoveries on Alt-A, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions. The $275.2 million R&W development and accretion of discount during 2009 in the above table primarily resulted from an increase in loan file

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

reviews and extrapolation of expected recoveries. The Company assumes that recoveries on HELOC and CES loans will occur in two years from the balance sheet date and that recoveries on Alt-A, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions.

"XXX" Life Insurance Transactions

The Company has 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 the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers. In order for the Company to incur an ultimate net loss on these transactions, adverse experience on the underlying block of life insurance policies and/or credit losses in the investment portfolio would need to exceed the level of credit enhancement built into the transaction structures. In particular, such credit losses in the investment portfolio could be realized in the event that circumstances arise resulting in the early liquidation of assets at a time when their market value is less than their intrinsic value.

The Company's $428.2 million in net par of XXX life insurance transactions includes as of December 31, 2010, a total of $248.2 million rated BIG comprising Class A-2 Floating Rate Notes issued by Ballantyne Re p.l.c and Series A-1 Floating Rate Notes issued by Orkney Re II p.l.c ("Orkney Re II"). The Company has rated the Ballantyne Re and Orkney Re II notes BIG. The Ballantyne Re and Orkney Re II XXX transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the current investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at December 31, 2010, the Company's gross expected loss, prior to reinsurance or netting of unearned premium, for its two BIG XXX insurance transactions was $73.8 million and its net reserve was $15.5 million.

Public Finance Transactions

The Company has insured $66.0 billion of public finance transactions across a number of different sectors. Within that category, $884.3 million is rated BIG, and the company is projecting $47.3 million of expected losses across the portfolio.

The most significant projected estimated loss was $33.0 million on its $192.4 million net par outstanding on Jefferson County Alabama Sewer Authority exposure. This estimate is based primarily on the Company's view of how much debt the Authority should be able to support under certain probability-weighted scenarios.

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 December 31, 2010, its commercial real estate exposure of $194.9 million of net par, its trust preferred securities ("TruPS") collateralized debt obligations ("CDOs") and its U.S. health care exposure of $5.0 billion of net par.

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Recovery Litigation

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

In December 2008, AGUK sued J.P. Morgan Investment Management Inc. ("JPMIM"), the investment manager in the Orkney Re II transaction, in New York Supreme Court ("Court") alleging that JPMIM engaged in breaches of fiduciary duty, gross negligence and breaches of contract based upon its handling of the investments of Orkney Re II. In January 2010, the Court ruled against the Company on a motion to dismiss filed by JPMIM, dismissing AGUK's claims for breaches of fiduciary duty and gross negligence on the ground that such claims are preempted by the Martin Act, which is New York's blue sky law, such that only the New York Attorney General has the authority to sue JPMIM. AGUK appealed and, in November 2010, the Appellate Division (First Department) issued a ruling, ordering the Court's order to be modified to reinstate the AGUK's claims for breach of fiduciary duty and gross negligence and certain of its claims for breach of contract, in each case for claims accruing on or after June 26, 2007. In December 2010, JPMIM filed a motion for permission to appeal to the Court of Appeals on the Martin Act issue; that motion was granted in February 2011.

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Net Loss Summary

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

Loss and LAE Reserve, Net of Reinsurance

			As of December 31,

			2010			2009
			(in millions)
First lien:
	Prime first lien		$	0.6		$	—
	Alt-A first lien			27.4			19.8
	Alt-A option ARM			48.5			16.5
	Subprime			27.2			16.2

		Total first lien		103.7			52.5
Second lien:
	Closed end second lien			6.0			16.7
	HELOC			2.3			5.4

		Total second lien		8.3			22.1

		Total U.S. RMBS		112.0			74.6
Other structured finance				24.0			15.8
Public finance				44.4			50.1

	Total			180.4			140.5
Effect of consolidating financial guaranty VIEs				(17.4	)		—

	Total(1)		$	163.0		$	140.5

(1): The December 31, 2010 total consists of $231.1 million loss and LAE reserves net of $68.1 million of reinsurance recoverable on unpaid losses. The December 31, 2009 total consists of $191.2 million loss and LAE reserves net of $50.7 million of reinsurance recoverable on unpaid losses.

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

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

Summary of Salvage and Subrogation

				As of December 31,

				2010			2009
				(in millions)
U.S. RMBS:
	Second lien:
		Closed end second lien		$	19.1		$	0.1
		HELOC			171.1			168.4

			Total second lien		190.2			168.5

Total U.S. RMBS					190.2			168.5
Other structured finance					1.4			1.0
Public finance					1.3			0.4

			Total		192.9			169.9
Effect of consolidating financial guaranty VIEs					(8.9	)		—

			Total gross recoverable		184.0			169.9
Less: Ceded recoverable(1)					52.4			55.4

			Net recoverable	$	131.6		$	114.5

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

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Loss and LAE Reported
on the Consolidated Statements of Operations

				Year Ended December 31,

				2010			2009		2008
				(in millions)
Financial Guaranty:
U.S. RMBS:
	First lien:
		Prime first lien		$	0.5		$	—	$	—
		Alt-A first lien			7.0			13.2		5.1
		Alt-A option ARM			32.1			7.9		—
		Subprime			12.0			10.4		7.7

			Total first lien		51.6			31.5		12.8
	Second lien:
		Closed end second lien			4.0			38.5		45.8
		HELOC			43.7			70.1		72.2

			Total second lien		47.7			108.6		118.0

Total U.S. RMBS					99.3			140.1		130.8
Other structured finance					7.8			5.3		4.9
Public finance					9.5			47.6		13.8

Total financial guaranty					116.6			193.0		149.5
Other					0.1			—		—

	Subtotal				116.7			193.0		149.5
Effect of consolidating financial guaranty VIEs					(5.5	)		—		—

	Total loss and LAE			$	111.2		$	193.0	$	149.5

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

Net Losses Paid on Financial Guaranty Insurance Contracts

				Year Ended December 31

				2010			2009		2008
				(in millions)
U.S. RMBS:
	First lien:
		Alt-A first lien		$	(0.8	)	$	0.9	$	—
		Alt-A option ARM			0.3			—		—
		Subprime			0.9			1.1		1.5

			Total first lien		0.4			2.0		1.5
	Second lien:
		Closed end second lien			39.8			53.1		13.8
		HELOC			61.0			131.6		119.6

			Total second lien		100.8			184.7		133.4

Total U.S. RMBS					101.2			186.7		134.9
Other structured finance					2.5			2.6		(3.6	)
Public finance					28.8			15.9		12.4

	Total				132.5			205.2		143.7
Effect of consolidating financial guaranty VIEs					(13.5	)		—		—

	Total			$	119.0		$	205.2	$	143.7

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

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

Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2010

			BIG Categories

			BIG 1					BIG 2					BIG 3
			BIG 1					BIG 2					BIG 3						Total BIG, Net(1)		Effect of Consolidating VIEs
			Gross		Ceded			Gross		Ceded			Gross			Ceded			Total BIG, Net(1)		Effect of Consolidating VIEs			Total
			(dollars in millions)
Number of risks(2)				61		(24	)		44		(24	)		48			(10	)		153		—			153
Remaining weighted-average contract period (in years)				14.3		13.7			7.0		6.7			13.2			15.8			11.1		—			11.1
Outstanding exposure:
	Principal		$	1,478.9	$	(297.9	)	$	1,215.7	$	(222.3	)	$	2,151.8		$	(982.2	)	$	3,344.0	$	—		$	3,344.0
	Interest			1,063.8		(181.0	)		346.7		(62.6	)		525.6			(165.0	)		1,527.5		—			1,527.5

		Total	$	2,542.7	$	(478.9	)	$	1,562.4	$	(284.9	)	$	2,677.4		$	(1,147.2	)	$	4,871.5	$	—		$	4,871.5

Expected cash flows			$	6.6	$	(2.2	)	$	316.7	$	(28.4	)	$	450.0		$	3.1		$	745.8	$	(93.1	)	$	652.7
Less:
	Potential recoveries(3)			2.7		(0.2	)		64.2		(10.4	)		414.9			(103.3	)		367.9		(77.2	)		290.7
	Discount			0.9		0.2			114.4		3.4			89.8			111.0			319.7		(6.5	)		313.2

Present value of expected cash flows			$	3.0	$	(2.2	)	$	138.1	$	(21.4	)	$	(54.7	)	$	(4.6	)	$	58.2	$	(9.4	)	$	48.8

Unearned premium reserve			$	4.5	$	(1.0	)	$	11.3	$	(1.6	)	$	34.9		$	(14.5	)	$	33.6	$	(2.1	)	$	31.5
Reserves (salvage)(4)			$	2.8	$	(2.0	)	$	128.0	$	(21.3	)	$	(76.4	)	$	8.8		$	39.9	$	(8.5	)	$	31.4

Table of Contents

Assured Guaranty Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010, 2009 and 2008

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

A downgrade of AGC or AGUK may result in increased claims under financial guaranties issued by the Company. In particular, with respect to variable rate demand obligations for which a bank has agreed to provide a liquidity facility, a downgrade of the insurer may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a "bank bond rate" that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% — 3.00%, often with a floor of 7%, and capped at the maximum legal limit). In the event that the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right additionally to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to the insurer under its financial guaranty. As of the date of this filing, the Company has insured approximately $0.2 billion of par of variable rate demand obligations issued by municipal obligors rated BBB- or lower pursuant to the Company's internal rating. For a number of such obligations, a downgrade of the insurer below A+, in the case of S&P, or below A1, in the case of Moody's Investors Service, Inc. ("Moody's"), triggers the ability of the bank to notify bondholders of the termination of the liquidity facility and to demand accelerated repayment of bond principal over a period of five to ten years. The specific terms relating to the rating levels that trigger the bank's termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

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

The Company reassessed the recoverability of goodwill in third quarter 2009 subsequent to the AGMH Acquisition by its parent. As a result of the continued credit crisis, which has adversely affected the fair value of the Company's in-force policies, management determined that the full carrying value of $85.4 million of goodwill on its books prior to the AGMH Acquisition should be written off in third quarter 2009. This charge does not have any adverse effect on the Company's debt agreements or its overall compliance with the covenants of its debt agreements.

The Company carries a portion of its assets and liabilities at fair value. Substantially all of such assets and liabilities are carried at fair value on a recurring basis.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). 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).

Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices, or with the assistance of an independent third-party using a discounted cash flow approach and the third party's proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company's credit exposure such as collateral rights.

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company's creditworthiness, constraints on liquidity and unobservable parameters. Valuation adjustments are applied consistently over time. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company continues to refine its methodologies. During 2010, no changes were made to the Company's valuation models that had or are expected to have, a material impact on the Company's consolidated balance sheets or statements of operations and comprehensive income.

The Company's methods for calculating fair value may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

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 Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows, with level 1 being the highest and level 3 the lowest. An asset or liability's categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

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.

Transfers between levels 1, 2 and 3 in the investment portfolio are recognized at the beginning of the period when the transfer occurs. The Company reviews quarterly the classification between levels 1, 2 and 3 to determine, based on the definitions provided, whether a transfer is necessary.

The following is a description of the valuation methodologies used by the Company to measure instruments at fair value.

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 security prices from pricing services, index providers or broker-dealers to be Level 2 in the fair value hierarchy. Prices determined based upon model processes where at least one significant model assumption or input is unobservable, are considered to be Level 3 in the fair value hierarchy. The Company used model processes to price 7 fixed maturity securities as of December 31, 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 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 AGC CCS securities are recorded 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 fair value of the Company's financial guaranty contracts accounted for as insurance was based on management's estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company's in-force book of financial guaranty insurance business. This amount was based on the pricing assumptions management has observed in recent portfolio transfers that have occurred in the financial guaranty market and included adjustments to the carrying value of unearned premium reserve for stressed losses ceding commissions and return on capital. The significant inputs were not readily observable.

The fair value of the Company's note payable to affiliate is determined by calculating the effect of changes in U.S. Treasury yield at the end of each reporting period as well as the change in its own credit spread.

The Company's credit derivatives consist of insured CDS contracts requiring fair value accounting through the statement of operations. The Company does not typically terminate its credit derivative contracts, and there are no quoted prices for its instruments or for similar instruments. 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. 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 discussed above.

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 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. 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. The expected remaining contractual cash flows are the most readily observable inputs since they are based on the CDS contractual terms. These cash flows include net premiums and claims to be received or paid under the terms of the contract.

Market conditions at December 31, 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, when available, 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 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 market during 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 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. Gross spread was an observable input that the Company historically obtained for deals it had closed or bid on in the market place prior to the credit crisis. The Company uses these historical gross spreads as a reference point to estimate fair value in current reporting periods.

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 resemble 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 who 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. The assumptions used in these examples are hypothetical amounts. 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 rates 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 0.8% to 4.1% at December 31, 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 assuming all other assumptions remain constant. 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 on protection sold 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 gross 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 the premium the Company receives when a financial guaranty contract accounted for as a credit derivative is close 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 December 31, 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 VIEs' assets and liabilities upon consolidation of financial guaranty VIEs on the date the VIE is first consolidated under the new VIE consolidation accounting standard described in Note 8.

The VIEs that are consolidated by the Company issued securities collateralized by RMBS, Alt-A second lien RMBS and other loans and 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 (i.e. unobservable), management 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; market values of the assets that collateralize the securities; estimated default rates (determined on the basis of an analysis of collateral attributes, recoveries from excess spread or salvage, 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, for those liabilities insured by the Company, the benefit from the Company's insurance policy guaranteeing the timely payment of principal and interest for the VIE tranches insured by the Company, taking into account the Company's own credit rating.

The payment of financial guaranty VIE liabilities for both recourse and non-recourse obligations is supported by cash flows from financial guaranty VIE assets. To the extent that VIE assets related to recourse liabilities are insufficient to make principal and interest payments on the corresponding debt obligations, AGC would be responsible, under the financial guaranty insurance contract covering such VIE obligations, to pay the shortfall between the assets and recourse liabilities. AGC is not responsible for any shortfall between VIE assets and non-recourse liabilities. AGC's creditors do not have any rights with regard to the assets of the VIEs.

Changes in fair value of the financial guaranty VIEs' assets and liabilities are included in net change in financial guaranty variable interest entities within the consolidated statement 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 VIEs' assets that were over 90 days or more past due was approximately $429.4 million. The change in the instrument-specific credit risk of the VIEs' assets for the year ended December 31, 2010 was a loss of approximately $347.6 million. The difference between the aggregate unpaid principal and aggregate fair value of the VIEs' liabilities was approximately $722.9 million at December 31, 2010.

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

The table below presents a rollforward of the Company's financial instruments whose fair value included significant unobservable inputs (Level 3) during the years ended December 31, 2010 and 2009.

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

Credit derivatives are recorded at fair value. Changes in fair value are recorded in "net change in fair value of credit derivatives" on the consolidated statement of operations. 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. 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. 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. See Note 6 for a discussion on the fair value methodology for credit derivatives.

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

The Company has a portfolio of financial guaranty contracts accounted for as derivatives (primarily CDS) that meet the definition of a derivative in accordance with GAAP. Management considers these agreements to be a normal part of its financial guaranty business. A loss payment is made only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. A credit event may be a non-payment event such as a failure to pay, bankruptcy or restructuring, as negotiated by the parties to the credit derivative transactions. Credit derivative transactions are governed by ISDA documentation and operate differently from financial guaranty contracts accounted for as insurance. 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 accounted for as insurance. In addition, while the Company's exposure under credit derivatives, like the Company's exposure under financial guaranty contracts accounted for as insurance, 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.

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

The estimated remaining weighted average life of credit derivatives was 6.4 years at December 31, 2010 and 8.0 years at December 31, 2009. The components of the Company's credit derivative net par outstanding as of December 31, 2010 and December 31, 2009 are:

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

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

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 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 $2.0 billion of exposure to three 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 $3.2 billion of exposure in "Other" CDS contracts is comprised of numerous deals typically structured with significant underlying credit enhancement and spread across various asset classes, such as commercial receivables, international RMBS securities, infrastructure, regulated utilities and consumer receivables.

The following table summarizes net par outstanding by rating of the Company's direct credit derivatives as of December 31, 2010 and December 31, 2009.

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

The following tables present additional details about the Company's U.S. RMBS CDS by vintage:

The following table presents additional details about the Company's CMBS transactions by vintage:

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

The following table disaggregates the components of net change in fair value of credit derivatives

Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, credit ratings of the referenced entities, realized gains and other settlements, the issuing company's own credit rating and credit spreads, and other market factors. Except for estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives is expected to reduce to zero as the exposure approaches its maturity date. During 2010 and 2009, the Company made $52.0 million and $3.6 million in claim payments on credit derivatives, respectively. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

In 2010, U.S. RMBS unrealized fair value losses were generated primarily in the Alt-A option ARM and Alt-A first lien sector due to wider implied net spreads. The wider implied net spreads were a result of internal ratings downgrades on several of these Alt-A option ARM and Alt-A first lien policies. The unrealized fair value gain within the TruPS CDO and other asset classes resulted from tighter implied spreads. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC increased, which management refers to as the CDS spread on AGC, the implied spreads that the Company would expect to receive on these transactions decreased. During 2010, AGC's spreads widened. However, gains due to the widening of the Company's own CDS spread were offset by declines in fair value resulting from price changes and the internal downgrades of several U.S. RMBS policies referenced above.

In 2009, AGC's credit spreads narrowed, however they remained relatively wide compared to pre-2007 levels. Offsetting the benefit attributable to AGC's wide 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

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

spreads in the fixed income security market were primarily due to continuing market concerns over the most recent vintages of Subprime RMBS and trust-preferred securities.

The 2008 gain included an amount of $3.2 billion associated with the change in AGC's credit spread, which widened substantially from 180 basis points at December 31, 2007 to 1,775 basis points at December 31, 2008. Management believed that the widening of AGC's credit spread was 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 increased business volume. Offsetting the gain attributable to the significant increase in 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, rather than from delinquencies or defaults on securities guaranteed by the Company. The higher credit spreads in the fixed income security market were due to the lack of liquidity in the high yield CDO and CLO markets as well as continuing market concerns over the most recent vintages of subprime RMBS and CMBS.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company's own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of the CDS prices traded on AGC 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.

7. Financial Guaranty Contracts Accounted for as Credit Derivatives (Continued)

						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		$	484.3	$	—	$	484.3	$	—
		Obligations of state and political subdivisions			1,437.5		—		1,437.5		—
		Corporate securities			224.8		—		224.8		—
		Mortgage-backed securities:
			RMBS		113.5		—		77.7		35.8
			CMBS		80.3		—		80.3		—
		Asset-backed securities			59.3		—		47.6		11.7
		Foreign government securities			89.2		—		89.2		—

			Total fixed maturity securities		2,488.9		—		2,441.4		47.5
	Short-term investments				235.7		13.6		222.1		—
	Credit derivative assets				399.5		—		—		399.5
	Financial guaranty VIEs' assets, at fair value				966.0		—		—		966.0
	Other assets(1)				21.4		10.3		11.1		—

		Total assets carried at fair value		$	4,111.5	$	23.9	$	2,674.6	$	1,413

Liabilities:
	Credit derivative liabilities			$	1,360.4	$	—	$	—	$	1,360.4
	Financial guaranty VIEs' liabilities with recourse, at fair value				523.5		—		—		523.5
	Financial guaranty VIEs' liabilities without recourse, at fair value				495.7		—		—		495.7

		Total liabilities carried at fair value		$	2,379.6	$	—	$	—	$	2,379.6

						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		$	451.5	$	—	$	451.5	$	—
		Obligations of state and political subdivisions			1,059.1		—		1,059.1		—
		Corporate securities			183.3		—		183.3		—
		Mortgage-backed securities:
			RMBS		190.6		—		190.6		—
			CMBS		64.3		—		64.3		—
		Asset-backed securities			16.7		—		16.7		—
		Foreign government securities			79.7		—		79.7		—

			Total fixed maturity securities		2,045.2		—		2,045.2		—
	Short-term investments				802.6		43.2		759.4		—
	Credit derivative assets				252.0		—		—		252.0
	Other assets(1)				10.3		6.3		4.0		—

		Total assets carried at fair value		$	3,110.1	$	49.5	$	2,808.6	$	252.0

Liabilities:
	Credit derivative liabilities			$	1,076.7	$	—	$	—	$	1,076.7

		Total liabilities carried at fair value		$	1,076.7	$	—	$	—	$	1,076.7

										Year Ended December 31, 2010

										Total Pre-tax Realized/ Unrealized Gains/(Losses)(1) Recorded in:																Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at December 31, 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			Consolidations, Deconsolidations, net			Transfers in and/or out of Level 3		Fair Value at December 31, 2010
	(in millions)
Investment portfolio	$	—		$	—		$	—		$	1.7	(2)	$	3.2	$	14.2		$	—		$	28.4	$	47.5		$	3.2
Financial guaranty VIEs' assets		—			348.3			348.3			70.1	(3)		—		(19.9	)		567.5			—		966.0			73.6
Credit derivative asset (liability), net(4)		(824.7	)		—			(824.7	)		(77.5	)(5)		—		(58.7	)		—			—		(960.9	)		(124.8	)
Financial guaranty VIEs' liabilities with recourse		—			(390.3	)		(390.3	)		(59.7	)(3)		—		32.9			(106.4	)		—		(523.5	)		(0.3	)
Financial guaranty VIEs' liabilities without recourse		—			(18.1	)		(18.1	)		(2.9	)(3)		—		7.7			(482.4	)		—		(495.7	)		(8.0	)

				Year Ended December 31, 2009

																	Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at December 31, 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 December 31, 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 December 31, 2009
	(in millions)
Credit derivative asset (liability), net(4)	$	(341.5	)	$	(396.1	)(5)	$	—	$	(87.1	)	$	—	$	(824.7	)	$	(490.4	)

		As of December 31, 2010				As of December 31, 2009

		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(in millions)
Assets:
	Fixed maturity securities	$	2,488.9	$	2,488.9	$	2,045.2	$	2,045.2
	Short-term investments		235.7		235.7		802.6		802.6
	Other invested assets		12.5		12.5		—		—
	Credit derivative assets		399.5		399.5		252.0		252.0
	Financial guaranty VIEs' assets, at fair value		966.0		966.0		—		—
	Other assets		21.4		21.4		10.3		10.3
Liabilities:
	Financial guaranty insurance contracts(1)		765.6		979.2		801.3		1,061.3
	Note payable to affiliate		300.0		300.9		300.0		300.0
	Credit derivative liabilities		1,360.4		1,360.4		1,076.7		1,076.7
	Financial guaranty VIEs' liabilities with recourse, at fair value		523.5		523.5		—		—
	Financial guaranty VIEs' liabilities without recourse, at fair value		495.7		495.7		—		—

	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

	As of December 31,

	2010			2009
Based on actual collateral specific spreads		10	%		9	%
Based on market indices		84	%		81	%
Provided by the CDS counterparty		6	%		10	%

Total		100	%		100	%

			As of December 31, 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		36.2	%		32.9	%	$	16,648	AAA		35.4	%		30.2	%	$	17,312	AAA
		Synthetic investment grade pooled corporate(3)		30.0			30.1			702	AAA		30.0			29.4			1,647	AAA
		TruPS CDOs		47.0			31.5			4,360	BB+		46.5			36.9			4,566	BB+
		Market value CDOs of corporate obligations		44.9			39.6			2,729	AAA		38.8			39.0			3,002	AAA

	Total pooled corporate obligations			38.9			33.3			24,439	AA+		37.4			32.3			26,527	AA+
	U.S. RMBS:
		Alt-A option ARMs and Alt-A first lien		19.7			17.0			3,656	B+		20.3			22.0			4,320	BB
		Subprime first lien		27.9			50.4			3,389	A+		27.6			52.4			3,782	A+
		Prime first lien		10.9			10.3			390	B		10.9			11.1			467	BB
		Closed end second lien and HELOCs		—			18.7			10	AA-		—			19.2			13	AA

	Total U.S. RMBS			23.1			32.4			7,445	BBB-		22.9			34.6			8,582	BBB
	CMBS			29.8			31.3			5,461	AAA		28.5			30.9			5,844	AAA
	Other			—			—			5,222	AA-		—			—			7,253	AA

Total Financial Guaranty Direct										42,567	AA								48,206	AA
Financial Guaranty Reinsurance										2	A								2	A

Total									$	42,569	AA							$	48,208	AA

		December 31, 2010					December 31, 2009

Ratings(1)		Net Par Outstanding		% of Total			Net Par Outstanding		% of Total
		(dollars in millions)
Super Senior		$	9,325		21.9	%	$	1,587		3.3	%
AAA			17,799		41.8			28,728		59.6
AA			3,232		7.6			3,857		8.0
A			2,998		7.0			3,354		7.0
BBB			3,321		7.8			5,490		11.4
BIG			5,892		13.9			5,190		10.7

	Total direct credit derivative net par outstanding	$	42,567		100.0	%	$	48,206		100.0	%

	December 31, 2010

Vintage	Original Subordination(1)			Current Subordination(1)			Net Par Outstanding (in millions)		Weighted Average Credit Rating(2)	Net Change in Unrealized Gain (Loss) (in millions)
2004 and Prior		6.2	%		19.9	%	$	121	A	$	(0.6	)
2005		27.2			55.6			2,556	AA-		0.3
2006		29.0			37.5			1,116	BBB+		(11.9	)
2007		18.7			14.7			3,652	B		(228.2	)
2008		—			—			—	—		—
2009		—			—			—	—		—
2010		—			—			—	—		—

Total		23.1	%		32.4	%	$	7,445	BBB-	$	(240.4	)

	As of December 31, 2010

Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)			Estimated Change in Gain/(Loss)(Pre-Tax)
	(in millions)
100% widening in spreads	$	(2,175.9	)	$	(1,215.0	)
50% widening in spreads		(1,570.3	)		(609.4	)
25% widening in spreads		(1,265.6	)		(304.7	)
10% widening in spreads		(1,082.8	)		(121.9	)
Base Scenario		(960.9	)		—
10% narrowing in spreads		(862.4	)		98.5
25% narrowing in spreads		(714.7	)		246.2
50% narrowing in spreads		(471.8	)		489.1

		As of December 31, 2010

		Assets		Liabilities
		(in millions)
Alt-A second liens		$	661.2	$	714.4
Life insurance			304.8		304.8

	Total	$	966.0	$	1,019.2

		Year Ended December 31, 2010

		(in millions)
Interest income		$	19.9
Interest expense			(9.1	)
Net realized and unrealized gains (losses) on assets			56.9
Net realized and unrealized gains (losses) on liabilities with recourse			(52.3	)
Net realized and unrealized gains (losses) on liabilities without recourse			3.4
Other expenses			(7.6	)

	Net change in financial guaranty variable interest entities	$	11.2

		Year Ended December 31, 2010

		(in millions)
Net earned premiums		$	(1.4	)
Net change in financial guaranty VIEs			11.2
Loss and LAE			5.5

	Total pre-tax effect on net income		15.3
Less: tax provision (benefit)			5.4

	Total effect on net income	$	9.9

	Total effect on shareholder's equity attributable to AGC	$	(30.0	)

			As of December 31, 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			Weighted Average Credit Quality(2)
						(dollars in millions)
Fixed maturity securities
	U.S. government and agencies			17	%	$	465.6	$	19.0	$	(0.3	)	$	484.3	$	—		AAA
	Obligations of state and political subdivisions			54			1,452.8		24.2		(39.5	)		1,437.5		(0.5	)	AA
	Corporate securities			8			217.0		8.0		(0.2	)		224.8		—		A+
	Mortgage-backed securities(3):
		RMBS		4			115.0		5.6		(7.1	)		113.5		3.9		A
		CMBS		3			76.0		4.4		(0.1	)		80.3		—		AA+
	Asset-backed securities			2			57.0		2.3		—			59.3		—		A+
	Foreign government securities			3			84.4		4.8		—			89.2		—		AA+

		Total fixed maturity securities		91			2,467.8		68.3		(47.2	)		2,488.9		3.4		AA
Short-term investments				9			235.7		—		—			235.7		—		AAA

		Total investment portfolio		100	%	$	2,703.5	$	68.3	$	(47.2	)	$	2,724.6	$	3.4		AA

		As of December 31, 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		$	11.6	$	(0.3	)	$	—	$	—		$	11.6	$	(0.3	)
Obligations of state and political subdivisions			862.5		(36.8	)		21.4		(2.7	)		883.9		(39.5	)
Corporate securities			7.7		(0.2	)		—		—			7.7		(0.2	)
Mortgage-backed securities:
	RMBS		8.2		(3.9	)		17.1		(3.2	)		25.3		(7.1	)
	CMBS		3.5		(0.1	)		—		—			3.5		(0.1	)
Asset-backed securities			—		—			—		—			—		—
Foreign government securities			—		—			—		—			—		—

	Total	$	893.5	$	(41.3	)	$	38.5	$	(5.9	)	$	932.0	$	(47.2	)

	Number of securities				174					7					181

	Number of securities with OTTI				2					—					2

		As of December 31, 2010

		Amortized Cost		Estimated Fair Value
		(in millions)
Due within one year		$	7.2	$	7.3
Due after one year through five years			701.9		724.5
Due after five years through ten years			366.2		383.8
Due after ten years			1,201.5		1,179.5
Mortgage-backed securities:
	RMBS		115.0		113.5
	CMBS		76.0		80.3

Total		$	2,467.8	$	2,488.9

	2010		2009		2008

	(in millions)
Balance as of January 1,	$	10.6	$	4.7	$	2.5
Increase in unrecognized tax benefits as a result of position taken during the current period		2.1		5.9		2.2

Balance as of December 31,	$	12.7	$	10.6	$	4.7

			Ratings at April 8, 2011		Par Outstanding as of December 31, 2010

Reinsurer			Moody's Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(3)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
			(dollars in millions)
Affiliated Companies(1)					$	42,989	$	431	$	—
Non-Affiliated Companies:
	RAM Reinsurance Co. Ltd		WR(2)	WR(2)		2,904		—		—
	Radian Asset Assurance Inc.		Ba1	BB-		183		1		—
	Ambac Assurance Corporation		WR	WR		109		2,204		1,899
	MBIA Insurance Corporation		B3	B		108		1,848		6,447
	ACA Financial Guaranty Corp		NR	WR		35		1		2
	CIFG Assurance North America Inc.		WR	WR		—		109		5,545
	Financial Guaranty Insurance Co.		WR	WR		—		1,583		361
	Syncora Guarantee Inc.		Ca	WR		—		861		19
	Multiple owner					—		894		—
	Other		Various	Various		1		—		—

Non-Affiliated Companies						3,340		7,501		14,273

		Total			$	46,329	$	7,932	$	14,273

		Credit Rating

Reinsurer		Super Senior		AAA		AA		A		BBB		BIG		Total
		(in millions)
Affiliated Companies		$	2,791	$	5,761	$	6,191	$	18,349	$	6,743	$	3,154	$	42,989
RAM Reinsurance Co. Ltd			244		1,466		137		519		346		192		2,904
Radian Asset Assurance Inc.			—		—		—		142		41		—		183
Ambac Assurance Corporation			—		—		—		109		—		—		109
MBIA Insurance Corporation			—		—		108		—		—		—		108
ACA Financial Guaranty Corp			—		—		—		—		35		—		35
Other			—		—		—		1		—		—		1

	Total	$	3,035	$	7,227	$	6,436	$	19,120	$	7,165	$	3,346	$	46,329

	As of December 31, 2010

	Assumed Premium Receivable, net of Commissions		Assumed Expected Loss and LAE Payable			Ceded Expected Loss and LAE Recoverable
	(in millions)
Affiliated Companies	$	—	$	—		$	34.3
RAM Reinsurance Co. Ltd		—		—			(6.5	)
MBIA Insurance Corporation		0.5		(12.8	)		—
CIFG Assurance North America Inc		7.0		—			—
Ambac Assurance Corporation		8.4		(10.2	)		—
Financial Guaranty Insurance Company		—		(33.5	)		—
Syncora Guarantee Inc		—		(0.3	)		—

Total	$	15.9	$	(56.8	)	$	27.8

	Year Ended December 31, 2010

	Financial Guaranty Direct			Financial Guaranty Reinsurance			Other			Underwriting Gain (Loss)			Consolidation of VIEs			Total
	(in millions)
Net earned premiums	$	86.4		$	21.6		$	0.1		$	108.1		$	(1.4	)	$	106.7
Credit derivative revenues(1)		86.4			0.2			—			86.6			—			86.6
Other income		(1.0	)		—			—			(1.0	)		—			(1.0	)
Loss and loss adjustment (expenses) recoveries		(102.7	)		(13.9	)		(0.1	)		(116.7	)		5.5			(111.2	)
Losses incurred on credit derivatives		(143.6	)		(1.1	)		—			(144.7	)		—			(144.7	)
Amortization of deferred acquisition costs		(8.7	)		(7.5	)		—			(16.2	)		—			(16.2	)
Other operating expenses		(70.6	)		(4.2	)		(0.2	)		(75.0	)		—			(75.0	)

Underwriting gain (loss)	$	(153.8	)	$	(4.9	)	$	(0.2	)	$	(158.9	)

ASSURED GUARANTY LTD - FORM 8-K - EX-99.1 - April 8, 2011

Attached files