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

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Exhibit 99.1

Assured Guaranty Municipal Corp and Subsidiaries
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
December 31, 2010

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ASSURED GUARANTY MUNICIPAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page

Reports of Independent Registered Public Accounting Firm		1-2
Consolidated Balance Sheets as of December 31, 2010 and 2009		3
Consolidated Statements of Operations for the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009		4
Consolidated Statements of Comprehensive Income for the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009		5
Consolidated Statements of Shareholder's Equity for the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009		6-7
Consolidated Statements of Cash Flows for the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009		8
Notes to Consolidated Financial Statements		9-120

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of Assured Guaranty Municipal 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 Municipal Corp. and its subsidiaries (the "Company") at December 31, 2010 and December 31, 2009 and the results of their operations and their cash flows for the year ended December 31, 2010 and for the six-month period from July 1, 2009 to December 31, 2009 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 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.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP New York, New York

April 22, 2011

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Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying consolidated statements of operations, of comprehensive income, of shareholder's equity, and of cash flows of Assured Guaranty Municipal Corp. and its subsidiaries (the "Company") present fairly, in all material respects, the results of their operations and their cash flows for the six-month period from January 1, 2009 to June 30, 2009 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 audit. We conducted our audit 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 audit 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 financial guaranty insurance contracts effective January 1, 2009.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP New York, New York

April 22, 2011

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Assured Guaranty Municipal Corp.

Consolidated Balance Sheets

(dollars in thousands except per share and share amounts)

			As of December 31,

			2010		2009
Assets
General investment portfolio:
	Fixed maturity securities, available-for-sale, at fair value (amortized cost of $4,658,183 and $5,069,061)		$	4,678,699	$	5,183,608
	Short-term investments, at fair value			588,706		542,039
	Other invested assets			133,722		156,110

		Total general investment portfolio		5,401,127		5,881,757
Note receivable from affiliate				300,000		300,000
Cash				43,650		23,616
Premiums receivable				729,151		787,425
Ceded unearned premium reserve				1,494,432		1,544,996
Reinsurance recoverable on unpaid losses				24,614		13,745
Salvage and subrogation recoverable				846,104		248,130
Credit derivative assets				181,826		226,958
Deferred tax asset, net				956,437		972,409
Financial guaranty variable interest entities' assets, at fair value				3,368,411		762,303
Other assets				107,506		137,173

	Total assets		$	13,453,258	$	10,898,512

Liabilities and shareholder's equity
Unearned premium reserve			$	5,321,252	$	6,468,314
Loss and loss adjustment expense reserve				243,044		55,285
Reinsurance balances payable, net				410,161		266,848
Notes payable				127,021		149,051
Credit derivative liabilities				592,845		625,765
Current income taxes payable				183,649		245,317
Financial guaranty variable interest entities' liabilities with recourse, at fair value				2,403,510		762,652
Financial guaranty variable interest entities' liabilities without recourse, at fair value				1,518,422		—
Other liabilities				271,054		251,145

	Total liabilities			11,070,958		8,824,377

Commitments and contingencies
Preferred stock (5,000.1 shares authorized; 0 shares issued and outstanding; par value of $1,000 per share)				—		—
Common stock (330 and 330 authorized; issued and outstanding; par value of $45,455 and $45,455)				15,000		15,000
Additional paid-in capital				1,191,785		1,241,785
Retained earnings				1,162,345		743,378
Accumulated other comprehensive income (loss), net of deferred tax (benefit) provision of $7,092 and $39,970				13,170		74,321

	Total shareholder's equity attributable to Assured Guaranty Municipal Corp.			2,382,300		2,074,484

	Noncontrolling interest.			—		(349	)

	Total shareholder's equity			2,382,300		2,074,135

	Total liabilities and shareholder's equity		$	13,453,258	$	10,898,512

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

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Assured Guaranty Municipal Corp.

Consolidated Statements of Operations

(in thousands)

				Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

				2010			2009			2009
Revenues
	Net earned premiums			$	907,835		$	575,426		$	242,210
	Net investment income				196,000			91,990			122,569
	Net realized investment gains (losses) from financial guaranty investment portfolio:
		Other-than-temporary impairment losses			(42,234	)		(752	)		(3,214	)
		Less: portion of other-than-temporary impairment loss recognized in other comprehensive income			(16,630	)		—			—
		Other net realized investment gains (losses)			13,610			2,081			(10,164	)

			Net realized investment gains (losses)		(11,994	)		1,329			(13,378	)
	Net change in fair value of credit derivatives:
		Realized gains and other settlements			61,792			63,468			59,963
		Net unrealized gains (losses)			(10,705	)		223,367			652,339

			Net change in fair value of credit derivatives		51,087			286,835			712,302
	Net interest income from financial products segment				—			—			21,718
	Net realized gain (loss) from financial products segment				—			—			(120,939	)
	Net realized and unrealized gain (loss) on derivative instruments				—			—			(83,067	)
	Net unrealized gain (loss) on financial instruments at fair value				—			—			(190,305	)
	Fair value gain (loss) on committed capital securities				2,060			(75,865	)		(18,585	)
	Net change in financial guaranty variable interest entities				(194,299	)		(1,156	)		—
	Other income				58,495			35,248			66,376

		Total revenues			1,009,184			913,807			738,901

Expenses
	Loss and loss adjustment expenses				191,511			51,763			230,368
	Amortization of deferred acquisition costs				(8,654	)		(478	)		16,817
	Interest expense				6,700			4,390			5,319
	Gain on bargain purchase				—			(232,554	)		—
	Foreign exchange (gains) losses from financial products segment				—			—			(2,781	)
	Interest expense from financial products segment				—			—			56,832
	Other operating expenses				82,782			107,377			59,783

		Total expenses			272,339			(69,502	)		366,338

Income (loss) before income taxes					736,845			983,309			372,563
Provision (benefit) for income taxes:
	Current				(24,003	)		259,848			7,749
	Deferred				175,240			(18,761	)		262,137

		Total provision (benefit) for income taxes			151,237			241,087			269,886

Net income (loss)					585,608			742,222			102,677
Less: Noncontrolling interest					—			(1,156	)		(457,303	)

Net income (loss) attributable to Assured Guaranty Municipal Corp.				$	585,608		$	743,378		$	559,980

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

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Assured Guaranty Municipal Corp.

Consolidated Statements of Comprehensive Income

(in thousands)

	Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

	2010			2009			2009
	2010			2009			2009
Net income (loss)	$	585,608		$	742,222		$	102,677
Unrealized holding gains (losses) arising during the period, net of tax provision (benefit) of $(36,828), $40,196 and $(9,008)		(68,487	)		74,740			(22,912	)
Less: reclassification adjustment for gains (losses) included in net income, net of tax provision (benefit) of $(3,950), $226 and $(69,992)		(7,336	)		419			(129,985	)

Change in net unrealized gains on investments		(61,151	)		(74,321	)		107,073
Change in cumulative translation adjustment		—			29			—

Other comprehensive income (loss)		(61,151	)		74,350			107,073

Comprehensive income (loss)		524,457			816,572			209,750
Less: Comprehensive income attributable to noncontrolling interest		—			(1,127	)		(463,487	)

Comprehensive Income (loss) of Assured Guaranty Municipal Corp.	$	524,457		$	817,699		$	673,237

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

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Assured Guaranty Municipal Corp.
Consolidated Statements of Shareholder's Equity
(dollars in thousands, except share data)

													Total Shareholder's Equity attributable to Assured Guaranty Municipal Corp.

	Common Stock									Accumulated Other Comprehensive Income (Loss)
	Common Stock				Additional Paid-In Capital		Retained Earnings									Noncontrolling Interest			Total Shareholder's Equity
	Shares		Amount		Additional Paid-In Capital		Retained Earnings									Noncontrolling Interest			Total Shareholder's Equity
Balance, December 31, 2008		330	$	15,000	$	1,410,202	$	901,373		$	(75,585	)	$	2,250,990		$	1,111,240		$	3,362,230
Cumulative effect of change in accounting principle, net of deferred income tax provision (benefit) of $(34,016) See Note 5		—		—		—		(63,172	)		—			(63,172	)		—			(63,172	)

Balance at beginning of the year, adjusted		330		15,000		1,410,202		838,201			(75,585	)		2,187,818			1,111,240			3,299,058
Net income (loss) for the six months		—		—		—		559,980			—			559,980			(457,303	)		102,677
Other comprehensive income (loss)		—		—		—		—			113,257			113,257			(6,184	)		107,073
Dividends declared on common stock		—		—		—		(10,000	)		—			(10,000	)		—			(10,000	)
Other		—		—		—		—			—			—			82			82

Balance, June 30, 2009		330	$	15,000	$	1,410,202	$	1,388,181		$	37,672		$	2,851,055		$	647,835		$	3,498,890

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

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Assured Guaranty Municipal Corp.

Consolidated Statements of Shareholder's Equity (Continued)

(dollars in thousands, except share data)

															Total Shareholder's Equity attributable to Assured Guaranty Municipal Corp.

		Common Stock										Accumulated Other Comprehensive Income
		Common Stock				Additional Paid-In Capital			Retained Earnings									Noncontrolling Interest			Total Shareholder's Equity
		Shares		Amount		Additional Paid-In Capital			Retained Earnings									Noncontrolling Interest			Total Shareholder's Equity
Balance, June 30, 2009			330	$	15,000	$	1,410,202		$	1,388,181		$	37,672		$	2,851,055		$	647,835		$	3,498,890
Acquisition accounting adjustments							(143,417	)		(1,388,181	)		(37,672	)		(1,569,270	)		(646,975	)		(2,216,245	)

Balance, July 1, 2009			330		15,000		1,266,785			—			—			1,281,785			860			1,282,645
Net income (loss) for the six months			—		—		—			743,378			—			743,378			(1,156	)		742,222
Change in unrealized gains (losses) on:
	Investments with no other-than-temporary impairment		—		—		—			—			74,740			74,740			29			74,769
	Less: reclassification adjustment for gains (losses) included in net income (loss)		—		—		—			—			419			419			—			419
Return of capital			—		—		(25,000	)		—			—			(25,000	)		—			(25,000	)
Other			—		—		—			—			—			—			(82	)		(82	)

Balance, December 31, 2009			330		15,000		1,241,785			743,378			74,321			2,074,484			(349	)		2,074,135
Cumulative effect of accounting change-consolidation of variable interest entities effective January 1, 2010			—		—		—			(166,641	)		—			(166,641	)		349			(166,292	)

Balance, January 1, 2010			330		15,000		1,241,785			576,737			74,321			1,907,843			—			1,907,843
Net income			—		—					585,608			—			585,608			—			585,608
Return of capital			—		—		(50,000	)		—			—			(50,000	)		—			(50,000	)
Change in unrealized gains (losses) on:
	Investments with no other-than-temporary impairment		—		—		—			—			(55,265	)		(55,265	)		—			(55,265	)
	Investments with other-than-temporary impairment		—		—		—			—			(13,222	)		(13,222	)		—			(13,222	)
	Less: reclassification adjustment for gains (losses) included in net income (loss)		—		—		—			—			(7,336	)		(7,336	)		—			(7,336	)

Balance, December 31, 2010			330	$	15,000	$	1,191,785		$	1,162,345		$	13,170		$	2,382,300		$	—		$	2,382,300

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

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Assured Guaranty Municipal Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

			Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

			2010			2009			2009
Operating activities
Net income (loss) attributable to Assured Guaranty Municipal Corp.			$	585,608		$	743,378		$	559,980
	Net amortization of premium (discount) on fixed maturity securities			36,213			26,290			2,345
	Provision (benefit) for deferred income taxes			175,240			(18,761	)		262,137
	Net realized investment (gains) losses			11,994			(1,329	)		131,158
	Net unrealized gains (losses) on credit derivatives			10,705			(223,367	)		(652,339	)
	Fair value (gain) loss on committed capital securities			(2,060	)		75,865			18,585
	Change in net deferred acquisition costs net of ceding commission income			55,929			26,972			10,031
	Change in premiums receivable			76,914			41,512			73,871
	Change in deferred premium revenue net of ceded deferred premium revenue			(974,582	)		(779,811	)		(284,926	)
	Change in net loss and loss adjustment expense reserve and salvage and subrogation, net			(323,161	)		(14,334	)		(182,885	)
	Change in current income taxes			(98,352	)		245,317			(11,007	)
	Noncontrolling interest			—			—			(457,303	)
	Bargain purchase gain			—			(232,554	)		—
	Changes in financial guaranty variable interest entities assets and liabilities, net			397,398			—			—
	Change in fair value of financials products segment financial instruments			—			—			336,956
	Change in fair value of assets acquired in refinancing transactions			—			—			(25,196	)
	Other			8,444			49,429			(92,791	)

Net cash flow provided by (used in) operating activities				(39,710	)		(61,393	)		(311,384	)

Investing activities
	General investment portfolio:
		Sales		514,227			385,704			440,730
		Maturities		532,798			194,880			187,514
		Purchases		(693,299	)		(473,370	)		(395,814	)
		Net sales (purchases) of short-term investments		(46,596	)		222,300			71,453
	Financial products segment investment portfolio:
		Maturities		—			—			9,300
		Net (increase) decrease in short-term		—			—			(9,149	)
	Other:
		Paydowns and proceeds from sales of other invested assets		17,970			14,670			18,985
		Net proceeds from paydowns on financial guaranty variable interest entities' assets		410,227			—			—
		Purchase of note receivable from affiliate		—			(300,000	)		—
		Other investments		1,816			(5,320	)		(1,043	)

Net cash flow provided by (used in) investing activities				737,143			38,864			321,976

Financing activities
	Dividends paid			—			—			(10,000	)
	Return of capital			(50,000	)		(25,000	)		—
	Repayment of notes payable			(20,891	)		(14,823	)		(17,530	)
	Repayment of financial products segment debt			—			—			(98	)
	Paydown of financial guaranty variable interest entities liabilities			(605,641	)		—			—
	Capital issuance costs			—			—			(2,153	)

Net cash provided by (used in) financing activities				(676,532	)		(39,823	)		(29,781	)

Effect exchange rate changes				(867	)		846			3,160

Net increase (decrease) in cash				20,034			(61,506	)		(16,029	)
Cash at beginning of period				23,616			85,122			101,151

Cash at end of period			$	43,650		$	23,616		$	85,122

Supplemental cash flow information
Cash paid (received) during the period for:
	Income taxes		$	46,039		$	21,246		$	18,756
	Interest		$	6,001		$	3,398		$	5,355

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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

1. Business and Basis of Presentation

Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("AGM," or together with its consolidated entities, the "Company"), a New York domiciled insurance company, is an indirect and wholly owned subsidiary of Assured Guaranty Ltd. ("AGL"). AGL is a Bermuda based holding company that provides, through its operating subsidiaries, credit enhancement products to the public finance, infrastructure and structured finance markets in the United States ("U.S.") as well as internationally. The Company is licensed to conduct financial guaranty insurance business in all fifty states of the U.S., the District of Columbia and Puerto Rico. The Company has applied its credit underwriting judgment, risk management skills and capital markets experience to develop insurance and credit derivative products that protect holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled principal and interest 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 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. Financial guaranty contracts accounted for as credit derivatives are primarily 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 a financial guaranty contract 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 mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value and issued by special purpose entities. While AGM has ceased insuring new originations of asset-backed financial guaranty business, a significant portfolio of such obligations remain outstanding and its wholly owned subsidiary Assured Guaranty (Europe) Ltd. ("AGE") provides financial guaranty insurance in both the international public finance and structured finance markets.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

1. Business and Basis of Presentation (Continued)

On July 1, 2009 (the "Acquisition Date"), AGL, through a wholly owned subsidiary, Assured Guaranty US Holdings Inc. ("AGUS"), acquired Assured Guaranty Municipal Holdings Inc. (formerly known as Financial Security Assurance Holdings Ltd. ("Holdings"), and together with its subsidiaries, "AGMH") and most of its subsidiaries, including AGM, from Dexia Holdings Inc. ("Dexia Holdings") (the "AGMH Acquisition"). The AGMH Acquisition excluded the subsidiaries that made up AGMH's financial products segment (the "Financial Products Companies"). AGM is the principal operating subsidiary of Holdings. AGM's name was changed from Financial Security Assurance Inc. in November 2009.

The financial products ("FP") segment activities were conducted through FSA Global Funding Limited ("FSA Global") and Premier International Funding Co. ("Premier"), two variable interest entities ("VIEs"), (collectively, the "FP VIEs"). Subsequent to the AGMH Acquisition, AGM was no longer the primary beneficiary or control party of the FP VIEs and therefore no longer consolidates the entities. FSA Global is a special purpose funding vehicle that was partially owned by a subsidiary of Holdings. FSA Global issued AGM-insured medium term notes and generally invested the proceeds from the sale of its notes in AGM-insured guaranteed investment contracts ("GICs") or other AGM-insured obligations with a view to realizing the yield difference between the notes issued and the obligations purchased with the note proceeds. Premier is principally engaged in leveraged lease transactions. The Company's management believed that even though prior to the AGMH Acquisition the assets were included in the Company's consolidated balance sheets, the assets held by FSA Global and Premier, including those that were eliminated in consolidation, were beyond the reach of the Company's creditors, even in bankruptcy or other receivership. Substantially all the assets of FSA Global are pledged to secure the repayment, on a pro rata basis, of FSA Global's notes and its other obligations.

Within the financial guaranty segment, the Company insures, among other obligations, GICs issued by the Financial Products Companies retained by Dexia Holdings. In November 2008, the Financial Products Companies ceased issuing GICs. See Note 2.

Prior to the AGMH Acquisition, AGMH was a direct subsidiary of Dexia Holdings, which, in turn, is owned 90% by Dexia Crédit Local S.A. ("DCL") and 10% by Dexia SA ("Dexia"). Dexia is a Belgian corporation primarily engaged in the business of public finance, banking and investment management in France, Belgium, Luxemburg and other European countries, as well as in the U.S. DCL is a wholly owned subsidiary of Dexia.

Debt obligations guaranteed by AGM and AGE are generally awarded debt credit ratings that are the same rating as the financial strength rating of AGM or AGE that has guaranteed that obligation. Investors in products insured by the Company 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, the Company manages its business 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

1. Business and Basis of Presentation (Continued)

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. Acquisition accounting creates a new basis of accounting for all assets and liabilities based on fair value as determined by AGL, as the acquirer, effective the Acquisition Date. As a result, the Company's results of operations and cash flows subsequent to the acquisition are not comparable with those prior to the acquisition, and therefore have been segregated with a vertical "black-line" to indicate pre-acquisition and post-acquisition periods. The post-acquisition period, July 1, 2009 and forward, includes acquisition accounting.

The consolidated financial statements include the accounts of AGM and its direct and indirect subsidiaries, (collectively, the "Subsidiaries"). The consolidated financial statements also include the accounts of certain VIEs. Intercompany accounts and transactions have been eliminated. 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 nonfunctional currency transactions, including non-U.S. operations where functional currency is the U.S. dollar, are reported in the consolidated statement of operations.

Cash is defined as cash on hand and demand deposits.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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 5
Loss and loss adjustment expense on financial guaranty contracts accounted for as insurance form		Note 5
Policy acquisition costs		Note 5
Fair value measurement		Note 6
Credit derivatives		Note 7
VIEs		Note 8
Investments		Note 9
Income taxes		Note 12
Employee benefit plans		Note 17

2. Business Changes and Accounting Developments

Summarized below are the most significant events over the past two 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 two 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 Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

2. Business Changes 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 financial strength ratings of AGM and AGE over the course of the last several years from their previous AAA levels. There can be no assurance that NRSROs will not take further action on the Company's ratings. 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 AGM, AGE and certain of its affiliates) 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. The Company's financial strength ratings are an important competitive factor in the financial guaranty insurance markets. If the financial strength or financial enhancement ratings of AGM or its insurance subsidiaries 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.

AGMH Acquisition

AGMH's former financial products business had been in the business of borrowing funds through the issuance of GICs and medium term notes and reinvesting the proceeds in investments that met AGMH's investment criteria. The financial products business also included portions of AGMH's leveraged lease business. In connection with the AGMH Acquisition, Dexia Holdings agreed to assume the risks in respect of the Financial Products Business and AGM agreed to retain the risks relating to the debt and strip policy portions of such business.

The Company is indemnified against exposure to AGMH's former financial products business through guaranties issued by Dexia and certain of its affiliates. In addition, the Company is protected from exposure to AGMH's GIC business through guaranties issued by the French and Belgian governments. Furthermore, to support the payment obligations of the Financial Products Companies, Dexia and its affiliate DCL have entered into two separate ISDA Master Agreements, each with its associated schedule, confirmation and credit support annex (the "Guaranteed Put Contract" and the "Non-Guaranteed Put Contract" respectively, and collectively, the "Dexia Put Contracts"), pursuant to which Dexia and DCL jointly and severally guarantee the scheduled payments of principal and interest in relation to each asset of FSA Asset Management LLC, which is one of the Financial Products

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

2. Business Changes and Accounting Developments (Continued)

Companies, as well as any failure of Dexia to provide liquidity or liquid collateral under certain liquidity facilities.

Accounting Changes

Over the past two 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 premium revenue and loss recognition methods. The most significant change was that loss and loss adjusted expense ("LAE") is recognized only to the extent that it exceeds unearned premium reserve. See Note 5.
•: 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 changed which VIEs were consolidated. See Note 8.

3. Business Combinations

Accounting Policy

The AGMH Acquisition was accounted for under the acquisition method of accounting. In conjunction with acquisition accounting, the economic effect of the acquisition was "pushed down" to the Company and reflected in the Company's consolidated financial statements.

A portion of the AGMH purchase price was allocated to the Company's assets and liabilities based on their estimated fair value at the Acquisition Date. In many cases, determining the fair value of the Company's assets and liabilities required significant judgment. The most significant of these determinations related to the valuation of the Company's financial guaranty direct and ceded contracts.

The fair value of the deferred premium revenue (which is a component of unearned premium reserve, as described in Note 5) is the estimated premium that a similarly rated hypothetical financial guarantor would demand from the Company to assume each policy. The methodology for determining such value takes into account the rating of the insured obligation, expectation of loss and sector. Because the fair value of the deferred premium revenue exceeded the estimate of expected loss for each contract, no loss reserve was recorded at the Acquisition Date. See Note 5.

The fair value of the Company's deferred premium revenue on its direct insurance contracts at July 1, 2009 was $7.3 billion, an amount approximately $1.7 billion greater than the Company's gross stand ready obligations as of June 30, 2009. The gross stand-ready obligation as of June 30, 2009 was comprised of $3.8 billion in deferred premium revenue and $1.8 billion of loss reserves. This indicates that the contractual premiums were less than the premiums a market participant of similar credit quality would demand to assume those contracts at the Acquisition Date. The fair value of the

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

3. Business Combinations (Continued)

Company's ceded contracts at July 1, 2009 was an asset of $1.7 billion and recorded in ceded unearned premium reserve. The fair value of the ceded contracts is in part derived from the fair value of the related insurance contracts with an adjustment for the credit quality of each reinsurer.

Other acquisition accounting adjustments included the write off of deferred acquisition costs. In addition, certain financial guaranty VIEs in which the combined variable interest of the Company and other AGL subsidiaries was determined to be the primary beneficiary were required to be consolidated as of the Acquisition Date.

The following table represents the allocation of the purchase price to the net assets of the Company. The bargain purchase gain results from the difference between the purchase price and the net assets fair value estimates.

			July 1, 2009

			(in millions)
Total purchase price allocated to the Company			$	1,282.6

Identifiable assets acquired:
	Investments			5,903.6
	Cash			85.1
	Premiums receivable			846.4
	Ceded unearned premium reserve			1,727.7
	Credit derivative assets			297.2
	Deferred tax asset, net			993.6
	Financial guaranty variable interest entities' assets			1,879.4
	Other assets			376.7

		Total assets		12,109.7

Liabilities assumed:
	Unearned premium reserve			7,286.4
	Reinsurance balances payable, net			249.6
	Notes payable			164.4
	Credit derivative liabilities			920.0
	Financial guaranty variable interest entities' liabilities			1,878.6
	Other liabilities			95.5

		Total liabilities		10,594.5

Net assets resulting from acquisition				1,515.2

Bargain purchase gain allocated to the Company resulting from the AGMH Acquisition			$	232.6

The bargain purchase gain was recorded in the Company's consolidated statements of operations on the Acquisition Date. The bargain purchase resulted from the unprecedented credit crisis, which resulted in a significant decline in the Company's franchise value due to material insured losses, ratings downgrades and significant losses and government intervention at Dexia and the resulting motivation to sell AGMH, and the absence of potential purchasers of AGMH due to the financial crisis.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. Outstanding Exposure

The Company's insurance policies and credit derivative contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest ("Debt Service") on public finance and structured finance obligations. 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 each reporting period, some of these VIEs are consolidated as described in Note 8. The outstanding par and Debt Service amounts presented below include 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		$	642,077	$	654,291	$	445,265	$	480,436
Structured finance			99,739		120,071		88,575		103,360

	Total	$	741,816	$	774,362	$	533,840	$	583,796

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. Outstanding Exposure (Continued)

Summary of Public 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		$	156,086	$	158,076	$	43,873	$	31,701	$	112,213	$	126,375
	Tax backed			69,766		71,514		19,669		17,755		50,097		53,759
	Municipal utilities			60,491		61,982		14,327		12,719		46,164		49,263
	Transportation			30,772		30,562		10,107		10,134		20,665		20,428
	Healthcare			18,238		19,204		8,181		8,171		10,057		11,033
	Higher education			10,160		9,603		2,807		1,694		7,353		7,909
	Housing			6,908		8,240		1,512		1,587		5,396		6,653
	Infrastructure finance			2,312		2,452		1,115		1,251		1,197		1,201
	Other public finance—U.S.			2,059		1,606		326		166		1,733		1,440

		Total public finance—U.S.		356,792		363,239		101,917		85,178		254,875		278,061
Non-U.S.:
	Infrastructure finance			16,718		16,293		5,185		5,182		11,533		11,111
	Regulated utilities			15,012		14,949		7,790		8,104		7,222		6,845
	Other public finance—non-U.S.			9,456		9,637		3,060		3,084		6,396		6,553

		Total public finance—non-U.S.		41,186		40,879		16,035		16,370		25,151		24,509

Total public finance obligations			$	397,978	$	404,118	$	117,952	$	101,548	$	280,026	$	302,570

Structured finance:
U.S.:
	Pooled corporate obligations		$	43,816	$	52,283	$	3,543	$	7,686	$	40,273	$	44,597
	RMBS			13,990		16,309		1,671		1,966		12,319		14,343
	Financial products(1)			6,831		10,251		—		—		6,831		10,251
	Consumer receivables			2,335		4,245		354		605		1,981		3,640
	Insurance securitization			476		476		108		107		368		369
	Commercial receivables			94		100		4		4		90		96
	Structured credit			177		181		97		100		80		81
	Other structured finance—U.S.			1,920		2,136		1,311		1,374		609		762

		Total structured finance—U.S.		69,639		85,981		7,088		11,842		62,551		74,139
Non-U.S.:
	Pooled corporate obligations			15,634		17,367		2,551		3,096		13,083		14,271
	RMBS			1,745		1,998		171		190		1,574		1,808
	Structured credit			628		852		130		228		498		624
	Commercial receivables			229		244		—		—		229		244
	Insurance securitizations			56		56		18		18		38		38
	Other structured finance— non-U.S.			470		328		61		32		409		296

		Total structured finance— non-U.S.		18,762		20,845		2,931		3,564		15,831		17,281

Total structured finance obligations			$	88,401	$	106,826	$	10,019	$	15,406	$	78,382	$	91,420

Total			$	486,379	$	510,944	$	127,971	$	116,954	$	358,408	$	393,990

(1): As discussed in Note 2, this represents the exposure to the Company's financial guaranties of GICs issued by AGMH's former financial products companies. This exposure is guaranteed by Dexia. The Company is also protected by guaranties issued by the French and Belgian governments.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. 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		$	—		0.0	%	$	—		0.0	%	$	13,019		20.8	%	$	5,031		31.8	%	$	18,050		5.0	%
AAA			4,122		1.6			1,304		5.2			24,241		38.8			6,899		43.6			36,566		10.2
AA			106,360		41.7			1,187		4.7			12,729		20.3			1,320		8.3			121,596		33.9
A			121,903		47.8			7,847		31.2			1,523		2.4			904		5.7			132,177		36.9
BBB			21,362		8.4			13,783		54.8			1,074		1.7			1,599		10.1			37,818		10.6
Below investment grade ("BIG")			1,128		0.5			1,030		4.1			9,965		16.0			78		0.5			12,201		3.4

	Total net par outstanding	$	254,875		100.0	%	$	25,151		100.0	%	$	62,551		100.0	%	$	15,831		100.0	%	$	358,408		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		$	24		0.0	%	$	—		0.0	%	$	16,480		22.2	%	$	7,221		41.8	%	$	23,725		6.0	%
AAA			5,111		1.8			1,301		5.3			19,651		26.5			5,208		30.1			31,271		7.9
AA			122,605		44.1			1,487		6.1			20,245		27.3			1,996		11.6			146,333		37.1
A			127,831		46.0			7,236		29.5			2,896		3.9			1,088		6.3			139,051		35.3
BBB			20,983		7.5			14,105		57.6			4,596		6.2			1,687		9.8			41,371		10.5
BIG			1,507		0.6			380		1.5			10,271		13.9			81		0.4			12,239		3.2

	Total net par outstanding	$	278,061		100.0	%	$	24,509		100.0	%	$	74,139		100.0	%	$	17,281		100.0	%	$	393,990		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 expected maturities for structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. Outstanding Exposure (Continued)

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		$	69,367	$	61,945	$	131,312
5 to 10 years			62,621		10,635		73,256
10 to 15 years			55,944		2,131		58,075
15 to 20 years			41,573		1,173		42,746
20 years and above			50,521		2,498		53,019

	Total net par outstanding	$	280,026	$	78,382	$	358,408

In addition to amounts shown in the tables above, at December 31, 2010 AGM had outstanding commitments to provide guaranties of $355.7 million for structured finance and up to $1.2 billion for public finance of which $853.0 million can be used together with Assured Guaranty Corp. ("AGC"), an affiliate of the Company. The structured finance commitments consist of 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 $865.3 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 at the counterparty's request. 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. Outstanding Exposure (Continued)

states in which municipalities located therein issued an aggregate of 2% 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				1,173	$	36,284		10.1	%	$	15,355
	New York				836		21,242		5.9			9,962
	Pennsylvania				884		20,099		5.6			5,974
	Texas				890		17,548		4.9			5,856
	Illinois				748		16,239		4.5			7,235
	Florida				286		14,747		4.1			4,877
	New Jersey				645		11,334		3.2			5,824
	Michigan				616		11,297		3.2			3,400
	Washington				311		8,455		2.4			4,269
	Massachusetts				223		7,439		2.1			4,475
	Other states				4,095		90,191		25.1			34,690

		Total U.S. public finance			10,707		254,875		71.1			101,917
	U.S. Structured finance (multiple states)				486		62,551		17.5			7,088

		Total U.S.			11,193		317,426		88.6			109,005
Non-U.S.:
	United Kingdom				76		12,209		3.4			8,908
	Australia				25		5,581		1.6			2,283
	Canada				9		4,072		1.1			865
	France				10		1,714		0.5			1,673
	Italy				10		1,666		0.5			1,088
	Other				74		15,740		4.3			4,149

			Total non-U.S.		204		40,982		11.4			18,966

Total					11,397	$	358,408		100.0	%	$	127,971

Significant Risk Management Activities

The Risk Oversight and Audit Committees of the Board of Directors of AGL oversee the Company's 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.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. Outstanding Exposure (Continued)

Risk Management and Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, and Surveillance personnel are responsible for recommending adjustments to those ratings to reflect changes in transaction credit quality. 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 chose to initiate litigation. See "Recovery Litigation" in Note 5 below.

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

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. 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 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 cycles based on the Company's view of the credit's quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter.

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 5 "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 5 for further explanation of accounting policy. The revisions do not impact whether a transaction 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

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. Outstanding Exposure (Continued)

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 Exposure
(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 RMBS:
	Prime first lien		$	—	$	—	$	—	$	—	$	102		—	%
	Alt-A first lien			53		663		569		1,285		1,404		0.4
	Alt-A options ARM			6		1,303		628		1,937		2,023		0.5
	Subprime (including net interest margin securities)			663		1,575		47		2,285		4,041		0.6
Second lien U.S. RMBS:
	Closed end second lien			62		398		417		877		1,077		0.2
	Home equity lines of credit ("HELOCs")			346		—		2,681		3,027		3,672		0.9

		Total U.S. RMBS		1,130		3,939		4,342		9,411		12,319		2.6
Other structured finance				316		17		299		632		66,063		0.2
Public finance				1,963		11		184		2,158		280,026		0.6

		Total	$	3,409	$	3,967	$	4,825	$	12,201	$	358,408		3.4	%

			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 RMBS:
	Prime first lien		$	—	$	—	$	—	$	—	$	115		—	%
	Alt-A first lien			147		1,176		59		1,382		1,575		0.4
	Alt-A options ARM			586		1,722		—		2,308		2,463		0.6
	Subprime (including net interest margin securities)			916		920		52		1,888		4,372		0.5
Second lien RMBS:
	Closed end second lien			—		565		395		960		1,210		0.2
	HELOC			—		—		3,273		3,273		4,608		0.8

		Total U.S. RMBS		1,649		4,383		3,779		9,811		14,343		2.5
Other structured finance				127		221		193		541		77,077		0.2
Public finance				1,372		329		186		1,887		302,570		0.5

		Total	$	3,148	$	4,933	$	4,158	$	12,239	$	393,990		3.2	%

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

4. 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	$	3,122		0.9	%	$	287		0.1	%	$	3,409		1.0	%		51
	Category 2		3,910		1.1			57		0.0			3,967		1.1			46
	Category 3		4,452		1.2			373		0.1			4,825		1.3			46

Total BIG		$	11,484		3.2	%	$	717		0.2	%	$	12,201		3.4	%		143

		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	$	2,898		0.7	%	$	250		0.1	%	$	3,148		0.8	%		59
	Category 2		4,663		1.2			270		0.1			4,933		1.3			54
	Category 3		3,958		1.0			200		0.1			4,158		1.1			28

Total BIG		$	11,519		2.9	%	$	720		0.3	%	$	12,239		3.2	%		141

5. 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, ceded to another insurer under a reinsurance treaty or recorded at fair value due to push-down accounting following 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.

"Unearned premium reserve" or "unearned premium revenue" represents "deferred premium revenue" net of paid claims that have not yet been expensed, or "contra-paid". See loss and LAE reserve accounting policy below for a description of "contra-paid".

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

The amount of deferred premium revenue 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 deferred premium revenue, and a corresponding adjustment to the premium receivable, and
•: the fair value at the date of acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the contract and not the actual cash flows under the insurance contract for contracts acquired in a business combination.

The Company recognizes deferred premium revenue 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 deferred premium revenue 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 deferred premium revenue related to that contract as earned premium.

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

Loss and Loss Adjustment Expense Reserve

Under financial guaranty insurance accounting, unearned premium reserve and loss and LAE reserve 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 reserve is only recorded when and to the extent expected losses to be paid plus contra-paid exceed deferred premium revenue on a contract by contract basis.

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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

When a claim payment is made on a contract it first reduces any recorded "loss and LAE reserve". To the extent a "loss and LAE reserve" is not recorded on a contract, which occurs when "total losses" (contra-paid plus expected loss to be paid) are less than deferred premium revenue, claim payments are recorded as "contra-paid," which reduce the unearned premium reserve. The contra-paid is recognized in the line item "loss and LAE" in the consolidated statement of operations when and for the amount that total losses exceed remaining deferred premium revenue on the contract.

The contra-paid is recognized in the line item "loss and LAE expense" in the consolidated statement of operations when total losses exceeds remaining deferred premium revenue on the contract.

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, net of potential recoveries, excluding reinsurance) are probability weighted cash flows. 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.

LAE consists of the estimated cost of settling claims, including legal and other fees and expenses associated with administering the claims process.

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 loss 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 entry recorded, if "total loss" is not in excess of deferred premium revenue, or
•: 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.

The Company recognizes the expected recovery of claim payments made prior to the AGMH Acquisition consistent with its policy for recognizing recoveries on all financial guaranty insurance contracts. 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.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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 review and update costs that qualify for deferral and deferral rates. Ceding commission income on business ceded to reinsurers reduce policy acquisition costs and are deferred. Expected losses and LAE and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of deferred acquisition costs. When an insured issue is retired early, the remaining related DAC is expensed at that time. Beginning January 1, 2009, ceding commission income associated with future installment premiums on ceded business are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to reinsurance balances payable, net.

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.

Adoption of Financial Guaranty Accounting Standard

Effective January 1, 2009, the Company adopted new financial guaranty industry-specific accounting guidance which changed the Company's premium revenue recognition and loss reserving methodology. The change in the premium revenue recognition model also changed the amount of deferred acquisition costs previously amortized, as such amortization is recognized in proportion to premium earnings. The cumulative effect of this adoption was a $63.2 million after-tax decrease to the opening retained earnings balance. The retained earnings adjustment was comprised of a $31.0 million after-tax increase relating to net loss reserves and a $32.2 million after-tax adjustment for inception-to-date premium earnings, net of the amortization of deferred acquisition costs. As a result, premium earnings and loss and LAE are not comparable between 2009 and prior years.

Application of Financial Guaranty Insurance Accounting to the AGMH Acquisition

Acquisition accounting requires that the fair value of each of the financial guaranty contracts in the Company's insured portfolio be recorded on the Company's consolidated balance sheet. The fair value of the Company's direct contracts was recorded on the line items "premium receivable" and "unearned premium reserve" and the fair value of its ceded contracts was recorded within "reinsurance

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

balances payable, net" and "ceded unearned premium reserves" on the consolidated balance sheet. Management recorded the Company's financial guaranty insurance and reinsurance contracts as follows:

Recorded Fair Value of Financial Guaranty Contracts

	Carrying Value As of June 30, 2009(1)			Acquisition Accounting Adjustment(2)			Carrying Value As of July 1, 2009

	(in millions)
Premiums receivable	$	846.4		$	—		$	846.4
Ceded unearned premium reserve		1,299.2			428.4			1,727.6
Reinsurance recoverable on unpaid losses		279.9			(279.9	)		—
Reinsurance balances payable, net		(249.6	)		—			(249.6	)
Unearned premium reserve		(3,778.7	)		(3,507.7	)		(7,286.4	)
Loss and loss adjustment expense reserves		(1,834.7	)		1,834.7			—
Deferred acquisition costs		289.3			(289.3	)		—

(1): Represents the amounts recorded in the Company's consolidated financial statements for financial guaranty insurance and reinsurance contracts prior to the AGMH Acquisition.
(2): Represents the adjustments required to record the balances at fair value. The fair value adjustment to unearned premium reserve takes into account ratings, estimated economic losses and pricing at the Acquisition Date.

Financial Guaranty Insurance Premiums and Losses

The following tables present net earned premium, premium receivable activity, expected collections of future premiums and expected future earnings on the existing book of business. Actual collections may differ from expected collections in the tables below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues and change in assumptions. 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,		Six Months Ended December 31,		Six Months Ended June 30,

		2010		2009		2009
				(in millions)
Scheduled net earned premiums		$	820.0	$	521.3	$	129.0
Acceleration of premium earnings(1)			67.1		48.0		97.9
Accretion of discount on net premiums receivable			20.7		6.1		15.3

	Total net earned premiums(2)	$	907.8	$	575.4	$	242.2

(1): Reflects the unscheduled refundings of underlying insured obligations.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

(2): Excludes $46.2 million in 2010 related to consolidated VIEs.

Gross Premium Receivable Roll Forward

		Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

		2010			2009			2009
					(in millions)
Gross premium receivable:
Balance beginning of period		$	787.4		$	846.4		$	29.6
Change in accounting(1)			(9.8	)		—			827.1

Balance beginning of the period, adjusted			777.6			846.4			856.7
Premium written			290.1			—			—
Premium payments received			(373.0	)		(87.1	)		(98.8	)
Adjustments:
	Changes in expected term of contracts		22.7			12.1			20.4
	Accretion of discount		28.5			8.8			21.9
	Foreign exchange translation		(11.9	)		7.2			46.2
	Other		(4.8	)		—			—

Balance, end of period		$	729.2		$	787.4		$	846.4

(1): Change in accounting represents elimination of premiums receivable related to consolidated financial guaranty VIEs. See Note 8.

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than U.S. dollar. Approximately 63% and 61% premiums receivable at December 31, 2010 and 2009, respectively, are denominated in currencies other than U.S. dollar, primarily in euro and British Pound Sterling.

For premiums received in installments, premium receivable is the present value of premiums due or expected to be collected over the life of the contract. Installment premiums typically relate 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 receipts are typically made from insured deal cash flows that are senior to payments made to the deal noteholders. When there are significant changes to expected premium collections, an adjustment is recorded to premium receivable, with a corresponding adjustment to deferred premium revenue.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Expected Collections of Premiums Receivable (1)

		December 31, 2010

		(in millions)
2011 (January 1 - March 31)		$	31.4
2011 (April 1 - June 30)			28.3
2011 (July 1 - September 30)			19.8
2011 (October 1 - December 31)			44.0
2012			67.9
2013			61.2
2014			56.8
2015			53.9
2016 - 2020			221.2
2021 - 2025			155.8
2026 - 2030			110.8
After 2030			144.1

	Total expected collections	$	995.2

(1): Represent undiscounted amounts expected to be collected and is gross of reinsurance.

Components of
Net Unearned Premium Reserve

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

		Gross Unearned Premium Reserve			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve			Gross Unearned Premium Reserve			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve
		(in millions)
Deferred premium revenue		$	5,467.4		$	1,526.4		$	3,941.0		$	6,617.5		$	1,564.8		$	5,052.7
Contra-paid			(146.1	)		(32.0	)		(114.1	)		(149.2	)		(19.9	)		(129.3	)

	Total	$	5,321.3		$	1,494.4		$	3,826.9		$	6,468.3		$	1,544.9		$	4,923.4

Net deferred premium revenue in the table above will be recognized as net earned premiums in the consolidated statement of operations. Amounts expected to be recognized in net earned premiums differ significantly from expected cash collections due primarily to amounts in deferred premium revenue representing cash already collected on policies paid upfront and fair value adjustments recorded in connection with the AGMH Acquisition.

The following table provides a schedule of expected timing of income statement recognition of financial guaranty insurance net deferred premium revenue and present value of expected losses, pre-tax. This table excludes amounts related to consolidated VIEs.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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)		$	151.0	$	48.7	$	102.3
2011 (April 1 - June 30)			136.5		39.5		97.0
2011 (July 1 - September 30)			124.8		31.3		93.5
2011 (October 1 - December 31)			115.9		26.0		89.9
2012			398.1		74.3		323.8
2013			334.7		68.5		266.2
2014			294.5		59.0		235.5
2015			257.7		51.8		205.9
2016 - 2020			923.4		172.9		750.5
2021 - 2025			539.7		89.3		450.4
2026 - 2030			316.5		50.7		265.8
After 2030			348.2		48.0		300.2

	Total present value basis(2)(3)		3,941.0		760.0		3,181.0
Discount			170.9		383.8		(212.9	)

	Total future value	$	4,111.9	$	1,143.8	$	2,968.1

(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 for the amount that total loss exceeds deferred premium revenue determined on a contract-by-contract basis.
(2): Balances represent discounted amounts.
(3): The effect of consolidating VIEs resulted in a reduction of $306.9 million in future scheduled net earned premium and $211.1 million in net expected loss and LAE.

Selected Information for Policies Paid in Installments

	As of December 31,

	2010			2009
	(dollars in millions)
Premiums receivable	$	729.2		$	787.4
Gross deferred premium revenue		2,466.4			3,551.6
Weighted-average risk-free rate used to discount premiums		3.5	%		3.5	%
Weighted-average period of premiums receivable (in years)		10.3			10.4

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Rollforward of Deferred Acquisition Costs
Net of Ceding Commission Income
Asset (Liability)

			Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

			2010			2009			2009
						(in millions)
Balance, beginning of period(1)			$	(27.0	)	$	289.3		$	299.3
Change in accounting(2)				—			—			6.8
Acquisition accounting adjustment				—			(289.3	)		—

Balance, July 1, 2009				(27.0	)		—			306.1
Amount deferred during the period:
	Ceded commissions			(86.0	)		(27.5	)		—
	Premium taxes			7.2			—			—
	Compensation and other acquisition costs			14.2			—			—

		Total		(64.6	)		(27.5	)		—
Amount earned (expensed) during the period				8.7			0.5			(16.8	)

Balance, end of period(1)			$	(82.9	)	$	(27.0	)	$	289.3

(1): Liability balances are included in other liabilities on the consolidated balance sheets.
(2): Change in accounting represents the effect of adoption of financial guaranty accounting guidance on January 1, 2009.

Loss Estimation Process

Loss reserve committees estimate expected losses for financial guaranty exposures. Surveillance personnel present analysis related to potential losses to the loss reserve committees for consideration in estimating the expected loss. 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 or judgmental assessment. The loss reserve committees review and refresh expected loss estimates each quarter. The 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.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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 payments, net of reinsurance and net of salvage and subrogation which includes the benefit of estimated present value recoveries on reps and warranties.

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:
		Alt-A first lien		$	175.9		$	29.4		$	60.3	$	145.0
		Alt-A option ARM			517.2			121.0			178.3		459.9
		Subprime			55.3			102.4			1.7		156.0

			Total first lien		748.4			252.8			240.3		760.9
	Second lien:
		Closed end second lien			175.8			(82.3	)		32.0		61.5
		HELOCs			(81.6	)		(125.2	)		414.2		(621.0	)

			Total second lien		94.2			(207.5	)		446.2		(559.5	)

Total U.S. RMBS					842.6			45.3			686.5		201.4
Other structured finance					9.8			4.5			3.8		10.5
Public finance					49.7			(17.2	)		24.3		8.2

			Total	$	902.1		$	32.6		$	714.6	$	220.1

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

			Expected Loss of AGMH at July 1, 2009		Development and Accretion of Discount			Less: Paid Losses		Expected Loss to be Paid as of December 31, 2009

			(in millions)
First lien:
	Alt-A first lien		$	223.1	$	(47.2	)	$	—	$	175.9
	Alt-A option ARM			477.6		40.2			0.6		517.2
	Subprime			72.4		(16.1	)		1.0		55.3

		Total first lien		773.1		(23.1	)		1.6		748.4
Second lien:
	Closed end second lien			227.4		(13.5	)		38.1		175.8
	HELOC			347.3		(131.1	)		297.8		(81.6	)

		Total second lien		574.7		(144.6	)		335.9		94.2

Total US RMBS				1,347.8		(167.7	)		337.5		842.6
Other structured finance				9.9		(0.1	)		—		9.8
Public finance				81.2		(29.2	)		2.3		49.7

Total			$	1,438.9	$	(197.0	)	$	339.8	$	902.1

(1): Amounts include all expected payments whether or not the insured transaction VIE is consolidated.
(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 reserve for mitigating claim liabilities was $3.4 million and $5.6 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.

The table below provides a reconciliation of the Company's expected loss to be paid to expected loss to be expensed. Expected loss to be paid differs from expected loss to be expensed due to: (1) the contra-paid because the payments have been made but have not yet been expensed, (2) for transactions with a net expected recovery, the addition of claim payments that have been made (and therefore are not included in the expected to be paid) that are expected to be recovered in the future (and therefore have also reduced the expected to be paid), and (3) loss reserves as they have already been established and therefore expensed but not yet paid.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Reconciliation of 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		$	220.1
Less: net expected loss to be paid for financial guaranty VIEs			(39.3	)

	Total		180.8
Contra-paid, net			114.1
Salvage and subrogation recoverable, net(1)			683.5
Loss and LAE reserve, net			(218.4	)

Net expected loss to be expensed(2)		$	760.0

(1): Represents gross salvage and subrogation amounts of $846.1 million net of ceded amounts of $162.6 million which is recorded in reinsurance balances payable.
(2): Excludes $211.1 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the 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. 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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 the AGMH Acquisition was somewhat different that used subsequent to the Acquisition. 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 prior to and subsequent to the AGMH Acquisition, and so the methodology used prior to the third quarter 2009 was somewhat different than that described here. However, the Company's second lien methodology utilized many of the same assumptions as those used at year-end 2009 and year-end 2010.

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 credits for four second lien transactions: two transactions where a capital infusion of the provider of the R&W made that company financially viable in the Company's opinion and another two transactions where the Company obtained loan files that it had not previously concluded were accessible. The Company added credits for four first lien and two second lien transactions where it has obtained loan files that it had not previously concluded were accessible. The Company also refined some of the assumptions in the calculation of the amount of the credit to reflect actual experience.

Prior to the AGMH Acquisition the Company used a similar approach to calculate a credit for recoveries on R&W.

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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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 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

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

Plateau conditional default rate	4.2% - 22.1%	10.7% - 40.0%	16.7% - 45.5%
Final conditional default rate trended down to	0.4% - 3.2%	0.5% - 3.2%	0.5% - 3.2%
Expected period until final conditional default rate	24 months	21 months	21 months
Initial conditional prepayment rate	3.3% - 17.1%	1.9% - 12.5%	2.0% - 9.2%
Final conditional prepayment rate	10%	10%	15%
Loss severity	98%	95%	95%
Initial draw rate	0.0% - 6.8%	0.1% - 2.0%	0.5% - 4.6%

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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	17.7% - 26.8%	21.5% - 37.0%	49.0% - 74.6%
Final conditional default rate trended down to	3.3% - 4.4%	3.3% - 8.1%	3.3% - 8.1%
Expected period until final conditional default rate achieved	24 months	21 months	21 months
Initial conditional prepayment rate	1.4% - 5.8%	0.8% - 3.6%	0.9% - 4.4%
Final conditional prepayment rate	10%	10%	15%
Loss severity	98%	95%	95%

In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively straight forward 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.

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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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 0.4% to 3.4%.

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 four months and keeping the ramp down at 18 months would increase the expected loss by approximately $100.2 million for HELOC transactions and $9.0 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 $56.2 million for HELOC transactions and $5.4 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 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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 Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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	45	%	45	%
	Alt-A option ARM	50		50
	Subprime	50		50
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	70		70
	Alt-A option ARM	75		75
	Subprime	75		75
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 Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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.

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	7.6% - 42.2%	5.3% - 35.7%
	Intermediate conditional default rate	1.1% - 6.3%	0.8% - 5.3%
	Final conditional default rate	0.4% - 2.1%	0.3% - 1.8%
	Initial loss severity	60%	60%
	Initial conditional prepayment rate	0.0% - 20.9%	0.0% - 7.5%
	Final conditional prepayment rate	10%	10%
Alt-A option ARM
	Plateau conditional default rate	14.4% - 32.7%	13.5% - 27.0%
	Intermediate conditional default rate	2.2% - 4.9%	2.0% - 4.0%
	Final conditional default rate	0.7% - 1.6%	0.7% - 1.4%
	Initial loss severity	60%	60%
	Initial conditional prepayment rate	0.0% - 6.0%	0.0% - 3.5%
	Final conditional prepayment rate	10%	10%
Subprime
	Plateau conditional default rate	12.4% - 34.6%	10.7% - 29.5%
	Intermediate conditional default rate	1.9% - 5.2%	1.6% - 4.4%
	Final conditional default rate	0.6% - 1.7%	0.5% - 1.5%
	Initial loss severity	80%	70%
	Initial conditional prepayment rate	0.0% - 4.7%	0.0% - 5.9%
	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 default rate. The current level of voluntary prepayments is assumed to continue for the plateau period

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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 $7.1 million for Alt-A first liens, $100.0 million for Option ARMs and $15.5 million for subprime 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 $29.0 million for Alt-A first liens, $172.9 million for Option ARMs and $189.9 million for subprime 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 $19.4 million for Alt-A first liens, $65.2 million for Option ARMs, $34.1 million for subprime and $40.0 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 25,600 second lien and 12,100 first lien defaulted loan files, representing nearly $1.9 billion in second lien and $4.3 billion in first lien outstanding par of defaulted loans underlying insured transactions. The Company identified approximately 22,100 second lien transaction loan files and approximately 11,600 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 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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 $220 million of second lien and $138 million of first lien loans. The $220 million for second lien loans represents the calculated repurchase price for 2,114 loans and the $138 million for first lien loans represents the calculated repurchase price for 396 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 $1.2 billion. 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 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.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

The following table represents the Company's total estimated recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures. The Company had $1,222.8 million of estimated recoveries from ineligible loans as of December 31, 2010, of which $642.8 million is reported in salvage and subrogation recoverable, $340.6 million is netted in loss and LAE reserve and $239.4 million is netted in unearned premium reserve. The Company had $761.2 million of estimated recoveries from ineligible loans as of December 31, 2009, of which $152.7 million was reported in salvage and subrogation recoverable, $200.8 million is netted in loss and LAE reserve and $407.7 million is included within the Company's unearned premium reserve portion of its stand-ready obligation reported on the Company's consolidated balance sheets.

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		Less: R&W Recovered During 2010(1)		Future Net R&W Benefit at December 31, 2010

		(dollars in millions)
Alt-A first lien			11	$	1,441.2	$	53.2	$	15.0	$	—	$	68.2
Alt-A option ARM			10		1,818.8		183.6		147.3		39.7		291.2
Subprime			1		227.0		—		26.6		—		26.6
Closed end second lien			2		258.3		—		98.4		—		98.4
HELOC			10		2,190.5		524.4		293.3		79.3		738.4

	Total		34	$	5,935.8	$	761.2	$	580.6	$	119.0	$	1,222.8

		# 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 July 1, 2009		R&W Development and Accretion of Discount During Six Months Ended December 31, 2009		Less: R&W Recovered During Six Months Ended December 31, 2009		Future Net R&W Benefit at December 31, 2009

		(dollars in millions)
Alt-A first lien			11	$	1,459.5	$	—	$	53.2	$	—	$	53.2
Alt-A option ARM			8		2,251.9		179.2		14.4		10.0		183.6
Subprime			—		—		—		—		—		—
Closed end second lien			—		—		—		—		—		—
HELOC			8		3,107.1		227.4		337.8		40.8		524.4

	Total		27	$	6,818.5	$	406.6	$	405.4	$	50.8	$	761.2

(1): Includes gross amounts recovered of $154.2 million.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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

		Year Ended December 31, 2010

		(in millions)
Inclusion of new deals with breaches of R&W during period		$	160.9
Change in recovery assumptions as the result of additional file review and recovery success			232.8
Estimated increase in defaults that will result in additional breaches			184.0
Accretion of discount on balance			2.9

	Total	$	580.6

The $580.6 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 seven additional transactions during 2010 which resulted in approximately $160.9 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 assumed in the base case that recoveries on HELOC and closed end second lien loans would 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 would occur as claims are paid over the life of the transactions. The $750.7 million R&W development and accretion of discount during 2009, $405.4 million of which occurred in the six months ended December 31, 2009, primarily resulted from an increase in loan file reviews and extrapolation of expected recoveries. The Company assumed that recoveries on HELOC and closed end second lien loans would occur in two years from the balance sheet date and that recoveries on Alt-A, Option ARM and Subprime loans would occur as claims are paid over the life of the transactions.

Other Sectors and Transactions

The Company has insured $276.5 billion of public finance transactions across a number of different sectors. Within that category, $1.9 billion is rated BIG, and the Company is projecting $9.4 million of expected losses across the portfolio.

The Company has $144.5 million of net par exposure to the city of Harrisburg, Pennsylvania, of which $73.2 million is BIG. The Company has paid $2.9 million in net claims to date, and expects a full recovery.

The Company continues to closely monitor other sectors and individual financial guaranty insurance transactions it feels warrant the additional attention, including, as of December 31, 2010, its trust preferred securities ("TruPS") collateralized debt obligations ("CDOs") exposure of $63.6 million,

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

its insurance on a financing of 78 train sets (one train set being composed of eight cars) for an Australian commuter railway for $448.4 million net par and its U.S. health care exposure of $9.9 billion of net par.

Recovery Litigation

As of the date of this filing, AGM has filed lawsuits with regard to three second lien U.S. RMBS transactions insured by AGM, alleging breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to AGM, and failure to cure or repurchase defective loans identified by AGM to such persons. These transactions consist of the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1 transaction (in which AGM has sued DB Structured Products, Inc. and its affiliate ACE Securities Corp.) and the Flagstar Home Equity Loan Trust 2005-1 and 2006-2 transactions (in which AGM has sued Flagstar Bank, FSB, Flagstar Capital Markets Corporation and Flagstar ABS, LLC).

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

In June 2010, AGM sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, "JPMorgan"), the underwriter of debt issued by Jefferson County, in New York Supreme Court alleging that JPMorgan induced AGM to issue its insurance policies in respect of such debt through material and fraudulent misrepresentations and omissions, including concealing that it had secured its position as underwriter and swap provider through bribes to Jefferson County commissioners and others. In December 2010, the Court denied JPMorgan's motion to dismiss. AGM is continuing its risk remediation efforts for this exposure.

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

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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)
U.S. RMBS:
	First lien:
		Alt-A first lien		$	2.6		$	1.6
		Alt-A option ARM			160.8			28.4
		Subprime			67.3			(0.1	)

			Total first lien		230.7			29.9
	Second lien:
		HELOC			—			4.5

			Total second lien		—			4.5

Total US RMBS					230.7			34.4
Other structured finance					7.1			2.9
Public finance					12.7			4.3

Total financial guaranty					250.5			41.6
Effect of consolidating financial guaranty VIEs					(32.1	)		—

		Total(1)		$	218.4		$	41.6

(1): The December 31, 2010 total consists of $243.0 million loss and LAE reserve net of $24.6 million of reinsurance recoverable on unpaid losses. The December 31, 2009 total consists of $55.3 million loss and LAE reserve net of $13.7 million of reinsurance recoverable on unpaid losses.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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

Summary of Salvage and Subrogation, Net of Reinsurance

				As of December 31,

				2010			2009
				(in millions)
U.S. RMBS:
	First lien:
		Alt-A first lien		$	2.7		$	—
		Alt-A option ARM			71.0			—
		Subprime			0.1			0.1

			Total first lien		73.8			0.1
	Second lien:
		Closed end second lien			34.7			—
		HELOC			786.2			248.0

			Total second lien		820.9			248.0

Total U.S. RMBS					894.7			248.1
Other structured finance					—			—
Public finance					34.7			—

Total					929.4			248.1
Effect of consolidating financial guaranty VIEs					(83.3	)		—

			Total gross recoverable		846.1			248.1
Less: Ceded recoverable(1)					(162.6	)		(47.8	)

			Net recoverable	$	683.5		$	200.3

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

The increase in the salvage and subrogation recoverable is due primarily to the increase in estimated representation and warranty recoveries expected as loan reviews are completed and more information is gathered with respect to loans underlying insured HELOCs.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Loss and LAE Reported
on the Consolidated Statements of Operations



					Year Ended December 31, 2010			Six Months Ended December 31, 2009			Six Months Ended June 30, 2009
								(in millions)
Financial Guaranty:
	U.S. RMBS:
		First lien:
			Alt-A first lien		$	25.9		$	1.6		$	102.6
			Alt-A option ARM			231.4			28.5			177.8
			Subprime			67.3			(0.4	)		37.2

				Total first lien		324.6			29.7			317.6
		Second lien:
			Closed end second lien			—			—			(88.4	)
			HELOC			(83.8	)		14.1			171.4

				Total second lien		(83.8	)		14.1			83.0

	Total U.S. RMBS					240.8			43.8			400.6
	Other structured finance					7.3			1.6			5.7
	Public finance					6.8			6.4			23.9
	Financial products					—			—			(199.8	)

Total financial guaranty						254.9			51.8			230.4
Effect of consolidating financial guaranty VIEs						(63.4	)		—			—

	Total loss and LAE				$	191.5		$	51.8		$	230.4

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Net Losses Paid on Financial Guaranty Insurance Contracts

								Six Months Ended December 31, 2009		Six Months Ended June 30, 2009

					Year Ended December 31, 2010			Six Months Ended December 31, 2009		Six Months Ended June 30, 2009
								(in millions)
Financial Guaranty:
	U.S. RMBS:
		First lien:
			Alt-A first lien		$	60.3		$	—	$	—
			Alt-A option ARM			178.3			0.6		0.1
			Subprime			1.7			1.0		0.7

				Total first lien		240.3			1.6		0.8
		Second lien:
			Closed end second lien			32.0			38.1		12.5
			HELOC			414.2			297.8		393.5

				Total second lien		446.2			335.9		406.0

	Total U.S. RMBS					686.5			337.5		406.8
	Other structured finance					3.8			—		4.8
	Public finance					24.3			2.3		1.7

Total financial guaranty						714.6			339.8		413.3
Effect of consolidating financial guaranty VIEs						(13.5	)		—		—

	Total				$	701.1		$	339.8	$	413.3

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

5. 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)				48			(44	)		41		(41	)		41			(41	)		130			—			130
Remaining weighted-average contract period (in years)				10.5			16.6			6.8		8.1			6.0			6.3			6.9			—			6.9
Outstanding exposure:
	Principal		$	4,209.9		$	(1,088.3	)	$	4,123.5	$	(213.1	)	$	5,355.7		$	(903.2	)	$	11,484.5		$	—		$	11,484.5
	Interest			2,134.2			(826.2	)		1,555.4		(83.7	)		1,545.3			(258.5	)		4,066.5			—			4,066.5

		Total	$	6,344.1		$	(1,914.5	)	$	5,678.9	$	(296.8	)	$	6,901.0		$	(1,161.7	)	$	15,551.0		$	—		$	15,551.0

Expected cash flows			$	288.4		$	(24.2	)	$	1,557.1	$	(80.6	)	$	1,173.7		$	(163.8	)	$	2,750.6		$	(260.0	)	$	2,490.6
Less:
	Potential recoveries(3)			373.0			(47.8	)		410.5		(18.6	)		1,573.9			(247.3	)		2,043.7			(273.5	)		1,770.2
	Discount			19.1			7.3			473.0		(26.0	)		3.6			9.8			486.8			52.8			539.6

Present value of expected cash flows			$	(103.7	)	$	16.3		$	673.6	$	(36.0	)	$	(403.8	)	$	73.7		$	220.1		$	(39.3	)	$	180.8

Deferred premium revenue			$	159.4		$	(25.0	)	$	548.3	$	(36.0	)	$	966.6		$	(154.6	)	$	1,458.7		$	(256.0	)	$	1,202.7
Reserves (salvage)(4)			$	(121.5	)	$	19.2		$	234.5	$	(12.1	)	$	(768.0	)	$	131.6		$	(516.3	)	$	51.2		$	(465.1	)

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2009

			BIG Categories

			BIG 1					BIG 2					BIG 3
			Gross		Ceded			Gross		Ceded			Gross			Ceded			Total
			(in millions)
Number of risks(2)				57		(52	)		46		(46	)		26			(26	)		129
Remaining weighted-average contract period (in years)				7.5		14.0			6.2		7.6			5.7			5.8			6.0
Outstanding exposure:
	Principal		$	3,489.4	$	(591.4	)	$	5,045.4	$	(382.4	)	$	5,012.6		$	(1,054.0	)	$	11,519.6
	Interest			939.8		(156.7	)		1,668.3		(150.1	)		1,319.6			(273.5	)		3,347.4

		Total	$	4,429.2	$	(748.1	)	$	6,713.7	$	(532.5	)	$	6,332.2		$	(1,327.5	)	$	14,867.0

Expected cash flows			$	32.4	$	(20.5	)	$	1,710.0	$	(98.3	)	$	1,862.2		$	(237.5	)	$	3,248.3
Less:
	Potential recoveries(3)			—		—			463.1		(15.7	)		1,648.2			(148.5	)		1,947.1
	Discount, net			18.4		(11.3	)		350.4		(28.4	)		25.3			44.7			399.1

Present value of expected cash flows			$	14.0	$	(9.2	)	$	896.5	$	(54.2	)	$	188.7		$	(133.7	)	$	902.1

Deferred premium revenue			$	45.5	$	(14.5	)	$	1,165.8	$	(14.5	)	$	1,243.2		$	(159.5	)	$	2,266.0
Reserves (salvage)			$	—	$	—		$	41.5	$	(5.4	)	$	(192.0	)	$	(2.8	)	$	(158.7	)

(1): Includes BIG amounts relating to VIEs that the Company consolidates.
(2): A risk represents the aggregate of the financial guarantee policies that share the same revenue source for purposes of making debt service payments.
(3): Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.
(4): See table "Components of net reserves (salvage)".

Components of Net Reserves (Salvage)

		As of December 31,

		2010			2009
		(in millions)
Loss and LAE reserve		$	243.0		$	55.3
Reinsurance recoverable on unpaid losses			(24.6	)		(13.7	)
Salvage and subrogation recoverable			(846.1	)		(248.1	)
Salvage and subrogation payable(1)			162.6			47.8

	Financial guaranty reserves, net of salvage and subrogation	$	(465.1	)	$	(158.7	)

(1): Recorded as a component of reinsurance balances payable, net.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

A downgrade of one of the Company's insurance subsidiaries 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 $1.0 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, 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.

6. Fair Value Measurement

Accounting Policy

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 have been 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

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

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 1—Quoted prices for identical instruments in active markets.

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

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

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.

Fixed Maturity Securities and Short-term Investments

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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

considered to be Level 3 in the fair value hierarchy. The Company used model processes to price 16 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).

Committed Capital Securities

Since July 1, 2009

The fair value of committed capital securities ("CCS") represents the difference between the present value of remaining expected put option premium payments under AGM Committed Preferred Trust Securities (the "AGM CPS 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 16). Changes in fair value of the AGM CPS 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.

Prior to July 1, 2009

There was no observable market for the Company's AGM CPS. Fair value of the AGM CPS was based on internally derived estimates and, therefore, these put options were categorized as Level 3 in the fair value hierarchy. The Company determined the fair value of the AGM CPS by estimating the fair value of a floating rate security with an estimated market yield reflective of the underlying committed preferred security structure and the relevant coupon based on the capped auction rate.

Financial Guaranty Contracts in Insurance Form

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 Company accordingly classified this fair value measurement as Level 3.

Notes Payable

The fair value of the notes payable was determined by calculating the present value of the expected cash flows. The Company uses a market approach to determine discounted future cash flows using market driven discount rates and a variety of assumptions if applicable including London Interbank Offered Rate ("LIBOR") curve projections, prepayment and default assumptions, and AGM CDS spreads.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

Note Receivable from Affiliate

The fair value of the Company's note receivable from affiliate is determined by calculating the effect of changes in U.S. Treasury yield adjusted for a credit factor at the end of each reporting period.

Financial Guaranty Contracts Accounted for as Credit Derivatives

The Company's credit derivatives consist primarily of insured CDS contracts, and also include net interest margin securitizations and interest rate swaps that fall under derivative accounting standards 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, if available. 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

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.

Assumptions and Inputs

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:

•

How gross spread is calculated: Gross spread is the difference between the yield of a security paid by an issuer on an insured versus uninsured basis or, in the case of a CDS transaction, the difference between the yield and an index such as the LIBOR. Such pricing is well established by historical financial guaranty fees relative to capital market spreads as observed and executed in competitive markets, including in financial guaranty reinsurance and secondary market transactions.

•

How gross spread is allocated: Gross spread on a financial guaranty contract accounted for as credit derivative is allocated among:

1.: the profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction ("bank profit");
2.: premiums paid to the Company for the Company's credit protection provided ("net spread"); and
3.: the cost of CDS protection purchased on the Company by the originator to hedge their counterparty credit risk exposure to the Company ("hedge cost").

•

The weighted average life which is based on expected remaining contractual cash flows and debt service schedules, which are the most readily observable inputs since they are based on the CDS contractual terms.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

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 AGM. The cost to acquire CDS protection referencing AGM 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 AGM increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGM 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.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

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

Example

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.

	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

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 AGM, when the CDS spread on AGM 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 AGM, when the CDS spread on AGM 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 0.26% to 4.19% at December 31, 2010. The expected future cash flows for the Company's credit derivatives were discounted at rates ranging from 0.25% to 4.5% at December 31, 2009.

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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

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 a gain 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.

•: Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available, they are used).
•: Credit spreads are interpolated based upon market indices or deals priced or closed during a specific quarter within a specific asset class and specific rating.
•: Credit spreads provided by the counterparty of the CDS.
•: Credit spreads are extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

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.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

Information by Credit Spread Type

		As of December 31,

		2010			2009
Based on actual collateral specific spreads			1	%		—	%
Based on market indices			99	%		100	%

	Total		100	%		100	%

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

Strengths and Weaknesses of Model

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

The primary strengths of the Company's CDS modeling techniques are:

•: The model takes into account the transaction structure and the key drivers of market value. The transaction structure includes par insured, weighted average life, level of subordination and composition of collateral.
•: The model maximizes the use of market-driven inputs whenever they are available. The key inputs to the model are market-based spreads for the collateral, and the credit rating of referenced entities. These are viewed by the Company to be the key parameters that affect fair value of the transaction.
•: The model is a documented, consistent approach to valuing positions that minimizes subjectivity. The Company has developed a hierarchy for market-based spread inputs that helps mitigate the degree of subjectivity during periods of high illiquidity.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

The primary weaknesses of the Company's CDS modeling techniques are:

•: There is no exit market or actual exit transactions. Therefore the Company's exit market is a hypothetical one based on the Company's entry market.
•: There is a very limited market in which to verify the fair values developed by the Company's model.
•: At December 31, 2010 and December 31, 2009, the markets for the inputs to the model were highly illiquid, which impacts their reliability. However, the Company employs various procedures to corroborate the reasonableness of quotes received and calculated by the Company's internal valuation model, including comparing to other quotes received on similarly structured transactions, observed spreads on structured products with comparable underlying assets and, on a selective basis when possible, through second independent quotes on the same reference obligation.
•: Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its 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.

Fair Value Option

GAAP provides an option to elect fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. The fair-value option may be applied to single eligible instruments, is irrevocable and is applied only to entire instruments and not to portions of instruments.

Fair Value Option on Financial Guaranty VIEs' Assets and Liabilities

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 HELOCs, first lien RMBS, Alt-A first and second lien RMBS, subprime automobile loans, 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

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

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, the Company would be responsible, under the financial guaranty insurance contract covering such VIE obligations, to pay the shortfall between the assets and recourse liabilities. The Company is not responsible for any shortfall between VIE assets and non-recourse liabilities. The Company'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 $769.6 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 $804.3 million. The difference between the aggregate unpaid principal and aggregate fair value of the VIEs' liabilities was approximately $1,481.7 million at December 31, 2010.

Fair Value Option Elections prior to AGMH Acquisition

The Company's fair value elections prior to the AGMH Acquisition Date were intended to mitigate the volatility in earnings that had been created by recording financial instruments and the related risk management instruments on a different basis of accounting, to eliminate the operational complexities of applying hedge accounting or to conform to the fair value elections made by the Company in 2006 under its International Financial Reporting Standards reporting to Dexia. However, where the Company carries liabilities at fair value, the potential for volatility in the Company's earnings is created by incorporating the Company's own credit risk in the valuation of liabilities, which is required by GAAP.

Elections

On January 1, 2008, the Company elected to record the following at fair value:

•: Certain FP liabilities for which interest rate risk is hedged using interest rate derivatives in accordance with the Company's risk management strategies. The fair value election enabled the Company to record the liabilities at fair value without having to designate them in a fair value hedge relationship, as it had previously.
•: Certain fixed-rate assets in the portfolio of assets acquired in refinancing transactions. The fair value election enabled the Company to record those assets that are economically hedged with derivatives at fair value without having to designate them in a fair value hedge relationship.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

The following table presents the pre-tax changes in fair value included in the consolidated statements of operations for the six months ended June 30, 2009 for items for which the SFAS 159 fair value election was made.

Net Unrealized Gains (Losses) on Financial Instruments at Fair Value

	Six Months Ended June 30, 2009

	(in millions)
Assets acquired in refinancing transactions	$	25.2
FP segment debt		(215.5	)

Financial Instruments Carried at Fair Value

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

Fair Value Hierarchy of Financial Instruments
As of December 31, 2010

						Fair Value Hierarchy

				Fair Value		Level 1		Level 2		Level 3
				(in millions)
Assets:
General investment portfolio:
	Fixed maturity securities, available-for-sale:
		U.S government and agencies		$	151.2	$	—	$	151.2	$	—
		Obligations of state and political subdivisions			3,417.2		—		3,417.2		—
		Corporate securities			192.5		—		192.5		—
		Mortgage-backed securities:
			RMBS		344.5		—		272.2		72.3
			Commercial mortgage-backed securities ("CMBS")		18.3		—		18.3		—
		Asset-backed securities			297.8		—		133.1		164.7
		Foreign government securities			257.2		—		257.2		—

			Total fixed maturity securities		4,678.7		—		4,441.7		237.0
	Short-term investments				588.7		161.0		427.7		—
	Other invested assets(1)				33.3		0.2		21.4		11.7
	Credit derivative assets				181.8		—		—		181.8
	Financial guaranty VIE assets				3,368.4		—		—		3,368.4
	Other assets				7.6		—		7.6		—

		Total assets carried at fair value		$	8,858.5	$	161.2	$	4,898.4	$	3,798.9

Liabilities:
	Credit derivative liabilities			$	592.8	$	—	$	—	$	592.8
	Financial guaranty VIES' liabilities with recourse, at fair value				2,403.5		—		—		2,403.5
	Financial guaranty VIEs' liabilities without recourse, at fair value				1,518.4		—		—		1,518.4
	Other liabilities				0.1		—		0.1		—

		Total liabilities carried at fair value		$	4,514.8	$	—	$	0.1	$	4,514.7

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

Fair Value Hierarchy of Financial Instruments
As of December 31, 2009

							Fair Value Hierarchy

					Fair Value		Level 1		Level 2		Level 3
					(in millions)
Assets:
General investment portfolio:
	Fixed maturity securities, available-for-sale:
		U.S government and agencies			$	176.0	$	—	$	176.0	$	—
		Obligations of state and political subdivisions				3,871.6		—		3,871.6		—
		Corporate securities				131.7		—		131.7		—
		Mortgage-backed securities:
			RMBS			447.3		—		447.3		—
		Asset-backed securities				286.7		—		82.8		203.9
		Foreign government securities				270.3		—		270.3		—

				Total fixed maturity securities		5,183.6		—		4,979.7		203.9
	Short-term investments					542.0		291.3		250.7		—
	Other invested assets(1)					34.4		1.8		21.3		11.3
Credit derivative assets						227.0		—		—		227.0
Other assets						5.5		—		5.5		—

		Total assets carried at fair value			$	5,992.5	$	293.1	$	5,257.2	$	442.2

Liabilities:
Credit derivative liabilities					$	625.8	$	—	$	—	$	625.8
Other liabilities						0.1		—		0.1		—

		Total liabilities carried at fair value			$	625.9	$	—	$	0.1	$	625.8

(1): Includes mortgage loans that are recorded at fair value on a non-recurring basis. At December 31, 2010 and December 31, 2009, such investments were carried at their market value of $9.4 million and $11.1 million, respectively. The mortgage loans are classified as Level 3 of the fair value hierarchy as there are significant unobservable inputs used in the valuation of such loans. An indicative dealer quote is used to price the non-performing portion of these mortgage loans. The performing loans are valued using management's determination of future cash flows arising from these loans, discounted at the rate of return that would be required by a market participant. This rate of return is based on indicative dealer quotes.

Changes in Level 3 Fair Value Measurements

The table below presents a rollforward of the Company's financial instruments whose fair value included significant unobservable inputs (Level 3) during the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009.

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Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

Fair Value Level 3 Rollforward

										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 Standard			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)
Fixed maturity securities	$	203.9		$	—		$	203.9		$	(17.7	)(2)	$	(36.7	)	$	64.0		$	—		$	23.5	$	237.0		$	(36.7	)
Other invested assets		0.2			—			0.2			—	(11)		(0.5	)		2.6			—			—		2.3			—
Financial guaranty VIEs' assets		—			1,577.0			1,577.0			14.7	(4)		—			(262.6	)		2,039.3			—		3,368.4			169.6
Credit derivative asset (liability), net(9)		(398.8	)		—			(398.8	)		51.1	(10)		—			(63.3	)		—			—		(411.0	)		(10.8	)
Financial guaranty VIEs' liabilities with recourse		—			(1,720.6	)		(1,720.6	)		14.4	(4)		—			326.2			(1,023.5	)		—		(2,403.5	)		(323.5	)
Financial guaranty VIE liabilities without recourse		—			(207.9	)		(207.9	)		(32.5	)(4)		—			84.1			(1,362.1	)		—		(1,518.4	)		0.5

				Six Months 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 July 1, 2009								Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at December 31, 2009
	Fair Value at July 1, 2009			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)
Fixed maturity securities	$	219.4		$	(0.7	)(2)	$	—	$	(14.8	)	$	—	$	203.9		$	(0.7	)
Other invested assets		—			(4.4	)(11)		—		4.6			—		0.2			(4.4	)
Credit derivative asset (liability), net(9)		(622.8	)		286.8	(10)		—		(62.8	)		—		(398.8	)		224.9

				Six Months Ended June 30, 2009

																		Change in Unrealized Gains/(Losses) Related to Financial Instruments Held at June 30, 2009
				Total Pre-tax Realized/Unrealized Gains/(Losses)(1) Recorded in:
	Fair Value at December 31, 2008									Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2009
	Fair Value at December 31, 2008			Net Income (Loss)			Other Comprehensive Income (Loss)			Purchases, Issuances, Settlements, net			Transfers in and/or out of Level 3		Fair Value at June 30, 2009
	(in millions)
Fixed maturity securities	$	44.7		$	(7.0	)(2)	$	11.0		$	154.7		$	—	$	203.4		$	(0.0	)
Other invested assets		117.8			24.9	(12)		—			(15.2	)		—		127.5			25.2
FP segment investment portfolio(3)		1,702.4			(139.3	)(5)		(9.8	)		(59.4	)		—		1,493.9			(9.8	)
FP segment derivatives(3)		59.3			0.0	(8)		—			—			—		59.3			0.0
Other assets		100.0			(18.6	)(6)		—			—			—		81.4			(18.6	)
FP segment debt(3)		(799.1	)		(225.4	)(7)		—			0.1			—		(1,024.4	)		(219.7	)
Credit derivative asset (liability), net(9)		(1,256.4	)		712.3	(10)		—			(67.2	)		—		(611.3	)		622.1

(1): Realized and unrealized gains/(losses) from changes in values of Level 3 are only for the periods in which the financial instruments were classified as Level 3.
(2): Included in net realized investment gains (losses) from financial guaranty investment portfolio.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

6. Fair Value Measurement (Continued)

(3): Amount in net income (loss) is offset in noncontrolling interest.
(4): Included in net change in financial guaranty variable interest entities.
(5): OTTI reported in net realized gains (losses) from financial products segment and interest income reported in net interest income from financial products segment.
(6): Reported in fair value gain (loss) on committed capital securities.
(7): Unrealized gain is reported in net unrealized gains (losses) on financial instruments at fair value, and interest expense is reported in net interest expense from financial products segment.
(8): Reported in net interest income from financial products segment if designated in a qualifying fair-value hedging relationship, or net realized and unrealized gains (losses) on derivative instruments if not so designated.
(9): Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure.
(10): Reported in net change in fair value of credit derivatives.
(11): Reported in other income.
(12): Reported in net unrealized gains (losses) on financial instruments at fair value.

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

Fair Value of Financial Instruments

		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	$	4,678.7	$	4,678.7	$	5,183.6	$	5,183.6
	Short-term investments		588.7		588.7		542.0		542.0
	Other invested assets		131.9		141.8		154.4		162.1
	Note receivable from affiliate		300.0		314.0		300.0		300.0
	Credit derivative assets		181.8		181.8		227.0		227.0
	Financial guaranty VIEs' assets		3,368.4		3,368.4		—		—
	Other assets		7.6		7.6		5.5		5.5
Liabilities:
	Financial guaranty insurance contracts(1)		2,880.2		2,853.8		4,196.1		4,032.9
	Notes payable		127.0		131.0		149.1		148.5
	Credit derivative liabilities		592.8		592.8		625.8		625.8
	Financial guaranty VIEs' liabilities with recourse		2,403.5		2,403.5		762.7		762.7
	Financial guaranty VIEs' liabilities without recourse		1,518.4		1,518.4		—		—

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

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

7. Financial Guaranty Contracts Accounted for as Credit Derivatives

Accounting Policy

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 commission 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.

Credit Derivatives

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 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.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Credit Derivative Net Par Outstanding by Sector

The estimated remaining weighted average life of credit derivatives was 3.2 years at December 31, 2010 and 3.4 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:

Net Par Outstanding on Credit Derivatives

		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)
Pooled corporate obligations:
	CLOs/CBOs		27.4	%		28.3	%	$	24,498	AAA		27.6	%		25.1	%	$	27,113	AAA
	Synthetic investment grade pooled corporate(3)		17.0			16.8			14,008	AAA		17.4			15.7			12,493	AAA
	Synthetic high yield pooled corporate		34.8			34.7			8,020	AAA		36.7			34.4			11,705	AAA
	TruPS CDOs		56.2			63.0			89	AA		49.6			52.4			99	AA
	Market value CDOs of corporate obligations		17.0			49.9			1,492	AAA		17.0			32.3			1,492	AAA

Total pooled corporate obligations			25.2			26.6			48,107	AAA		26.8			25.1			52,902	AAA
U.S. RMBS:
	Subprime first lien (including net interest margin)		—			—			165	BB+		—			—			174	BB+
	Closed end second lien and HELOCs(4)		—			—			173	BBB		—			—			221	BBB

Total U.S. RMBS			—			—			338	BBB-		—			—			395	BBB-
Other									4,605	A								4,679	A

Total								$	53,050	AAA							$	57,976	AAA

(1): Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.
(2): Based on the Company's internal rating. The Company's rating scale is similar to that used by the nationally recognized rating agencies; however, the ratings in the above table may not be the same as ratings assigned by any nationally recognized rating agency.
(3): Increase in net par outstanding in the synthetic investment grade pooled corporate sector is due principally to the reassumption of a previously ceded book of business.
(4): Many of the closed end second lien transactions insured by the Company have unique structures whereby the collateral may be written down for losses without a corresponding write-down of the obligations insured by the Company. Many of these transactions are currently under-collateralized, with the principal amount of collateral being less than the principal amount of the obligation insured by the Company. The Company is not required to pay principal shortfalls until legal maturity (rather than making timely principal payments), and takes the under-collateralization into account when estimating expected losses for these transactions.

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

The $4.6 billion of exposure in "Other" CDS contracts includes asset classes, such as commercial receivables, international infrastructure, international RMBS and home equity securities, and pooled infrastructure securities.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

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

Distribution of Credit Derivative Net Par Outstanding by Rating(1)

		December 31, 2010					December 31, 2009

Ratings(1)		Net Par Outstanding		% of Total			Net Par Outstanding		% of Total
		(dollars in millions)
Super Senior		$	17,409		32.8	%	$	22,892		39.6	%
AAA			26,757		50.4			19,275		33.2
AA			4,351		8.2			9,939		17.1
A			2,320		4.4			3,539		6.1
BBB			1,496		2.8			1,611		2.8
BIG			717		1.4			720		1.2

	Total credit derivative net par outstanding	$	53,050		100.0	%	$	57,976		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 AAA-rated exposure on its internal rating scale has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to the Company's exposure or (2) the Company's exposure benefiting from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management's opinion, causes the Company's attachment point to be materially above the AAA attachment point.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Net Change in Fair Value of Credit Derivatives

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

Net Change in Fair Value of Credit Derivatives
Gain (Loss)

		Year Ended December 31,			Six Month Ended December 31,		Six Month Ended June 30,

		2010			2009		2009
					(in millions)
Realized gains on credit derivatives(1)		$	100.4		$	56.6	$	44.2
Net credit derivative losses (paid and payable) recovered and recoverable			(38.6	)		6.9		15.8

	Total realized gains and other settlements on credit derivatives		61.8			63.5		60.0
Total unrealized gains and other settlements on credit derivatives			(10.7	)		223.4		652.3

Net change in fair value of credit derivatives		$	51.1		$	286.9	$	712.3

(1): Comprised of net credit derivative premiums received and receivable and net ceding commissions (paid and payable) received and receivable.

Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, credit ratings of the referenced entities, realized gains and other settlements, and the issuing company's own credit rating and other market factors. Except for estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives are expected to reduce to zero as the exposure approaches its maturity date. During 2010 and 2009, the Company made $26.0 million and $4.0 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.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Net Change in Unrealized Gains (Losses) in Credit Derivatives
By Sector

		Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

Asset Type		2010			2009			2009
					(in millions)
Pooled corporate obligations:
	CLOs/CBOs	$	(2.6	)	$	225.5		$	243.3
	Synthetic investment grade pooled corporate		(1.4	)		(27.0	)		245.0
	Synthetic high yield pooled corporate		10.7			104.7			244.7
	TruPS CDOs		0.3			2.7			1.3
	Market value CDOs of corporate obligations		0.2			5.7			7.2

Total pooled corporate obligations			7.2			311.6			741.5
U.S. RMBS:
	Subprime first lien (including net interest margin)		1.1			0.1			1.1
	Closed end second lien and HELOCs		(2.0	)		11.5			(22.3	)

Total U.S. RMBS			(0.9	)		11.6			(21.2	)
Other(1)			(17.0	)		(99.8	)		(68.0	)

Total		$	(10.7	)	$	223.4		$	652.3

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

In the year ended December 31, 2010, unrealized fair value losses were generated primarily in the Other asset class. The loss in Other was primarily attributable to price declines on a XXX life securitization transaction. During 2010, AGM'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.

In 2009, AGM's credit spreads narrowed; however they remained relatively wide compared to pre-2007 levels. Partially offsetting the benefit attributable to AGM's wide credit spread were declines in fixed income security market prices primarily attributable to widening spreads across several markets as a result of the continued deterioration in credit markets and some credit rating downgrades.

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 AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. Generally, a widening of the CDS prices traded on AGM has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGM has an effect of offsetting unrealized gains that result from narrowing

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

general market credit spreads. An overall narrowing of spreads generally results in an unrealized gain on credit derivatives for the Company and an overall widening of spreads generally results in an unrealized loss for the Company.

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

		As of December 31,

		2010			2009
		(dollars in millions)
Quoted price of CDS contract (in basis points)			650			541
Fair value of CDS contracts:
	Before considering implication of the Company's credit spreads	$	(1,491.8	)	$	(2,289.0	)
	After considering implication of the Company's credit spreads	$	(411.0	)	$	(398.8	)

Components of Credit Derivative Assets (Liabilities)

		As of December 31,

		2010			2009
		(in millions)
Credit derivative assets		$	181.8		$	227.0
Credit derivative liabilities			(592.8	)		(625.8	)

	Net fair value of credit derivatives	$	(411.0	)	$	(398.8	)

As of December 31, 2010, AGM's credit spreads remained relatively wide compared to pre-2007 levels, as did general market spreads. The $1.5 billion liability as of December 31, 2010, which represents the fair value of CDS contracts before considering the implications of AGM's credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets, and ratings downgrades. The asset classes that remain most affected are pooled corporate obligations. When looking at December 31, 2010 compared to December 31, 2009, there was tightening of general market spreads as well as a run-off in net par outstanding, resulting in a gain of approximately $797.2 million before taking into account AGM's credit spreads.

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

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

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

Sensitivity to Changes in Credit Spread

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

	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	$	(907.2	)	$	(496.2	)
50% widening in spreads		(664.1	)		(253.1	)
25% widening in spreads		(540.2	)		(129.2	)
10% widening in spreads		(465.1	)		(54.1	)
Base Scenario		(411.0	)		—
10% narrowing in spreads		(376.1	)		34.9
25% narrowing in spreads		(324.0	)		87.0
50% narrowing in spreads		(237.7	)		173.3

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

8. Consolidation of Variable Interest Entities

The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are over-collateralization, first loss protection (or subordination) and excess spread. In the case of over-collateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses of multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate cash flows that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction's cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby, creating additional over-collateralization), or distributed to equity or other investors in the transaction.

Accounting Policy

For all years presented, the Company has evaluated whether it was the primary beneficiary or control party of its VIEs. If the Company concludes that it is the primary beneficiary it is required to

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

8. Consolidation of Variable Interest Entities (Continued)

consolidate the entire VIE. The accounting rules governing the criteria for determining the primary beneficiary or control party of VIEs changed effective January 1, 2010.

Prior to January 1, 2010, the Company determined whether it was the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE that included, among other factors, its capital structure, contractual terms, which variable interests create or absorb variability, related party relationships and the design of the VIE. The Company performed a quantitative analysis when qualitative analysis was not conclusive.

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

As part of the terms of its financial guaranty contracts, the Company obtains certain protective rights with respect to the VIE that are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. The Company obtains protective rights under its insurance contracts that give the Company additional controls over a VIE if there is either deterioration of deal performance or in the financial health of the deal servicer. Under GAAP, the Company is deemed to be the control party typically when its protective rights give it the power to both terminate and replace the deal servicer.

VIEs' liabilities insured by the Company are considered to be with recourse, since the Company guarantees the payment of principal and interest regardless of the performance of the related VIEs' assets. VIEs' liabilities not insured by the Company are considered to be non-recourse, since the payment of principal and interest of these liabilities is wholly dependent on the performance of the VIEs' assets.

Adoption of Consolidation of VIE Standard on January 1, 2010

The new accounting mandated the accounting changes prescribed by the statement to be recognized as a cumulative effect adjustment to retained earnings on January 1, 2010. This cumulative effect was a $166.6 million after-tax decrease to the opening retained earnings balance due to the

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

8. Consolidation of Variable Interest Entities (Continued)

consolidation of 18 VIEs at fair value and the deconsolidation of four VIEs. The impact of adopting the new accounting guidance was as follows:

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

		(in millions)
Assets:
	Premiums receivable	$	787.4		$	(9.9	)	$	777.5
	Deferred tax asset, net		972.4			89.7			1,062.1
	Financial guaranty variable interest entities' assets		762.3			814.7			1,577.0
	Total assets		10,898.5			894.5			11,793.0
Liabilities and shareholders' equity:
	Unearned premium reserves		6,468.3			(121.9	)		6,346.4
	Loss and LAE reserve		55.3			16.8			72.1
	Financial guaranty variable interest entities' liabilities with recourse		762.7			957.9			1,720.6
	Financial guaranty variable interest entities' liabilities without recourse		—			207.9			207.9
	Total liabilities		8,824.4			1,060.7			9,885.1
	Retained earnings		743.4			(166.6	)		576.8
	Total shareholders' equity attributable to Assured Guaranty Municipal Corp.		2,074.5			(166.6	)		1,907.9
	Noncontrolling interest of financial guaranty variable interest entities		(0.4	)		0.4			—
	Total shareholders' equity		2,074.1			(166.2	)		1,907.9
	Total liabilities and shareholders' equity		10,898.5			894.5			11,793.0

At December 31, 2009, the Company consolidated four VIEs that had issued debt obligations insured by the Company. Under the new accounting standard effective January 1, 2010, consolidation was no longer required and, accordingly, the four VIEs were deconsolidated at fair value, which was approximately $791.9 million in VIEs' assets and $788.7 million in VIEs' liabilities. The impact of this deconsolidation is included in the "Transition Adjustment" amounts above.

Consolidated VIEs

During the year ended December 31, 2010, the Company determined that based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the VIEs' most significant activities, eight additional VIEs required consolidation and two VIEs were required to be deconsolidated, bringing the total consolidated VIEs to 24 at December 31, 2010. This resulted in an increase in financial guaranty variable interest entities' assets of $2,039.3 million, an increase in financial guaranty variable interest entities' liabilities of $2,385.6 million and a net loss on consolidation of $237.0 million, which was included in "net change in financial guaranty variable interest entities" in the consolidated statement of operations.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

8. Consolidation of Variable Interest Entities (Continued)

The financial reports of the consolidated VIEs are prepared by outside parties and are not available within the time constraints that the Company requires to ensure the financial accuracy of the operating results. As such, the financial results of the VIEs are consolidated on a one quarter lag. The Company has elected the fair value option for assets and liabilities classified as financial guaranty variable interest entities' assets and liabilities. Upon consolidation of financial guaranty VIEs, the Company elected the fair value option because the carrying amount transition method was not practical.

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

Consolidated VIEs
By Type of Collateral

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

		Assets		Liabilities		Assets		Liabilities
		(in millions)
HELOCs		$	857.1	$	1,021.2	$	—	$	—
First liens
	Subprime		528.7		612.7		—		—
	Option ARMs		1,303.5		1,587.5		—		—
Alt-A second liens			86.2		107.6		—		—
Automobile loans			486.8		486.8		—		—
Credit card loans			106.1		106.1		233.4		233.1
Health care receivables			—		—		211.8		212.5
Consumer loans			—		—		199.2		199.2
Gas pipeline tariffs			—		—		117.9		117.9

	Total	$	3,368.4	$	3,921.9	$	762.3	$	762.7

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

8. Consolidation of Variable Interest Entities (Continued)

The table below shows the consolidated statement of operations activity of the consolidated VIEs:

Effect of Consolidating Financial Guaranty VIEs on Net Income
and Shareholder's Equity attributable to AGM

			Year Ended December 31, 2010			Six Months Ended December 31, 2009

			(in millions)
Net earned premiums			$	(46.2	)	$	—
Net change in financial guaranty variable interest entities:
	Interest income			192.7			7.8
	Interest expense			(72.7	)		(7.6	)
	Net realized and unrealized gains (losses) on assets			(345.1	)		—
	Net realized and unrealized (gains) losses on liabilities with recourse			93.8			—
	Net realized and unrealized (gains) losses on liabilities without recourse			2.2			—
	Other income			4.3			0.8
	Other expenses			(69.5	)		(2.2	)

		Net change in financial guaranty variable interest entities		(194.3	)		(1.2	)
Loss and loss adjustment expenses				63.4			—

	Total pre-tax effect on net income			(177.1	)		(1.2	)
Less: tax provision (benefit)				(62.0	)		—

	Total effect on net income			(115.1	)		(1.2	)
Less: noncontrolling interest				—			(1.2	)

	Total effect on net income attributable to Assured Guaranty Municipal Corp		$	(115.1	)	$	—

Total effect on shareholder's equity attributable to Assured Guaranty Municipal Corp			$	(281.7	)	$	—

Non-Consolidated VIEs

To date, the results of qualitative and quantitative analyses have indicated that the Company does not have a majority of the variability in any other VIEs and, as a result, are not consolidated in the Company's consolidated financial statements. The Company's exposure provided through its financial guaranties with respect to debt obligations of special purpose entities is included within net par outstanding in Note 4.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

9. General Investment Portfolio

Accounting Policy

Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in money market funds. All the Company's fixed maturity securities were classified as available-for-sale at the time of purchase, and therefore carried at fair value with change in fair value recorded in OCI, unless OTTI. Changes in fair value for OTTI securities are bifurcated between credit losses and non-credit changes in fair value. Credit losses on OTTI securities are recorded in the consolidated statement of operations and the non-credit component of OTTI securities are recorded in OCI. OTTI credit losses adjust the amortized cost of impaired securities. That new amortized cost basis is not adjusted for subsequent recoveries in fair value. However, the amortized cost basis is adjusted for accretion and amortization using the effective interest method and recorded in net investment income.

Prior to April 1, 2009, if a security was deemed to be OTTI, the entire difference between fair value and the amortized cost of a debt security at the measurement date was recorded in the consolidated statement of operations as a realized loss. The previous amortized cost basis less the OTTI recognized in earnings was the new amortized cost basis of the investment. That new amortized cost basis was not adjusted for subsequent recoveries in fair value. However, if, based on cash flow estimates on the date of impairment, the recoverable value of the investment was greater than the new cost basis (i.e., the fair value on the date of impairment) of the investment, the difference was accreted into net investment income in future periods based upon the amount and timing of expected future cash flows of the security.

Realized gains and losses on sales of investments are determined using the specific identification method. Realized loss includes amounts recorded for other than temporary impairments on debt securities.

For mortgage-backed securities, and any other holdings for which there is prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any necessary adjustments required due to the resulting change in effective yields and maturities are recognized in current income.

Other invested assets includes assets acquired in refinancing transactions which are primarily comprised of franchise loans which are evaluated for impairment by assessing the probability of collecting expected cash flows. Any impairment is recorded in the consolidated statement of operations and any subsequent increases in expected cash flow are recorded as an increase in yield over the remaining life of the loans.

Assessment for Other-Than Temporary Impairments

Since April 1, 2009, if an OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

9. General Investment Portfolio (Continued)

If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is separated into (1) the amount representing the credit loss and (2) the amount related to all other factors.

The Company has a formal review process for all securities in its investment portfolio, including a review for impairment losses. Factors considered when assessing impairment include:

•: a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;
•: a decline in the market value of a security for a continuous period of 12 months;
•: recent credit downgrades of the applicable security or the issuer by rating agencies;
•: the financial condition of the applicable issuer;
•: whether loss of investment principal is anticipated;
•: whether scheduled interest payments are past due; and
•: whether the Company has the intent to sell or more likely than not will be required to sell a security prior to its recovery in fair value.

For all debt securities in unrealized loss positions where the Company (1) does not have the intent to sell the debt security or (2) it is more likely than not the Company will not be required to sell the debt security before its anticipated recovery, the Company analyzes the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the net present value is less than the amortized cost of the investment, an OTTI loss is recorded. The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company's estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis of an investment, as mentioned above, and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of the security. For mortgage-backed and asset backed securities, cash flow estimates also include prepayment assumptions and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The determination of the assumptions used in these projections requires the use of significant management judgment.

The Company's assessment of a decline in value included management's current assessment of the factors noted above. The Company also seeks advice from its outside investment managers. If that assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

9. General Investment Portfolio (Continued)

Fixed Maturity Securities and Short Term Investments

The difference between fair value at the Acquisition Date and par value or projected future cash is being amortized through net investment income over the estimated lives of each security. For the year ended December 31, 2010 and six months ended December 31, 2009, net investment income included approximately $22.8 million and $28.2 million, respectively, in amortization of premium on the investment portfolio.

Net Investment Income

		Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

		2010			2009			2009
					(in millions)
Income from fixed maturity securities		$	185.4		$	92.7		$	123.4
Income from short-term investments			(0.4	)		1.4			1.2
Dividends			—			—			—
Interest income from note receivable from affiliate			15.0			0.5			—

	Gross investment income		200.0			94.6			124.6
Investment expense			(4.0	)		(2.6	)		(2.0	)

	Net investment income	$	196.0		$	92.0		$	122.6

Net Realized Investment Gains (Losses)

			Year Ended December 31,			Six Months Ended December 31,			Six Months Ended June 30,

			2010			2009			2009
						(in millions)
Realized gains on investment portfolio			$	20.1		$	3.6		$	8.2
Realized losses on investment portfolio				(6.5	)		(1.5	)		(18.4	)
OTTI:
	Intent to sell			(2.3	)		—			(3.2	)
	Credit component of OTTI securities			(23.3	)		(0.8	)		—

		OTTI		(25.6	)		(0.8	)		(3.2	)

Net realized investment gains (losses)			$	(12.0	)	$	1.3		$	(13.4	)

For fixed maturity securities for which the Company has recognized OTTI and where the portion of the fair value adjustment related to other factors was recognized in OCI balance at January 1, 2010 was $0 and at December 31, 2010 was $7.3 million attributable to additions for credit losses on securities for which an OTTI was not previously recognized.

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

9. General Investment Portfolio (Continued)

Fixed Maturity Securities and Short-Term Investments
By Security Type

			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(2)			Weighted Average of Credit Quality(3)
			(dollars in millions)
Fixed maturity securities:
	U.S. government and agencies			3	%	$	147.4	$	3.8	$	—		$	151.2	$	—		AA+
	Obligations of state and political subdivisions			64			3,364.1		73.5		(20.4	)		3,417.2		(0.8	)	AA
	Corporate securities			4			193.2		2.1		(2.8	)		192.5		—		AA-
	Mortgage-backed securities:(4)
		RMBS		7			371.6		9.7		(36.8	)		344.5		(15.4	)	A+
		CMBS		0			18.1		0.3		(0.1	)		18.3		—		AAA
	Asset-backed securities			6			300.8		1.6		(4.6	)		297.8		(4.1	)	BBB-
	Foreign government securities			5			263.0		0.4		(6.2	)		257.2		—		AA+

Total fixed maturity securities				89			4,658.2		91.4		(70.9	)		4,678.7		(20.3	)	AA
Short-term investments				11			588.4		0.3		—			588.7		—		AAA

	Total fixed maturity and short-term investments			100	%	$	5,246.6	$	91.7	$	(70.9	)	$	5,267.4	$	(20.3	)	AA

Table of Contents

Assured Guaranty Municipal Corp.

Notes to Consolidated Financial Statements (Continued)

December 31, 2010 and 2009

9. General Investment Portfolio (Continued)

The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. The following tables summarize, for all securities in an unrealized loss position as of December 31, 2010 and December 31, 2009, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

The increase in gross unrealized losses during 2010 was due to the increase in U.S. Treasury yields during the fourth quarter of 2010.

Of the securities in an unrealized loss position for 12 months or more as of December 31, 2010, four securities had unrealized losses greater than 10% of book value. The total unrealized loss for

these securities as of December 31, 2010 was $9.5 million. The Company has determined that these securities were not impaired as of December 31, 2010.

The amortized cost and estimated fair value of long term available-for-sale fixed maturity securities by contractual maturity as of December 31, 2010 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

To fulfill state licensing requirements the Company has placed on deposit eligible securities of $10.9 million and $12.6 million as of December 31, 2010 and December 31, 2009, respectively, for the protection of policyholders.

No material investments of the Company were non-income producing for the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009, respectively.

The Company has purchased securities that it has insured, and for which it has expected losses, in order to economically mitigate insured losses. These securities are purchased at a discount. As of December 31, 2010, securities purchased for loss mitigation purposes had a fair value of $70.8 million representing $273.3 million of par. Under the terms of certain credit derivative contracts, the Company has obtained the obligations referenced in the transactions and recorded such assets in fixed maturity securities in the consolidated balance sheets. Such amounts totaled $166.2 million, representing $251.8 million of par.

The Company has rights under certain of its financial guaranty insurance policies and indentures that allow it to accelerate the insured notes and pay claims under its insurance policies upon the occurrence of predefined events of default. To mitigate financial guaranty insurance losses, the Company may elect to purchase the outstanding insured obligation or its underlying collateral. Generally, refinancing vehicles reimbursed AGM in whole for its claim payments in exchange for assignments of certain of AGM's rights against the trusts. The refinancing vehicles obtained their funds from the proceeds of AGM-insured GICs issued in the ordinary course of business by the Financial Products Companies. The refinancing vehicles are consolidated with the Company. The carrying value of assets acquired in refinancing transactions was $129.4 million and $152.4 million as of December 31, 2010 and 2009, respectively and primarily comprised of franchise loans. The accretable yield on the franchise loans was $137.1 million and $141.1 million at December 31, 2010 and 2009, respectively.

Income on assets acquired in refinancing transactions is recorded in "other income" was $6.7 million for year ended December 31, 2010, $3.2 million and $4.3 million for six months ended December 31, 2009 and June 30, 2009, respectively.

The Company's "FP Segment Investment Portfolio", consisted of the investments supporting the FP VIE liabilities. The Company intended to, and on July 1, 2009, did transfer to Dexia the FP Investment Portfolio as part of the separation of the FP and Financial Guaranty businesses immediately prior to the sale of AGMH. As a result, the Company was required to record an OTTI charge in the consolidated statements of operations for all assets in the FP Investment Portfolio in an unrealized loss position. OTTI was $120.9 million in the first six months of 2009.

Each of the Company's insurance companies' ability to pay dividends depends, among other things, upon their financial condition, results of operations, cash requirements and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their state of domicile and other states. Financial statements prepared in accordance with accounting practices prescribed or permitted by local insurance regulatory authorities differ in certain respects from GAAP.

The Company's U.S. domiciled insurance companies prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners ("NAIC") and their respective insurance departments. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual. There are no permitted accounting practices on a statutory basis.

GAAP differs in certain significant respects from statutory accounting practices, applicable to insurance companies, that are prescribed or permitted by insurance regulatory authorities. The principal differences result from the following statutory accounting practices:

Statutory net income was $401.8 million for the year ended December 31, 2010, net income was $244.1 million for six months ended December 31, 2009 and net loss was $15.9 million for the period of six months ended June 30, 2009. Statutory surplus totaled $992.7 million at December 31, 2010 and $909.4 million at December 31, 2009. Statutory contingency reserve was $1,585.4 million at December 31, 2010 and $1,323.0 million at December 31, 2009.

AGM is a New York domiciled insurance company. Under the insurance laws of the State of New York (the "New York Insurance Law") and related requirements, AGM may pay dividends out of

earned surplus, provided that, together with all dividends declared or distributed by AGM during the preceding 12 months, the dividends do not exceed the lesser of (a) 10% of policyholders' surplus as of its last statement filed with the Superintendent of Insurance of the State of New York (the "New York Superintendent") or (b) adjusted net investment income (net investment income at the preceding December 31, plus net investment income which has not already been paid out as dividends for the three calendar years prior to the preceding calendar year) during this period. Based on AGM's statutory statements for the year ended December 31, 2010, the maximum amount available for payment of dividends by AGM without regulatory approval over the 12 months following December 31, 2010, was approximately $92.7 million. However, in connection with the AGMH Acquisition, AGM has committed to the New York Insurance Department that it will not pay any dividends for a period of two years from the Acquisition Date without the written approval of the New York Insurance Department. Under New York insurance regulations, AGM is required at all times to maintain a minimum surplus of $66.5 million.

The provision for income taxes consists of an amount for taxes currently payable and an amount for deferred taxes. Deferred income taxes are provided for the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset to that amount that is more likely than not to be realized.

Non-interest-bearing tax and loss bonds are purchased to prepay the tax benefit that results from deducting contingency reserves as provided under Internal Revenue Code Section 832(e). The Company records the purchase of tax and loss bonds in deferred taxes.

The Company's Bermuda subsidiary, Assured Guaranty (Bermuda) Ltd. (formerly Financial Security Assurance International Ltd. ("AGBM")), is not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGBM will be exempt from taxation in Bermuda until March 28, 2016. The Company's U.S. and United Kingdom ("U.K.") subsidiary are subject to income taxes imposed by U.S. and U.K. authorities and file applicable tax returns.

In conjunction with AGL's purchase of AGMH on July 1, 2009, AGM and its insurance company subsidiaries have joined the consolidated federal tax group of AGUS. A new tax sharing agreement was entered into effective July 1, 2009 whereby each company in the AGUS consolidated tax group will pay or receive its proportionate share of taxable expense or benefit as if it filed on a separate return basis.

During the year ended December 31, 2010, a net tax benefit of $55.8 million was recorded by the Company due to the filing of an amended tax return which included the AGMH and Subsidiaries tax group. The amended return filed in September 2010 was for a period prior to the AGMH Acquisition and consequently, the Company no longer has a deferred tax asset related to net operating losses or alternative minimum tax credits associated with the AGMH Acquisition. Instead, the Company has recorded additional deferred tax assets for loss reserves and foreign tax credits and has decreased its liability for uncertain tax positions. The event giving rise to this recognition occurred after the Measurement Period as defined by acquisition accounting and thus the amount is included in the year ended December 31, 2010 net income.

A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below:

The deferred income tax asset (liability) reflects the tax effect of the following temporary differences:

As of December 31, 2010, the Company had foreign tax credits carry forward of $22.3 million which never expire. Internal Revenue Code limits the amounts of foreign tax credits the Company may utilize each year. Management believes sufficient future taxable income exists to realize the full benefit of these foreign tax credits.

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

The U.S. Internal Revenue Service ("IRS") has completed audits of all of the Company's U.S. subsidiaries' federal income tax returns for taxable years through 2005. AGMH and subsidiaries are under audit for 2008 while as members of the Dexia Holdings Inc. consolidated group. The Company is indemnified by Dexia for any potential liability associated with this audit of any periods prior to the AGMH acquisition.

The following table provides a reconciliation of the beginning and ending balances of the total liability for unrecognized tax benefits recorded under ASC 740-10-25. The Company does not believe it is reasonably possible that this amount will change significantly in the next twelve months.

The Company's policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2010, the Company has accrued $1.1 million in interest and penalties.

The Company treats the guaranty it provides on CDS as insurance contracts for tax purposes and as such a taxable loss does not occur until the Company expects to make a loss payment to the buyer of credit protection based upon the occurrence of one or more specified credit events with respect to the contractually referenced obligation or entity. The Company holds its CDS to maturity, at which time any unrealized mark to market loss would revert to zero absent any credit related losses.

The tax treatment of CDS is an unsettled area of the law. The uncertainty relates to the IRS determination of the income or potential loss associated with CDS as either subject to capital gain (loss) or ordinary income (loss) treatment. In treating CDS as insurance contracts the Company treats both the receipt of premium and payment of losses as ordinary income and believes it is more likely than not that any CDS credit related losses will be treated as ordinary by the IRS. To the extent the IRS takes the view that the losses are capital losses in the future and the Company incurred actual losses associated with the CDS the Company would need sufficient taxable income of the same character within the carryback and carryforward period available under the tax law.

The Company came to the conclusion that it is more likely than not that its deferred tax asset will be fully realized after weighing all positive and negative evidence available as required under GAAP. The evidence that was considered included the following:

After examining all of the available positive and negative evidence, the Company believes that no valuation allowance is necessary in connection with this deferred tax asset. The Company will continue to analyze the need for a valuation allowance on a quarter-to-quarter basis.

The Company cedes portions of its exposure on obligations it has insured ("Ceded Business") in exchange for premiums, net of ceding commissions. The Company enters into ceded reinsurance agreements to limit its exposure to risk on an on-going basis. In the event that any of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. The Company's ceded contracts generally allow the Company to recapture Ceded Business after certain triggering events, such as reinsurer downgrades. Over the past two years, the Company has entered into several commutations in order to reassume books of business from BIG financial guaranty companies and its other reinsurers. Any commutation gains were recorded in other income. The resulting commutation gains of $49.8 million and losses of $1.8 million for 2010 and 2009, respectively, were recorded in other income. While certain Ceded Business has been re-assumed, the Company still has significant Ceded Business.

The effect of the Company's commutations of reinsurance contracts is summarized below.

Direct, assumed, and ceded premium and loss and LAE amounts for the year ended December 31, 2010, six months ended December 31, 2009 and six months ended June 30, 2009 were as follows:

		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		$	3.5	$	—		$	—	$	—		$	3.5	$	—
Obligations of state and political subdivisions			786.2		(20.0	)		2.1		(0.4	)		788.3		(20.4	)
Corporate securities			84.3		(2.8	)		—		—			84.3		(2.8	)
Mortgage-backed securities
	RMBS		72.3		(27.7	)		12.2		(9.1	)		84.5		(36.8	)
	CMBS		5.4		(0.1	)		—		—			5.4		(0.1	)
Asset-backed securities			197.4		(4.6	)		—		—			197.4		(4.6	)
Foreign securities			245.3		(6.2	)		—		—			245.3		(6.2	)

	Total	$	1,394.4	$	(61.4	)	$	14.3	$	(9.5	)	$	1,408.7	$	(70.9	)

Number of securities					194					6					200

Number of securities with OTTI					6					1					7

		As of December 31

		Increase in Net Unearned Premium Reserve		Increase in Net Par
		(in millions)
2010		$	103.4	$	15,299
2009			45.8		2,042

	Total	$	149.2	$	17,341

		Ratings at April 19, 2011		Par Outstanding as of December 31, 2010

Reinsurer		Moody's Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(1)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
		(dollars in millions)
Affiliated Companies(2)				$	67,095	$	673	$	395
Radian Asset Assurance Inc.		Ba1	BB-		21,700		63		—
Tokio Marine & Nichido Fire Insurance Co., Ltd.		Aa2(3)	AA-(3)		19,286		—		930
RAM Reinsurance Co. Ltd		WR(4)	WR(4)		10,480		—		24
Syncora Guarantee Inc		Ca	WR		4,252		1,185		—
Mitsui Sumitomo Insurance Co. Ltd.		Aa3	AA-		2,462		—		—
ACA Financial Guaranty Corporation		NR	WR		835		17		—
Swiss Reinsurance Co.		A1	A+		516		—		—
Financial Guaranty Insurance Company		WR	WR		249		1,514		540
CIFG Assurance North America Inc.		WR	WR		73		122		—
MBIA Insurance Corporation		B3	B		—		8,239		—
Ambac Assurance Corp		WR	WR		—		3,938		—
Other		Various	Various		1,023		—		15

	Total			$	127,971	$	15,751	$	1,904

		Credit Rating

Reinsurer		Super Senior		AAA		AA		A		BBB		BIG		Total
				(dollars in millions)
Affiliated Companies		$	111	$	1,957	$	29,116	$	26,756	$	8,432	$	723	$	67,095
Radian Asset Assurance Inc.			193		1,040		9,722		7,686		2,737		322		21,700
Tokio Marine & Nichido Fire Insurance Co., Ltd.			489		1,883		6,088		6,626		3,331		869		19,286
RAM Reinsurance Co. Ltd			149		881		4,606		3,122		1,503		219		10,480
Syncora Guarantee Inc			—		25		462		803		2,938		24		4,252
Mitsui Sumitomo Insurance Co. Ltd.			8		153		908		895		415		83		2,462
ACA Financial Guaranty Corporation			—		—		574		247		14		—		835
Swiss Reinsurance Co.			—		10		109		215		99		83		516
Financial Guaranty Insurance Company			—		—		—		249		—		—		249
CIFG Assurance North America Inc.			—		—		—		—		—		73		73
Other			—		—		224		742		56		1		1,023

	Total	$	950	$	5,949	$	51,809	$	47,341	$	19,525	$	2,397	$	127,971

		As of December 31, 2010

		Assumed Premium Receivable, net of Commissions		Ceded Expected Loss and LAE Receivable
		(in millions)
Affiliated Companies		$	—	$	(8.3	)
Radian Asset Assurance Inc.			—		22.6
Tokio Marine & Nichido Fire Insurance Co., Ltd.			—		(17.8	)
RAM Reinsurance Co. Ltd.			—		(4.2	)
Swiss Reinsurance Co.			—		(4.2	)
Mitsui Sumitomo Insurance Co. Ltd.			—		(6.1	)
Syncora Guarantee Inc.			—		1.5
Financial Guaranty Insurance Company			5.8		—

	Total	$	5.8	$	(16.5	)

	As of December 31, 2009

	(in millions)
Unearned premium reserve	$	35.5
Net credit derivative liabilities		333.0
Notes payable		149.1
Other liabilities		0.3
Other information:
Gross par outstanding	$	21,049

	Year Ended December 31, 2010			Six Months Ended December 31, 2009

	(in millions)
Revenues:
Net earned premiums	$	(83.8	)	$	(36.8	)
Profit commission income		1.1			5.8
Realized gains and other settlements on credit derivatives		(1.9	)		(1.1	)
Net unrealized gains (losses) on credit derivatives		19.4			(24.1	)
Expenses:
Loss and loss adjustment expenses		0.7			3.2
Commissions incurred (earned)		(8.3	)		(0.2	)

Year		(in millions)

2011		$	8.8
2012			8.9
2013			8.5
2014			7.4
2015			7.2
Thereafter			81.4

	Total	$	122.2

	As of December 31,

	2010				2009
	Principal		Carrying Value		Principal		Carrying Value
	(in millions)
Notes Payable	$	119.3	$	127.0	$	140.1	$	149.1

Expected Withdrawal Date		Principal Amount

		(in millions)
2011		$	31.9
2012			22.9
2013			21.8
2014			16.2
2015			9.5
Thereafter			17.0

	Total	$	119.3

			Year Ended December 31, 2010		Six Months Ended December 31, 2009

			(in millions)
Share-Based Employee Cost
Restricted Stock
	Recurring amortization		$	0.1	$	—
	Accelerated amortization for retirement eligible employees			—		—

		Subtotal		0.1		—

Restricted Stock Units
	Recurring amortization			0.4		0.1
	Accelerated amortization for retirement eligible employees			0.7		—

		Subtotal		1.1		0.1

Stock Options
	Recurring amortization			0.3		0.2
	Accelerated amortization for retirement eligible employees			0.4		—

		Subtotal		0.7		0.2

ESPP				0.0		—

Total Share-Based Employee Cost				1.9		0.3

Less: Share-based compensation capitalized as deferred acquisition costs				0.1		—

Share-based compensation expense			$	1.8	$	0.3

						Price per Share at Grant Date	Paid During the Year

							(dollars in millions)
2009	977,413	—	276,842	198,611	501,960	N/A	$	—
2010	501,960	—	289,388	41,711	170,861	N/A		4.1

						Price per Share at Purchase Date

2009	439,380	—	260,199	29,692	149,489	$	N/A
2010	149,489	—	81,671	13,326	54,492		N/A

ASSURED GUARANTY LTD - FORM 8-K - EX-99.1 - April 22, 2011

Attached files