Assured Guaranty (AGO) 8-K Other Events

Exhibit 99.1

Assured Guaranty Corp.

Consolidated Financial Statements

(Unaudited)

Index

March 31, 2011

	Page(s)
Financial statements
Consolidated Balance Sheets (unaudited) as of March 31, 2011 and December 31, 2010	2
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010	3
Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2011 and 2010	4
Consolidated Statement of Shareholder's Equity (unaudited) for the Three Months Ended March 31, 2011	5
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and 2010	6
Notes to Consolidated Financial Statements (unaudited)	7-62

Assured Guaranty Corp.

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 $2,503,607and $2,467,801)		$	2,526,496		$	2,488,920
	Short-term investments, at fair value			172,010			235,665
	Other invested assets			12,500			12,500
		Total investment portfolio		2,711,006			2,737,085
Cash				2,978			16,601
Premiums receivable, net of ceding commissions payable				243,634			269,560
Ceded unearned premium reserve				371,540			388,598
Deferred acquisition costs				61,184			57,882
Reinsurance recoverable on unpaid losses				66,109			68,120
Salvage and subrogation recoverable				199,089			183,955
Credit derivative assets				425,750			399,517
Deferred tax asset, net				393,705			342,587
Current income tax receivable				58,602			38,275
Financial guaranty variable interest entities' assets, at fair value				1,000,678			965,998
Other assets				90,150			74,678
	Total assets		$	5,624,425		$	5,542,856
Liabilities and shareholder's equity
Unearned premium reserve			$	1,269,241		$	1,323,138
Loss and loss adjustment expense reserve				206,394			231,130
Reinsurance balances payable, net				120,932			121,585
Note payable to affiliate				300,000			300,000
Credit derivative liabilities				1,631,533			1,360,369
Financial guaranty variable interest entities' liabilities with recourse, at fair value				518,483			523,478
Financial guaranty variable interest entities' liabilities without recourse, at fair value				511,250			495,720
Other liabilities				105,923			113,350
	Total liabilities			4,663,756			4,468,770
Commitments and contingencies
Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding)				—			—
Common stock ($720.00 par value, 500,000 shares authorized; 20,834 shares issued and outstanding)				15,000			15,000
Additional paid-in capital				1,037,087			1,037,087
Retained earnings (deficit)				(99,541	)		15,897
Accumulated other comprehensive income (loss), net of deferred tax provision (benefit) of $4,374 and $3,285				8,123			6,102
	Total shareholder's equity			960,669			1,074,086
	Total liabilities and shareholder's equity		$	5,624,425		$	5,542,856

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

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Assured Guaranty Corp.

Consolidated Statements of Operations (Unaudited)

(in thousands)

				Three Months Ended March 31,
				2011			2010
Revenues
	Net earned premiums			$	28,706		$	29,490
	Net investment income				24,847			19,559
	Net realized investment gains (losses):
		Other-than-temporary impairment losses			(2,179	)		—
		Less: portion of other-than-temporary impairment loss recognized in other comprehensive income			—			—
		Other net realized investment gains (losses)			2,226			2,841
			Net realized investment gains (losses)		47			2,841
	Net change in fair value of credit derivatives:
		Realized gains and other settlements			10,405			(6,680	)
		Net unrealized gains (losses)			(234,782	)		209,456
			Net change in fair value of credit derivatives		(224,377	)		202,776
	Fair value gain (loss) on committed capital securities				285			1,421
	Net change in financial guaranty variable interest entities				8,398			11,514
	Other income				1,218			(2,162	)
		Total revenues			(160,876	)		265,439
Expenses
	Loss and loss adjustment expenses				(18,652	)		34,524
	Amortization of deferred acquisition costs				3,847			4,144
	Interest expense				3,750			3,750
	Other operating expenses				17,628			27,627
		Total expenses			6,573			70,045
Income (loss) before income taxes					(167,449	)		195,394
Provision (benefit) for income taxes
	Current				(17,459	)		(16,815	)
	Deferred				(44,553	)		82,195
		Total provision (benefit) for income taxes			(62,012	)		65,380
Net income (loss).				$	(105,437	)	$	130,014

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

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Assured Guaranty Corp.

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

	Three Months Ended March 31,
	2011			2010
Net income (loss)	$	(105,437	)	$	130,014
Unrealized holding gains (losses) arising during the period, net of tax provision (benefit) of $585 and $3,875		1,087			7,038
Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $16 and $994		31			1,847
Change in net unrealized gains on investments		1,056			5,191
Change in cumulative translation adjustment, net of tax provision (benefit) of $520 and $(2,079)		965			(3,768	)
Other comprehensive income (loss)		2,021			1,423
Comprehensive income (loss)	$	(103,416	)	$	131,437

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

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Assured Guaranty Corp.

Consolidated Statement of Shareholder's Equity (Unaudited)

For the Three Months Ended March 31, 2011

(in thousands)

		Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholder's Equity
Balance, December 31, 2010		$	—	$	15,000	$	1,037,087	$	15,897		$	6,102		$	1,074,086
Net loss			—		—		—		(105,437	)		—			(105,437	)
Dividends			—		—		—		(10,001	)		—			(10,001	)
Change in cumulative translation adjustment			—		—		—		—			965			965
Change in unrealized gains (losses) on:
	Investments with no other-than-temporary impairment		—		—		—		—			(1,888	)		(1,888	)
	Investments with other-than-temporary impairment		—		—		—		—			2,975			2,975
	Less: reclassification adjustment for gains (losses) included in net income (loss)		—		—		—		—			31			31
Balance, March 31, 2011		$	—	$	15,000	$	1,037,087	$	(99,541	)	$	8,123		$	960,669

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

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Assured Guaranty Corp.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

			Three Months Ended March 31,
			2011			2010
Net cash flows provided by (used in) operating activities			$	(47,984	)	$	(77,216	)
Investing activities
	Fixed maturity securities:
		Purchases		(149,351	)		(194,221	)
		Sales		91,793			54,067
		Maturities		45,698			38,985
	Net sales (purchases) of short-term investments			63,691			222,636
	Net proceeds from paydowns on financial guaranty variable interest entities' assets			23,121			5,501
Net cash flows provided by (used in) investing activities				74,952			126,968
Financing activities
	Dividends paid			(10,001	)		(15,000	)
	Net paydowns of financial guaranty variable interest entities' liabilities			(30,532	)		(5,501	)
Net cash flows provided by (used in) financing activities				(40,533	)		(20,501	)
Effect of exchange rate changes				(58	)		318
Increase (decrease) in cash				(13,623	)		29,569
Cash at beginning of period				16,601			2,470
Cash at end of period			$	2,978		$	32,039
Supplemental cash flow information
Cash paid (received) during the period for:
	Income taxes		$	—		$	—
	Interest		$	—		$	—

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

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Assured Guaranty Corp.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011

1. Business and Basis of Presentation

Business

        Assured Guaranty Corp. ("AGC" and, together with its subsidiary, the "Company"), a Maryland domiciled insurance company, is an indirect and wholly-owned subsidiary of Assured Guaranty Ltd. ("AGL" and together with its subsidiaries "Assured Guaranty"). AGL is a Bermuda-based insurance holding company that provides, through its operating subsidiaries, credit protection products to the United States ("U.S.") and international public finance, infrastructure and structured finance markets. It is licensed to conduct financial guaranty insurance business in all fifty states of the U.S., the District of Columbia and Puerto Rico. AGC owns 100% of Assured Guaranty (UK) Ltd. ("AGUK"), a company incorporated in the United Kingdom ("U.K.") as a U.K. insurance company which AGC has elected to place into runoff. The Company has applied its credit underwriting judgment, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products that protect holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The securities insured by the Company include taxable and tax-exempt obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities issued by special purpose entities. The Company 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 financial obligations. The Company guarantees financial obligations issued in many countries, although its principal focus is on the U.S. and Europe. The Company 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. Third party ceded reinsurance is generally not currently available.

        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.

        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

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

        On January 24, 2011, Standard and Poor's Rating Services ("S&P") released a publication entitled "Request for Comment: Bond Insurance Criteria," in which it requested comments on proposed changes to its bond insurance ratings criteria. In the Request for Comment, S&P noted that it could lower its financial strength ratings on existing investment- grade bond insurers (which include 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 if the Company were unable to reduce risk or raise capital on acceptable terms.

        Unless otherwise noted, ratings on the Company'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 the Company's AAA-rated exposure on its internal rating scale has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to the Company's exposure or (2) the Company's exposure benefiting from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management's opinion, causes the Company's attachment point to be materially above the AAA attachment point.

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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 AGC and its subsidiary, AGUK, along with the accounts of certain variable interest entities ("VIEs"). Intercompany accounts and transactions between AGC and its subsidiary have been eliminated as well as transactions between AGC and its consolidated VIEs. Certain prior year balances have been reclassified to conform to the current year's presentation.

        These unaudited interim consolidated financial statements should be read in conjunction with the Company's 2010 consolidated financial statements included as Exhibit 99.1 in AGL's Form 8-K dated April 8, 2011, filed with the U.S. Securities and Exchange Commission (the "SEC").

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 third party financial guaranty reinsurance in the past two years and it is not expected to develop in the foreseeable future. As a result, the chief operating decision maker now manages the 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 consolidated financial statements 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 AGC or its affiliate Assured Guaranty Municipal Corp. ("AGM"), including claims relating to reimbursement for breaches of representations and warranties ("R&W") and historical loan servicing issues (the "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 AGC or AGM has insured, as well as certain other securitizations containing concentrations of Countrywide originated loans that AGC or AGM has insured. The AGC-insured transactions covered by the Bank of America Agreement include nine first lien and two second lien transactions that have a combined gross par outstanding of $1.3 billion ($0.9 billion net par outstanding) as of March 31, 2011, or 18% of the Company's total below investment grade ("BIG") RMBS net par outstanding.

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        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 nine first lien RMBS transactions insured by AGC were approximately $0.1 billion and the Company's estimated gross economic loss before considering R&W benefit on these transactions was $116.4 million, which assumes cumulative projected collateral losses of $0.4 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. 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.

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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		$	163,649	$	165,397	$	114,968	$	117,061
Structured finance			69,900		73,069		51,558		53,986
	Total	$	233,549	$	238,466	$	166,526	$	171,047

Financial Guaranty Net Par Outstanding 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		$	—		—	%	$	1,002		23.3	%	$	6,839		17.6	%	$	2,373		26.4	%	$	10,214		8.9	%
AAA			102		0.2			13		0.3			14,529		37.4			4,113		45.8			18,757		16.3
AA			10,654		16.9			266		6.2			3,091		8.0			432		4.8			14,443		12.5
A			41,427		65.6			1,359		31.6			2,569		6.6			271		3.0			45,626		39.6
BBB			10,143		16.1			1,442		33.5			3,730		9.6			1,236		13.8			16,551		14.4
BIG			782		1.2			220		5.1			8,057		20.8			554		6.2			9,613		8.3
	Total net par outstanding	$	63,108		100.0	%	$	4,302		100.0	%	$	38,815		100.0	%	$	8,979		100.0	%	$	115,204		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		$	—		—	%	$	955		22.7	%	$	6,919		17.0	%	$	2,313		24.4	%	$	10,187		8.6	%
AAA			126		0.2			13		0.3			16,143		39.7			4,666		49.3			20,948		17.6
AA			11,240		17.4			257		6.1			3,326		8.2			434		4.6			15,257		12.8
A			41,849		64.8			1,368		32.6			2,966		7.3			266		2.8			46,449		39.1
BBB			10,565		16.4			1,409		33.5			3,627		8.9			1,230		13.0			16,831		14.2
BIG			800		1.2			201		4.8			7,680		18.9			555		5.9			9,236		7.7
	Total net par outstanding	$	64,580		100.0	%	$	4,203		100.0	%	$	40,661		100.0	%	$	9,464		100.0	%	$	118,908		100.0	%

        In addition to amounts shown in the tables above, AGC had outstanding commitments to provide guaranties of $3.2 billion for structured finance transactions and, together with AGM up to $790.6 million for public finance commitments at March 31, 2011. The structured finance commitments include the unfunded component of pooled corporate and other 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 $303.8 million 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 by the entity to which the commitment was issued. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

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Significant Risk Management Activities

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

        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.

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

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

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

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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:

•

BIG Category 1: Below investment grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.

•

BIG Category 2: Below investment grade transactions for which lifetime losses are expected but for which no claims (other than liquidity claims) have yet been paid.

•

BIG Category 3: Below investment grade transactions for which lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

13

Financial Guaranty Exposures
(Insurance and Credit Derivative Form)

			March 31, 2011
			BIG Net Par Outstanding
											Net Par Outstanding		BIG Net 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		$	55	$	413	$	—	$	468	$	522		0.4	%
	Alt-A first lien			647		2,157		—		2,804		3,471		2.4
	Option ARM			—		672		42		714		912		0.6
	Subprime			45		567		35		647		3,768		0.6
Second lien U.S. RMBS:
	Closed end second lien			84		36		60		180		206		0.2
	Home equity lines of credit ("HELOCs")			3		—		460		463		487		0.4
		Total U.S. RMBS		834		3,845		597		5,276		9,366		4.6
Other structured finance				2,124		24		1,187		3,335		38,428		2.8
Public finance				710		48		244		1,002		67,410		0.9
		Total	$	3,668	$	3,917	$	2,028	$	9,613	$	115,204		8.3	%

			December 31, 2010
			BIG Net Par Outstanding
											Net Par Outstanding		BIG Net 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		$	55	$	432	$	—	$	487	$	549		0.4	%
	Alt-A first lien			687		1,864		—		2,551		3,584		2.2
	Option ARM			20		734		—		754		960		0.6
	Subprime			41		550		36		627		3,869		0.5
Second lien U.S. RMBS:
	Closed end second lien			—		37		163		200		228		0.2
	HELOCs			3		—		489		492		520		0.4
		Total U.S. RMBS		806		3,617		688		5,111		9,710		4.3
Other structured finance				1,904		24		1,196		3,124		40,415		2.6
Public finance				702		48		251		1,001		68,783		0.8
		Total	$	3,412	$	3,689	$	2,135	$	9,236	$	118,908		7.7	%

14

Net Par Outstanding for Below Investment Grade Credits

		As of March 31, 2011
		Financial Guaranty Insurance(1)				Credit Derivatives(2)				Total BIG
Description		Net Par Outstanding		Number of Credits		Net Par Outstanding		Number of Credits		Net Par Outstanding			Number of Credits
		(dollars in millions)
BIG:
	Category 1	$	1,326		75	$	2,342		31	$	3,668			106
	Category 2		987		43		2,930		40		3,917			83
	Category 3		1,031		49		997		13		2,028			62
												��
Total BIG		$	3,344		167	$	6,269		84	$	9,613			251

		As of December 31, 2010
		Financial Guaranty Insurance(1)				Credit Derivatives(2)				Total BIG
Description		Net Par Outstanding		Number of Credits		Net Par Outstanding		Number of Credits		Net Par Outstanding		Number of Credits
		(dollars in millions)
BIG:
	Category 1	$	1,181		61	$	2,231		30	$	3,412		91
	Category 2		993		44		2,696		42		3,689		86
	Category 3		1,170		48		965		7		2,135		55
Total BIG		$	3,344		153	$	5,892		79	$	9,236		232

(1)

Represents contracts accounted for as financial guaranty insurance. See Note 4.

(2)

Represents contracts accounted for as credit derivatives and carried at fair value on the consolidated balance sheets. See Note 6.

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.

Net Earned Premiums

		First Quarter
		2011		2010
		(in millions)
Scheduled net earned premiums		$	18.7	$	25.6
Acceleration of premium earnings(1)			8.3		2.1
Accretion of discount on net premiums receivable			1.7		1.7
	Total net earned premiums(2)	$	28.7	$	29.4

(1)

Reflects the unscheduled refundings of underlying insured obligations.

15

(2)

Excludes $0.1 million and $0 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)
Gross premium receivable, net of ceding commissions payable:
Balance, beginning of period		$	269.6		$	351.4
Premium written, net			3.0			29.7
Premium payments received, net			(12.2	)		(35.7	)
Adjustments to the premium receivable:
	Changes in the expected term of financial guaranty insurance contracts		(21.2	)		(3.4	)
	Accretion of the discount		2.1			2.5
	Foreign exchange translation		1.1			(5.9	)
	Other adjustments		1.2			—
Balance, end of period		$	243.6		$	338.6

        Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 10% and 12% 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, British Pound Sterling and Australian dollars.

        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 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 premiums receivable with a corresponding adjustment to change to unearned premium reserve.

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)		$	21.0
2011 (July 1-September 30)			9.2
2011 (October 1-December 31)			8.8
2012			33.4
2013			27.9
2014			22.7
2015			20.6
2016-2020			73.4
2021-2025			43.1
2026-2030			26.8
After 2030			30.4
	Total gross expected collections	$	317.3

(1)

Represents undiscounted amounts expected to be collected.

16

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

Expected Timing of Financial Guaranty Insurance
Premium and Loss Recognition

		As of March 31, 2011
		Scheduled Net Earned Premium		Net Expected Loss to be Expensed(1)		Net
		(in millions)
2011 (April 1-June 30)		$	16.9	$	0.6	$	16.3
2011 (July 1-September 30)			19.4		0.6		18.8
2011 (October 1-December 31)			18.0		0.6		17.4
2012			70.6		2.1		68.5
2013			65.4		1.6		63.8
2014			59.8		1.2		58.6
2015			56.0		1.1		54.9
2016-2020			224.6		3.6		221.0
2021-2025			156.9		1.6		155.3
2026-2030			103.7		1.1		102.6
After 2030			106.4		1.1		105.3
	Total present value basis(2)(3)		897.7		15.2		882.5
Discount			52.6		130.2		(77.6	)
	Total future value	$	950.3	$	145.4	$	804.9

(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 reserve is only recorded for the amount total loss exceeds unearned premium reserve determined on a contract-by-contract basis.

(2)

Balances represent discounted amounts.

(3)

The effect of consolidating financial guaranty VIEs resulted in a reduction of $6.0 million in future scheduled net earned premium and $0.8 million in net expected loss and LAE to be expensed, excluding accretion of discount.

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	$243.6	$269.6
Gross unearned premium reserve	236.9	269.1
Weighted-average risk-free rate to discount premiums	3.6%	2.9%
Weighted-average period of premiums receivable (in years)	8.3	8.3

17

Loss Estimation Process

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

        The following table presents a 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		$	0.8		$	(0.5	)	$	—	$	0.3
		Alt-A first lien			28.8			0.3			0.3		28.8
		Option ARM			49.6			(26.5	)		0.1		23.0
		Subprime			28.8			7.9			0.1		36.6
			Total first lien		108.0			(18.8	)		0.5		88.7
	Second lien:
		Closed end second lien			(6.3	)		(10.1	)		16.6		(33.0	)
		HELOCs			(118.3	)		19.6			13.4		(112.1	)
			Total second lien		(124.6	)		9.5			30.0		(145.1	)
Total U.S. RMBS					(16.6	)		(9.3	)		30.5		(56.4	)
Other structured finance					27.5			(0.7	)		0.5		26.3
Public finance					47.3			(9.1	)		0.1		38.1
			Total	$	58.2		$	(19.1	)	$	31.1	$	8.0

18

				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		$	—		$	0.2		$	—		$	0.2
		Alt-A first lien			20.6			0.8			(0.9	)		22.3
		Option ARM			17.4			10.3			—			27.7
		Subprime			16.9			7.1			0.2			23.8
			Total first lien		54.9			18.4			(0.7	)		74.0
	Second lien:
		Closed end second lien			17.4			3.6			8.6			12.4
		HELOCs			(107.5	)		4.5			20.9			(123.9	)
			Total second lien		(90.1	)		8.1			29.5			(111.5	)
Total U.S. RMBS					(35.2	)		26.5			28.8			(37.5	)
Other structured finance					19.7			(1.4	)		0.3			18.0
Public finance					55.8			5.1			19.2			41.7
			Total	$	40.3		$	30.2		$	48.3		$	22.2

(1)

Amounts include all expected payments whether or not the insured transaction VIE is consolidated.

(2)

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

        The Company's expected LAE for mitigating claim liabilities were $5.4 million and $4.9 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.

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

		As of March 31, 2011			As of December 31, 2010
		(in millions)
Net expected loss to be paid		$	8.0		$	58.2
Less: net expected loss to be paid for financial guaranty VIEs			(6.2	)		9.4
	Total		14.2			48.8
Salvage and subrogation recoverable, net(1)			141.3			131.6
Loss and LAE reserve, net			(140.3	)		(163.0	)
Net expected loss to be expensed(2)		$	15.2		$	17.4

(1)

The March 31, 2011 amount consists of gross salvage and subrogation amounts of $199.1 million net of ceded amounts of $57.8 million which is recorded in reinsurance balances payable. The December 31, 2010 amount consists of gross salvage and subrogation amounts of $184.0 million net of ceded amounts of $52.4 million which is recorded in reinsurance balances payable.

(2)

Excludes $0.8 million and $0.8 million as of March 31, 2011 and December 31, 2010, respectively, related to consolidated financial guaranty VIEs.

19

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 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

20

tranche. In each case, the credit is a function of the projected lifetime collateral losses in the collateral pool, so an increase in projected collateral losses increases the representation and warranty credit calculated by the Company for the RMBS issuer. Further detail regarding how the Company calculates these credits may be found under "Breaches of Representations and Warranties" below.

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

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 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 of R&W in First Quarter 2011as 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 six 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

21

exposure is to HELOCs originated and serviced by Countrywide, a subsidiary of Bank of America. See "Breaches of Representations and Warranties."

        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:

Key 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	10.2%-16.3%	10.0%-19.4%	14.0%-23.8%
Final conditional default rate trended down to	0.5%-2.2%	0.5%-2.2%	0.5%-2.2%
Expected period until final conditional default rate	36 months	24 months	21 months
Initial conditional prepayment rate	4.7%-11.4%	3.9%-17.5%	0.4%-3.7%
Final conditional prepayment rate	10%	10%	10%
Loss severity	98%	98%	95%
Initial draw rate	0.0%-1.0%	0.0%-0.5%	0.4%-0.5%

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%	31.5%-36.4%
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	1.2%-12.6%	1.3%-9.7%	0.8%-3.3%
Final conditional prepayment rate	10%	10%	10%
Loss severity	98%	98%	95%

(1)

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

22

        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 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

23

transactions, the draw rate is assumed to decline from the current level to the final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 0.5%.

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

        At March 31, 2011, the Company's base case assumed a one month conditional default rate plateau and 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 $19.0 million for HELOC transactions and $2.8 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 the 24 month assumption (for a total stress period of 30 months) would decrease the expected loss by approximately $16.5 million for HELOC transactions and $1.3 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 comprised of loans made to prime borrowers. Both first lien RMBS and second lien RMBS sometimes include a portion of loan collateral with a different priority than the majority of the collateral.

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

        The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent, in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). An increase in non-performing loans beyond that projected in the previous period is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of 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

24

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.

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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        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%-18.0%	2.6%-16.7%	2.1%-19.1%
	Intermediate conditional default rate	0.4%-2.7%	0.4%-2.5%	0.3%-2.9%
	Final conditional default rate	0.1%-0.9%	0.1%-0.8%	0.1%-1.0%
	Initial loss severity	65%	60%	60%
	Initial conditional prepayment rate	5.6%-40.5%	0.0%-36.5%	2.7%-27.9%
	Final conditional prepayment rate	10%	10%	10%
Option ARM
	Plateau conditional default rate	12.3%-33.2%	11.7-32.3%	15.3%-23.3%
	Intermediate conditional default rate	1.8%-5.0%	1.8%-4.8%	2.3%-3.5%
	Final conditional default rate	0.6%-1.7%	0.6%-1.6%	0.8%-1.2%
	Initial loss severity	65%	60%	60%
	Initial conditional prepayment rate	0.0%-24.5%	1.0%-17.7%	0.0%-2.3%
	Final conditional prepayment rate	10%	10%	10%
Subprime
	Plateau conditional default rate	8.0%-15.7%	9.0%-13.6%	7.8%-12.8%
	Intermediate conditional default rate	1.2%-2.3%	1.3%-2.0%	1.2%-1.9%
	Final conditional default rate	0.4%-0.8%	0.4%-0.7%	0.4%-0.6%
	Initial loss severity	80%	80%	75%
	Initial conditional prepayment rate	0.0%-13.3%	1.2%-13.5%	0.9%-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 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

26

to monitor the performance of its RMBS exposures and will adjust the loss projections for those transactions based on actual performance and management's estimates of future performance.

        In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed conditional prepayment rates and the speed of recovery of loss severity rates. In a somewhat more stressful environment than that of the base case, where the conditional default rate recovery was more gradual and the final conditional prepayment rate was 15% rather than 10%, the Company's expected losses would increase by approximately $7.1 million for Alt-A first liens, $6.4 million for Option ARMs, $0 for subprime and $0 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 $66.8 million for Alt-A first liens, $17.9 million for Option ARMs, $38.3 million for subprime and $0.4 million for prime transactions. The Company also considered a scenario where the recovery was faster than in its base case. In this scenario, where the conditional default rate plateau was 3 months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, the Company's expected losses would decrease by approximately $29.9 million for Alt-A first liens, $11.2 million for Option ARMs, $16.1 million for subprime and $0.2 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 a negotiated agreement on April 14, 2011, in respect of the Company's R&W claims, 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 4,000 second lien and 2,100 first lien defaulted loan files, representing approximately $0.3 billion in second lien and $0.5 billion in first lien outstanding par of defaulted loans underlying insured transactions. The Company identified approximately 3,550 second lien transaction loan files and approximately 1,900 first lien transaction loan files that breached one or more R&W regarding the characteristics of the loans such as misrepresentation of income or employment of 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

27

March 31, 2011, the Company had reached agreement for providers to repurchase $10.2 million of second lien and $0 of first lien loans. The $10.2 million for second lien loans represents the calculated repurchase price for 99 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 $339.6 million, 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.

        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 $339.6 million of estimated recoveries from ineligible loans as of March 31, 2011, of which $154.5 million is reported in salvage and subrogation recoverable, $173.7 million is netted in loss and LAE reserves and $11.4 million is netted in the unearned premium reserve portion of its stand-ready obligation reported on the Company's consolidated balance sheet. The Company had $254.5 million of estimated recoveries from ineligible loans as of December 31, 2010, of which $136.9 million is reported in salvage and subrogation recoverable, $114.4 million is

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netted in loss and LAE reserves and $3.2 million 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 of 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		$	0.6	$	0.6	$	—	$	1.2
Alt-A first lien			10.1		3.9		—		14.0
Option ARM			14.3		58.0		20.0		52.3
Subprime			—		—		—		—
Closed end second lien			67.0		36.7		—		103.7
HELOC			162.5		11.3		5.4		168.4
	Total	$	254.5	$	110.5	$	25.4	$	339.6

		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		$	—	$	0.5		$	—	$	0.5
Alt-A first lien			8.8		0.7			—		9.5
Option ARM			16.3		(0.4	)		—		15.9
Subprime			—		—			—		—
Closed end second lien			64.2		(1.1	)		—		63.1
HELOC			193.4		2.1			6.4		189.1
	Total	$	282.7	$	1.8		$	6.4	$	278.1

(1)

Gross amounts recovered are $30.7 million and $8.1 million in First Quarter 2011 and 2010, respectively.

(2)

Includes R&W benefit of $159.4 million attributable to transactions covered by the Bank of America Agreement.

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Financial Guaranty Insurance U.S. RMBS Policies with R&W Benefit

		# of Policies as of				Outstanding Principal and Interest as of
		March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010
		(dollars in millions)
Prime first lien			1		1	$	27.8	$	28.6
Alt-A first lien			10		6		416.1		353.3
Option ARM			2		1		218.0		67.9
Subprime			—		—		—		—
Closed end second lien			2		2		138.1		156.5
HELOC			4		3		556.0		492.3
	Total		19		13	$	1,356.0	$	1,098.6

        The following table provides a breakdown of the development and accretion amount in the rollforward 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		$	23.5	$	0.5
Change in recovery assumptions as the result of additional file review and recovery success		$	3.3	$	0.9
Estimated increase in defaults that will result in additional breaches			9.2		0.4
Results of Bank of America Agreement			74.4		—
Accretion of discount on balance			0.1		—
	Total	$	110.5	$	1.8

        The $110.5 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 one transaction 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.

XXX Life Insurance Transactions

        The Company has insured $416.0 million of net par in XXX life insurance reserve securitization transactions based on discrete blocks of individual life insurance business. In these transactions the monies raised by the sale of the bonds insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers. In order for the Company to incur

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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 $416.0 million in net par of XXX life insurance transactions includes, as of March 31, 2011, a total of $248.2 million rated BIG comprising Class A-2 Floating Rate Notes issued by Ballantyne Re p.l.c and Series A-1 Floating Rate Notes issued by Orkney Re II p.l.c ("Orkney Re II"). The 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 $69.1 million. The Company's net loss and LAE reserve was $15.5 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. In particular, the Company has projected estimated losses of $20.3 million on its total net par outstanding of $187.6 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.

Recovery Litigation

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

        In December 2008, AGUK sued J.P. Morgan Investment Management Inc. ("JPMIM"), the investment manager in the Orkney Re II transaction, in New York Supreme Court 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 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.

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Net Loss Summary

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

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		$	0.7		$	—		$	0.7		$	0.6		$	—		$	0.6
		Alt-A first lien			27.0			—			27.0			27.4			—			27.4
		Option ARM			22.0			—			22.0			48.5			—			48.5
		Subprime			34.8			—			34.8			27.2			—			27.2
			Total first lien		84.5			—			84.5			103.7			—			103.7
	Second lien:
		Closed end second lien			7.0			41.7			(34.7	)		6.0			16.2			(10.2	)
		HELOC			3.4			122.2			(118.8	)		2.3			120.7			(118.4	)
			Total second lien		10.4			163.9			(153.5	)		8.3			136.9			(128.6	)
Total U.S. RMBS					94.9			163.9			(69.0	)		112.0			136.9			(24.9	)
Other structured finance					27.2			1.6			25.6			24.0			2.3			21.7
Public finance					38.7			1.3			37.4			44.4			1.3			43.1
	Total				160.8			166.8			(6.0	)		180.4			140.5			39.9
Effect of consolidating financial guaranty VIEs					(20.5	)		(25.5	)		5.0			(17.4	)		(8.9	)		(8.5	)
	Total(1)			$	140.3		$	141.3		$	(1.0	)	$	163.0		$	131.6		$	31.4

(1)

The March 31, 2011 total consists of $206.4 million loss and LAE reserve net of $66.1 million of reinsurance recoverable on unpaid losses. The December 31, 2010 total consists of $231.1 million loss and LAE reserve net of $68.1 million of reinsurance recoverable on unpaid losses.

(2)

Salvage and subrogation recoverable is net of $57.8 million and $52.4 million in ceded salvaged and subrogation recorded in "reinsurance balances payable" at March 31, 2011 and December 31, 2010, respectively

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        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		$	—
		Alt-A first lien			(0.1	)		0.8
		Option ARM			(26.4	)		10.1
		Subprime			7.8			7.1
			Total first lien		(18.6	)		18.0
	Second lien:
		Closed end second lien			(7.9	)		3.8
		HELOC			12.9			5.8
			Total second lien		5.0			9.6
Total U.S. RMBS					(13.6	)		27.6
Other structured finance					3.4			1.1
Public finance					(6.1	)		5.8
Total financial guaranty					(16.3	)		34.5
Other					—			—
	Subtotal				(16.3	)		34.5
Effect of consolidating financial guaranty VIEs					(2.4	)		—
	Total loss and LAE			$	(18.7	)	$	34.5

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        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
																				Total BIG, Net(1)			Effect of Consolidating VIEs
			Gross			Ceded			Gross		Ceded			Gross			Ceded									Total
			(dollars in millions)
Number of risks(2)				75			(27	)		43		(24	)		49			(9	)		167			—			167
Remaining weighted-average contract period (in years)				13.2			11.4			7.1		6.8			13.8			16.0			11.2			—			11.2
Outstanding exposure:
	Principal		$	1,720.0		$	(393.9	)	$	1,207.0	$	(219.7	)	$	1,980.9		$	(950.0	)	$	3,344.3		$	—		$	3,344.3
	Interest			1,172.9			(208.1	)		350.1		(63.8	)		481.5			(157.0	)		1,575.6			—			1,575.6
		Total	$	2,892.9		$	(602.0	)	$	1,557.1	$	(283.5	)	$	2,462.4		$	(1,107.0	)	$	4,919.9		$	—		$	4,919.9
Expected cash flows			$	9.3		$	(0.1	)	$	338.6	$	(52.2	)	$	880.5		$	(328.6	)	$	847.5		$	(50.5	)	$	797.0
Less:
	Potential recoveries(3)			31.5			(4.1	)		115.3		(18.0	)		830.6			(220.3	)		735.0			(38.4	)		696.6
	Discount			(3.4	)		0.2			104.7		(16.9	)		119.2			(99.3	)		104.5			(18.3	)		86.2
Present value of expected cash flows			$	(18.8	)	$	3.8		$	118.6	$	(17.3	)	$	(69.3	)	$	(9.0	)	$	8.0		$	6.2		$	14.2
Unearned premium reserve			$	6.2		$	(0.9	)	$	8.1	$	(1.3	)	$	23.4		$	(14.3	)	$	21.2		$	(1.9	)	$	19.3
Reserves (salvage)(4)			$	(19.8	)	$	5.5		$	106.3	$	(13.8	)	$	(85.4	)	$	1.2		$	(6.0	)	$	5.0		$	(1.0	)

Financial Guaranty Insurance BIG Transaction Loss Summary
December 31, 2010

			BIG Categories
			BIG 1					BIG 2					BIG 3
																			Total BIG, Net(1)		Effect of Consolidating VIEs
			Gross		Ceded			Gross		Ceded			Gross			Ceded								Total
			(dollars in millions)
Number of risks(2)				61		(24	)		44		(24	)		48			(10	)		153		—			153
Remaining weighted-average contract period (in years)				14.3		13.7			7.0		6.7			13.2			15.8			11.1		—			11.1
Outstanding exposure:
	Principal		$	1,478.9	$	(297.9	)	$	1,215.7	$	(222.3	)	$	2,151.8		$	(982.2	)	$	3,344.0	$	—		$	3,344.0
	Interest			1,063.8		(181.0	)		346.7		(62.6	)		525.6			(165.0	)		1,527.5		—			1,527.5
		Total	$	2,542.7	$	(478.9	)	$	1,562.4	$	(284.9	)	$	2,677.4		$	(1,147.2	)	$	4,871.5	$	—		$	4,871.5
Expected cash flows			$	6.6	$	(2.2	)	$	316.7	$	(28.4	)	$	450.0		$	3.1		$	745.8	$	(93.1	)	$	652.7
Less:
	Potential recoveries(3)			2.7		(0.2	)		64.2		(10.4	)		414.9			(103.3	)		367.9		(77.2	)		290.7
	Discount			0.9		0.2			114.4		3.4			89.8			111.0			319.7		(6.5	)		313.2
Present value of expected cash flows			$	3.0	$	(2.2	)	$	138.1	$	(21.4	)	$	(54.7	)	$	(4.6	)	$	58.2	$	(9.4	)	$	48.8
Unearned premium reserve			$	4.5	$	(1.0	)	$	11.3	$	(1.6	)	$	34.9		$	(14.5	)	$	33.6	$	(2.1	)	$	31.5
Reserves (salvage)(4)			$	2.8	$	(2.0	)	$	128.0	$	(21.3	)	$	(76.4	)	$	8.8		$	39.9	$	(8.5	)	$	31.4

(1)

Includes BIG amounts relating to VIEs that the Company consolidates.

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(2)

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

(3)

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

(4)

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

Components of Net Reserves (Salvage)

		March 31, 2011			December 31, 2010
		(in millions)
Loss and LAE reserve		$	206.4		$	231.1
Reinsurance recoverable on unpaid losses			(66.1	)		(68.1	)
Salvage and subrogation recoverable			(199.1	)		(184.0	)
Salvage and subrogation payable(1)			57.8			52.4
	Total	$	(1.0	)	$	31.4

(1)

Recorded as a component of reinsurance balances payable.

Ratings Impact on Direct Financial Guaranty Business

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

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 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,

35

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. 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. This hierarchy requires the use of observable market data when available.

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

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

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

        Transfers between levels 1, 2 and 3 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.

36

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		$	483.6	$	—	$	483.6	$	—
		Obligations of state and political subdivisions			1,482.2		—		1,482.2		—
		Corporate securities			198.9		—		198.9		—
		Mortgage-backed securities:
			RMBS		145.8		—		109.8		36.0
			Commercial mortgage-backed securities ("CMBS")		85.3		—		85.3		—
		Asset-backed securities			41.8		—		30.8		11.0
		Foreign government securities			88.9		—		88.9		—
			Total fixed maturity securities		2,526.5		—		2,479.5		47.0
	Short-term investments				172.0		1.5		170.5		—
	Credit derivative assets				425.8		—		—		425.8
	Financial guaranty VIEs' assets, at fair value				1,000.7		—		—		1,000.7
	Other assets(1)				25.2		13.8		11.4		—
		Total assets carried at fair value		$	4,150.2	$	15.3	$	2,661.4	$	1,473.5
Liabilities:
	Credit derivative liabilities			$	1,631.5	$	—	$	—	$	1,631.5
	Financial guaranty VIEs' liabilities with recourse, at fair value				518.5		—		—		518.5
	Financial guaranty VIEs' liabilities without recourse, at fair value				511.3		—		—		511.3
		Total liabilities carried at fair value		$	2,661.3	$	—	$	—	$	2,661.3

37

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		$	484.3	$	—	$	484.3	$	—
		Obligations of state and political subdivisions			1,437.5		—		1,437.5		—
		Corporate securities			224.8		—		224.8		—
		Mortgage-backed securities:
			RMBS		113.5		—		77.7		35.8
			CMBS		80.3		—		80.3		—
		Asset-backed securities			59.3		—		47.6		11.7
		Foreign government securities			89.2		—		89.2		—
			Total fixed maturity securities		2,488.9		—		2,441.4		47.5
	Short-term investments				235.7		13.6		222.1		—
	Credit derivative assets				399.5		—		—		399.5
	Financial guaranty VIEs' assets, at fair value				966.0		—		—		966.0
	Other assets(1)				21.4		10.3		11.1		—
		Total assets carried at fair value		$	4,111.5	$	23.9	$	2,674.6	$	1,413
Liabilities:
	Credit derivative liabilities			$	1,360.4	$	—	$	—	$	1,360.4
	Financial guaranty VIEs' liabilities with recourse, at fair value				523.5		—		—		523.5
	Financial guaranty VIEs' liabilities without recourse, at fair value				495.7		—		—		495.7
		Total liabilities carried at fair value		$	2,379.6	$	—	$	—	$	2,379.6

(1)

Includes fair value of AGC CCS and Supplemental Executive Retirement Account assets.

38

Changes in Level 3 Fair Value Measurements

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

Fair Value Level 3 Rollforward
First Quarter 2011

																	Financial Guaranty VIEs' Liabilities without Recourse, at Fair Value
		Fixed Maturity Securities												Financial Guaranty VIEs' Liabilities with Recourse, at Fair Value
								Financial Guaranty VIEs' Assets. at Fair Value
		RMBS			Asset-Backed Securities						Credit Derivative Asset (Liability), net(4)
		(in millions)
Fair value at December 31, 2010		$	35.8		$	11.7		$	966.0		$	(960.9	)	$	(523.5	)	$	(495.7	)
Total pre-tax realized and unrealized gains/(losses)(1) recorded in:
	Net income (loss)		1.3	(2)		—			60.3	(3)		(224.4	)(5)		(23.1	)(3)		(35.0	)(3)
	Other comprehensive income (loss)		6.2			(0.7	)		—			—			—			—
Sales			(7.3	)		—			—			—			—			—
Settlements			—			—			(25.6	)		(20.4	)		28.1			19.4
Fair value at March 31, 2011		$	36.0		$	11.0		$	1,000.7		$	(1,205.7	)	$	(518.5	)	$	(511.3	)
Change in unrealized gains/(losses) related to financial instruments held at March 31, 2011		$	6.2		$	(0.7	)	$	60.3		$	(236.2	)	$	(23.1	)	$	(35.0	)

39

Fair Value Level 3 Rollforward
First Quarter 2010

		Fixed Maturity Securities- RMBS			Financial Guaranty VIEs' Assets. at Fair Value			Credit Derivative Asset (Liability), net(4)			Financial Guaranty VIEs' Liabilities with Recourse, at Fair Value			Financial Guaranty VIEs' Liabilities without Recourse, at Fair Value
		(in millions)
Fair value at December 31, 2009		$	—		$	—		$	(824.7	)	$	—		$	—
Adoption of new accounting standard			—			348.3			—			(390.3	)		(18.1	)
Fair value at January 1, 2010			—			348.3			(824.7	)		(390.3	)		(18.1	)
Total pre-tax realized and unrealized gains/(losses)(1) recorded in:
	Net income (loss)		(0.1	)(2)		27.0	(3)		202.8	(4)		(16.5	)(3)		1.0	(3)
	Other comprehensive income (loss)		0.7			—			—			—			—
Purchases, issuances, sales, settlements, net			2.4			(5.5	)		7.9			3.1			2.4
Transfers in and/or out of Level 3			28.4			—			—			—			—
Fair value at March 31, 2010		$	31.4		$	369.8		$	(614.0	)	$	(403.7	)	$	(14.7	)
Change in unrealized gains/(losses) related to financial instruments held at March 31, 2010		$	0.7		$	31.9		$	(1.4	)	$	(18.6	)	$	(2.8	)

(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 realized investments gains (losses) and net investment income.

(3)

Included in net change in financial guaranty variable interest entities.

(4)

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

(5)

Reported in net change in fair value of credit derivatives.

40

        The carrying amount and estimated fair value of 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	$	2,526.5	$	2,526.5	$	2,488.9	$	2,488.9
	Short-term investments		172.0		172.0		235.7		235.7
	Other invested assets		12.5		12.5		12.5		12.5
	Credit derivative assets		425.8		425.8		399.5		399.5
	Financial guaranty VIEs' assets, at fair value		1,000.7		1,000.7		966.0		966.0
	Other assets		25.2		25.2		21.4		21.4
Liabilities:
	Financial guaranty insurance contracts(1)		716.2		899.9		765.6		979.2
	Note payable to affiliate		300.0		303.9		300.0		300.9
	Credit derivative liabilities		1,631.5		1,631.5		1,360.4		1,360.4
	Financial guaranty VIEs' liabilities with recourse, at fair value		518.5		518.5		523.5		523.5
	Financial guaranty VIEs' liabilities without recourse, at fair value		511.3		511.3		495.7		495.7

(1)

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

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.

Credit Derivative Net Par Outstanding by Sector

        The estimated remaining weighted average life of credit derivatives was 6.5 years at March 31, 2011 and 6.4 years at December 31, 2010.

41

Credit Derivatives Net Par Outstanding

		As of March 31, 2011									As of December 31, 2010
Asset Type		Net Par Outstanding		Original Subordination (1)			Current Subordination (1)			Weighted Average Credit Rating	Net Par Outstanding		Original Subordination (1)			Current Subordination (1)			Weighted Average Credit Rating
		(dollars in millions)
Pooled corporate obligations:
	Collateralized loan obligations/Collateralized bond obligations	$	15,953		36.5	%		33.7	%	AAA	$	16,648		36.2	%		32.9	%	AAA
	Synthetic investment grade pooled corporate(2)		702		30.0			30.1		AAA		702		30.0			30.1		AAA
	Trust preferred securities collateralized debt obligations		4,336		46.9			31.4		BB+		4,360		47.0			31.5		BB+
	Market value collateralized debt obligations of corporate obligations		2,623		43.8			36.4		AAA		2,729		44.9			39.6		AAA
Total pooled corporate obligations			23,614		39.1			33.5		AA+		24,439		38.9			33.3		AA+
U.S. RMBS:
	Option ARMs and Alt-A first lien		3,532		19.6			16.1		B		3,656		19.7			17.0		B+
	Subprime first lien		3,300		30.0			53.9		A+		3,389		27.9			50.4		A+
	Prime first lien		372		10.9			10.1		B		390		10.9			10.3		B
	Closed end second lien and HELOCs(3)		10		—			—		AA-		10		—			—		AA-
Total U.S. RMBS			7,214		23.9			32.9		BBB-		7,445		23.1			32.4		BBB-
CMBS			5,260		30.8			34.9		AAA		5,461		29.8			31.3		AAA
Other			4,594		—			—		A+		5,224		—			—		AA-
Total		$	40,682							AA	$	42,569							AA

(1)

Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

(2)

Increase in net par outstanding in the synthetic investment grade pooled corporate sector is due principally to the reassumption of a previously ceded book of business.

(3)

Many of the closed end second lien transactions insured by the Company have unique structures whereby the collateral may be written down for losses without a corresponding write-down of the obligations insured by the Company. Many of these transactions are currently under-collateralized, with the principal amount of collateral being less than the principal amount of the obligation insured by the Company. The Company is not required to pay principal shortfalls until legal maturity (rather than making timely principal payments), and takes the under- collateralization into account when estimating expected losses for these transactions.

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

42

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

        The Company's exposure to "Other" CDS contracts is also highly diversified. It includes $2.0 billion of exposure to three pooled infrastructure transactions comprised of diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels. The remaining $2.6 billion of exposure in "Other" CDS contracts is comprised of numerous deals typically structured with significant underlying credit enhancement and spread across various asset classes, such as commercial receivables, international RMBS securities, infrastructure, regulated utilities and consumer receivables.

        The following table summarizes net par outstanding by rating of the Company's credit derivatives portfolio as of March 31, 2011 and December 31, 2010.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating

		March 31, 2011					December 31, 2010
Ratings		Net Par Outstanding		% of Total			Net Par Outstanding		% of Total
		(dollars in millions)
Super Senior		$	9,352		23.0	%	$	9,325		21.9	%
AAA			16,213		39.9			17,799		41.8
AA			3,014		7.4			3,232		7.6
A			2,665		6.5			2,999		7.0
BBB			3,169		7.8			3,322		7.8
BIG			6,269		15.4			5,892		13.9
	Total credit derivative net par outstanding	$	40,682		100.0	%	$	42,569		100.0	%

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

U.S. Residential Mortgage-Backed Securities

	March 31, 2011									First Quarter 2011 Net Change in Unrealized Gain (Loss) (in millions)
Vintage	Original Subordination(1)			Current Subordination(1)			Net Par Outstanding (in millions)		Weighted Average Credit Rating
2004 and Prior		6.2	%		19.8	%	$	116	A	$	(3.3	)
2005		30.3			63.6			2,465	AA-		(15.5	)
2006		29.0			35.4			1,096	BBB+		(34.9	)
2007		18.6			13.7			3,537	B-		(167.5	)
Total		23.9	%		32.9	%	$	7,214	BBB-	$	(221.2	)

(1)

Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

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

Commercial Mortgage-Backed Securities

	March 31, 2011
										First Quarter 2011 Net Change in Unrealized Gain (Loss) (in millions)
Vintage	Original Subordination(1)			Current Subordination(1)			Net Par Outstanding (in millions)		Weighted Average Credit Rating
2004 and Prior		29.2	%		45.6	%	$	307	AAA	$	(0.1	)
2005		17.8			26.5			508	AAA		(0.1	)
2006		29.0			32.6			3,250	AAA		0.5
2007		42.6			43.4			1,195	AAA		0.2
Total		30.8	%		34.9	%	$	5,260	AAA	$	0.5

(1)

Represents the sum of subordinate tranches and over-collateralization and does not include any benefit from excess interest collections that may be used to absorb losses.

Net Change in Fair Value of Credit Derivatives

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

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

		First Quarter
		2011			2010
		(in millions)
Net credit derivative premiums received and receivable		$	21.2		$	18.7
Net ceding commissions (paid and payable) received and receivable			2.1			2.0
	Realized gains on credit derivatives		23.3			20.7
	Net credit derivative losses (paid and payable) recovered and recoverable		(12.9	)		(27.4	)
Total realized gains and other settlements on credit derivatives			10.4			(6.7	)
Total unrealized gains (losses) on credit derivatives			(234.8	)		209.5
	Net change in fair value of credit derivatives	$	(224.4	)	$	202.8

        In First Quarter 2011, CDS contracts totaling $1.4 billion in net par were terminated for total net payments to the Company of $4.8 million. Changes in the fair value of credit derivatives occur primarily because of changes in interest rates, credit spreads, credit ratings of the referenced entities, realized gains and other settlements, and the issuing company's own credit rating credit spreads and other market factors. Except for estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit derivatives is expected to reduce to zero as the exposure approaches its maturity date. During First Quarter 2011 and 2010, the Company made $12.9 million and $27.4 million in claim payments on credit derivatives, respectively. With considerable volatility continuing in the market, unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.

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

		First Quarter
Asset Type		2011			2010
		(in millions)
Pooled corporate obligations:
	CLOs/Collateralized bond obligations	$	0.1		$	1.0
	Synthetic investment grade pooled corporate		(0.1	)		(0.8	)
	TruPS CDOs		(16.1	)		23.3
	Market value CDOs of corporate obligations		(0.1	)		0.2
Total pooled corporate obligations			(16.2	)		23.7
U.S. RMBS:
	Option ARMs and Alt-A first lien		(200.9	)		115.3
	Subprime first lien		(20.9	)		0.6
	Prime first lien		0.6			11.9
Total U.S. RMBS			(221.2	)		127.8
CMBS			0.5			8.0
Other(1)			2.1			50.0
Total		$	(234.8	)	$	209.5

(1)

"Other" includes all other U.S. and international asset classes, such as commercial receivables, international infrastructure, international RMBS securities, and pooled infrastructure securities.

        One of the key assumptions of the Company's internally developed model is gross spread and how that gross spread is allocated.

        Gross spread is the difference between the yield of a security paid by an issuer on an insured versus uninsured basis or, in the case of a CDS transaction, the difference between the yield and an index such as the London Interbank Offered Rate ("LIBOR"). Such pricing is well established by historical financial guaranty fees relative to capital market spreads as observed and executed in competitive markets, including in financial guaranty reinsurance and secondary market transactions. Gross spread on a financial guaranty accounted for as CDS is allocated among:

1.

the profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction ("bank profit");



2.

premiums paid to the Company for the Company's credit protection provided ("net spread"); and



3.

the cost of CDS protection purchased on the Company by the originator to hedge their counterparty credit risk exposure to the Company ("hedge cost").

        The premium the Company receives is referred to as the "net spread." The Company's own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS deals that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a deal generally decreases. As the cost to acquire CDS protection referencing AGC decreases, the amount of premium the Company retains on a deal generally increases. In the Company's valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company

45

would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts.

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

        The Company's fair value model inputs are gross spread, credit spreads on risks assumed and credit spreads on the Company's name. Gross spread is an input into the Company's fair value model that is used to ultimately determine the net spread a comparable financial guarantor would charge the Company to transfer risk at the reporting date. The Company's estimate of the fair value represents the difference between the estimated present value of premiums that a comparable financial guarantor would accept to assume the risk from the Company on the current reporting date, on terms identical to the original contracts written by the Company and the contractual premium for each individual credit derivative contract. Gross spread was an observable input that the Company historically obtained for deals it had closed or bid on in the market place prior to the credit crisis. The Company uses these historical gross spreads as a reference point to estimate fair value in current reporting periods.

        With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spreads was revised in First Quarter 2011 to reflect a higher allocation to the cost of credit rather than the bank profit component. In the current market, it is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements. The effect of this refinement in assumptions was an increase in fair value losses of $195.2 million and was concentrated in the Alt-A first lien and Option ARMs sectors.

        In First Quarter 2011, U.S. RMBS unrealized fair value losses were generated primarily in the Option ARM, Alt-A first lien, and Subprime RMBS sectors due to wider implied net spreads. The wider implied net spreads were a result of price deterioration as well as the decreased cost to buy protection in AGC's name as the market cost of AGC's credit protection declined. These transactions were pricing above their floor levels (or the minimum rate at which the Company would consider assuming these risks based on historical experience); therefore when the cost of purchasing CDS protection on AGC declined, which management refers to as the CDS spread on AGC, the implied spreads that the Company would expect to receive on these transactions increased.

        The First Quarter 2010 unrealized gain on credit derivatives was primarily due to the increased cost to buy protection in AGC's name as the market cost of AGC's credit protection increased. This led to lower implied premiums on several Subprime RMBS and TruPS transactions.

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

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

		As of March 31, 2011			As of December 31, 2010			As of March 31, 2010			As of December 31, 2009
		(dollars in millions)
Quoted price of CDS contract (in basis points)			724			804			734			634
Fair value of CDS contracts:
	Before considering implication of the Company's credit spreads	$	(3,260.5	)	$	(2,936.1	)	$	(2,508.3	)	$	(2,630.2	)
	After considering implication of the Company's credit spreads	$	(1,205.7	)	$	(960.9	)	$	(614.0	)	$	(824.7	)

Components of Credit Derivative Assets (Liabilities)

		As of March 31, 2011			As of December 31, 2010
		(in millions)
Credit derivative assets		$	425.8		$	399.5
Credit derivative liabilities			(1,631.5	)		(1,360.4	)
	Net fair value of credit derivatives	$	(1,205.7	)	$	(960.9	)

        The $3.3 billion liability as of March 31, 2011, which represents the fair value of CDS contracts before considering the implications of AGC's credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets, and ratings downgrades. The asset classes that remain most affected are recent vintages of Subprime RMBS and Alt-A first lien deals, as well as trust- preferred securities. When looking at March 31, 2011, compared to December 31, 2010, there was a widening of spreads relating to the Company's Alt-A first lien and Subprime RMBS transactions, which was partially offset by a narrowing of spreads in the Company's pooled corporate obligation asset classes. These price movements during the quarter resulted in a loss of approximately $324.4 million before taking into account AGC's credit spreads.

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

Ratings Sensitivities of Credit Derivative Contracts

        The Company has $2.8 billion in CDS par insured that have rating triggers that allow the CDS counterparty to terminate in the case of a rating downgrade. If the ratings of AGC were reduced below certain levels and its counterparty elected to terminate the CDS, AG Financial Products Inc. ("AGFP") could be required to make a termination payment on certain of its credit derivative contracts as determined under the relevant documentation. As the credit support provider, AGC would be responsible for such payments if AGFP were unable to pay. Under certain documents, AGFP may have the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a third party guaranty of the obligations of AGC. AGFP currently has three ISDA master agreements under which the applicable counterparty could

47

elect to terminate transactions upon a rating downgrade of AGC: if AGC's ratings were downgraded to BBB- or Baa3, $89 million in par insured could be terminated by one counterparty; and if AGC's ratings were downgraded to BB+ or Ba1, approximately $2.7 billion in par insured could be terminated by the other two counterparties. The Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with AGFP. These payments could have a material adverse effect on the Company's liquidity and financial condition.

        Under a limited number of other CDS contracts, AGC may be required to post eligible securities as collateral—generally cash or U.S. government or agency securities. For certain of such contracts, this requirement is based on a mark-to-market valuation, as determined under the relevant documentation, in excess of contractual thresholds that decline or are eliminated if AGC's ratings decline. Under other contracts, AGC has negotiated caps such that the posting requirement cannot exceed a certain amount. As of March 31, 2011, and without giving effect to thresholds that apply at current ratings, the amount of par that is subject to collateral posting is approximately $18.2 billion, for which AGC has agreed to post approximately $764.9 million of collateral. AGC may be required to post additional collateral from time to time, depending on its ratings and on the market values of the transactions subject to the collateral posting. Counterparties have agreed that for approximately $17.5 billion of that $18.2 billion, the maximum amount that AGC could be required to post is capped at $625 million at current rating levels (which amount is included in the $764.9 million as to which AGC has agreed to post). Such cap increases by $50 million to $675 million in the event AGC's ratings are downgraded to A+ or A3.

7. Consolidation of Variable Interest Entities

        The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. The Company has not originated any VIEs nor acted as the servicer or collateral manager for any VIE deals that it insures. The transaction structure generally provides certain financial protections to the Company. This financial protection can take several forms, the most common of which are over-collateralization, first loss protection (or subordination) and excess spread. In the case of over-collateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial guaranty insurance policy only covers a senior layer of losses of multiple obligations issued by special purpose entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose entities, including VIEs, generate cash flows that are in excess of the interest payments on the debt issued by the special purpose entity. Such excess spread is typically distributed through the transaction's cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby, creating additional over-collateralization), or distributed to equity or other investors in the transaction.

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

Consolidated VIEs

        During First Quarter 2011, the Company determined that based on the assessment of its control rights over servicer or collateral manager replacement, given that servicing/managing collateral were deemed to be the VIEs' most significant activities, five VIEs required consolidation, consistent with the total number of VIEs consolidated at December 31, 2010.

48

        The total unpaid principal balance for the VIEs' assets that were over 90 days or more past due was approximately $389.9 million and $429.4 million as of March 31, 2011 and December 31, 2010, respectively. The change in the instrument-specific credit risk of the VIEs' assets for First Quarter 2011 and 2010 was a gain of $78.0 million and a loss of $36.1 million, respectively. The difference between the aggregate unpaid principal and aggregate fair value of the VIEs' liabilities was approximately $653.1 million and $722.9 million at March 31, 2011 and December 31, 2010, respectively.

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

Consolidated VIEs
By Type of Collateral

		As of March 31, 2011				As of December 31, 2010
		Assets		Liabilities		Assets		Liabilities
		(in millions)
Alt-A second liens		$	681.5	$	710.6	$	661.2	$	714.4
Life insurance			319.2		319.2		304.8		304.8
	Total	$	1,000.7	$	1,029.8	$	966.0	$	1,019.2

49

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

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

			First Quarter
			2011			2010
			(in millions)
Net earned premiums			$	0.1		$	—
Net change in financial guaranty variable interest entities
	Interest income			19.0			5.5
	Interest expense			(11.4	)		(2.3	)
	Net realized and unrealized gains (losses) on assets			60.3			21.5
	Net realized and unrealized gains (losses) on liabilities with recourse			(23.1	)		(13.4	)
	Net realized and unrealized gains (losses) on liabilities without recourse			(35.0	)		3.4
	Other expenses			(1.4	)		(3.2	)
		Net change in financial guaranty variable interest entities		8.4			11.5
Loss and loss adjustment expenses				2.4			—
		Total pre-tax effect on net income		10.9			11.5
Less: tax provision (benefit)				3.8			4.0
		Total effect on net income	$	7.1		$	7.5
		Total effect on shareholder's equity	$	(22.9	)	$	(31.5	)

        Contractual maturities of financial guaranty VIE liabilities with recourse are due in 2027 and 2037 for the amount of $48.7 million and 262.4 million, respectively.

Non-Consolidated VIEs

        To date, the Company's analyses have indicated that it does not have a controlling financial interest in any other VIEs and, as a result, they are not consolidated in the Company's consolidated financial statements. The Company's exposure provided through its financial guaranties with respect to debt obligations of special purpose entities is included within net par outstanding in Note 3.

8. Investments

Fixed Maturity Securities and Short Term Investments

Net Investment Income

		First Quarter
		2011			2010
		(in millions)
Income from fixed maturity securities		$	25.3		$	19.9
Income from short-term investments			0.1			0.2
	Gross investment income		25.4			20.1
Investment expenses			(0.6	)		(0.5	)
	Net investment income	$	24.8		$	19.6

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        The increase in net investment income in First Quarter 2011 compared to First Quarter 2010 was primarily due to the deployment of accumulated cash into fixed maturity assets. Accrued investment income was $28.4 million as of March 31, 2011 and December 31, 2010.

Net Realized Investment Gains (Losses)

			First Quarter
			2011			2010
			(in millions)
Realized gains on investment portfolio			$	2.9		$	3.1
Realized losses on investment portfolio				(0.7	)		(0.3	)
Other-than-temporary impairment ("OTTI"):
	Intent to sell			(1.5	)		—
	Credit component of OTTI securities			(0.7	)		—
		OTTI		(2.2	)		—
Net realized investment gains (losses)			$	—		$	2.8

        The credit loss component of the amortized cost of fixed maturity securities for which the Company has recognized OTTI and where the portion of the fair value adjustment related to other factors was recognized in other comprehensive income ("OCI") was $1.6 million at March 31, 2011 and 2010 and December 31, 2010 and 2009.

Fixed Maturity Securities and Short Term Investments
by Security Type

			As of March 31, 2011
Investments Category			Percent of Total(1)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI(2)			Weighted Average Credit Quality(3)
						(dollars in millions)
Fixed maturity securities:
	U.S. government and agencies			18	%	$	468.0	$	16.2	$	(0.6	)	$	483.6	$	—		AAA
	Obligations of state and political subdivisions			56			1,495.6		23.3		(36.7	)		1,482.2		(0.3	)	AA
	Corporate securities			7			192.1		7.0		(0.2	)		198.9		—		A+
	Mortgage-backed securities(4):
		RMBS		5			141.1		9.9		(5.2	)		145.8		8.3		A+
		CMBS		3			81.1		4.3		(0.1	)		85.3		—		AA+
	Asset-backed securities			2			40.5		1.4		(0.1	)		41.8		—		A
	Foreign government securities			3			85.2		3.7		—			88.9		—		AAA
Total fixed maturity securities				94			2,503.6		65.8		(42.9	)		2,526.5		8.0		AA
Short-term investments				6			172.0		—		—			172.0		—		AAA
		Total investment portfolio		100	%	$	2,675.6	$	65.8	$	(42.9	)	$	2,698.5	$	8.0		AA

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			As of December 31, 2010
Investments Category			Percent of Total(1)			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI			Weighted Average Credit Quality(3)
						(dollars in millions)
Fixed maturity securities:
	U.S. government and agencies			17	%	$	465.6	$	19.0	$	(0.3	)	$	484.3	$	—		AAA
	Obligations of state and political subdivisions			54			1,452.8		24.2		(39.5	)		1,437.5		(0.5	)	AA
	Corporate securities			8			217.0		8.0		(0.2	)		224.8		—		A+
	Mortgage-backed securities(4):
		RMBS		4			115.0		5.6		(7.1	)		113.5		3.9		A
		CMBS		3			76.0		4.4		(0.1	)		80.3		—		AA+
	Asset-backed securities			2			57.0		2.3		—			59.3		—		A+
	Foreign government securities			3			84.4		4.8		—			89.2		—		AA+
Total fixed maturity securities				91			2,467.8		68.3		(47.2	)		2,488.9		3.4		AA
Short-term investments				9			235.7		—		—			235.7		—		AAA
		Total investment portfolio		100	%	$	2,703.5	$	68.3	$	(47.2	)	$	2,724.6	$	3.4		AA

(1)

Based on amortized cost.

(2)

Accumulated OCI ("AOCI").

(3)

Ratings in the table above represent the lower of the Moody's and S&P classifications except for bonds purchased for loss mitigation or risk management strategies which use internal ratings classifications. The Company's portfolio is comprised primarily of high-quality, liquid instruments.

(4)

As of March 31, 2011 and December 31, 2010, respectively, approximately 48% and 40% of the Company's total mortgage-backed securities were government agency obligations.

        The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. As of March 31, 2011, amounts, net of tax in AOCI included a net unrealized gain of $5.2 million for securities for which the Company had recognized OTTI and net unrealized gain of $9.4 million for securities for which the Company had not recognized OTTI. As of December 31, 2010, amounts, net of tax, in AOCI included a net unrealized gain of $2.2 million for securities for which the Company had recognized OTTI and net unrealized gain of $11.3 million for securities for which the Company had not recognized OTTI.

        The following tables summarize, for all securities in an unrealized loss position as of March 31, 2011 and December 31, 2010, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

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Fixed Maturity Securities
Gross Unrealized Loss by Length of Time

		As of March 31, 2011
		Less than 12 Months					12 Months or More					Total
		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
		(dollars in millions)
U.S. government and agencies		$	36.4	$	(0.6	)	$	—	$	—		$	36.4	$	(0.6	)
Obligations of state and political subdivisions			862.5		(34.4	)		15.6		(2.3	)		878.1		(36.7	)
Corporate securities			19.6		(0.2	)		—		—			19.6		(0.2	)
Mortgage-backed securities:
	RMBS		24.5		(3.2	)		1.4		(2.0	)		25.9		(5.2	)
	CMBS		3.5		(0.1	)		—		—			3.5		(0.1	)
Asset-backed securities			3.5		(0.1	)		—		—			3.5		(0.1	)
	Total	$	950.0	$	(38.6	)	$	17.0	$	(4.3	)	$	967.0	$	(42.9	)
	Number of securities				185					4					189
	Number of securities with OTTI				2					—					2

		As of December 31, 2010
		Less than 12 Months					12 Months or More					Total
		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
		(dollars in millions)
U.S. government and agencies		$	11.6	$	(0.3	)	$	—	$	—		$	11.6	$	(0.3	)
Obligations of state and political subdivisions			862.5		(36.8	)		21.4		(2.7	)		883.9		(39.5	)
Corporate securities			7.7		(0.2	)		—		—			7.7		(0.2	)
Mortgage-backed securities:
	RMBS		8.2		(3.9	)		17.1		(3.2	)		25.3		(7.1	)
	CMBS		3.5		(0.1	)		—		—			3.5		(0.1	)
Asset-backed securities			—		—			—		—			—		—
	Total	$	893.5	$	(41.3	)	$	38.5	$	(5.9	)	$	932.0	$	(47.2	)
	Number of securities				174					7					181
	Number of securities with OTTI				2					—					2

        Of the securities in an unrealized loss position for 12 months or more as of March 31, 2011, four securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of March 31, 2011 was $4.2 million. The unrealized loss is yield related and not specific to individual issuer credit. The Company has determined that these securities were not other-than-temporarily-impaired as of March 31, 2011.

        The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of March 31, 2011, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Distribution of Fixed-Maturity Securities
by Contractual Maturity

		As of March 31, 2011
		Amortized Cost		Estimated Fair Value
		(in millions)
Due within one year		$	20.4	$	20.9
Due after one year through five years			669.0		687.6
Due after five years through ten years			418.6		434.8
Due after ten years			1,173.4		1,152.1
Mortgage-backed securities:
	RMBS		141.1		145.8
	CMBS		81.1		85.3
Total		$	2,503.6	$	2,526.5

        To fulfill state licensing requirements the Company has placed on deposit eligible securities of $8.3 million as of March 31, 2011 and December 31, 2010, for the protection of policyholders.

        Under certain derivative contracts, AGC is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on mark-to-market valuations in excess of contractual thresholds. The fair market value of AGC's pledged securities totaled $764.9 million and $765.2 million as of March 31, 2011 and December 31, 2010, respectively.

        No material investments of the Company were non-income producing for First Quarter 2011 and 2010, respectively.

        The Company purchased securities that it has insured, and for which it has expected losses, in order to economically mitigate insured losses. These securities were purchased at a discount and are accounted for excluding the effects of the Company's insurance on the securities. As of March 31, 2011, securities purchased for loss mitigation purposes had a fair value of $47.0 million representing $111.1 million of par.

9. Insurance Company Regulatory Requirements

Dividend Restrictions and Capital Requirements

        AGC is a Maryland domiciled insurance company. Under Maryland's insurance law, AGC may not pay dividends out of earned surplus in any twelve-month period in an aggregate amount exceeding the lesser of (a) 10% of surplus to policyholders or (b) net investment income at the preceding December 31, (including net investment income which has not already been paid out as dividends for the three calendar years prior to the preceding calendar year) without prior approval of the Maryland Commissioner of Insurance. As of March 31, 2011, the amount available for distribution from the Company during 2011 with notice to, but without prior approval of, the Maryland Commissioner of Insurance under the Maryland insurance law is approximately $86.6 million. During First Quarter 2011 and 2010, AGC declared and paid $10.0 million and $15.0 million, respectively, in dividends to Assured Guaranty US Holdings Inc. Under Maryland insurance regulations, AGC is required at all times to maintain a minimum capital stock of $1.5 million and minimum surplus as regards policyholders of $1.5 million. AGC must also meet minimum capital and surplus requirements under New York insurance regulations in order to maintain its insurance license in New York.

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10. Income Taxes

Provision for Income Taxes

        AGC and AGUK are subject to U.S. and U.K. income tax, respectively. The provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year of 2011. A discrete calculation of the provision is calculated for each interim period.

        The following table provides the Company's income tax (benefit) provision and effective tax rates:

Components of Income Tax Provision (Benefit)

		First Quarter
		2011			2010
		(dollars in millions)
Current tax (benefit) provision		$	(17.4	)	$	(16.8	)
Deferred tax provision (benefit)			(44.6	)		82.2
	Provision (benefit) for income taxes	$	(62.0	)	$	65.4
Effective tax rate			37.0	%		33.5	%

        The effective rate for First Quarter 2011 and First Quarter 2010 was 37.0% and 33.5%, respectively. The effective tax rates reflect the proportion of income recognized by each of the Company's operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35% and U.K. subsidiary taxed at the U.K. marginal corporate tax rate of 28%. For periods subsequent to April 1, 2011, the U.K. marginal corporate tax rate has been reduced to 26%.

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

Effective Tax Rate Reconciliation

		First Quarter
		2011			2010
		(in millions)
Expected tax provision (benefit) at statutory rates in taxable jurisdictions		$	(58.7	)	$	68.4
Tax-exempt interest			(4.1	)		(3.5	)
Change in liability for uncertain tax positions			0.6			0.5
Other			0.2			—
	Provision (benefit) for income taxes	$	(62.0	)	$	65.4

Valuation Allowance

        As of March 31, 2011 and December 31, 2010, net deferred tax assets for each period presented were $393.7 million and $342.6 million, respectively. The deferred tax assets for these periods consists primarily of the book and tax difference in treatment of unearned premium reserve, mark to market adjustments for CDS, loss reserves, and VIEs offset by net deferred tax liabilities. The Company came to the conclusion that it is more likely than not that its net deferred tax asset will be fully realizable

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after weighing all positive and negative evidence available as required under GAAP. The Company will continue to analyze the need for a valuation allowance on a quarter-to-quarter basis.

11. Reinsurance

        AGC assumes exposure on insured obligations ("Assumed Business") and cedes portions of its exposure on obligations it has insured ("Ceded Business") in exchange for premiums, net of ceding commissions.

        If AGC were downgraded by Moody's to below Aa3 or by S&P below AA-, an additional portion of the Company's in-force financial guaranty assumed reinsurance business could be recaptured. Subject to the terms of each reinsurance agreement, the ceding company has the right to recapture business ceded to AGC and assets representing substantially all of the statutory unearned premium and loss reserves (if any) associated with that business. As of March 31, 2011, if this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $12.5 million.

        The Company is party to reinsurance agreements as a reinsurer to other monoline financial guaranty insurance companies. The Company's facultative and treaty agreements are generally subject to termination:

(a)

at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary, or



(b)

upon certain changes of control of the Company.

        Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all statutory unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements after which the Company would be released from liability with respect to the assumed business. Upon the occurrence of the conditions set forth in (a) above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.

        AGC ceded businesses to limit its exposure to risk. In the event that any of the reinsurers are unable to meet their obligations, AGC would be liable for such defaulted amounts.

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        Direct, assumed, and ceded premium and loss and LAE amounts for First Quarter 2011 and 2010 were as follows:

		First Quarter
		2011			2010
		(in millions)
Premiums Written
	Direct(1)	$	(17.0	)	$	26.6
	Assumed(1)		(1.8	)		(0.3	)
	Ceded(1)		6.8			(6.1	)
	Net	$	(12.0	)	$	20.2
Premiums Earned
	Direct	$	35.3		$	33.6
	Assumed		4.1			7.5
	Ceded		(10.7	)		(11.6	)
	Net	$	28.7		$	29.5
Loss and LAE
	Direct	$	(13.4	)	$	40.8
	Assumed		(3.1	)		6.3
	Ceded		(2.2	)		(12.6	)
	Net	$	(18.7	)	$	34.5

(1)

Gross and ceded premiums written in 2011 were primarily driven by changes in expected debt service schedules.

        Ceded par outstanding represents the portion of insured risk ceded to other reinsurers. Under these relationships, the Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers.

        Assumed par outstanding represents the amount of par assumed by the Company from other monolines. Under these relationships, the Company assumes a portion of the ceding company's insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is experiencing financial distress and is unable to pay premiums.

        In addition to assumed and ceded reinsurance arrangements, the company may also have exposure to some financial guaranty reinsurers (i.e. monolines) in other areas. Second-to-pay insured par outstanding represents transactions the Company has insured that were previously insured by other monolines. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary insurer. Another area of exposure is in the investment portfolio where the Company holds fixed maturity securities that are wrapped by monolines and whose value may decline based on the rating of the monoline. At March 31, 2011, the Company had $136.0 million of fixed maturity securities in its investment portfolio wrapped by Ambac Assurance Corporation

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("Ambac"), $118.5 million by MBIA Insurance Corporation, $82.9 million by AGM and $9.6 million by other guarantors at fair value.

Exposure by Reinsurer

			Ratings at May 24, 2011		Par Outstanding as of March 31, 2011
Reinsurer			Moody's Reinsurer Rating	S&P Reinsurer Rating	Ceded Par Outstanding(3)		Second-to- Pay Insured Par Outstanding		Assumed Par Outstanding
			(dollars in millions)
Affiliated Companies(1)					$	42,077	$	433	$	—
Non-Affiliated Companies:
	RAM Reinsurance Co. Ltd		WR(2)	WR		2,781		—		—
	Radian Asset Assurance Inc.		Ba1	BB-		184		1		—
	MBIA Insurance Corporation		B3	B		100		1,533		6,156
	Ambac		WR	WR		94		1,803		1,798
	ACA Financial Guaranty Corp		NR	WR		33		1		2
	CIFG Assurance North America Inc.		WR	WR		—		109		5,425
	Financial Guaranty Insurance Co.		WR	WR		—		1,447		333
	Syncora Guarantee Inc.		Ca	WR		—		850		19
	Other		Various	Various		1		918		—
Non-Affiliated Companies						3,193		6,662		13,733
		Total			$	45,270	$	7,095	$	13,733

(1)

The affiliates of AGC are Assured Guaranty Re Ltd. and its subsidiaries ("AG Re") rated A1 (negative) by Moody's and AA (stable) by S&P and AGM and its subsidiaries rated Aa3 (negative) by Moody's and AA+ (stable) by S&P.

(2)

Represents "Withdrawn Rating."

(3)

Includes $14,656 million in ceded par outstanding related to insured credit derivatives.

Amounts Due (To) From Reinsurers

	As of March 31, 2011
	Assumed Premium Receivable, net of Commissions		Assumed Expected Loss and LAE (Payable)			Ceded Expected Loss and LAE Recoverable
	(in millions)
Affiliated Companies	$	—	$	—		$	21.7
RAM Reinsurance Co. Ltd		—		—			(5.7	)
MBIA Insurance Corporation		0.4		(19.0	)		—
Ambac		6.4		(7.6	)		—
CIFG Assurance North America Inc		7.0		—			—
Financial Guaranty Insurance Company		0.0		(27.8	)		—
Syncora Guarantee Inc		—		(0.3	)		—
Total	$	13.8	$	(54.7	)	$	16.0

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12. Commitments and Contingencies

Legal Proceedings

Litigation

        Lawsuits arise in the ordinary course of the Company's business. It is the opinion of the Company's management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company's results of operations in a particular fiscal quarter or year. In addition, in the ordinary course of its business, AGC and AGUK assert claims in legal proceedings against third parties to recover losses paid in prior periods. See, for example, Note 4 (Financial Guaranty Contracts Accounted for as Insurance—Loss Estimation Process—Recovery Litigation). The amounts, if any, the Company will recover in proceedings to recover losses are uncertain, and recoveries, or failure to obtain recoveries, in any one or more of these proceedings during any quarter or fiscal year could be material to the Company's results of operations in that particular quarter or fiscal year.

        The Company has received subpoenas duces tecum and interrogatories from the State of Connecticut Attorney General and the Attorney General of the State of California related to antitrust concerns associated with the methodologies used by rating agencies for determining the credit rating of municipal debt, including a proposal by Moody's to assign corporate equivalent ratings to municipal obligations, and the Company's communications with rating agencies. The Company has satisfied such requests. It may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future.

        In addition, on May 16, 2011, AGC and AGM received a subpoena duces tecum from the Attorney General of the State of New York requesting documents and information relating to RMBS litigation, settlements, and repurchase demands. AGC and AGM are responding to such requests.

        Beginning in December 2008, AGC's affiliate AGM and various other financial guarantors were named in complaints filed in the Superior Court, San Francisco County, California. Since that time, plaintiffs' counsel has filed amended complaints against AGC and AGM and added additional plaintiffs. As of the date of this filing, the plaintiffs with complaints against AGC and AGM, among other financial guaranty insurers, are: (a) City of Los Angeles, acting by and through the Department of Water and Power; (b) City of Sacramento; (c) City of Los Angeles; (d) City of Oakland; (e) City of Riverside; (f) City of Stockton ; (g) County of Alameda; (h) County of Contra Costa; (i) County of San Mateo; (j) Los Angeles World Airports; (k) City of Richmond; (l) Redwood City; (m) East Bay Municipal Utility District; (n) Sacramento Suburban Water District; (o) City of San Jose; (p) County of Tulare; (q) The Regents of the University of California; (r) The Redevelopment Agency of the City of Riverside; (s) The Public Financing Authority of the City of Riverside; (t) The Jewish Community Center of San Francisco; (u) The San Jose Redevelopment Agency; and (v) The Olympic Club. Complaints filed by the City and County of San Francisco and the Sacramento Municipal Utility District were subsequently dismissed against AGC and AGM.

        At a hearing on March 1, 2010, the court struck all of the plaintiffs' complaints with leave to amend. The court instructed plaintiffs to file one consolidated complaint. On October 13, 2010, plaintiffs' counsel filed three consolidated complaints, two of which also added the three major credit rating agencies as defendants in addition to the financial guaranty insurers. In November 2010, the credit rating agency defendants filed a motion to remove the cases to the Northern District of California and plaintiffs responded with a motion to remand the cases back to California state court.

59

On January 31, 2011, the court for the Northern District of California granted plaintiffs' motion and the action was remanded to the Superior Court, San Francisco County, California.

        These complaints allege that the financial guaranty insurer defendants (i) participated in a conspiracy in violation of California's antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance, (ii) participated in risky financial transactions in other lines of business that damaged each insurer's financial condition (thereby undermining the value of each of their guaranties), and (iii) failed to adequately disclose the impact of those transactions on their financial condition. In addition to their antitrust claims, various plaintiffs in these actions assert claims for breach of the covenant of good faith and fair dealing, fraud, unjust enrichment, negligence, and negligent misrepresentation. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys' fees, costs and other expenses. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits.

        On April 8, 2011, AGC and its affiliate AG Re filed a Petition to Compel Arbitration with the Supreme Court of the State of New York, requesting an order compelling Ambac to arbitrate Ambac's disputes with AGC and AG Re concerning their obligations under reinsurance agreements with Ambac. In March 2010, Ambac placed a number of insurance policies that it had issued, including policies reinsured by AGC and AG Re pursuant to the reinsurance agreements, into a segregated account. The Wisconsin state court has approved a rehabilitation plan whereby permitted claims under the policies in the segregated account will be paid 25% in cash and 75% in surplus notes issued by the segregated account. Ambac has advised AGC and AG Re that it has and intends to continue to enter into commutation agreements with holders of policies issued by Ambac, and reinsured by AGC and AG Re, pursuant to which Ambac will pay a combination of cash and surplus notes to the policyholder. AGC and AG Re have informed Ambac that they believe their only current payment obligation with respect to the commutations arises from the cash payment, and that there is no obligation to pay any amounts in respect of the surplus notes until payments of principal or interest are made on such notes. AGC and AG Re may satisfy their obligations to Ambac by delivering their quota share of surplus notes to Ambac. Ambac has disputed this position on one commutation and may take a similar position on subsequent commutations. On April 15, 2011, attorneys for the Wisconsin Insurance Commissioner filed a motion with Lafayette County, Wis., Circuit Court Judge William Johnston, asking him to find AGC and AG Re to be in violation of an injunction protecting the interests of the segregated account by their seeking to compel arbitration on this matter and failing to pay in full all amounts with respect to Ambac's payments in the form of surplus notes. The motion was heard on May 25, 2011.

13. Credit Facilities

Credit Facilities

Recourse Credit Facilities

2006 Credit Facility

        On November 6, 2006, AGL and certain of its subsidiaries entered into a $300.0 million five-year unsecured revolving credit facility (the "2006 Credit Facility") with a syndicate of banks. Under the 2006 Credit Facility, each of AGC, AGUK, AG Re, Assured Guaranty Re Overseas Ltd. ("AGRO") and AGL are entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower. Of the $300.0 million available to be borrowed, no more than $100.0 million may be borrowed by AGL, AG Re or AGRO, individually or in the aggregate, and no more than $20.0 million may be borrowed by AGUK. The stated amount of all outstanding letters of credit and the amount of all unpaid drawings in respect of all letters of credit cannot, in the aggregate, exceed $100.0 million. The 2006 Credit Facility also provides that AGL may

60

request that the commitment of the banks be increased an additional $100.0 million up to a maximum aggregate amount of $400.0 million. Any such incremental commitment increase is subject to certain conditions provided in the agreement and must be for at least $25.0 million.

        The proceeds of the loans and letters of credit are to be used for the working capital and other general corporate purposes of the borrowers and to support reinsurance transactions.

        At the effective date of the 2006 Credit Facility, AGC guaranteed the obligations of AGUK under the facility and AGL guaranteed the obligations of AG Re and AGRO under the facility and agreed that, if the consolidated assets of Assured Guaranty (as defined in the related credit agreement) were to fall below $1.2 billion, AGL would, within 15 days, guarantee the obligations of AGC and AGUK under the facility. At the same time, Assured Guaranty Overseas U.S. Holdings Inc. ("AGOUS") guaranteed the obligations of AGL, AG Re and AGRO under the facility, and each of AG Re and AGRO guaranteed the other as well as AGL.

        The 2006 Credit Facility's financial covenants require that AGL:

(a)

maintain a minimum net worth of 75% of the Consolidated Net Worth of Assured Guaranty as of June 30, 2009 (calculated as if the Assured Guaranty Municipal Holdings Inc. acquisition on July 1, 2009 had been consummated on such date); and



(b)

maintain a maximum debt-to-capital ratio of 30%.

        In addition, the 2006 Credit Facility requires that AGC maintain qualified statutory capital of at least 75% of its statutory capital as of the fiscal quarter ended June 30, 2006. Furthermore, the 2006 Credit Facility contains restrictions on AGL and its subsidiaries, including, among other things, in respect of their ability to incur debt, permit liens, become liable in respect of guaranties, make loans or investments, pay dividends or make distributions, dissolve or become party to a merger, consolidation or acquisition, dispose of assets or enter into affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. The 2006 Credit Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements. A default by one borrower will give rise to a right of the lenders to terminate the facility and accelerate all amounts then outstanding. As of March 31, 2011 and December 31, 2010, Assured Guaranty was in compliance with all of the financial covenants.

        As of March 31, 2011, no amounts were outstanding under this facility nor have there been any borrowings during the life of the 2006 Credit Facility.

        Letters of credit totaling approximately $2.9 million remained outstanding as of March 31, 2011 and December 31, 2010. The Company obtained the letters of credit in connection with entering into a lease for new office space in 2008, which space was subsequently sublet.

Committed Capital Securities

        On April 8, 2005, AGC entered into separate agreements (the "Put Agreements") with four custodial trusts (each, a "Custodial Trust") pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50.0 million of perpetual preferred stock of AGC (the "AGC Preferred Stock"). The custodial trusts were created as a vehicle for providing capital support to AGC by allowing AGC to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, AGC would receive $200.0 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose, including the payment of claims. The put options have not been exercised through the date of

61

this filing. Initially, all of AGC CCS Securities were issued to a special purpose pass-through trust (the "Pass-Through Trust"). The Pass-Through Trust was dissolved in April 2008 and the AGC CCS Securities were distributed to the holders of the Pass-Through Trust's securities. Neither the Pass-Through Trust nor the custodial trusts are consolidated in the Company's financial statements.

        Income distributions on the Pass-Through Trust Securities and AGC CCS Securities were equal to an annualized rate of one-month LIBOR plus 110 basis points for all periods ending on or prior to April 8, 2008. Following dissolution of the Pass-Through Trust, distributions on the AGC CCS Securities are determined pursuant to an auction process. On April 7, 2008, this auction process failed, thereby increasing the annualized rate on the AGC CCS Securities to One-Month LIBOR plus 250 basis points. Distributions on the AGC preferred stock will be determined pursuant to the same process.

Committed Capital Securities
Fair Value Gain (Loss)

	First Quarter
	2011		2010
	(in millions)
Fair value gain (loss)	$	0.3	$	1.4

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