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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 March 31, 2011

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 April 30, 2011 was 184,155,488 (excludes 50,441 unvested restricted shares).


ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q

 
   
  Page

 

PART I. FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements:

   

 

Consolidated Balance Sheets (unaudited) as of March 31, 2011 and December 31, 2010

  1

 

Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010

  2

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2011 and 2010

  3

 

Consolidated Statement of Shareholders' Equity (unaudited) for Three Months Ended March 31, 2011

  4

 

Consolidated Statements of Cash Flows (unaudited) for Three Months Ended March 31, 2011 and 2010

  5

 

Notes to Consolidated Financial Statements (unaudited)

  6

 

        1. Business and Basis of Presentation

  6

 

        2. Business Changes, Risks, Uncertainties and Accounting Developments

  9

 

        3. Outstanding Exposure

  10

 

        4. Financial Guaranty Contracts Accounted for as Insurance

  15

 

        5. Fair Value Measurement

  43

 

        6. Financial Guaranty Contracts Accounted for as Credit Derivatives

  50

 

        7. Consolidation of Variable Interest Entities

  60

 

        8. Investments

  63

 

        9. Insurance Company Regulatory Requirements

  68

 

      10. Income Taxes

  70

 

      11. Reinsurance

  71

 

      12. Commitments and Contingencies

  75

 

      13. Long Term Debt and Credit Facilities

  81

 

      14. Earnings Per Share

  86

 

      15. Subsidiary Information

  87

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  93

 

Forward-Looking Statements

  93

 

Convention

  94

 

Website Information

  94

 

Introduction

  94

 

Executive Summary

  96

 

Results of Operations

  100

 

Non-GAAP Financial Measures

  128

 

Insured Portfolio

  132

 

Exposure to Residential Mortgage Backed Securities

  136

 

Exposures by Reinsurer

  139

 

Liquidity and Capital Resources

  142

Item 3.

 

Market Risk

  162

Item 4.

 

Controls and Procedures

  162

 

PART II. OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

  163

Item 1A.

 

Risk Factors

  167

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  170

Item 6.

 

Exhibits

  170

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Assured Guaranty Ltd.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands except per share and share amounts)

 
  March 31,
2011
  December 31,
2010
 

Assets

             

Investment portfolio:

             
 

Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,382,237 and $9,289,444)

  $ 9,472,130   $ 9,415,315  
 

Short term investments, at fair value

    768,463     1,031,578  
 

Other invested assets

    264,517     283,032  
           
   

Total investment portfolio

    10,505,110     10,729,925  

Cash

    95,866     107,179  

Premiums receivable, net of ceding commissions payable

    1,118,033     1,167,587  

Ceded unearned premium reserve

    794,300     821,819  

Deferred acquisition costs

    235,982     239,805  

Reinsurance recoverable on unpaid losses

    18,641     22,255  

Salvage and subrogation recoverable

    1,056,961     1,032,369  

Credit derivative assets

    619,303     592,898  

Deferred tax asset, net

    1,004,528     1,223,958  

Current income tax receivable

    159,571      

Financial guaranty variable interest entities' assets, at fair value

    3,679,025     3,657,481  

Other assets

    221,858     199,308  
           
 

Total assets

  $ 19,509,178   $ 19,794,584  
           

Liabilities and shareholders' equity

             

Unearned premium reserve

  $ 6,637,213   $ 6,972,894  

Loss and loss adjustment expense reserve

    407,889     562,955  

Reinsurance balances payable, net

    268,221     274,431  

Long-term debt

    1,049,708     1,052,936  

Credit derivative liabilities

    2,761,505     2,465,520  

Current income tax payable

        93,020  

Financial guaranty variable interest entities' liabilities with recourse, at fair value

    2,757,778     2,926,988  

Financial guaranty variable interest entities' liabilities without recourse, at fair value

    1,373,006     1,337,214  

Other liabilities

    359,367     309,862  
           
 

Total liabilities

    15,614,687     15,995,820  
           

Commitments and contingencies

             

Common stock ($0.01 par value, 500,000,000 shares authorized; 184,044,597 and 183,744,655 shares issued and outstanding in 2011 and 2010)

    1,840     1,837  

Additional paid-in capital

    2,589,197     2,585,423  

Retained earnings

    1,215,912     1,098,859  

Accumulated other comprehensive income, net of tax provision (benefit) of $7,929 and $17,746

    85,542     110,645  

Deferred equity compensation (181,818 shares)

    2,000     2,000  
           
 

Total shareholders' equity

    3,894,491     3,798,764  
           
 

Total liabilities and shareholders' equity

  $ 19,509,178   $ 19,794,584  
           

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 March 31,  
 
  2011   2010  

Revenues

             
 

Net earned premiums

  $ 253,977   $ 319,560  
 

Net investment income

    96,387     84,302  
 

Net realized investment gains (losses):

             
   

Other-than-temporary impairment losses

    (6,947 )   (1,117 )
   

Less: portion of other-than-temporary impairment loss recognized in other comprehensive income

    (2,369 )   (661 )
   

Other net realized investment gains (losses)

    7,384     9,869  
           
     

Net realized investment gains (losses)

    2,806     9,413  
 

Net change in fair value of credit derivatives:

             
   

Realized gains and other settlements

    35,427     26,703  
   

Net unrealized gains (losses)

    (271,126 )   252,098  
           
     

Net change in fair value of credit derivatives

    (235,699 )   278,801  
 

Fair value gain (loss) on committed capital securities

    526     (1,275 )
 

Net change in financial guaranty variable interest entities

    93,905     (10,590 )
 

Other income

    42,151     (12,929 )
           
   

Total Revenues

    254,053     667,282  
           

Expenses

             
 

Loss and loss adjustment expenses

    (27,047 )   130,501  
 

Amortization of deferred acquisition costs

    7,420     8,173  
 

Assured Guaranty Municipal Holdings Inc. acquisition-related expenses

        4,021  
 

Interest expense

    24,760     25,134  
 

Other operating expenses

    56,835     62,533  
           
   

Total expenses

    61,968     230,362  
           

Income (loss) before income taxes

    192,085     436,920  

Provision (benefit) for income taxes

             
 

Current

    (197,599 )   (38,953 )
 

Deferred

    264,277     153,898  
           
   

Total provision (benefit) for income taxes

    66,678     114,945  
           

Net income (loss)

  $ 125,407   $ 321,975  
           

Earnings per share:

             
   

Basic

  $ 0.68   $ 1.74  
   

Diluted

  $ 0.67   $ 1.69  

Dividends per share

  $ 0.045   $ 0.045  

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
March 31,
 
 
  2011   2010  

Net income (loss)

  $ 125,407   $ 321,975  

Unrealized holding gains (losses) arising during the period, net of tax provision (benefit) of $(10,258) and $(5,382)

    (25,212 )   9,214  

Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $172 and $2,768

    1,029     6,645  
           

Change in net unrealized gains on investments

    (26,241 )   2,569  

Change in cumulative translation adjustment, net of tax provision (benefit) of $669 and $(2,108)

    1,243     (3,884 )

Change in cash flow hedge, net of tax provision (benefit) of $(56) and $(56)

    (105 )   (105 )
           

Other comprehensive income (loss)

    (25,103 )   (1,420 )
           

Comprehensive income (loss)

  $ 100,304   $ 320,555  
           

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 Three Months Ended March 31, 2011

(dollars in thousands, except share data)

 
  Common Stock    
   
  Accumulated
Other
Comprehensive
Income
   
   
 
 
  Additional
Paid-in
Capital
  Retained
Earnings
  Deferred
Equity
Compensation
  Total
Shareholders'
Equity
 
 
  Shares   Amount  

Balance, December 31, 2010

    183,744,655   $ 1,837   $ 2,585,423   $ 1,098,859   $ 110,645   $ 2,000   $ 3,798,764  

Net income

                125,407             125,407  

Dividends ($0.045 per share)

                (8,286 )           (8,286 )

Dividends on restricted stock units

            68     (68 )            

Share-based compensation and other

    299,942     3     3,706                 3,709  

Change in cumulative translation adjustment

                    1,243         1,243  

Change in cash flow hedge

                    (105 )       (105 )

Change in unrealized gains (losses) on:

                                           
 

Investments with no other-than-temporary impairment

                    (46,057 )       (46,057 )
 

Investments with other-than-temporary impairment

                    20,845         20,845  
 

Less: reclassification adjustment for gains (losses) included in net income (loss)

                    1,029         1,029  
                               

Balance, March 31, 2011

    184,044,597   $ 1,840   $ 2,589,197   $ 1,215,912   $ 85,542   $ 2,000   $ 3,894,491  
                               

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)

 
  Three Months Ended
March 31,
 
 
  2011   2010  

Net cash flows provided by (used in) operating activities

  $ (158,158 ) $ (236,590 )
           

Investing activities

             
 

Fixed maturity securities:

             
   

Purchases

    (511,679 )   (418,032 )
   

Sales

    299,877     187,800  
   

Maturities

    184,151     265,268  
 

Net sales (purchases) of short-term investments

    263,236     246,001  
 

Net proceeds from paydowns on financial guaranty variable interest entities' assets

    162,500     60,687  
 

Other

    4,246     4,867  
           

Net cash flows provided by (used in) investing activities

    402,331     346,591  
           

Financing activities

             
 

Dividends paid

    (8,286 )   (8,305 )
 

Share activity under option and incentive plans

    (2,312 )   (2,583 )
 

Net paydowns of financial guaranty variable interest entities' liabilities

    (241,618 )   (46,157 )
 

Repayment of long-term debt

    (5,095 )   (6,363 )
           

Net cash flows provided by (used in) financing activities

    (257,311 )   (63,408 )

Effect of exchange rate changes

    1,825     (254 )
           

Increase (decrease) in cash

    (11,313 )   46,339  

Cash at beginning of period

    107,179     44,133  
           

Cash at end of period

  $ 95,866   $ 90,472  
           

Supplemental cash flow information

             

Cash paid (received) during the period for:

             
 

Income taxes

  $ 51,465   $ 136,645  
 

Interest

  $ 12,190   $ 12,588  

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)

March 31, 2011

1. Business and Basis of Presentation

Business

        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 has applied its credit underwriting judgment, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products that protect holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The securities insured by the Company include taxable and tax-exempt obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities issued by special purpose entities. The Company 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., Europe and Australia.

        Financial guaranty contracts accounted for as insurance provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company's obligation to make loss payments are similar to those for financial guaranty contracts accounted for as insurance and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents, with respect to one or more third party referenced securities or loans. Financial guaranty contracts accounted for as credit derivatives are primarily comprised of credit default swaps ("CDS"). In general, the Company structures credit derivative transactions such that the circumstances giving rise to the Company's obligation to make loss payments are similar to those for financial guaranty contracts accounted for as insurance but are governed by International Swaps and Derivative Association, Inc. ("ISDA") documentation. The Company has not written any new CDS since 2009 and does not expect to write CDS in the future. The Company also entered into ceded reinsurance agreements to provide greater business diversification and reduce the net potential loss from large risks; however, ceded contracts do not relieve the Company of its obligations. Ceded reinsurance is generally not currently available.

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

1. Business and Basis of Presentation (Continued)


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

        Financial obligations guaranteed by AGL's insurance company subsidiaries are generally awarded 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 the Company's insurance company subsidiaries frequently rely on ratings published by nationally recognized statistical rating organizations ("NRSROs") because such ratings influence the trading value of securities and form the basis for many institutions' investment guidelines as well as individuals' bond purchase decisions. Therefore, the Company manages its business with the goal of achieving high financial strength ratings, preferably the highest that NRSROs will assign. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company's products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.

        On January 24, 2011, S&P released a publication entitled "Request for Comment: Bond Insurance Criteria," in which it requested comments on proposed changes to its bond insurance ratings criteria. In the Request for Comment, S&P noted that it could lower its financial strength ratings on existing investment-grade bond insurers (which include the Company's insurance subsidiaries) by one or more rating categories if the proposed bond insurance ratings criteria are adopted, unless those bond insurers raise additional capital or reduce risk. The proposed ratings criteria contemplate the imposition of a leverage test which is based solely on the amount of par insured and which does not take into account the bond insurer's unearned premium reserve as a claims-paying resource; changes to S&P's capital adequacy model, including significant increases in capital charges for both U.S. public finance obligations and structured finance obligations; and reductions in the single risk limits for U.S. public finance obligations. This action by S&P has exacerbated uncertainty in the market over the Company's financial strength ratings. The Company has submitted comment letters to S&P discussing the modifications that it believes would be necessary to establish a supportable framework for determining the ratings of financial guaranty companies, and on April 21, 2011, S&P announced that it is in the process of analyzing the feedback received from market participants and revisiting its assumptions and analysis in light of the feedback. S&P also stated that it expects to publish the final criteria early in the third quarter of 2011 and to publish updated ratings that reflect the application of the new criteria by September 30, 2011. If S&P were not to accept any of our comments and adopts the ratings criteria as proposed, the new criteria could have an adverse impact on the financial strength rating of the Company's insurance subsidiaries if the Company were unable to reduce risk or raise capital on acceptable terms.

        Unless otherwise noted, ratings on Assured Guaranty's insured portfolio reflect its internal rating. The Company's ratings scale is similar to that used by the NRSROs; however, the ratings in this report may not be the same as ratings assigned by any such rating agency. The super senior category, which is not generally used by rating agencies, is used by the Company in instances where Assured Guaranty's AAA-rated exposure on its internal rating scale has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to Assured Guaranty's exposure or (2) Assured Guaranty's exposure benefiting from a different form of credit enhancement that would

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

1. Business and Basis of Presentation (Continued)


pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management's opinion, causes Assured Guaranty's attachment point to be materially above the AAA attachment point.

Basis of Presentation

        The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and, in the opinion of management, reflect all adjustments which are of a normal recurring nature, necessary for a fair statement of the Company's financial condition, results of operations and cash flows for the periods presented. The 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 March 31, 2011 ("First Quarter 2011") and the three-month period ended March 31, 2010 ("First Quarter 2010").

        These unaudited interim consolidated financial statements include the accounts of AGL and its direct and indirect subsidiaries (collectively, the "Subsidiaries"). These unaudited interim consolidated financial statements also include the accounts of certain variable interest entities ("VIEs"). Intercompany accounts and transactions between and among AGL and its subsidiaries have been eliminated as well as transactions between the insurance company subsidiaries and the consolidated VIEs. Certain prior year balances have been reclassified to conform to the current year's presentation.

        These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission (the "SEC").

        AGL's principal insurance company subsidiaries are Assured Guaranty Corp. ("AGC"), domiciled in Maryland, Assured Guaranty Municipal Corp. ("AGM"), domiciled in New York, and Assured Guaranty Re Ltd. ("AG Re"), a Bermuda insurance company. In addition, the Company also has another U.S. and another Bermuda insurance company subsidiary that participate in a pooling agreement with AGM, two insurance subsidiaries organized in the United Kingdom, and a mortgage insurance company. The Company's organizational structure includes various holdings companies, two of which—Assured Guaranty US Holdings Inc. ("AGUS") and Assured Guaranty Municipal Holdings Inc. ("AGMH")—have public debt outstanding. See Note 13.

Change in Accounting Policy

        Prior to January 1, 2011, the Company managed its business and reported financial information for two principal financial guaranty segments: direct and reinsurance. There has been no market for financial guaranty reinsurance in the past two years and it is not expected to develop in the foreseeable future. The Company's reinsurance subsidiary, AG Re, now only writes new treaties with affiliates that are eliminated in consolidation. As a result, the chief operating decision maker now manages the

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

1. Business and Basis of Presentation (Continued)


operations of the Company at a consolidated level and no longer uses underwriting gain (loss) by segment as an operating metric. Therefore, segment financial information is no longer disclosed.

2. Business Changes, Risks, Uncertainties and Accounting Developments

        Summarized below are updates of the most significant events since the filing of the 2010 Report on Form 10-K, that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company.

Bank of America Agreement

        On April 14, 2011, Assured Guaranty reached a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, "Bank of America"), regarding their liabilities with respect to 29 RMBS transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of representations and warranties ("R&W") and historical loan servicing issues ("Bank of America Agreement"). Of the 29 RMBS transactions, eight are second lien transactions and 21 are first lien transactions. The Bank of America Agreement covers Bank of America sponsored securitizations that AGM or AGC has insured, as well as certain other securitizations containing concentrations of Countrywide originated loans that AGM or AGC has insured. The transactions covered by the Bank of America Agreement have a gross par outstanding of $5.2 billion ($4.8 billion net par outstanding) as of March 31, 2011, or 29% of Assured Guaranty's total below investment grade ("BIG") RMBS net par outstanding.

        Bank of America paid Assured Guaranty $850 million on April 14, 2011 and is obligated to pay another $250 million by March 2012. In addition, Bank of America will reimburse Assured Guaranty 80% of claims Assured Guaranty pays on the 21 first lien transactions, up to collateral losses of $6.6 billion. On April 14, 2011, Bank of America placed $1 billion of eligible assets into trust in order to collateralize the reimbursement obligation relating to the first lien transactions. The amount of assets required to be posted may increase or decrease from time to time, as determined by rating agency requirements. As of March 31, 2011, cumulative collateral losses on these first lien RMBS transactions were approximately $1.5 billion, AGM had paid $2.0 million in claims and the Company's estimated gross economic loss before considering R&W benefit on these transactions was $538.3 million, which assumes cumulative projected collateral losses of $4.8 billion.

        The execution of the Bank of America Agreement is considered a Type 1 subsequent event, meaning that the terms of the Bank of America Agreement provide additional evidence about the estimates inherent in the loss estimation process at March 31, 2011. A Type 1 subsequent event requires that such additional information obtained subsequent to the reporting date be used when preparing the financial statements if financial statements have not yet been issued for the previous reporting period. Therefore, the March 31, 2011 loss estimates incorporate updated assumptions and estimates reflecting the terms of the Bank of America Agreement. The First Quarter 2011 benefit for R&W reflects higher expected recoveries across all transactions as a result of the Bank of America Agreement. For transactions covered under the Bank of America Agreement, the R&W benefit has been updated to reflect amounts collected and expected to be collected subsequent to March 31, 2011 under the terms of the Bank of America Agreement. For transactions with other sponsors of U.S.

9


Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


RMBS, against which the Company is pursuing R&W claims, the Company has increased the benefit for R&W to reflect the probability that actual recovery rates may be higher than originally expected. For transactions with counterparties other than Bank of America, the Company has continued to review additional loan files and has found breach rates consistent with those in the Bank of America and Countrywide transactions. Therefore, the Company assumed higher recovery rates in First Quarter 2011.

3. Outstanding Exposure

        The Company's insurance policies and credit derivative contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest ("Debt Service") on public finance and structured finance obligations. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third-party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Based on accounting standards in effect during any given reporting period, some of these VIEs are consolidated as described in Note 7. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs whether or not they are consolidated.

Debt Service Outstanding

 
  Gross Debt Service Outstanding   Net Debt Service Outstanding  
 
  March 31,
2011
  December 31,
2010
  March 31,
2011
  December 31,
2010
 
 
  (in millions)
 

Public finance

  $ 835,072   $ 851,634   $ 746,388   $ 760,167  

Structured finance

    170,440     178,348     159,611     166,976  
                   
 

Total

  $ 1,005,512   $ 1,029,982   $ 905,999   $ 927,143  
                   

10


Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

3. Outstanding Exposure (Continued)

Financial Guaranty Portfolio by Internal Rating

 
  As of March 31, 2011  
 
  Public Finance
U.S.
  Public Finance
Non-U.S.
  Structured Finance
U.S
  Structured Finance
Non-U.S
  Total  
Rating Category
  Net Par
Outstanding
  %   Net Par
Outstanding
  %   Net Par
Outstanding
  %   Net Par
Outstanding
  %   Net Par
Outstanding
  %  
 
  (dollars in millions)
 

Super senior

  $     %   1,486     3.6 % $ 22,256     19.7 % $ 8,081     27.0 % $ 31,823     5.3 %

AAA

    5,587     1.3     1,382     3.3     41,376     36.6     12,911     43.1     61,256     10.2  

AA

    156,954     37.6     1,367     3.3     15,776     13.9     1,970     6.6     176,067     29.2  

A

    210,705     50.5     12,932     30.9     6,181     5.5     1,827     6.1     231,645     38.5  

BBB

    41,130     9.9     22,793     54.4     6,841     6.0     3,903     12.9     74,667     12.3  

BIG

    2,991     0.7     1,868     4.5     20,678     18.3     1,292     4.3     26,829     4.5  
                                           
 

Total net par outstanding

  $ 417,367     100.0 % $ 41,828     100.0 % $ 113,108     100.0   $ 29,984     100.0 % $ 602,287     100.0 %
                                           

 

 
  As of December 31, 2010  
 
  Public Finance
U.S.
  Public Finance
Non-U.S.
  Structured Finance
U.S
  Structured Finance
Non-U.S
  Total  
Rating Category
  Net Par
Outstanding
  %   Net Par
Outstanding
  %   Net Par
Outstanding
  %   Net Par
Outstanding
  %   Net Par
Outstanding
  %  
 
  (dollars in millions)
 

Super senior

  $     % $ 1,420     3.5 % $ 21,837     18.4 % $ 7,882     25.7 % $ 31,139     5.0 %

AAA

    5,784     1.4     1,378     3.4     45,067     37.9     13,573     44.3     65,802     10.7  

AA

    161,906     37.9     1,330     3.3     17,355     14.6     1,969     6.4     182,560     29.6  

A

    214,199     50.2     12,482     30.6     6,396     5.4     1,873     6.1     234,950     38.1  

BBB

    41,948     9.8     22,338     54.8     7,543     6.4     4,045     13.2     75,874     12.3  

BIG

    3,159     0.7     1,795     4.4     20,558     17.3     1,294     4.3     26,806     4.3  
                                           
 

Total net par outstanding

  $ 426,996     100.0 % $ 40,743     100.0 % $ 118,756     100.0 % $ 30,636     100.0 % $ 617,131     100.0 %
                                           

        In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $3.7 billion for structured finance and $1.3 billion for public finance commitments at March 31, 2011. The structured finance commitments include the unfunded component of and delayed draws on pooled corporate transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between April 1, 2011 and February 1, 2019, with $0.9 billion expiring prior to December 31, 2011. All the commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled at the counterparty's request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Significant Risk Management Activities

        The Risk Oversight and Audit Committees of the Board of Directors of AGL oversee the Company's risk management policies and procedures. With input from the board committees, specific

11


Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

3. Outstanding Exposure (Continued)


risk policies and limits are set by the Portfolio Risk Management Committee, which includes members of senior management and senior Credit and Surveillance officers.

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

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

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

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

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

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

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

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

3. Outstanding Exposure (Continued)

Surveillance Categories

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

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

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

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

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

3. Outstanding Exposure (Continued)

Financial Guaranty Exposures
(Insurance and Credit Derivative Form)

 
  March 31, 2011  
 
  BIG Net Par Outstanding    
   
 
 
  Net Par
Outstanding
  BIG Par as a %
of Net Par
Outstanding
 
 
  BIG 1   BIG 2   BIG 3   Total BIG  
 
  (in millions)
   
 

First lien U.S. RMBS:

                                     
 

Prime first lien

  $ 82   $ 519   $   $ 601   $ 813     0.1 %
 

Alt-A first lien

    919     3,485     549     4,953     5,939     0.8  
 

Option ARM

    3     1,433     1,327     2,763     3,020     0.5  
 

Subprime (including net interest margin securities)

    62     2,734     185     2,981     8,726     0.5  

Second lien U.S. RMBS:

                                     
 

Closed end second lien

    161     441     482     1,084     1,114     0.2  
 

Home equity lines of credit ("HELOCs")

    495         3,314     3,809     4,513     0.6  
                           
   

Total U.S. RMBS

    1,722     8,612     5,857     16,191     24,125     2.7  

Other structured finance

    2,956     388     2,435     5,779     118,967     1.0  

Public finance

    3,691     282     886     4,859     459,195     0.8  
                           
     

Total

  $ 8,369   $ 9,282   $ 9,178   $ 26,829   $ 602,287     4.5 %
                           

 

 
  December 31, 2010  
 
  BIG Net Par Outstanding    
   
 
 
  Net Par
Outstanding
  BIG Par as a %
of Net Par
Outstanding
 
 
  BIG 1   BIG 2   BIG 3   Total BIG  
 
  (in millions)
   
 

First lien U.S. RMBS:

                                     
 

Prime first lien

  $ 82   $ 542   $   $ 624   $ 849     0.1 %
 

Alt-A first lien

    976     3,108     573     4,657     6,134     0.8  
 

Option ARM

    33     2,186     640     2,859     3,214     0.5  
 

Subprime (including net interest margin securities)

    729     2,248     106     3,083     9,039     0.4  

Second lien U.S. RMBS:

                                     
 

Closed end second lien

    63     444     624     1,131     1,164     0.2  
 

HELOCs

    369         3,632     4,001     4,730     0.6  
                           
   

Total U.S. RMBS

    2,252     8,528     5,575     16,355     25,130     2.6  

Other structured finance

    2,758     292     2,447     5,497     124,262     0.9  

Public finance

    3,752     283     919     4,954     467,739     0.8  
                           
     

Total

  $ 8,762   $ 9,103   $ 8,941   $ 26,806   $ 617,131     4.3 %
                           

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

3. Outstanding Exposure (Continued)

Net Par Outstanding for Below Investment Grade Credits

 
  As of March 31, 2011  
Description
  Net Par
Outstanding
Financial
Guaranty
Insurance
  Number of
Financial
Guaranty
Credits
in Category
  Net Par
Outstanding
Credit
Derivatives
  Number of
Credit
Derivatives
Credits
in Category
  BIG Net Par
Outstanding
Total
  Total Number
of BIG
Credits
 
 
  (dollars in millions)
 

BIG:

                                     
 

Category 1

  $ 4,990     130   $ 3,379     31   $ 8,369     161  
 

Category 2

    5,517     95     3,765     48     9,282     143  
 

Category 3

    7,490     117     1,688     18     9,178     135  
                           

Total BIG

  $ 17,997     342   $ 8,832     97   $ 26,829     439  
                           

 

 
  As of December 31, 2010  
Description
  Net Par
Outstanding
Financial
Guaranty
Insurance
  Number of
Financial
Guaranty
Credits
in Category
  Net Par
Outstanding
Credit
Derivatives
  Number of
Credit
Derivatives
Credits
in Category
  BIG Net Par
Outstanding
Total
  Total Number
of BIG
Credits
 
 
  (dollars in millions)
 

BIG:

                                     
 

Category 1

  $ 5,521     120   $ 3,241     31   $ 8,762     151  
 

Category 2

    5,646     97     3,457     50     9,103     147  
 

Category 3

    7,281     114     1,660     13     8,941     127  
                           

Total BIG

  $ 18,448     331   $ 8,358     94   $ 26,806     425  
                           

4. Financial Guaranty Contracts Accounted for as Insurance

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

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

Net Earned Premiums

 
  First Quarter  
 
  2011   2010  
 
  (in millions)
 

Scheduled net earned premiums

  $ 214.9   $ 290.9  

Acceleration of premium earnings(1)

    29.6     15.4  

Accretion of discount on net premiums receivable

    9.0     12.7  
           

Total financial guaranty

    253.5     319.0  

Other

    0.5     0.6  
           
 

Total net earned premiums(2)

  $ 254.0   $ 319.6  
           

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

(2)
Excludes $19.1 million and $6.0 million in First Quarter 2011 and 2010, respectively, related to consolidated VIEs.

Gross Premium Receivable, Net of Ceding Commissions Roll Forward

 
  First Quarter  
 
  2011   2010  
 
  (in millions)
 

Balance beginning of period

  $ 1,167.6   $ 1,418.2  

Change in accounting(1)

        (3.5 )
           

Balance beginning of the period, adjusted

    1,167.6     1,414.7  

Premium written, net

    48.0     83.7  

Premium payments received, net

    (72.8 )   (114.8 )

Adjustments to the premium receivable:

             
 

Changes in the expected term of financial guaranty insurance contracts

    (51.1 )   9.7  
 

Accretion of the discount

    9.2     14.5  
 

Foreign exchange translation

    15.9     (38.6 )
 

Other adjustments

    1.2     2.4  
           

Balance, end of period

  $ 1,118.0   $ 1,371.6  
           

(1)
Represents elimination of premium receivable related to consolidated financial guaranty VIEs.

        Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 45% and 42% of the Company's installment premiums at March 31, 2011 and December 31, 2010, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro and British Pound Sterling.

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

        For premiums received in installments, premium receivable is the present value of premiums due or expected to be collected over the life of the contract. Installment premiums typically relate to structured finance transactions, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the deal. Premium receipts are typically made from insured deal cash flows that are senior to payments made to the holders of the insured securities. When there are significant changes to expected premium collections, an adjustment is recorded to premium receivable, with a corresponding adjustment to deferred premium revenue.

Expected Collections of Gross Premiums Receivable,
Net of Ceding Commissions

 
  March 31, 2011(1)  
 
  (in millions)
 

Gross premium collections expected:

       

2011 (April 1 - June 30)

  $ 67.7  

2011 (July 1 - September 30)

    34.7  

2011 (October 1 - December 31)

    57.3  

2012

    120.5  

2013

    105.3  

2014

    93.8  

2015

    84.5  

2016 - 2020

    339.4  

2021 - 2025

    237.6  

2026 - 2030

    170.6  

After 2030

    217.7  
       
 

Total gross expected collections

  $ 1,529.1  
       

(1)
Represents undiscounted amounts expected to be collected.

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

        The unearned premium reserve is comprised of deferred premium revenue and the contra-paid as presented in the table below.

Net Unearned Premium Reserve

 
  As of March 31, 2011   As of December 31, 2010  
 
  Gross
Unearned
Premium
Reserve
  Ceded
Unearned
Premium
Reserve
  Net
Unearned
Premium
Reserve
  Gross
Unearned
Premium
Reserve
  Ceded
Unearned
Premium
Reserve
  Net
Unearned
Premium
Reserve
 
 
  (in millions)
 

Deferred premium revenue

  $ 6,823.5   $ 816.5   $ 6,007.0   $ 7,108.6   $ 846.6   $ 6,262.0  

Contra-paid

    (195.9 )   (22.2 )   (173.7 )   (146.1 )   (24.8 )   (121.3 )
                           
 

Total financial guaranty

    6,627.6     794.3     5,833.3     6,962.5     821.8     6,140.7  

Other

    9.6         9.6     10.4         10.4  
                           
 

Total

  $ 6,637.2   $ 794.3   $ 5,842.9   $ 6,972.9   $ 821.8   $ 6,151.1  
                           

        Net deferred premium revenue will be recognized as net earned premiums. Amounts expected to be recognized in net earned premiums differ significantly from expected cash collections due primarily to amounts in deferred premium revenue representing cash already collected on policies paid upfront and fair value adjustments recorded in connection with the acquisition of AGHM on July 1, 2009 ("AGMH Acquisition").

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Table of Contents


Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

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


Expected Timing of Financial Guaranty Insurance
Premium and Loss Recognition

 
  As of March 31, 2011  
 
  Scheduled
Net Earned
Premium
  Net Expected
Loss to be
Expensed(1)
  Net  
 
  (in millions)
 

2011 (April 1 - June 30)

  $ 200.4   $ 48.0   $ 152.4  

2011 (July 1 - September 30)

    185.1     49.1     136.0  

2011 (October 1 - December 31)

    171.6     40.2     131.4  

2012

    589.9     110.8     479.1  

2013

    491.2     61.8     429.4  

2014

    434.7     45.8     388.9  

2015

    385.4     37.2     348.2  

2016 - 2020

    1,451.2     138.4     1,312.8  

2021 - 2025

    918.3     68.1     850.2  

2026 - 2030

    567.9     54.6     513.3  

After 2030

    611.3     53.6     557.7  
               
 

Total present value basis(2)(3)

    6,007.0     707.6     5,299.4  

Discount

    358.4     707.1     (348.7 )
               
 

Total future value

  $ 6,365.4   $ 1,414.7   $ 4,950.7  
               

(1)
These amounts reflect the Company's estimate as of March 31, 2011 of expected losses to be expensed and are not included in loss and LAE reserve because loss and LAE is only recorded for the amount total loss exceeds deferred premium revenue, determined on a contract-by-contract basis.

(2)
Balances represent discounted amounts.

(3)
The effect of consolidating financial guaranty VIEs resulted in a reduction of $294.0 million in future scheduled net earned premium and $196.6 million in expected loss and LAE to be expensed, excluding accretion of discount.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


Selected Information for Policies Paid in Installments

 
  As of
March 31, 2011
  As of
December 31, 2010
 
 
  (dollars in millions)
 

Premiums receivable, net of ceding commission payable

  $ 1,118.0   $ 1,167.6  

Gross deferred premium revenue

    2,733.0     2,933.6  

Weighted-average risk-free rate used to discount premiums

    3.6 %   3.5 %

Weighted-average period of premiums receivable (in years)

    10.1     10.1  

Loss Estimation Process

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

        The following table presents a roll forward of the present value of net expected loss and LAE to be paid for financial guaranty contracts accounted for as insurance by sector. Expected loss to be paid is the Company's estimate of the present value of future claim payments, net of reinsurance and net of salvage and subrogation which includes the present value benefit of estimated recoveries for breaches of R&W.


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

 
  Expected
Loss to be
Paid as of
December 31,
2010
  Development
and
Accretion
of Discount(2)
  Less:
Paid
Losses
  Expected
Loss to be
Paid as of
March 31,
2011
 
 
  (in millions)
 

U.S. RMBS:

                         
 

First lien:

                         
   

Prime first lien

  $ 1.4   $ 0.1   $   $ 1.5  
   

Alt-A first lien

    184.4     6.5     19.5     171.4  
   

Option ARM

    523.7     (114.7 )   86.9     322.1  
   

Subprime

    200.4     (17.8 )   15.1     167.5  
                   
     

Total first lien

    909.9     (125.9 )   121.5     662.5  
 

Second lien:

                         
   

Closed end second lien

    56.6     (106.4 )   27.1     (76.9 )
   

HELOCs

    (805.7 )   77.6     64.6     (792.7 )
                   
     

Total second lien

    (749.1 )   (28.8 )   91.7     (869.6 )
                   

Total U.S. RMBS

    160.8     (154.7 )   213.2     (207.1 )

Other structured finance

    145.1     16.0     2.4     158.7  

Public finance

    88.9     (13.6 )   9.0     66.3  
                   
     

Total

  $ 394.8   $ (152.3 ) $ 224.6   $ 17.9  
                   

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

 

 
  Expected
Loss to be
Paid as of
December 31,
2009
  Development
and
Accretion
of Discount(2)
  Less:
Paid
Losses
  Expected
Loss to be
Paid as of
March 31,
2010
 
 
  (in millions)
 

U.S. RMBS:

                         
 

First lien:

                         
   

Prime first lien

  $   $ 0.4   $   $ 0.4  
   

Alt-A first lien

    204.4     9.0     14.0     199.4  
   

Option ARM

    545.2     31.8     16.4     560.6  
   

Subprime

    77.5     50.0     0.9     126.6  
                   
     

Total first lien

    827.1     91.2     31.3     887.0  
 

Second lien:

                         
   

Closed end second lien

    199.3     (42.3 )   20.5     136.5  
   

HELOCs

    (232.9 )   89.9     149.0     (292.0 )
                   
     

Total second lien

    (33.6 )   47.6     169.5     (155.5 )
                   

Total U.S. RMBS

    793.5     138.8     200.8     731.5  

Other structured finance

    102.6     0.6     3.7     99.5  

Public finance

    130.9     20.1     24.4     126.6  
                   
     

Total

  $ 1,027.0   $ 159.5   $ 228.9   $ 957.6  
                   

(1)
Amounts include all expected payments whether or not the insured transaction VIE is consolidated. Amounts exclude expected losses for mortgage business of $2.1 million as of March 31, 2011 and December 31, 2010.

(2)
Represents economic loss development plus accretion of discount in the period.

        The Company's expected LAE for mitigating claim liabilities were $16.5 million and $17.2 million as of March 31, 2011 and December 31, 2010, respectively. The Company used weighted-average risk free rates ranging from 0% to 5.29% and 0% to 5.34% to discount expected losses as of March 31, 2011 and December 31, 2010, respectively.

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


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

 
  As of
March 31, 2011
  As of
December 31, 2010
 
 
  (in millions)
 

Net expected loss to be paid

  $ 17.9   $ 394.8  

Less: net expected loss to be paid for financial guaranty VIEs

    24.9     49.2  
           
 

Total

    (7.0 )   345.6  

Contra-paid, net

    173.7     121.3  

Salvage and subrogation recoverable, net(1)

    928.1     903.0  

Loss and LAE reserve, net(2)

    (387.2 )   (538.6 )
           

Net expected loss to be expensed(3)

  $ 707.6   $ 831.3  
           

(1)
The March 31, 2011 amount consists of gross salvage and subrogation amounts of $1,057.0 million net of ceded amounts of $128.9 million which is recorded in reinsurance balances payable. The December 31, 2010 amount consists of gross salvage and subrogation amounts of $1,032.4 million net of ceded amounts of $129.4 million which is recorded in reinsurance balances payable.

(2)
Represents loss and LAE reserves, net of reinsurance recoverable on unpaid losses, excluding $2.1 million in reserves for other run off lines of business as of March 31, 2011 and December 31, 2010.

(3)
Excludes $196.6 million and $211.9 million as of March 31, 2011 and December 31, 2010, respectively, related to consolidated financial guaranty VIEs.

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

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

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

        Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how much of the currently performing loans will default and when by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates, then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the liquidation of currently delinquent loans represent defaults of currently performing loans. A conditional default rate is the outstanding principal amount of loans defaulting in a given month divided by the remaining outstanding amount of the whole pool of loans (or "collateral pool balance"). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal repayments, and defaults.

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

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

        The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for (a) the collateral losses it projects as described above, (b) assumed voluntary prepayments and (c) recoveries for breaches of R&W as described above. The Company then applies an individual model of the

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


structure of the transaction to the projected future cash flow from that transaction's collateral pool to project the Company's future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted to a present value using a risk free rate. As noted above, the Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

First Quarter-End 2011 U.S. RMBS Loss Projections

        The Company's RMBS projection methodology assumes that the housing and mortgage markets will eventually recover. Accordingly, the Company retaining the initial plateau period used in the previous quarter reflects an assumption that the recovery in the housing and mortgage markets will be delayed by another three months.

        The scenarios used to project RMBS collateral losses in first quarter of 2011, with the exception of an increase in the recovery time for second lien transactions and an increase to the initial Alt-A first lien and Option ARM loss severities, were the same as those employed at year-end 2010. During the First Quarter 2011, the Company observed continued elevated levels of early stage delinquencies. As a result, it adjusted its second lien loss projection curves to reflect its view that the recovery would be longer and more gradual than it had anticipated at year-end 2010. The Company also adjusted its probability weights to reflect that this adjustment was made to each of its second lien scenarios. Additionally, during the First Quarter 2011, the Company noted that Alt-A first lien and Option ARM loss severities appeared to be trending higher. As a result, it increased its initial loss severity for Alt-A first lien and Option ARM collateral from 60% to 65%.

        The Company also used generally the same methodology to project the credit received by the RMBS issuers for recoveries in R&W in First Quarter 2011 as it used at year-end 2010. The primary difference relates to the Company's execution of the Bank of America Agreement and the inclusion of the terms of the agreement as a potential scenario in transactions not sponsored by Bank of America. The Company also added R&W credits for two second lien transactions where the Company concluded it had the right to obtain loan files that it had not previously concluded were accessible. The Company also added R&W credits for ten first lien transactions where either it concluded it had the right to obtain loan files that it had not previously concluded were accessible or where it anticipates receiving a benefit due to the Bank of America Agreement. See "Bank of America Agreement" in Note 2.

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

        The Company insures two types of second lien RMBS: those secured by HELOCs and those secured by closed end second lien mortgages. HELOCs are revolving lines of credit generally secured by a second lien on a one to four family home. A mortgage for a fixed amount secured by a second lien on a one to four family home is generally referred to as a closed end second lien. Both first lien RMBS and second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority of the collateral. The Company has material exposure to second lien mortgage loans originated and serviced by a number of parties, but the Company's most significant second lien exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America. See "Breaches of Representations and Warranties."

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

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

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

        The following table shows the Company's key assumptions used in its calculation of estimated expected losses for the Company's direct vintage 2004 - 2008 second lien U.S. RMBS as of March 31, 2011, December 31, 2010, and March 31, 2010:

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

HELOC Key Variables
  As of
March 31, 2011
  As of
December 31, 2010
  As of
March 31, 2010

Plateau conditional default rate

  4.7% - 21.4%   4.2% - 22.1%   11.5% - 38.0%

Final conditional default rate trended down to

  0.4% - 3.2%   0.4% - 3.2%   0.5% - 3.2%

Expected period until final conditional default rate

  36 months   24 months   21 months

Initial conditional prepayment rate

  0.9% - 12.6%   3.3% - 17.5%   0.4% - 13.4%

Final conditional prepayment rate

  10%   10%   10%

Loss severity

  98%   98%   95%

Initial draw rate

  0.0% - 5.2%   0.0% - 6.8%   0.2% - 4.8%

 

Closed end second lien Key Variables
  As of
March 31, 2011
  As of
December 31, 2010
  As of
March 31, 2010

Plateau conditional default rate

  7.2% - 28.9%   7.3% - 27.1%   21.5% - 44.2%

Final conditional default rate trended down to

  2.9% - 8.1%   2.9% - 8.1%   2.9% - 8.1%

Expected period until final conditional default rate achieved

  36 months   24 months   21 months

Initial conditional prepayment rate

  0.9% - 12.7%   1.3% - 9.7%   0.8% - 3.6%

Final conditional prepayment rate

  10%   10%   10%

Loss severity

  98%   98%   95%

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

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

        As of March 31, 2011, in the base scenario, the conditional default rate (the "plateau conditional default rate") was held constant for one month. Once the plateau period has ended, the conditional default rate is assumed to gradually trend down in uniform increments to its final long-term steady state conditional default rate. In the base scenario, the time over which the conditional default rate trends down to its final conditional default rate is thirty months (compared to eighteen months at year-end 2010). Therefore, the total stress period for second lien transactions would be thirty-six months which is comprised of: five months of delinquent data, a one month plateau period and 30 months decrease to the steady state conditional default rate. This is twelve months longer than the 24 months of total stress period used at year-end 2010.The long-term steady state conditional default rates are calculated as the constant conditional default rates that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally very low recovery. Based on current expectations of future performance, the Company assumes that it will only recover 2% of the collateral.

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


prepayment rate at year-end 2010. To the extent that prepayments differ from projected levels it could materially change the Company's projected excess spread.

        The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percent of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to the final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 2.6%.

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

        At March 31, 2011, the Company's base case assumed a one month conditional default rate plateau and a 30 months ramp down (for a total stress period of 36 months). Increasing the conditional default rate plateau to 4 months and keeping the ramp down at 30 months (for a total stress period of 39 months) would increase the expected loss by approximately $88.3 million for HELOC transactions and $9.8 million for closed end second lien transactions. On the other hand, keeping the conditional default rate plateau at one month but decreasing the length of the conditional default rate ramp down to a 24 month assumption (for a total stress period of 30 months) would decrease the expected loss by approximately $80.1 million for HELOC transactions and $3.9 million for closed end second lien transactions.

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

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

        The performance of the Company's first lien RMBS exposures began to deteriorate in 2007 and such transactions, particularly those originated in the period from 2005 through 2007 continue to

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


perform below the Company's original underwriting expectations. The Company currently projects first lien collateral losses many times those expected at the time of underwriting. While insured securities benefitted from structural protections within the transactions designed to absorb some of the collateral losses, in many first lien RMBS transactions, projected losses exceed those structural protections.

        The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent, in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). An increase in non-performing loans beyond that projected in the previous period is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquency categories. The Company arrived at its liquidation rates based on data in loan performance and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The 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 to occur over two years.

        The following table shows the Company's liquidation assumptions for various delinquency categories. There were no changes to the liquidation rates as of March 31, 2011, December 31, 2010 and March 31, 2010.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


First Lien Liquidation Rates

30 - 59 Days Delinquent

       
 

Alt-A first lien

    50 %
 

Option ARM

    50  
 

Subprime

    45  

60 - 89 Days Delinquent

       
 

Alt-A first lien

    65  
 

Option ARM

    65  
 

Subprime

    65  

90 - Bankruptcy

       
 

Alt-A first lien

    75  
 

Option ARM

    75  
 

Subprime

    70  

Foreclosure

       
 

Alt-A first lien

    85  
 

Option ARM

    85  
 

Subprime

    85  

Real Estate Owned

       
 

Alt-A first lien

    100  
 

Option ARM

    100  
 

Subprime

    100  

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

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

        Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historical high levels and the Company is assuming that these historical high levels will continue for another year. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in March 2012, and in the base scenario decline over two years to 40%.

        The following table shows the Company's key assumptions used in its calculation of expected losses for the Company's direct vintage 2004 - 2008 first lien U.S. RMBS as of March 31, 2011, December 31, 2010 and March 31, 2010.


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

 
  As of
March 31,
2011
  As of
December 31,
2010
  As of
March 31,
2010

Alt-A First Lien

           
 

Plateau conditional default rate

  2.7% - 40.2%   2.6% - 42.2%   2.0% - 34.4%
 

Intermediate conditional default rate

  0.4% - 6.0%   0.4% - 6.3%   0.3% - 5.2%
 

Final conditional default rate

  0.1% - 2.0%   0.1% - 2.1%   0.1% - 1.7%
 

Initial loss severity

  65%   60%   60%
 

Initial conditional prepayment rate

  0.4% - 40.5%   0.0% - 36.5%   0.0% - 27.9%
 

Final conditional prepayment rate

  10%   10%   10%

Option ARM

           
 

Plateau conditional default rate

  12.3% - 33.2%   11.7% - 32.7%   15.1% - 27.4%
 

Intermediate conditional default rate

  1.8% - 5.0%   1.8% - 4.9%   2.3% - 4.1%
 

Final conditional default rate

  0.6% - 1.7%   0.6% - 1.6%   0.8 - 1.4%
 

Initial loss severity

  65%   60%   60%
 

Initial conditional prepayment rate

  0.0% - 24.5%   0.0% - 17.7%   0.0% - 12.3%
 

Final conditional prepayment rate

  10%   10%   10%

Subprime

           
 

Plateau conditional default rate

  8.0% - 34.3%   9.0% - 34.6%   7.8% - 30.4%
 

Intermediate conditional default rate

  1.2% - 5.1%   1.3% - 5.2%   1.2% - 4.6%
 

Final conditional default rate

  0.4% - 1.7%   0.4% - 1.7%   0.4% - 1.5%
 

Initial loss severity

  80%   80%   75%
 

Initial conditional prepayment rate

  0.0% - 13.3%   0.0% - 13.5%   0.0% - 12.5%
 

Final conditional prepayment rate

  10%   10%   10%

        The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the conditional prepayment rate follows a similar pattern to that of the conditional

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


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

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

        In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed conditional prepayment rates and the speed of recovery of loss severity rates. In a somewhat more stressful environment than that of the base case, where the conditional default rate recovery was more gradual and the final conditional prepayment rate was 15% rather than 10%, the Company's expected losses would increase by approximately $8.3 million for Alt-A first liens, $57.3 million for Option ARMs, $25.7 million for subprime and $0.1 million for prime transactions. In an even more stressful scenario where the conditional default rate plateau was extended 3 months (to be 27 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over 4 rather than 2 years (and subprime loss severities were assumed to recover only to 60%), the Company's expected losses would increase by approximately $40.6 million for Alt-A first liens, $142.3 million for Option ARMs, $170.8 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 conditional default rate plateau was 3 months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, the Company's expected losses would decrease by approximately $22.5 million for Alt-A first liens, $76.7 million for Option ARMs, $30.7 million for subprime and $0.3 million for prime transactions.

Breaches of Representations and Warranties

        The Company is pursuing reimbursements for breaches of R&W regarding loan characteristics. Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company's original expectations. The Company has employed several loan file diligence firms and law firms as well as devoted internal resources to review the mortgage files surrounding many of the defaulted loans. The Company's success in these efforts resulted in two negotiated agreements, to date, in respect of the Company's R&W claims, including on April 14, 2011 with Bank of America as described under "Bank of America Agreement" in Note 2. Additionally, for the counterparties with which the Company had not settled its claims for breaches of representations and warranties, the Company had performed a detailed review of approximately 13,500 second lien and 15,400 first lien defaulted loan files, representing approximately $940 million in second lien and

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


$4.5 billion in first lien outstanding par of defaulted loans underlying insured transactions. The Company identified approximately 12,000 second lien transaction loan files and approximately 14,550 first lien transaction loan files that breached one or more R&W regarding the characteristics of the loans, such as misrepresentation of income or employment of the borrower, occupancy, undisclosed debt and non-compliance with underwriting guidelines at loan origination. The Company continues to review new files as new loans default and as new loan files are made available to it. The Company generally obtains the loan files from the originators or servicers (including master servicers). In some cases, the Company requests loan files via the trustee, which then requests the loan files from the originators and/or servicers. On second lien loans, the Company requests loan files for all charged-off loans. On first lien loans, the Company requests loan files for all severely (60+ days) delinquent loans and all liquidated loans. Recently, the Company started requesting loan files for all the loans (both performing and non-performing) in certain deals to limit the number of requests for additional loan files as the transactions season and loans charge-off, become 60+ days delinquent or are liquidated. The Company takes no repurchase credit for R&W breaches on loans that are expected to continue to perform. Following negotiations with the providers of the R&W, as of March 31, 2011, the Company had reached agreement for providers to repurchase $33 million of second lien and $42 million of first lien loans. The $33 million for second lien loans represents the calculated repurchase price for 123 loans and the $42 million for first lien loans represents the calculated repurchase price for 378 loans. The repurchase proceeds are paid to the RMBS transactions and distributed in accordance with the payment priorities set out in the transaction agreements, so the proceeds are not necessarily allocated to the Company on a dollar-for-dollar basis. Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims, projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company's exposure. These amounts reflect payments made pursuant to the negotiated transaction agreements and not payments made pursuant to legal settlements. See "Recovery Litigation" below for a description of the related legal proceedings the Company has commenced.

        The Company has included in its net expected loss estimates as of March 31, 2011 an estimated benefit from loan repurchases related to breaches of R&W of $2.2 billion, which includes amounts with Bank of America. The amount of benefit recorded as a reduction of expected losses was calculated by extrapolating each transaction's breach rate on defaulted loans to projected defaults and, in the case of transactions subject to the Bank of America Agreement, the estimated impact of that agreement on the relevant transactions. See "Bank of America Agreement" in Note 2. The Company did not incorporate any gain contingencies or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the credit worthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches with the provider of the R&W and the potential amount of time until the recovery is realized.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

        The calculation of expected recovery from breaches of R&W involved a variety of scenarios which ranged from the Company recovering substantially all of the losses it incurred due to violations of R&W to the Company realizing very limited recoveries. The Company did not include any recoveries related to breaches of R&W in amounts greater than the losses it expected to pay under any given cash flow scenario. These scenarios were probability weighted in order to determine the recovery incorporated into the Company's reserve estimate. This approach was used for both loans that had already defaulted and those assumed to default in the future. In all cases, recoveries were limited to amounts paid or expected to be paid by the Company.

        The following table represents the Company's total estimated recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures. The Company had $2.2 billion of estimated recoveries from ineligible loans as of March 31, 2011, of which $1.0 billion is reported in salvage and subrogation recoverable, $0.8 billion is netted in loss and LAE reserves and $0.4 billion is netted in the unearned premium reserve portion of its stand-ready obligation reported on the Company's consolidated balance sheet. The Company had $1.6 billion of estimated recoveries from ineligible loans as of December 31, 2010, of which $0.9 billion is reported in salvage and subrogation recoverable, $0.5 billion is netted in loss and LAE reserves and $0.2 billion is netted in unearned premium reserve portion of its stand-ready obligation reported on the Company's consolidated balance sheet.


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

 
  Future Net
R&W
Benefit at
December 31, 2010
  R&W
Development and
Accretion of
Discount during 2011
  Less:
R&W
Recovered
During 2011(1)
  Future Net
R&W
Benefit at
March 31, 2011(2)
 
 
  (dollars in millions)
 

Prime first lien

  $ 1.1   $ 1.2   $   $ 2.3  

Alt-A first lien

    81.0     39.7         120.7  

Option ARM

    309.3     335.3     25.6     619.0  

Subprime

    26.8     54.3         81.1  

Closed end second lien

    178.2     95.0         273.2  

HELOC

    1,004.1     154.5     33.9     1,124.7  
                   
 

Total

  $ 1,600.5   $ 680.0   $ 59.5   $ 2,221.0  
                   

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

 

 
  Future Net
R&W
Benefit at
December 31, 2009
  R&W
Development and
Accretion of
Discount during 2010
  Less:
R&W
Recovered
During 2010(1)
  Future Net
R&W
Benefit at
March 31, 2010
 
 
  (dollars in millions)
 

Prime first lien

  $   $ 0.9   $   $ 0.9  

Alt-A first lien

    64.2     11.6         75.8  

Option ARM

    203.7     40.0     7.7     236.0  

Subprime

                 

Closed end second lien

    76.5     60.2         136.7  

HELOC

    828.7     43.3     22.7     849.3  
                   
 

Total

  $ 1,173.1   $ 156.0   $ 30.4   $ 1,298.7  
                   

(1)
Gross amount recovered are $64.2 million and $34.8 million in First Quarter 2011 and 2010, respectively.

(2)
Includes R&W benefit of $1,324.3 million attributable to transactions covered by the Bank of America Agreement.


Financial Guaranty Insurance U.S. RMBS Policies with R&W Benefit
as of March 31, 2011 and December 31, 2010

 
  # of Insurance
Policies with
R&W Benefit Recorded as of
  Outstanding Principal
and Interest
Policies with
R&W Benefit Recorded as of
 
 
  March 31, 2011   December 31, 2010   March 31, 2011   December 31, 2010  
 
  (dollars in millions)
 

Prime first lien

    1     1   $ 55.6   $ 57.1  

Alt-A first lien

    21     17     1,909.9     1,882.8  

Option ARM

    12     11     2,099.7     1,909.8  

Subprime

    4     1     995.9     228.7  

Closed end second lien

    4     4     411.0     444.9  

HELOC

    16     13     3,909.7     2,969.8  
                   
 

Total

    58     47   $ 9,381.8   $ 7,493.1  
                   

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

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

 
  First Quarter  
 
  2011   2010  
 
  (in millions)
 

Inclusion of new deals with breaches of R&W during period

  $ 107.1   $ 62.4  

Change in recovery assumptions as the result of additional file review and recovery success

    198.4     29.8  

Estimated increase in defaults that will result in additional breaches

    39.8     63.7  

Results of Bank of America Agreement

    334.1      

Accretion of discount on balance

    0.6     0.1  
           
 

Total

  $ 680.0   $ 156.0  
           

        The $680.0 million R&W development and accretion of discount during First Quarter 2011 in the above table resulted in large part from the Bank of America Agreement the Company executed on April 14, 2011 with Bank of America related to the Company's R&W claims and described under "Bank of America Agreement" in Note 2. The benefit of the Bank of America Agreement is included in the R&W credit for the transactions directly impacted by the agreement. In addition, the Bank of America Agreement caused the Company to increase the probability of successful pursuit of R&W claims against other providers where the Company believed those providers were breaching at a similar rate. Also, during First Quarter 2011, the Company added four transactions not subject to the Bank of America Agreement for which it expects R&W benefits, because it concluded it had the right to obtain loan files it had not previously concluded were accessible. The remainder of the development primarily relates to additional projected defaults. The accretion of discount was not a primary driver of the development. The Company assumes that recoveries on HELOC and closed end second lien loans that were not subject to the Bank of America Agreement will occur in two to four years from the balance sheet date depending on the scenarios and that recoveries on Alt-A first lien, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions. Recoveries on second lien transactions subject to the Bank of America Agreement will be paid in full by March 31, 2012.

Student Loan Transactions

        The Company has insured or reinsured $3.0 billion net par of student loan securitization transactions, $1.5 billion issued by private issuers and classified as asset-backed and $1.5 billion issued by public authorities and classified as public finance. Of these amounts, $243.7 million and $585.7 million, respectively, are rated BIG. The Company is projecting approximately $57.4 million and $13.6 million, respectively, of losses in these portfolios. In general the losses are due to: (i) the poor credit performance of private student loan collateral; (ii) high interest rates on auction rate securities with respect to which the auctions have failed or (iii) high interest rates on variable rate demand obligations that have been put to the liquidity provider by the holder and are therefore bearing high "bank bond" interest rates. The largest of these losses was approximately $31.8 million and related to a transaction backed by a pool of private student loans ceded to AG Re by another monoline insurer. The guaranteed bonds were issued as auction rate securities that now bear a high rate of interest due

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


to the primary insurer's downgrade. Further the underlying loan collateral has performed below expectations. The Company has estimated its losses based upon a weighting of potential outcomes.

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

        The Company's $2.1 billion net par of XXX life insurance transactions includes, as of March 31, 2011, a total of $882.5 million rated BIG, comprising Class A-2 Floating Rate Notes issued by Ballantyne Re p.l.c and Series A-1 Floating Rate Notes issued by Orkney Re II p.l.c ("Orkney Re II"). The Ballantyne Re and Orkney Re II XXX transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the current investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at March 31, 2011, the Company's gross expected loss, prior to reinsurance or netting of unearned premium, for its two BIG XXX insurance transactions was $70.1 million. The Company's net loss and LAE reserve was $59.6 million.

Other Notable Transactions

        The preceding pages describe the sectors in the financial guaranty portfolio that encompass most of the Company's projected losses. The Company also projects losses on a number of other transactions, the most significant of which are described in the following paragraphs.

        The Company has projected estimated losses of $28.3 million on its total net par outstanding of $494.4 million on Jefferson County Alabama Sewer Authority exposure. This estimate is based primarily on the Company's view of how much debt the Authority should be able to support under certain probability-weighted scenarios.

        The Company has projected estimated losses of $8.8 million on a transaction backed by revenues generated by telephone directory "yellow pages" in various jurisdictions with a net par of $110.8 million and insured by Ambac Assurance Corporation. This estimate is based primarily on the Company's view of how quickly "yellow pages" revenues are likely to decline in the future.

        The Company has $164.8 million of net par exposure to the city of Harrisburg, Pennsylvania, of which $92.9 million is BIG. The Company has paid $3.3 million in net claims to date, and expects a full recovery.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

Recovery Litigation

        As of the date of this filing, the Company has filed lawsuits with regard to six second lien U.S. RMBS transactions insured by AGM or AGC, alleging breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to AGM and AGC, and failure to cure or repurchase defective loans identified by AGM and AGC to such persons. These transactions consist of the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1, the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL2 and the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL3 transactions (in each of which AGC or AGM has sued Deutsche Bank AG affiliates DB Structured Products, Inc. and ACE Securities Corp.), the SACO I Trust 2005-GP1 transaction (in which AGC has sued JPMorgan Chase & Co.'s affiliate EMC Mortgage Corporation) and the Flagstar Home Equity Loan Trust, Series 2005-1 and Series 2006-2 transactions (in which AGM has sued Flagstar Bank, FSB, Flagstar Capital Markets Corporation and Flagstar ABS, LLC).

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

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

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

        In September 2010, AGM, together with TD Bank, National Association and Manufacturers and Traders Trust Company, filed a complaint in the Court of Common Pleas in the Supreme Court of Pennsylvania against The Harrisburg Authority, The City of Harrisburg, Pennsylvania (the "City"), and

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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


the Treasurer of the City in connection with certain Resource Recovery Facility bonds and notes issued by the Harrisburg Authority, alleging, among other claims, breach of contract by both the Harrisburg Authority and the City, and seeking remedies including an order compelling the Harrisburg Authority to pay all unpaid and past due principal and interest and to charge and collect sufficient rates, rental and other charges adequate to carry out its pledge of revenues and receipts; an order compelling the City to budget for, impose and collect taxes and revenues sufficient to satisfy its obligations; and the appointment of a receiver for the Harrisburg Authority.

Net Loss Summary

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

Loss and LAE Reserve, Net of Reinsurance and Salvage and Subrogation Recoverable

 
  As of March 31, 2011   As of December 31, 2010  
 
  Loss and LAE
Reserve(1)
  Salvage and
Subrogation
Recoverable(2)
  Net   Loss and LAE Reserve(1)   Salvage and Subrogation Recoverable(2)   Net  
 
  (in millions)
 

U.S. RMBS:

                                     
 

First lien:

                                     
   

Prime first lien

  $ 1.1   $   $ 1.1   $ 1.2   $     1.2  
   

Alt-A first lien

    39.0     4.6     34.4     39.2     2.6     36.6  
   

Option ARM

    112.8     76.2     36.6     223.3     63.0     160.3  
   

Subprime

    82.7         82.7     108.3     0.1     108.2  
                           
     

Total first lien

    235.6     80.8     154.8     372.0     65.7     306.3  
 

Second lien:

                                     
   

Closed end second lien

    7.7     113.3     (105.6 )   7.7     50.3     (42.6 )
   

HELOC

    7.5     849.1     (841.6 )   7.1     843.4     (836.3 )
                           
     

Total second lien

    15.2     962.4     (947.2 )   14.8     893.7     (878.9 )
                           

Total U.S. RMBS

    250.8     1,043.2     (792.4 )   386.8     959.4     (572.6 )

Other structured finance

    139.5     1.8     137.7     119.7     1.4     118.3  

Public finance

    59.4     36.6     22.8     81.6     34.4     47.2  
                           

Total financial guaranty

    449.7     1,081.6     (631.9 )   588.1     995.2     (407.1 )

Other

    2.1         2.1     2.1         2.1  
                           
   

Subtotal

    451.8     1,081.6     (629.8 )   590.2     995.2     (405.0 )

Effect of consolidating financial guaranty VIEs

    (62.5 )   (153.5 )   91.0     (49.5 )   (92.2 )   42.7  
                           
   

Total(1)

  $ 389.3   $ 928.1   $ (538.8 ) $ 540.7   $ 903.0   $ (362.3 )
                           

(1)
The March 31, 2011 loss and LAE consists of $407.9 million loss and LAE reserve net of $18.6 million of reinsurance recoverable on unpaid losses. The December 31, 2010 loss and LAE

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

(2)
Salvage and subrogation recoverable is net of $128.9 million and $129.4 million in ceded salvaged and subrogation recorded in "reinsurance balances payable" at March 31, 2011 and December 31, 2010, respectively.

        The following table presents the loss and LAE by sector for financial guaranty contracts accounted for as insurance that was recorded in the consolidated statements of operations. Amounts presented are net of reinsurance and net of the benefit for recoveries from breaches of R&W.

Loss and LAE Reported
on the Consolidated Statements of Operations

 
  First Quarter  
 
  2011   2010  
 
  (in millions)
 

Financial Guaranty:

             
 

U.S. RMBS:

             
   

First lien:

             
     

Prime first lien

  $ (0.1 ) $ 0.1  
     

Alt-A first lien

    8.2     5.4  
     

Option ARM

    (29.1 )   44.4  
     

Subprime

    (9.4 )   24.7  
           
       

Total first lien

    (30.4 )   74.6  
   

Second lien:

             
     

Closed end second lien

    (9.9 )   4.4  
     

HELOC

    61.0     23.6  
           
       

Total second lien

    51.1     28.0  
           
 

Total U.S. RMBS

    20.7     102.6  
 

Other structured finance

    20.0     10.2  
 

Public finance

    (15.8 )   27.7  
           

Total financial guaranty

    24.9     140.5  

Other

         
           
   

Subtotal

    24.9     140.5  

Effect of consolidating financial guaranty VIEs

    (51.9 )   (10.0 )
           
   

Total loss and LAE (recoveries)

  $ (27.0 ) $ 130.5  
           

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

        The following table provides information on financial guaranty insurance and reinsurance contracts categorized as BIG as of March 31, 2011 and December 31, 2010:

Financial Guaranty Insurance BIG Transaction Loss Summary
March 31, 2011

 
  BIG Categories  
 
  BIG 1   BIG 2   BIG 3    
  Effect
of
Consolidating
VIEs
   
 
 
  Total
BIG,
Net(1)
   
 
 
  Gross   Ceded   Gross   Ceded   Gross   Ceded   Total  
 
  (dollars in millions)
 

Number of risks(2)

    130     (42 )   94     (40 )   118     (44 )   342         342  

Remaining weighted-average contract period (in years)

    12.6     19.2     8.7     6.6     8.5     6.0     9.6         9.6  

Outstanding exposure:

                                                       
 

Principal

  $ 5,562.9   $ (572.6 ) $ 5,750.9   $ (234.0 ) $ 8,192.2   $ (702.4 ) $ 17,997.0   $   $ 17,997.0  
 

Interest

    3,516.1     (548.5 )   2,631.3     (77.6 )   2,344.8     (183.2 )   7,682.9         7,682.9  
                                       
   

Total

  $ 9,079.0   $ (1,121.1 ) $ 8,382.2   $ (311.6 ) $ 10,537.0   $ (885.6 ) $ 25,679.9   $   $ 25,679.9  
                                       

Expected cash flows

  $ 136.1   $ (6.5 ) $ 1,564.9   $ (73.3 ) $ 2,672.0   $ (148.2 ) $ 4,145.0   $ (404.7 ) $ 3,740.3  

Less:

                                                       
 

Potential recoveries(3)

    151.1     (1.7 )   677.2     (25.5 )   3,021.7     (194.3 )   3,628.5     (395.9 )   3,232.6  
 

Discount

    74.6     (17.8 )   434.8     (29.3 )   27.9     8.4     498.6     16.1     514.7  
                                       

Present value of expected cash flows

  $ (89.6 ) $ 13.0   $ 452.9   $ (18.5 ) $ (377.6 ) $ 37.7   $ 17.9   $ (24.9 ) $ (7.0 )
                                       

Deferred premium revenue

  $ 121.5   $ (16.9 ) $ 569.8   $ (30.3 ) $ 995.9   $ (120.7 ) $ 1,519.3   $ (274.0 ) $ 1,245.3  

Reserves (salvage)(4)

  $ (102.0 ) $ 15.1   $ 236.1   $ (7.1 ) $ (877.9 ) $ 103.9   $ (631.9 ) $ 91.0   $ (540.9 )

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2010

 
  BIG Categories  
 
  BIG 1   BIG 2   BIG 3    
  Effect
of
Consolidating
VIEs
   
 
 
  Total
BIG,
Net(1)
   
 
 
  Gross   Ceded   Gross   Ceded   Gross   Ceded   Total  
 
  (dollars in millions)
 

Number of risks(2)

    120     (46 )   97     (41 )   115     (42 )   332         332  

Remaining weighted-average contract period (in years)

    11.7     15.9     8.5     8.0     8.8     6.0     9.6         9.6  

Outstanding exposure:

                                                       
 

Principal

  $ 6,246.5   $ (726.0 ) $ 5,825.8   $ (180.1 ) $ 7,954.5   $ (673.6 ) $ 18,447.1   $   $ 18,447.1  
 

Interest

    3,622.7     (581.3 )   2,578.5     (70.1 )   2,490.7     (186.3 )   7,854.2         7,854.2  
                                       
   

Total

  $ 9,869.2   $ (1,307.3 ) $ 8,404.3   $ (250.2 ) $ 10,445.2   $ (859.9 ) $ 26,301.3   $   $ 26,301.3  
                                       

Expected cash flows

  $ 303.9   $ (20.2 ) $ 2,019.8   $ (68.9 ) $ 2,256.6   $ (133.2 ) $ 4,358.0   $ (384.2 ) $ 3,973.8  

Less:

                                                       
 

Potential recoveries(3)

    375.2     (37.4 )   533.0     (16.6 )   2,543.6     (197.5 )   3,200.3     (354.8 )   2,845.5  
 

Discount

    21.0     5.5     610.4     (21.5 )   139.6     7.9     762.9     19.8     782.7  
                                       

Present value of expected cash flows

  $ (92.3 ) $ 11.7   $ 876.4   $ (30.8 ) $ (426.6 ) $ 56.4   $ 394.8   $ (49.2 ) $ 345.6  
                                       

Deferred premium revenue

  $ 169.9   $ (16.9 ) $ 569.8   $ (30.3 ) $ 995.9   $ (120.7 ) $ 1,567.7   $ (263.9 ) $ 1,303.8  

Reserves (salvage)(4)

  $ (112.9 ) $ 12.4   $ 413.0   $ (9.5 ) $ (815.9 ) $ 105.8   $ (407.1 ) $ 42.7   $ (364.4 )

(1)
Includes BIG amounts relating to VIEs that the Company consolidates.

(2)
A risk represents the aggregate of the financial guarantee policies that share the same revenue source for purposes of making debt service payments.

(3)
Includes estimated future recoveries for breaches of R&W as well as excess spread, and draws on HELOCs.

(4)
See table "Components of net reserves (salvage)".

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

Components of Net Reserves (Salvage)

 
  March 31, 2011   December 31, 2010  
 
  (in millions)
 

Loss and LAE reserve

  $ 407.9   $ 563.0  

Reinsurance recoverable on unpaid losses

    (18.6 )   (22.3 )

Salvage and subrogation recoverable

    (1,057.0 )   (1,032.4 )

Salvage and subrogation payable(1)

    128.9     129.4  
           
 

Total

    (538.8 )   (362.3 )

Less: other

    2.1     2.1  
           

Financial guaranty reserves, net of salvage and subrogation

  $ (540.9 ) $ (364.4 )
           

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

Ratings Impact on Financial Guaranty Business

        A downgrade of one of the Company's insurance subsidiaries may result in increased claims under financial guaranties issued by the Company. In particular, with respect to variable rate demand obligations for which a bank has agreed to provide a liquidity facility, a downgrade of the insurer may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a "bank bond rate" that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00%-3.00%, often with a floor of 7%, and capped at the maximum legal limit). In the event that the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right additionally to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to the insurer under its financial guaranty policy. As of the date of this filing, the Company has insured approximately $1.3 billion of par of variable rate demand obligations issued by municipal obligors rated BBB- or lower pursuant to the Company's internal rating. For a number of such obligations, a downgrade of the insurer below A+, in the case of Standard and Poor's Rating Services ("S&P"), or below A1, in the case of Moody's Investor Services, Inc. ("Moody's"), triggers the ability of the bank to notify bondholders of the termination of the liquidity facility and to demand accelerated repayment of bond principal over a period of five to ten years. The specific terms relating to the rating levels that trigger the bank's termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction. See also Note 13 for a discussion of the impact of a downgrade in the financial strength rating on the Company's insured leveraged lease transactions.

5. Fair Value Measurement

        The Company carries a portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

5. Fair Value Measurement (Continued)


is based on the market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).

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

        Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company's creditworthiness, constraints on liquidity and unobservable parameters. Valuation adjustments have been applied consistently over time. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company continues to refine its methodologies. During First Quarter 2011, no changes were made to the Company's valuation models that had or are expected to have, a material impact on the Company's consolidated balance sheets or statements of operations and comprehensive income.

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

        The fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows, with level 1 being the highest and level 3 the lowest. An asset or liability's categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

        Transfers between levels 1, 2 and 3 are recognized at the beginning of the period when the transfer occurs. The Company reviews quarterly the classification between levels 1, 2 and 3 to determine, based on the definitions provided, whether a transfer is necessary. There we no transfers between levels during the periods presented.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

5. Fair Value Measurement

Financial Instruments Carried at Fair Value

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

Fair Value Hierarchy of Financial Instruments
As of March 31, 2011

 
   
  Fair Value Hierarchy  
 
  Fair Value   Level 1   Level 2   Level 3  
 
  (in millions)
 

Assets:

                         

Investment portfolio, available-for-sale:

                         
 

Fixed maturity securities

                         
   

U.S. government and agencies

  $ 1,007.8   $   $ 1,007.8   $  
   

Obligations of state and political subdivisions

    4,931.6         4,931.6      
   

Corporate securities

    953.1         953.1      
   

Mortgage-backed securities:

                         
     

RMBS

    1,305.8         1,083.4     222.4  
     

Commercial Mortgage-Backed Securities ("CMBS")

    409.0         409.0      
   

Asset-backed securities

    516.0         283.9     232.1  
   

Foreign government securities

    348.8         348.8      
                   
     

Total fixed maturity securities

    9,472.1         9,017.6     454.5  
 

Short-term investments

    768.5     155.3     613.2      
 

Other invested assets(1)

    33.2     0.4     21.4     11.4  
 

Credit derivative assets

    619.3             619.3  
 

Financial guaranty VIEs' assets, at fair value

    3,679.0             3,679.0  
 

Other assets

    48.5     29.2     19.3      
                   
   

Total assets carried at fair value

  $ 14,620.6   $ 184.9   $ 9,671.5   $ 4,764.2  
                   

Liabilities:

                         
 

Credit derivative liabilities

  $ 2,761.5   $   $   $ 2,761.5  
 

Financial guaranty VIEs' liabilities with recourse, at fair value

    2,757.8             2,757.8  
 

Financial guaranty VIEs' liabilities without recourse, at fair value

    1,373.0             1,373.0  
                   
   

Total liabilities carried at fair value

  $ 6,892.3   $   $   $ 6,892.3  
                   

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

5. Fair Value Measurement (Continued)

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

 
   
  Fair Value Hierarchy  
 
  Fair Value   Level 1   Level 2   Level 3  
 
  (in millions)
 

Assets:

                         

Investment portfolio, available-for-sale:

                         
 

Fixed maturity securities

                         
   

U.S. government and agencies

  $ 1,048.2   $   $ 1,048.2   $  
   

Obligations of state and political subdivisions

    4,959.9         4,959.9      
   

Corporate securities

    992.5         992.5      
   

Mortgage-backed securities:

                         
     

RMBS

    1,184.1         1,071.7     112.4  
     

CMBS

    379.1         379.1      
   

Asset-backed securities

    502.9         292.7     210.2  
   

Foreign government securities

    348.6         348.6      
                   
     

Total fixed maturity securities

    9,415.3         9,092.7     322.6  
 

Short-term investments

    1,031.6     253.4     778.2      
 

Other invested assets(1)

    33.3     0.2     21.4     11.7  
 

Credit derivative assets

    592.9             592.9  
 

Financial guaranty VIEs' assets, at fair value

    3,657.5             3,657.5  
 

Other assets

    44.4     25.7     18.7      
                   
   

Total assets carried at fair value

  $ 14,775.0   $ 279.3   $ 9,911.0   $ 4,584.7  
                   

Liabilities:

                         
 

Credit derivative liabilities

  $ 2,465.5   $   $   $ 2,465.5  
 

Financial guaranty VIEs' liabilities with recourse, at fair value

    2,927.0             2,927.0  
 

Financial guaranty VIEs' liabilities without recourse, at fair value

    1,337.2             1,337.2  
 

Other liabilities

    0.1         0.1      
                   
   

Total liabilities carried at fair value

  $ 6,729.8   $   $ 0.1   $ 6,729.7  
                   

(1)
Includes mortgage loans that are recorded at fair value on a non-recurring basis. At March 31, 2011 and December 31, 2010, such investments were carried at their market value of $9.2 million and $9.4 million, respectively. The mortgage loans are classified as Level 3 of the fair value hierarchy as there are significant unobservable inputs used in the valuation of such loans. An indicative dealer quote is used to price the non-performing portion of these mortgage loans. The performing loans are valued using management's determination of future cash flows arising from these loans, discounted at the rate of return that would be required by a market participant. This rate of return is based on indicative dealer quotes.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

5. Fair Value Measurement (Continued)

Changes in Level 3 Fair Value Measurements

        The table below presents a roll forward of the Company's financial instruments whose fair value included significant unobservable inputs (Level 3) during First Quarter 2011 and 2010.

Fair Value Level 3 Roll Forward

 
  Fixed Maturity
Securities
   
   
   
   
   
 
 
   
   
  Credit
Derivative
Asset
(Liability),
net(5)
  Financial
Guaranty VIEs'
Liabilities with
Recourse, at
Fair Value
  Financial
Guaranty VIEs'
Liabilities without
Recourse, at
Fair Value
 
 
   
  Financial
Guaranty VIEs'
Assets. at
Fair Value
 
 
  RMBS   Asset-
Backed
Securities
  Other
Invested
Assets
 
 
  (in millions)
 

Fair value at December 31, 2010

  $ 112.4   $ 210.2   $ 2.3   $ 3,657.5   $ (1,872.6 ) $ (2,927.0 ) $ (1,337.2)  

Total pre-tax realized and unrealized gains/(losses)(1) recorded in:

                                           
 

Net income (loss)

    4.2 (2)   1.6 (2)       234.4 (3)   (235.7 )(6)   (35.9 )(3)   (135.5) (3)
 

Other comprehensive income (loss)

    (30.9 )   20.3     (0.1 )                

Purchases

    150.5                          

Sales

    (13.5 )                        

Settlements

                (212.9 )   (33.9 )   205.1     99.7  

VIE consolidation

    (0.3 )                        
                               

Fair value at March 31, 2011

  $ 222.4   $ 232.1   $ 2.2   $ 3,679.0   $ (2,142.2 ) $ (2,757.8 ) $ (1,373.0)  
                               

Change in unrealized gains/(losses) related to financial instruments held at March 31, 2011

  $ (30.9 ) $ 20.3   $ (0.1 ) $ 234.4   $ (282.3 ) $ (35.9 ) $ (135.5)  
                               

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

5. Fair Value Measurement (Continued)

 

 
  Fixed Maturity
Securities
   
   
   
   
   
 
 
   
   
  Credit
Derivative
Asset
(Liability),
net(5)
  Financial
Guaranty VIEs'
Liabilities with
Recourse, at
Fair Value
  Financial
Guaranty VIEs'
Liabilities without
Recourse, at
Fair Value
 
 
   
  Financial
Guaranty VIEs'
Assets. at
Fair Value
 
 
  RMBS   Asset-
Backed
Securities
  Other
Invested
Assets
 
 
  (in millions)
 

Fair value at December 31, 2009

  $   $ 203.9   $ 0.2   $   $ (1,542.1 ) $   $  

Adoption of new accounting standard

                1,925.3         (2,110.9 )   (226.0)  
                               

Fair value at January 1, 2010

        203.9     0.2     1,925.3     (1,542.1 )   (2,110.9 )   (226.0)  

Total pre-tax realized and unrealized gains/(losses)(1) recorded in:

                                           
 

Net income (loss)

    0.4 (2)   (0.6 )(2)   0.1 (4)   4.2 (3)   278.8 (6)   (9.6 )(3)   (5.1) (3)
 

Other comprehensive income (loss)

    (18.2 )   0.6                      

Purchases, issuances, sales, settlements, net

    42.0         4.1     (60.9 )   (21.6 )   53.3     25.4  

Transfers in and/or out of Level 3

    55.1     18.8                      
                               

Fair value at March 31, 2010

  $ 79.3   $ 222.7   $ 4.4   $ 1,868.6   $ (1,284.9 ) $ (2,067.2 ) $ (205.7)  
                               

Change in unrealized gains/(losses) related to financial instruments held at March 31, 2010

  $ (18.2 ) $ 0.6   $ 0.1   $ 64.0   $ 257.8   $ (58.5 ) $ (3.4)  
                               

(1)
Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses) from changes in values of those financial instruments only for the periods in which the instruments were classified as Level 3.

(2)
Included in net realized investment gains (losses) and net investment income.

(3)
Included in net change in financial guaranty variable interest entities.

(4)
Recorded in other income.

(5)
Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based on net counterparty exposure.

(6)
Reported in net change in fair value of credit derivatives.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

5. Fair Value Measurement (Continued)

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

Fair Value of Financial Instruments

 
  As of
March 31, 2011
  As of
December 31, 2010
 
 
  Carrying
Amount
  Estimated
Fair Value
  Carrying
Amount
  Estimated
Fair Value
 
 
  (in millions)
 

Assets:

                         
 

Fixed maturity securities

  $ 9,472.1   $ 9,472.1   $ 9,415.3   $ 9,415.3  
 

Short-term investments

    768.5     768.5     1,031.6     1,031.6  
 

Other invested assets

    255.3     265.5     259.8     269.7  
 

Credit derivative assets

    619.3     619.3     592.9     592.9  
 

Financial guaranty VIEs' assets, at fair value

    3,679.0     3,679.0     3,657.5     3,657.5  
 

Other assets

    48.5     48.5     44.4     44.4  

Liabilities:

                         
 

Financial guaranty insurance contracts(1)

    4,325.4     4,482.5     4,766.3     5,595.8  
 

Long-term debt

    1,049.7     1,107.8     1,052.9     1,074.5  
 

Credit derivative liabilities

    2,761.5     2,761.5     2,465.5     2,465.5  
 

Financial guaranty VIEs' liabilities with recourse, at fair value

    2,757.8     2,757.8     2,927.0     2,927.0  
 

Financial guaranty VIEs' liabilities without recourse, at fair value

    1,373.0     1,373.0     1,337.2     1,337.2  

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

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

6. Financial Guaranty Contracts Accounted for as Credit Derivatives

Credit Derivatives

        The Company has a portfolio of financial guaranty contracts accounted for as derivatives (primarily CDS) that meet the definition of a derivative in accordance with GAAP. Management has considered these agreements to be a normal part of its financial guaranty business. A loss payment is made only upon the occurrence of one or more defined credit events with respect to the referenced securities or loans. A credit event may be a non-payment event such as a failure to pay, bankruptcy or restructuring, as negotiated by the parties to the credit derivative transactions. Credit derivative transactions are governed by ISDA documentation and operate differently from financial guaranty contracts accounted for as insurance. For example, the Company's control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty contract accounted for as insurance. In addition, while the Company's exposure under credit derivatives, like the Company's exposure under financial guaranty contracts accounted for as insurance, has been generally for as long as the reference obligation remains outstanding, unlike financial guaranty contracts, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. The Company may be required to make a termination payment to its swap counterparty upon such termination.

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Assured Guaranty Ltd.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

March 31, 2011

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

Credit Derivative Net Par Outstanding by Sector

        The estimated remaining weighted average life of credit derivatives was 4.8 years at March 31, 2011 and 4.9 years at December 31, 2010. The components of the Company's credit derivative net par outstanding as of March 31, 2011 and December 31, 2010 are:

Net Par Outstanding on Credit Derivatives

 
  As of March 31, 2011   As of December 31, 2010
Asset Type
  Original
Subordination(1)
  Current
Subordination(1)
  Net Par
Outstanding
  Weighted
Average
Credit
Rating
  Original
Subordination(1)
  Current
Subordination(1)
  Net Par
Outstanding
  Weighted
Average
Credit
Rating
 
  (dollars in millions)

Pooled corporate obligations:

                                           
 

Collateralized loan obligations/Collateralized bond obligations

    32.4 %   31.1 % $ 44,393   AAA     32.2 %   30.4 % $ 45,953   AAA
 

Synthetic investment grade pooled corporate(2)

    19.2     17.5     15,164   AAA     19.2     17.6     14,905   AAA
 

Synthetic high yield pooled corporate

    39.6     34.6     6,605   AAA     39.4     34.6     7,316   AAA
 

Trust preferred securities collateralized debt obligations

    46.7     31.9     5,737   BB+     46.8     32.0     5,757   BB+
 

Market value collateralized debt obligations of corporate obligations

    34.9     42.0     4,926   AAA     36.0     42.9     5,069   AAA
                                 

Total pooled corporate obligations

    31.6     29.5     76,825   AAA     31.7     29.3     79,000   AAA

U.S. RMBS:

                                           
 

Option ARMs and Alt-A first lien

    19.6     16.1     4,607   B     19.7     17.0     4,767   B+
 

Subprime first lien (including net interest margin)

    30.0     53.9     4,307   A+     27.9     50.4     4,460   A+
 

Prime first lien

    10.9     10.1     446   B     10.9     10.3     468   B
 

Closed end second lien and HELOCs(3)

            71   B             81   B
                                 

Total U.S. RMBS

    23.9     32.9     9,431   BBB-     23.1     32.4