Edgar Filing: ASSURED GUARANTY LTD

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

FORM 10-Q


(Mark One)
ý		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2010
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition Period from to

Commission File No. 001-32141

ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter)


Bermuda (State or other jurisdiction of incorporation)		98-0429991 (I.R.S. employer identification no.)

30 Woodbourne Avenue
Hamilton HM 08
Bermuda
(Address of principal executive offices)

(441) 279-5700
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

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


Large accelerated filer ý		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

The number of registrant's Common Shares ($0.01 par value) outstanding as of July 31, 2010 was 183,743,594 (excludes 192,390 unvested restricted shares).

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ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q



PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets (unaudited) as of June 30, 2010 and December 31, 2009	1
	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009	2
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009	3
	Consolidated Statements of Shareholders' Equity (unaudited) for the Six Months ended June 30, 2010	4
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2010	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	105
	Forward-Looking Statements	105
	Website Information	106
	Executive Summary	106
	Importance of Financial Strength Ratings	113
	AGMH Acquisition	115
	Insured Portfolio Profile	118
	Results of Operations	121
	Exposure to Residential Mortgage Backed Securities	148
	Summary of Relationships with Monolines	154
	Non-GAAP Financial Measures	155
	Liquidity and Capital Resources	158
Item 3.	Market Risk	179
Item 4.	Controls and Procedures	182
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	183
Item 1A.	Risk Factors	186
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	191
Item 6.	Exhibits	191

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Assured Guaranty Ltd.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands except per share and share amounts)

			June 30, 2010		December 31, 2009

Assets
Investment portfolio:
	Fixed maturity securities, available-for-sale, at fair value (amortized cost of $8,861,683 and $8,943,909)		$	9,113,803	$	9,139,900
	Short term investments, at fair value			1,391,183		1,668,279

		Total investment portfolio		10,504,986		10,808,179
Assets acquired in refinancing transactions				138,306		152,411
Cash				97,212		44,133
Premiums receivable, net of ceding commissions payable				1,311,254		1,418,232
Ceded unearned premium reserve				929,475		1,080,466
Deferred acquisition costs				250,635		241,961
Reinsurance recoverable on unpaid losses				19,044		14,122
Credit derivative assets				491,122		492,531
Committed capital securities, at fair value				20,855		9,537
Deferred tax asset, net				1,072,260		1,158,205
Salvage and subrogation recoverable				686,039		420,238
Financial guaranty variable interest entities' assets				1,844,673		762,303
Other assets				222,729		200,375

	Total assets		$	17,588,590	$	16,802,693

Liabilities and shareholders' equity
Unearned premium reserves			$	7,661,289	$	8,400,152
Loss and loss adjustment expense reserve				403,471		289,470
Long-term debt				921,628		917,362
Notes payable				137,632		149,051
Credit derivative liabilities				1,765,966		2,034,634
Reinsurance balances payable, net				243,039		215,239
Financial guaranty variable interest entities' liabilities with recourse				2,049,253		762,652
Financial guaranty variable interest entities' liabilities without recourse				184,890		—
Other liabilities				352,857		513,974

	Total liabilities			13,720,025		13,282,534

Commitments and contingencies
Common stock ($0.01 par value, 500,000,000 shares authorized; 183,743,517 and 184,162,896 shares issued and outstanding in 2010 and 2009)				1,837		1,842
Additional paid-in capital				2,581,269		2,584,983
Retained earnings				1,092,129		789,869
Accumulated other comprehensive income, net of deferred tax provision (benefit) of $55,425 and $58,551				191,330		141,814
Deferred equity compensation (181,818 shares)				2,000		2,000

	Total shareholders' equity attributable to Assured Guaranty Ltd.			3,868,565		3,520,508
Noncontrolling interest of financial guaranty variable interest entities				—		(349	)

	Total shareholders' equity			3,868,565		3,520,159

	Total liabilities and shareholders' equity		$	17,588,590	$	16,802,693

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

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Assured Guaranty Ltd.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands except per share amounts)

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

				2010			2009			2010			2009
Revenues
	Net earned premiums			$	292,110		$	78,634		$	611,670		$	227,080
	Net investment income				90,871			43,300			175,173			86,901
	Net realized investment gains (losses):
		Other-than-temporary impairment ("OTTI") losses			(17,412	)		(36,466	)		(18,529	)		(54,912	)
		Less: portion of OTTI loss recognized in other comprehensive income			—			(21,633	)		(661	)		(21,633	)
		Other net realized investment gains (losses)			8,974			9,945			18,843			11,281

			Net realized investment gains (losses)		(8,438	)		(4,888	)		975			(21,998	)
	Net change in fair value of credit derivatives:
		Realized gains and other settlements			38,353			27,816			65,056			48,395
		Net unrealized gains (losses)			35,115			(254,284	)		287,213			(227,302	)

			Net change in fair value of credit derivatives		73,468			(226,468	)		352,269			(178,907	)
	Fair value gain (loss) on committed capital securities				12,593			(60,570	)		11,318			(40,904	)
	Financial guaranty variable interest entities' revenues				(19,133	)		—			(14,945	)		—
	Other income				(13,396	)		492			(26,325	)		1,394

		Total Revenues			428,075			(169,500	)		1,110,135			73,566

Expenses
	Loss and loss adjustment expenses				71,156			38,030			201,657			117,784
	Amortization of deferred acquisition costs				6,936			16,548			15,109			39,969
	Assured Guaranty Municipal Holdings Inc. ("AGMH") acquisition-related expenses				2,751			24,225			6,772			28,846
	Interest expense				24,831			6,484			49,965			12,305
	Financial guaranty variable interest entities' expenses				(19,610	)		—			(4,832	)		—
	Other operating expenses				47,507			26,533			110,040			55,885

		Total expenses			133,571			111,820			378,711			254,789

Income (loss) before income taxes					294,504			(281,320	)		731,424			(181,223	)
Provision (benefit) for income taxes
	Current				44,822			(9,874	)		5,869			1,701
	Deferred				46,144			(101,442	)		200,042			(98,409	)

		Total provision (benefit) for income taxes			90,966			(111,316	)		205,911			(96,708	)

Net income (loss)					203,538			(170,004	)		525,513			(84,515	)
Less: Noncontrolling interest of variable interest entities					—			—			—			—

Net income (loss) attributable to Assured Guaranty Ltd.				$	203,538		$	(170,004	)	$	525,513		$	(84,515	)

Earnings per share:
		Basic		$	1.10		$	(1.82	)	$	2.85		$	(0.91	)
		Diluted		$	1.08		$	(1.82	)	$	2.77		$	(0.91	)
Dividends per share				$	0.045		$	0.045		$	0.090		$	0.090

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

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Assured Guaranty Ltd.

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

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

		2010			2009			2010			2009
Net income (loss)		$	203,538		$	(170,004	)	$	525,513		$	(84,515	)
Unrealized holding gains (losses) arising during the period on:
	Investments with no OTTI, net of deferred income tax provision (benefit) of $3,785, $10,415, $(1,597) and $14,930		48,183			59,667			58,058			49,965
	Investments with OTTI, net of deferred income tax provision (benefit) of $0, $(1,665), $0 and $(1,665)		—			(19,968	)		(661	)		(19,968	)

Unrealized holding gains (losses) during the period, net of tax			48,183			39,699			57,397			29,997
Less: reclassification adjustment for gains (losses) included in net income (loss), net of deferred income tax provision (benefit) of $(4,206), $2,226, $(1,438) and $2,191			(4,232	)		(7,114	)		2,413			(24,189	)

Change in net unrealized gains on investments			52,415			46,813			54,984			54,186
Change in cumulative translation adjustment			(1,375	)		6,384			(5,259	)		(2,003	)
Change in cash flow hedge			(104	)		(104	)		(209	)		(209	)

Other comprehensive income (loss)			50,936			53,093			49,516			51,974

Comprehensive income (loss)			254,474			(116,911	)		575,029			(32,541	)
Less: Comprehensive income (loss) attributable to noncontrolling interest of variable interest entities			—			—			—			—

Comprehensive income (loss) of Assured Guaranty Ltd.		$	254,474		$	(116,911	)	$	575,029		$	(32,541	)

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

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Assured Guaranty Ltd.

Consolidated Statement of Shareholders' Equity (Unaudited)

For the Six Months Ended June 30, 2010

(dollars in thousands, except share data)

																					Noncontrolling Interest of Financial Guaranty Consolidated Variable Interest Entities

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

Balance, January 1, 2010		184,162,896			1,842			2,584,983			583,329			141,814			2,000		3,313,968			—			3,313,968
Net income		—			—			—			525,513			—			—		525,513			—			525,513
Dividends on common stock ($0.09 per share)		—			—			—			(16,613	)		—			—		(16,613	)		—			(16,613	)
Dividends on restricted stock units		—			—			100			(100	)		—			—		—						—
Common stock repurchases		(707,350	)		(7	)		(10,450	)		—			—			—		(10,457	)		—			(10,457	)
Share-based compensation and other		287,971			2			6,636			—			—			—		6,638			—			6,638
Change in cash flow hedge, net of tax of $(113)		—			—			—			—			(209	)		—		(209	)		—			(209	)
Change in cumulative translation adjustment, net of tax of $(2,854)		—			—			—			—			(5,259	)		—		(5,259	)		—			(5,259	)
Unrealized gain on investments, net of tax of $(159)		—			—			—			—			54,984			—		54,984			—			54,984

Balance, June 30, 2010		183,743,517		$	1,837		$	2,581,269		$	1,092,129		$	191,330		$	2,000	$	3,868,565		$	—		$	3,868,565

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

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Assured Guaranty Ltd.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

			Six Months Ended June 30,

			2010			2009
Net cash flows provided by (used in) operating activities			$	(249,589	)	$	202,780

Investing activities
	Fixed maturity securities:
		Purchases		(1,166,379	)		(827,862	)
		Sales		780,818			705,004
		Maturities		488,552			5,500
	Net sales (purchases) of short-term investments			276,641			(693,637	)
	Proceeds from financial guaranty variable interest entities' assets			217,329			—
	Other			8,317			—

Net cash flows provided by (used in) investing activities				605,278			(810,995	)

Financing activities
	Net proceeds from issuance of common stock			—			448,495
	Net proceeds from issuance of equity units			—			167,972
	Dividends paid			(16,613	)		(8,199	)
	Repurchases of common stock			(10,457	)		(3,676	)
	Share activity under option and incentive plans			(2,233	)		(778	)
	Paydown of financial guaranty variable interest entities' liabilities			(259,367	)		—
	Repayment of notes payable			(10,850	)		—

Net cash flows provided by (used in) financing activities				(299,520	)		603,814
Effect of exchange rate changes				(3,090	)		603

Increase in cash				53,079			(3,798	)
Cash at beginning of period				44,133			12,305

Cash at end of period			$	97,212		$	8,507

Supplemental cash flow information
Cash paid (received) during the period for:
	Income taxes		$	136,645		$	6,836
	Interest		$	45,266		$	11,800
Claims paid, net of reinsurance			$	516,834		$	210,818

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2010

1. Business and Organization

Assured Guaranty Ltd. ("AGL" and, together with its subsidiaries, "Assured Guaranty" or the "Company") is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States ("U.S.") and international public finance, infrastructure and structured finance markets. The Company applies its credit underwriting expertise, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products. The Company's primary product is a guaranty of principal and interest payments on debt securities. These securities include municipal finance obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued for international infrastructure projects; and asset-backed securities ("ABS") issued by special purpose entities ("SPEs"). The Company markets its credit protection products directly to issuers and underwriters of public finance, infrastructure and structured finance securities as well as to investors in such debt obligations. The Company guarantees debt obligations issued in many countries, although its principal focus is on the U.S. and European markets.

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

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

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

Segments

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

1. Business and Organization (Continued)

external reinsurers. The financial guaranty segments include contracts accounted for as both insurance and credit derivatives. These segments are further discussed in Note 19.

Importance of Financial Strength Ratings

Debt obligations guaranteed by AGL's insurance company subsidiaries are generally awarded debt credit ratings that are the same rating as the financial strength rating of the AGL subsidiary that has guaranteed that obligation. Investors in products insured by AGC or AGM frequently rely on rating agency ratings because ratings influence the trading value of securities and form the basis for many institutions' investment guidelines as well as individuals' bond purchase decisions. Therefore, the Company manages its business with the goal of achieving high financial strength ratings, preferably the highest that an agency will assign. However, the models used by rating agencies differ, presenting conflicting goals that sometimes make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company's products) and change frequently.

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

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

There can be no assurance that rating agencies will not take action on the Company's ratings, including downgrading such ratings. The Company's business and its financial condition have been and will continue to be subject to risk of the global financial and economic conditions that could materially and negatively affect the demand for its products, the amount of losses incurred on transactions it guarantees, and its financial strength ratings.

2. AGMH Acquisition

On the Acquisition Date, AGL, through its wholly owned subsidiary Assured Guaranty US Holdings Inc. ("AGUS"), purchased AGMH and, indirectly, its subsidiaries (excluding those involved in

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

2. AGMH Acquisition (Continued)

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

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

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

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

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

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

The fair value of a financial guaranty direct contract is the estimated premium that a similarly rated hypothetical financial guarantor would demand to assume each policy. The methodology for determining such value takes into account the rating of the insured obligation, expectation of loss, sector and term. On January 1, 2009, new accounting guidance became effective for financial guaranty insurance which requires a Company to recognize loss reserves only to the extent expected losses

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

2. AGMH Acquisition (Continued)

exceed deferred premium revenue. As the fair value of the deferred premium revenue exceeded the Company's estimate of expected loss for each contract, no loss reserves were recorded at July 1, 2009 for the Acquired Companies' contracts.

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

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

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

The bargain purchase gain was recorded within "Goodwill and settlement of pre-existing relationship" in the Company's consolidated statements of operations at the Acquisition Date. The bargain purchase resulted from the unprecedented credit crisis, which resulted in a significant decline in AGMH's franchise value due to material insured losses, ratings downgrades and significant losses at Dexia. Dexia required government intervention in its affairs, resulting in motivation to sell AGMH, and with the absence of potential purchasers of AGMH due to the financial crisis, the Company was able to negotiate a bargain purchase price. The initial difference between the purchase price of $822 million and AGMH's recorded net assets of $2.1 billion was reduced significantly by the recognition of additional liabilities related to AGMH's insured portfolio on a fair value basis as required by purchase accounting.

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

2. AGMH Acquisition (Continued)

Pro Forma Condensed Combined Statement of Operations

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

Pro Forma Unaudited Results of Operations

	Second Quarter 2009									Six Months 2009

	Revenues			Net Income (Loss) Attributable to Assured Guaranty Ltd.			Net Income per Basic Share			Revenues		Net Income (Loss) Attributable to Assured Guaranty Ltd.			Net Income per Basic Share
	(dollars in thousands, except per share amounts)
Assured Guaranty as reported	$	(169,500	)	$	(170,004	)	$	(1.82	)	$	73,566	$	(84,515	)	$	(0.91	)
Pro Forma Combined		382,709			137,053			0.86			1,480,260		606,212			3.81

3. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with GAAP and, in the opinion of management, reflect all adjustments which are of a normal recurring nature, necessary for a fair statement of the Company's financial condition, results of operations and cash flows for the periods presented. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements cover the three-month period ended June 30, 2010 ("Second Quarter 2010") and the three-month period ended June 30, 2009 ("Second Quarter 2009"), the six-month period ended June 30, 2010 ("Six Months 2010") and the six-month period ended June 30, 2009 ("Six Months 2009). Results of operations for the Second Quarter and Six Months ended June 30, 2010 and 2009 are not necessarily indicative of the results that may be expected for a full year. The Second Quarter 2010 and Six Months 2010 financial statements include the effects of the Company's common share and equity units offerings that took place in 2009 and the effects of the AGMH Acquisition, which was effective July 1, 2009. In addition, 2010 financial statements include the effects of consolidating certain financial guaranty VIEs (See Note 8).

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

3. Summary of Significant Accounting Policies (Continued)

These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, filed with the U.S. Securities and Exchange Commission (the "SEC").

Certain of AGL's subsidiaries are subject to U.S. and U.K. income tax. The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year of 2010. A discrete calculation of the provision is calculated for each interim period.

The global financial markets experienced volatility and disruption over the past several years including depressed home prices and increased foreclosures, falling equity market values, rising unemployment, declining business and consumer confidence and the risk of increased inflation, which have precipitated an economic slowdown. While there have been signs of a recovery as seen by stabilizing unemployment and home prices as well as rising equity markets, there can be no assurance that volatility and disruption will not return to these markets in the near term. These conditions may adversely affect the Company's future profitability, financial position, investment portfolio, cash flow, statutory capital, financial strength ratings and stock price. Additionally, future legislative, regulatory or judicial changes in the jurisdictions regulating the Company may adversely affect its ability to pursue its current mix of business, materially impacting its financial results.

4. Outstanding Exposure

The Company's insurance policies and credit derivative contracts which, although written in different forms, collectively are considered financial guaranty contracts and typically guarantee the scheduled payments of principal and interest on public finance and structured finance obligations. The gross amount of in force exposure (principal and interest) was $1,058.0 billion at June 30, 2010 and $1,095.0 billion at December 31, 2009. The net amount of in force exposure (principal and interest), which deducts amounts ceded to third party reinsurers, was $942.6 billion at June 30, 2010 and $958.3 billion at December 31, 2009.

The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade ("IG") at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations, as well as through reinsurance.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Outstanding Exposure (Continued)

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

Summary of Public Finance Insured Portfolio

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Types of Issues			June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
			(in millions)
U.S.:
	General obligation		$	199,969	$	201,264	$	18,001	$	22,880	$	181,968	$	178,384
	Tax backed			94,440		94,825		9,785		11,796		84,655		83,029
	Municipal utilities			77,307		77,872		6,320		8,294		70,987		69,578
	Transportation			42,862		42,540		6,106		7,243		36,756		35,297
	Healthcare			27,351		28,214		5,194		6,205		22,157		22,009
	Higher education			15,796		16,399		1,025		1,267		14,771		15,132
	Housing			7,470		9,623		808		1,099		6,662		8,524
	Infrastructure finance			4,894		4,530		895		977		3,999		3,553
	Investor-owned utilities			1,677		1,694		3		4		1,674		1,690
	Other public finance—U.S.			6,318		6,002		73		120		6,245		5,882

		Total public finance—U.S.		478,084		482,963		48,210		59,885		429,874		423,078
Non-U.S.:
	Infrastructure finance			17,738		19,404		2,790		3,060		14,948		16,344
	Regulated utilities			17,716		18,979		4,771		5,128		12,945		13,851
	Pooled infrastructure			4,267		4,684		259		280		4,008		4,404
	Other public finance—non-U.S.			9,857		10,485		2,185		2,309		7,672		8,176

		Total public finance—non-U.S.		49,578		53,552		10,005		10,777		39,573		42,775

Total public finance obligations			$	527,662	$	536,515	$	58,215	$	70,662	$	469,447	$	465,853

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Outstanding Exposure (Continued)

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

Summary of Structured Finance Insured Portfolio

			Gross Par Outstanding				Ceded Par Outstanding				Net Par Outstanding

Types of Collateral			June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
			(in millions)
U.S.:
	Pooled corporate obligations		$	76,840	$	82,622	$	7,997	$	8,289	$	68,843	$	74,333
	RMBS and home equity			28,720		31,033		1,708		1,857		27,012		29,176
	Financial products(1)			8,394		10,251		—		—		8,394		10,251
	CMBS			7,347		7,463		53		53		7,294		7,410
	Consumer receivables			7,410		9,314		356		441		7,054		8,873
	Structured credit			2,602		2,738		126		131		2,476		2,607
	Commercial receivables			2,364		2,485		3		3		2,361		2,482
	Insurance securitizations			1,731		1,731		80		80		1,651		1,651
	Other structured finance—U.S.			2,056		2,754		1,186		1,236		870		1,518

		Total structured finance—U.S.		137,464		150,391		11,509		12,090		125,955		138,301
Non-U.S.:
	Pooled corporate obligations			24,687		27,743		2,770		3,046		21,917		24,697
	RMBS and home equity			4,824		5,623		359		396		4,465		5,227
	Structured credit			1,951		2,285		142		216		1,809		2,069
	Commercial receivables			1,742		1,908		36		36		1,706		1,872
	Insurance securitizations			994		995		15		14		979		981
	CMBS			674		752		—		—		674		752
	Other structured finance—non-U.S.			644		717		82		47		562		670

		Total structured finance—non-U.S.		35,516		40,023		3,404		3,755		32,112		36,268

Total structured finance obligations			$	172,980	$	190,414	$	14,913	$	15,845	$	158,067	$	174,569

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Outstanding Exposure (Continued)

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

		June 30, 2010					December 31, 2009

Ratings(1)		Net Par Outstanding		% of Net Par Outstanding			Net Par Outstanding		% of Net Par Outstanding
		(dollars in millions)
Super senior		$	30,593		4.9	%	$	43,353		6.8	%
AAA			70,755		11.3			59,786		9.3
AA			187,846		29.9			196,859		30.7
A			235,446		37.5			233,200		36.4
BBB			77,399		12.3			82,059		12.8
Below investment grade ("BIG") (See Note 5)(2)			25,475		4.1			25,165		4.0

	Total exposures	$	627,514		100.0	%	$	640,422		100.0	%

(1): Represents the Company's internal rating. The Company's ratings scale is similar to that used by the nationally recognized rating agencies; however, the ratings in the above table may not be the same as ratings assigned by any nationally recognized rating agency. The super senior category, which is not generally used by rating agencies, is used by the Company in instances where the Company's triple-A-rated exposure 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 benefits 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.
(2): Includes $747.3 million in gross par as of June 30, 2010 which the Company obtained for risk mitigation purposes.

As part of its financial guaranty business, the Company enters into credit derivative transactions. In such transactions, the buyer of protection pays the seller of protection a periodic fee in fixed basis points on a notional amount. In return, the seller makes a contingent payment to the buyer if one or more defined credit events occurs with respect to one or more third party referenced securities or loans. A credit event may be a non-payment event such as a failure to pay, bankruptcy, or restructuring, as negotiated by the parties to the credit derivative transaction. The total notional amount of insured credit derivative exposure outstanding which is accounted for at fair value as of June 30, 2010 and December 31, 2009 and included in the Company's financial guaranty exposure in the tables above was $112.2 billion and $119.0 billion, respectively. See Note 7.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $6.0 billion for structured finance and $2.2 billion for public finance commitments at June 30, 2010. The structured finance commitments include the unfunded component of and delayed draws on pooled corporate transactions. Public finance commitments are typically short term and relate to primary and secondary public finance debt issuances. The commitments are contingent on the satisfaction of all conditions set forth in the them and may expire unused or be cancelled at the

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

4. Outstanding Exposure (Continued)

counterparty's request. Therefore the total commitment amount does not necessarily reflect actual future guaranteed amounts.

5. Significant Risk Management Activities

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

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

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

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

The Company monitors its IG credits to determine whether any new credits need to be internally downgraded to BIG. Quarterly procedures include qualitative and quantitative analysis of the Company's insured portfolio to identify potential new BIG credits. The Company refreshes its internal credit ratings on individual credits in cycles based on the Company's view of the credit's quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. Credits identified through this process as BIG are subjected to further review by Surveillance personnel to determine the various probabilities of a loss. Surveillance personnel present analysis related to potential loss scenarios to the reserve committee.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Significant Risk Management Activities (Continued)

Below Investment Grade Surveillance Categories

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

•: BIG Category 1: Below investment grade transactions showing sufficient deterioration to make material losses possible, but for which no losses have been incurred. Non-investment grade transactions on which liquidity claims have been paid are in this category.
•: BIG Category 2: Below investment grade transactions for which expected losses have been established but for which no unreimbursed claims have yet been paid.
•: BIG Category 3: Below investment grade transactions for which expected losses have been established and on which unreimbursed claims have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

Financial Guaranty Exposures
(Insurance and Credit Derivative Form)

				June 30, 2010

				BIG Net Par Outstanding
				BIG Net Par Outstanding								Total Net Par Outstanding
				BIG 1		BIG 2		BIG 3		Total BIG		Total Net Par Outstanding
				(in millions)
First Lien U.S. RMBS:
	Prime First Lien			$	28	$	656	$	—	$	684	$	920
	Alt-A First Lien				622		4,059		224		4,905		6,517
	Alt-A Options ARM				551		2,069		545		3,165		3,579
	Subprime (including net interest margin ("NIMs")				28		2,941		98		3,067		9,485
Second Lien U.S. RMBS:
	Closed end second lien ("CES")				114		519		545		1,178		1,218
	Home equity lines of credit ("HELOC")				636		24		3,626		4,286		5,293

		Total U.S. RMBS			1,979		10,268		5,038		17,285		27,012
Other structured finance					1,229		980		2,246		4,455		131,055
Public finance					2,234		901		600		3,735		469,447

			Total	$	5,442	$	12,149	$	7,884	$	25,475	$	627,514

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

June 30, 2010

5. Significant Risk Management Activities (Continued)

Information in this note is only for contracts accounted for as financial guaranty insurance and reinsurance contracts.

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

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

The $65.9 million loss due to foreign exchange rate changes relates to installment premium receivable denominated in currencies other than the U.S. dollar. Approximately 40% of the Company's installment premiums at June 30, 2010 are denominated in currencies other than the U.S. dollar, primarily in Euros and British Pound Sterling ("GBP"). Premium receivable is revalued to the spot rate at the end of each reporting period with the change reflected in either (1) other income in the consolidated statements of operations for premium receivable recorded by subsidiaries using the U.S. dollar as its functional currency or (2) other comprehensive income ("OCI") as a cumulative translation adjustment for premium receivables recorded by subsidiaries using a functional currency other than the U.S. dollar.

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

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

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

The following table presents a rollforward of the present value of net expected loss and LAE since December 31, 2009 by sector.

Financial Guaranty Insurance
Present Value of Net Expected Loss and Loss Adjustment Expense
Roll Forward by Sector(1)

Expected loss to be paid in the table above represents the present value of losses to be paid net of expected salvage and subrogation and reinsurance cessions. The amount of "expected loss to be paid" differs from "net expected PV losses to be expensed" due primarily to amounts paid that have not yet been expensed and amounts expensed not yet paid.

Loss expense is recognized in the consolidated statements of operations when the sum of claim payments not yet expensed, plus the present value of future expected losses exceeds deferred premium revenue.

The Company's estimate of ultimate losses on a policy is subject to significant uncertainty over the life of the insured transaction due to the potential for significant variability in credit performance due to changing economic, fiscal and financial market variability over the long duration of most contracts. The determination of expected loss is an inherently subjective process involving numerous estimates, assumptions and judgments by management. The Company's estimates of expected losses on RMBS transactions takes into account expected recoveries from sellers and originators of the underlying residential mortgages due to breaches in the originator's representations and warranties regarding the loans transferred to the RMBS transaction.

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

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

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

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

In accordance with the Company's standard practices, the Company evaluated the most current available information as part of its loss estimation process, including trends in delinquencies and charge-offs on the underlying loans and its experience in requiring providers of representations and warranties to purchase ineligible loans out of these transactions. Most of the Company's expected loss and loss adjustment expense reserves and paid losses relate to U.S. RMBS. As has been widely reported in the press, unprecedented levels of delinquencies and defaults have negatively impacted the mortgage market, especially U.S. RMBS issued in the period from 2005 through 2007. Based on information observed during the quarter (particularly early stage delinquencies), the Company determined that it may be witnessing the beginning of an improvement in the housing and mortgage markets. The Company also formed a view that any improvement in the second lien loan markets may be more gradual than it had assumed in its prior projection scenarios for second liens. As a result, the Company adjusted from prior quarters the assumptions and probability weightings of its loss projection scenarios to reflect those views. These changes were made with respect to how scenarios were run in the first quarter of 2010. The scenarios used in the first quarter of 2010, with the exception of an adjustment to the subprime severity, were the same as those employed at year-end 2009.

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

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

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

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

For second lien transactions the Company calculates expected losses in the following fashion. A loan is generally "charged off" by the securitization's servicer once the loan is 180 days past due and therefore the Company's projections assume that a loss is charged off once it is 180 days past due. Most second lien transactions report the amount of loans in five monthly delinquency categories (i.e., 30-59 days past due, 60-89 days past due, 90-119 days past due, 120-149 days past due and 150-179 days past due). The Company estimates the amount of loans that will default over the next five months by calculating current representative liquidation rates (the percent of loans in a given delinquency status that are assumed to ultimately default) from selected transactions and then applying those liquidation rates to the amount of loans in the delinquency categories. The amount of loans projected to default in the third, fourth and fifth month are then expressed as conditional default rates ("CDR"), and the average of those CDRs is then used as the basis for calculating defaults after the fifth month. In the base scenario, this CDR (the "plateau CDR") is held constant for one month. Last quarter, the base scenario's plateau was 4 months, the change this quarter reflects an improvement in the mortgage and real estate markets. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. In the base scenario, the time over which the CDR trends down to its final CDR is eighteen months. Last quarter,

the base scenario's ramp was 12 months, the change this quarter was implemented to reflect that the recovery may take longer than the Company had previously anticipated. Therefore, in the base case scenario, the total time from the current period to the end of the ramp (when the long-term steady CDR is reached) is 24 months. The long-term steady state CDRs are calculated as the constant conditional default rates that would have yielded the amount of losses originally expected at underwriting.

Breaches of Representations and Warranties—Second Lien U.S. RMBS: As mentioned above, performance of the collateral underlying certain securitizations has substantially differed from the Company's original expectations. The Company has employed several loan file diligence firms and law firms as well as devoting internal resources to review the mortgage files surrounding many of the defaulted loans. As of June 30, 2010 the Company had performed a detailed review of approximately 24,800 files, representing nearly $1.9 billion in outstanding par of defaulted second lien loans underlying insured transactions, and identified a material number of defaulted loans that breach representations and warranties regarding the characteristics of the loans such as misrepresentation of income or occupation, undisclosed debt and non- compliance with underwriting guidelines at loan origination. The Company continues to review new files as new loans default and as new loan files are made available to it. As of June 30, 2010 following negotiation with the sellers and originators of the breaching loans, the Company had reached agreement to have $227 million of the second lien loans repurchased and has included in its net expected loss estimates for second liens as of June 30, 2010 an estimated benefit from repurchases of $998.0 million of second lien loans, of which $875.0 million relates to HELOCs and the remainder to CES. The amount the Company ultimately recovers related to contractual representations and warranties is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and amount of loans determined to have breached representations and warranties and, potentially, negotiated settlements or litigation. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of representations and warranties the Company considered: the credit worthiness of the provider of representations and warranties, the number of breaches found on defaulted loans, the success rate resolving these breaches with the provider of the representations and warranties and the potential amount of time until the recovery is realized. This calculation involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of representations and warranties, to the Company realizing very limited recoveries. These scenarios were probability weighted in order to determine the recovery incorporated into the Company's reserve estimate. This approach was used for both loans that had already defaulted and those assumed to default in the future. Recoveries were limited to amounts paid or expected to be paid out by the Company.

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

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, loss severities (assumed to be 95%) and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percent of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to the final draw rate over a period of three months. The final draw rates were assumed to range from 0.1% to 3.5%.

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

In the most recent prior quarters, the Company's base case assumed a 4 month CDR plateau and a 12 month CDR assumed the date of commencement ramp down. Reflecting the Company's belief that the primary variable relating to the Company's assumption was when an improvement in the mortgage markets would begin, in recent prior quarters it also modeled a 1 month CDR plateau and a 7 month CDR plateau. Consistent with the Company's current belief that an improvement in the mortgage market may be beginning but that any recovery may be more gradual that had previously been anticipated, this quarter's base case assumed a 1 month plateau and an 18 month ramp down. Increasing the CDR plateau to 4 months and keeping the ramp down at 18 months would increase the expected loss by approximately $106.0 million for HELOC transactions and $10.1 million for CES transactions. On the other hand, keeping the CDR plateau at 1 month but decreasing the length of the CDR ramp down back to last quarter's 12 month assumption would decrease the expected loss from those taken by approximately $110.5 million for HELOC transactions and $10.0 million for CES transactions.

First lien RMBS are generally categorized in accordance with the characteristics of the first lien mortgage loans on one to four family homes supporting the transactions. The collateral supporting "Subprime RMBS" transactions is comprised of first-lien residential mortgage loans made to subprime borrowers. A "subprime borrower" is one considered to be a higher risk credit based on credit scores or other risk characteristics. Another type of RMBS transaction is generally referred to as "Alt-A RMBS." The collateral supporting such transactions is comprised of first-lien residential mortgage loans made to "prime" quality borrowers that lack certain ancillary characteristics that would make them prime. When more than 66% of the loans originally included in the pool are mortgage loans with an option to make a minimum payment that has the potential to negatively amortize the loan (i.e., increase the amount of principal owed), the transaction is referred to as an "Option ARM." Finally, transactions may be primarily composed of loans made to prime borrowers.

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

The majority of projected losses in first lien RMBS transactions are expected to come from mortgage loans that are delinquent or in foreclosure, an increase in delinquent and foreclosed loans beyond those delinquent and foreclosed last quarter is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquency categories. The following table shows the Company's liquidation assumptions for various delinquency categories as of June 30 and March 31, 2010. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations over two years.

Losses are also projected on first lien RMBS that are presently current loans. The Company projects these losses by applying a CDR trend. The start of that CDR trend is based on the defaults the Company projected would emerge from currently delinquent and foreclosed loans. The total amount of expected defaults from these loans is then translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 24 months, would be sufficient to produce

approximately the amount of losses that were calculated to emerge from the various delinquency categories. In the base case, each transaction's CDR is projected to improve over 12 months to an intermediate CDR (calculated as 15% of its CDR plateau); that intermediate CDR is held constant for 36 months then trails off in steps to a final CDR of 5% of the CDR plateau. In the First Quarter 2010, the CDR plateau was held constant for 3 months before it was assumed to begin improving, which reflects the Company's view that an improvement in the real estate and mortgage market may be beginning. Under the Company's methodology, defaults projected to occur in the first 24 months represent defaults that can be attributed to loans that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 24 month period represent defaults attributable to borrowers that are currently performing.

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historical highs and the Company is assuming that these historical highs continue for another year. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in June 2011, and in the base scenario decline over two years to 40%.

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

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

The rate at which the principal amount of loan is prepaid may impact both the amount of losses projected (since that amount is a function of the CDR and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the CPR follows a similar pattern to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be either 10% or 15% depending on the scenario run.

Breaches of Representations and Warranties—First Lien U.S. RMBS: As mentioned above, performance of the collateral underlying certain securitizations has substantially differed from the Company's original expectations. The Company has employed several loan file diligence firms and law firms as well as devoting internal resources to review the mortgage files surrounding many of the defaulted loans. As of June 30, 2010 the Company had performed a detailed review of approximately

5,200 files representing nearly $2.3 billion in outstanding par of defaulted first lien loans underlying insured transactions, and identified a material number of defaulted loans that breach representations and warranties regarding the characteristics of the loans. The Company continues to review new files as new loans default and as new loan files are made available to it. Following negotiation with the sellers and originators of the breaching loans, as of June 30, 2010, the Company had reached agreement to have $50.5 million of first lien loans repurchased. The Company has included in its net expected loss estimates for first liens as of June 30, 2010 an estimated benefit from repurchases of $322.8 million, of which $242.8 million relates to Option ARMs, $79.2 million to Alt A first liens and $0.8 million to prime transactions. The amount the Company will ultimately recover related to contractual representations and warranties is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and amount of loans determined to have breached representations and warranties and, potentially, negotiated settlements or litigation recoveries. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of representations and warranties, the Company considered the credit worthiness of the provider of representations and warranties, the number of breaches found on defaulted loans, the success rate in resolving these breaches with the provider of the representations and warranty and the potential amount of time until the recovery is realized. This calculation involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of representations and warranties to the Company realizing very limited recoveries. These scenarios were probability weighted in order to determine the recovery incorporated into the Company's reserve estimate. This approach was used for both loans that had already defaulted and those assumed to default in the future. In all cases, recoveries were limited to amounts paid or expected to be paid by the Company.

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

In establishing its reserves, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast an economic recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the current CDR. The Company also stressed CPRs and the speed of recovery of loss severity rates. In a somewhat more stressful environment than that of the base case, where the CDR recovery was more gradual and the final CPR was 15% rather than 10%, the Company's expected losses would increase by approximately $11.3 million for Alt A first liens, $89.9 million for Option ARMs, $16.3 million for subprime and $0.1 million for prime transactions. In an even more stressful scenario where the CDR plateau was extended 3 months (so was 27 months long) before the same more gradual CDR recovery and loss severities were assumed to recover over 4 rather than 2 years (and subprime loss severities were assumed to recover only to 55%), the Company's expected losses would increase by approximately $39.5 million for Alt A first liens, $196.7 million for Option ARMs, $106.3 million for subprime and $0.6 million for prime transactions. The Company also considered a scenario where the recovery was faster than in its base case. In this scenario, where the CDR plateau was 3 months shorter (21 months, effectively assuming that liquidation rates would

improve) and the CDR recovery was more pronounced, the Company's expected losses would decrease by approximately $21.4 million for Alt A first liens, $83.0 million for Option ARMs, $29.5 million for subprime and $0.3 million for prime transactions.

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

The Company's $2.1 billion in net par of XXX Life Insurance transactions include $882.5 million rated BIG by the Company as of June 30, 2010, and corresponded to three transactions. These two of the three XXX transactions had material amounts of their assets invested in US RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the current investment manager, projected credit impairments on the invested assets and performance of the blocks of life insurance business at June 30, 2010, the Company's gross expected loss, prior to reinsurance or netting of unearned premium, for its two BIG XXX insurance transactions was $63.3 million and its net reserve was $51.1 million.

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

Within the public finance category, $3.5 billion was rated BIG, with the largest BIG exposure being a public finance transaction for sewer service in Jefferson County, Alabama. The Company's total exposure to this transaction is approximately $512 million of net par. The Company has made debt service payments during the year and expects to make additional payments in the near term. The Company is continuing its risk remediation efforts for this exposure. In addition, during the Second Quarter 2010, the Company sued JPMorgan Chase Bank, N.A. and JPMorgan Securities, Inc. (together, "JPMorgan"), the underwriter of debt issued by Jefferson County, in New York Supreme Court alleging that JPMorgan induced the Company to issue its insurance policies in respect of such debt through material and fraudulent misrepresentation and omissions, including concealing that it had secured its

position as underwriter and swap provider through bribes to Jefferson County commissioners and others.

The Company continues to closely monitor other sectors and individual financial guaranty insurance transactions it feels warrant the additional attention, including, as of June 30, 2010, its commercial mortgage exposure of $912.5 million of net par, its trust preferred securities ("TruPS") collateralized debt obligations ("CDOs") exposure of $1.1 billion, its student loan exposure of $4.1 billion net par and its U.S. health care exposure of $21.9 billion of net par.

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

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

Some of the Company's CDS have rating triggers that allow certain CDS counterparties to terminate in the case of downgrades. If certain of its credit derivative contracts were terminated, the Company could be required to make a termination payment as determined under the relevant documentation, although under certain documents, the Company may have the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a third party guaranty of the obligations of the Company. As of June 30, 2010 and December 31, 2009, if AGC's ratings were downgraded to levels between BBB or Baa2 and BB+ or Ba1, certain CDS counterparties could terminate certain CDS contracts covering approximately $5.9 billion and $6.0 billion par insured, respectively. As of the date of this filing, none of AG Re,

AGRO or AGM had any material CDS exposure subject to termination based on its rating. The Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with the Company. These payments could have a material adverse effect on the Company's liquidity and financial condition.

Under a limited number of other CDS contracts, the Company may be required to post eligible securities as collateral—generally cash or U.S. government or agency securities. For certain of such contracts, this requirement is based on a mark-to-market valuation, as determined under the relevant documentation, in excess of contractual thresholds that decline or are eliminated if the Company's ratings decline. Under other contracts, the Company has negotiated caps such that the posting requirement cannot exceed a certain amount. As of June 30, 2010, without giving effect to thresholds that apply under current ratings, the amount of par that is subject to collateral posting is approximately $18.9 billion. Counterparties have agreed that for approximately $17.6 billion of that $18.9 billion, the maximum amount that the Company could be required to post at current ratings is $435 million; if AGC were downgraded to A+ by Standard & Poor's Rating Services ("S&P") or A3 by Moody's Investors Service, Inc. ("Moody's"), that maximum amount would be $485 million. As of June 30, 2010, the Company had posted approximately $637.7 million of collateral in respect of approximately $18.8 billion of par insured. The Company may be required to post additional collateral from time to time, depending on its ratings and on the market values of the transactions subject to the collateral posting.

Realized gains and other settlements on credit derivatives include credit derivative premiums received and receivable for credit protection the Company has sold under its insured CDS contracts, premiums paid and payable for credit protection the Company has purchased, contractual claims paid and payable and received and receivable related to insured credit events under these contracts, ceding commissions (expense) income and realized gains or losses related to their early termination.

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

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

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

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

As of June 30, 2010, AGC's and AGM's credit spreads remained relatively wide compared to pre-2007 levels, as did general market spreads. The $5.6 billion liability as of June 30, 2010, which represents the fair value of CDS contracts before considering the implications of AGC's and AGM's credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets, and ratings downgrades. The asset classes that remain most affected, are recent vintages of Subprime RMBS and Alt-A deals, as well as trust-preferred securities. When looking at June 30, 2010 compared to December 31, 2009, there was tightening of general market spreads as well as a run-off in net par outstanding and the effect of extending estimated remaining lives, resulting in a gain of approximately $194.5 million before taking into account AGC or AGM's credit spreads.

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

The estimated remaining weighted average life of credit derivatives was 5.6 years at June 30, 2010 and 6.0 years at December 31, 2009.

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

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

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

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

The Company's exposure to "Other" CDS contracts is also highly diversified. It includes $3.9 billion of exposure to four pooled infrastructure transactions comprised of diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels. The remaining $9.9 billion of exposure in "Other" CDS contracts is comprised of numerous deals typically structured with significant underlying credit enhancement and spread across various asset classes, such as commercial receivables, international RMBS and home equity securities, infrastructure, regulated utilities and consumer receivables.

The unrealized gain for Six Months 2010 on "Other" CDS contracts is primarily attributable to implied spreads narrowing on several different transactions, none of which represent material amounts. The unrealized gain for Second Quarter and Six Months 2009 on "Other" CDS contracts is primarily attributable to implied spreads narrowing on several UK public finance infrastructure transactions and a film securitization transaction.

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

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

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

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


	As of June 30, 2010
Credit Spreads(1)	Estimated Net Fair Value (Pre-Tax)		Estimated Pre-Tax Change in Gain/(Loss)
	(in millions)
100% widening in spreads	$	(3,099.1	)	$	(1,824.3	)
50% widening in spreads		(2,264.1	)		(989.3	)
25% widening in spreads		(1,737.9	)		(463.1	)
10% widening in spreads		(1,462.9	)		(188.1	)
Base Scenario		(1,274.9	)		—
10% narrowing in spreads		(1,151.9	)		122.9
25% narrowing in spreads		(988.6	)		286.2
50% narrowing in spreads		(662.4	)		612.4

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

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

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

Pursuant to the new accounting guidance, the Company evaluated its power to direct the significant activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE losses that could potentially be significant to the VIE. The Company determined that it is the primary beneficiary of 20 VIEs at June 30, 2010 based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the VIEs' most significant activities. The Company consolidated 21 VIEs at March 31, 2010. As a result of changes in control rights during the quarter ended June 30, 2010, two VIEs were deconsolidated and one additional VIE was consolidated during the quarter resulting in an increase in financial guaranty variable interest entities' assets of $51.0 million, an increase in financial guaranty variable interest entities' liabilities of $71.5 million and a net gain on deconsolidation/consolidation of $2.2 million, which was included in "financial guaranty variable interest entities' revenues" in the consolidated statement of operations. The Company is not primarily liable for the debt obligations issued by the VIEs and would only be required to make payments on these debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. The Company's creditors do not have any rights with regard to the assets of the VIEs.

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

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 20 VIEs are consolidated on a one quarter lag.

The new accounting guidance mandates the accounting changes prescribed by the statement to be recognized by the Company as a cumulative effect adjustment to retained earnings as of January 1, 2010. The cumulative effect of adopting the new accounting guidance was a $206.5 million after-tax decrease to the opening retained earnings balance due to the consolidation of 21 VIEs at fair value on January 1, 2010. The impact of adopting the new accounting guidance on the Company's balance sheet was as follows:

		June 30, 2010(1)

		(in thousands)
2010 (July 1 - September 30)		$	73,957
2010 (October 1 - December 31)			75,659
2011			135,614
2012			119,603
2013			108,322
2014			96,565
2015 - 2019			398,876
2020 - 2024			288,809
2025 - 2029			210,344
After 2029			251,474

	Total expected collections	$	1,759,223

			(in thousands)

Premium receivable, net at December 31, 2009			$	1,418,222
	Cumulative effect of change in accounting principle			(19,087	)

	Premium receivable, net at January 1, 2010			1,399,135
	Premium written, net			178,734
	Premium payments received, net			(234,271	)
	Adjustments to the premium receivable:
		Changes in the expected term of financial guaranty insurance contracts		8,160
		Accretion of the premium receivable discount		23,689
		Foreign exchange rate changes		(65,886	)
		Other adjustments		1,693

Premium receivable, net at June 30, 2010			$	1,311,254

	June 30, 2010

	(dollars in thousands)
Premiums receivable, net of ceding commission payable	$	1,311,254
Deferred premium revenue		3,583,915
Weighted-average risk-free rate used to discount premiums		3.4
Weighted-average period of premiums receivable (in years)		10.3

		Second Quarter				Six Months

		2010		2009		2010		2009
		(in thousands)
Scheduled net earned premiums		$	267,359	$	52,156	$	558,326	$	104,247
Acceleration of premium earnings(2)			15,446		20,049		30,770		110,336
Accretion of discount on premium receivable			8,667		5,539		21,276		10,897

	Total net earned premiums	$	291,472	$	77,744	$	610,372	$	225,480

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

		Gross Unearned Premium Reserve(1)			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve			Gross Unearned Premium Reserve(1)			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve
		(in thousands)
Deferred premium revenue		$	7,855,351		$	954,682		$	6,900,669		$	8,536,682		$	1,095,593		$	7,441,089
Claim payments			(205,479	)		(25,207	)		(180,272	)		(149,223	)		(15,127	)		(134,096	)

	Total	$	7,649,872		$	929,475		$	6,720,397		$	8,387,459		$	1,080,466		$	7,306,993

		As of June 30, 2010

		Scheduled Net Earned Premium		Expected Loss and LAE(1)		Net
		(in thousands)
2010 (July 1 - September 30)		$	254,846	$	82,264	$	172,582
2010 (October 1 - December 31)			239,693		74,769		164,924
2011			762,231		186,283		575,948
2012			604,798		115,426		489,372
2013			522,378		92,925		429,453
2014			501,190		88,647		412,543
2015 - 2019			1,678,091		257,632		1,420,459
2020 - 2024			1,025,097		117,252		907,845
2025 - 2029			630,973		65,522		565,451
After 2029			681,372		64,580		616,792

	Total present value basis(2)(3)	$	6,900,669	$	1,145,300		5,755,369
Discount			411,222		632,837		(221,615	)

	Total future value	$	7,311,891	$	1,778,137	$	5,533,754

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

				(in thousands)
U.S. RMBS:
	First Lien:
		Prime First lien		$	—		$	394		$	9		$	385
		Alt-A First lien			204,368			15,443			28,971			190,840
		Alt-A Options ARM			545,238			75,003			49,068			571,173
		Subprime			77,528			69,331			2,294			144,565

			Total First Lien		827,134			160,171			80,342			906,963
	Second Lien:
		CES			199,254			(40,438	)		39,881			118,935
		HELOCs			(232,913	)		55,069			315,844			(493,688	)

			Total Second Lien		(33,659	)		14,631			355,725			(374,753	)

Total U.S. RMBS					793,475			174,802			436,067			532,210
Other structured finance					102,613			35,566			5,593			132,586
Public Finance					130,858			(8,155	)		34,191			88,512

			Subtotal(1)		1,026,946			202,213			475,851			753,308
Effect of consolidating VIEs					(40,045	)		(21,437	)		(58,851	)		(2,631	)

			Total	$	986,901		$	180,776		$	417,000		$	750,677

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

Plateau conditional default rate ("CDR")	8.3 - 27.5%	11.5 - 38.0%	10.7 - 40.0%
Final CDR trended down to	0.5 - 3.2%	0.5 - 3.2%	0.5 - 3.2%
Expected Period until Final CDR	24 months	21 months	21 months
Initial CPR	0.9 - 20.1%	0.4 - 13.4%	1.9 - 14.9%
Final CPR	10%	10%	10%
Loss Severity	95%	95%	95%
Future Repurchase of Ineligible Loans	$875 million	$849 million	$828 million
Initial Draw Rate	0.2 - 6.9%	0.2 - 4.8%	0.1 - 2.0%

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

Plateau CDR	8.0 - 28.0%	7.4 - 32.7%	21.5 - 44.2%
Final CDR Rate trended down to	2.9 - 8.1%	2.9 - 8.1%	3.3 - 8.1%
Expected Period until Final CDR achieved	24 months	21 months	21 months
Initial CPR	0.8 - 10.1%	1.6 - 8.4%	0.8 - 3.6%
Final CPR	10%	10%	10%
Loss Severity	95%	95%	95%
Future Repurchase of Ineligible Loans	$123 million	$137 million	$77 million



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

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

Alt A First Lien
	Plateau CDR	2.2% - 40.6%	2.0% - 34.4%	1.5% - 35.7%
	Intermediate CDR	0.3% - 6.1%	0.3% - 5.2%	0.2% - 5.4%
	Final CDR	0.1% - 2.0%	0.1% - 1.7%	0.1% - 1.8%
	Initial Loss Severity	60%	60%	60%
	Future Repurchases of Ineligible Loans	$79.2 million	$75.8 million	$64.2 million
	Initial CPR	0.0% - 16.2%	0.0% - 27.9%	0.0% - 20.5%
	Final CPR	10%	10%	10%
Alt A Option ARM
	Plateau CDR	12.5% - 29.9%	15.1% - 27.4%	13.5% - 27.0%
	Intermediate CDR	1.9% - 4.5%	2.3% - 4.1%	2.0% - 4.1%
	Final CDR	0.6% - 1.5%	0.8% - 1.4%	0.7% - 1.4%
	Initial Loss Severity	60%	60%	60%
	Future Repurchases of Ineligible Loans	$242.8 million	$236.0 million	$203.7 million
	Initial CPR	0.0% - 9.3%	0.0% - 12.3%	0.0% - 3.5%
	Final CPR	10%	10%	10%
Subprime
	Plateau CDR	8.4% - 34.4%	7.8% - 30.4%	7.1% - 29.5%
	Intermediate CDR	1.3% - 5.2%	1.2% - 4.6%	1.1% - 4.4%
	Final CDR	0.4% - 1.7%	0.4% - 1.5%	0.4% - 1.5%
	Initial Loss Severity	75%	75%	70%
	Future Repurchases of Ineligible Loans	$0	$0	$0
	Initial CPR	0.0% - 12.0%	0.0% - 12.5%	0.0% - 12.0%
	Final CPR	10%	10%	10%

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

		(dollars in millions)
Quoted price of CDS contract (in basis points):
	AGC		1,010			634
	AGM		802			541
Fair value of CDS contracts:
	Before considering implication of the Company's credit spreads	$	(5,636.3	)	$	(5,830.8	)
	After considering implication of the Company's credit spreads	$	(1,274.9	)	$	(1,542.1	)

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

Asset Type			Original Subordination(1)			Current Subordination(1)			Net Par Outstanding		Weighted Average Credit Rating(2)		Original Subordination(1)			Current Subordination(1)			Net Par Outstanding		Weighted Average Credit Rating(2)
			(dollars in millions)
Financial Guaranty Direct:
	Pooled corporate obligations:
		CLOs/CBOs		31.7	%		28.9	%	$	46,761		AAA		31.1	%		27.4	%	$	49,447		AAA
		Synthetic investment grade pooled corporate		18.2			16.4			12,673		AAA		19.2			17.7			14,652		AAA
		Synthetic high yield pooled corporate		38.0			33.1			8,439		AA+		36.7			34.4			11,040		AAA
		TruPS CDOs		46.8			34.1			5,793		BB+		46.6			37.3			6,041		BBB-
		Market value CDOs of corporate obligations		32.2			44.4			5,566		AAA		32.1			36.9			5,401		AAA

	Total pooled corporate obligations			31.4			28.9			79,232		AAA		30.9			27.9			86,581		AAA
	U.S. RMBS:
		Alt-A Option ARMs and Alt-A First Lien		20.1			19.7			5,076		B+		20.3			22.0			5,662		BB
		Subprime First lien (including NIMs)		27.5			57.6			4,733		A+		27.6			52.4			4,970		A+
		Prime first lien		10.9			10.4			524		B		10.9			11.1			560		BB
		CES and HELOCs		—			18.9			92		B		—			19.2			111		B

	Total U.S. RMBS			22.8			36.1			10,425		BBB-		22.9			34.6			11,303		BBB
	CMBS			28.7			29.2			7,055		AAA		28.5			30.9			7,191		AAA
	Other			—			—			13,806		AA-		—			—			15,700		AA-

Total Financial Guaranty Direct										110,518		AA+								120,775		AA+
Financial Guaranty Reinsurance										1,648		AA-								1,642		AA-

Total									$	112,166		AA+							$	122,417		AA+

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

2004 and Prior		6.1	%	19.4	%	$	178	A	$	(0.1	)	$	0.3
2005		26.8		58.9			3,273	AA-		(0.1	)		1.7
2006		28.5		50.5			1,705	BBB		(4.3	)		1.1
2007		19.1		17.1			5,269	B		5.3			171.8
2008		—		—			—	—		—			—
2009		—		—			—	—		—			—
2010		—		—			—	—		—			—

	Total	22.8	%	36.1	%	$	10,425	BBB-	$	0.8		$	174.9

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

2004 and Prior		28.5	%	43.8	%	$	579	AAA	$	—		$	0.3
2005		17.6		25.0			684	AAA		(0.1	)		0.3
2006		26.4		25.3			4,377	AAA		0.5			5.0
2007		41.1		37.5			1,415	AAA		(0.1	)		4.2
2008		—		—			—	—		—			—
2009		—		—			—	—		—			—
2010		—		—			—	—		—			—

	Total	28.7	%	29.2	%	$	7,055	AAA	$	0.3		$	9.8

			BIG Categories

			BIG 1			BIG 2		BIG 3			Total BIG			Effect of Consolidating VIEs(2)			Total
			(dollars in millions)
Number of risks				69			165		87			321			—			321
Remaining weighted-average contract period (in years)				9.12			9.16		9.61			9.31			—			9.31
Gross insured contractual payments outstanding:
	Principal		$	4,306.2		$	7,810.6	$	7,101.0		$	19,217.8		$	—		$	19,217.8
	Interest			1,581.6			3,609.6		2,058.5			7,249.7			—			7,249.7

		Total	$	5,887.8		$	11,420.2	$	9,159.5		$	26,467.5		$	—		$	26,467.5

Gross expected cash outflows for loss and LAE			$	475.8		$	2,054.9	$	2,246.0		$	4,776.7		$	(170.4	)	$	4,606.3
Less:
	Gross potential recoveries(1)			492.4			584.5		2,305.3			3,382.2			(174.9	)		3,207.3
	Discount			19.3			476.7		122.5			618.5			13.5			632.0

Present value of expected cash flows for loss and LAE			$	(35.9	)	$	993.7	$	(181.8	)	$	776.0		$	(9.0	)	$	767.0

Deferred premium revenue			$	97.1		$	974.5	$	978.6		$	2,050.2		$	(161.4	)	$	1,888.8
Gross reserves (salvage) for loss and LAE reported in the balance sheet			$	(39.9	)	$	276.9	$	(545.8	)	$	(308.8	)	$	22.8		$	(286.0	)
Reinsurance recoverable (payable)			$	(10.4	)	$	7.1	$	(62.6	)	$	(65.9	)	$	—		$	(65.9	)

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

		Assets		Liabilities		Assets		Liabilities
		(in thousands)
HELOCs		$	436,454	$	669,950	$	—	$	—
First liens			314,585		417,040		—		—
Alt-A Second liens			98,552		152,071		—		—
Automobile loans			589,431		589,431		—		—
Life insurance			293,805		293,805		—		—
Credit card loans			111,846		111,846		233,419		233,129
Health care receivables			—		—		211,808		212,484
Consumer loans			—		—		199,189		199,178
Gas pipeline tariffs			—		—		117,887		117,861

	Total	$	1,844,673	$	2,234,143	$	762,303	$	762,652

			Second Quarter 2010			Six Months 2010

			(in thousands)
Revenues:
Financial guaranty variable interest entities' revenues:
	Interest income		$	54,412		$	115,290
	Net realized and unrealized gains (losses) on assets			(73,545	)		(130,235	)

		Financial guaranty variable interest entities' revenues	$	(19,133	)	$	(14,945	)

Expenses:
Financial guaranty variable interest entities' expenses:
	Interest expense		$	20,657		$	44,710
	Net realized and unrealized (gains) losses on liabilities with recourse			(50,209	)		(75,863	)
	Net realized and unrealized (gains) losses on liabilities without recourse			(8,686	)		(14,440	)
	Other expenses			18,628			40,761

		Financial guaranty variable interest entities' expenses	$	(19,610	)	$	(4,832	)

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

	(in thousands)
Assets:
Premiums receivable, net of ceding commissions payable	$	1,418,232		$	(19,087	)	$	1,399,145
Deferred tax asset, net		1,158,205			111,213			1,269,418
Financial guaranty variable interest entities' assets		762,303			1,162,983			1,925,286
Total assets		16,802,693			1,255,109			18,057,802
Liabilities and shareholders' equity:
Unearned premium reserves		8,400,152			(129,875	)		8,270,277
Loss and loss adjustment expense reserve		289,470			16,999			306,469
Financial guaranty variable interest entities' liabilities with recourse		762,652			1,348,200			2,110,852
Financial guaranty variable interest entities' liabilities without recourse		—			225,976			225,976
Total liabilities		13,282,534			1,461,300			14,743,834
Retained earnings		789,869			(206,540	)		583,329
Total shareholders' equity attributable to Assured Guaranty Ltd.		3,520,508			(206,540	)		3,313,968
Noncontrolling interest of financial guaranty variable interest entities		(349	)		349			—
Total shareholders' equity		3,520,159			(206,191	)