UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

transition Period from to

Commission File No. 001-32141

ASSURED GUARANTY LTD.

(Exact name of registrant as specified in its charter)

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

30 Woodbourne Avenue

Hamilton HM 08

Bermuda

(address of principal executive office)

(441) 299-9375

(Registrants telephone number, including area code)

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

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

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

Large accelerated filer x		Accelerated filer o

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

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

The number of registrant’s Common Shares ($0.01 par value) outstanding as of July 31, 2009 was 156,599,838 (excludes 455,234 unvested restricted shares) .

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ASSURED GUARANTY LTD.

INDEX TO FORM 10-Q

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets (unaudited) as of June 30, 2009 and December 31, 2008	3
	Consolidated Statements of Operations and Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2009 and 2008	4
	Consolidated Statements of Shareholders’ Equity (unaudited) for Six Months Ended June 30, 2009	5
	Consolidated Statements of Cash Flows (unaudited) for Six Months Ended June 30, 2009 and 2008	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	68
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	130
Item 4.	Controls and Procedures	131
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	132
Item 1A.	Risk Factors	135
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	137
Item 6.	Exhibits	137

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Assured Guaranty Ltd.

Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)

(Unaudited)

	June 30,			December 31,
	2009			2008
Assets
Fixed maturity securities, at fair value (amortized cost: $3,418,383 in 2009 and $3,162,308 in 2008)	$	3,413,257		$	3,154,137
Short-term investments, at cost which approximates fair value	1,170,970			477,197
Total investments	4,584,227			3,631,334
Cash and cash equivalents	8,507			12,305
Accrued investment income	31,477			32,846
Deferred acquisition costs	374,087			288,616
Prepaid reinsurance premiums	23,121			18,856
Reinsurance recoverable on ceded losses	4,533			6,528
Premiums receivable	752,892			15,743
Goodwill	85,417			85,417
Credit derivative assets	146,350			146,959
Deferred tax asset	209,109			129,118
Current income taxes receivable	26,351			21,427
Salvage recoverable	199,828			80,207
Committed capital securities, at fair value	10,158			51,062
Other assets	39,682			35,289
Total assets	$	6,495,739		$	4,555,707
Liabilities and shareholders’ equity
Liabilities
Unearned premium reserves	$	2,222,717		$	1,233,714
Reserves for losses and loss adjustment expenses	200,287			196,798
Profit commissions payable	10,220			8,584
Reinsurance balances payable	33,754			17,957
Funds held by Company under reinsurance contracts	30,000			30,683
Credit derivative liabilities	957,752			733,766
Long-term debt	516,974			347,210
Other liabilities	169,116			60,773
Total liabilities	4,140,820			2,629,485
Commitments and contingencies
Shareholders’ equity
Common stock ($0.01 par value, 500,000,000 shares authorized; 134,445,139 and 90,955,703 shares issued and outstanding in 2009 and 2008)	1,344			910
Additional paid-in capital	1,733,997			1,284,370
Retained earnings	622,369			638,055
Accumulated other comprehensive (loss) income	(2,791		)	2,887
Total shareholders’ equity	2,354,919			1,926,222
Total liabilities and shareholders’ equity	$	6,495,739		$	4,555,707

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

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Assured Guaranty Ltd.

Consolidated Statements of Operations and Comprehensive Income
(in thousands of U.S. dollars except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues
Net earned premiums	$	78,634		$	51,685		$	227,080		$	98,518
Net investment income	43,300			40,232			86,901			76,806
Net realized investment (losses) gains (includes impairment losses of $14,833, consisting of $36,466 of total other-than-temporary impairment losses, net of $21,633 recognized in other comprehensive income, for the quarter ended June 30, 2009)	(4,888		)	1,453			(21,998		)	2,080
Change in fair value of credit derivatives
Realized gains and other settlements on credit derivatives	27,816			31,793			48,395			59,410
Unrealized (losses) gains on credit derivatives	(254,284		)	708,502			(227,302		)	448,881
Net change in fair value of credit derivatives	(226,468		)	740,295			(178,907		)	508,291
Fair value (loss) gain on committed capital securities	(60,570		)	8,896			(40,904		)	17,407
Other income	492			153			1,394			178
Total revenues	(169,500		)	842,714			73,566			703,280
Expenses
Loss and loss adjustment expenses	38,030			38,125			117,784			93,263
Profit commission expense	2,071			1,022			2,326			2,202
Acquisition costs	16,548			11,825			39,969			23,708
Other operating expenses	22,594			19,665			50,291			48,303
FSAH acquisition-related expenses	24,225			—			28,846			—
Interest expense	6,484			5,820			12,305			11,641
Other expenses	1,868			1,715			3,268			2,450
Total expenses	111,820			78,172			254,789			181,567
(Loss) income before (benefit) provision for income taxes	(281,320		)	764,542			(181,223		)	521,713
(Benefit) provision for income taxes
Current	(9,874		)	7,212			1,701			17,325
Deferred	(101,442		)	212,114			(98,409		)	128,381
Total (benefit) provision for income taxes	(111,316		)	219,326			(96,708		)	145,706
Net (loss) income	(170,004		)	545,216			(84,515		)	376,007
Other comprehensive income (loss), net of taxes
Unrealized holding gains (losses) on fixed maturity securities arising during the year	59,667			(41,289		)	49,965			(46,186		)
Reclassification adjustment for realized losses (gains) included in net (loss) income	7,114			(895		)	24,189			(1,289		)
Change in net unrealized gains on fixed maturity securities	66,781			(42,184		)	74,154			(47,475		)
Unrealized losses on fixed maturity securities related to factors other than credit	(19,968		)	—			(19,968		)	—
Change in cumulative translation adjustment	6,384			(458		)	(2,003		)	(101		)
Cash flow hedge	(104		)	(104		)	(209		)	(209		)
Other comprehensive income (loss), net of taxes	53,093			(42,746		)	51,974			(47,785		)
Comprehensive (loss) income	$	(116,911	)	$	502,470		$	(32,541	)	$	328,222
Earnings per share:
Basic	$	(1.82	)	$	6.01		$	(0.91	)	$	4.38
Diluted	$	(1.82	)	$	5.96		$	(0.91	)	$	4.35
Dividends per share	$	0.045		$	0.045		$	0.09		$	0.09

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

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Assured Guaranty Ltd.

Consolidated Statements of Shareholders’ Equity
For Six Months Ended June 30, 2009
(in thousands of U.S. dollars except per share amounts)

(Unaudited)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, December 31, 2008	$	910		$	1,284,370		$	638,055		$	2,887		$	1,926,222
Cumulative effect of accounting change - Adoption of FAS 163 effective January 1, 2009	—			—			19,443			—			19,443
Cumulative effect of accounting change - Adoption of FSP 115-2 effective April 1, 2009	—			—			57,652			(57,652		)	—
Net loss	—			—			(84,515		)	—			(84,515		)
Dividends ($0.09 per share)	—			—			(8,199		)	—			(8,199		)
Dividends on restricted stock units	—			67			(67		)	—			—
Net proceeds from issuance of common stock	443			447,647			—			—			448,090
Common stock repurchases	(10		)	(3,666		)	—			—			(3,676		)
Shares cancelled to pay withholding taxes	(1		)	(982		)	—			—			(983		)
Shares issued under ESPP	—			205			—			—			205
Share-based compensation and other	2			6,356			—			—			6,358
Change in cash flow hedge, net of tax of $(113)	—			—			—			(209		)	(209		)
Change in cumulative translation adjustment	—			—			—			(2,003		)	(2,003		)
Unrealized losses related to factors other than credit, net of tax of $(1,665)	—			—			—			(19,968		)	(19,968		)
All other unrealized gains on fixed maturity securities, net of tax of $12,739	—			—			—			74,154			74,154
Balance, June 30, 2009	$	1,344		$	1,733,997		$	622,369		$	(2,791	)	$	2,354,919

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

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Assured Guaranty Ltd.

Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
Operating activities
Net (loss) income	$	(84,515	)	$	376,007
Adjustments to reconcile net (loss) income to net cash flows provided by operating activities:
Non-cash interest and operating expenses	8,542			10,771
Net amortization of (discount) premium on fixed maturity securities	(4,810		)	2,295
Accretion of discount on premium receivable	(10,812		)	—
(Benefit) provision for deferred income taxes	(98,409		)	128,381
Net realized investment losses (gains)	21,998			(2,080		)
Unrealized losses (gains) on credit derivatives	227,302			(448,881		)
Fair value loss (gain) on committed capital securities	40,904			(17,407		)
Change in deferred acquisition costs	16,365			(25,282		)
Change in accrued investment income	1,369			(5,451		)
Change in premiums receivable	(4,899		)	1,962
Change in prepaid reinsurance premiums	2,360			(7,121		)
Change in unearned premium reserves	161,350			320,214
Change in reserves for losses and loss adjustment expenses, net	(73,400		)	19,843
Change in profit commissions payable	1,636			(11,583		)
Change in funds held by Company under reinsurance contracts	(683		)	3,852
Change in current income taxes	(4,924		)	(3,372		)
Tax benefit for stock options exercised	—			(10		)
Other changes in credit derivatives assets and liabilities, net	(2,707		)	(2,820		)
Other	6,113			(7,956		)
Net cash flows provided by operating activities	202,780			331,362

Investing activities
Fixed maturity securities:
Purchases	(827,862		)	(840,455		)
Sales	705,004			252,503
Maturities	5,500			3,350
(Purchases) sales of short-term investments, net	(693,637		)	17,807
Net cash flows used in investing activities	(810,995		)	(566,795		)

Financing activities
Net proceeds from issuance of common stock	448,495			248,978
Net proceeds from issuance of equity units	167,972			—
Dividends paid	(8,199		)	(7,769		)
Repurchases of common stock	(3,676		)	—
Share activity under option and incentive plans	(778		)	(3,833		)
Tax benefit for stock options exercised	—			10
Net cash flows provided by (used in) financing activities	603,814			237,386
Effect of exchange rate changes	603			123
(Decrease) increase in cash and cash equivalents	(3,798		)	2,076
Cash and cash equivalents at beginning of period	12,305			8,048
Cash and cash equivalents at end of period	$	8,507		$	10,124

Supplementary cash flow information
Cash paid during the period for:
Income taxes	$	6,836		$	20,700
Interest	$	11,800		$	11,800

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

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Assured Guaranty Ltd.
Notes to Consolidated Financial Statements

June 30, 2009

(Unaudited)

1. Business and Organization

Assured Guaranty Ltd. is a Bermuda-based holding company which provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance and mortgage markets (together with its subsidiaries, the “Company”). Credit enhancement products are financial guarantees or other types of support, including credit derivatives, which improve the credit of underlying debt obligations. The Company issues policies in both financial guaranty and credit derivative form. Assured Guaranty Ltd. applies its credit expertise, risk management skills and capital markets experience to develop insurance, reinsurance and derivative products that meet the credit enhancement needs of its customers. Under a reinsurance agreement, the reinsurer, in consideration of a premium paid to it, agrees to indemnify another insurer, called the ceding company, for part or all of the liability of the ceding company under one or more insurance policies that the ceding company has issued. A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying security. Assured Guaranty Ltd. markets its products directly to and through financial institutions, serving the U.S. and international markets. Assured Guaranty Ltd.’s financial results include four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. These segments are further discussed in Note 14.

Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. A loss event occurs upon existing or anticipated credit deterioration, while a payment under a policy occurs when the insured obligation defaults. This requires the Company to pay the required principal and interest when due in accordance with the underlying contract. The principal types of obligations covered by the Company’s financial guaranty direct and financial guaranty assumed reinsurance businesses are structured finance obligations and public finance obligations. Because both businesses involve similar risks, the Company analyzes and monitors its financial guaranty direct portfolio and financial guaranty assumed reinsurance portfolio on a unified process and procedure basis.

Mortgage guaranty insurance is a specialized class of credit insurance that provides protection to mortgage lending institutions against the default of borrowers on mortgage loans that, at the time of the advance, had a loan to value in excess of a specified ratio. Reinsurance in the mortgage guaranty insurance industry is used to increase the insurance capacity of the ceding company, to assist the ceding company in meeting applicable regulatory and rating agency requirements, to augment the financial strength of the ceding company, and to manage the ceding company’s risk profile. The Company provides mortgage guaranty protection on an excess of loss basis.

The Company has participated in several lines of business that are reflected in its historical financial statements but that the Company exited in connection with its 2004 initial public offering (“IPO”). The results from these lines of business make up the Company’s Other segment discussed in Note 14.

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The Company’s subsidiaries have been assigned the following insurance financial strength ratings as of the date of this filling . These ratings are subject to continuous review:

	Moody’s	S&P	Fitch
Assured Guaranty Corp. (“AGC”)	Aa2(Excellent)	AAA(Extremely Strong)	AA(Very Strong)
Assured Guaranty Re Ltd. (“AG Re”)	Aa3(Excellent)	AA(Very Strong)	AA-(Very Strong)
Assured Guaranty Re Overseas Ltd. (“AGRO”)	Aa3(Excellent)	AA(Very Strong)	AA-(Very Strong)
Assured Guaranty Mortgage Insurance Company	Aa3(Excellent)	AA(Very Strong)	AA-(Very Strong)
Assured Guaranty (UK) Ltd. (“AG(UK)”)	Aa2(Excellent)	AAA(Extremely Strong)	AA(Very Strong)
Financial Security Assurance Inc. (“FSA”)	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)
FSA Insurance Company	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)
Financial Security Assurance International Ltd.	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)
Financial Security Assurance (U.K.) Ltd	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)

On May 4, 2009, Fitch Inc. (“Fitch”) downgraded the debt and insurer financial strength ratings of Assured Guaranty Ltd. and its subsidiaries, as applicable, based on Fitch’s concerns that Assured Guaranty Ltd. continued to face negative credit migration within the combined insured portfolio, primarily related to structured finance, outpacing its ability to build capital resources through earnings retention. It cited mortgage-related exposures as a particular area of concern, as well as exposures to trust preferred securities collateralized debt obligations (“TruPS CDOs”) and other structured finance transactions which have been subject to ratings downgrades. Fitch downgraded the insurer financial stronger ratings of AGC and AG(UK) to “AA” from “AAA”, downgraded the insurer financial strength ratings of AG Re, AGRO and Assured Guaranty Mortgage Insurance Company to “AA-” from “AA” and the debt ratings of Assured Guaranty US Holdings Inc. (“AGUS”). All such ratings were placed on Rating Watch Evolving. On May 11, 2009, Fitch downgraded the insurer financial strength relating of FSA and certain other affiliates to “AA+” from “AAA” and the long term rating of Financial Security Assurance Holding Ltd. (“FSAH”) to “A+” from “AA”. All such ratings remain on Rating Watch Negative. Fitch cited as the primary reason for this action Fitch’s view of the residual risks retained by FSA following the transfer of its financial products business to Dexia S.A. (“Dexia”), which transfer is described in greater detail below. On August 10, 2009, Fitch placed the debt and insurer financial strength ratings of the Company and its subsidiaries on Rating Watch Negative, a change from Rating Watch Evolving. It confirmed that the ratings of FSAH and its subsidiaries remained on Rating Watch Negative. Fitch reported that it is currently in the process of analyzing the insured portfolios and overall capital adequacy of AGC, AG Re and FSA, and that the Rating Watch Negative reflects concerns with respect to further credit deterioration in mortgage-related exposures, which could negatively impact the capital positions of the companies. It noted that credit deterioration in other areas of the insured portfolios, including TruPS CDOs and public finance exposures, could also place additional pressure on claims paying resources, as could ratings-based triggers which could force termination or collateralization of insured exposures at AGC or the claw-back of certain businesses underwritten by AG Re. Fitch notes that it expects to complete its rating review over the next four to six weeks. There is no assurance that Fitch will not take further action on our ratings.

On May 20, 2009, Moody’s Investors Service (‘‘Moody’s’’) placed under review for possible downgrade the Aa2 insurance financial strength rating of AGC, as well as the ratings of other entities within the Assured group. In its public announcement of the rating action, Moody’s stated that this action reflects its view that despite recent improvements in the Company’s market position, the expected performance of its insured portfolio—particularly the mortgage-related risks—has substantially worsened. At the same time, Moody’s also placed the Aa3 insurance financial strength ratings of FSA and its affiliated insurance operating companies on review for possible downgrade. In its public announcement of the rating action, Moody’s cited its growing concerns about FSA’s business and financial profile as a result of further deterioration in FSA’s U.S. mortgage portfolio and the related adverse effect on its capital adequacy, profitability, and market traction. In both press releases, Moody’s noted that it has taken a more negative view of mortgage-related exposures and Assured Guaranty Ltd.’s pooled corporate exposures in light of worse-than-expected performance trends, and recognized the continued susceptibility of the insured portfolio to the weak economic environment. Moody’s also commented that the deterioration in the insured portfolios could have negative implications for the companies’ franchise values, profitability and financial flexibility given the likely sensitivity of those business attributes to its capital position. Moody’s also noted that the market dislocation caused by the declining financial strength of financial guaranty insurers may alter the competitive dynamics of the industry by encouraging the entry of new participants or the growth of alternative forms of execution. There can be no assurance as to the outcome of Moody’s review. Moody’s did note on June 17, 2009, in respect of the securities of AGUS, that in light of the high sensitivity of the Company’s financial profile to RMBS and CDOs, meaningful increases in Moody’s stress loss estimates for these exposures, which are possible, combined with the subordination of the AGUS securities, could result in a multiple-notch downgrade of the AGUS securities, perhaps below investment grade. On July 24, 2009, Moody’s announced that it expects to conclude its ratings review of the companies by mid-August 2009.

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acquisition is described in greater detail below. In addition, the outlook also reflects S&P’s view that the change in the competitive dynamics of the industry — with the potential entrance of new competitors, alternative forms of credit enhancement and limited insurance penetration in the U.S. public finance market — could hurt the companies’ business prospects. There can be no assurance that S&P will not take further action on our ratings.

Acquisition of Financial Security Assurance Holdings Ltd.

On July 1, 2009, the Company, through its fully-owned subsidiary, AGUS, purchased FSAH and, indirectly, all of its subsidiaries other than those involved in its financial products business, including its principal operating subsidiary, the financial guaranty insurance company Financial Security Assurance, Inc. from Dexia Holdings, Inc. (“Dexia Holdings”), which is a subsidiary of Dexia. The former FSAH subsidiaries that were involved in the financial products business were transferred to Dexia at closing and the Company is indemnified, through guarantees issued by Dexia and affiliated entities and the French and Belgian governments, against exposure to FSAH’s financial products segment, which includes its guaranteed investment contract business, medium term note business and leveraged tax lease business.

The purchase price paid by the Company was approximately $546 million in cash and approximately 22.3 million common shares of the Company for a total purchase price of approximately $822 million. The issuance of these 22.3 million common shares is in addition to the common shares issued by the Company on June 24, 2009 as discussed below. Dexia Holdings owns approximately 14.0% of Assured Guaranty Ltd.’s issued common shares as a result of this transaction. Dexia Holdings has agreed that the voting rights with respect to all Assured Guaranty Ltd.’s common shares issued pursuant to the Purchase Agreement will constitute less than 9.5% of the voting power of all issued and outstanding Assured Guaranty Ltd.’s common shares. Dexia Holdings has also agreed to a “standstill” arrangement until the date on which it and its affiliates beneficially own Assured Guaranty Ltd.’s common shares in an amount less than 10% of the outstanding Assured Guaranty Ltd.’s common shares. In addition, Dexia Holdings has agreed that, until November 14, 2009, the first anniversary of the date of the Purchase Agreement, it will not transfer any of the Assured Guaranty Ltd.’s common shares issued pursuant to the Purchase Agreement without the consent of the Company, other than to one or more of its affiliates that agrees to abide by the voting and other restrictions described above.

The Company financed the cash portion of the acquisition with the proceeds of the public equity offering discussed below.

Common Share and Equity Units Offerings

On June 24, 2009, the Company completed the sale of 44,275,000 of its common shares (including 5,775,000 common shares allocable to the underwriters pursuant to the overallotment option) at a price of $11.00 per share. Concurrent with the common share offering, the Company along with AGUS sold 3,450,000 equity units (including 450,000 equity units allocable to the underwriters) at a stated amount of $50 per unit. The equity units initially consist of a forward purchase contract and a 5% undivided beneficial ownership interest in $1,000 principal amount 8.50% senior notes due 2014 issued by AGUS (“8.50% Senior Notes”). Under the purchase contract, holders are required to purchase the Company’s common shares no later than June 1, 2012. The threshold appreciation price of the equity units is $12.93, which represents a premium of 17.5% over the public offering price in the common share offering. The 8.50% Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd. The net proceeds after underwriting expenses and offering costs for these two offerings totaled approximately $616.5 million. Of that amount, the net proceeds from the equity offering were $170.8 million, which was allocated between $168.0 million recognized as long-term debt and $2.8 million of the purchase contract recognized in additional paid-in-capital in shareholders’ equity in the consolidated balance sheets.

In conjunction with the acquisition, the Company entered into an Amendment to the Investment Agreement dated as of November 13, 2008 with investment funds affiliated with WL Ross Group, L.P. (“WLR Funds”), which amended the Investment Agreement (the “Investment Agreement”) dated as of February 28, 2008 between the Company and WLR Funds, which provided a back up funding commitment to finance the acquisition. Pursuant to pre-emptive rights set forth in the Investment Agreement, WLR Funds, which are affiliated with Wilbur L. Ross, Jr., who is one of the Company’s directors, purchased 3,850,000 common shares of the

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Company in the Company’s June 2009 public common share offering at $11.00 per common share, the public offering price in the public offering. As of the date of this filing the WLR Funds own approximately 10.2% of the outstanding common stock of the Company.

2. Basis of Presentation

The unaudited interim consolidated financial statements, which include the accounts of the Company, 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 June 30, 2009 (“Second Quarter 2009”), the three-month period ended June 30, 2008 (“Second Quarter 2008”), the six-month period ended June 30, 2009 (“Six Months 2009”) and the six-month period ended June 30, 2008 (“Six Months 2008”). Operating results for the three- and six-month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for a full year. These financial statements include the effects of the Company’s common share and equity units offering that took place on June 24, 2009 but do not include the effects of the acquisition of FSAH, which occurred effective July 1, 2009. The Company’s financial statements as of September 30, 2009 will include the effects of the FSAH acquisition, including three months of operating results attributable to FSAH entities.

Certain prior year items have been reclassified to conform to the current year presentation. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission. All intercompany accounts and transactions have been eliminated. The Company has evaluated all subsequent events through August 10, 2009, the date the financial statements were issued.

Certain of the Company’s subsidiaries are subject to U.S. and U.K. income tax. The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards (“FAS”) No. 109, “Accounting for Income Taxes”. The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its credit derivatives, which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year of 2009. A discrete calculation of the provision is calculated for each interim period.

Volatility and disruption in the global financial markets including depressed home prices and increasing foreclosures, falling equity market values, rising unemployment, declining business and consumer confidence and the risk of increased inflation, have precipitated an economic slowdown. The conditions may adversely affect the Company’s future profitability, financial position, investment portfolio, cash flow, statutory capital, financial strength ratings and stock price. Additionally, future legislative, regulatory or judicial changes in the jurisdictions regulating the Company may adversely affect its ability to pursue its current mix of business, materially impacting its financial results.

Adoption of FAS 163

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“FAS 163”). FAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. FAS 163 also clarifies the methodology to be used for financial guaranty premium revenue recognition and claim liability measurement, as well as requiring expanded disclosures about the insurance enterprise’s risk management activities. FAS 163 has been applied to all existing and future financial guaranty insurance contracts written by the Company.

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The accounting changes prescribed by the statement were recognized by the Company as a cumulative effect adjustment to retained earnings as of January 1, 2009.

Premium Revenue Recognition

Premiums are received either upfront or in installments.

Upon Adoption of FAS 163

The Company recognizes a liability for the unearned premium revenue at the inception of a financial guarantee contract equal to the present value of the premiums due or expected to be collected over the period of the contract. If the premium is a single premium received at the inception of the financial guarantee contract, the Company measures the unearned premium revenue as the amount received. The period of the contract is the expected period of risk that generally equates to the contract period. However, in some instances, the expected period of risk is significantly shorter than the full contract period due to expected prepayments. In those instances where the financial guarantee contract insures a homogeneous pool of assets that are contractually prepayable and where those prepayments are probable and the timing and amount of prepayments can be reasonably estimated the Company uses the expected period of risk to recognize premium revenues. The Company adjusts prepayment assumptions when those assumptions change and recognizes a prospective change in premium revenues as a result. The adjustment to the unearned premium revenue is equal the adjustment to the premium receivable with no effect on earnings at the time of the adjustment.

The Company recognizes the premium from a financial guarantee insurance contract as revenue over the period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a corresponding decrease in the unearned premium revenue occurs. The amount of insurance protection provided is a function of the insured principal amount outstanding. Therefore, the proportionate share of premium revenue to be recognized in a given reporting period is a constant rate calculated based on the relationship between the insured principal amount outstanding in a given reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When the issuer of an insured financial obligation retires the insured financial obligation before its maturity and replaces it with a new financial obligation, referred to as a refunding, the financial guarantee insurance contract on the retired financial obligation is extinguished. The Company immediately recognizes any nonrefundable unearned premium revenue related to that contract as premium revenue and any associated acquisition costs previously deferred as an expense.

The following table provides information for financial guaranty insurance contracts where premiums are received on an installment basis as of and for the six months ended June 30, 2009 (dollars in thousands):

Premiums receivable, net of ceding commissions (end of period)(1)	$	732,504
Unearned premium reserves (end of period)(2)	$	933,771
Accretion of discount on premium receivable	$	10,812
Weighted-average risk-free rate to discount premiums	2.7		%
Weighted-average period of premiums receivable (in years)	10.4

(1) Includes $94.8 million of ceding commissions due on future installment premium receivable.

(2) Includes unearned premium related to the upfront portion of premiums received on bi-furcated deals.

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The premiums receivable expected to be collected are:

(dollars in thousands)
2009 (July 1 – September 30)	$	36,605
2009 (October 1 – December 31)	17,546
2010 (January 1 – March 31)	17,512
2010 (April 1 – June 30)	15,181
2010 (July 1 – December 31)	27,635
2011	50,112
2012	47,845
2013	41,259
2014 - 2018	164,027
2019 - 2023	119,010
2024 - 2028	93,285
2029 - 2033	73,087
2034 - 2038	32,754
2039 - 2043	12,577
2044 - 2048	3,970
2049 - 2053	460
2054 - 2056	27
Total premiums receivable, net of ceding commissions	$	752,892

The following table provides a reconciliation of the beginning and ending balances of premium receivable:

(dollars in thousands)
Balance as of January 1, 2009	$	737,181
Add: premiums written - net	376,799
Add: accretion of premium receivable discount	10,812
Less: premium payments received	(371,900		)
Balance as of June 30, 2009	$	752,892

The accretion of premium receivable discount is included in earned premium in the Company’s statement of operations. The above amounts are presented net of applicable ceding commissions.

The future expected financial guarantee premium revenue that the Company expects to recognize are:

(dollars in thousands)
2009 (July 1 – September 30)	$	49,750
2009 (October 1 – December 31)	48,713
2010 (January 1 – March 31)	45,654
2010 (April 1 – June 30)	46,001
2010 (July 1 – December 31)	88,639
2011	165,333
2012	150,753
2013	136,441
2014 - 2018	538,190
2019 - 2023	374,382
2024 - 2028	260,215
After 2028	305,678
Total future expected financial guarantee premium revenue	$	2,209,749

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In the Company’s reinsurance businesses, the Company estimates the ultimate written and earned premiums to be received from a ceding company at the end of each quarter and the end of each year because some of the Company’s ceding companies report premium data anywhere from 30 to 90 days after the end of the relevant period. Written premiums reported in the Company’s statement of operations are based upon reports received from ceding companies supplemented by the Company’s own estimates of premium for which ceding company reports have not yet been received. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined.

Prior to Adoption of FAS 163

Prior to January 1, 2009, upfront premiums were earned in proportion to the expiration of the amount at risk. Each installment premium was earned ratably over its installment period, generally one year or less. Premium earnings under both the upfront and installment revenue recognition methods were based upon and were in proportion to the principal amount guaranteed and therefore resulted in higher premium earnings during periods where guaranteed principal was higher. For insured bonds for which the par value outstanding was declining during the insurance period, upfront premium earnings were greater in the earlier periods thus matching revenue recognition with the underlying risk. The premiums were allocated in accordance with the principal amortization schedule of the related bond issue and were earned ratably over the amortization period. When an insured issue was retired early, was called by the issuer, or was in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the remaining unearned premium reserves were earned at that time. Unearned premium reserves represented the portion of premiums written that were applicable to the unexpired amount at risk of insured bonds.

Deferred Acquisition Costs

Acquisition costs incurred, other than those associated with financial guarantees written in credit derivative form, that vary with and are directly related to the production of new business are deferred in proportion to written premium and amortized in relation to earned premiums. These costs include direct and indirect expenses such as ceding commissions, brokerage expenses and the cost of underwriting and marketing personnel. Management uses its judgment in determining what types of costs should be deferred, as well as what percentage of these costs should be deferred. The Company annually conducts a study to determine which operating costs vary with, and are directly related to, the acquisition of new business and qualify for deferral. Ceding commissions received on premiums the Company cedes to other reinsurers reduce acquisition costs. Anticipated losses, loss adjustment expenses and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of acquisition costs. Acquisition costs associated with credit derivative products are expensed as incurred. When an insured issue is retired early, as discussed above in the Premium Revenue Recognition section, the remaining related deferred acquisition cost is expensed at that time. Ceding commissions, calculated at their contractually defined rate, associated with future installment premiums on assumed and ceded reinsurance business were recorded in deferred acquisition costs upon the adoption of FAS 163 with a corresponding offset to premium receivable.

Reserves for Losses and Loss Adjustment Expenses

The Company’s financial guarantees written in credit derivative form have substantially the same terms and conditions in respect of the obligation to make payments upon the failure of an obligor to pay as its financial guaranty contracts written in insurance form. Under GAAP, however, the former are subject to derivative accounting rules and the latter are subject to insurance accounting rules.

Financial Guaranty Contracts Upon Adoption of FAS 163

The Company recognizes a reserve for losses and loss adjustment expenses on a financial guarantee insurance contract when the Company expects that a claim loss will exceed the unearned premium revenue for that contract based on the present value of expected net cash outflows to be paid under the insurance contract. The unearned premium revenue represents the insurance enterprise’s stand-ready obligation under a financial guarantee insurance contract at initial recognition. Subsequently, if the likelihood of a default (insured event) increases so that the present value of the expected net cash outflows expected to be paid under the insurance contract exceeds the

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unearned premium revenue, the Company recognizes a reserve for losses and loss adjustment expenses in addition to the unearned premium revenue.

A reserve for losses is equal to the present value of expected net cash outflows to be paid under the insurance contract discounted using a current risk-free rate. That current risk-free rate is based on the remaining period (contract or expected, as applicable) of the insurance contract. Expected net cash outflows (cash outflows, net of potential recoveries, expected to be paid to the holder of the insured financial obligation, excluding reinsurance) are probability-weighted cash flows that reflect the likelihood of possible outcomes. The Company estimates the expected net cash outflows using the internal assumptions about the likelihood of possible outcomes based on all information available. Those assumptions consider all relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk-management activities.

The Company updates the discount rate each reporting period and revises expected net cash outflows when increases (or decreases) in the likelihood of a default (insured event) and potential recoveries occur. The discount amount is accreted on the reserve for losses and loss adjustment expenses through earnings in incurred loss and loss adjustment expenses (recoveries). Revisions to a reserve for loss and loss adjustment expenses in periods after initial recognition are recognized as incurred loss and loss adjustment expenses (recoveries) in the period of the change.

Financial Guaranty Contracts Prior to Adoption of FAS 163

Prior to January 1, 2009, reserves for losses for non-derivative transactions in the Company’s financial guaranty direct and financial guaranty assumed reinsurance included case reserves and portfolio reserves. Case reserves were established when there was significant credit deterioration on specific insured obligations and the obligations were in default or default was probable, not necessarily upon non-payment of principal or interest by an insured. Case reserves represented the present value of expected future loss payments and loss adjustment expenses, net of estimated recoveries, but before considering ceded reinsurance. This reserving method was different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish incurred but not reported reserves (“IBNR”) for the difference between actuarially estimated ultimate losses and recorded case reserves. Financial guaranty insurance and assumed reinsurance case reserves and related salvage and subrogation, if any, were discounted at the taxable equivalent yield on the Company’s investment portfolio, which was approximately 6%, during 2008.

The Company recorded portfolio reserves in its financial guaranty direct and financial guaranty assumed reinsurance business. Portfolio reserves were established with respect to the portion of the Company’s business for which case reserves were not established.

Portfolio reserves were not established based on a specific event, rather they were calculated by aggregating the portfolio reserve calculated for each individual transaction. Individual transaction reserves were calculated on a quarterly basis by multiplying the par in-force by the product of the ultimate loss and earning factors without regard to discounting. The ultimate loss factor was defined as the frequency of loss multiplied by the severity of loss, where the frequency was defined as the probability of default for each individual issue. The earning factor was inception to date earned premium divided by the estimated ultimate written premium for each transaction. The probability of default was estimated from rating agency data and was based on the transaction’s credit rating, industry sector and time until maturity. The severity was defined as the complement of recovery/salvage rates gathered by the rating agencies of defaulting issues and was based on the industry sector.

Portfolio reserves were recorded gross of reinsurance. The Company did not cede any amounts under these reinsurance contracts, as the Company’s recorded portfolio reserves did not exceed the Company’s contractual retentions, required by said contracts.

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statement of operations. Any subsequent change in portfolio reserves or the initial case reserves were recorded quarterly as a charge or credit in the Company’s statement of operations in the period such estimates changed.

Mortgage Guaranty and Other Lines of Business

Mortgage guaranty and other lines of business are not in the scope of FAS 163. Reserves for losses and loss adjustment expenses in the Company’s mortgage guaranty line of business include case reserves and portfolio reserves. Case reserves are established when there is significant credit deterioration on specific insured obligations and the obligations are in default or default is probable, not necessarily upon non-payment of principal or interest by an insured. Case reserves represent the present value of expected future loss payments and loss adjustment expenses (“LAE”), net of estimated recoveries, but before considering ceded reinsurance. This reserving method is different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish IBNR reserves for the difference between actuarially estimated ultimate losses and recorded case reserves.

The Company also records portfolio reserves for mortgage guaranty line of business in a manner consistent with its financial guaranty business prior to the adoption of FAS 163. While other mortgage guaranty insurance companies do not record portfolio reserves, rather just case and IBNR reserves, the Company records portfolio reserves because the Company writes business on an excess of loss basis, while other industry participants write quota share or first layer loss business. The Company manages and underwrites this business in the same manner as its financial guaranty insurance and reinsurance business because management believes they have similar characteristics as insured obligations of mortgage backed securities.

The Company also records IBNR reserves for its other line of business. IBNR is an estimate of losses for which the insured event has occurred but the claim has not yet been reported to the Company. In establishing IBNR, the Company uses traditional actuarial methods to estimate the reporting lag of such claims based on historical experience, claim reviews and information reported by ceding companies. The Company records IBNR for trade credit reinsurance within its other segment, which is 100% reinsured. The other segment represents lines of business that the Company exited or sold as part of the Company’s IPO.

Due to the inherent uncertainties of estimating loss and LAE reserves, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements, and the differences may be material.

Reinsurance

In the ordinary course of business, the Company’s insurance subsidiaries assume and retrocede business with other insurance and reinsurance companies. These agreements provide greater diversification of business and may reduce the net potential loss from large risks. Retrocessional contracts do not relieve the Company of its obligation to the reinsured. Reinsurance recoverable on ceded losses includes balances due from reinsurance companies for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force, and is presented net of any provision for estimated uncollectible reinsurance. Any change in the provision for uncollectible reinsurance is included in loss and loss adjustment expenses. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers relating to the unexpired terms of the reinsurance contracts in force.

Certain of the Company’s assumed and ceded reinsurance contracts are funds held arrangements. In a funds held arrangement, the ceding company retains the premiums instead of paying them to the reinsurer and losses are offset against these funds in an experience account. Because the reinsurer is not in receipt of the funds, the reinsurer earns interest on the experience account balance at a predetermined credited rate of interest. The Company generally earns interest at fixed rates of between 4% and 6% on its assumed funds held arrangements and generally pays interest at fixed rates of between 4% and 6% on its ceded funds held arrangements. The interest earned or credited on funds held arrangements is included in net investment income. In addition, interest on funds held arrangements will continue to be earned or credited until the experience account is fully depleted, which can extend many years beyond the expiration of the coverage period.

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Salvage Recoverable

When the Company becomes entitled to the underlying collateral (generally a future stream of cash flows or pool assets) of an insured credit under salvage and subrogation rights as a result of a claim payment or estimates recoveries from disputed claim payments on contractual grounds, it reduces the corresponding loss reserve for a particular financial guaranty insurance policy for the estimated salvage and subrogation, in accordance with FAS No. 60, “Accounting and Reporting by Insurance Enterprises.” If the expected salvage and subrogation exceeds the estimated loss reserve for a policy, such amounts are recorded as a salvage recoverable asset in the Company’s balances sheets.

Goodwill

In connection with FAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill, but instead is required to perform an impairment test annually or more frequently should circumstances warrant. The impairment test evaluates goodwill for recoverability by comparing the fair value of the Company’s direct and reinsurance lines of business to their carrying value. If fair value is greater than carrying value then goodwill is deemed to be recoverable and there is no impairment. If fair value is less than carrying value then goodwill is deemed to be impaired and written down an amount such that the fair value of the reporting unit is equal to the carrying value, but not less than $0. No such impairment to goodwill was recognized in the year ended December 31, 2008.

As part of the impairment test of goodwill, there are inherent assumptions and estimates used by management in developing discounted future cash flows related to our direct and reinsurance lines of business that are subject to change based on future events. Management’s estimates include projecting earned premium, incurred losses, expenses, interest rates, cost of capital and tax rates. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments.

The Company has concluded that it is reasonably likely that the goodwill associated with our reinsurance line of business could become impaired in future periods if the volume of new business in the financial guaranty reinsurance market does not return to levels experienced in prior years or if the Company is not able to continue to execute portfolio based reinsurance contracts on blocks of business for other financial guarantors in financial distress. The FSAH transaction, completed on July 1, 2009, will cause management to reassess its goodwill amounts related to its reinsurance line of business during the Third Quarter 2009 due to its impact on the volume of third party reinsurance business that the Company is expected to assume going forward. If management determines in a future reporting period that goodwill is impaired, the Company would recognize a non-cash impairment charge in its statement of operations and comprehensive income in an amount up to $85.4 million, the current carrying value of goodwill. This charge would not have any adverse effect on the Company’s debt agreements or its overall compliance with the covenants of its debt agreements.

3. Recent Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised), “Business Combinations” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. FAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim statements within those fiscal years. Since FAS 141R applies prospectively to business combinations whose acquisition date is subsequent to the statement’s adoption. The Company is applying the provisions of FAS 141R to account for its acquisition of FSAH, which closed on July 1, 2009.

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application of FAS 157, “Fair Value Measurements” (“FAS 157”), in a market that is not active. FSP 157-3 was effective when issued. It did not have an impact on the Company’s current results of operations or financial position.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures About Credit Derivatives and Certain Guarantees” (“FSP 133-1”) and FAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”) to address concerns that current derivative disclosure requirements did not adequately address the potential adverse effects that these instruments can have on the financial performance and operations of an entity. Companies are required to provide enhanced disclosures about their derivative activities to enable users to better understand: (1) how and why a company uses derivatives, (2) how it accounts for derivatives and related hedged items, and (3) how derivatives affect its financial statements. These should include the terms of the derivatives, collateral posting requirements and triggers, and other significant provisions that could be detrimental to earnings or liquidity. Management believes that the Company’s current derivatives disclosures are in compliance with the requirements of FSP 133-1 and FAS 161.

In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 amends FAS 157 to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. FSP 157-4 also provides additional guidance on circumstances that may indicate that a transaction is not orderly. FSP 157-4 supersedes FSP 157-3. FSP 157-4 amends FAS 157 to require additional disclosures about fair value measurements in annual and interim reporting periods. The Company adopted FSP 157-4 effective with Company’s financial statements for the quarter ended June 30, 2009. The prospective application of FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. FSP 157-4 did not have an impact on the Company’s current results of operations or financial position. The disclosures related to FSP 157-4 are included in Note 5.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”). FSP 107-1 extends the disclosure requirements of FAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim financial statements of publicly traded companies. The Company adopted FSP 107-1 effective with Company’s financial statements for the quarter ended June 30, 2009. FSP 107-1 did not have an impact on the Company’s current results of operations or financial position. The disclosures related to FSP 107-1 are included in Note 5.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”). FSP 115-2 provides new guidance on the recognition and presentation of an other than temporary impairment (“OTTI”) for debt securities classified as available-for-sale and held-to-maturity and provides some new disclosure requirements for both debt and equity securities. FSP 115-2 mandates new disclosure requirements that affect both debt and equity securities and extend the disclosure requirements (both new and existing) to interim periods. The Company adopted FSP 115-2 effective with Company’s financial statements for the quarter ended June 30, 2009 and increased the April 1, 2009 balance of retained earnings by $62.2 million ($57.7 million after tax) with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in previous periods on securities in the Company’s portfolio at April 1, 2009, that would not have been required had the FSP been effective for those periods. See Note 6.

In May 2009, the FASB issued FAS No. 165, “Subsequent Events” (“FAS 165”). FAS 165 establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective for reporting periods ending after June 15, 2009. The Company adopted FAS 165 for the quarter ended June 30, 2009. FAS 165 did not have an impact on the Company’s consolidated financial position or results of operations, as its requirements are disclosure-only in nature. See Note 2 for the related disclosures.

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exposure due to that involvement. FAS 167 will become effective for the Company’s fiscal year beginning January 1, 2010. The Company is currently evaluating the effect, if any, the adoption of FAS 167 will have on its consolidated financial statements.

4. Credit Derivatives

Financial guarantees written in credit derivative form issued by the Company, principally in the form of insured credit default swap (“CDS”) contracts, have been deemed to meet the definition of a derivative under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”) and FAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“FAS 155”). FAS 133 and FAS 149 require that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a fair value, cash flow or foreign currency hedge. FAS 155 requires companies to recognize freestanding or embedded derivatives relating to beneficial interests in securitized financial instruments. This recognition was not required prior to January 1, 2007. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

Realized gains and other settlements on credit derivatives include credit derivative premiums received and receivable for credit protection the Company has sold under its insured CDS contracts as well as any contractual claim losses paid and payable related to insured credit events under these contracts, ceding commissions (expense) income and realized gains or losses related to their early termination. The Company generally holds credit derivative contracts to maturity. However, if events of default or termination events specified in the 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 following table disaggregates realized gains and other settlements on credit derivatives into its component parts for the three- and six-month periods ended June 30, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Realized gains and other settlements on credit derivatives
Net credit derivative premiums received and receivable	$	27,953		$	31,486		$	57,468		$	59,308
Net credit derivative losses (paid and payable) recovered and recoverable	15			366			(9,043		)	380
Ceding commissions received/receivable (paid/payable), net	(152		)	(59		)	(30		)	(278		)
Total realized gains and other settlements on credit derivatives	$	27,816		$	31,793		$	48,395		$	59,410

Unrealized gains (losses) on credit derivatives represent the adjustments for changes in fair value that are recorded in each reporting period, under FAS 133. Changes in unrealized gains and losses on credit derivatives are reflected in the consolidated statements of operations and comprehensive income in unrealized gains (losses) on credit derivatives. Cumulative unrealized losses, determined on a contract by contract basis, are reflected as either net assets or net liabilities in the Company’s balance sheets. Unrealized gains and losses resulting from changes in the fair value of credit derivatives occur because of changes in interest rates, credit spreads, the credit ratings of the referenced entities and the issuing company’s own credit rating and other market factors. The unrealized gains and losses on credit derivatives will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early termination. Changes in the fair value of the Company’s credit derivative contracts do not generally reflect actual claims or credit losses, and have no impact on the Company’s claims paying resources, rating agency capital or regulatory capital positions.

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contracts, and expected contractual life to derive an estimate of the value of our contracts in our principal market (see Note 5). Credit spreads capture the impact of recovery rates and performance of underlying assets, among other factors, on these contracts. The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affects pricing, but also how the Company’s own credit spread affects the pricing of its deals. If credit spreads of the underlying obligations change, the fair value of the related credit derivative changes. Market liquidity could also impact valuations of the underlying obligations.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structure terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. During Second Quarter 2009 and Six Months 2009, the Company incurred net pre-tax unrealized losses on credit derivatives of $(254.3) million and $(227.3) million, respectively. As of June 30, 2009 the net credit liability includes a reduction in the liability of $4,240.5 million representing AGC’s credit value adjustment, which is based on the market cost of AGC’s credit protection of 1,544 basis points. Management believes that the trading level of AGC’s credit spread is due to the correlation between AGC’s risk profile and that experienced currently by the broader financial markets and increased demand for credit protection against AGC as the result of its direct segment financial guarantee volume as well as the overall lack of liquidity in the CDS market. Offsetting the benefit attributable to AGC’s credit spread were declines in fixed income security market prices primarily attributable to widening spreads in certain markets as a result of the continued deterioration in credit markets and some credit rating downgrades. The higher credit spreads in the fixed income security market are primarily due to the recent lack of liquidity in the high yield collateralized debt obligation and collateralized loan obligation markets as well as continuing market concerns over the most recent vintages of subprime residential mortgage backed securities and commercial mortgage backed securities.

During Second Quarter 2008 and Six Months 2008, the Company incurred net pre-tax unrealized gains on credit derivatives of $708.5 million and $448.9 million, respectively. The Second Quarter gain included a gain of $958.7 million associated with the change in AGC’s credit spread, which widened substantially from 540 basis points at March 31, 2008 to 900 basis points at June 30, 2008.

The total notional amount of credit derivative exposure outstanding as of June 30, 2009 and December 31, 2008 and included in the Company’s financial guaranty exposure was $73.5 billion and $75.1 billion, respectively.

The components of the Company’s unrealized gain (loss) on credit derivatives as of June 30, 2009 are:

	As of June 30, 2009
Asset Type	Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
Corporate collateralized loan obligations	$	25.8	AAA	$	3.6		$	(75.3	)
Market value CDOs of corporate obligations	3.8		AAA	(0.3		)	(7.3		)
Trust preferred securities	6.0		A-	(75.7		)	(0.4		)
Total pooled corporate obligations	35.6		AA+	(72.4		)	(82.9		)
Commercial mortgage-backed securities	5.8		AAA	1.0			(30.2		)
Residential mortgage-backed securities	18.7		A+	(191.0		)	(280.8		)
Other	10.1		AA-	12.4			154.8
Total	70.2		AA	(250.0		)	(239.1		)
Reinsurance exposures written in CDS form	3.2		AA	(4.3		)	11.9
Grand Total	$	73.5	AA	$	(254.3	)	$	(227.3	)

(1) Based on the Company’s internal rating, which is on a comparable scale to that of the nationally recognized rating agencies.

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securities are comprised of commercial U.S. structured finance and commercial international mortgage backed securities. Residential mortgage-backed securities are comprised of prime and subprime U.S. mortgage-backed and home equity securities, international residential mortgage-backed and international home equity securities. Other includes all other U.S. and international asset classes, such as commercial receivables, and international infrastructure and pooled infrastructure securities.

The Company’s exposure to pooled corporate obligations is highly diversified in terms of obligors and 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 in the direct segment consists of collateralized loan obligations (“CLOs”). Most of these direct CLOs have an average obligor size of less than 1% and typically restrict the maximum exposure to any one industry to approximately 10%. The Company’s exposure also benefits from embedded credit enhancement in the transactions which allows a transaction to sustain a certain level of losses in the underlying collateral, further insulating the Company from industry specific concentrations of credit risk on these deals.

The Company’s $10.1 billion exposure to Other CDS contracts is also highly diversified. It includes $4.3 billion of exposure to four pooled infrastructure transactions comprised of diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels. The remaining $5.8 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, infrastructure, regulated utilities and consumer receivables. Substantially all of this $10.1 billion of exposure is rated investment grade and the weighted average credit rating is AA-.

The unrealized gain of $12.4 million in Second Quarter 2009 and $154.8 million in Six Months 2009 on Other CDS contracts is primarily attributable to implied spread narrowing during Six Months 2009 on several UK public finance infrastructure transactions and a film securitization transaction .

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

The Company’s exposure to the mortgage industry is discussed in Note 7.

The following table presents additional details about the Company’s unrealized loss on pooled corporate obligation credit derivatives, which includes collateralized loan obligations, market value CDOs and trust preferred securities, by asset type as of June 30, 2009:

Asset Type	Original Subordinatio n(2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
High yield corporate obligations	35.5	%	29.3	%	$	22.7	AAA	$	1.6		$	(75.8	)
Trust preferred	46.6	%	38.7	%	6.0		A-	(75.7		)	(0.4		)
Market value CDOs of corporate obligations	41.3	%	34.9	%	3.8		AAA	(0.3		)	(7.3		)
Investment grade corporate obligations	28.7	%	29.8	%	2.3		AAA	1.3			2.9
Commercial real estate	49.2	%	48.0	%	0.8		AAA	0.1			(2.1		)
CDO of CDOs (corporate obligations)	1.7	%	5.5	%	0.1		AAA	0.6			(0.3		)
Total	37.8	%	31.9	%	$	35.6	AA+	$	(72.4	)	$	(82.9	)

(1) Based on the Company’s internal rating, which is on a comparable scale to that of the nationally recognized rating agencies.

(2) 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 unrealized gain (loss) on credit derivatives associated with commercial mortgage-backed securities by vintage as of June 30, 2009:

Vintage	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
2004 and Prior	19.8	%	22.0	%	$	0.3	AAA	$	—		$	(0.6	)
2005	27.8	%	29.0	%	3.4		AAA	0.8			(18.9		)
2006	27.5	%	28.3	%	1.9		AAA	0.3			(9.3		)
2007	35.8	%	36.0	%	0.2		AAA	(0.1		)	(1.5		)
2008	—		—		—		—	—			—
2009	—		—		—		—	—			—
Total	27.7	%	28.8	%	$	5.8	AAA	$	1.0		$	(30.2	)

The following tables present additional details about the Company’s unrealized loss on credit derivatives associated with residential mortgage-backed securities by vintage and asset type as of June 30, 2009:

Vintage	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
2004 and Prior	5.6	%	15.7	%	$	0.3	BBB+	$	28.4		$	33.0
2005	26.5	%	59.8	%	3.9		AA-	(1.2		)	0.1
2006	16.2	%	22.8	%	5.9		AA	(1.9		)	(0.7		)
2007	16.3	%	18.2	%	8.6		A	(216.4		)	(313.3		)
2008	—		—		—		—	—			—
2009	—		—		—		—	—			—
Total	18.2	%	28.2	%	$	18.7	A+	$	(191.0	)	$	(280.8	)

Asset Type	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
Alt-A loans	20.3	%	22.9	%	$	6.0	BBB+	$	(201.8	)	$	(245.9	)
Prime first lien	9.6	%	12.1	%	7.2		AA+	10.0			(38.7		)
Subprime lien	26.9	%	54.8	%	5.5		A+	0.7			3.7
Total	18.2	%	28.2	%	$	18.7	A+	$	(191.0	)	$	(280.8	)

As of June 30, 2009 and December 31, 2008, the Company considered the impact of its own credit risk, in combination with credit spreads on risk that it assumes through CDS contracts, in determining the fair value of its credit derivatives. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. The quoted price of CDS contracts traded on AGC at June 30, 2009 and December 31, 2008 was 1,544 basis points and 1,775 basis points, respectively. Historically, the price of CDS traded on AGC moves directionally the same as general market spreads. 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. At June 30, 2009, the values of our CDS contracts before and after considering implications of our credit spreads were $(4,979.9) million and $(739.4) million, respectively. At December 31, 2008, the values of our CDS contracts before and after considering implications of our credit spreads were $(4,686.8) million and $(539.2) million, respectively.

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In general, the Company structures credit derivative transactions such that the circumstances giving rise to our obligation to make loss payments is similar to that for financial guaranty insurance policies and only occurs as losses are realized on the underlying reference obligation. Nonetheless, credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. (“ISDA”) documentation and operate differently from financial guaranty insurance policies. For example, our control rights with respect to a reference obligation under a credit derivative may be more limited than when we issue a financial guaranty policy on a direct primary basis. In addition, while our exposure under credit derivatives, like our exposure under financial guaranty policies, has been generally for as long as the reference obligation remains outstanding, unlike financial guaranty insurance policies, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events.

If certain of its credit derivative contracts are terminated the Company could be required to make a termination payment as determined under the relevant documentation. Under certain documents, the Company may have the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a third party guaranty of the obligations of the Company. As of the date of this filing, if AGC’s ratings are downgraded to levels between BBB or Baa2 and BB+ or Ba1, certain CDS counterparties could terminate certain CDS contracts covering approximately $7.7 billion par insured, compared to $16.6 billion as of March 31, 2009. As of the date of this filing, if AGRO’s ratings are downgraded to BBB- or Baa3, certain CDS counterparties could terminate certain CDS contracts covering approximately $3.2 million par insured. As of the date of this filing, AG Re has no exposure subject to termination based on its rating. Given current market conditions, the Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with the Company. These payments could have a material adverse effect on the Company’s liquidity and financial condition.

During Second Quarter 2009, the Company entered into agreements with two CDS counterparties which previously had the right to terminate certain CDS contracts in the event that AGC was downgraded to below AA- or Aa3, in one case, or below A- or A3, in the other case. These agreements eliminated the ability of those CDS counterparties to receive a termination payment. In return, the Company agreed to post $325 million in collateral to secure its potential payment obligations under those CDS contracts, which cover approximately $18.6 billion of par insured. The collateral posting requirement would increase to $375 million if AGC were downgraded to below AA- or A2. The posting of this collateral has no impact on the Company’s net income or shareholders’ equity under U.S. GAAP nor does it impact AGC’s statutory surplus or net income. In addition, in July 2009, we terminated an ISDA master agreement with Lehman Brothers International (Europe) (“LBIE”) due to its default under the agreement. The Company has discussed with several other CDS counterparties the reduction of its exposure to possible termination payments. The Company can give no assurance that any agreement will be reached with any such CDS counterparty.

In addition to the collateral posting described in the previous paragraph, under a limited number of other CDS contracts, the Company may be required to post eligible securities as collateral -- generally cash or U.S. government or agency securities. This requirement is based generally on a mark-to-market valuation in excess of contractual thresholds which decline if the Company’s ratings decline. As of the date of this filing, the Company is posting approximately $160.2 million of collateral in respect of approximately $1.5 billion of par insured. Any amounts required to be posted as collateral in the future will depend on changes in the market values of these transactions. The amount that the Company could be required to post upon any downgrade cannot be quantified at this time, but could be substantial and could have a material adverse effect on the Company’s liquidity. If AGC were downgraded below A- or A3, certain of the contractual thresholds would be reduced or eliminated and the amount of par that could be subject to collateral posting requirements would be approximately $1.8 billion. If AG Re or AGRO were downgraded below BBB or Baa2, certain of the contractual thresholds would be reduced or eliminated and the amount of par that could be subject to collateral posting requirements would be $11.5 million in the case of AG Re and $290.7 million in the case of AGRO.

The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and on the risks that it assumes at June 30, 2009:

(Dollars in millions)

Credit Spreads( 1)	Estimated Net Fair Value (Pre-Tax)			Estimated Pre-Tax Change in Gain / (Loss)
June 30, 2009:
100% widening in spreads	$	(1,973.4	)	$	(1,234.0	)
50% widening in spreads	(1,376.2		)	(636.8		)
25% widening in spreads	(1,061.3		)	(321.9		)
10% widening in spreads	(869.0		)	(129.6		)
Base Scenario	(739.4		)	—
10% narrowing in spreads	(657.3		)	82.1
25% narrowing in spreads	(532.4		)	207.0
50% narrowing in spreads	(318.8		)	420.6

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

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The Company had no derivatives designated as hedges during 2009 and 2008.

5. Fair Value of Financial Instruments

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

	As of June 30, 2009				As of December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands of U.S. dollars)
Assets:
Fixed maturity securities	$	3,413,257	$	3,413,257	$	3,154,137	$	3,154,137
Cash and short-term investments	1,179,477		1,179,477		489,502		489,502
Credit derivative assets	146,350		146,350		146,959		146,959
Liabilities:
Unearned premium reserves	2,222,717		2,883,665		1,233,714		1,785,769
Long-term debt:
7.0% Senior Notes	197,461		147,420		197,443		105,560
8.50 % Senior Notes	169,732		169,732		—		—
Series A Enhanced Junior Subordinated Debentures	149,781		75,000		149,767		37,500
Credit derivative liabilities	957,752		957,752		733,766		733,766
Off-Balance Sheet Instruments:
Future installment premiums	—		—		—		463,407

Background

Effective January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies to other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements.

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The price represents that 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).

FAS 157 specifies a fair value hierarchy 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. In accordance with FAS 157, the fair value hierarchy prioritizes model inputs into three broad levels as follows:

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

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

· Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available.

An asset or liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

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Effect on the Company’s financial statements

FAS 157 applies to both amounts recorded in the Company’s financial statements and to disclosures. Amounts recorded at fair value in the Company’s financial statements on a recurring basis are fixed maturity securities available for sale, short-term investments, credit derivative assets and liabilities relating to the Company’s CDS contracts and CCS Securities. The fair value of these items as of June 30, 2009 is summarized in the following table.

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity securities:
U.S. government and agencies	$	796.1	$	—	$	796.1	$	—
Obligations of state and political subdivisions	1,093.6		—		1,093.6		—
Corporate securities	339.8		—		339.8		—
Mortgage-backed securities:
Residential mortgage-backed securities	790.8		—		790.8		—
Commercial mortgage-backed securities	233.0		—		233.0		—
Asset-backed securities	71.5		—		71.5		—
Foreign government securities	88.4		—		88.4		—
Short-term investments	1,171.0		165.8		1,005.2		—
Credit derivative assets	146.4		—		—		146.4
CCS Securities	10.2		—		10.2		—
Total assets	$	4,740.8	$	165.8	$	4,428.6	$	146.4
Liabilities
Credit derivative liabilities	$	957.8	$	—	$	—	$	957.8
Total liabilities	$	957.8	$	—	$	—	$	957.8

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The fair value of these items as of December 31, 2008 is summarized in the following table(1).

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity securities:
U.S. government and agencies	$	475.9	$	—	$	475.9	$	—
Obligations of state and political subdivisions	1,217.7		—		1,217.7		—
Corporate securities	268.2		—		268.2		—
Mortgage-backed securities:
Residential mortgage-backed securities	830.3		—		830.3		—
Commercial mortgage-backed securities	221.5		—		221.5		—
Asset-backed securities	73.6		—		73.6		—
Foreign government securities	54.5		—		54.5		—
Preferred stock	12.4		—		12.4		—
Short-term investments	477.2		47.8		429.4		—
Credit derivative assets	147.0		—		—		147.0
CCS Securities	51.1		—		51.1		—
Total assets	$	3,829.4	$	47.8	$	3,634.6	$	147.0
Liabilities
Credit derivative liabilities	$	733.8	$	—	$	—	$	733.8
Total liabilities	$	733.8	$	—	$	—	$	733.8

(1) Reclassified to conform to the current period’s presentation.

Fixed Maturity Securities and Short-term Investments

The fair value of fixed maturity securities and short-term investments is determined using one of three different pricing services: pricing vendors, index providers or broker-dealer quotations. Pricing services for each sector of the market are determined based upon the provider’s expertise.

Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. The Company does not make any internal adjustments to prices provided by its third party pricing service.

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observable inputs are classified as Level 2. Prices on the money fund portion of short-term investments are classified as Level 1. No investments were classified as Level 3 as of or for the three- and six-month periods ended June 30, 2009.

Committed Capital Securities (“CCS Securities”)

Level 3 Valuation Techniques

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. A brief description of the valuation techniques used for Level 3 assets and liabilities is provided below.

Credit Derivatives

The Company’s credit derivatives consist of insured CDS contracts (see Note 4). As discussed in Note 4, the Company does not typically exit its credit derivative contracts, and there are no quoted prices for its instruments or for similar instruments. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to the credit derivative contracts issued by the Company. Therefore, the valuation of credit derivative contracts requires the use of models that contain significant, unobservable inputs. Thus, we believe the credit derivative valuations are in Level 3 in the fair value hierarchy discussed above.

The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining expected premiums the Company receives for the credit protection and the estimated present value of premiums that a comparable financial guarantor would hypothetically charge the Company for the same protection at the balance sheet date. The fair value of the Company’s credit derivatives depends on a number of factors including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. Contractual cash flows, which are included in the “Realized gains and other settlements on credit derivatives” fair value component of credit derivatives, are the most readily observable variables of the fair value of credit derivative contracts since they are based on contractual terms. These variables include (i) net premiums received and receivable on written credit derivative contracts, (ii) net premiums paid and payable on purchased contracts, (iii) losses paid and payable to credit derivative contract counterparties and (iv) losses recovered and recoverable on purchased contracts. The remaining key variables described above impact “Unrealized gains (losses) on credit derivatives”.

Market conditions at June 30, 2009 were such that market prices of the Company’s CDS contracts were not generally available. Where market prices were not available, the Company used a combination of observable market data and valuation models, using various market indices, credit spreads, the Company’s own credit risk, and estimated contractual payments to estimate the “Unrealized gains (losses) on credit derivatives” portion of the fair value of its credit derivatives. These models are primarily developed internally based on market conventions for similar transactions.

Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. These terms differ from credit derivatives sold by companies outside the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions, relatively high attachment points and the fact that the Company does not exit derivatives it sells for credit protection purposes, except under specific circumstances such as exiting a line of business. Because of these terms and conditions, the fair value of the Company’s credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in

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the financial guaranty market. These models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information.

Valuation models include the use of management estimates and current market information. Management is also required to make assumptions on how the fair value of credit derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, performance of underlying assets, life of the instrument, and the extent of credit derivative exposure the Company ceded under reinsurance agreements, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine its fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these credit derivative products, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.

Listed below are various inputs and assumptions that are key to the establishment of our fair value for CDS contracts.

Assumptions

The key assumptions of our internally developed model include:

· 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 LIBOR. Such pricing is well established by historical financial guarantee fees relative to capital market spreads as observed and executed in competitive markets, including in financial guarantee reinsurance and secondary market transactions.

· Gross spread on a financial guarantee written in CDS form is allocated among 1) profit the originator, usually an investment bank, realizes for putting the deal together and funding the transaction, 2) premiums paid to us for our credit protection provided and 3) the cost of CDS protection purchased on us by the originator to hedge their counterparty credit risk exposure to the Company. 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 sold on Assured Guaranty Corp. The cost to acquire CDS protection sold on AGC affects the amount of spread on CDS deals that the Company captures and, hence, their fair value. As the cost to acquire CDS protection sold on AGC increases the amount of premium we capture on a deal generally decreases. As the cost to acquire CDS protection sold on AGC decreases the amount of premium we capture on a deal generally increases. In our model, the premium we capture is not permitted to go below the minimum rate that we would currently charge to assume similar risks. This has 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 net spread for the remaining duration of each contract to the notional value of its CDS contracts.

· Actual transactions are used to validate the model results and to explain the correlation between various market indices and indicative CDS market prices.

Inputs

The specific model inputs are listed below, including how we derive inputs for market credit spreads on the underlying transaction collateral.

· Gross spread—This 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 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 at the contractual premium for each individual credit derivative contract. This is an observable input that the Company obtains for deals it has closed or bid on in the market place.

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· Credit spreads on risks assumed—These are obtained from market data sources published by third parties (e.g. dealer spread tables for the collateral similar to assets within our transactions) as well as collateral-specific spreads provided by trustees or obtained from market sources. If observable market credit spreads are not available or reliable for the underlying reference obligations, then market indices are used that most closely resembles the underlying reference obligations, considering asset class, credit quality rating and maturity of the underlying reference obligations. As discussed previously, these indices are adjusted to reflect the non-standard terms of the Company’s CDS contracts. As of June 30, 2009, the Company obtained approximately 20% of its credit spread data, based on notional par outstanding, from sources published by third parties, while 80% was obtained from market sources or similar market indices. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, we compare the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants and or market traders whom are not trustees. Management obtains this information as the result of direct communication with these sources as part of the valuation process.

· Credit spreads on the Company’s name—The Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties.

The following is an example of how changes in gross spreads, the Company’s own credit spread and the cost to buy protection on the Company affect the amount of premium the Company can demand for its credit protection. Scenario 1 represents the market conditions in effect on the transaction date and Scenario 2 represents market conditions at a subsequent reporting date.

	Scenario 1			Scenario 2
	bps	% of Total		bps	% of Total
Original Gross Spread / Cash Bond Price (in Bps)	185			500
Bank Profit (in Bps)	115	62	%	50	10	%
Hedge Cost (in Bps)	30	16	%	440	88	%
AGC Premium Received Per Annum (in Bps)	40	22	%	10	2	%

In Scenario 1, the gross spread is 185bps. The bank or deal originator captures 115bps of the original gross spread and hedges 10% of its exposure to AGC, when the CDS spread on AGC was 300bps (300bps × 10% = 30bps). Under this scenario AGC received premium of 40bps, or 22% of the gross spread.

In Scenario 2, the gross spread is 500bps. The bank or deal originator captures 50bps of the original gross spread and hedges 25% of its exposure to AGC, when the CDS spread on AGC was 1,760bps (1,760bps × 25% = 440bps). Under this scenario AGC would receive premium of 10bps, or 2% of the gross spread.

In this example, the contractual cash flows (the AGC premium above) exceed the amount a market participant would require AGC to pay in today’s market to accept its obligations under the credit default swap contract, thus resulting in an asset. This credit derivative asset is equal to the difference in premium rate discounted at a risk adjusted rate over the weighted average remaining life of the contract. The expected future cash flows for the Company’s credit derivatives were discounted at rates ranging from 1.0% to 7.0% over LIBOR at June 30, 2009, with over 99% of the transactions ranging from 1.0% to 6.0% over LIBOR.

The Company corroborates the assumptions in its fair value model, including the amount of exposure to the Company hedged by its counterparties, with independent third parties each reporting period. Recent increases in the CDS spread on AGC have resulted in the bank or deal originator hedging a greater portion of its exposure to AGC. This has the effect of reducing the amount of contractual cash flows AGC can capture for selling our protection.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that contractual terms of financial guaranty insurance contracts typically do not require the posting of collateral by the guarantor. The widening of a financial guarantor’s own credit spread increases the cost to buy credit protection on

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the guarantor, thereby, reducing the amount of premium the guarantor can capture out of the gross spread on the deal. The extent of the hedge depends on the types of instruments insured and the current market conditions.

A credit derivative asset under FAS 157 is the result of contractual cash flows on in-force deals in excess of what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the current reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would be able to realize an asset representing the difference between the higher contractual premiums to which it’s entitled and the current market premiums for a similar contract.

To clarify, management does not believe there is an established market where financial guaranty insured credit derivatives are actively traded. The terms of the protection under an insured financial guaranty credit derivative do not, except for certain rare circumstances, allow the Company to exit its contracts. Management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s deals to establish historical price points in the hypothetical market that are used in the fair value calculation.

The following spread hierarchy is utilized in determining which source of spread to use, with the rule being to use CDS spreads where available. If not available, the Company either interpolates or extrapolates CDS spreads based on similar transactions or market indices.

1. Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available, they are used).

2. Credit spreads are interpolated based upon market indices or deals priced or closed during a specific quarter within a specific asset class and specific rating.

3. Credit spreads provided by the counterparty of the credit default swap.

4. Credit spreads are extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

Over time the data inputs can change as new sources become available or existing sources are discontinued or are no longer considered to be the most appropriate. It is the Company’s objective to move to higher levels on the hierarchy whenever possible, but it is sometimes necessary to move to lower priority inputs because of discontinued data sources or management’s assessment that the higher priority inputs are no longer considered to be representative of market spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.

As of June 30, 2009, the Company obtained approximately 8% of its credit spread information, based on notional par outstanding, from actual collateral specific credit spreads, while 80% was based on market indices and 12% was based on spreads provided by the CDS counterparty. The Company interpolates a curve based on the historical relationship between premium the Company receives when a financial guarantee written in CDS form closes to the daily closing price of the market index related to the specific asset class and rating of the deal. This curve indicates expected credit spreads at each indicative level on the related market index. For specific transactions where no price quotes are available and credit spreads need to be extrapolated, an alternative transaction for which the Company has received a spread quote from one of the first three sources within the Company’s spread hierarchy is chosen. This alternative transaction will be within the same asset class, have similar underlying assets, similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the transaction for which no price quote was received in order to calculate the transactions current spread. Counterparties determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question. These quotes are validated by cross-referencing quotes received from one market source with those quotes received from another market source to ensure reasonableness. In addition, management compares the relative change experienced on published market indices for a specific asset class for reasonableness and accuracy.

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

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

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· The model takes account of transaction structure and the key drivers of market value. The transaction structure includes par insured, weighted average life, level of subordination and composition of collateral.

· The model maximizes the use of market-driven inputs whenever they are available. The key inputs to the model are market-based spreads for the collateral, and the credit rating of referenced entities. These are viewed by us to be the key parameters that affect fair value of the transaction.

· The Company is able to use actual transactions to validate its model results and to explain the correlation between various market indices and indicative CDS market prices.

· The model is a well-documented, consistent approach to valuing positions that minimizes subjectivity. The Company has developed a hierarchy for market-based spread inputs that helps mitigate the degree of subjectivity during periods of high illiquidity.

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

· There is no exit market or actual exit transactions. Thus our exit market is a hypothetical one based on our entry market.

· There is a very limited market in which to verify the fair values developed by the Company’s model.

· At June 30, 2009, the markets for the inputs to the model were highly illiquid, which impacts their reliability. However, the Company employs various procedures to corroborate the reasonableness of quotes received and calculated by our internal valuation model, including comparing to other quotes received on similarly structured transactions, observed spreads on structured products with comparable underlying assets and, on a selective basis when possible, through second independent quotes on the same reference obligation.

· Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.

As discussed above, the Company does not trade or exit its credit derivative contracts in the normal course of business. As such, the ability to test modeled results is limited by the absence of actual exit transactions. However, management does compare modeled results to actual data that is available. Management first attempts to compare modeled values to premiums on deals the Company received on new deals written within the reporting period. If no new transactions were written for a particular asset type in the period or if the number of transactions is not reflective of a representative sample, management compares modeled results to premium bids offered by the Company to provide credit protection on new transactions within the reporting period, the premium the Company has received on historical transactions to provide credit protection in net tight and wide credit environments and/or the premium on transactions closed by other financial guaranty insurance companies during the reporting period.

The net par outstanding of the Company’s credit derivative contracts was $73.5 billion and $75.1 billion at June 30, 2009 and December 31, 2008, respectively. The estimated remaining average life of these contracts at June 30, 2009 was 8.2 years.

As required by FAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of June 30, 2009, these contracts are classified as Level 3 in the FAS 157 hierarchy since there is reliance on at least one unobservable input deemed significant to the valuation model, most significantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and of the Company’s current credit standing.

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The table below presents a reconciliation of the Company’s credit derivatives whose fair value included significant unobservable inputs (Level 3) during the three months ended June 30, 2009 and 2008.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Second Quarter 2009			Second Quarter 2008
(Dollars in millions)	Credit Derivative Liability (Asset), net			Credit Derivative Liability (Asset), net
Beginning Balance	$	556,970		$	881,637
Total gains or losses realized and unrealized
Unrealized losses (gains) on credit derivatives	254,284			(708,502		)
Realized gains and other settlements on credit derivatives	(27,816		)	(31,793		)
Current period net effect of purchases, settlements and other activity included in unrealized portion of beginning balance	27,964			24,601
Transfers in and/or out of Level 3	—			—
Ending Balance	$	811,402		$	165,943

Gains and losses (realized and unrealized) included in earnings for the period are reported as follows:
Total realized and unrealized (gains) losses included in earnings for the period	$	226,468		$	740,295
Change in unrealized (gains) losses on credit derivatives still held at the reporting date	$	282,727		$	705,029

The table below presents a reconciliation of the Company’s credit derivatives whose fair value included significant unobservable inputs (Level 3) during the six months ended June 30, 2009 and 2008.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Six Months 2009			Six Months 2008
(Dollars in millions)	Credit Derivative Liability (Asset), net			Credit Derivative Liability (Asset), net
Beginning Balance	$	586,807		$	617,644
Total gains or losses realized and unrealized
Unrealized losses (gains) on credit derivatives	227,302			(448,881		)
Realized gains and other settlements on credit derivatives	(48,395		)	(59,410		)
Current period net effect of purchases, settlements and other activity included in unrealized portion of beginning balance	45,688			56,590
Transfers in and/or out of Level 3	—			—
Ending Balance	$	811,402		$	165,943

Gains and losses (realized and unrealized) included in earnings for the period are reported as follows:
Total realized and unrealized (gains) losses included in earnings for the period	$	178,907		$	508,291
Change in unrealized (gains) losses on credit derivatives still held at the reporting date	$	255,545		$	442,567

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Items in the Company’s financial statements measured at fair value but carried at historical cost are unearned premiums reserve, 7.0% Senior Notes, 8.5% Senior Notes, Series A Enhanced Junior Subordinated Debentures and financial guaranty installment premiums (prior to adoption of FAS 163). The fair values of these items as of June 30, 2009 and December 31, 2008 are summarized in the following table.

As of June 30, 2009

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Liabilities
Unearned premium reserves	$	2,883.7	$	—	$	—	$	2,883.7	$	(660.9	)
7.0% Senior Notes	147.4		—		147.4		—		50.0
8.5% Senior Notes	169.7		—		169.7		—		—
Series A Enhanced Junior Subordinated Debentures	75.0		—		75.0		—		74.8
Total liabilities	$	3,275.8	$	—	$	392.1	$	2,883.7	$	(536.1	)

Off-Balance Sheet Instruments
Future installment premiums	$	—	$	—	$	—	$	—	$	—

As of December 31, 2008

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Liabilities
Unearned premium reserves	$	1,785.8	$	—	$	—	$	1,785.8	$	(552.1	)
7.0% Senior Notes	106.6		—		106.6		—		90.9
Series A Enhanced Junior Subordinated Debentures	37.5		—		37.5		—		112.5
Total liabilities	$	1,929.9	$	—	$	144.1	$	1,785.8	$	(345.2	)

Off-Balance Sheet Instruments
Future installment premiums	$	463.4	$	—	$	463.4	$	—	$	—

Unearned Premium Reserves

The fair value of the Company’s unearned premium reserves was based on the estimated cost of entering into a cession of entire financial guaranty insurance portfolio with third party reinsurers under current market conditions. This figure was based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to assume the Company’s in-force book of financial guaranty insurance business. This amount was based on the pricing assumptions we have observed in recent portfolio transfers that have occurred in the financial guaranty market and included adjustments to the carrying value of unearned premiums reserves for stressed losses and ceding commissions. The significant inputs for stressed losses

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and ceding commissions were not readily observable inputs, therefore, the Company classified this fair value measurement as Level 3.

7.0% Senior Notes and Series A Enhanced Junior Subordinated Debentures

The fair value of the Company’s $200.0 million of Senior Notes (“7.0% Senior Notes”) and $150.0 million of Series A Enhanced Junior Subordinated Debentures are determined by calculating the midpoint of quoted bid/ask prices over the U.S. Treasury yield at the year-end date and the appropriate credit spread for similar debt instruments. The significant market inputs used are observable, therefore, the Company classified this fair value measurement as Level 2.

8.50 % Senior Notes

The Company’s subsidiary, AGUS, issued $172.5 million par, 8.50% Senior Notes on June 24, 2009. The fair value of the 8.50% Senior Notes approximates the carrying value, which is based on the net cash proceeds received and adjusted for the accrued interest for the remaining 6 days through June 30, 2009.

Future Installment Premiums

As described in Note 2, with the adoption of FAS 163 effective January 1, 2009, future installment premiums are included in the unearned premium reserves. See “Unearned Premium Reserves” section above for additional information.

Prior to adoption of FAS 163, future installment premiums were not recorded in the Company’s financial statements. The fair value of the Company’s installment premiums was derived by calculating the present value of the estimated future cash flow stream for financial guaranty installment premiums discounted at 6.0%. The significant inputs used to fair value this item were observable, therefore, the Company classified this fair value measurement as Level 2.

6. Investments

The following table summarizes the Company’s aggregate investment portfolio as of June 30, 2009:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		OTTI in OCI
	(in thousands of U.S. dollars)
Fixed maturity securities
U.S. government and agencies	$	771,056	$	27,581	$	(2,540	)	$	796,097	$	—
Obligations of state and political subdivisions	1,083,315		31,582		(21,303		)	1,093,594		—
Corporate securities	342,820		7,839		(10,854		)	339,805		2,009
Mortgage-backed securities:
Residential mortgage-backed securities	801,748		23,837		(34,786		)	790,799		67,666
Commercial mortgage-backed securities	262,876		728		(30,629		)	232,975		14,173
Asset-backed securities	71,656		303		(444		)	71,515		—
Foreign government securities	84,912		3,730		(170		)	88,472		—
Preferred stock	—		—		—			—		—
Total fixed maturity securities	3,418,383		95,600		(100,726		)	3,413,257		83,848
Short-term investments	1,170,970		—		—			1,170,970		—
Total investments	$	4,589,353	$	95,600	$	(100,726	)	$	4,584,227	$	83,848

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The following table summarizes the Company’s aggregate investment portfolio as of December 31, 2008(1):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands of U.S. dollars)
Fixed maturity securities
U.S. government and agencies	$	426,592	$	49,370	$	(36	)	$	475,926
Obligations of state and political subdivisions	1,235,942		33,196		(51,427		)	1,217,711
Corporate securities	274,237		5,793		(11,793		)	268,237
Mortgage-backed securities:
Residential mortgage-backed securities	829,091		21,717		(20,470		)	830,338
Commercial mortgage-backed securities	252,788		55		(31,347		)	221,496
Asset-backed securities	80,710		—		(7,144		)	73,566
Foreign government securities	50,323		4,173		—			54,496
Preferred stock	12,625		—		(258		)	12,367
Total fixed maturity securities	3,162,308		114,304		(122,475		)	3,154,137
Short-term investments	477,197		—		—			477,197
Total investments	$	3,639,505	$	114,304	$	(122,475	)	$	3,631,334

(1) Reclassified to conform to the current period’s presentation.

Approximately 22% and 29% of the Company’s total investment portfolio as of June 30, 2009 and December 31, 2008, respectively, was composed of mortgage backed securities, including collateralized mortgage obligations and commercial mortgage backed securities. As of June 30, 2009 and December 31, 2008, respectively, approximately 66% and 69% of the Company’s total mortgage backed securities were government agency obligations. As of both June 30, 2009 and December 31, 2008, the weighted average credit quality of the Company’s entire investment portfolio was AA+. The Company’s portfolio is comprised primarily of high-quality, liquid instruments. The Company continues to receive sufficient information to value its investments and has not had to modify its approach due to the current market conditions.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities as of June 30, 2009, by contractual maturity, 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.

	Amortized Cost		Estimated Fair Value
	(in thousands of U.S. dollars)
Due within one year	$	53,871	$	55,569
Due after one year through five years	724,468		738,542
Due after five years through ten years	537,758		552,951
Due after ten years	1,037,662		1,042,421
Mortgage-backed securities:
Residential mortgage-backed securities	801,748		790,799
Commercial mortgage-backed securities	262,876		232,975
Total	$	3,418,383	$	3,413,257

Proceeds from the sale of available-for-sale fixed maturity securities were $705.0 million and $252.5 million for the six months ended June 30, 2009 and 2008, respectively.

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Net realized investment gains (losses) consisted of the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands of U.S. dollars)
Gains	$	10,320		$	2,235		$	19,588		$	3,274
Losses	(375		)	(519		)	(8,307		)	(931		)
Other than temporary impairments	(14,833		)	(263		)	(33,279		)	(263		)
Net realized investment (losses) gains	$	(4,888	)	$	1,453		$	(21,998	)	$	2,080

The change in net unrealized gains (losses) of un-impaired available-for-sale fixed maturity securities consists of:

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
	(in thousands of U.S. dollars)
Fixed maturity securities	$	74,970	$	(49,280	)	$	86,893	$	(60,635	)
Less: Deferred income tax expense (benefit)	8,189		(7,096		)	12,739		(13,160		)
Change in net unrealized gains (losses) on fixed maturity securities	$	66,781	$	(42,184	)	$	74,154	$	(47,475	)

Net investment income is derived from the following sources:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands of U.S. dollars)
Income from fixed maturity securities	$	43,827	$	37,398	$	87,306	$	69,927
Income from short-term investments	437		3,507		1,512		8,230
Gross investment income	44,264		40,905		88,818		78,157
Less: investment expenses	964		673		1,917		1,351
Net investment income	$	43,300	$	40,232	$	86,901	$	76,806

Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts of $1,346.7 million and $1,233.4 million as of June 30, 2009 and December 31, 2008, respectively, for the benefit of reinsured companies and for the protection of policyholders, generally in states in which the Company or its subsidiaries, as applicable, are not licensed or accredited.

Under certain derivative contracts, the Company is required to post eligible securities as collateral, generally cash or U.S. government or agency securities. The need to post collateral under these transactions is generally based on mark-to-market valuation in excess of contractual thresholds. The fair market value of the Company’s pledged securities totaled $547.7 million and $157.7 million as of June 30, 2009 and December 31, 2008, respectively.

The Company is not exposed to significant concentrations of credit risk within its investment portfolio.

No material investments of the Company were non-income producing for the three and six months ended June 30, 2009 and 2008.

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Other-Than Temporary Impairment (“OTTI”) Methodology

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

· a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;

· a decline in the market value of a security for a continuous period of 12 months;

· recent credit downgrades of the applicable security or the issuer by rating agencies;

· the financial condition of the applicable issuer;

· whether loss of investment principal is anticipated;

· whether scheduled interest payments are past due; and

· whether the Company has the intent to sell a security prior to its recovery in fair value.

If the Company believes a decline in the value of a particular investment is temporary, the decline is recorded as an unrealized loss on the balance sheet in “accumulated other comprehensive income” in shareholders’ equity.

As discussed in more detail below, prior to April 1, 2009, the reviews for impairment of investments were conducted pursuant to FSP No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”) and accordingly, any unrealized loss identified as other than temporary was recorded directly in the consolidated statement of income. As of April 1, 2009, the Company adopted FSP 115-2. Accordingly, any credit-related impairment related to debt securities the Company does not plan to sell and is more-likely-than-not not to be required to sell is recognized in the consolidated statement of income, with the non-credit-related impairment recognized in other comprehensive income (“OCI”). For other impaired debt securities, where the Company has the intent to sell the security or where the entire impairment is deemed by the Company to be credit-related, the entire impairment is recognized in the consolidated statement of income.

Effective with the adoption of FSP 115-2 the Company recognizes an OTTI loss in earnings for a debt security in an unrealized loss position when either (a) the Company has the intent to sell the debt security or (b) it is more likely than not the Company will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the Company analyzes the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the net present value is less than the amortized cost of the investment, an OTTI loss is recorded. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company’s estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis of an investment, as mentioned above, and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of the security. For mortgage-backed and asset-backed securities, cash flow estimates also include prepayment assumptions and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The determination of the assumptions used in these projections requires the use of significant management judgment.

Prior to adoption of FSP 115-2 on April 1, 2009, if the Company believed the decline was “other than temporary,” the Company would write down the carrying value of the investment and record a realized loss in its consolidated statement of operations equal to the total difference between amortized cost and fair value at the impairment measurement date.

In periods subsequent to the recognition of an OTTI loss, the impaired debt security is accounted for as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income in future periods based upon the amount and timing of expected future cash flows of the security, if the recoverable value of the investment based upon those cash flows is greater than the carrying value of the investment after the impairment.

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the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

As part of its OTTI review process, management considers the nature of the investment, the cause for the impairment (interest or credit related), the severity (both as a percentage of book value and absolute dollars) and duration of the impairment, the severity of the impairment regardless of duration, and any other available evidence, such as discussions with investment advisors, volatility of the securities fair value and recent news reports when performing its assessment.

During the three and six months ended June 30, 2009, the Company recorded OTTI losses on fixed maturity securities as follows:

	Three Months Ended			Six Months Ended
	June 30, 2009
	(in thousands of U.S. dollars)
Total OTTI impairment losses	$	(36,466	)	$	(54,912	)
Less: Portion of OTTI loss recognized in OCI (before taxes)	(21,633		)	(21,633		)
Net impairment losses recognized in statements of operations	$	(14,833	)	$	(33,279	)

The following table presents a roll-forward of the credit loss component of the amortized cost of fixed maturity securities that the Company has written down for OTTI where the portion related to other factors was recognized in OCI.

(in thousands of U.S. dollars)	Three Months Ended June 30, 2009
Balance, beginning of period	$	582
Additions for credit losses on securities for which an OTTI was not previously recognized:	14,833
Balance, end of period	$	15,415

As of June 30, 2009, amounts, net of tax, in AOCI include $(37.6) million for securities for which we have recognized OTTI and $41.2 million for securities for which we have not recognized OTTI. As of December 31, 2008, substantially all of AOCI related to unrealized gains and losses on securities.

The following tables summarize, for all securities in an unrealized loss position as of June 30, 2009 and December 31, 2008, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

	As of June 30, 2009
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(in millions of U.S. dollars)
U.S. government and agencies	$	277.6	$	(2.5	)	$	—	$	—		$	277.6	$	(2.5	)
Obligations of state and political subdivisions	94.9		(1.2		)	332.3		(20.1		)	427.2		(21.3		)
Corporate securities	44.6		(4.7		)	84.4		(6.1		)	129.0		(10.8		)
Mortgage-backed securities:
Residential mortgage-backed securities	140.2		(29.8		)	17.2		(5.0		)	157.4		(34.8		)
Commercial mortgage-backed securities	74.3		(13.1		)	104.6		(17.6		)	178.9		(30.7		)
Asset-backed securities	26.4		(0.4		)	—		—			26.4		(0.4		)
Foreign government securities	25.0		(0.2		)	—		—			25.0		(0.2		)
Preferred stock	—		—			—		—			—		—
Total	$	683.0	$	(51.9	)	$	538.5	$	(48.8	)	$	1,221.5	$	(100.7	)

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	As of December 31, 2008 (1)
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(in millions of U.S. dollars)
U.S. government and agencies	$	8.0	$	—		$	—	$	—		$	8.0	$	—
Obligations of state and political subdivisions	479.4		(28.7		)	137.9		(22.7		)	617.3		(51.4		)
Corporate securities	105.6		(10.2		)	14.2		(1.6		)	119.8		(11.8		)
Mortgage-backed securities
Residential mortgage-backed securities	46.4		(17.7		)	38.2		(2.8		)	84.6		(20.5		)
Commercial mortgage-backed securities	135.0		(26.8		)	36.2		(4.5		)	171.2		(31.3		)
Asset-backed securities	73.2		(7.2		)	—		—			73.2		(7.2		)
Foreign government securities	—		—			—		—			—		—
Preferred stock	12.4		(0.3		)	—		—			12.4		(0.3		)
Total	$	860.0	$	(90.9	)	$	226.5	$	(31.6	)	$	1,086.5	$	(122.5	)

(1) Reclassified to conform to the current period’s presentation.

The above unrealized loss balances are comprised of 175 and 218 fixed maturity securities as of June 30, 2009 and December 31, 2008, respectively. As of June 30, 2009, the Company’s gross unrealized loss position stood at $100.7 million compared to $122.5 million at December 31, 2008. The $21.8 million decrease in gross unrealized losses was primarily attributable to municipal securities, $30.1 million, and partially offset by an increase in gross unrealized losses in mortgage- and asset-backed securities, $6.9 million. The decrease in gross unrealized losses during the six months ended June 30, 2009 was related to the recovery of liquidity in the financial markets offset in part by a $62.2 million transition adjustment for adoption of FSP 115-2.

As of June 30, 2009, the Company had 95 securities in an unrealized loss position for greater than 12 months, representing a gross unrealized loss of $48.8 million. Of these securities, 27 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2009 was $31.1 million. This unrealized loss is primarily attributable to the market illiquidity and volatility in the U.S. economy mentioned above and not specific to individual issuer credit. Except as noted below, the Company has recognized no other than temporary impairment losses.

The Company recognized $14.8 million and $33.3 million of other than temporary impairment losses substantially related to mortgage backed and corporate securities for the three and six months ended June 30, 2009, respectively. The 2009 OTTI represents the credit component of the changes in unrealized losses for impaired securities. The Company intends to hold these securities until there is a recovery in their value. The Company continues to monitor the value of these investments. Future events may result in further impairment of the Company’s investments. The Company continues to monitor the value of these investments. Future events may result in further impairment of the Company’s investments. The Company wrote down $0.3 million of investments for other than temporary impairment losses for the three- and six-month periods ended June 30, 2008.

7. Significant Risk Management Activities

The Risk Oversight and Audit Committees of the Board of Directors oversees our risk management policies and procedures. Within the limits established by 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. As part of its risk management strategy, the Company may seek to obtain third party

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reinsurance or retrocessions and may also periodically enter into other arrangements to alleviate all or a portion of this risk.

Risk Management and Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio, including exposures in both the Direct and Reinsurance segments. 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 risk rated, and surveillance personnel are responsible for adjusting those ratings to reflect changes in transaction credit quality. Surveillance personnel are also responsible for managing work-out and loss situations when necessary. For transactions where a loss is considered probable, surveillance personnel present analysis related to potential loss situations to a Reserve Committee. The Reserve Committee is made up of the Chief Executive Officer, Chief Financial Officer, President and Chief Operating Officer, Chief Actuary, Chief Surveillance Officer, General Counsel and Chief Accounting Officer. The Reserve Committee considers the information provided by surveillance personnel when setting reserves.

Direct Businesses

We conduct surveillance procedures to track risk aggregations and monitor performance of each risk. The review cycle and scope vary based upon transaction type and credit quality. In general, the review process includes the collection and analysis of information from various sources, including trustee and servicer reports, financial statements and reports, general industry or sector news and analyses, and rating agency reports. For Public Finance risks, the surveillance process includes monitoring general economic trends, developments with respect to state and municipal finances, and the financial situation of the issuers. For structured finance transactions, the surveillance process can include monitoring transaction performance data and cash flows, compliance with transaction terms and conditions, and evaluation of servicer or collateral manager performance and financial condition. Additionally, the Company uses various quantitative tools and models to assess transaction performance and identify situations where there may have been a change in credit quality. For all transactions, surveillance activities may include discussions with or site visits to issuers, servicers or other parties to a transaction.

Reinsurance Businesses

For transactions in the Company’s Reinsurance segment, the primary insurers are responsible for conducting ongoing surveillance, and our surveillance personnel monitor the activities of the primary insurers through a variety of means, such as review of surveillance reports provided by the primary insurers, and meetings and discussions with their analysts. Our surveillance personnel take steps to ensure that the primary insurer is managing risk pursuant to the terms of the applicable reinsurance agreement. To this end, we conduct periodic reviews of ceding companies’ surveillance activities and capabilities. That process may include the review of the primary insurer’s underwriting, surveillance, and claim files for certain transactions. In the event of credit deterioration of a particular exposure, more frequent reviews of the ceding company’s risk mitigation activities are conducted. Our surveillance personnel also monitor general news and information, industry trends, and rating agency reports to help focus surveillance activities on sectors or credits of particular concern. For certain exposures, we also will undertake an independent analysis and remodeling of the transaction.

Below Investment Grade Credits

The Company’s surveillance department is responsible for monitoring our portfolio of credits and maintains a list of below investment grade (“BIG”) credits. The BIG credits are divided into three categories:

· Category 1 (below investment grade credit with no expected losses);

· Category 2 (below investment grade credit with a loss reserve established prior to an event of default);

· Category 3 (below investment grade credit with a loss reserve established and where an event of default has occurred or is imminent).

The BIG credit list includes all credits rated lower than BBB- where there is a material amount of exposure (generally greater than $10.0 million) or a material risk of the Company incurring a loss greater than $0.5 million. Credit ratings are based on the Company’s internal assessment of the likelihood of default. The Company’s internal credit ratings are generally in line or lower than those of the ratings agencies.

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As part of our surveillance process, we continually monitor all of our investment grade credits to determine whether they have suffered any credit impairments. Our quarterly procedures included qualitative and quantitative analysis on all of our insured credits to ensure that all potential BIG credits have been identified. Credits we identified through this process as having future credit impairments are subjected to further review by surveillance personnel to ensure that they have an appropriate ratings assigned to them.

The following table provides financial guaranty net par outstanding by BIG category as of June 30, 2009 (dollars in millions):

	BIG Credits
	Category 1		Category 2		Category 3			Total
Number of policies	35		188		160			383
Remaining weighted-average contract period (in years)	17.3		13.3		11.3			12.5
Insured contractual payments outstanding:
Principal	$	573.9	$	1,604.8	$	3,409.2		$	5,588.0
Interest	197.9		918.4		1,365.9			2,482.2
Total	$	771.9	$	2,523.3	$	4,775.1		$	8,070.2
Gross reserves for loss and loss adjustment expenses	$	0.1	$	25.1	$	326.7		$	351.9
Less:
Gross potential recoveries	—		1.2		198.6			199.8
Discount, net	—		10.4		123.3			133.7
Net reserves for loss and loss adjustment expenses	$	0.1	$	13.4	$	4.9		$	18.4
Unearned premium reserves	$	—	$	4.6	$	18.4		$	23.0
Net reserves for loss and loss adjustment expenses reported in the balance sheet	$	0.1	$	8.8	$	(13.5	)	$	(4.6	)
Reinsurance recoverable	$	—	$	—	$	(4.4	)	$	(4.4	)

The Company’s loss adjustment expense reserves for mitigating claim liabilities were $1.7 million as of June 30, 2009.

In accordance with FAS 163, the above table includes financial guaranty contracts written in insurance form. It does not include financial guaranty contracts written in CDS form, mortgage guaranty insurance or the Company’s other lines of insurance.

The Company used weighted-average risk free discount rate of 2.3% to discount reserves for loss and loss adjustment expenses.

Overview of Significant Risk Management Activities

The Company insures various types of residential mortgage backed securitizations (“RMBS”). Such transactions may include obligations backed by closed-end first mortgage loans and closed and open-end second mortgage loans or home equity loans on one-to-four family residential properties, including condominiums and cooperative apartments. An RMBS transaction where the underlying collateral is comprised of revolving home equity lines of credit is generally referred to as a “HELOC” transaction. In general, the collateral supporting HELOC securitizations are second lien loans made to prime borrowers. As of June 30, 2009, Company had net par outstanding of $1.5 billion related to HELOC securitizations, of which $1.1 billion were written in the Company’s financial guaranty direct segment. As of June 30, 2009, of the $1.5 billion related to HELOC securitizations, the Company had net par outstanding of $1.3 billion for transactions with Countrywide, of which $1.0 billion were written in the Company’s financial guaranty direct segment (“direct Countrywide transactions” or “Countrywide 2005-J” and “Countrywide 2007-D”). As of December 31, 2008, the Company had net par outstanding of $1.7 billion related to HELOC securitizations, of which $1.5 billion were transactions with Countrywide.

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our original underwriting expectations. In accordance with our standard practices, during Second Quarter 2009 and Six Months 2009, the Company evaluated the most currently available information, including trends in delinquencies and charge-offs on the underlying loans, draw rates on the lines of credit, and the servicer’s ability to fulfill its contractual obligations including its obligation to fund additional draws. The key assumptions used in our analysis of potential case loss reserves on the direct Countrywide transactions are presented in the following table:

Key Variables
Constant payment rate (CPR)		3-month average, 6.83–10.92% as of June 30, 2009
Constant default rate (CDR)		6-month average CDR of approximately 17–21% used for our initial default projections, ramping down to a steady state CDR of 1.0%
Draw rate		3-month average, 0.76–1% as of June 30, 2009
Excess spread		250 bps per annum
Repurchases of Ineligible loans by Countrywide		$195.0 million; or approximately 8.1% of original pool balance of $2.4 billion
Loss Severity		100%

In recent periods, CDR, CPR, Draw Rates and delinquency percentages have fluctuated within ranges that we believe make it appropriate to use rolling averages to project future performance. Accordingly, the Company is using modeling assumptions that are based upon or which approximate recent actual historical performance to project future performance and potential losses. In the Second Quarter 2009 and Six Months 2009, consistent with FAS 163, the Company modeled and probability weighted a variety of potential time periods over which an elevated CDR may potentially occur. Further, the Company also incorporated in its loss reserve estimates the possibility that in some of those scenarios the prepayment rates increase after the stressed CDR period, leading to lower recoveries through excess spread. The Company continues to model sensitivities around the results booked using a variety of CDR rates and stress periods as well as other modeling approaches including roll rates and hybrid roll rate/CDR methods. Additionally, the Company continues to perform a detailed review of the performing and non-performing loans in the securitizations to determine their compliance with the originators stated underwriting criteria.

As a result of this modeling and analysis, the Company incurred loss and loss adjustment expenses of $0.5 million and $(4.4) million for its direct Countrywide transactions during Second Quarter 2009 and Six Months 2009, respectively. The Company’s cumulative incurred loss and loss adjustment expenses on the direct Countrywide transactions as of June 30, 2009 were $93.8 million ($73.0 million after-tax). During 2009, the Company paid losses and loss adjustment expenses for its direct Countrywide transactions of $83.6 million, compared to $65.4 million paid during 2008. The Company’s cumulative paid losses and loss adjustment expenses for its direct Countrywide transactions are $253.6 million as of June 30, 2009. The Company expects to recover a significant amount of these paid losses through excess spread from future cash flows as well as funding of future draws and recoverables from breaches of representations and warranties with respect to the underlying collateral inappropriately included in the pool by the originator. The excess of paid losses and loss adjustment expenses over expected losses, including amounts related to these recoveries above, results in a net recovery of $159.7 million, which is included in “salvage recoverable” on the balance sheet as of June 30, 2009.

For the three months ended June 30, 2009, the Company incurred loss and loss adjustment expenses of $18.7 million for its HELOC exposures. Of this amount, $2.5 million related to the Company’s financial guaranty direct segment. The remaining $16.2 million of incurred loss and loss adjustment expenses related to the Company’s assumed HELOC exposures in its financial guaranty reinsurance segment.

For the six months ended June 30, 2009, the Company incurred loss and loss adjustment expenses of $37.4 million for its HELOC exposures. Of this amount, $2.4 million related to the Company’s financial guaranty direct segment. The remaining $34.9 million of incurred loss and loss adjustment expenses related to the Company’s assumed HELOC exposures in its financial guaranty reinsurance segment.

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impact upon the ultimate performance of each transaction, including the ability of the seller and servicer to fulfill all of their contractual obligations including its obligation to fund future draws on lines of credit as well as the amount of benefit received from repurchases of ineligible loans by Countrywide. The variables affecting transaction performance are interrelated, difficult to predict and subject to considerable volatility. If actual results differ materially from any of our assumptions, the losses incurred could be materially different from our estimate. We continue to update our evaluation of these exposures as new information becomes available.

A summary of the Company’s exposure to these two transactions and their actual performance statistics through June 30, 2009 are as follows:

($ in millions)

	Countrywide 2005J			Countrywide 2007D
Original principal balance	$	1,500		$	900
Remaining principal balance	$	461.0		$	527.5
Cumulative losses (% of original principal balance)( 1)	13.7		%	21.2		%
Total delinquencies (% of current balance)(2)	19.2		%	15.2		%
Average initial FICO score of borrowers(3)	709			712
Interest margin over prime(4)	2.0		%	1.8		%
Revolving period(5)	10			10
Repayment period(6)	15			15
Average draw rate(7)	1.0		%	0.8		%
Average constant payment rate(8)	6.8		%	10.9		%
Excess spread(9)	286		bps	275		bps
Expected collateral loss(10)	20.4		%	36.0		%

(1) Cumulative collateral losses expressed as a percentage of the original deal balance.

(2) Total delinquencies (includes bankruptcies, foreclosures and real estate owned by Countrywide) as a percentage of the current deal balance.

(3) Fair Isaacs and Company score is a measurement designed to indicate the credit quality of a borrower.

(4) Floating rate charged to borrowers above the prime rate.

(5) Time period (usually 5-10 years) in which the borrower may draw funds from their HELOC.

(6) Time period (usually 10-20 years) in which the borrower must repay the funds withdrawn from the HELOC.

(7) Represents the three-month average draw rate as of June 2009.

(8) Represents the three-month average constant payment rate as of June 2009.

(9) Excess spread during June 2009.

(10) Calculated using a weighted average basis.

Another type of RMBS transaction is generally referred to as “Subprime RMBS”. The collateral supporting such 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. As of June 30, 2009, we had net par outstanding of $918 million related to Subprime RMBS securitizations, of which $201 million is classified by us as Below Investment Grade risk. Of the total U.S. Subprime RMBS exposure of $918 million, $430 million is from transactions issued in the period from 2005 through 2007 and written in our direct financial guaranty segment. As of June 30, 2009, we had case reserves of $14.3 million related to our $918 million U.S. Subprime RMBS exposure, of which $3.7 million were related to our $430 million exposure in the direct financial guaranty segment for transactions issued from 2005 through 2007.

The problems affecting the subprime mortgage market have been widely reported, with rising delinquencies, defaults and foreclosures negatively impacting the performance of Subprime RMBS transactions. Those concerns relate primarily to Subprime RMBS issued in the period from 2005 through 2007. The $430 million exposure that we have to such transactions in our direct financial guaranty segment benefits from various structural protections, including credit enhancement that on average currently equals approximately 42% of the remaining principal balance of the transactions.

We also have exposure of $380 million to Closed-End Second (“CES”) RMBS transactions, of which $371 million is in the direct segment. The collateral supporting such transactions is comprised of second-lien residential mortgage loans that generally accrue interest at a fixed rate and can be amortized for periods usually up to 15 years; at the end of a loan's term, a balloon payment is typically due. As with other types of RMBS, we have seen significant deterioration in the performance of our CES transactions. On four transactions that had exposure of $320 million, as of June 30, 2009, we have seen a significant increase in delinquencies and collateral losses, which resulted in erosion of the Company’s

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credit enhancement and the payment of claims totaling $24.0 million. Based on the Company’s analysis of these transaction and their projected collateral losses, the Company had case reserves of $36.4 million as of June 30, 2009.

Another type of RMBS transaction is generally referred to as “Alt-A RMBS”. The collateral supporting such transactions is comprised of first-lien residential mortgage loans made to prime quality borrowers that lack certain ancillary characteristics that would make them prime. Included in this category is Alt-A Option ARMs, which include transactions where 66% or more of the collateral is comprised of mortgage loans that have the potential to negatively amortize. As of June 30, 2009, the Company had net par outstanding of $1.4 billion related to Alt-A RMBS securitizations. Of that amount, $1.3 billion is from transactions issued in the period from 2005 through 2007 and written in the Company’s financial guaranty direct segment. As of June 30, 2009, the Company had case reserves of $16.2 million for Alt-A and $19.3 million for Option-ARM related to its $1.4 billion Alt-A/Option ARM RMBS exposure, in the financial guaranty direct and reinsurance segments.

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

The Company has exposure on two life insurance reserve securitization transactions based on two discrete blocks of individual life insurance business reinsured by Scottish Re (U.S.) Inc. (“Scottish Re”). The two transactions relate to Ballantyne Re p.l.c. (“Ballantyne”) (gross exposure of $500 million) and Orkney Re II, p.l.c. (“Orkney II”) (gross exposure of $423 million). Under both transactions, monies raised through the issuance of the insured notes support present and future U.S. statutory life insurance reserve requirements. The monies were invested at inception of each transaction in accounts managed by a large, well-known investment manager. However, those investment accounts have incurred substantial mark-to-market losses since mid-year 2007, principally as a result of their exposure to subprime and Alt-A RMBS transactions. Largely as a result of these mark-to-market losses, both we and the rating agencies have downgraded our exposure to both Ballantyne and Orkney II to below investment grade. As regards the Ballantyne transaction, the Company is working with the directing guarantor, who has insured exposure of $900 million, to remediate the risk. On the Orkney Re II transaction, the Company, as the directing financial guarantor, is taking remedial action. There can be no assurance that any such remedial action will be effective.

Some credit losses have been realized on the securities in the Ballantyne and Orkney Re II portfolios and significant additional credit losses are expected to occur. Performance of the underlying blocks of life insurance business thus far generally has been in accordance with expectations. Adverse investment experience has led the Company to fund interest shortfalls which, except under its most severe loss projections , it expects to be repaid. Additionally, the transactions also contain features linked to the market values of the invested assets, reserve funding requirements on the underlying blocks of life insurance business, and minimum capital requirements for the transactions themselves that may trigger a shut off of interest payments to the insured notes and thereby result in claim payments by the Company.

Another key risk is that the occurrence of certain events may result in a situation where either Ballantyne and/or Orkney Re II are required to sell assets and potentially realize substantial investment losses and for Assured Guaranty Ltd. to incur corresponding insured losses ahead of the scheduled final maturity date. For example, cedants to Scottish Re may have the right to recapture blocks of life insurance business which Scottish Re has ceded to Orkney Re II. Such recaptures could require Orkney Re II to sell assets and realize investment losses. In the Ballantyne transaction, further declines in the market value of the invested assets and/or an increase in the reserve funding requirements could lead to a similar mandatory realization of investment losses and for Assured Guaranty Ltd. to incur corresponding insured losses ahead of the scheduled final maturity date.

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and performance of the blocks of life insurance business at June 30, 2009, the Company’s case reserve is now $30.9 million for the Ballantyne transaction. The Company has not established a case loss reserve for the Orkney Re II transaction due to the fact that modeled loss scenarios project sufficient cash flows from the investment and life insurance activities so that the Company does not suffer an ultimate loss in excess of its unearned premium reserve as of June 30, 2009.

On December 19, 2008, the Company sued J.P. Morgan Investment Management Inc. (“JPMIM”), the investment manager in the Orkney 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. On May 13, 2009, the Company filed a First Amended Complaint, additionally asserting the same claims in the name of Orkney II. JPMIM has filed a motion to dismiss the First Amended Complaint. The court has not yet acted upon the motion.

The Company has exposure to a public finance transaction for sewer service in Jefferson County, Alabama through several reinsurance treaties. The Company’s total exposure to this transaction is approximately $455 million as of June 30, 2009. The Company has made debt service payments during the year and expects to make additional payments in the near term. Through our cedants, the Company is currently in discussions with the bond issuer to structure a solution, which may result in some or all of these payments being recoverable. The Company’s loss and loss adjustment expense reserve as of June 30, 2009 is $0.9 million and the Company has incurred cumulative loss and loss adjustment expenses of $26.3 million through June 30, 2009.

8. Analysis of premiums written, premiums earned and l oss and loss adjustment expenses

The Company enters into reinsurance agreements with non-affiliated companies to limit its exposure to risk on an on-going basis. In the event that any or all of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. Direct, assumed, and ceded premium and loss and loss adjustment expense amounts for three and six months ended June 30, 2009 and 2008 were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009			2008
	(in thousands of U.S. dollars)
Premiums Written
Direct	$	137,560	$	197,766		$	277,640		$	344,175
Assumed	3,504		48,010			98,182			77,403
Ceded	939		(5,107		)	977			(11,217		)
Net	$	142,003	$	240,669		$	376,799		$	410,361

Premiums Earned
Direct	$	30,883	$	21,681		$	137,346		$	39,648
Assumed	47,380		31,990			94,308			62,917
Ceded	371		(1,986		)	(4,574		)	(4,047		)
Net	$	78,634	$	51,685		$	227,080		$	98,518

Loss and Loss Adjustment Expenses
Direct	$	28,932	$	28,216		$	43,998		$	64,131
Assumed	6,559		9,838			73,787			28,866
Ceded	2,539		71			(1		)	266
Net	$	38,030	$	38,125		$	117,784		$	93,263

Total net written premiums for Second Quarter 2009 and Six Months 2009 were $142.0 million and $376.8 million, respectively, compared with $240.7 million and $410.4 million for Second Quarter 2008 and Six Months 2008, respectively.

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Direct written premiums decreased $60.2 million in Second Quarter 2009 compared with Second Quarter 2008 primarily attributable to our U.S. public finance business, which generated $120.9 million of direct written premium in Second Quarter 2009 compared with $183.2 million during Second Quarter 2008. Partially offsetting this decrease was a $3.4 million increase in U.S. structured finance business premium. Direct written premiums decreased $66.5 million in Six Months 2009 compared with Six Months 2008 primarily due to a $47.2 million decrease in U.S. public finance business. Additionally, there was a reduction of our U.S. structured finance and international business of $9.3 million and $10.0 million for Six Months 2009 compared with Six Months 2008, as a result of changes in market conditions.

Assumed written premiums decreased to $3.5 million in Second Quarter 2009 compared with $48.0 million in Second Quarter 2008, as the prior year included large facultative cessions, mainly as a result of a portfolio assumption of $14.8 million in premium from one of our cedants. We did not have any portfolio assumptions in Second Quarter 2009.

Total net premiums earned for Second Quarter 2009 were $78.6 million compared with $51.7 million for Second Quarter 2008, while net premiums earned for Six Months 2009 were $227.1 million compared with $98.5 million for Six Months 2008.

Direct earned premiums increased $9.2 million, to $30.9 million for Second Quarter 2009 compared with $21.7 million for Second Quarter 2008, reflecting the continued growth of our direct book of business. Direct earned premiums increased $97.7 million to $137.3 million for Six Months 2009 compared with $39.6 million for Second Quarter 2008. This increase is principally attributable to accelerated premiums earned of $73.6 million during the three months ended March 31, 2009 resulting from early contract terminations in the financial guaranty direct segment and to the continued growth of the Company’s in-force book of business. Second Quarter 2009 and Six Months earned premiums include $5.5 million and $10.8 million, respectively, related to the accretion of discount on future financial guaranty installment premiums as the result of the implementation of FAS 163 effective January 1, 2009. The Second Quarter 2009, Six Months 2009, Second Quarter 2008 and Six Months 2008 did not have any direct earned premiums from public finance refundings. Public finance refundings reflect the unscheduled pre-payment or refundings of underlying municipal bonds. Also contributing to the Company’s increase in net premiums earned was the financial guaranty reinsurance segment, which increased $17.8 million in Second Quarter 2009 compared to Second Quarter 2008. This increase was mainly due to an increase in refundings of $6.2 million, as well as $11.8 million of accelerated premiums earned related to an assumed exposure that was extinguished. Offsetting these increases were decreases of $0.5 million and $1.5 million for the three- and six-month periods ended June 30, 2009, respectively, in net premiums earned in the mortgage segment due to run-off.

Assumed premiums earned increased $31.4 million ($0.9 million decrease excluding refundings) in Six Months 2009 compared with Six Months 2008 primarily due to $6.5 million generated in Six Months 2009 from the portfolio assumed from CIFG in January 2009.

Total loss and loss adjustment expenses were $38.0 million and $38.1 million for Second Quarter 2009 and Second Quarter 2008, respectively. Second Quarter 2009 loss and LAE was primarily related to reserve increase for RMBS transactions in both the financial guaranty direct and reinsurance segments. Second Quarter 2008 included an increase in case reserves in the financial guaranty direct segment of $31.2 million, related to the Company’s CES and HELOC exposures. Additionally, loss and loss adjustment expenses in the financial guaranty reinsurance segment were $11.3 million, including a $7.7 million increase in case reserves and $9.9 million of paid losses related predominantly to our HELOC exposures. The Second Quarter 2008 also included a decrease in portfolio reserves of $5.9 million, associated with exposures where a case reserve was established.

Total loss and LAE were $117.8 million and $93.3 million for Six Months 2009 and Six Months 2008, respectively. Loss and LAE for Six Months 2009 was primarily related to reserve increase for RMBS transactions in both the financial guaranty direct and reinsurance segments. In addition to Second Quarter 2008 activity, assumed loss and LAE for Six Months 2008 in the financial guaranty direct segment included an increase in portfolio reserves of $35.7 million mainly attributable to our HELOC and other RMBS exposures driven by internal ratings downgrades. In the financial guaranty reinsurance segment, Six Months 2008 included the Second Quarter 2008 activity discussed above, as well as increases to case and portfolio reserves of $9.7 million and $7.4 million, respectively, mainly related to our U.S. RMBS and HELOC exposures.

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To limit its exposure on assumed risks, the Company entered into certain proportional and non-proportional retrocessional agreements with other insurance companies, primarily subsidiaries of ACE Limited (“ACE”), the Company’s former parent, to cede a portion of the risk underwritten by the Company, prior to the IPO. In addition, the Company enters into reinsurance agreements with non-affiliated companies to limit its exposure to risk on an on-going basis.

Reinsurance recoverable on ceded losses and LAE as of June 30, 2009 and December 31, 2008 were $4.5 million and $6.5 million, respectively and are mainly related to the Company’s other segment. In the event that any or all of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts.

Agreement with CIFG Assurance North America, Inc.

AGC entered into an agreement with CIFG Assurance North America, Inc. (“CIFG”) to assume a diversified portfolio of financial guaranty contracts totaling approximately $13.3 billion of net par outstanding. The Company closed the transaction in January 2009 and received $75.6 million ($85.7 million of upfront premiums net of ceding commissions) and will receive approximately $12.2 million of future installments premiums.

9. Commitments and Contingencies

Litigation

In the ordinary course of their respective businesses, certain of the Company’s subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. The amounts, if any, the Company will recover in these proceedings are uncertain, although 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.

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 could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.

Litigation Involving Assured Guaranty Mortgage Insurance Company

Effective January 1, 2004, Assured Guaranty Mortgage Insurance Company (“AGMIC”) reinsured a private mortgage insurer (the “Reinsured”) under a Mortgage Insurance Stop Loss Excess of Loss Reinsurance Agreement (the “Agreement”). Under the Agreement, AGMIC agreed to cover the Reinsured’s aggregate mortgage guaranty insurance losses in excess of a $25 million retention and subject to a $95 million limit. Coverage under the Agreement was triggered only when the Reinsured’s: (1) combined loss ratio exceeded 100%; and (2) risk to capital ratio exceeded 25 to 1, according to insurance statutory accounting. In April 2008, AGMIC notified the Reinsured it was terminating the Agreement because of the Reinsured’s breach of the terms of the Agreement. This matter went to arbitration and on June 4, 2009, the arbitration panel issued a Final Interim Award with respect to this Agreement in which the majority of the panel concluded that the Reinsured breached a covenant in the Agreement. AGMIC and the Reinsured executed a final settlement agreement on June 17, 2009 to settle the matter in full in exchange for a payment by AGMIC to the reinsured of $10 million. The final settlement agreement resolves all disputes between the parties and concludes all remaining rights and obligations of the parties under the Agreement.

Litigation Involving FSAH and its Subsidiaries

As noted above, on July 1, 2009 the Company completed the acquisition of FSAH pursuant to the purchase agreement, dated as of November 14, 2008, between the Company, Dexia Holdings and DCL. FSAH is the parent of FSA.

The following is a description of legal proceedings involving FSAH and its subsidiaries. Although the Company did not acquire FSAH’s former financial products business, which included FSAH’s former guaranteed investment contract business and medium-term note and leveraged tax lease businesses, certain legal proceedings relating to those businesses are against entities which the Company did acquire. Pursuant to an indemnification agreement entered into among FSA, DCL and Dexia in connection with the acquisition of FSAH, each of DCL and Dexia, jointly and severally, has agreed to indemnify FSA and its affiliates against any liability arising out of the proceedings described under “—Proceedings Related to FSAH’s Former Financial Products Business” below.

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FSAH and FSA have received various regulatory inquiries and requests for information regarding a variety of subjects. These include (i) 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 their communications with rating agencies and (ii) subpoenas duces tecum and interrogatories from the Attorney General of the States of Connecticut and West Virginia and antitrust civil investigative demands from the Attorney General of the State of Florida relating to their investigations of alleged bid rigging of municipal GICs. FSAH has satisfied or is in the process of satisfying such requests. FSAH may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future.

Proceedings Related to FSAH’s Former Financial Products Business

In November 2006, (i) FSAH received a subpoena from the Antitrust Division of the DOJ issued in connection with an ongoing criminal investigation of bid rigging of awards of municipal GICs and other municipal derivatives and (ii) FSA received a subpoena from the SEC related to an ongoing industry-wide investigation concerning the bidding of municipal GICs and other municipal derivatives. Pursuant to the subpoenas FSAH has furnished to the DOJ and SEC records and other information with respect to FSAH’s municipal GIC business. On February 4, 2008, FSAH received a “Wells Notice” from the staff of the Philadelphia Regional Office of the SEC relating to the foregoing matter. The Wells Notice indicates that the SEC staff is considering recommending that the SEC authorize the staff to bring a civil injunctive action and/or institute administrative proceedings against FSAH, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. FSAH has had ongoing discussions with the DOJ and the SEC. The ultimate loss that may arise from these investigations remains uncertain.

During 2008 nine putative class action lawsuits were filed in federal court alleging federal antitrust violations in the municipal derivatives industry, seeking damages and alleging, among other things, a conspiracy to fix the pricing of, and manipulate bids for, municipal derivatives, including GICs. These cases have been coordinated and consolidated for pretrial proceedings in the U.S. District Court for the Southern District of New York as MDL 1950, In re Municipal Derivatives Antitrust Litigation, Case No. 1:08-cv-2516 (“MDL 1950”). Five of these cases name both FSAH and FSA: (a) Hinds County, Mississippi v. Wachovia Bank, N.A. (filed on or about March 13, 2008); (b) Fairfax County, Virginia v. Wachovia Bank, N.A. (filed on or about March 12, 2008); (c) Central Bucks School District, Pennsylvania v. Wachovia Bank N.A. (filed on or about June 4, 2008); (d) Mayor & City Counsel of Baltimore, Maryland v. Wachovia Bank N.A. (filed on or about July 3, 2008); and (e) Washington County, Tennessee v. Wachovia Bank N.A. (filed on or about July 14, 2008). Four of the cases name only FSAH and also allege that the defendants violated state antitrust law and common law by engaging in illegal bid-rigging and market allocation, thereby depriving the cities of competition in the awarding of GICs and ultimately resulting in the cities paying higher fees for these products: (a) City of Oakland, California, v. AIG Financial Products Corp. (filed on or about April 23, 2008); (b) County of Alameda, California v. AIG Financial Products Corp. (filed on or about July 8, 2008); (c) City of Fresno, California v. AIG Financial Products Corp. (filed on or about July 17, 2008); and (d) Fresno County Financing Authority v. AIG Financial Products Corp . (filed on or about December 24, 2008).

The MDL 1950 court has determined that it will handle federal claims alleged in the consolidated class action complaint before addressing state claims. In April 2009, the MDL 1950 court granted the defendants’ motion to dismiss on the federal claims, but granted leave for the plaintiffs to file a second amended complaint. On June 18, 2009, interim lead plaintiffs’ counsel filed a Second Consolidated Amended Class Action Complaint. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits; although the Second Consolidated Amended Class Action Complaint currently describes some of FSAH’s and FSA’s activities, it does not name those entities as defendants.

FSAH and FSA also are named in five non-class action lawsuits originally filed in the California Superior Courts alleging violations of California law related to the municipal derivatives industry:

(a) City of Los Angeles v. Bank of America, N.A. (filed on or about July 23, 2008 in the Superior Court of the State of California in and for the County of Los Angeles, Case No. BC 394944, removed to the U.S. District Court for the Central District of California (“C.D. Cal.”) as Case No. 2:08-cv-5574, transferred to S.D.N.Y. as Case No. 1:08-cv-10351);

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(b) City of Stockton v. Bank of America, N.A. (filed on or about July 23, 2008 in the Superior Court of the State of California in and for the County of San Francisco, Case No. CGC-08-477851, removed to the N.D. Cal. as Case No. 3:08-cv-4060, transferred to S.D.N.Y. as Case No. 1:08-cv-10350);

(c) County of San Diego v. Bank of America, N.A. (filed on or about August 28, 2008 in the Superior Court of the State of California in and for the County of Los Angeles, Case No. SC 99566, removed to C.D. Cal. as Case No. 2:08-cv-6283, transferred to S.D.N.Y. as Case No. 1:09-cv-1195);

(d) County of San Mateo v. Bank of America, N.A. (filed on or about October 7, 2008 in the Superior Court of the State of California in and for the County of San Francisco, Case No. CGC-08-480664, removed to N.D. Cal. as Case No. 3:08-cv-4751, transferred to S.D.N.Y. as Case No. 1:09-cv-1196); and

(e) County of Contra Costa v. Bank of America, N.A. (filed on or about October 8, 2008 in the Superior Court of the State of California in and for the County of San Francisco, Case No. CGC-08-480733, removed to N.D. Cal. as Case No. 3:08-cv-4752, transferred to S.D.N.Y. as Case No. 1:09-cv-1197).

These cases have been transferred to the S.D.N.Y. and consolidated with MDL 1950 for pretrial proceedings. 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.

Proceedings Relating to FSAH’s Financial Guaranty Business

In December 2008 and January 2009, FSA and various other financial guarantors were named in three complaints filed in the Superior Court, San Francisco County: (a) City of Los Angeles Department of Water and Power v. Ambac Financial Group et. al (filed on or about December 31, 2008), Case No. CG-08-483689; Sacramento Municipal Utility District v. Ambac Financial Group et. al (filed on or about December 31, 2008), Case No. CGC-08-483691; and (c) City of Sacramento v. Ambac Financial Group Inc. et. al (filed on or about January 6, 2009), Case No. CGC-09-483862. These complaints alleged participation 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 and participation in risky financial transactions in other lines of business that damaged each bond insurer’s financial condition (thereby undermining the value of each of their guaranties), and a failure to adequately disclose the impact of those transactions on their financial condition. These latter allegations form the predicate for five separate causes of action against each of the Insurers: breach of contract, breach of the covenant of good faith and fair dealing, fraud, 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.

In August 2008 a number of financial institutions and other parties, including FSA, were named as defendants in a civil action brought in the circuit court of Jefferson County, Alabama relating to the County’s problems meeting its debt obligations on its $3.2 billion sewer debt: Charles E. Wilson vs. JPMorgan Chase & Co et al (filed on or about August 8, 2008 in the Circuit Court of Jefferson County, Alabama), Case No. 01-CV-2008-901907.00, a putative class action. The action was brought on behalf of rate payers, tax payers and citizens residing in Jefferson County, and alleges conspiracy and fraud in connection with the issuance of the County’s debt. The complaint in this lawsuit seeks unspecified monetary damages, interest, attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss or range of loss that may arise from this lawsuit.

Real Estate Lease

The Company and its subsidiaries are party to various lease agreements. In June 2008, the Company’s subsidiary, AGC, entered into a new five-year lease agreement for New York office space. Future minimum annual payments of $5.3 million for the first twelve month period and $5.7 million for subsequent twelve month periods commenced October 1, 2008 and are subject to escalation in building operating costs and real estate taxes. As a result of the FSAH acquisition, during Second Quarter 2009 the Company decided not to occupy the office space described above and subleased it to two tenants for total minimum annual payments of approximately $3.7 million until October 2013 . AGC wrote off related leasehold improvements and recorded a pre-tax loss on the sublease of $11.7 million,

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which is included in FSAH acquisition-related expenses and other liabilities in the unaudited consolidated income statements and balance sheets, respectively.

Reinsurance

The Company is party to reinsurance agreements with other monoline financial guaranty insurance companies. The Company’s facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) 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 (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, 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 ceded business. Upon the occurrence of the conditions set forth in (ii) 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.

10. Long-Term Debt and Credit Facilities

The carrying value of long-term debt was as follows:

	As of
(dollars in millions)	June 30, 2009		December 31, 2008

7.0% Senior Notes	$	197,461	$	197,443
8.50% Senior Notes	169,732		—
Series A Enhanced Junior Subordinated Debentures	149,781		149,767
Total long-term debt	$	516,974	$	347,210

The Company’s unaudited interim consolidated financial statements include long-term debt and related interest expense, which was used to fund the Company’s insurance operations and acquisition of FSAH on July 1, 2009, as described below.

7.0% Senior Notes

AGUS issued $200.0 million of 7.0% Senior Notes due 2034 for net proceeds of $197.3 million. The proceeds of the offering were used to repay substantially all of a $200.0 million promissory note issued to a subsidiary of ACE in April 2004 as part of the IPO-related formation transactions. The coupon on the Senior Notes is 7.0%, however, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004, the term of which matches that of the Senior Notes. The Company recorded interest expense of $3.3 million, including $0.2 million of amortized gain on the cash flow hedge, for both Second Quarter 2009 and Second Quarter 2008. The Company recorded interest expense of $6.7 million, including $0.3 million of amortized gain on the cash flow hedge, for both Six Months 2009 and Six Months 2008. These Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd.

8.50% Senior Notes

On June 24, 2009, the Company along with its wholly-owned subsidiary, AGUS, issued 3,450,000 Equity Units for gross proceeds of $172.5 million in a publicly registered offering. Each Equity Unit consists of (i) a purchase contract (the “Purchase Contract”) requiring the counterparty to purchase from the Company for $50 between 3.8685 and 4.5455 common shares of Assured Guaranty Ltd. on June 1, 2012, the actual number of shares to be determined based on the average closing price of the Assured Guaranty Ltd’s common shares over the 20-trading day period ending three trading days prior to June 1, 2012 and (ii) notes (the “Notes”) issued by AGUS, initially bearing interest at a rate of 8.50% per annum, payable quarterly, maturing on June 1, 2014, subject to a

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mandatory remarketing in which the rate of interest, periodicity of payments, maturity date and certain other terms may be modified.

The purchase price was allocated between the Notes and the Purchase Contracts based on their relative fair values as of the offering date. The fair value of the Notes and the Purchase Contracts was determined to be $49.19 (per 1/20 th ownership interest) and $0.81, respectively at the date of issuance. The allocation was based on the determination that a new-issue, three-year senior debt would be priced at par if it yielded 9.13%,

The Notes

· Face Amount of the Notes: Each Note has a face amount of $1,000 and each Equity Unit represents a 1/20 th ownership interest in a $1,000 face amount Note plus an obligation under the Purchase Contract as described more fully below,

· Interest Rate on the Notes: Each Note initially bears interest at a rate of 8.50% per annum on the face amount, payable quarterly, and subject to reset upon a successful remarketing,

· Remarketing of the Notes: The Notes are required to be remarketed on a date chosen by the Company occurring after December 1, 2011 and prior to May 1, 2012 (or if not remarketed during this period, then the Notes will be remarketed on the final remarketing date as specified in the Notes indenture). At the remarketing, terms of the Notes including the interest rate, tenor and covenants will be modified at the discretion of a remarketing agent selected by the Company such that the proceeds generated from the remarketing will be sufficient to repay par plus accrued interest to those holders participating in the remarketing on June 1, 2012 plus fees payable to the remarketing agent,

· Maturity of the Notes: The Notes mature on June 1, 2014, unless the maturity date is extended during the Remarketing. In no event may the maturity date be extended beyond June 1, 2039,

· Holder Put Right: Holders of the Notes may exercise their put right only upon a failed final remarketing for the face amount plus accrued interest,

· Ranking : The Notes are senior, unsecured obligations of AGUS and are guaranteed by the Company. The ranking may not be modified as part of the remarketing.

The Purchase Contracts

· Parties to the Purchase Contract: Under the Purchase Contract, The Company is required on the Contract Settlement Date to deliver shares equal to the settlement rate to counterparties in exchange for a cash payment equal to the purchase price from the counterparties.

· Settlement Rate: The number of the Company’s common shares is calculated as follows:

1. If Applicable Market Value > $12.93 (the “Threshold Appreciation Price”) : If the average closing price per share for the 20 trading day period immediately preceding the Purchase Contract Settlement Date (such average being the “Applicable Market Value”) exceeds the Threshold Appreciation Price, the Settlement Rate will be 3.8685 shares,

2. If Applicable Market Value < $11.00 (the “Reference Price”) : If the Applicable Market Value is less than or equal to the Reference Price, the Settlement Rate will be 4.5455 shares,

3. Reference Price < Applicable Market Value < Threshold Appreciation Price : If the Applicable Market Value is between the Reference Price and Threshold Appreciation Price, the Settlement Rate will be equal to the quotient of $50.00 and the Applicable Market Value.

· Contract Settlement Date: June 1, 2012. Counterparties to the Purchase Contract may elect to settle Purchase Contracts prior to the Contract Settlement Date by delivering the purchase price to the Company in exchange for the minimum Settlement Rate of 3.8685 shares, regardless of the Applicable Market Value at the time of early settlement.

· Counterparty Collateral requirements: At all times, a counterparty is required to maintain collateral with the designated collateral agent securing the counterparty’s obligation to deliver the purchase price under the Purchase Contracts on the Contract Settlement Date. If a counterparty holds Notes, such Notes will be posted as collateral (such arrangement referred to as “Corporate Units”). If a counterparty does not hold Notes, it will be required to post specified zero coupon, U.S. Treasury securities (such arrangement referred to as Treasury Units). Notwithstanding the posting of collateral, counterparty’s obligation to pay the Purchase Price will be with full recourse to such counterparty.

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· Adjustment Events: Upon the occurrence of specified events (including changes in dividend policy and certain other corporate actions), the Reference Price, Threshold Appreciation Price and Settlement Ratio will be adjusted in a manner designed to preserve the fair value of the Purchase Contracts immediately prior to such specified events for both the Company and counterparty. Generally, the nature of these adjustments is designed to protect both parties against dilutive events.

The Company recorded interest expense related to the 8.50% Senior Notes of $0.7 million and $0.7 million for Second Quarter 2009 and Six Months 2009, respectively.

Series A Enhanced Junior Subordinated Debentures

On December 20, 2006, AGUS issued $150.0 million of Series A Enhanced Junior Subordinated Debentures (the “Debentures”) due 2066 for net proceeds of $149.7 million. The proceeds of the offering were used to repurchase 5,692,599 of Assured Guaranty Ltd.’s common shares from ACE Bermuda Insurance Ltd., a subsidiary of ACE. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to 3 month LIBOR plus a margin equal to 2.38%. AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date. The Company recorded interest expense of $2.5 million for both Second Quarter 2009 and Second Quarter 2008 and $4.9 million for both Six Months 2009 and Six Months 2008, respectively. These Debentures are guaranteed on a junior subordinated basis by Assured Guaranty Ltd.

Credit Facilities

2006 Credit Facility

On November 6, 2006, Assured Guaranty Ltd. 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, AG(UK), AG Re, AGRO and Assured Guaranty Ltd. 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 Assured Guaranty Ltd., AG Re or AGRO, individually or in the aggregate, and no more than $20.0 million may be borrowed by AG(UK). 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 Assured Guaranty Ltd. may 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 closing of the 2006 credit facility, (i) AGC guaranteed the obligations of AG(UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AG Re and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of AGC and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of AGC and AG(UK) under such facility, (iii) Assured Guaranty Overseas US Holdings Inc., guaranteed the obligations of Assured Guaranty Ltd., AG Re and AGRO under such facility and (iv) each of AG Re and AGRO guarantees the other as well as Assured Guaranty Ltd.

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facility contains restrictions on Assured Guaranty Ltd. 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 June 30, 2009 and December 31, 2008, Assured Guaranty was in compliance with all of those financial covenants.

As of June 30, 2009 and December 31, 2008, no amounts were outstanding under this facility nor have there been any borrowings under this facility.

Letters of credit totaling approximately $2.9 million remained outstanding as of June 30, 2009 and December 31, 2008, respectively, discussed in Note 9.

Non-Recourse Credit Facilities

AG Re Credit Facility

On July 31, 2007 AG Re entered into a non-recourse credit facility (“AG Re Credit Facility”) with a syndicate of banks which provides up to $200.0 million to satisfy certain reinsurance agreements and obligations. The AG Re Credit Facility expires in July 2014.

The AG Re Credit Facility does not contain any financial covenants. The AG Re 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. If any such event of default were triggered, AG Re could be required to repay potential outstanding borrowings in an accelerated manner.

AG Re’s obligations to make payments of principal and interest on loans under the AG Re Credit Facility, whether at maturity, upon acceleration or otherwise, are limited recourse obligations of AG Re and are payable solely from the collateral securing the AG Re Credit Facility, including recoveries with respect certain insured obligations in a designated portfolio, premiums with respect to defaulted insured obligations in that portfolio, certain designated reserves and other designated collateral.

As of June 30, 2009 and December 31, 2008, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility.

Committed Capital Securities

On April 8, 2005, AGC entered into four separate agreements with four different unaffiliated custodial trusts 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 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 were not exercised during 2009 or 2008. Initially, all of committed capital securities of the custodial trusts (the “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 committed capital 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 Assured Guaranty Ltd.’s financial statements.

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dissolution of the Pass-Through Trust, distributions on the CCS Securities are determined pursuant to an auction process. On April 7, 2008 this auction process failed, thereby increasing the annualized rate on the CCS Securities to One-Month LIBOR plus 250 basis points. Distributions on the AGC Preferred Stock will be determined pursuant to the same process .

During Second Quarter 2009 and Second Quarter 2008, AGC incurred $1.9 million and $1.7 million, respectively, of put option premiums which are an on-going expense. During Six Months 2009 and Six Months 2008, AGC incurred $3.3 million and $2.5 million, respectively, of put option premiums which are an on-going expense. The increase in Six Months 2009 compared to the respective periods in 2008 was due to the increase in annualized rates from One-Month LIBOR plus 110 basis points to One-Month LIBOR plus 250 basis points as a result of the failed auction process in April 2008. These expenses are presented in the Company’s unaudited interim consolidated statements of operations and comprehensive income under other expenses.

The CCS Securities had a fair value of $10.2 million (see Note 5) and $51.1 million as of June 30, 2009 and December 31, 2008, respectively, and a change in fair value during Second Quarter 2009 and Six Months 2009 of $(60.6) million and $(40.9) million, respectively, which are recorded in the consolidated balance sheets in other assets and the unaudited interim consolidated statements of operations and comprehensive income in fair value gain (loss) on committed capital securities, respectively. The change in fair value during Second Quarter 2008 and Six Months 2008 of $8.9 million and $17.4 million, respectively.

Guarantee of FSAH’s Debt

On July 20, 2009, Assured Guaranty Ltd. announced that the Company would fully and unconditionally guarantee the following three series of FSAH debt obligations consisting of: 1) $100.0 million of 6-7/8% Notes due December 15, 2101, 2) $230.0 million principal amount of 6.25% Notes due November 1, 2102, and 3) $100.0 million principal amount of 5.60% Notes due July 15, 2103. The Company also would guarantee, on a junior subordinated basis, the $300 million of FSAH’s outstanding Junior Subordinated Debentures due 2066.

11. Employee Benefit Plans

Share-Based Compensation

Share-based compensation expense in Second Quarter 2009 and Second Quarter 2008 was $1.6 million ($1.2 million after tax) and $2.0 million ($1.5 million after tax), respectively. Share-based compensation expense in Six Months 2009 and Six Months 2008 was $5.3 million ($4.3 million after tax) and $8.4 million ($6.9 million after tax), respectively. The effect on basic and diluted earnings per share for Second Quarter 2009 and Six Months 2009 was $0.01 and $0.05, respectively. The effect on basic and diluted earnings per share for Second Quarter 2008 and Six Months 2008 was $0.02 and $0.08, respectively. Second Quarter 2009 and Six Months 2009 expense included $(0.1) million ($(0.1) million after tax) and $2.0 million ($1.7 million after tax), respectively, related to accelerated vesting for stock award grants to retirement-eligible employees. Second Quarter 2008 and Six Months 2008 expense included $(0.2) million ($(0.2) million after tax) and $3.7 million ($3.3 million after tax), respectively, related to accelerated vesting for stock award grants to retirement-eligible employees.

Performance Retention Plan

The Company recognized approximately $0.9 million ($0.6 million after tax) and $0.8 million ($0.6 million after tax) of expense for performance retention awards in Second Quarter 2009 and Second Quarter 2008, respectively. The Company recognized approximately $6.2 million ($5.1 million after tax) and $6.3 million ($5.2 million after tax) of expense for performance retention awards in Six Months 2009 and Six Months 2008, respectively. Included in Second Quarter 2009 and Six Months 2009 amounts were $0 million and $4.3 million, respectively, of accelerated expense related to retirement-eligible employees. Included in Second Quarter 2008 and Six Months 2008 amounts were $0 million and $4.6 million, respectively, of accelerated expense related to retirement-eligible employees.

12. Earnings Per Share

Effective January 1, 2009, the Company adopted FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP”). The FSP clarifies that share-

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based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities. Restricted stock awards granted prior to February 2008 are considered participating securities as they received non-forfeitable rights to dividends at the same rate as common stock. As participating securities, the Company is required to include these instruments in the calculation of basic earnings per share (“EPS”), and needs to calculate basic EPS using the two-class method described in FAS No. 128, “Earnings per Share.”

Prior to adoption of the FSP, restricted stock was included in our dilutive EPS calculation using the treasury stock method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Basic EPS is then calculated by dividing net (loss) income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS adjusts basic (loss) earnings per share for the effects of restricted stock, stock options and other potentially dilutive financial instruments (“dilutive securities”), only in the periods in which such effect is dilutive. The dilutive effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method assuming nonvested shares are not converted into common shares. The FSP requires the presentation of basic and diluted EPS for each class of common stock. The Company has a single class of common stock. Therefore, the following EPS amounts only pertain to common stock. Pursuant to the FSP, all prior period EPS data were adjusted retrospectively. The impact of adopting the FSP decreased previously reported basic EPS by $0.05 and $0.04 for the three and six months ended June 30, 2008, and previously reported diluted EPS by $0.01 for the three months ended June 30, 2008. There was no impact of adopting the FSP on previously reported diluted EPS for the six months ended June 30, 2008.

The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended June 30,					Six Months Ended June 30,
	2009			2008		2009			2008
	(in thousands of U.S. dollars, except per share amounts)
Basic earnings per share:
Net (loss) income	$	(170,004	)	$	545,216	$	(84,515	)	$	376,007
Less: Distributed and undistributed income (loss) available to nonvested shareholders	(818		)	4,708		(459		)	3,934
Distributed and undistributed income (loss) available to common shareholders	$	(169,186	)	$	540,508	$	(84,056	)	$	372,073
Basic shares	93,058			89,914		91,941			84,979
Basic EPS	$	(1.82	)	$	6.01	$	(0.91	)	$	4.38
Diluted earnings per share:
Distributed and undistributed income (loss) available to common shareholders	$	(169,186	)	$	540,508	$	(84,056	)	$	372,073
Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders	—			36		—			29
Distributed and undistributed income (loss) available to common shareholders	$	(169,186	)	$	540,544	$	(84,056	)	$	372,102
Basic shares	93,058			89,914		91,941			84,979
Effect of dilutive securities:
Options and restricted stock awards	—			710		—			653
Diluted shares	93,058			90,624		91,941			85,632
Diluted EPS	$	(1.82	)	$	5.96	$	(0.91	)	$	4.35

Potentially dilutive securities representing approximately 5.8 million and 2.0 million shares of common stock for the three months ended June 30, 2009 and 2008, respectively, and 5.7 million and 2.0 million shares of common stock for the six months ended June 30, 2009 and 2008, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been antidilutive.

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13. Income Taxes

As of both June 30, 2009 and December 31, 2008, AGRO had a standalone NOL of $47.9 million, which is available to offset its future U.S. taxable income. The Company has $27.2 million of this NOL available through 2017 and $20.7 million available through 2023. AGRO’s stand alone NOL is not permitted to offset the income of any other members of AGRO’s consolidated group due to certain tax regulations. Assured Guaranty Mortgage Insurance Company is a member of the same consolidated tax group as AGRO. In Six Months 2009 AGMIC had a projected NOL of $2.4 million which would be available through 2020.

Under applicable accounting rules, the Company is required to establish a valuation allowance for NOLs that are more likely than not to expire before being utilized. Management has assessed the likelihood of realization of all of its deferred tax assets. Based on this analysis, management believes it is more likely than not that $20.0 million of AGRO’s $47.9 million NOL will not be utilized before it expires and has established a $7.0 million valuation allowance related to the NOL deferred tax asset. In addition, for the three months ended June 30, 2009, management assessed that a valuation allowance of $3.4 million is no longer necessary for AGMIC due to the decrease in loss reserves in the same period. Management believes that all other deferred income taxes are more-likely-than-not to be realized. The valuation allowance is subject to considerable judgment, is reviewed quarterly and will be adjusted to the extent actual taxable income differs from estimates of future taxable income that may be used to realize NOLs or capital losses.

Liability For Tax Basis Step-Up Adjustment

In connection with the IPO, the Company and ACE Financial Services Inc. (“AFS”), a subsidiary of ACE, entered into a tax allocation agreement, whereby the Company and AFS made a “Section 338 (h)(10)” election that has the effect of increasing the tax basis of certain affected subsidiaries’ tangible and intangible assets to fair value. Future tax benefits that the Company derives from the election will be payable to AFS when realized by the Company.

As a result of the election, the Company has adjusted its net deferred tax liability to reflect the new tax basis of the Company’s affected assets. The additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company. Any tax benefit realized by the Company will be paid to AFS. Such tax benefits will generally be calculated by comparing the Company’s affected subsidiaries’ actual taxes to the taxes that would have been owed by those subsidiaries had the increase in basis not occurred. After a 15 year period, to the extent there remains an unrealized tax benefit, the Company and AFS will negotiate a settlement of the unrealized benefit based on the expected realization at that time.

The Company initially recorded a $49.0 million reduction of its existing deferred tax liability, based on an estimate of the ultimate resolution of the Section 338(h)(10) election. Under the tax allocation agreement, the Company estimated that, as of the IPO date, it was obligated to pay $20.9 million to AFS and accordingly established this amount as a liability. The initial difference, which is attributable to the change in the tax basis of certain liabilities for which there is no associated step-up in the tax basis of its assets and no amounts due to AFS, resulted in an increase to additional paid-in capital of $28.1 million. As of June 30, 2009 and December 31, 2008, the liability for tax basis step-up adjustment, which is included in the Company’s balance sheets in “Other liabilities,” were $8.8 million and $9.1 million, respectively. The Company has paid ACE and correspondingly reduced its liability by $0.4 million and $0.4 million in Six Months 2009 and Six Months 2008, respectively.

Tax Treatment of CDS

The Company treats the guaranty it provides on CDS as insurance contracts for tax purposes and as such a taxable loss does not occur until the Company expects to make a loss payment to the buyer of credit protection based upon the occurrence of one or more specified credit events with respect to the contractually referenced obligation or entity. The Company holds its CDS to maturity, at which time any unrealized mark to market loss would revert to zero absent any credit related losses. As of June 30, 2009, the Company did not anticipate any significant credit related losses on its credit default swaps and, therefore, no resultant tax deductions.

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ordinary by the IRS. To the extent the IRS takes the view that the losses are capital losses in the future and the Company incurred actual losses associated with the CDS the Company would need sufficient taxable income of the same character within the carryback and carryforward period available under the tax law.

As of June 30, 2009 and December 31, 2008 the deferred tax assets associated with CDS were $192.1 million and $116.5 million, respectively. The Company came to the conclusion that it is more likely than not that its deferred tax asset related to CDS will be fully realized after weighing all positive and negative evidence available as required under FAS 109. The evidence that was considered included the following:

Negative Evidence

· Although the Company believes that income or losses for these credit default swaps are properly characterized for tax purposes as ordinary, the federal tax treatment is an unsettled area of tax law as described above.

· Changes in the fair value of CDS have resulted in significant swings in the Company’s net income in recent periods. Changes in the fair value of CDS in future periods could result in the U.S. consolidated tax group having a pre-tax loss under GAAP. Although not recognized for tax, this loss could result in a cumulative three year pre-tax loss, which is considered significant negative evidence for the recoverability of a deferred tax asset under FAS 109.

· For the three year period ended June 30, 2009 the US consolidated tax group had a pre-tax loss under GAAP of $464.1 million.

Positive Evidence

· The mark-to-market loss on CDS is not considered a tax event, and therefore no taxable loss has occurred.

· After analysis of the current tax law on CDS the Company believes it is more likely than not that the CDS will be treated as ordinary income or loss for tax purposes.

· Assuming a hypothetical loss were triggered for the amount of deferred tax asset (“DTA”), there would be enough taxable income through carryback and future income to offset it as follows:

· The amortization of the tax-basis unearned premium reserve of $682.2 million as of June 30, 2009 as well as the collection of future installment premiums of contracts already written we believe will result in significant taxable income in the future.

· The Company has the ability to carryback losses two years which would offset over $22.8 million of losses as of June 30, 2009.

· Although the Company has a significant tax exempt portfolio, this can be converted to taxable securities as permitted as a tax planning strategy under FAS 109.

· The mark-to-market loss is reflective of market valuations and will change from quarter to quarter. It is not indicative of the Company’s ability to enter new business. The Company writes and continues to write new business which will increase the amortization of unearned premium and investment portfolio resulting in expected taxable income in future periods.

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

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14. Segment Reporting

The Company has four principal business segments: (1) financial guaranty direct, which includes transactions whereby the Company provides an unconditional and irrevocable guaranty that indemnifies the holder of a financial obligation against non-payment of principal and interest when due, and could take the form of a credit derivative; (2) financial guaranty reinsurance, which includes agreements whereby the Company is a reinsurer and agrees to indemnify a primary insurance company against part or all of the loss which the latter may sustain under a policy it has issued; (3) mortgage guaranty, which includes mortgage guaranty insurance and reinsurance whereby the Company provides protection against the default of borrowers on mortgage loans; and (4) other, which includes lines of business in which the Company is no longer active.

The Company does not segregate assets and liabilities at a segment level since management reviews and controls these assets and liabilities on a consolidated basis. The Company allocates operating expenses to each segment based on a comprehensive cost study and is based on departmental time estimates and headcount.

Management uses underwriting gains and losses as the primary measure of each segment’s financial performance. Underwriting gain is calculated as net earned premiums plus realized gains and other settlements on credit derivatives, less the sum of loss and loss adjustment expenses (recoveries) including incurred losses on credit derivatives, profit commission expense, acquisition costs and other operating expenses that are directly related to the operations of the Company’s insurance businesses. This measure excludes certain revenue and expense items, such as net investment income, realized investment gains and losses, unrealized losses on credit derivatives, fair value gain (loss) on committed capital securities, other income, FSAH acquisition-related expenses, interest expense and other expenses, that are not directly related to the underwriting performance of the Company’s insurance operations, but are included in net income.

The following tables summarize the components of underwriting gain (loss) for each reporting segment:

	Three Months Ended June 30, 2009
	Financial Guaranty Direct			Financial Guaranty Reinsurance		Mortgage Guaranty			Other		Total
	(in millions of U.S. dollars)
Net earned premiums	$	30.4		$	47.4	$	0.8		$	—	$	78.6
Realized gain and other settlements on credit derivatives	27.6			0.2		—			—		27.8
Loss and loss adjustment expenses	31.8			25.6		(19.4		)	—		38.0
Incurred losses on credit derivatives	35.1			0.2		—			—		35.2
Total loss and loss adjustment expenses (recoveries)	66.9			25.8		(19.4		)	—		73.2
Profit commission expense	—			1.8		0.3			—		2.1
Acquisition costs	3.6			12.8		0.1			—		16.5
Other operating expenses	15.9			6.2		0.6			—		22.6
Underwriting (loss) gain	$	(28.4	)	$	1.0	$	19.2		$	—	$	(8.2	)

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	Three Months Ended June 30, 2008
	Financial Guaranty Direct			Financial Guaranty Reinsurance		Mortgage Guaranty		Other			Total
	(in millions of U.S. dollars)
Net earned premiums	$	20.8		$	29.6	$	1.3	$	—		$	51.7
Realized gain and other settlements on credit derivatives	30.9			0.6		—		0.4			31.8
Loss and loss adjustment expenses (recoveries)	28.2			11.3		0.1		(1.5		)	38.1
Incurred losses on credit derivatives	5.6			—		—		—			5.6
Total loss and loss adjustment expenses (recoveries)	33.8			11.3		0.1		(1.5		)	43.7
Profit commission expense	—			0.9		0.1		—			1.0
Acquisition costs	3.1			8.6		0.1		—			11.8
Other operating expenses	15.2			4.0		0.5		—			19.7
Underwriting (loss) gain	$	(0.4	)	$	5.4	$	0.5	$	1.9		$	7.3

	Six Months Ended June 30, 2009
	Financial Guaranty Direct		Financial Guaranty Reinsurance			Mortgage Guaranty			Other		Total
	(in millions of U.S. dollars)
Net earned premiums	$	131.9	$	93.6		$	1.6		$	—	$	227.1
Realized gain and other settlements on credit derivatives	47.6		0.8			—			—		48.4
Loss and loss adjustment expenses	43.5		62.4			11.8			—		117.8
Incurred losses on credit derivatives	27.7		(0.5		)	—			—		27.2
Total loss and loss adjustment expenses (recoveries)	71.2		61.9			11.8			—		145.0
Profit commission expense	—		2.0			0.4			—		2.3
Acquisition costs	9.8		29.9			0.2			—		40.0
Other operating expenses	36.2		12.9			1.3			—		50.3
Underwriting (loss) gain	$	62.3	$	(12.3	)	$	(12.1	)	$	—	$	37.9

	Six Months Ended June 30, 2008
	Financial Guaranty Direct			Financial Guaranty Reinsurance			Mortgage Guaranty		Other			Total
	(in millions of U.S. dollars)
Net earned premiums	$	38.1		$	57.4		$	3.1	$	—		$	98.5
Realized gain and other settlements on credit derivatives	58.1			0.9			—		0.4			59.4
Loss and loss adjustment expenses (recoveries)	64.1			30.5			0.1		(1.5		)	93.3
Incurred losses on credit derivatives	8.8			—			—		—			8.8
Total loss and loss adjustment expenses (recoveries)	72.9			30.5			0.1		(1.5		)	102.1
Profit commission expense	—			2.0			0.2		—			2.2
Acquisition costs	6.1			17.4			0.2		—			23.7
Other operating expenses	36.5			10.4			1.4		—			48.3
Underwriting (loss) gain	$	(19.3	)	$	(2.0	)	$	1.2	$	1.9		$	(18.1	)

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The following is a reconciliation of total underwriting gain (loss) to income (loss) before provision for income taxes for the periods ended:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in millions of U.S. dollars)
Total underwriting gain (loss)	$	(8.2	)	$	7.3		$	37.9		$	(18.1	)
Net investment income	43.3			40.2			86.9			76.8
Net realized investment gains (losses)	(4.9		)	1.5			(22.0		)	2.1
Unrealized gains (losses) on credit derivatives, excluding incurred losses on credit derivatives	(218.9		)	714.1			(200.1		)	457.7
Fair value (loss) gain on committed capital securities	(60.6		)	8.9			(40.9		)	17.4
Other income	0.5			0.2			1.4			0.2
FSAH acquisition-related expense	(24.2		)	—			(28.8		)	—
Interest expense	(6.5		)	(5.8		)	(12.3		)	(11.6		)
Other expenses	(1.9		)	(1.7		)	(3.3		)	(2.5		)
(Loss) income before provision for income taxes	$	(281.3	)	$	764.5		$	(181.2	)	$	521.7

The following table provides the lines of businesses from which each of the Company’s segments derive their net earned premiums:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in millions of U.S. dollars)
Financial guaranty direct:
Public finance	$	15.7	$	7.2	$	101.2	$	11.3
Structured finance	14.7		13.6		30.7		26.8
Total	30.4		20.8		131.9		38.1
Financial guaranty reinsurance:
Public finance	36.9		17.5		71.7		36.1
Structured finance	10.5		12.1		21.9		21.3
Total	47.4		29.6		93.6		57.4
Mortgage guaranty:
Mortgage guaranty	0.8		1.3		1.6		3.1
Total net earned premiums	$	78.6	$	51.7	$	227.1	$	98.5
Net credit derivative premiums received and receivable	$	28.0	$	31.5	$	57.5	$	59.3
Total net earned premiums and credit derivative premiums received and receivable	$	106.6	$	83.2	$	284.5	$	157.8

The other segment had an underwriting gain of $0 million during both Second Quarter 2009 and Six Months 2009. The other segment had an underwriting gain of $1.9 million during both Second Quarter 2008 and Six Months 2008, consisting of $0.4 million net credit derivative loss recoveries and $1.5 million recoveries.

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15. Subsidiary Information

The following tables present the unaudited condensed consolidated financial information for Assured Guaranty Ltd., Assured Guaranty US Holdings Inc., of which AGC is a subsidiary and other subsidiaries of Assured Guaranty Ltd. as of June 30, 2009 and December 31, 2008 and for the three and six months ended June 30, 2009 and 2008.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2009

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)		Assured Guaranty US Holdings Inc.		AG Re and Other Subsidiaries		Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)

Assets
Total investments and cash	$	82,616	$	2,404,513	$	2,105,605	$	—		$	4,592,734
Investment in subsidiaries	2,257,981		—		—		(2,257,981		)	—
Deferred acquisition costs	—		56,885		317,202		—			374,087
Reinsurance recoverable	—		45,690		1,055		(42,212		)	4,533
Goodwill	—		85,417		—		—			85,417
Credit derivative assets	—		112,640		33,710		—			146,350
Premiums receivable	—		385,938		492,590		(125,636		)	752,892
Deferred tax asset	—		196,693		12,416		—			209,109
Other	20,314		631,741		124,511		(445,949		)	330,617
Total assets	$	2,360,911	$	3,919,517	$	3,087,089	$	(2,871,778	)	$	6,495,739

Liabilities and shareholders’ equity

Liabilities
Unearned premium reserves	$	—	$	1,308,643	$	1,288,413	$	(374,339	)	$	2,222,717
Reserves for losses and loss adjustment expenses	—		146,073		89,826		(35,612		)	200,287
Profit commissions payable	—		4,749		5,471		—			10,220
Credit derivative liabilities	—		714,516		243,236		—			957,752
Long-term debt	—		516,974		—		—			516,974
Other	5,992		264,420		166,304		(203,846		)	232,870
Total liabilities	5,992		2,955,375		1,793,250		(613,797		)	4,140,820

Total shareholders’ equity	2,354,919		964,142		1,293,839		(2,257,981		)	2,354,919

Total liabilities and shareholders’ equity	$	2,360,911	$	3,919,517	$	3,087,089	$	(2,871,778	)	$	6,495,739

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2008

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)		Assured Guaranty US Holdings Inc.		AG Re and Other Subsidiaries		Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)

Assets
Total investments and cash	$	188	$	1,651,761	$	1,991,690	$	—		$	3,643,639
Investment in subsidiaries	1,901,108		—		—		(1,901,108		)	—
Deferred acquisition costs	—		78,987		209,629		—			288,616
Reinsurance recoverable	—		22,014		3,474		(18,960		)	6,528
Goodwill	—		85,417		—		—			85,417
Credit derivative assets	—		125,082		21,877		—			146,959
Premiums receivable	—		6,659		23,559		(14,475		)	15,743
Deferred tax asset	—		109,565		19,553		—			129,118
Other	29,427		383,272		49,502		(222,514		)	239,687
Total assets	$	1,930,723	$	2,462,757	$	2,319,284	$	(2,157,057	)	$	4,555,707

Liabilities and shareholders’ equity

Liabilities
Unearned premium reserves	$	—	$	707,957	$	713,948	$	(188,191	)	$	1,233,714
Reserves for losses and loss adjustment expenses	—		133,710		90,752		(27,664		)	196,798
Profit commissions payable	—		3,971		4,613		—			8,584
Credit derivative liabilities	—		481,253		252,513		—			733,766
Long-term debt	—		347,210		—		—			347,210
Other	4,501		82,024		62,982		(40,094		)	109,413
Total liabilities	4,501		1,756,125		1,124,808		(255,949		)	2,629,485

Total shareholders’ equity	1,926,222		706,632		1,194,476		(1,901,108		)	1,926,222

Total liabilities and shareholders’ equity	$	1,930,723	$	2,462,757	$	2,319,284	$	(2,157,057	)	$	4,555,707

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2009

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)			Assured Guaranty US Holdings Inc.			AG Re and Other Subsidiaries			Consolidating Adjustments (1)			Assured Guaranty Ltd. (Consolidated)
Revenues
Net earned premiums	$	—		$	26,666		$	51,968		$	—		$	78,634
Net investment income	1			19,737			23,562			—			43,300
Net realized investment gains (losses)	—			5,356			(10,244		)	—			(4,888		)
Change in fair value of credit derivatives
Realized gain and other settlements on credit derivatives	—			23,385			4,410			21			27,816
Unrealized losses on credit derivatives	—			(225,329		)	(28,934		)	(21		)	(254,284		)
Net change in fair value of credit derivatives	—			(201,944		)	(24,524		)	—			(226,468		)
Equity in earnings of subsidiaries	(166,626		)	—			—			166,626			—
Other income(2)	—			(59,848		)	11			(241		)	(60,078		)
Total revenues	(166,625		)	(210,033		)	40,773			166,385			(169,500		)

Expenses
Loss and loss adjustment expenses (recoveries)	—			46,427			(8,397		)	—			38,030
Acquisition costs and other operating expenses	4,063			17,752			19,398			—			41,213
Other(3)	(684		)	32,815			446			—			32,577
Total expenses	3,379			96,994			11,447			—			111,820

(Loss) income before (benefit) provision for income taxes	(170,004		)	(307,027		)	29,326			166,385			(281,320		)
Total (benefit) provision for income taxes	—			(113,303		)	1,987			—			(111,316		)

Net (loss) income	$	(170,004	)	$	(193,724	)	$	27,339		$	166,385		$	(170,004	)

(1) Due to the accounting for subsidiaries under common control, net income in the consolidating adjustment column does not equal parent company equity in earnings of subsidiaries, due to recognition of income by Assured Guaranty US Holdings Inc. for dividends received from Assured Guaranty Ltd.

(2) Includes fair value gain (loss) on committed capital securities and other income.

(3) Includes FSAH acquisition-related expenses, interest expense and other expenses.

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2008

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)		Assured Guaranty US Holdings Inc.		AG Re and Other Subsidiaries			Consolidating Adjustments (1)			Assured Guaranty Ltd. (Consolidated)
Revenues
Net earned premiums	$	—	$	19,021	$	32,664		$	—		$	51,685
Net investment income	514		17,557		22,164			(3		)	40,232
Net realized investment gains (losses)	—		1,557		(112		)	8			1,453
Change in fair value of credit derivatives
Realized gains and other settlements on credit derivatives	—		25,682		6,111			—			31,793
Unrealized gains on credit derivatives	—		610,551		97,951			—			708,502
Net change in fair value of credit derivatives	—		636,233		104,062			—			740,295
Equity in earnings of subsidiaries	548,017		—		—			(548,017		)	—
Other income(2)	—		9,290		—			(241		)	9,049
Total revenues	548,531		683,658		158,778			(548,253		)	842,714

Expenses
Loss and loss adjustment expenses	—		23,495		14,630			—			38,125
Acquisition costs and other operating expenses	3,315		16,556		12,641			—			32,512
Other	—		7,535		—			—			7,535
Total expenses	3,315		47,586		27,271			—			78,172

Income before provision for income taxes	545,216		636,072		131,507			(548,253		)	764,542
Total provision for income taxes	—		218,463		860			3			219,326

Net income	$	545,216	$	417,609	$	130,647		$	(548,256	)	$	545,216

(1) Due to the accounting for subsidiaries under common control, net income in the consolidating adjustment column does not equal parent company equity in earnings of subsidiaries, due to 1) recognition of income by Assured Guaranty US Holdings Inc. for dividends received from Assured Guaranty Ltd. and 2) the residual effects of the FSA backbook transaction that occurred in 2005.

(2) Includes fair value gain (loss) on committed capital securities and other income.

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)			Assured Guaranty US Holdings Inc.			AG Re and Other Subsidiaries			Consolidating Adjustments (1)			Assured Guaranty Ltd. (Consolidated)
Revenues
Net earned premiums	$	—		$	94,391		$	132,689		$	—		$	227,080
Net investment income	2			39,050			47,929			(80		)	86,901
Net realized investment gains (losses)	—			5,594			(27,592		)	—			(21,998		)
Change in fair value of credit derivatives
Realized gain and other settlements on credit derivatives	—			47,748			647			—			48,395
Unrealized losses on credit derivatives	—			(248,476		)	21,174			—			(227,302		)
Net change in fair value of credit derivatives	—			(200,728		)	21,821			—			(178,907		)
Equity in earnings of subsidiaries	(69,900		)	—			—			69,900			—
Other income(2)	—			(39,039		)	11			(482		)	(39,510		)
Total revenues	(69,898		)	(100,732		)	174,858			69,338			73,566

Expenses
Loss and loss adjustment expenses	—			67,809			49,975			—			117,784
Acquisition costs and other operating expenses	10,680			33,990			47,916			—			92,586
Other(3)	3,937			40,036			446			—			44,419
Total expenses	14,617			141,835			98,337			—			254,789

(Loss) income before (benefit) provision for income taxes	(84,515		)	(242,567		)	76,521			69,338			(181,223		)
Total (benefit) provision for income taxes	—			(94,522		)	(2,186		)	—			(96,708		)

Net (loss) income	$	(84,515	)	$	(148,045	)	$	78,707		$	69,338		$	(84,515	)

(1) Due to the accounting for subsidiaries under common control, net income in the consolidating adjustment column does not equal parent company equity in earnings of subsidiaries, due to 1) recognition of income by Assured Guaranty US Holdings Inc. for dividends received from Assured Guaranty Ltd. and 2) the residual effects of the FSA backbook transaction that occurred in 2005.

(2) Includes fair value gain (loss) on committed capital securities and other income.

(3) Includes FSAH acquisition-related expenses, interest expense and other expenses.

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)		Assured Guaranty US Holdings Inc.		AG Re and Other Subsidiaries			Consolidating Adjustments (1)			Assured Guaranty Ltd. (Consolidated)

Revenues
Net earned premiums	$	—	$	35,055	$	63,463		$	—		$	98,518
Net investment income	521		33,807		42,477			1			76,806
Net realized investment gains (losses)	—		2,224		(152		)	8			2,080
Change in fair value of credit derivatives
Realized gains and other settlements on credit derivatives	—		47,563		11,847			—			59,410
Unrealized gains on credit derivatives	—		394,164		54,717			—			448,881
Net change in fair value of credit derivatives	—		441,727		66,564			—			508,291
Equity in earnings of subsidiaries	387,339		—		—			(387,339		)	—
Other income(2)	—		18,067		—			(482		)	17,585
Total revenues	387,860		530,880		172,352			(387,812		)	703,280

Expenses
Loss and loss adjustment expenses	—		47,020		46,243			—			93,263
Acquisition costs and other operating expenses	11,853		36,338		26,022			—			74,213
Other	—		14,091		—			—			14,091
Total expenses	11,853		97,449		72,265			—			181,567

Income before provision for income taxes	376,007		433,431		100,087			(387,812		)	521,713
Total provision for income taxes	—		144,123		1,580			3			145,706

Net income	$	376,007	$	289,308	$	98,507		$	(387,815	)	$	376,007

(1) Due to the accounting for subsidiaries under common control, net income in the consolidating adjustment column does not equal parent company equity in earnings of subsidiaries, due to 1) recognition of income by Assured Guaranty US Holdings Inc. for dividends received from Assured Guaranty Ltd. and 2) the residual effects of the FSA backbook transaction that occurred in 2005.

(2) Includes fair value gain (loss) on committed capital securities and other income.

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)			Assured Guaranty US Holdings Inc.			AG Re and Other Subsidiaries			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)

Dividends received	$	30,276		$	482		$	—		$	(30,758	)	$	—
Other operating activities	(5,183		)	166,731			41,232			—			202,780
Net cash flows provided by (used in) operating activities	25,093			167,213			41,232			(30,758		)	202,780

Cash flows from investing activities
Fixed maturity securities:
Purchases	—			(543,322		)	(284,540		)	—			(827,862		)
Sales	—			387,149			317,855			—			705,004
Maturities	—			—			5,500			—			5,500
Purchases of short-term investments, net	(82,428		)	(561,534		)	(49,675		)	—			(693,637		)
Capital contribution to subsidiary	(378,672		)	—			—			378,672			—
Net cash flows used in investing activities	(461,100		)	(717,707		)	(10,860		)	378,672			(810,995		)

Cash flows from financing activities
Net proceeds from issuance of common stock and equity units	449,142			167,325			—			—			616,467
Capital contribution from parent	—			378,672			—			(378,672		)	—
Dividends paid	(8,681		)	—			(30,276		)	30,758			(8,199		)
Repurchases of common stock	(3,676		)	—			—			—			(3,676		)
Share activity under option and incentive plans	(778		)	—			—			—			(778		)
Net cash flows provided by (used in) financing activities	436,007			545,997			(30,276		)	(347,914		)	603,814
Effect of exchange rate changes	—			467			136			—			603

(Decrease) increase in cash and cash equivalents	—			(4,030		)	232			—			(3,798		)
Cash and cash equivalents at beginning of period	—			10,226			2,079			—			12,305

Cash and cash equivalents at end of period	$	—		$	6,196		$	2,311		$	—		$	8,507

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(in thousands of U. S. dollars)

	Assured Guaranty Ltd. (Parent Company)			Assured Guaranty US Holdings Inc.			AG Re and Other Subsidiaries			Consolidating Adjustments			Assured Guaranty Ltd. (Consolidated)

Dividends received	$	6,000		$	482		$	—		$	(6,482	)	$	—
Other operating activities	7,644			262,246			61,472			—			331,362
Net cash flows provided by (used in) operating activities	13,644			262,728			61,472			(6,482		)	331,362

Cash flows from investing activities
Fixed maturity securities:
Purchases	—			(309,615		)	(530,840		)	—			(840,455		)
Sales	—			124,897			127,606			—			252,503
Maturities	—			—			3,350			—			3,350
(Purchases) sales of short-term investments, net	(538		)	(175,701		)	194,046			—			17,807
Capital contribution to subsidiary	(250,000		)	—			—			250,000			—
Net cash flows used in investing activities	(250,538		)	(360,419		)	(205,838		)	250,000			(566,795		)

Cash flows from financing activities
Net proceeds from issuance of common stock	248,978			—			—			—			248,978
Capital contribution from parent	—			100,000			150,000			(250,000		)	—
Dividends paid	(8,251		)	—			(6,000		)	6,482			(7,769		)
Share activity under option and incentive plans	(3,833		)	—			—			—			(3,833		)
Tax benefit from stock options exercised	—			10			—			—			10
Net cash flows provided by (used in) financing activities	236,894			100,010			144,000			(243,518		)	237,386
Effect of exchange rate changes	—			38			85			—			123

Increase (decrease) in cash and cash equivalents	—			2,357			(281		)	—			2,076
Cash and cash equivalents at beginning of period	—			5,688			2,360			—			8,048

Cash and cash equivalents at end of period	$	—		$	8,045		$	2,079		$	—		$	10,124

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give Assured Guaranty Ltd.’s (hereafter “Assured Guaranty,” “we,” “our” or the “Company”) expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.

Any or all of Assured Guaranty’s forward-looking statements herein may turn out to be wrong and are based on current expectations and the current economic environment. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ materially are: (1) downgrades of the financial strength ratings assigned by the major rating agencies to any of our insurance subsidiaries at any time, which has occurred in the past; (2) downgrades of the transactions we insure; (3) our inability to execute our business strategy; (4) reduction in the amount of reinsurance facultative cessions or portfolio opportunities available to us; (5) contract cancellations; (6) developments in the world’s financial and capital markets that adversely affect our loss experience, the demand for our products, our access to capital, our unrealized (losses) gains on derivative financial instruments or our investment returns; (7) more severe or frequent losses associated with our insurance products, or changes in our assumptions used to estimate loss reserves and unrealized (losses) gains on derivative financial instruments; (8) changes in regulation or tax laws applicable to us, our subsidiaries or customers; (9) governmental actions; (10) natural or man-made catastrophes; (11) dependence on customers; (12) decreased demand for our insurance or reinsurance products or increased competition in our markets; (13) loss of key personnel; (14) technological developments; (15) the effects of mergers, acquisitions and divestitures; (16) changes in accounting policies or practices; (17) changes in the credit markets, segments thereof or general economic conditions, including the overall level of activity in the economy or particular sectors, interest rates, credit spreads and other factors; (18) other risks and uncertainties that have not been identified at this time; and (19) management’s response to these factors . Assured Guaranty is not obligated to publicly correct or update any forward-looking statement if we later become aware that it is not likely to be achieved, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in our periodic reports filed with the Securities and Exchange Commission.

Website Information

We routinely post important information for investors on our website (www.assuredguaranty.com), under the Investor Information tab. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Information portion of our website, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.

Executive Summary

Assured Guaranty Ltd. is a Bermuda based holding company which provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance and mortgage markets. We apply our credit expertise, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products that meet the credit enhancement needs of our customers. We market our products directly and through financial institutions. We serve the U.S. and international markets.

On July 1, 2009 the Company completed the acquisition of Financial Security Assurance Holdings Ltd. (“FSAH”) pursuant to the purchase agreement, dated as of November 14, 2008 (as amended, the “Purchase Agreement”), between the Company, Dexia Holdings, Inc. (“Dexia Holdings”) and Dexia Crédit Local S.A. (“DCL”). FSAH is the parent of financial guaranty insurance company Financial Security Assurance Inc., a New York stock insurance company (“FSA”). The total purchase price paid by the Company was approximately $546

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million in cash and approximately 22.3 million Assured common shares. The acquisition excluded FSAH’s financial products business, which included FSAH’s former guaranteed investment contract business and medium-term note and leveraged tax lease businesses, as described below under “Liquidity and Capital Resources.”

The Company entered into an Amendment to Investment Agreement dated as of November 13, 2008 with WLR Recovery Fund IV, LP, a Delaware limited partnership (the “Investor”), which amended the Investment Agreement (the “Investment Agreement”) dated as of February 28, 2008 between the Company and the Investor, which provided a back up funding commitment to finance the Acquisition. Pursuant to pre-emptive rights set forth in the Investment Agreement, the Investor and affiliated funds, which are affiliated with Wilbur L. Ross, Jr., who is one of the Company’s directors, purchased 3,850,000 common shares of the Company in the Company’s June 2009 public common share offering at $11.00 per common share, the public offering price in the public offering.

These financial statements include the effects of the Company’s common share and equity units offering that took place on June 24, 2009 but do not include the effects of the acquisition of FSAH, which occurred effective July 1, 2009. The Company’s financial statements as of September 30, 2009 will include the effects of the FSAH acquisition, including three months of operating results attributable to FSAH entities.

The Company believes the acquisition of FSAH will enhance its financial strength and competitive position in the financial guaranty market. The Company will now write direct financial guaranty business through its two primary operating subsidiaries, Assured Guaranty Corp. (“AGC”) and FSA. Management expects these dual platforms will allow the Company to capitalize on the well established franchise of each company and allow it to provide investors with increased capacity and greater risk diversification. The Company will also operate through a common infrastructure and risk management framework. The pro forma effects of the acquisition are described in the Company’s Current Report on Form 8-K filed on July 8, 2009 (the “July 8, 2009 8-K”).

Our insurance company subsidiaries have been assigned the following insurance financial strength ratings as of the date of the filing. These ratings are subject to continuous review:

	Moody’s	S&P	Fitch
Assured Guaranty Corp.	Aa2(Excellent)	AAA(Extremely Strong)	AA(Very Strong)
Assured Guaranty Re Ltd.(“AG Re”)	Aa3(Excellent)	AA(Very Strong)	AA-(Very Strong)
Assured Guaranty Re Overseas Ltd. (“AGRO”)	Aa3(Excellent)	AA(Very Strong)	AA-(Very Strong)
Assured Guaranty Mortgage Insurance Company	Aa3(Excellent)	AA(Very Strong)	AA-(Very Strong)
Assured Guaranty (UK) Ltd. (“AG(UK)”)	Aa2(Excellent)	AAA(Extremely Strong)	AA(Very Strong)
Financial Security Assurance, Inc.	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)
FSA Insurance Company	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)
Financial Security Assurance International Ltd.	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)
Financial Security Assurance (U.K.) Ltd	Aa3(Excellent)	AAA(Extremely Strong)	AA+(Very Strong)

“Aaa” (Exceptional) is the highest ranking, which Assured Guaranty Corp. (“AGC”) and Assured Guaranty (UK) Ltd. achieved in July 2007, and “Aa2” (Excellent) is the third highest ranking of 21 ratings categories used by Moody’s Investors Service (“Moody’s”). A “AAA” (Extremely Strong) rating is the highest ranking and “AA” (Very Strong) is the third highest ranking of the 21 ratings categories used by Standard & Poor’s Inc. (“S&P”). “AAA” (Extremely Strong) is the highest ranking and “AA” (Very Strong) is the third highest ranking of the 24 ratings categories used by Fitch Ratings (“Fitch”). An insurance financial strength rating is an opinion with respect to an insurer’s ability to pay under its insurance policies and contracts in accordance with their terms. The opinion is not specific to any particular policy or contract. Insurance financial strength ratings do not refer to an insurer’s ability to meet non insurance obligations and are not a recommendation to purchase or discontinue any policy or contract issued by an insurer or to buy, hold, or sell any security issued by an insurer, including our common shares.

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On May 4, 2009, Fitch Inc. (“Fitch”) downgraded the debt and insurer financial strength ratings of Assured Guaranty Ltd. and its subsidiaries, as applicable, based on Fitch’s concerns that Assured Guaranty Ltd. continued to face negative credit migration within the combined insured portfolio, primarily related to structured finance, outpacing its ability to build capital resources through earnings retention. It cited mortgage-related exposures as a particular area of concern, as well as exposures to trust preferred securities collateralized debt obligations (“TruPs CDOs”) and other structured finance transactions which have been subject to ratings downgrades. Fitch downgraded the insurer financial stronger ratings of AGC and AG(UK) to “AA” from “AAA”, downgraded the insurer financial strength ratings of AG Re, AGRO and Assured Guaranty Mortgage Insurance Company to “AA-” from “AA” and the debt ratings of Assured Guaranty US Holdings Inc. All such ratings were placed on Rating Watch Evolving. On May 11, 2009, Fitch downgraded the insurer financial strength relating of FSA and certain other affiliates to “AA+” from “AAA” and the long term rating of FSAH to “A+” from “AA”. All such ratings remain on Rating Watch Negative. Fitch cited as the primary reason for this action Fitch’s view of the residual risks retained by FSA following the transfer of its financial products business to Dexia S.A., which transfer is described in greater detail below. On August 10, 2009, Fitch placed the debt and insurer financial strength ratings of the Company and its subsidiaries on Rating Watch Negative, a change from Rating Watch Evolving. It confirmed that the ratings of FSAH and its subsidiaries remained on Rating Watch Negative. Fitch reported that it is currently in the process of analyzing the insured portfolios and overall capital adequacy of AGC, AG Re and FSA, and that the Rating Watch Negative reflects concerns with respect to further credit deterioration in mortgage-related exposures, which could negatively impact the capital positions of the companies. It noted that credit deterioration in other areas of the insured portfolios, including TruPS CDOs and public finance exposures, could also place additional pressure on claims paying resources, as could ratings-based triggers which could force termination or collateralization of insured exposures at AGC or the claw-back of certain businesses underwritten by AG Re. Fitch notes that it expects to complete its rating review over the next four to six weeks. There is no assurance that Fitch will not take further action on our ratings.

On May 20, 2009, Moody’s Investors Service (‘‘Moody’s’’) placed under review for possible downgrade the Aa2 insurance financial strength rating of AGC, as well as the ratings of other entities within the Assured group. In its public announcement of the rating action, Moody’s stated that this action reflects its view that despite recent improvements in the Company’s market position, the expected performance of its insured portfolio—particularly the mortgage-related risks—has substantially worsened. At the same time, Moody’s also placed the Aa3 insurance financial strength ratings of FSA and its affiliated insurance operating companies on review for possible downgrade. In its public announcement of the rating action, Moody’s cited its growing concerns about FSA’s business and financial profile as a result of further deterioration in FSA’s U.S. mortgage portfolio and the related adverse effect on its capital adequacy, profitability, and market traction. In both press releases, Moody’s noted that it has taken a more negative view of mortgage-related exposures and Assured Guaranty Ltd.’s pooled corporate exposures in light of worse-than-expected performance trends, and recognized the continued susceptibility of the insured portfolio to the weak economic environment. Moody’s also commented that the deterioration in the insured portfolios could have negative implications for the companies’ franchise values, profitability and financial flexibility given the likely sensitivity of those business attributes to its capital position. Moody’s also noted that the market dislocation caused by the declining financial strength of financial guaranty insurers may alter the competitive dynamics of the industry by encouraging the entry of new participants or the growth of alternative forms of execution. There can be no assurance as to the outcome of Moody’s review. On July 24, 2009, Moody’s announced that it expects to conclude its ratings review of the companies by mid-August 2009.

On July 1, 2009, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) published a Research Update in which it affirmed its “AAA” counterparty credit and financial strength ratings on AGC and FSA. At the same time, S&P revised its outlook on AGC and AG(UK) to negative from stable and continued its negative outlook on FSA . S&P cited as a rationale for its actions the large single risk concentration exposure that Assured Guaranty Ltd. and FSA retain to Belgium and France prior to the posting of collateral by Dexia in October 2011, all in connection with the acquisition of FSAH by a subsidiary of Assured Guaranty Ltd., which acquisition is described in greater detail below. In addition, the outlook also reflects S&P’s view that the change in the competitive dynamics of the industry — with the potential entrance of new competitors, alternative forms of credit enhancement and limited insurance penetration in the U.S. public finance market — could hurt the companies’ business prospects. There can be no assurance that S&P will not take further action on our ratings.

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If the ratings of any of our insurance subsidiaries were reduced below current levels, we expect it would have an adverse effect on our subsidiary’s competitive position and its prospects for future business opportunities. A downgrade may also reduce the value of the reinsurance we offer, which may no longer be of sufficient economic value for our customers to continue to cede to our subsidiaries at economically viable rates.

With respect to a significant portion of our in-force financial guaranty reinsurance business, in the event that AG Re were downgraded from Aa3 to A1, subject to the terms of each reinsurance agreement, the ceding company may have the right to recapture business ceded to AG Re and assets representing substantially all of the statutory unearned premium and loss reserves (if any) associated with that business. As of June 30, 2009, the statutory unearned premium, which represents deferred revenue to the Company, subject to recapture is approximately $162 million. If this entire amount was recaptured, it would result in a corresponding one-time reduction to net income of approximately $11 million. With respect to one of AG Re’s ceding companies, the right to recapture business can only be exercised if AG Re were downgraded to the A category by more than one rating agency, or below A2 or A by any one rating agency. As of June 30, 2009, the statutory unearned premium subject to recapture by this ceding company is approximately $334 million. If this entire amount were recaptured, it would result in a corresponding one-time reduction to net income of approximately $25 million. Alternatively, the ceding company can increase the commissions it charges AG Re for cessions. Any such increase may be retroactive to the date of the cession. As of June 30, 2009, the potential increase in ceding commissions would result in a one-time reduction to net income of approximately $38 million. The effect on net income under these scenarios is exclusive of any capital gains or losses that may be realized.

Additionally, if the ratings of our insurance subsidiaries were reduced below current levels, the Company could be required to make a termination payment on certain of its credit derivative contracts as determined under the relevant documentation. Under certain documents, the Company may have the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a thrid party guaranty of the obligations of the Company. As of the date of this filing, if AGC’s ratings are downgraded to levels between BBB or Baa2 and BB+ or Ba1, certain CDS counterparties could terminate certain CDS contracts covering approximately $7.7 billion par insured, compared to $16.6 billion as of March 31, 2009. As of the date of this filing, if AGRO’s ratings are downgraded to BBB- or Baa3, certain CDS counterparties could terminate certain CDS contracts covering approximately $3.2 million par insured. As of the date of this filing, AG Re has no exposure subject to termination based on its rating. Given current market conditions, the Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with the Company. These payments could have a material adverse effect on the Company’s liquidity and financial condition.

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or A2. The posting of this collateral has no impact on the Company’s net income or shareholders’ equity under U.S. GAAP nor does it impact AGC’s statutory surplus or net income. In addition, in July 2009, we terminated an ISDA master agreement with Lehman Brothers International (Europe) (“LBIE”) due to its default under the agreement. The Company is in discussions with several other CDS counterparties to further reduce its exposure to possible termination payments. The Company can give no assurance that any agreement will be reached with any such CDS counterparty.

In addition to the collateral posting described in the previous paragraph, under a limited number of other CDS contracts, the Company may be required to post eligible securities as collateral — generally cash or U.S. government or agency securities. This requirement is based generally on a mark-to-market valuation in excess of contractual thresholds which decline if the Company’s ratings decline. As of the date of this filing, the Company is posting approximately $160.2 million of collateral in respect of approximately $1.5 billion of par insured. Any amounts required to be posted as collateral in the future will depend on changes in the market values of these transactions. The amount that the Company could be required to post upon any downgrade cannot be quantified at this time, but could be substantial and could have a material adverse effect on the Company’s liquidity. If AGC were downgraded below A- or A3, certain of the contractual thresholds would be reduced or eliminated and the amount of par that could be subject to collateral posting requirements would be approximately $1.8 billion. If AG Re or AGRO were downgraded below BBB or Baa2, certain of the contractual thresholds would be reduced or eliminated and the amount of par that could be subject to collateral posting requirements would be $11.5 million in the case of AG Re and $290.7 million in the case of AGRO.

On April 8, 2008, investment funds each with WL Ross Group, L.P. (“WL Ross”) as the managing member of its general partner or otherwise affiliated with WL Ross purchased 10,651,896 shares of the Company’s common equity at a price of $23.47 per share, resulting in proceeds to the Company of $250.0 million. The Company contributed $150.0 million of these proceeds to its subsidiary, Assured Guaranty Re Ltd. In addition, the Company contributed $100.0 million of these proceeds to its subsidiary, Assured Guaranty US Holdings Inc. (“AGUS”), which in turn contributed the same amount to its subsidiary, AGC. In addition, Wilbur L. Ross, Jr., managing member of the general partner of WL Ross has been elected as a Director of the Company with a term expiring at the Company’s 2012 annual general meeting of shareholders.

On June 24, 2009, the Company completed the sale of 44,275,000 of its common shares (including 5,775,000 common shares allocable to the underwriters) at a price of $11.00 per share. On June 24, 2009, concurrently with the common share offering Assured Guaranty US Holdings Inc. (“AGUS”), a subsidiary of the Company, sold 3,450,000 equity units (including 450,000 equity units allocable to the underwriters) at an initial stated amount of $50 per unit. The equity units initially consist of a forward purchase contract and a 5% undivided beneficial ownership interest in $1,000 principal amount 8.50% senior notes due 2014 issued by AGUS (“8.50% Senior Notes”). Under the purchase contract, holders are required to purchase the Company’s common shares no later than June 1, 2012. The threshold appreciation price of the equity units is $12.93, which represents a premium of 17.5% over the public offering price in the common share offering. The 8.50% Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd. The net proceeds after underwriting expenses and offering costs for these two offerings totaled approximately $616.5 million. Of that amount, the net proceeds from equity offering were $170.8 million, which was allocated between $168.0 million recognized as long-term debt and $2.8 million of the purchase contract recognized in additional paid-in-capital in shareholders’ equity in the consolidated balance sheets.

On July 1, 2009 the Company completed its acquisition of FSAH pursuant to the Purchase Agreement. The Company acquired 99.9264% of the common stock of FSAH pursuant to the Purchase Agreement and the remaining shares from one of FSAH’s executives as described below.

The total purchase price paid by the Company was approximately $546 million in cash and approximately 22.3 million of the Company’s common shares. The Company issued approximately 21.8 million common shares to Dexia. Dexia Holdings has agreed that the voting rights with respect to all Assured Guaranty Ltd.’s common shares issued pursuant to the Purchase Agreement will constitute less than 9.5% of the voting power of all issued and outstanding Assured Guaranty Ltd.’s common shares. Dexia Holdings has also agreed to a “standstill” arrangement until the date on which it and its affiliates beneficially own Assured Guaranty Ltd.’s common shares in an amount less than 10% of the outstanding Assured Guaranty Ltd.’s common shares. In addition, Dexia Holdings

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has agreed that, until November 14, 2009, the first anniversary of the date of the Purchase Agreement, it will not transfer any of the Assured Guaranty Ltd.’s common shares issued pursuant to the Purchase Agreement without the consent of the Company other than to one or more of its affiliates that agrees to abide by the voting and other restrictions described above. The acquisition excluded FSAH’s financial products business.

The Company acquired 24,611 shares of common stock of FSAH from Robert Cochran, the former Chairman and Chief Executive Officer of FSAH, for 305,017 common shares of the Company. The Company also exchanged the deemed investment of Sean McCarthy, who became the President and Chief Operating Officer of Assured Guaranty US Holdings Inc. following the closing of the acquisition, in 22,306 share units of FSAH under a FSAH nonqualified deferred compensation plan for a deemed investment in 130,000 share units of the Company. The Company share units will ultimately be distributed to Mr. McCarthy as a corresponding number of Assured Guaranty Ltd.’s common shares at the time he receives a distribution from such nonqualified deferred compensation plan.

In conjunction with the Purchase Agreement, the Company entered into an Amendment to Investment Agreement (the “Amendment”) dated as of November 13, 2008 with WLR Funds, which amended the Investment Agreement (the “Investment Agreement”) dated as of February 28, 2008 between the Company and WLR Funds, which provided a back up funding commitment to finance the Acquisition. Pursuant to pre-emptive rights set forth in the Investment Agreement, WLR Funds, which are affiliated with Wilbur Ross, who is one of the Company’s directors, purchased 3,850,000 common shares of the Company in the Company’s June 2009 public common share offering at $11.00 per common share, the public offering price in the public offering.

The Company has agreed with Dexia Holdings to operate the business of FSA in accordance with the key parameters described below. These restrictions will limit the Company’s operating and financial flexibility.

For three years after the closing of the acquisition:

· Unless FSA is rated below A1 by Moody’s and AA- by S&P, it will only write municipal bond and infrastructure bond insurance business. An exception applies in connection with the recapture of business ceded by FSA to a third party reinsurer under certain circumstances.

· FSA will continue to be domiciled in New York and be treated as a monoline bond insurer for regulatory purposes.

· FSA will not take any of the following actions unless it receives prior rating agency confirmation that such action would not cause any rating currently assigned to FSA to be downgraded immediately following such action:

· merger;

· issuance of debt or other borrowing exceeding $250 million;

· issuance of equity or other capital instruments exceeding $250 million;

· entry into new reinsurance arrangements involving more than 10% of the portfolio as measured by either unearned premium reserves or net par outstanding; or

· any waiver, amendment or modification of any agreement relating to capital or liquidity support of FSA exceeding $250 million.

· FSA will not repurchase, redeem or pay any dividends in relation to any class of equity interests, including without limitation, interest payments in relation to its surplus notes unless

· (A) at such time FSA is rated at least AA- by S&P, AA- by Fitch and Aa3 by Moody’s (if such rating agencies still rate financial guaranty insurers generally) and (B) the aggregate amount of such dividends in any year does not exceed 125% of FSAH’s debt service for that year; or

· FSA receives prior rating agency confirmation that such action would not cause any rating currently assigned to FSA to be downgraded immediately following such action.

· FSA will not (i) enter into commutation or novation agreements with respect to its insured public finance portfolio involving a payment by FSA exceeding $250 million or (ii) enter into any “cut-through” reinsurance, pledge of collateral security or similar arrangement involving a payment by FSA whereby the benefits of reinsurance purchased by FSA or of other assets of FSA would be available on a preferred or priority basis to a particular class or subset of policyholders of FSA relative to the position of Dexia as policyholder upon the default or insolvency of FSA (whether or not with the consent of any relevant insurance regulatory authority). This provision does not limit: (a) collateral arrangements between FSA and its subsidiaries in support of intercompany reinsurance obligations; or (b) statutory deposits or other collateral arrangements required by law in connection with the conduct of business in any jurisdiction; or

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(c) pledges of recoveries or other amounts to secure repayment of amounts borrowed under FSA’s “soft capital” facilities or the $1 billion strip liquidity facility with DCL.

Furthermore, until the date on which (i) a credit rating has been assigned by S&P, Moody’s and Fitch to the Guaranteed Investment Contract (“GIC”) issuers (and/or the liabilities of the GIC issuers under the relevant GICs have been separately rated by S&P, Moody’s and Fitch) which is independent of the financial strength rating of FSA and (ii) the principal amount of GICs in relation to which a downgrade of FSA may result in a requirement to post collateral or terminate such GIC notwithstanding the existence of a separate rating referred to in (i) above of at least AA or higher is below $1.0 billion (the “FSA De-Linkage Date”):

· FSA will restrict its liquidity exposure such that no GIC contracts or similar liabilities insured by FSA after the closing shall have terms that require acceleration, termination or prepayment based on a downgrade or withdrawal of any rating assigned to FSA’s financial strength, a downgrade of the issuer or obligor under the agreement, a downgrade of any third party.

· FSA will continue to be rated by each of Moody’s, S&P and Fitch, if such rating agencies still rate financial guaranty insurers generally.

Notwithstanding the above, all such restrictions will terminate on any date after the FSA De-Linkage Date that the aggregate principal amount or notional amount of exposure of Dexia and any of its affiliates (excluding the exposures relating to the FP business) to any transactions insured by FSA or any of its affiliates prior to November 14, 2008 is less than $1 billion. Breach of any of these restrictions not remedied within 30 days of notice by Dexia Holdings entitles Dexia Holdings to payment of damages, injunctive relief or other remedies available under applicable law.

We regularly evaluate potential acquisitions of other companies, lines of business and portfolios of risks and hold discussions with potential third parties regarding such transactions. As a general rule, we publicly announce such transactions only after a definitive agreement has been reached.

The financial guaranty industry, along with many other financial institutions, continues to be threatened by deterioration of the credit performance of securities collateralized by U.S. residential mortgages. There is significant uncertainty surrounding general economic factors, including interest rates and housing prices, which may adversely affect our loss experience on these securities. The Company continues to monitor these exposures and update our loss estimates as new information is received. Additionally, scrutiny from state and federal regulatory agencies could result in changes that limit our business.

Our financial results include four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. The other segment represents lines of business that we exited or sold as part of our 2004 initial public offering (“IPO”).

We derive our revenues principally from premiums from our insurance and reinsurance businesses, unrealized gains and losses and realized gains and other settlements on credit derivatives, net investment income, and net realized gains and losses from our investment portfolio. Our premiums and realized gains and other settlement on credit derivatives are a function of the amount and type of contracts we write as well as prevailing market prices. We receive payments on an upfront basis when the policy is issued or the contract is executed and/or on an installment basis over the life of the applicable transaction.

Investment income is a function of invested assets and the yield that we earn on those assets. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of our invested assets. In addition, we could realize capital losses on securities in our investment portfolio from other than temporary declines in market value as a result of changing market conditions, including changes in market interest rates, and changes in the credit quality of our invested assets.

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

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to maturity. However, in certain circumstances such as for risk management purposes or as a result of a decision to exit a line of business, the Company may decide to terminate a derivative contract prior to maturity.

Unrealized gains (losses) on credit derivatives represent the adjustments for changes in fair value that are recorded in each reporting period under Statement of Financial Accounting Standards (“FAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). Changes in unrealized gains and losses on credit derivatives are reflected in the consolidated statements of operations and comprehensive income in unrealized gains (losses) on credit derivatives. Cumulative unrealized gains (losses), determined on a contract by contract basis, are reflected as either net assets or net liabilities in the Company’s balance sheets. Unrealized gains and losses resulting from changes in the fair value of credit derivatives occur because of changes in interest rates, credit spreads, the credit ratings of the referenced entities, the Company’s credit rating and other market factors. The unrealized gains (losses) on credit derivatives will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early termination. Changes in the fair value of the Company’s credit derivatives that do not reflect actual claims or credit losses have no impact on the Company’s claims paying resources, rating agency capital or regulatory capital positions.

In the three and six months ended June 30, 2009 the Company also recorded a fair value loss of $(60.6) million and $(40.9) million, pre-tax, respectively, related to Assured Guaranty Corp.’s committed capital securities.

Our expenses consist primarily of losses and loss adjustment expenses (“LAE”), profit commission expense, acquisition costs, operating expenses, FSAH acquisition-related expenses, interest expense, put-option premium expense associated with our committed capital securities (the “CCS Securities”) and income taxes. Losses and LAE are a function of the amount and types of business we write. Losses and LAE are based upon estimates of the ultimate aggregate losses inherent in the portfolio. The risks we take have a low expected frequency of loss and are investment grade at the time we accept the risk. Profit commission expense represents payments made to ceding companies generally based on the profitability of the business reinsured by us. Acquisition costs are related to the production of new business. Certain acquisition costs that vary with and are directly attributable to the production of new business are deferred and recognized over the period in which the related premiums are earned. Operating expenses consist primarily of salaries and other employee related costs, including share based compensation, various outside service providers, rent and related costs and other expenses related to maintaining a holding company structure. These costs do not vary with the amount of premiums written. FSAH acquisition-related expenses consist of non-recurring employee related costs, consulting fees and lease termination amounts that the Company is incurring as part of its July 1, 2009 acquisition of FSAH. Interest expense is a function of outstanding debt and the contractual interest rate related to that debt. Put-option premium expense, which is included in “other expenses” on the Consolidated Statements of Operations and Comprehensive Income, is a function of the outstanding amount of the CCS Securities and the applicable distribution rate. Income taxes are a function of our profitability and the applicable tax rate in the various jurisdictions in which we do business.

Critical Accounting Estimates

Our unaudited interim consolidated financial statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the United States of America (“GAAP”), are determined using estimates and assumptions. The actual amounts realized could ultimately be materially different from the amounts currently provided for in our unaudited interim consolidated financial statements. We believe the items requiring the most inherently subjective and complex estimates to be reserves for losses and LAE, fair value of credit derivatives , fair value of committed capital securities, valuation of investments, other than temporary impairments of investments, premium revenue recognition, deferred acquisition costs, deferred income taxes and accounting for share based compensation. An understanding of our accounting policies for these items is of critical importance to understanding our unaudited interim consolidated financial statements. The following discussion provides more information regarding the estimates and assumptions used for these items and should be read in conjunction with the notes to our unaudited interim consolidated financial statements.

Reserves for Losses and Loss Adjustment Expenses

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contracts written in insurance form. Under GAAP, however, the former are subject to derivative accounting rules and the latter are subject to insurance accounting rules.

Financial Guaranty Contracts Upon Adoption of FAS 163

The Company, subsequent to the adoption of FAS No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“FAS 163”) on January 1, 2009, recognizes a reserve for losses and loss adjustment expenses on a financial guarantee insurance contract when the Company expects that a claim loss will exceed the unearned premium revenue for that contract based on the present value of expected net cash outflows to be paid under the insurance contract. The unearned premium revenue represents the insurance enterprise’s stand-ready obligation under a financial guarantee insurance contract at initial recognition. Subsequently, if the likelihood of a default (insured event) increases so that the present value of the expected net cash outflows expected to be paid under the insurance contract exceeds the unearned premium revenue, the Company recognizes a reserve for losses and loss adjustment expenses in addition to the unearned premium revenue.

A reserve for losses and loss adjustment expenses is equal to the present value of expected net cash outflows to be paid under the insurance contract discounted using a current risk-free rate. That current risk-free rate is based on the remaining period (contract or expected, as applicable) of the insurance contract. Expected net cash outflows (cash outflows, net of potential recoveries, expected to be paid to the holder of the insured financial obligation, excluding reinsurance) are probability-weighted cash flows that reflect the likelihood of possible outcomes. The Company estimates the expected net cash outflows using the internal assumptions about the likelihood of possible outcomes based on all information available. Those assumptions consider all relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk-management activities.

It is possible that our estimated loss and loss adjustment expense reserves recorded in our June 30, 2009 financial statements could experience significant adverse development which could lead to material amounts of incurred loss and loss adjustment expenses in future reporting periods as a result of continued deterioration in housing prices; the effects of a weakened economy marked by growing unemployment and wage pressures and/or continued illiquidity of the mortgage market. The Company believes that the maximum probable development under reasonably stressful scenarios on its loss reserve is approximately $550 million. This amount reflects stressed loss assumptions that the Company used in modeling all of its material below investment grade credits. These scenarios were modeled by increasing defaults probabilities and default severities to reflect our view of the maximum probable deterioration likely to occur on these transactions.

Financial Guaranty Contracts Prior to Adoption of FAS 163

Prior to January 1, 2009, reserves for losses and loss adjustment expenses for non-derivative transactions in our financial guaranty direct and financial guaranty assumed reinsurance included case reserves and portfolio reserves. See the “Fair Value of Credit Derivatives” of the Critical Accounting Estimates section for more information on our derivative transactions. Case reserves were established when there was significant credit deterioration on specific insured obligations and the obligations were in default or default was probable, not necessarily upon non-payment of principal or interest by an insured. Case reserves represented the present value of expected future loss payments and LAE, net of estimated recoveries, but before considering ceded reinsurance. This reserving method was different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish incurred but not reported (“IBNR”) reserves for the difference between actuarially estimated ultimate losses and recorded case reserves. Financial guaranty insurance and assumed reinsurance case reserves and related salvage and subrogation, if any,

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

We recorded portfolio reserves in our financial guaranty direct and financial guaranty assumed reinsurance business. Portfolio reserves were established with respect to the portion of our business for which case reserves were not established.

Portfolio reserves were recorded gross of reinsurance. We did not cede any amounts under these reinsurance contracts, as our recorded portfolio reserves did not exceed our contractual retentions, required by said contracts.

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

The weighted average default frequencies and severities of the Company’s portfolio reserves as of December 31, 2008 were 1.08% and 23.87%, respectively. Effective January 1, 2009, upon the adoption of FAS 163, the Company no longer maintains portfolio reserves.

The Company incorporates default frequency and severity by asset class into its portfolio loss reserve models. Average default frequency and severity are based on information published by rating agencies. The increase in average default frequency shown in 2008 is reflective of downgrades within the Company’s direct insured portfolio, including HELOC exposures. Rating agencies update default frequency and severity information on a periodic basis, as warranted by changes in observable data.

Mortgage Guaranty and Other Lines of Business

Reserves for losses and loss adjustment expenses in our mortgage guaranty line of business include case reserves and portfolio reserves. Case reserves are established when there is significant credit deterioration on specific insured obligations and the obligations are in default or default is probable, not necessarily upon non-payment of principal or interest by an insured. Case reserves represent the present value of expected future loss payments and loss adjustment expenses, net of estimated recoveries, but before considering ceded reinsurance. This reserving method is different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish IBNR reserves for the difference between actuarially estimated ultimate losses and recorded case reserves.

We also record portfolio reserves for our mortgage guaranty line of business in a manner consistent with our financial guaranty business prior to the adoption of FAS 163. While other mortgage guaranty insurance companies do not record portfolio reserves, rather just case reserves and IBNR reserves, we record portfolio reserves because we write business on an excess of loss basis, while other industry participants write quota share or first layer loss business. We manage and underwrite this business in the same manner as our financial guaranty insurance and reinsurance business because management believes they have similar characteristics as insured obligations of mortgage backed securities.

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We also record IBNR reserves for our other lines of business. IBNR is an estimate of losses for which the insured event has occurred but the claim has not yet been reported to us. In establishing IBNR, we use traditional actuarial methods to estimate the reporting lag of such claims based on historical experience, claim reviews and information reported by ceding companies. We record IBNR for trade credit reinsurance within our other segment, which is 100% reinsured. The other segment represents lines of business that we exited or sold as part of the Company’s IPO.

Due to the inherent uncertainties of estimating loss and LAE reserves, actual experience may differ from the estimates reflected in our consolidated financial statements and the differences may be material.

Home Equity Line of Credit (HELOC) Transactions

Specifically with respect to reserves related to our U.S. home equity line of credit (“HELOC”) and other U.S. residential mortgage exposures, there exists significant uncertainty as to the ultimate performance of these transactions. As of June 30, 2009, the Company had net par outstanding of $1.5 billion related to HELOC securitizations, of which $1.3 billion are transactions with Countrywide and $1.0 billion were written in the Company’s financial guaranty direct segment (“direct Countrywide transactions” or “Countrywide 2005-J” and “Countrywide 2007-D”).

The performance of our HELOC exposures deteriorated during 2007 and 2008 and the first six months of 2009 and transactions, particularly those originated in the period from 2005 through 2007, continue to perform below our original underwriting expectations. In accordance with our standard practice, during the three and six months ended June 30, 2009, we evaluated the most currently available information, including trends in delinquencies and charge-offs on the underlying loans, draw rates on the lines of credit, and the servicer’s ability to fulfill its contractual obligations including its obligation to fund additional draws. In recent periods, Constant Default Rate (CDR), Constant Payment Rate (CPR), Draw Rates and delinquency percentages have fluctuated within ranges that we believe make it appropriate to use rolling averages to project future performance. Accordingly, the Company is using modeling assumptions that are based upon or which approximate recent actual historical performance to project future performance and potential losses. In the three and six months ended June 30, 2009, consistent with FAS 163, the Company modeled and probability weighted a variety of potential time periods over which an elevated CDR may potentially occur. Further, the Company also incorporated in its loss reserve estimates the possibility that in some of those scenarios the prepayment rates increase after the stressed CDR period, leading to lower recoveries through excess spread. The Company continues to model sensitivities around the results booked using a variety of CDR rates and stress periods as well as other modeling approaches including roll rates and hybrid roll rate/CDR methods. As a result of this modeling and analysis, the Company incurred loss and loss adjustment expenses of $0.5 million and $(4.4) million for its direct Countrywide transactions during the three and six months ended June 30, 2009, respectively. The Company’s cumulative incurred loss and loss adjustment expenses on the direct Countrywide transactions as of June 30, 2009 was $93.8 million ($73.0 million after-tax). During 2009, the Company paid losses and loss adjustment expenses for its direct Countrywide transactions of $83.6 million. The Company’s cumulative paid losses and loss adjustment expenses for its direct Countrywide transactions are $253.6 million as of June 30, 2009, of which we expect to recover $159.7 million from the receipt of excess spread from future cash flows as well as funding of future draws and recoverables from breaches of representations and warranties with respect to the underlying collateral. The excess of paid losses and loss adjustment expenses over expected losses, including amounts related to these recoveries above, results in a recovery of $159.7 million, which is included in “salvage recoverable” on the balance sheet as of June 30, 2009.

Credit support for HELOC transactions comes primarily from two sources. In the first instance, excess spread is used to build a certain amount of credit enhancement and absorb losses. Over the past 12 months, excess spread (the difference between the interest collections on the collateral and the interest paid on the insured notes) has averaged approximately 270 basis points per annum. Additionally, for the transactions serviced by Countrywide, the servicer is required to fund additional draws on the HELOC loans following the occurrence of a Rapid Amortization Event. Among other things, such an event is triggered when claim payments by us exceed a certain threshold. Prior to the occurrence of a Rapid Amortization Event, during the transactions’ revolving period, new draws on the HELOC loans are funded first from principal collections. As such, during the revolving period no additional credit enhancement is created by the additional draws, and the speed at which our exposure amortizes is reduced to the extent of such additional draws, since principal collections are used to fund those draws rather than pay down the insured notes. Subsequent to the occurrence of a Rapid Amortization Event, new draws are funded by Countrywide

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and all principal collections are used to pay down the insured notes. Any draws funded by Countrywide are subordinate to us in the cash flow waterfall and hence represent additional credit enhancement available to absorb losses before we have to make a claim payment. Additionally, since all principal collections are used to pay down the insured notes, rather than fund additional draws, our exposure begins to amortize more quickly. A Rapid Amortization Event occurred for Countrywide 2007-D in April 2008 and for Countrywide 2005-J in May 2008.

We have modeled our HELOC exposures under a number of different scenarios, taking into account the multiple variables and structural features that materially affect transaction performance and potential losses to us. The key variables include the speed or rate at which borrowers make payments on their loans, as measured by the CPR(1) the default rate, as measured by the CDR(2) excess spread, and the amount of loans that are already delinquent more than 30 days. We also take into account the pool factor (the percentage of the original principal balance that remains outstanding), and the timing of the remaining cash flows. Additionally, it should be noted that our contractual rights allow us to retroactively claim that loans included in the insured pool were inappropriately included in the pool by the seller, and to put these loans back to the originator such that we would not be responsible for losses related to these loans. Such actions would benefit us by reducing potential losses. We have included in our loss model an estimated benefit for loans we expect Countrywide will repurchase.

The ultimate performance of the Company’s HELOC transactions will depend on many factors, such as the level and timing of loan defaults, interest proceeds generated by the securitized loans, repayment speeds and changes in home prices, as well as the levels of credit support built into each transaction. Other factors also may have a material impact upon the ultimate performance of each transaction, including the ability of the seller and servicer to fulfill all of their contractual obligations including its obligation to fund future draws on lines of credit, as well as the amount of benefit received from repurchases of ineligible loans by Countrywide. The variables affecting transaction performance are interrelated, difficult to predict and subject to considerable volatility. Consequently, the range of potential outcomes is wide and subject to significant uncertainty. We continue to update our evaluation of these exposures as new information becomes available.

The key assumptions used in our analysis of potential case loss reserves on the direct Countrywide transactions are presented in the following table:

Key Variables
Constant payment rate (CPR)		3-month average, 6.83–10.92% as of June 30, 2009
Constant default rate (CDR)		6-month average CDR of approximately 17–21% used for our initial default projections, ramping down to a steady state CDR of 1.0%
Draw rate		3-month average, 0.76–1% as of June 30, 2009
Excess spread		250 bps per annum
Repurchases of Ineligible loans by Countrywide		$195.0 million; or approximately 8.1% of original pool balance of $2.4 billion
Loss Severity		100%

Subprime, Alt-A and Closed End Second RMBS Transactions

(1) The CPR is the annualized rate at which the portfolio amortizes, so that a 15% CPR implies that 15% of the collateral will be retired over a one-year period.

(2) The CDR is the annualized default rate, so that a 1.0% CDR implies that 1.0% of the remaining collateral will default each year.

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classified by us as Below Investment Grade risk. Of the total U.S. Subprime RMBS exposure of $918 million, $430 million is from transactions issued in the period from 2005 through 2007 and written in our direct financial guaranty segment. As of June 30, 2009, we had case reserves of $14.3 million related to our $918 million U.S. Subprime RMBS exposure, of which $3.7 million were related to our $430 million exposure in the direct financial guaranty segment for transactions issued from 2005 through 2007.

Another type of RMBS transaction is generally referred to as “Alt-A RMBS”. The collateral supporting such transactions is comprised of first-lien residential mortgage loans made to prime quality borrowers that lack certain ancillary characteristics that would make them prime. Included in this category is Alt-A Option ARMs, which include transactions where 66% or more of the collateral is comprised of mortgage loans that have the potential to negatively amortize. As of June 30, 2009, the Company had net par outstanding of $1.4 billion related to Alt-A RMBS securitizations. Of that amount, $1.3 billion is from transactions issued in the period from 2005 through 2007 and written in the Company’s financial guaranty direct segment. As of June 30, 2009, the Company had case reserves of $16.2 million for Alt-A and $19.3 million for the Option-ARM related to its $1.4 billion Alt-A/Option-ARM RMBS exposure, in the financial guaranty direct and reinsurance segments.

Life Insurance Securitizations

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Additionally, the transactions also contain features linked to the market values of the invested assets, reserve funding requirements on the underlying blocks of life insurance business, and minimum capital requirements for the transactions themselves that may trigger a shut off of interest payments to the insured notes and thereby result in claim payments by the Company.

In order for the Company to incur an ultimate net loss on these transactions, adverse experience on the underlying block of life insurance policies and/or credit losses in the investment portfolio would need to exceed the level of credit enhancement built into the transaction structures. Based on its analysis of the information currently available, including estimates of future investment performance, projected credit impairments on the invested assets and performance of the blocks of life insurance business, at June 30, 2009, the Company’s case reserve is $30.9 million for the Ballantyne transaction. This case reserve reflects expected losses resulting primarily from the deterioration in the investment portfolio as discussed above. At this time we do not expect the shut off triggers or recaptures by cedants discussed above to occur. Should these events occur our losses could be significantly greater than our case reserve. The Company has not established a case loss reserve for the Orkney Re II transaction due to the fact that modeled loss scenarios project sufficient cash flows from the investment and life insurance activities so that the Company does not suffer an ultimate loss in excess of its unearned premium reserve as of June 30, 2009.

A sensitivity analysis is not appropriate for our other segment reserves, since the amounts are 100% reinsured.

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The following tables summarize our reserves for losses and LAE by segment and type of reserve as of the dates presented. For an explanation of changes in these reserves see “—Consolidated Results of Operations.”

	As of June 30, 2009
	Financial Guaranty Direct		Financial Guaranty Reinsurance		Mortgage Guaranty		Other		Total
	(in millions of U.S. dollars)
Financial Guaranty Insurance Reserves by segment and type (1) :
Case	$	112.1	$	83.1	$	0.1	$	1.1	$	196.4
IBNR and portfolio	N/A		N/A		2.0		1.9		3.9
Total financial guaranty insurance loss and LAE reserves	112.1		83.1		2.1		3.0		200.3
Credit Derivative Reserves by segment and type (2) :
Case	77.7		5.0		—		—		82.7
Total credit derivative loss and LAE reserves	77.7		5.0		—		—		82.7
Total loss and LAE reserves, including credit derivatives	$	189.8	$	88.1	$	2.1	$	3.0	$	283.0

	As of December 31, 2008
	Financial Guaranty Direct		Financial Guaranty Reinsurance		Mortgage Guaranty		Other		Total
	(in millions of U.S. dollars)
Financial Guaranty Insurance Reserves by segment and type (1) :
Case	$	64.2	$	55.7	$	0.1	$	1.5	$	121.5
IBNR	—		—		—		3.0		3.0
Portfolio reserves associated with fundamentally sound credits	11.8		35.5		2.5		—		49.8
Portfolio reserves associated with CMC credits	15.8		6.7		—		—		22.5
Total financial guaranty insurance loss and LAE reserves	91.8		97.9		2.6		4.5		196.8
Credit Derivative Reserves by segment and type (2) :
Case	7.2		5.5		—		—		12.7
Credit derivative portfolio reserves associated with fundamentally sound credits	15.7		—		—		—		15.7
Credit derivative portfolio reserves associated with CMC credits	23.4		—		—		—		23.4
Total credit derivative loss and LAE reserves	46.3		5.5		—		—		51.8
Total loss and LAE reserves, including credit derivatives (3)	$	138.1	$	103.4	$	2.6	$	4.5	$	248.6

(1) Included in Reserves for losses and loss adjustment expenses on the Balance Sheet.

(2) Included in Credit derivative liabilities/assets on the Balance Sheet.

(3) Total does not add due to rounding.

N/A = Not applicable

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The following table sets forth the financial guaranty insurance policy and CDS contract in-force portfolio by underlying rating:

	As of June 30, 2009				As of December 31, 2008
Ratings (1)	Net par outstanding		% of Net par outstanding		Net par outstanding		% of Net par outstanding
	(in billions of U.S. dollars)

Super senior	$	27.7	11.2	%	$	32.4	14.5	%
AAA	35.3		14.3	%	40.7		18.3	%
AA	50.0		20.3	%	47.7		21.4	%
A	88.1		35.7	%	66.0		29.6	%
BBB	35.5		14.4	%	29.4		13.2	%
Below investment grade	10.1		4.1	%	6.6		3.0	%
Total exposures	$	246.8	100.0	%	$	222.7	100.0	%

(1) The Company’s internal rating. The Company’s scale is comparable to that of the nationally recognized rating agencies. 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 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 benefits 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.

(2) Total does not add due to rounding.

The change in ratings above is mainly related to the Company’s U.S. RMBS exposures.

Our surveillance department is responsible for monitoring our portfolio of credits and maintains a list of below investment grade (“BIG”) credits. This list includes credits written in both financial guarantee insurance policy and CDS contract form. The BIG credits are divided into three categories: Category 1 (below investment grade credit with no expected losses); Category 2 (below investment grade credit with a loss reserve established prior to an event of default); Category 3 (below investment grade credit with a loss reserve established and where an event of default has occurred or is imminent).

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The following table provides financial guaranty insurance policy and CDS contract net par outstanding by credit monitoring category as of June 30, 2009:

	As of June 30, 2009
Description:	Net Par Outstanding		% of Net Par Outstanding		# of Policies in Category	Case Reserves (2)
	($ in millions)
Category 1	$	1,209	12.0	%	44	$	0.1
Category 2	3,155		31.3	%	282	45.8
Category 3	5,701		56.6	%	432	232.1
BIG total(1)	$	10,066	100.0	%	758	$	277.9

(1) Total does not add due to rounding.

(2) Includes case reserves on credit derivatives of $82.7 million at June 30, 2009, which balances are included in credit derivative liabilities in the Company’s consolidated balance sheets.

During the Second Quarter 2009, we added net par of approximately $0.5 billion related to U.S. RMBS, $0.2 billion related trust preferred collateralized debt obligations and $0.2 billion related to U.S. municipal obligations to our BIG list.

Prior to 2009, our surveillance department maintained a list of closely monitored credits (“CMC”). The closely monitored credits were divided into four categories: Category 1 (low priority; fundamentally sound, greater than normal risk); Category 2 (medium priority; weakening credit profile, may result in loss); Category 3 (high priority; claim/default probable, case reserve established); Category 4 (claim paid, case reserve established for future payments). The closely monitored credits included all below investment grade exposures where there was a material amount of exposure (generally greater than $10.0 million) or a material risk of the Company incurring a loss greater than $0.5 million. The closely monitored credits also included investment grade risks where credit quality was deteriorating and where, in the view of the Company, there was significant potential that the risk quality will fall below investment grade. As of December 31, 2008, the closely monitored credits included approximately 99% of our BIG exposure, and the remaining BIG exposure of $92.3 million was distributed across 89 different credits. Other than those excluded BIG credits, credits that were not included in the closely monitored credit list were categorized as fundamentally sound risks.

The following table provides financial guaranty insurance policy and credit derivative contract net par outstanding by credit monitoring category as of December 31, 2008:

	As of December 31, 2008
Description:	Net Par Outstanding		% of Net Par Outstanding		# of Credits in Category	Case Reserves (2)
	($ in millions)
Fundamentally sound risk	$	215,987	97.0	%
Closely monitored:
Category 1	2,967		1.3	%	51	$	—
Category 2	767		0.3	%	21	1
Category 3	2,889		1.3	%	54	111
Category 4	20		—		14	20
CMC total(1)	6,643		3.0	%	140	133
Other below investment grade risk	92		—		89	—
Total(1)	$	222,722	100.0	%		$	133

(1) Total does not add due to rounding.

(2) Includes case reserves on credit derivatives of $12.7 million at December 31, 2008, which balances are included in credit derivative liabilities in the Company’s consolidated balance sheets.

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Salvage Recoverable

When the Company becomes entitled to the underlying collateral (generally a future stream of cash flows or pool assets) of an insured credit under salvage and subrogation rights as a result of a claim payment or estimates recoveries from disputed claim payments on contractual grounds, it reduces the corresponding loss reserve for a particular financial guaranty insurance policy for the estimated salvage and subrogation, in accordance with FAS 60, “Accounting and Reporting by Insurance Enterprises.” If the expected salvage and subrogation exceeds the estimated loss reserve for a policy, such amounts are recorded as a salvage recoverable asset in the Company’s balances sheets.

Fair Value of Credit Derivatives

The Company follows FAS 133, , FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”) and FAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“FAS 155”), which establishes accounting and reporting standards for derivative instruments and FAS No. 157 “Fair Value Measurements” (“FAS 157”), which establishes a comprehensive framework for measuring fair value. FAS 133 and FAS 149 require recognition of all derivatives on the balance sheet at fair value. FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also requires an entity maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. The price represents that 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).

FAS 157 specifies a fair value hierarchy 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-based market assumptions. In accordance with FAS 157, the fair value hierarchy prioritizes model inputs into three broad levels as follows:

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

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

· Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available.

An asset or liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

We issue credit derivatives that we view as an extension of our financial guaranty business but that do not qualify for the financial guaranty insurance scope exception under FAS 133 and FAS 149 and therefore are reported at fair value, with changes in fair value included in our earnings.

Our realized gains and other settlements on credit derivatives include credit derivative premiums received and receivable, credit derivative losses paid and payable and realized gains or losses due to early terminations and ceding commissions (expense) income. Credit derivative premiums and ceding commissions (expense) income are earned over the life of the transaction. Claim payments or recoveries are related to credit events requiring payment by or to us under the credit derivative contract. Realized gains or losses are recorded related to the early termination of credit derivative contracts.

Our unrealized gains and losses on credit derivatives represent changes in fair value of these instruments that are required to be recorded under FAS 133. The unrealized gains and losses on credit derivatives will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early

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termination . However, in the event that we terminate a credit derivative contract prior to maturity the unrealized gain or loss will be realized through realized gains or losses and other settlements on credit derivatives. Changes in the fair value of our derivative contracts do not generally reflect actual claims or credit losses, and have no impact on the Company’s claims paying resources, rating agency capital or regulatory capital positions or debt covenants.

We do not typically exit our credit derivative contracts and there are not quoted prices for our instruments or similar instruments. Observable inputs other than quoted market prices exist; however, these inputs reflect contracts that do not contain terms and conditions similar to the credit derivatives issued by us. Therefore, the valuation of our credit derivative contracts requires the use of models that contain significant, unobservable inputs. Thus, we believe that our credit derivative contract valuations are in Level 3 in the fair value hierarchy of FAS 157.

The fair value of these instruments represents the difference between the present value of remaining contractual premiums charged for the credit protection and the estimated present value of premiums that a comparable financial guarantor would hypothetically charge for the same protection at the balance sheet date. The fair value of these contracts depends on a number of factors including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of the referenced entities, our own credit risk and remaining contractual flows.

Remaining contractual cash flows, which are included in the realized gains and other settlements on credit derivatives component of credit derivatives, are the most readily observable variables since they are based on the CDS contractual terms. These variables include i) net premiums received and receivable on written credit derivative contracts, ii) net premiums paid and payable on purchased contracts, iii) losses paid and payable to credit derivative contract counterparties and iv) losses recovered and recoverable on purchased contracts. The remaining key variables described above impact unrealized gains (losses) on credit derivatives.

Market conditions at June 30, 2009 were such that market prices for our CDS contracts were generally not available. Where market prices were not available, we used a combination of observable market data and valuation models, including various market indices, credit spreads, our own credit risk and estimated contractual payments to estimate the fair value of the Company’s credit derivatives. These models are primarily developed internally based on market conventions for similar transactions. Management considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts. These terms differ from credit derivatives sold by companies outside of the financial guaranty industry. The non-standard terms include the absence of collateral support agreements or immediate settlement provisions, relatively high attachment points and the fact that the Company does not exit derivatives it sells for credit protection purposes, except under specific circumstances such as exiting a line of business. Because of these terms and conditions, the fair value of the Company’s credit derivatives may not reflect the same prices observed in an actively traded market of credit default swaps that do not contain terms and conditions similar to those observed in the financial guaranty market. These models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information.

Valuation models include the use of management estimates and current market information. Management is also required to make assumptions on how the fair value of credit derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, performance of underlying assets, life of the instrument, and the extent of credit default swaps exposure the Company ceded under reinsurance agreements, and the nature and extent of activity in the financial guaranty credit derivative marketplace. The assumptions that management uses to determine its fair value may change in the future due to market conditions. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these credit derivative products, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements and the differences may be material.

The fair value adjustment recognized in our statements of operations for the three months ended June 30, 2009 (“Second Quarter 2009”) was a $(254.3) million loss compared with a $708.5 million gain for the three months ended June 30, 2008 (“Second Quarter 2008”). The fair value adjustment recognized in our statements of operations for the six months ended June 30, 2009 (“Six Months 2009”) was a $(227.3) million loss compared with a $448.9 million gain for the six months ended June 30, 2008 (“Six Months 2008”). The change in fair value for Second Quarter 2009 and Six Months 2009 was attributable to spreads widening and includes no credit losses, partially offset by the higher credit risk of the Company as indicated by the cost of credit protection on us, which decreased

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from 1,775 basis points at December 31, 2008 to 1,544 basis points at June 30, 2009.The change in fair value for Second Quarter 2008 and Six Months 2008 is mainly due to an increase in the market measure of the Company’s credit risk as indicated by the cost of CDS credit protection on us, which increased from 180 basis points at December 31, 2007 to 900 basis points at June 30, 2008, which was only partially offset by widening spreads of the underlying obligations. For Second Quarter 2008 and Six Months 2008, approximately 55% and 65%, respectively, of our unrealized gain on credit derivative financial instruments is attributable to the fair value of high yield and investment grade corporate collateralized loan obligation transactions, with the balance of the change in fair values principally in the residential and commercial mortgage backed securities markets. With considerable volatility continuing in the market, the fair value adjustment amount will fluctuate significantly in future periods.

Fair Value of Committed Capital Securities (“CCS”)

The fair value of CCS Securities represents the present value of remaining expected put option premium payments under the CCS Securities agreements and the value of such estimated payments based upon the quoted price for such premium payments as of June 30, 2009 and December 31, 2008. The $10.2 million and $51.1 million fair value asset for CCS Securities as of June 30, 2009 and December 31, 2008, respectively, is included in the consolidated balance sheets. Changes in fair value of this asset are included in fair value gain (loss) on committed capital securities in the consolidated statements of operations and comprehensive income. The Second Quarter 2009 and Six Months 2009 amounts also included a fair value loss of $(60.6) million and $(40.9) million, pre-tax, respectively, related to Assured Guaranty Corp.’s CCS Securities as resulting of the widening of the Company’s credit spreads. The Second Quarter 2008 and Six Months 2008 amounts also included a fair value gain of $8.9 million and $17.4 million, pre-tax, respectively, related to Assured Guaranty Corp.’s CCS Securities as resulting of the widening of the Company’s credit spreads.

Valuation of Investments

As of June 30, 2009 and December 31, 2008, we had total investments of $4.6 billion and $3.6 billion, respectively. The fair values of all of our investments are calculated from independent market valuations. The fair values of the Company’s U.S. Treasury securities are primarily determined based upon broker dealer quotes obtained from several independent active market makers. The fair values of the Company’s portfolio other than U.S. Treasury securities are determined primarily using matrix pricing models. The matrix pricing models incorporate factors such as tranche type, collateral coupons, average life, payment speeds, and spreads, in order to calculate the fair values of specific securities owned by the Company. As of June 30, 2009, under FAS 157, all of our fixed maturity securities were classified as Level 2 and our short-term investments were classified as either Level 1 or Level 2.

As of June 30, 2009, approximately 74% of our investments were long-term fixed maturity securities, and our portfolio had an average duration of 3.3 years, compared with 87% and 4.1 years as of December 31, 2008. Changes in interest rates affect the value of our fixed maturity portfolio. As interest rates fall, the fair value of fixed maturity securities increases and as interest rates rise, the fair value of fixed maturity securities decreases. The Company’s portfolio is comprised primarily of high-quality, liquid instruments. We continue to receive sufficient information to value our investments and have not had to modify our approach due to the current market conditions.

Other Than Temporary Impairment (“OTTI”) Methodology

We have a formal review process for all securities in our investment portfolio, including a review for impairment losses. Factors considered when assessing impairment include:

· a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;

· a decline in the market value of a security for a continuous period of 12 months;

· recent credit downgrades of the applicable security or the issuer by rating agencies;

· the financial condition of the applicable issuer;

· whether loss of investment principal is anticipated;

· whether scheduled interest payments are past due; and

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· whether the Company has the intent to sell a security prior to its recovery in fair value .

If we believe a decline in the value of a particular investment is temporary, we record the decline as an unrealized loss on our balance sheet in “accumulated other comprehensive income” in shareholders’ equity.

As discussed in more detail below, prior to April 1, 2009, the reviews for impairment of investments were conducted pursuant to FSP No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”). And accordingly, any unrealized loss identified as other than temporary was recorded directly in the consolidated statement of income. As of April 1, 2009, we adopted FSP 115-2. Accordingly, any credit-related impairment related to debt securities the Company does not plan to sell and is more-likely-than-not not to be required to sell is recognized in the consolidated statement of income, with the non-credit-related impairment recognized in other comprehensive income (“OCI”). For other impaired debt securities, the entire impairment is recognized in the consolidated statement of income.

We adopted FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”) on April 1, 2009. Effective with the adoption of FSP 115-2 we recognize an OTTI loss in earnings for a debt security in an unrealized loss position when either (a) we have the intent to sell the debt security or (b) it is more likely than not we will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, we analyze the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the net present value is less than the amortized cost of the investment, an OTTI loss is recorded. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Our estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. We develop these estimates using information based on historical experience, credit analysis of an investment, as mentioned above, and market observable data, such as industry analyst reports and forecast, sector credit ratings and other data relevant to the collectability of the security. For mortgage-backed and asset-backed securities, cash flow estimates also include prepayment assumptions and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The determination of the assumptions used in these projections requires the use of significant management judgment.

Prior to adoption of FSP 115-2 on April 1, 2009, if we believed the decline was “other than temporary,” we wrote down the carrying value of the investment and recorded a realized loss in our statement of operations equal to the total difference between amortized cost and fair value at the impairment measurement date .

Our assessment of a decline in value includes management’s current assessment of the factors noted above. If that assessment changes in the future, we may ultimately record a loss after having originally concluded that the decline in value was temporary.

As part of our OTTI review process, we consider the nature of the investment, the cause for the impairment (interest or credit related), the severity (both as a percentage of book value and absolute dollars) and duration of the impairment and any other available evidence, such as discussions with investment advisors, volatility of the securities fair value, recent news reports, etc., when performing our assessment.

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As of June 30, 2009, excluding the securities described above, the Company’s gross unrealized loss position stood at $100.7 million compared to $122.5 million at December 31, 2008. The $21.8 million decrease in gross unrealized losses was primarily attributable to municipal securities, $30.1 million, and partially offset by an increase in gross unrealized losses in mortgage- and asset backed securities, $6.9 million. The decrease in gross unrealized losses during the six months ended June 30, 2009 was related to the recovery of liquidity in the financial markets offset in part by a $62.2 million transition adjustment for adoption of FSP 115-2.

The Company recognized $14.8 million and $33.3 million of other than temporary impairment losses substantially related to mortgage backed and corporate securities for the three and six months ended June 30, 2009, respectively. The 2009 OTTI represents the credit component of the changes in unrealized losses for impaired securities. The Company intends to hold these securities until there is a recovery in their value. The Company continues to monitor the value of these investments. Future events may result in further impairment of the Company’s investments. The Company wrote down $0.3 million of investments for other than temporary impairment losses for the three- and six-month periods ended June 30, 2008.

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The following table summarizes the unrealized losses in our investment portfolio by type of security and the length of time such securities have been in a continuous unrealized loss position as of the dates indicated:

	As of June 30, 2009					As of December 31, 2008 (1)
Length of Time in Continuous Unrealized Loss Position	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	($ in millions)
U.S. Government and agencies
0-6 months	$	277.6	$	(2.5	)	$	—	$	—
7-12 months	—		—			8.0		—
Greater than 12 months	—		—			—		—
	277.6		(2.5		)	8.0		—

Obligations of state and political subdivisions
0-6 months	81.1		(0.9		)	168.8		(5.8		)
7-12 months	13.8		(0.3		)	310.6		(22.9		)
Greater than 12 months	332.3		(20.1		)	137.9		(22.7		)
	427.2		(21.3		)	617.3		(51.4		)

Corporate and foreign government securities
0-6 months	59.7		(3.1		)	23.7		(1.7		)
7-12 months	9.9		(1.8		)	81.9		(8.5		)
Greater than 12 months	84.4		(6.1		)	14.2		(1.6		)
	154.0		(11.0		)	119.8		(11.8		)

Residential mortgage-backed securities
0-6 months	131.6		(25.7		)	8.0		(2.0		)
7-12 months	8.6		(4.1		)	38.4		(15.7		)
Greater than 12 months	17.2		(5.0		)	38.2		(2.8		)
	157.4		(34.8		)	84.6		(20.5		)

Commercial mortgage-backed securities
0-6 months	47.9		(11.5		)	62.3		(6.3		)
7-12 months	26.4		(1.6		)	72.7		(20.5		)
Greater than 12 months	104.6		(17.6		)	36.2		(4.5		)
	178.9		(30.7		)	171.2		(31.3		)

Asset-backed securities
0-6 months	24.8		(0.1		)	73.2		(7.2		)
7-12 months	1.6		(0.3		)	—		—
Greater than 12 months	—		—			—		—
	26.4		(0.4		)	73.2		(7.2		)

Preferred stock
0-6 months	—		—			12.4		(0.3		)
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			12.4		(0.3		)
Total	$	1,221.5	$	(100.7	)	$	1,086.5	$	(122.5	)

(1) December 31, 2008 amounts are not comparable to June 30, 2009 due to adoption of FSP 115-2 effective April 1, 2009.

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The following table summarizes the unrealized losses in our investment portfolio by type of security and remaining time to maturity as of the dates indicated:

	As of June 30, 2009					As of December 31, 2008 (1)
Remaining Time to Maturity	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	($ in millions)
U.S. Government and agencies
Due in one year or less	$	8.0	$	—		$	8.0	$	—
Due after one year through five years	236.4		(2.3		)	—		—
Due after five years through ten years	33.2		(0.2		)	—		—
Due after ten years	—		—			—		—
	277.6		(2.5		)	8.0		—

Obligations of state and political subdivisions
Due in one year or less	—		—			—		—
Due after one year through five years	—		—			5.4		—
Due after five years through ten years	30.4		(0.9		)	42.4		(2.6		)
Due after ten years	396.8		(20.4		)	569.5		(48.8		)
	427.2		(21.3		)	617.3		(51.4		)

Corporate and foreign government securities
Due in one year or less	1.0		—			0.8		—
Due after one year through five years	29.5		(0.8		)	23.9		(1.2		)
Due after five years through ten years	105.4		(5.0		)	72.6		(6.6		)
Due after ten years	18.1		(5.2		)	22.5		(4.0		)
	154.0		(11.0		)	119.8		(11.8		)

Residential mortgage-backed securities	157.4		(34.8		)	84.6		(20.5		)

Commercial mortgage-backed securities	178.9		(30.7		)	171.2		(31.3		)

Asset-backed securities	26.4		(0.4		)	73.2		(7.2		)

Preferred stock	—		—			12.4		(0.3		)

Total	$	1,221.5	$	(100.7	)	$	1,086.5	$	(122.5	)

(1) December 31, 2008 amounts are not comparable to June 30, 2009 due to adoption of FSP 115-2 effective April 1, 2009.

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The following table summarizes, for all securities sold at a loss through June 30, 2009 and 2008, the fair value and realized loss by length of time such securities were in a continuous unrealized loss position prior to the date of sale:

	Three Months Ended June 30,
	2009					2008
Length of Time in Continuous Unrealized Loss Prior to Sale	Estimated Fair Value		Gross Realized Losses			Estimated Fair Value		Gross Realized Losses
	($ in millions)
U.S. Government and agencies
0-6 months	$	—	$	—		$	—	$	—
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			—		—

Obligations of state and political subdivisions
0-6 months	24.5		(0.3		)	—		—
7-12 months	—		—			—		—
Greater than 12 months	4.2		(0.1		)	—		—
	28.7		(0.4		)	—		—

Corporate and foreign government securities
0-6 months	0.4		—			1.1		—
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	0.4		—			1.1		—

Residential mortgage-backed securities
0-6 months	57.8		(2.8		)	38.1		(0.3		)
7-12 months	—		—			—		—
Greater than 12 months	2.5		(12.0		)	4.2		(0.1		)
	60.3		(14.8		)	42.3		(0.4		)

Commercial mortgage-backed securities
0-6 months	—		—			8.7		(0.1		)
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			8.7		(0.1		)

Asset-backed securities
0-6 months	—		—			—		—
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			—		—

Preferred stock (1)
0-6 months	—		—			4.6		(0.3		)
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			4.6		(0.3		)

Total	$	89.4	$	(15.2	)	$	56.7	$	(0.8	)

(1) 2008 amount relates to other than temporary impairment losses.

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	Six Months Ended June 30,
	2009					2008
Length of Time in Continuous Unrealized Loss Prior to Sale	Estimated Fair Value		Gross Realized Losses			Estimated Fair Value		Gross Realized Losses
	($ in millions)
U.S. Government and agencies
0-6 months	$	—	$	—		$	—	$	—
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			—		—

Obligations of state and political subdivisions
0-6 months	24.6		(0.3		)	2.5		(0.3		)
7-12 months	—		—			—		—
Greater than 12 months	7.8		(1.8		)	—		—
	32.4		(2.1		)	2.5		(0.3		)

Corporate and foreign government securities
0-6 months	1.5		(0.4		)	1.5		—
7-12 months	7.3		(6.9		)	2.1		—
Greater than 12 months	0.8		(0.2		)	—		—
	9.6		(7.5		)	3.6		—

Residential mortgage-backed securities
0-6 months	57.8		(2.9		)	42.9		(0.4		)
7-12 months	10.2		(15.4		)	—		—
Greater than 12 months	23.3		(12.2		)	4.2		(0.1		)
	91.3		(30.5		)	47.1		(0.5		)

Commercial mortgage-backed securities
0-6 months	—		—			8.8		(0.1		)
7-12 months	—		—			1.2		—
Greater than 12 months	—		—			1.2		—
	—		—			11.2		(0.1		)

Asset-backed securities
0-6 months	—		—			—		—
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	—		—			—		—

Preferred stock (1)
0-6 months	11.2		(1.5		)	4.6		(0.3		)
7-12 months	—		—			—		—
Greater than 12 months	—		—			—		—
	11.2		(1.5		)	4.6		(0.3		)

Total	$	144.5	$	(41.6	)	$	69.0	$	(1.2	)

(1) 2008 amount relates to other than temporary impairment losses.

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Premium Revenue Recognition

Premiums are received either upfront or in installments.

Upon Adoption of FAS 163

In our reinsurance businesses, we estimate the ultimate written and earned premiums to be received from a ceding company at the end of each quarter and the end of each year because some of our ceding companies report premium data anywhere from 30 to 90 days after the end of the relevant period. Written premiums reported in our statement of operations are based upon reports received from ceding companies supplemented by our own estimates of premium for which ceding company reports have not yet been received. As of June 30, 2009 and December 31, 2008, the assumed premium estimate and related ceding commissions included in our unaudited interim consolidated financial statements were $1.0 million and $0.3 million and $5.4 million and $1.0 million, respectively. Key assumptions used to arrive at management’s best estimate of assumed premiums are premium amounts reported historically and informal communications with ceding companies. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. Historically, the differences have not been material. We do not record a provision for doubtful accounts related to our assumed premium estimate. Historically there have not been any material issues related to the collectibility of assumed premium. No provision for doubtful accounts related to our premium receivable was recorded for June 30, 2009 or December 31, 2008.

Prior to Adoption of FAS 163

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Unearned premium reserves represented the portion of premiums written that was applicable to the unexpired amount at risk of insured bonds.

Deferred Acquisition Costs

Acquisition costs incurred, other than those associated with credit derivative products, that vary with and are directly related to the production of new business are deferred in proportion to written premium and amortized in relation to earned premiums. These costs include direct and indirect expenses such as ceding commissions, brokerage expenses and the cost of underwriting and marketing personnel. As of June 31, 2009 and December 31, 2008, we had deferred acquisition costs of $374.1 million and $288.6 million, respectively. Ceding commissions paid to primary insurers are the largest component of deferred acquisition costs, constituting 68% and 59% of total deferred acquisition costs as of June 30, 2009 and December 31, 2008, respectively. Management uses its judgment in determining what types of costs should be deferred, as well as what percentage of these costs should be deferred. We annually conduct a study to determine which operating costs vary with, and are directly related to, the acquisition of new business and qualify for deferral. Ceding commissions received on premiums we cede to other reinsurers reduce acquisition costs. Anticipated losses, LAE and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of acquisition costs. Acquisition costs associated with credit derivative products are expensed as incurred. When an insured issue is retired early, as discussed above in the Premium Revenue Recognition section of these Critical Accounting Estimates, the remaining related deferred acquisition cost is expensed at that time. Upon the adoption of FAS 163, ceding commissions associated with future installment premiums on assumed and ceded reinsurance business were recorded in deferred acquisition costs.

Taxation of Subsidiaries

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

The U.S. Internal Revenue Service (“IRS”) has completed audits of all of the Company’s U.S. subsidiaries’ federal income tax returns for taxable years through 2001. In September 2007, the IRS completed its audit of tax years 2002 through 2004 for Assured Guaranty Overseas US Holdings Inc. and subsidiaries, which includes Assured Guaranty Overseas US Holdings Inc., AGRO, Assured Guaranty Mortgage Insurance Company and AG Intermediary Inc. As a result of the audit there were no significant findings and no cash settlements with the IRS. In addition the IRS is reviewing Assured Guaranty US Holdings Inc. and subsidiaries for tax years 2002 through the date of the IPO. AGUS includes Assured Guaranty US Holdings Inc., AGC and AG Financial Products and were part of the consolidated tax return of a subsidiary of ACE Limited (“ACE”), our former parent, for years prior to the IPO. The Company is indemnified by ACE for any potential tax liability associated with the tax examination of AGUS as it relates to years prior to the IPO. In addition, tax years 2005 and subsequent remain open.

Deferred Income Taxes

As of June 30, 2009 and December 31, 2008, we had a net deferred income tax asset of $209.1 million and $129.1 million, respectively. Certain of our subsidiaries are subject to U.S. income tax. Deferred income tax assets and liabilities are established for the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Such temporary differences relate principally to unrealized gains and losses on investments and credit derivatives, deferred acquisition costs, reserves for losses and LAE, unearned premium reserves, net operating loss carryforwards (“NOLs”) and statutory contingency reserves. A valuation allowance is recorded to reduce a deferred tax asset to the amount that in management’s opinion is more likely than not to be realized.

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Insurance Company (“AGMIC”) is a member of the same consolidated tax group as AGRO. In Six Months 2009 AGMIC had a projected NOL of $2.4 million which would be available through 2020.

Under applicable accounting rules, we are required to establish a valuation allowance for NOLs that we believe are more likely than not to expire before being utilized. Management has assessed the likelihood of realization of all of its deferred tax assets. Based on this analysis, management believes it is more likely than not that $20.0 million of AGRO’s $47.9 million NOL will not be utilized before it expires and has established a $7.0 million valuation allowance related to the NOL deferred tax asset. In addition, for the three months ended June 30, 2009, management assessed that a valuation allowance of $3.4 million is no longer necessary for AGMIC due to the decrease in loss reserves in the same period. Management believes that all other deferred income taxes are more-likely-than-not to be realized. The valuation allowance is subject to considerable judgment, is reviewed quarterly and will be adjusted to the extent actual taxable income differs from estimates of future taxable income that may be used to realize NOLs or capital losses.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. The total liability for unrecognized tax benefits as of both June 30, 2009 and December 31, 2008 was $5.1 million and is included in other liabilities on the balance sheet. The Company does not believe it is reasonably possible that this amount will change significantly in the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.

Liability For Tax Basis Step-Up Adjustment

Accounting for Share-Based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of FAS No. 123 (revised), “Share-Based Payment” (“FAS 123R”) using the modified prospective transition method. Share-based compensation expense in Second Quarter 2009 and Second Quarter 2008 was $1.6 million ($1.2 million after tax) and $2.0 million ($1.5 million after tax), respectively. Share-based compensation expense in Six Months 2009 and Six Months 2008 was $5.3 million ($4.3 million after tax) and $8.4 million ($6.9 million after tax), respectively. The effect on basic and diluted earnings per share for Second Quarter 2009 and Six Months 2009 was $0.01 and $0.05, respectively. The effect on basic and diluted earnings per share for Second Quarter 2008 and Six Months 2008 was $0.02 and $0.08, respectively. Second Quarter 2009 and Second Quarter 2008 expense included $(0.1) million ($(0.1) million after tax) and $(0.2) million ($(0.2) million after tax), respectively, related to accelerated vesting for stock award grants to retirement-eligible employees. Six Months Quarter 2009 and Six Months 2008 expense

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included $2.0 million ($1.7 million after tax) and $3.7 million ($3.3 million after tax), respectively, related to accelerated vesting for stock award grants to retirement-eligible employees.

Accounting for Cash-Based Compensation

Information on Residential Mortgage Backed Securities (“RMBS”), Subprime RMBS, Collateralized Debt Obligations of Asset Backed Securities (“CDOs of ABS”) and Prime RMBS Exposures

Our 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 take such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are risk rated, and surveillance personnel are responsible for adjusting these ratings to reflect changes in transaction credit quality. In assessing the credit quality of our insured portfolio, we take into consideration a variety of factors. For RMBS exposures such factors include the amount of credit support or subordination benefiting our exposure, delinquency and loss trends on the underlying collateral, the extent to which the exposure has amortized and the year in which it was insured.

The tables below provide information on the risk ratings and certain other risk characteristics of the Company’s RMBS, subprime RMBS, CDOs of ABS and Prime exposures as of June 30, 2009 (dollars in millions):

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Distribution of U.S. RMBS by Rating (1) and by Segment as of June 30, 2009

	Direct				Reinsurance				Total
	Net Par				Net Par				Net Par
Ratings(1):	Outstanding		%		Outstanding		%		Outstanding		%
Super senior	$	2,660	16.9	%	$	—	—		$	2,660	15.9	%
AAA	2,615		16.6	%	142		15.1	%	2,758		16.5	%
AA	830		5.3	%	88		9.3	%	918		5.5	%
A	1,900		12.1	%	110		11.7	%	2,010		12.0	%
BBB	1,909		12.1	%	113		12.0	%	2,022		12.1	%
Below investment grade	5,841		37.1	%	490		52.0	%	6,331		37.9	%
	$	15,755	100.0	%	$	943	100.0	%	$	16,698	100.0	%

Distribution of U.S. RMBS by Rating (1), December 31, 2006 to June 30, 2009

Ratings(1):	12/31/06		12/31/07		12/31/08		06/30/09
Super senior	41.4	%	35.4	%	34.7	%	15.9	%
AAA	23.1	%	33.9	%	9.1	%	16.5	%
AA	0.3	%	5.0	%	8.5	%	5.5	%
A	9.2	%	6.4	%	13.4	%	12.0	%
BBB	25.1	%	9.1	%	10.4	%	12.1	%
Below investment grade	0.9	%	10.1	%	24.0	%	37.9	%
	100.0	%	100.0	%	100.0	%	100.0	%

Distribution of U.S. RMBS by Rating (1) and Type of Exposure as of June 30, 2009

Year insured:	Prime First Lien		Prime Closed End Seconds		Prime HELOC		Alt-A First Lien		Alt-A Option ARMs		Subprime First Lien		Total Net Par Outstanding
Super senior	$	—	$	—	$	—	$	—	$	—	$	2,660	$	2,660
AAA	13		53		10		2,485		5		192		2,758
AA	72		—		7		697		—		142		918
A	31		3		8		501		200		1,267		2,010
BBB	138		—		93		436		86		1,269		2,022
Below investment grade	673		325		1,393		1,816		1,215		909		6,331
Total exposures	$	927	$	381	$	1,510	$	5,935	$	1,505	$	6,440	$	16,698

Distribution of U.S. RMBS by Year Insured and Type of Exposure as of June 30, 2009

Year insured:	Prime First Lien		Prime Closed End Seconds		Prime HELOC		Alt-A First Lien		Alt-A Option ARMs		Subprime First Lien		Total Net Par Outstanding
2004 and prior	$	119	$	3	$	132	$	82	$	68	$	467	$	870
2005	194		—		655		377		49		85		1,361
2006	1		5		120		56		74		4,372		4,628
2007	614		373		603		3,043		1,170		1,491		7,294
2008	—		—		—		2,376		144		24		2,545
2009	—		—		—		—		—		—		—
Total exposures	$	927	$	381	$	1,510	$	5,935	$	1,505	$	6,440	$	16,698

(1) Assured’s internal rating. Assured’s scale is comparable to that of the nationally recognized rating agencies. The super senior category, which is not generally used by rating agencies, is used by the Company in instances where Assured’s AAA-rated exposure has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to Assured’s exposure or (2) Assured’s exposure benefits 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 Assured’s attachment point to be materially above the AAA attachment point.

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Distribution of U.S. RMBS by Rating (1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year insured:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	172		$	91		$	149		$	208		$	250		$	870
2005	—			51			155			102			191			862			1,361
2006	2,660			96			135			705			731			302			4,628
2007	—			62			537			896			893			4,905			7,294
2008	—			2,376			—			157			—			12			2,545
2009	—			—			—			—			—			—			—
	$	2,660		$	2,758		$	918		$	2,010		$	2,022		$	6,331		$	16,698

% of total	15.9		%	16.5		%	5.5		%	12.0		%	12.1		%	37.9		%	100.0		%

Distribution of U.S. Prime HELOC RMBS by Rating (1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year insured:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	0		$	6		$	5		$	75		$	45		$	132
2005	—			—			—			2			14			639			655
2006	—			—			—			—			3			117			120
2007	—			10			1			0			1			591			603
2008	—			—			—			—			—			—			—
2009	—			—			—			—			—			—			—
	$	—		$	10		$	7		$	8		$	93		$	1,393		$	1,510

% of total	0.0		%	0.6		%	0.5		%	0.5		%	6.1		%	92.2		%	100.0		%

Distribution of U.S. Closed End Seconds RMBS by Rating (1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year insured:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	0		$	—		$	2		$	—		$	—		$	3
2005	—			—			—			—			—			—			—
2006	—			—			—			—			—			5			5
2007	—			53			—			1			—			320			373
2008	—			—			—			—			—			—			—
2009	—			—			—			—			—			—			—
	$	—		$	53		$	—		$	3		$	—		$	325		$	381

% of total	0.0		%	13.9		%	0.0		%	0.8		%	0.0		%	85.3		%	100.0		%

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Distribution of U.S. Alt-A RMBS by Rating (1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year insured:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	12		$	7		$	41		$	22		$	—		$	82
2005	—			46			155			26			39			111			377
2006	—			50			—			—			—			6			56
2007	—			—			536			433			375			1,699			3,043
2008	—			2,376			—			—			—			—			2,376
2009	—			—			—			—			—			—			—
	$	—		$	2,485		$	697		$	501		$	436		$	1,816		$	5,935

% of total	0.0		%	41.9		%	11.8		%	8.4		%	7.4		%	30.6		%	100.0		%

Distribution of U.S. Alt-A Option ARM RMBS by Rating (1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year insured:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	—		$	—		$	51		$	16		$	—		$	68
2005	—			3			—			2			1			43			49
2006	—			1			—			—			4			69			74
2007	—			—			—			2			65			1,104			1,170
2008	—			—			—			144			—			—			144
2009	—			—			—			—			—			—			—
	$	—		$	5		$	—		$	200		$	86		$	1,215		$	1,505

% of total	0.0		%	0.3		%	0.0		%	13.3		%	5.7		%	80.7		%	100.0		%

Distribution of U.S. Subprime RMBS by Rating (1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year insured:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	147		$	6		$	18		$	91		$	205		$	467
2005	—			1			—			71			2			11			85
2006	2,660			44			135			705			724			104			4,372
2007	—			—			1			461			452			578			1,491
2008	—			—			—			13			—			12			24
2009	—			—			—			—			—			—			—
	$	2,660		$	192		$	142		$	1,267		$	1,269		$	909		$	6,440

% of total	41.3		%	3.0		%	2.2		%	19.7		%	19.7		%	14.1		%	100.0		%

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Distribution of Financial Guaranty Direct U.S. RMBS by Rating(1) and Type of Exposure as of June 30, 2009

Ratings(1):	Prime First Lien		Prime Closed End Seconds		Prime HELOC		Alt-A First Lien		Alt-A Option ARMs		Subprime First Lien		Total Net Par Outstanding
Super senior	$	—	$	—	$	—	$	—	$	—	$	2,660	$	2,660
AAA	—		51		—		2,433		—		132		2,615
AA	—		—		—		695		—		135		830
A	—		—		—		473		196		1,230		1,900
BBB	134		—		20		433		81		1,240		1,909
Below investment grade	667		320		1,058		1,788		1,192		816		5,841
Total exposures	$	801	$	371	$	1,078	$	5,823	$	1,469	$	6,213	$	15,755

Distribution of Financial Guaranty Direct U.S. RMBS by Year Insured as of June 30, 2009

Year insured:	Prime First Lien		Prime Closed End Seconds		Prime HELOC		Alt-A First Lien		Alt-A Option ARMs		Subprime First Lien		Total Net Par Outstanding
2004 and prior	$	—	$	—	$	20	$	48	$	66	$	322	$	456
2005	187		—		536		371		39		71		1,204
2006	—		—		—		—		53		4,348		4,401
2007	614		371		522		3,027		1,167		1,473		7,173
2008	—		—		—		2,376		144		—		2,521
2009	—		—		—		—		—		—		—
	$	801	$	371	$	1,078	$	5,823	$	1,469	$	6,213	$	15,755

Distribution of Financial Guaranty Direct U.S. RMBS by Year Issued as of June 30, 2009

Year issued:	Prime First Lien		Prime Closed End Seconds		Prime HELOC		Alt-A First Lien		Alt-A Option ARMs		Subprime First Lien		Total Net Par Outstanding
2004 and prior	$	—	$	—	$	20	$	48	$	66	$	322	$	456
2005	187		—		536		371		39		3,519		4,652
2006	—		—		—		345		53		1,899		2,298
2007	614		371		522		5,058		1,311		474		8,350
2008	—		—		—		—		—		—		—
2009	—		—		—		—		—		—		—
	$	801	$	371	$	1,078	$	5,823	$	1,469	$	6,213	$	15,755

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Distribution of Financial Guaranty Direct U.S. RMBS Net Par Outstanding by Rating(1) and Year Issued as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year issued:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	98		$	5		$	64		$	122		$	167		$	456
2005	1,760			90			290			803			897			813			4,652
2006	900			262			—			24			450			662			2,298
2007	—			2,165			536			1,009			440			4,199			8,350
2008	—			—			—			—			—			—			—
2009	—			—			—			—			—			—			—
	$	2,660		$	2,615		$	830		$	1,900		$	1,909		$	5,841		$	15,755

% of total	16.9		%	16.6		%	5.3		%	12.1		%	12.1		%	37.1		%	100.0		%

Distribution of Financial Guaranty Direct U.S. RMBS Net Par Outstanding by Rating(1) and Year Insured as of June 30, 2009

	Super			AAA			AA			A			BBB			BIG
Year issued:	Senior			Rated			Rated			Rated			Rated			Rated			Total
2004 and prior	$	—		$	98		$	5		$	64		$	122		$	167		$	456
2005	—			46			155			98			174			733			1,204
2006	2,660			44			135			705			724			133			4,401
2007	—			51			536			889			890			4,808			7,173
2008	—			2,376			—			144			—			—			2,521
2009	—			—			—			—			—			—			—
	$	2,660		$	2,615		$	830		$	1,900		$	1,909		$	5,841		$	15,755

% of total	16.9		%	16.6		%	5.3		%	12.1		%	12.1		%	37.1		%	100.0		%

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Distribution of Financial Guaranty Direct U.S. Mortgage-Backed Securities Issued January 1, 2005 or Later by Exposure Type, Average Pool Factor, Subordination, Cumulative Losses and 60+ Day Delinquencies as of June 30, 2009 (1)

U.S. Prime First Lien

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	$	187	69.2	%	5.4	%	0.2	%	4.7	%	6
2006	N/A		N/A		N/A		N/A		N/A		N/A
2007	614		83.2	%	11.1	%	0.7	%	7.1	%	1
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	801	79.9	%	9.8	%	0.6	%	6.5	%	7

U.S. Prime CES

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	N/A		N/A		N/A		N/A		N/A		N/A
2006	N/A		N/A		N/A		N/A		N/A		N/A
2007	$	371	56.2	%	20.6	%	34.7	%	20.0	%	5
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	371	56.2	%	20.6	%	34.7	%	20.0	%	5

U.S. Prime HELOC

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	$	536	29.7	%	0.0	%	13.4	%	16.0	%	2
2006	N/A		N/A		N/A		N/A		N/A		N/A
2007	522		58.5	%	0.0	%	20.8	%	11.3	%	2
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	1,058	44.0	%	0.0	%	17.1	%	13.7	%	4

U.S. Alt-A First Lien

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	$	371	57.9	%	11.8	%	1.1	%	11.8	%	13
2006	345		71.4	%	39.2	%	4.2	%	31.9	%	2
2007	5,058		74.9	%	20.3	%	2.2	%	26.4	%	11
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	5,775	73.6	%	20.9	%	2.3	%	25.8	%	26

(1) For this release, net par outstanding is based on values as of June 2009. All performance information such as pool factor, subordination, cumulative losses and delinquency is based on June 2009 information obtained from Intex, Bloomberg, and/or provided by the trustee (except for CES, Alt-A, and Subprime, which is based on May) and may be subject to restatement or correction.

(2) Pool factor is the percentage of net par outstanding divided by the original net par outstanding of the transactions at inception.

(3) Represents the sum of subordinate tranches and over-collateralization, expressed as a percentage of total transaction size and does not include any benefit from excess interest collections that may be used to absorb losses.

(4) Cumulative losses are defined as net charge-offs on the underlying loan collateral divided by the original pool balance.

(5) 60+ day delinquencies are defined as loans that are greater than 60 days delinquent and all loans that are in foreclosure, bankruptcy or REO divided by net par outstanding.

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U.S. Alt-A Option ARMs

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	$	39	31.2	%	27.3	%	1.4	%	22.6	%	1
2006	53		53.6	%	18.7	%	1.6	%	29.3	%	1
2007	1,311		78.0	%	20.5	%	2.1	%	28.1	%	7
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	1,403	75.8	%	20.6	%	2.0	%	28.0	%	9

U.S. Subprime First Lien

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	$	3,519	30.2	%	63.8	%	8.0	%	42.4	%	42
2006	1,899		44.3	%	40.7	%	10.3	%	44.2	%	49
2007	474		46.2	%	39.3	%	11.0	%	47.1	%	2
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	5,892	36.0	%	54.4	%	9.0	%	43.4	%	93

U.S. CMBS

Year issued:	Net Par Outstanding		Pool Factor(2)		Subordination (3)		Cumulative Losses (4)		60+ Day Delinquencies (5)		Number of Transactions
2005	$	3,429	95.9	%	29.0	%	0.0	%	0.5	%	158
2006	1,418		98.0	%	30.7	%	0.0	%	0.7	%	57
2007	512		87.7	%	21.2	%	0.0	%	2.8	%	13
2008	N/A		N/A		N/A		N/A		N/A		N/A
2009	N/A		N/A		N/A		N/A		N/A		N/A
	$	5,359	95.7	%	28.7	%	0.0	%	0.8	%	228

(2) Pool factor is the percentage of net par outstanding divided by the original net par outstanding of the transactions at inception.

(4) Cumulative losses are defined as net charge-offs on the underlying loan collateral divided by the original pool balance.

(5) 60+ day delinquencies are defined as loans that are greater than 60 days delinquent and all loans that are in foreclosure, bankruptcy or REO divided by net par outstanding.

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Consolidated Results of Operations (1)

The following table presents summary consolidated results of operations data for the three and six months ended June 30, 2009 and 2008.

	Three Months Ended June 30,						Six Months Ended June 30,
	2009 (2)			2008			2009 (2)			2008
				($ in millions)
Revenues:
Net earned premiums	$	78.6		$	51.7		$	227.1		$	98.5
Net investment income	43.3			40.2			86.9			76.8
Net realized investment (losses) gains	(4.9		)	1.5			(22.0		)	2.1
Change in fair value of credit derivatives
Realized gains and other settlements on credit derivatives	27.8			31.8			48.4			59.4
Unrealized (losses) gains on credit derivatives	(254.3		)	708.5			(227.3		)	448.9
Net change in fair value of credit derivatives	(226.5		)	740.3			(178.9		)	508.3
Fair value (loss) gain on committed capital securities	(60.6		)	8.9			(40.9		)	17.4
Other income	0.5			0.2			1.4			0.2
Total revenues	(169.5		)	842.7			73.6			703.3

Expenses:
Loss and loss adjustment expenses	38.0			38.1			117.8			93.3
Profit commission expense	2.1			1.0			2.3			2.2
Acquisition costs	16.5			11.8			40.0			23.7
Operating expenses	22.6			19.7			50.3			48.3
FSAH acquisition-related expenses	24.2			—			28.8			—
Interest expense	6.5			5.8			12.3			11.6
Other expenses	1.9			1.7			3.3			2.5
Total expenses	111.8			78.2			254.8			181.6
(Loss) income before (benefit) provision for income taxes	(281.3		)	764.5			(181.2		)	521.7
(Benefit) provision for income taxes	(111.3		)	219.3			(96.7		)	145.7
Net (loss) income	$	(170.0	)	$	545.2		$	(84.5	)	$	376.0

Underwriting (loss) gain by segment:
Financial guaranty direct	$	(28.4	)	$	(0.4	)	$	62.3		$	(19.3	)
Financial guaranty reinsurance	1.0			5.4			(12.3		)	(2.0		)
Mortgage guaranty	19.2			0.5			(12.1		)	1.2
Other	—			1.9			—			1.9

Total	$	(8.2	)	$	7.3		$	37.9		$	(18.1	)

(1) Some amounts may not add due to rounding.

(2) Effective January 1, 2009, the Company adopted FAS 163. See “—Critical Accounting Estimates” for additional information.

We organize our business around four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. There are a number of lines of business that we have exited as part of our IPO in April 2004, which are included in the other segment. However, the results of these businesses are reflected in the above numbers. These unaudited interim consolidated financial statements cover the Second Quarter 2009, Second Quarter 2008, Six Months 2009 and Six Months 2008.

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Net (Loss) Income

Net (loss) income was $(170.0) million and $545.2 million for Second Quarter 2009 and Second Quarter 2008, respectively. The decrease of $715.2 million in 2009 compared with 2008 is primarily due to the following factors:

· excluding the incurred losses on credit derivatives, which we include in underwriting gain, there was a $(218.9) million unrealized loss on credit derivatives in Second Quarter 2009 compared with a $714.1 million unrealized gain on credit derivatives in Second Quarter 2008, mainly attributable to the Company’s own credit spread narrowing, which resulted in wider pricing on several transactions. With considerable volatility continuing in the market, this amount will fluctuate significantly in future periods,

· a decrease of $69.5 million in fair value gain (loss) on committed capital securities in Second Quarter 2009, which included a fair value loss of $(60.6) million pre-tax, $(39.4) million after-tax, related to Assured Guaranty Corp.’s committed capital securities, as compared to Second Quarter 2008, which included a fair value gain of $8.9 million pre-tax, $5.8 million after-tax,

· a decrease of $15.5 million in underwriting gain to a $(8.2) million underwriting loss in 2009, compared with a $7.3 million underwriting gain in 2008, primarily due to an increase in incurred losses on credit derivatives as a result of credit deterioration for RMBS transactions written in CDS form,

· a $24.2 million increase in expenses related to our acquisition of FSAH,

· a decrease of $6.4 million in net realized investment losses in 2009, mainly due to the recognition of other-than-temporary impairment of $14.8 million on the Company’s asset backed investments.

Partially offsetting these negative factors were:

· a $330.6 million decrease in our provision for income tax to $(111.3) million income tax benefit in Second Quarter 2009, compared with $219.3 million income tax expense in Second Quarter 2008. This benefit is mainly related to the unrealized loss on credit derivatives recognized in Second Quarter 2009, as compared to the unrealized gain on credit derivatives recognized in Second Quarter 2008. Additionally, the mix of income and losses in our taxable and non-taxable entities is such that there was a tax benefit for the Second Quarter 2009 as compared to a tax expense for the Second Quarter 2008,

· an increase of $3.1 million in net investment income to $43.3 million in Second Quarter 2009 from $40.2 million in Second Quarter 2008 which is attributable to increased invested assets from proceeds from common stock and equity units offerings and positive operating cash flows.

Net (loss) income was $(84.5) million for Six Months 2009, compared with $376.0 million for Six Months 2008. The decrease of $460.5 million in 2009 compared with 2008 is primarily due to the same reasons mentioned above.

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Net Earned Premiums

	Three Months Ended June 30,				Six Months Ended June 30,
Net Earned Premiums	2009		2008		2009		2008
	($ in millions)

Financial guaranty direct	$	30.4	$	20.8	$	131.9	$	38.1
Financial guaranty reinsurance	47.4		29.6		93.6		57.4
Mortgage guaranty	0.8		1.3		1.6		3.1
Total financial guaranty net earned premiums	78.6		51.7		227.1		98.5

Other	—		—		—		—
Total net earned premiums	$	78.6	$	51.7	$	227.1	$	98.5

Net earned premiums for Second Quarter 2009 were $78.6 million compared with $51.7 million for Second Quarter 2008. Financial guaranty direct net earned premiums increased $9.6 million in Second Quarter 2009, compared with Second Quarter 2008. This increase is attributable to the continued growth of our in-force book of business, resulting in increased net earned premiums. Second Quarter 2009 and Second Quarter 2008 had no earned premiums from public finance refundings in the financial guaranty direct segment. Public finance refunding premiums reflect the unscheduled pre-payment or refundings of underlying municipal bonds. Excluding refundings, as well as the acceleration of earned premiums due to extinguishment of a certain assumed exposure, our financial guaranty reinsurance segment decreased $0.2 million in Second Quarter 2009 compared with Second Quarter 2008 due mainly to the CIFG portfolio assumed in January 2009 which contributed $2.1 million to net earned premiums, offset by run-off of the existing book of business. The $0.5 million decrease in net earned premiums in our mortgage guaranty segment in Second Quarter 2009 compared with Second Quarter 2008 reflects the continued run-off of this business.

Net earned premiums for Six Months 2009 were $227.1 million, compared with $98.5 million for Six Months 2008. Six Months 2009 earned premiums include $10.8 million related to the accretion of discount on future financial guaranty installment premiums as the result of the implementation of FAS 163 effective January 1, 2009. Financial guaranty direct segment net earned premiums were $131.9 million for Six Months 2009 an increase of $93.8 million compared with Six Months 2008. This increase is partially attributable to cancellation of certain international infrastructure transactions which resulted in $73.6 million of net earned premiums, as well as the growth of our in-force book of business. Six Months 2009 and Six Months 2008 had no earned premiums from public finance refundings in the financial guaranty direct segment. The variance in the financial guaranty reinsurance segment, excluding refundings and earned premium acceleration from both periods, was an increase of $3.9 million mainly related to the portfolio assumed from CIFG Assurance North America, Inc. (“CIFG”) in January 2009 which contributed $6.5 million to net earned premiums, offset by run-off of the existing book of business..The variance in the mortgage guaranty segments for Six Months 2009 compared with Six Months 2008 is primarily due to the same reason mentioned above.

Net Investment Income

Net investment income was $43.3 million for Second Quarter 2009, compared with $40.2 million for Second Quarter 2008. The $3.1 million increase is attributable to increased invested assets due to the proceeds from common share and equity units offerings and positive operating cash flows.

Net investment income was $86.9 million for Six Months 2009, compared with $76.8 million for Six Months 2008. Pre-tax book yields were 4.3% and 4.7% for the six-month periods ended June 30, 2009 and 2008, respectively. The $10.1 million increase for Six Months 2009 compared with Six Months 2008 is primarily due to the same reasons mentioned above.

Net Realized Investment (Losses) Gains

Net realized investment (losses) gains, principally from the sale of fixed maturity securities were $(4.9) million and $1.5 million for Second Quarter 2009 and Second Quarter 2008, respectively, and $(22.0) million and $2.1 million for Six Months 2009 and Six Months 2008, respectively. The Company recognized $14.8 million of

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other than temporary impairment losses for the three months ended June 30, 2009 attributable to credit impairments on RMBS securities that the Company does not have the intent to sell. The Company’s $33.3 million of other than temporary impairment losses for the six month period additionally includes losses on RMBS and corporate securities that the Company did not intend to hold until a recovery of value as of March 31, 2009 . The Company wrote down $0.3 million of investments for other than temporary impairment losses for the three and six months ended June 30, 2008. Net realized investment (losses) gains, net of related income taxes, were $(7.1) million and $0.9 million for Second Quarter 2009 and Second Quarter 2008, respectively, and $(24.2) million and $1.3 million for Six Months 2009 and Six Months 2008, respectively.

Realized Gains and Other Settlements on Credit Derivatives

Realized gains and other settlements on credit	Three Months Ended June 30,						Six Months Ended June 30,
derivatives	2009			2008			2009			2008
	($ in millions)

Net credit derivative premiums received and receivable:
Direct segment	$	27.1		$	30.6		$	55.5		$	58.0
Reinsurance segment	0.9			0.8			2.1			1.3
Total net credit derivative premiums received and receivable	28.0			31.5			57.5			59.3
Net credit derivative losses (paid and payable) recovered and recoverable	—			0.4			(9.0		)	0.4
Ceding commissions received/receivable (paid/payable) , net	(0.2		)	(0.1		)	—			(0.3		)
Total realized gains and other settlements on credit derivatives	$	27.8		$	31.8		$	48.4		$	59.4

Realized gains and other settlements on credit derivatives, were $27.8 million and $31.8 million for Second Quarter 2009 and Second Quarter 2008, respectively. Total net credit derivative premiums received and receivable, which represents premium income recognized attributable to CDS contracts, was $28.0 million and $31.5 million for the Second Quarter 2009 and Second Quarter 2008, respectively. This decrease is attributable to a decrease in our net par outstanding for CDS transactions due to amortization as well as a decline in our direct business written in CDS form. Net credit derivative losses (paid and payable) recovered and recoverable, which represents contractual claim losses paid and payable related to insured credit events under these contracts, were $0 million and $0.4 million for Second Quarter 2009 and Second Quarter 2008, respectively. The Second Quarter 2008 amount related to recoveries received by us related to claim payments made in prior years. We did not have any losses paid or payable under these contracts in Second Quarter 2008.

Realized gains and other settlements on credit derivatives, were $48.4 million and $59.4 million for Six Months 2009 and Six Months 2008, respectively. Total net credit derivative premiums received and receivable, which represents premium income recognized attributable to CDS contracts, was $57.5 million and $59.3 million for the Six Months 2009 and Six Months Quarter 2008, respectively. This decrease is attributable to same reason mentioned above. Net credit derivative losses (paid and payable) recovered and recoverable, which represents contractual claim losses paid and payable related to insured credit events under these contracts, were $9.0 million and $0.4 million for Six Months 2009 and Six Months 2008, respectively. Six Months 2008 amount related to recoveries received by us related to claim payments made in prior years. We did not have any losses paid or payable under these contracts in Six Months 2008.

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Unrealized Gains (Losses) on Credit Derivatives

	Three Months Ended June 30,						Six Months Ended June 30,
Unrealized gains (losses) on credit derivatives	2009			2008			2009			2008
				($ in millions)
Pre-tax:
Unrealized gains (losses) on credit derivatives, excluding incurred losses on credit derivatives	$	(218.9	)	$	714.1		$	(200.1	)	$	457.7
Incurred losses on credit derivatives	(35.4		)	(5.6		)	(27.2		)	(8.8		)
Total unrealized gains (losses) on credit derivatives	$	(254.3	)	$	708.5		$	(227.3	)	$	448.9
After-tax:
Unrealized gains (losses) on credit derivatives, excluding incurred losses on credit derivatives	$	(150.8	)	$	499.8		$	(124.5	)	$	318.4
Incurred losses on credit derivatives	(26.0		)	(4.1		)	(19.1		)	(6.2		)
Total unrealized gains (losses) on credit derivatives	$	(176.8	)	$	495.7		$	(143.6	)	$	312.2

Credit derivatives are recorded at fair value as required by FAS 133, FAS 149 and FAS 155. The fair value adjustment for Second Quarter 2009 and Second Quarter 2008, on a pre-tax basis, was a $(254.3) million loss and a $708.5 million gain, respectively. The fair value adjustment for Six Months 2009 and Six Months 2008, on a pre-tax basis, was a $(227.3) million loss and a $448.9 million gain, respectively. As part of management’s assessment of CDS exposure, the Company bifurcates the unrealized gains (losses) on credit derivatives to segregate the portion of the fair value movement that it believes is related to credit losses, using methodologies consistent with how it models loss reserves on financial guaranty insurance contracts. The credit portion of change in fair value, which we call incurred losses on credit derivatives, on a pre-tax basis, was $35.4 million during Second Quarter 2009 compared to $5.6 million in the same period of 2008. This increase in incurred losses is primarily attributable to adverse developments on RMBS transactions written in CDS form, specifically rising delinquencies, defaults and foreclosures. The increase in incurred losses on credit derivatives in the Six Month period of 2009 compared to 2008 is primarily driven by the same factors.

The change in unrealized gains (losses) on credit derivatives, excluding incurred losses on credit derivatives, reflects overall market movements in spreads both in the broader financial markets and on the Company’s own spread. The $218.9 unrealized loss, on a pre-tax basis, in the Second Quarter 2009 was primarily attributable to the narrowing of the Company’s own credit spread, which decreased from 3,847 basis points at March 31, 2009 to 1,544 basis points at June 30, 2009. The $714.1 million unrealized gain, on a pre-tax basis, for Second Quarter 2008 includes a gain of $958.7 million associated with the widening of AGC’s credit spread, from 540 basis points at March 31, 2008 to 900 basis points at June 30, 2008.

The $200.1 million unrealized loss, on a pre-tax basis, for the Six Months 2009 was attributable to certain market spreads widening, primarily in the RMBS and corporate collateralized loan sectors as well as the narrowing of the Company’s own credit spread, which decreased from 1,775 basis points at December 31, 2008 to 1,544 basis points at June 30, 2009. The $457.7 million unrealized gain, on a pre-tax basis, for the Six Months 2008 was attributable to the widening of AGC’s spread, which increased from 180 basis points at December 31, 2007 to 900 basis points at June 30, 2008. For the six months ended June 30, 2008, approximately 65% of our unrealized gain on credit derivative financial instruments is attributable to the fair value of high yield and investment grade corporate collateralized loan obligation transactions, with the balance of the change in fair values principally in the residential and commercial mortgage backed securities markets.

Unrealized gains (losses) on credit derivative financial instruments, excluding incurred losses on credit derivatives, net of related income taxes, were $(150.8) million and $499.8 million for the Three Months 2009 and 2008, respectively. These same values for the Six Months 2009 and 2008 were $(124.5) million and $318.4 million, respectively.

The gain or loss created by the estimated fair value adjustment will rise or fall based on estimated market pricing and may not be an indication of ultimate claims. Fair value is defined as the amount at which an asset or

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liability could be bought or sold in a current transaction between willing parties. We enter into credit derivative contracts which require us to make payments upon the occurrence of certain defined credit events relating to an underlying obligation (generally a fixed income obligation). The Company’s credit derivative exposures are substantially similar to its financial guaranty insurance contracts and provide for credit protection against payment default. They are contracts that are generally held to maturity. The unrealized gains and losses on credit derivatives will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early termination.

Fair Value (Loss) Gain on Committed Capital Securities

The Second Quarter 2009 and Six Months 2009 fair value losses related to Assured Guaranty Corp.’s committed capital securities were $(60.6) million and $(40.9) million, pre-tax, respectively, compared to the Second Quarter 2008 and Six Months 2008 fair value gains of $8.9 million and $17.4 million, pre-tax, respectively. The loss in 2009 and the gain in 2008 were due to the narrowing and widening of the Company’s credit spreads in those periods, respectively.

Other Income

The Company recorded $0.5 million and $0.2 million in other income during Second Quarter 2009 and Second Quarter 2008, respectively. The Company recorded $1.4 million and $0.2 million in other income during Six Months 2009 and Six Months 2008, respectively.

Loss and Loss Adjustment Expenses

	Three Months Ended June 30,						Six Months Ended June 30,
Loss and Loss Adjustment Expenses	2009			2008			2009		2008
				($ in millions)

Financial guaranty direct	$	31.8		$	28.2		$	43.5	$	64.1
Financial guaranty reinsurance	25.6			11.3			62.4		30.5
Mortgage guaranty	(19.4		)	0.1			11.8		0.1
Total financial guaranty loss and loss adjustment expenses	38.0			39.6			117.8		94.7

Other	—			(1.5		)	—		(1.5		)
Total loss and loss adjustment expenses	$	38.0		$	38.1		$	117.8	$	93.3

Loss and loss adjustment expenses for Second Quarter 2009 and Second Quarter 2008 were $38.0 million and $38.1 million, respectively. Loss and loss adjustment expenses for the financial guaranty direct segment increased $3.6 million to $31.8 million in Second Quarter 2009 from $28.2 million in Second Quarter 2008. Loss and loss adjustment expenses for the Second Quarter 2009 were mainly related to rising delinquencies, defaults and foreclosures in RMBS transactions. Second Quarter 2008 included an increase in case reserves of $31.2 million, mainly related to one CES transaction and HELOC exposures, other than the direct Countrywide transactions, driven by further deterioration, including increases in delinquencies and decreases in credit enhancement. The financial guaranty reinsurance segment loss and loss adjustment expenses were $25.6 million in Second Quarter 2009, compared with $11.3 million in Second Quarter 2008. Loss and loss adjustment expenses for the Second Quarter 2009 were mainly related to rising delinquencies, defaults and foreclosures in RMBS transactions, as well as a public finance transaction experiencing cash shortfalls. Second Quarter 2008 included increases in case reserves of $6.1 million and paid losses of $11.2 million related primarily to our HELOC exposures. This was offset by a $5.9 million decrease in portfolio reserve related to these reinsured exposures where a case reserve was established. Loss and loss adjustment expenses in our Mortgage guaranty segment decreased $19.5 million during Second Quarter 2009 primarily due to a loss settlement related to an arbitration proceeding where a greater reserve was established in First Quarter 2009.

Loss and LAE for Six Months 2009 and Six Months 2008 were $117.8 million and $93.3 million, respectively. Loss and loss adjustment expenses for the Six Months 2009 were mainly related to rising delinquencies, defaults and foreclosures in RMBS transactions. In addition to Second Quarter 2008 activity, results for the financial guaranty direct segment for Six Months 2008 included an increase in portfolio reserves of $35.7

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million, mainly related to our HELOC and other RMBS exposures driven by internal ratings downgrades. Loss and loss adjustment expenses for the Six Months 2009 were mainly related to rising delinquencies, defaults and foreclosures in RMBS transactions, as well as a public finance transaction, experiencing current cash shortfalls. In addition to the Second Quarter 2008 activity mentioned above, the financial guaranty reinsurance segment included increases in case and portfolio reserves of $9.7 million and $7.4 million, respectively, related primarily to our HELOC and U.S. Subprime RMBS exposures during Six Months 2008. Loss and loss adjustment expenses in our Mortgage guaranty segment increased $11.7 million during Six Months 2009 primarily due to a loss settlement related to an arbitration proceeding.

Profit Commission Expense

Profit commissions, which are primarily related to our mortgage guaranty segment, allow the ceding company to share favorable experience on a reinsurance contract due to lower than expected losses. Expected or favorable loss development generates profit commission expense, while the inverse occurs on unfavorable loss development. Portfolio reserves are not a component of these profit commission calculations. Profit commissions for Second Quarter 2009 and Six Months 2009 were $2.1 million and $2.3 million, respectively, compared with $1.0 million and $2.2 million for the comparable periods in the prior year. The increases in both periods are primarily related to the recording of updated amounts reported by our cedants for certain assumed business subject to profit commission.

Acquisition Costs

Acquisition costs primarily consist of ceding commissions, brokerage fees and operating expenses that are related to the acquisition of new business. Acquisition costs that vary with and are directly related to the acquisition of new business are deferred and amortized in relation to earned premium. For Second Quarter 2009 and Second Quarter 2008, acquisition costs incurred were $16.5 million and $11.8 million, respectively, while Six Months 2009 and Six Months 2008 acquisition costs incurred were $40.0 million and $23.7 million, respectively. These amounts are consistent with changes in net earned premium from non-derivative transactions.

Operating Expenses

For Second Quarter 2009 and Second Quarter 2008, operating expenses were $22.6 million and $19.7 million, respectively. Operating expenses for Six Months 2009 were $50.3 million, compared with $48.3 million for Six Months 2008. The $2.9 million increase for Second Quarter 2009 compared with Second Quarter 2008 and the $2.0 million increase for Six Months 2009 compared with Six Months 2008 was mainly due to a decrease in the amount of operating expenses deferred as acquisition costs as a result of decreased new business volumes in the structured finance and international financial guarantee insurance markets, partially offset by a decrease in employee related expenses.

FSAH Acquisition-Related Expenses

For Second Quarter 2009 and Six Months Quarter 2009, the Company recognized expenses related to FSAH acquisition of $24.2 million and $28.8 million, respectively. These expenses include various real estate. legal, consulting and relocation fees.

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Interest Expense

For Second Quarter 2009 and Second Quarter 2008, interest expense was $6.5 million and $5.8 million, respectively. For Six Months 2009 and Six Months 2008, interest expense was $12.3 million and $11.6 million, respectively. Interest expense related to the issuance of our 7% Senior Notes (“7.0 % Senior Notes”) in May 2004 was $3.3 million in both Second Quarter 2009 and Second Quarter 2008 and $6.7 million in both Six Months 2009 and Six Months 2008. Interest expense related to the issuance of our 6.40% Series A Enhanced Junior Subordinated Debentures in December 2006 was $2.5 million in both Second Quarter 2009 and Second Quarter 2008 and $4.9 million in both Six Months 2009 and Six Months 2008. In addition, the Company recognized $0.7 million of interest expense in both Second Quarter 2009 and Six Months 2009 related to the issuance of 8.5% Senior Notes in June 2009.

Other Expenses

For Second Quarter 2009 and Second Quarter 2008, other expenses were $1.9 million and $1.7 million, respectively. For Six Months 2009 and Six Months 2008, other expenses were $3.3 million and $2.5 million, respectively. These amounts reflect the put option premiums associated with AGC’s $200.0 million committed capital securities. The increase in Second Quarter 2009 and Six Months 2009 compared to the respective periods in 2008 was due to the increase in annualized rates from One-Month LIBOR plus 110 basis points to One-Month LIBOR plus 250 basis points as a result of the failed auction process in April 2008.

Income Tax

For Second Quarter 2009 and Second Quarter 2008, income tax (benefit) expense was $(111.3) million and $219.3 million, respectively. For Six Months 2009 and Six Months 2008, income tax (benefit) expense was $(96.7) million and $145.7 million, respectively. Our effective tax rate was 39.6% and 53.4% for Second Quarter 2009 and Six Months 2009, respectively, compared with 28.7% and 27.9% for Second Quarter 2008 and Six Months 2008, respectively. Our effective tax rates reflect the proportion of income recognized by each of our operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, UK subsidiaries taxed at the UK marginal corporate tax rate of 30%, and no taxes for our Bermuda holding company and subsidiaries. Accordingly, our overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions. Second Quarter 2009 and Six Months 2009 included $(254.3) million and $(227.3) million, respectively, of unrealized losses on credit derivatives, the majority of which is associated with subsidiaries taxed in the U.S., and are the primary reasons for the 39.6% and 53.4% effective tax rates, respectively. Second Quarter 2008 and Six Months 2008 included $708.5 million and $448.9 million, respectively, of unrealized gains on credit derivatives, the majority of which is associated with subsidiaries taxed in the U.S., and are the primary reasons for the 28.7% and 27.9% effective tax rates, respectively.

Segment Results of Operations

Our financial results include four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. Management uses underwriting gains and losses as the primary measure of each segment’s financial performance. Underwriting gain is calculated as net earned premiums plus realized gains and other settlements on credit derivatives less the sum of loss and loss adjustment expenses including incurred losses on credit derivatives, profit commission expense, acquisition costs and other operating expenses that are directly related to the operations of our insurance businesses. This measure excludes certain revenue and expense items, such as net investment income, realized investment gains and losses, unrealized gains and losses on credit derivatives, excluding loss reserves allocation , fair value gain (loss) on committed capital securities, other income, FSAH acquisition-related expenses, interest expense and other expenses, that are not directly related to the underwriting performance of our insurance operations, but are included in net income.

Loss and loss adjustment expense ratio, which is a non-GAAP financial measure, is defined as loss and loss adjustment expenses (recoveries) plus the Company’s net estimate of credit derivative incurred case and portfolio loss and loss adjustment expense reserves, which is included in unrealized gains (losses) on credit derivatives, plus net credit derivative losses (recoveries), which is included in realized gains and other settlements on credit derivatives, divided by net earned premiums plus net credit derivative premiums received and receivable, which is

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included in realized gains and other settlements on credit derivatives. Expense ratio is calculated by dividing the sum of ceding commissions expense (income), profit commission expense, acquisition costs and operating expenses by net earned premiums plus net credit derivative premiums received and receivable, which is included in realized gains and other settlements on credit derivatives. Combined ratio, which is a non-GAAP financial measure, is the sum of the loss and loss adjustment expense ratio and the expense ratio.

Financial Guaranty Direct Segment

The financial guaranty direct segment consists of our primary financial guaranty insurance business and our credit derivative business. Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. As an alternative to traditional financial guaranty insurance, credit protection on a particular security or issuer can also be provided through a credit derivative, such as a credit default swap. Under a credit default swap, the seller of protection makes a specified payment to the buyer of protection upon the occurrence of one or more specified credit events with respect to a reference obligation or a particular reference entity. Credit derivatives typically provide protection to a buyer rather than credit enhancement of an issue as in traditional financial guaranty insurance.

The table below summarizes the financial results of our financial guaranty direct segment for the periods presented:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
				($ in millions)

Net earned premiums	$	30.4		$	20.8		$	131.9		$	38.1
Realized gains and other settlements on credit derivatives:
Net credit derivative premiums received and receivable	27.1			30.6			55.5			58.0
Net credit derivative losses (paid and payable) recovered and recoverable	0.1			—			(8.7		)	—
Ceding commissions received/receivable (paid/payable), net	0.4			0.2			0.8			0.1
Total realized gains and other settlements on credit derivatives	27.6			30.9			47.6			58.1
Loss and loss adjustment expenses	31.8			28.2			43.5			64.1
Incurred losses on credit derivatives	35.1			5.6			27.7			8.8
Total loss and loss adjustment expenses	66.9			33.8			71.2			72.9
Profit commission expense	—			—			—			—
Acquisition costs	3.6			3.1			9.8			6.1
Operating expenses	15.9			15.2			36.2			36.5
Underwriting (loss) gain	$	(28.4	)	$	(0.4	)	$	62.3		$	(19.3	)

Loss and loss adjustment expense ratio	116.2		%	65.7		%	42.6		%	75.9		%
Expense ratio	33.2		%	35.1		%	24.1		%	44.2		%
Combined ratio	149.4		%	100.8		%	66.7		%	120.1		%

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	Three Months Ended June 30,				Six Months Ended June 30,
Net Earned Premiums	2009		2008		2009		2008
			($ in millions)

Public finance	$	15.7	$	7.2	$	101.2	$	11.3
Structured finance	14.7		13.6		30.7		26.8
Total	$	30.4	$	20.8	$	131.9	$	38.1

Included in public finance direct net earned premiums are refundings of	$	—	$	—	$	—	$	—
Included in public finance direct net earned premiums are transaction cancellations of	$	—	$	—	$	73.6	$	—

Net earned premiums for Second Quarter 2009 were $30.4 million compared with $20.8 million for Second Quarter 2008. The increase in net earned premiums for the Second Quarter 2009 compared with Second Quarter 2008 reflects our increased market penetration, which has resulted in growth of our in-force book of business. Net earned premiums for Six Months 2009 increased $93.8 million compared with Six Months 2008 mainly due to the cancellation of certain international infrastructure transactions, which resulted in $73.6 million of net earned premiums, as well as an increase in our in-force business. There were no unscheduled refundings during 2009 and 2008. These unscheduled refundings are sensitive to market interest rates. We evaluate our net earned premiums both including and excluding these refundings.

Realized gains and other settlements on credit	Three Months Ended June 30,				Six Months Ended June 30,
derivatives	2009		2008		2009			2008
			($ in millions)

Net credit derivative premiums received and receivable	$	27.1	$	30.6	$	55.5		$	58.0
Net credit derivative losses (paid and payable) recovered and recoverable or payable	0.1		—		(8.7		)	—
Ceding commissions receivable/receivable (paid/payable), net	0.4		0.2		0.8			0.1
Total realized gains and other settlements on credit derivatives	$	27.6	$	30.9	$	47.6		$	58.1

Realized gains and other settlements on credit derivatives, were $27.6 million and $30.9 million for Second Quarter 2009 and Second Quarter 2008, respectively, and $47.6 million and $58.1 million for Six Months 2009 and Six Months 2008, respectively. This decrease in both periods is attributable to lower net credit derivative premiums received and receivable from CDS contracts as net par outstanding decreased due to amortization and new business writings decreased in 2009 compared to 2008. In addition, the decrease in Six Months 2009 is due to the $(8.7) million of losses paid or payable under these contracts. We did not have any losses paid or payable under the CDS contracts in 2008.

Loss and LAE were $31.8 million and $28.2 million, respectively, for Second Quarter 2009 and Second Quarter 2008, while loss and LAE were $43.5 million and $64.1 million for Six Months 2009 and Six Months 2008, respectively. Second Quarter 2009 loss and LAE is mainly related to our rising delinquencies, defaults and foreclosures on RMBS exposures. Second Quarter 2008 included an increase in case reserves of $31.2 million mainly attributable to one Closed-End Second transaction and HELOC exposures, other than the direct Countrywide transactions, driven by further deterioration, including increases in delinquencies and decreases in credit enhancement.

Loss and LAE for Six Months 2009 were also primarily driven by RMBS exposures. Six Months 2008 included an increase in portfolio reserves of $35.7 million mainly attributable to our HELOC and other RMBS exposures driven by internal ratings downgrades.

Incurred losses on credit derivatives was $35.1 million during Second Quarter 2009 compared to $5.6

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million in the same period of 2008. This increase in incurred losses on credit derivatives is, consistent with loss and LAE expense on financial guaranty insurance contracts, primarily attributable to adverse developments on RMBS transactions written in CDS form, specifically rising delinquencies, defaults and foreclosures. The increase in incurred losses on credit derivatives in the Six Month period of 2009 compared to 2008 is primarily driven by the same factors.

Acquisition costs incurred for Second Quarter 2009 and Six Months 2009 were $3.6 million and $9.8 million, respectively. For Second Quarter 2008 and Six Months 2008 acquisition costs were $3.1 million and $6.1 million, respectively. The changes in acquisition costs incurred over the periods are directly related to changes in net earned premium from non-derivative transactions.

Operating expenses for Second Quarter 2009 and Second Quarter 2008 were $15.9 million and $15.2 million, respectively. Operating expenses for Six Months 2009 were $36.2 million, compared with $36.5 million for Six Months 2008. The increase in operating expenses for the Second Quarter 2009 compared with the Second Quarter 2008 is mainly due to a decrease in the amount of operating expenses deferred as acquisition costs as a result of changes in market conditions, partially offset by a decrease in employee related expenses.

Financial Guaranty Reinsurance Segment

In our financial guaranty reinsurance business, we assume all or a portion of risk undertaken by other insurance companies that provide financial guaranty protection. The financial guaranty reinsurance business consists of public finance and structured finance reinsurance lines. Premiums on public finance are typically written upfront and earned over the life of the policy, and premiums on structured finance are typically written on an installment basis and earned ratably over the installment period.

The table below summarizes the financial results of our financial guaranty reinsurance segment for the periods presented:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
				($ in millions)

Net earned premiums	$	47.4		$	29.6		$	93.6		$	57.4
Realized gains and other settlements on credit derivatives:
Net credit derivative premiums received and receivable	0.9			0.8			2.1			1.3
Net credit derivative losses (paid and payable) recovered and recoverable	—			—			(0.3		)	—
Ceding commissions paid/payable, net	(0.7		)	(0.3		)	(1.0		)	(0.4		)
Total realized gains and other settlements on credit derivatives	0.2			0.6			0.8			0.9
Loss and loss adjustment expenses	25.6			11.3			62.4			30.5
Incurred (gains) losses on credit derivatives	0.2			—			(0.5		)	—
Total loss and loss adjustment expenses	25.8			11.3			61.9			30.5
Profit commission expense	1.8			0.9			2.0			2.0
Acquisition costs	12.8			8.6			29.9			17.4
Operating expenses	6.2			4.0			12.9			10.4
Underwriting gain (loss)	$	1.0		$	5.4		$	(12.3	)	$	(2.0	)

Loss and loss adjustment expense ratio	53.4		%	37.1		%	65.1		%	51.9		%
Expense ratio	44.5		%	45.2		%	47.8		%	51.5		%
Combined ratio	97.9		%	82.3		%	112.9		%	103.4		%

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	Three Months Ended June 30,				Six Months Ended June 30,
Net Earned Premiums	2009		2008		2009		2008
			($ in millions)

Public finance	$	36.9	$	17.5	$	71.7	$	36.1
Structured finance	10.5		12.1		21.9		21.3
Total	$	47.4	$	29.6	$	93.6	$	57.4

Included in public finance reinsurance net earned premiums are refundings of	$	8.3	$	2.1	$	25.0	$	4.5
Included in public finance reinsurance net earned premiums is a transaction acceleration of	$	11.8	$	—	$	11.8	$	—

Net earned premiums for Second Quarter 2009 and Six Months 2009 were $47.4 million and $93.6 million, respectively, compared with $29.6 million and $57.4 million for Second Quarter 2008 and Six Months 2008, respectively. Public finance net earned premiums also include refundings, which reflect the unscheduled pre-payment or refundings of underlying municipal bonds. These unscheduled refundings, which were $8.3 million and $25.0 million for Second Quarter 2009 and Six Months 2009, respectively, compared with $2.1 million and $4.5 million, respectively, for the same periods last year, are sensitive to market interest rates. Additionally, Second Quarter 2009 included accelerated earned premium of $11.8 million for a transaction whose exposure was extinguished. Excluding refundings and acceleration from both periods, net earned premiums decreased $0.2 million and increased $3.9 million in the three and six months ended June 30, 2009 compared with 2008, respectively. The variances for both periods is a result of run-off of the existing book of business, offset by net earned premiums from the portfolio assumed from CIFG in January 2009, which contributed $2.1 million and $6.5 million to net earned premiums in Second Quarter 2009 and Six Months 2009, respectively.

Realized gains and other settlements on credit	Three Months Ended June 30,						Six Months Ended June 30,
derivatives	2009			2008			2009			2008
				($ in millions)

Net credit derivative premiums received and receivable	$	0.9		$	0.8		$	2.1		$	1.3
Net credit derivative losses (paid and payable) recovered and recoverable	—			—			(0.3		)	—
Ceding commissions received/receivable (paid/payable), net	(0.7		)	(0.3		)	(1.0		)	(0.4		)
Total realized gains and other settlements on credit derivatives	$	0.2		$	0.6		$	0.8		$	0.9

Realized gains and other settlements on credit derivatives, were $0.2 million and $0.6 million for Second Quarter 2009 and Second Quarter 2008, respectively, and $0.8 million and $0.9 million for Six Months 2009 and Six Months 2008, respectively. Net credit derivative premiums received and receivable, which represents premium income recognized attributable to CDS contracts, and related ceding commission expense, increased based on amounts reported to us by our cedants. We had $0.3 million of losses paid or payable under these contracts in Six Months 2009. We did not have any losses paid or payable under these contracts in the three months ended June 30, 2009 and 2008, respectively, and six months ended June 30, 2008.

Loss and LAE were $25.6 million and $11.3 million for Second Quarter 2009 and Second Quarter 2008, respectively. Second Quarter 2009 loss and LAE included $18.0 million related to our assumed RMBS exposures, as well as $4.8 million related to the Jefferson County public finance transaction. Second Quarter 2008 included increases to case reserves of $6.1 million and paid losses of $11.2 million mainly related to our HELOC exposures. This was offset by a $5.9 million decrease in portfolio reserves associated with transactions where a case reserve was established.

Loss and LAE were $62.4 million and $30.5 million for Six Months 2009 and Six Months 2008, respectively. Loss and LAE for Six Months 2009 was primarily due to assumed HELOC and other RMBS transactions, as well as

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$15.4 million for two public finance transactions. In addition to the reserve increases mentioned above, Six Months 2008 included increases to case and portfolio reserves of $9.3 million and $7.4 million, respectively, mainly related to our U.S. Subprime RMBS and HELOC exposures.

Profit commission expense was $1.8 million in Second Quarter 2009 compared to $0.9 million in Second Quarter 2008, and $2.0 million in both Six Months 2009 and Six Months 2008. The increase in Second Quarter 2009 compared to Second Quarter 2008 is primarily related to amounts reported by our ceding companies.

For Second Quarter 2009 and Second Quarter 2008, acquisition costs incurred were $12.8 million and $8.6 million, respectively, while acquisition costs incurred were $29.9 million for Six Months 2009 compared with $17.4 million for Six Months 2008. The changes in acquisition costs incurred over the periods are directly related to changes in net earned premiums from non-derivative transactions.

Operating expenses for Second Quarter 2009 and Second Quarter 2008 were $6.2 million and $4.0 million, respectively. Operating expenses for Six Months 2009 were $12.9 million, compared with $10.4 million for Six Months 2008. The increase in operating expenses for the six month period is mainly due to an increase in Federal Excise Taxes related to business ceded to our Bermuda entity. Additionally, there was a decrease in the amount of operating expenses deferred as acquisition costs as a result of changes in market conditions.

Mortgage Guaranty Segment

Mortgage guaranty insurance provides protection to mortgage lending institutions against the default of borrowers on mortgage loans that, at the time of the advance, had a loan-to-value ratio in excess of a specified ratio. We primarily function as a reinsurer in this industry and assume all or a portion of the risks undertaken by primary mortgage insurers.

The table below summarizes the financial results of our mortgage guaranty segment for the periods presented:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
				($ in millions)
Net earned premiums	$	0.8		$	1.3		$	1.6		$	3.1
Loss and loss adjustment expenses (recoveries)	(19.4		)	0.1			11.8			0.1
Profit commission expense	0.3			0.1			0.4			0.2
Acquisition costs	0.1			0.1			0.2			0.2
Operating expenses	0.6			0.5			1.3			1.4
Underwriting gain	$	19.2		$	0.5		$	(12.1	)	$	1.2

Loss and loss adjustment expense ratio	NM			7.9		%	737.5		%	3.2		%
Expense ratio	125.0		%	55.1		%	118.8		%	57.5		%
Combined ratio	NM			63.0		%	856.3		%	60.7		%

NM = Not meaningful

Loss and LAE were $(19.4) million and $0.1 million for Second Quarter 2009 and Second Quarter 2008, respectively. Loss and LAE for Six Months 2009 and Six Months 2008 were $11.8 million and $0.1 million, respectively. The decrease in loss and LAE in Second Quarter 2009 and an increase in Six Months 2009 compared to the same periods last year are mainly a result of a $10.0 million settlement in Second Quarter 2009 of a contract under dispute for which the Company set up a loss reserve in the First Quarter 2009.

The activity of this segment in the near future, is expected to be comprised of installment premiums on deals entered into in 2006 and prior.

Other Segment

The other segment represents lines of business that we exited or sold as part of our 2004 IPO.

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The other segment had no earned premiums during 2009 or 2008. The other segment had $0 underwriting gain during both Second Quarter 2009 and Six Months 2009. During both Second Quarter 2008 and Six Months 2008, due to loss recoveries the other segment generated $1.9 million of underwriting gain.

Liquidity and Capital Resources

Our liquidity, both on a short-term basis (for the next twelve months) and a long-term basis (beyond the next twelve months), is largely dependent upon: (1) the ability of our operating subsidiaries to pay dividends or make other payments to us, (2) external financings and (3) net investment income from our invested assets. Our liquidity requirements include the payment of our operating expenses, interest on our debt, and dividends on our common shares. We may also require liquidity to make periodic capital investments in our operating subsidiaries. In the ordinary course of our business, we evaluate our liquidity needs and capital resources in light of holding company expenses, debt-related expenses and our dividend policy, as well as rating agency considerations. Based on the amount of dividends we expect to receive from our subsidiaries and the income we expect to receive from our invested assets, management believes that we will have sufficient liquidity to satisfy our needs over the next twelve months, including the ability to pay dividends on our common shares. Total cash paid in Six Months 2009 and Six Months 2008 for dividends to shareholders was $8.2 million, or $0.09 per common share, and $7.8 million, or $0.09 per common share, respectively. Beyond the next twelve months, the ability of our operating subsidiaries to declare and pay dividends may be influenced by a variety of factors including market conditions, insurance and rating agencies regulations and general economic conditions. Consequently, although management believes that we will continue to have sufficient liquidity to meet our debt service and other obligations over the long term, it remains possible that we may be required to seek external debt or equity financing in order to meet our operating expenses, debt service obligations or pay dividends on our common shares. These external sources of financing may or may not be available to us, and if available, the costs of such financing may be higher than our current levels.

We anticipate that a major source of our liquidity, for the next twelve months and for the longer term, will be amounts paid by our operating subsidiaries as dividends. Certain of our operating subsidiaries are subject to restrictions on their ability to pay dividends. See “Business—Regulation.” The amount available at AGC to pay dividends in 2009 with notice to, but without the prior approval of, the Maryland Insurance Commissioner is approximately $37.8 million. Dividends paid by a U.S. company to a Bermuda holding company presently are subject to a 30% withholding tax. The amount available at AG Re to pay dividends or make a distribution of contributed surplus in 2009 in compliance with Bermuda law is $1,125.0 million. However, any distribution which results in a reduction of 15% or more of AG Re’s total statutory capital, as set out in its previous years’ financial statements, would require the prior approval of the Bermuda Monetary Authority.

Liquidity at our operating subsidiaries is used to pay operating expenses, claims, payment obligations with respect to credit derivatives, including collateral postings, reinsurance premiums and dividends to Assured Guaranty US Holdings Inc. (“AGUS”) for debt service and dividends to us, as well as, where appropriate, to make capital investments in their own subsidiaries. In addition, certain of our operating companies may be required to post additional collateral in connection with credit derivatives and reinsurance transactions. Management believes that these subsidiaries’ operating needs generally can be met from operating cash flow, including gross written premium and investment income from their respective investment portfolios.

Net cash flows provided by operating activities were $202.8 million and $331.4 million during Six Months 2009 and Six Months 2008, respectively. The decrease in Six Months 2009 cash flows provided by operating activities compared with Six Months 2008 was due to a slight decrease in premiums written and an increase in loss and loss adjustment expense reserves.

Net cash flows used in investing activities were $811.0 million and $566.8 million during Six Months 2009 and Six Months 2008, respectively. These investing activities consist of net purchases and sales of fixed maturity securities and short-term investments. The increase in 2009 was due to purchases of fixed maturity securities with the cash generated from common stock and equity units offerings, as described below, and positive cash flows from operating activities.

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Net cash flows provided by financing activities were $603.8 million and $237.4 million during Six Months 2009 and Six Months 2008, respectively. During Six Months 2009 we paid $8.2 million in dividends, $0.8 million, net, under our option and incentive plans and $3.7 million for share repurchases as described below.

On November 8, 2007, the Company’s Board of Directors approved a new share repurchase program for up to 2.0 million common shares. Share repurchases will take place at management’s discretion depending on market conditions. Through December 31, 2008 we repurchased 0.3 million shares of our common shares. During Six Months 2009 we paid $3.7 million to repurchase 1.0 million shares of our common shares.

As described above, on June 24, 2009, the Company completed the sale of 44,275,000 of its common shares (including 5,775,000 common shares allocable to the underwriters) at a price of $11.00 per share. On June 24, 2009, concurrently with the common share offering the Company along with AGUS, a subsidiary of the Company, sold 3,450,000 equity units (including 450,000 equity units allocable to the underwriters) at an initial stated amount of $50 per unit. The equity units will initially consist of a forward purchase contract and a 5% undivided beneficial ownership interest in $1,000 principal amount 8.50% Senior Notes due 2014 issued by AGUS. Under the purchase contract, holders are required to purchase the Company’s common shares no later than June 1, 2012. The threshold appreciation price of the equity units is $12.93, which represents a premium of 17.5% over the public offering price in the common share offering. The 8.50% Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd. The net proceeds after underwriting expenses and offering costs for these two offerings totaled approximately $616.5 million. Of that amount, the net proceeds from equity offering were $170.8 million, which was allocated between $168.0 million recognized as long-term debt and $2.8 million of the purchase contract recognized in additional paid-in-capital in shareholders’ equity in the consolidated balance sheets.

D uring Six Months 2008 we paid $7.8 million in dividends, $3.8 million, net, under our option and incentive plans and $1.0 million for offering costs incurred in connection with the December 2007 equity offering and issuance of common shares to WL Ross.

In June 2008, the Company’s subsidiary, Assured Guaranty Corp., entered into a new five-year lease agreement for New York office space. Future minimum annual payments of $5.3 million for the first twelve month period and $5.7 million for subsequent twelve month periods commenced October 1, 2008 and are subject to escalation in building operating costs and real estate taxes. As a result of the acquisition of FSAH, during Second Quarter 2009 the Company decided not to use the office space described above and subleased it to two tenants for total minimum annual payments of approximately $3.7 million till October 2013. Assured Guaranty Corp. wrote off related leasehold improvements and recorded a loss on the sublease of $11.7 million, which is included in operating expenses and other liabilities in the unaudited consolidated income statements and balance sheets, respectively.

As of June 30, 2009 our future cash payments associated with other contractual obligations have not materially changed since December 31, 2008.

8.50% Senior Notes

On June 24, 2009, the Company along with AGUS sold 3,450,000 equity units (including 450,000 equity units allocable to the underwriters) at an initial stated amount of $50 per unit for gross proceeds of $172.5 million. Of that amount, the net proceeds from equity offering were $170.8 million, which was allocated between $168.0 million recognized as long-term debt and $2.8 million of the purchase contract recognized in additional paid-in-capital in shareholders’ equity in the consolidated balance sheets.

The equity units consist of a forward purchase contract and a 5% undivided beneficial ownership interest in $1,000 principal amount 8.50% Senior Notes due 2014 issued by AGUS. Under the purchase contract, holders are required to purchase the Company’s common shares no later than June 1, 2012. The threshold appreciation price of the equity units is $12.93, which represents a premium of 17.5% over the public offering price in the common share offering. The 8.50% Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd. The 8.50% Senior Notes bear a coupon rate of 8.50% per year, payable quarterly. The 8.50% Senior Notes will be remarketed between December 1, 2011 and June 1, 2012.

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The 8.50% Senior Notes will initially bear interest at a rate of 8.50% per year, payable, initially, quarterly. Following a successful remarketing, the interest rate on the notes will be reset and interest may become payable semi-annually if Assured Guaranty US Holdings Inc. so elects.

Credit Facilities

2006 Credit Facility

On November 6, 2006, Assured Guaranty Ltd. 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, for which ABN AMRO Incorporated and Bank of America Securities LLC acted as lead arrangers. Under the 2006 credit facility, each of AGC, AG(UK), AG Re, AGRO and Assured Guaranty Ltd. 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.

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 closing of the 2006 credit facility, (i) AGC guaranteed the obligations of AG(UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AG Re and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of AGC and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of AGC and AG(UK) under such facility, (iii) Assured Guaranty Overseas US Holdings Inc. guaranteed the obligations of Assured Guaranty Ltd., AG Re and AGRO under such facility and (iv) Each of AG Re and AGRO guarantees the other as well as Assured Guaranty Ltd.

The 2006 credit facility’s financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of seventy-five percent (75%) of the Consolidated Net Worth of Assured Guaranty Ltd. as of the most recent fiscal quarter of Assured Guaranty Ltd. prior to November 6, 2006 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 prior to November 6, 2006. Furthermore, the 2006 credit facility contains restrictions on Assured Guaranty Ltd. 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

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all amounts then outstanding. As of June 30, 2009 and December 31, 2008, Assured Guaranty was in compliance with all of those financial covenants.

As of June 30, 2009 and December 31, 2008, no amounts were outstanding under this facility nor have there been any borrowings under this facility.

Letters of credit totaling approximately $2.9 million remained outstanding as of June 30, 2009 and December 31, 2008, respectively, related to the Real Estate Lease agreement discussed above.

Non-Recourse Credit Facilities

AG Re Credit Facility

AG Re’s obligations to make payments of principal and interest on loans under the AG Re Credit Facility, whether at maturity, upon acceleration or otherwise, are limited recourse obligations of AG Re and are payable solely from the collateral securing the AG Re Credit Facility, including recoveries with respect to certain insured obligations in a designated portfolio, premiums with respect to defaulted insured obligations in that portfolio, certain designated reserves and other designated collateral.

As of June 30, 2009 and December 31, 2008, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility.

Committed Capital Securities

On April 8, 2005, AGC entered into separate agreements (the “Put Agreements”) with each of Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV (each, a “Custodial Trust”) pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50,000,000 of perpetual preferred stock of AGC (the “AGC Preferred Stock”).

Structure

Each of the Custodial Trusts is a newly organized Delaware statutory trust formed for the purpose of (i) issuing a series of flex committed capital securities (the “CCS Securities”) representing undivided beneficial interests in the assets of such Custodial Trust; (ii) investing the proceeds from the issuance of the CCS Securities or any redemption in full of AGC Preferred Stock in a portfolio of high-grade commercial paper and (in limited cases) U.S. Treasury Securities (the “Eligible Assets”), (iii) entering into the Put Agreement with AGC; and (iv) entering into related agreements.

Initially, all of the 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 committed capital 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 Assured Guaranty’s financial statements.

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Income distributions on the Pass-Through Trust Securities and 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 CCS Securities are determined pursuant to an auction process. On April 7, 2008 this auction process failed, thereby increasing the annualized rate on the CCS Securities to One-Month LIBOR plus 250 basis points. Distributions on the AGC Preferred Stock will be determined pursuant to the same process or, if the Company so elects upon the dissolution of the Custodial Trusts at a fixed rate equal to One-Month LIBOR plus 250 basis points (based on the then current 30-year swap rate).

Put Agreement

Pursuant to the Put Agreement, AGC will pay a monthly put premium to each Custodial Trust except (1) during any period when the AGC Preferred Stock that has been put to a Custodial Trust is held by that Custodial Trust or (2) upon termination of the Put Agreement. The put premium will equal the product of (A) the applicable distribution rate on the CCS Securities for the respective distribution period less the excess of (i) the Custodial Trust’s stated return on the Eligible Assets for such distribution period (including any fees and expenses of the Pass-Through Trust) (expressed as an annual rate) over (ii) the expenses of the Custodial Trust for such distribution period (expressed as an annual rate), (B) the aggregate face amount of the CCS Securities of the Custodial Trust outstanding on the date the put premium is calculated, and (C) a fraction, the numerator of which will be the actual number of days in such distribution period and the denominator of which will be 360. In addition, and as a condition to exercising the put option under a Put Agreement, AGC is required to enter into a Custodial Trust Expense Reimbursement Agreement with the respective Custodial Trust pursuant to which AGC agrees it will pay the fees and expenses of the Custodial Trust (which includes the fees and expenses of the Pass-Through Trust) during the period when such Custodial Trust holds AGC Preferred Stock.

Upon exercise of the put option granted to AGC pursuant to the Put Agreement, a Custodial Trust will liquidate its portfolio of Eligible Assets and purchase the AGC Preferred Stock and will hold the AGC Preferred Stock until the earlier of (i) the redemption of such AGC Preferred Stock and (ii) the liquidation or dissolution of the Custodial Trust.

Each Put Agreement has no scheduled termination date or maturity, however, it will terminate if (1) AGC fails to pay the put premium in accordance with the Put Agreement, and such failure continues for five business days, (2) AGC elects to have the AGC Preferred Stock bear a fixed rate dividend (a “Fixed Rate Distribution Event”), (3) AGC fails to pay (i) dividends on the AGC Preferred Stock, or (ii) the fees and expenses of the Custodial Trust, for the related dividend period, and such failure continues for five business days, (4) AGC fails to pay the redemption price of the AGC Preferred Stock and such failure continues for five business days, (5) the face amount of a Custodial Trust’s CCS Securities is less than $20,000,000, (6) AGC elects to terminate the Put Agreement, or (7) a decree of judicial dissolution of the Custodial Trust is entered. If, as a result of AGC’s failure to pay the put premium, the Custodial Trust is liquidated, AGC will be required to pay a termination payment which will be distributed to the holders of the Pass-Through Trust Securities. The termination payment will be at a rate equal to 1.10% per annum of the amount invested in Eligible Assets calculated from the date of the failure to pay the put premium through the end of the applicable period.

As of June 30, 2009 and December 31, 2008, the put option had not been exercised.

AGC Preferred Stock

AGC Preferred Stock under the Put Agreement will be issued in one or more series, with each series in an aggregate liquidation preference amount equal to the aggregate face amount of a Custodial Trust’s outstanding CCS Securities, net of fees and expenses, upon exercise of the put option. Unless redeemed by AGC, the AGC Preferred Stock will be perpetual.

For each distribution period, holders of the outstanding AGC Preferred Stock of any series, in preference to the holders of common stock and of any other class of shares ranking junior to the AGC Preferred Stock, will be entitled to receive out of any funds legally available therefore when, as and if declared by the Board of Directors of AGC or a duly authorized committee thereof, cash dividends at a rate per share equal to the dividends rate for such series of AGC Preferred Stock for the respective distribution period. Prior to a Fixed Rate Distribution Event, the dividend rate on the AGC Preferred Stock will be equal to the distribution rate on the CCS Securities. The Custodial

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Trust’s expenses (including any expenses of the Pass-Through Trust) for the period will be paid separately by AGC pursuant to the Custodial Trust Expense Reimbursement Agreement.

Upon a Fixed Rate Distribution Event, the distribution rate on the AGC Preferred Stock will equal the fixed rate equivalent of one-month LIBOR plus 2.50%. A “Fixed Rate Distribution Event” will be deemed to have occurred when AGC Preferred Stock is outstanding, if: (1) AGC elects to have the AGC Preferred Stock bear dividends at a fixed rate, (2) AGC fails to pay dividends on the AGC Preferred Stock for the related distribution period and such failure continues for five business days or (3) AGC fails to pay the fees and expenses of the Custodial Trust for the related distribution period pursuant to the Custodial Trust Expense Reimbursement Agreement and such failure continues for five business days.

During the period in which AGC Preferred Stock is held by a Custodial Trust and unless a Fixed Rate Distribution Event has occurred , dividends will be paid every 49 days. Following a Fixed Rate Distribution Event, dividends will be paid every 90 days.

Following exercise of the put option during any Flexed Rate Period, AGC may redeem the AGC Preferred Stock held by a Custodial Trust in whole and not in part on any distribution payment date by paying a redemption price to such Custodial Trust in an amount equal to the liquidation preference amount of the AGC Preferred Stock (plus any accrued but unpaid dividends on the AGC Preferred Stock for the then current distribution period). If AGC redeems the AGC Preferred Stock held by a Custodial Trust, the Custodial Trust will reinvest the redemption proceeds in Eligible Assets and, in accordance with the Put Agreement, AGC will pay the put premium to the Custodial Trust. If the AGC Preferred Stock was distributed to holders of CCS Securities during any Flexed Rate Period then AGC may not redeem the AGC Preferred Stock until the end of such period.

Following exercise of the put option AGC Preferred Stock held by a Custodial Trust in whole or in part on any distribution payment date by paying a redemption price to the Custodial Trust in an amount equal to the liquidation preference amount of the AGC Preferred Stock to be redeemed (plus any accrued but unpaid dividends on such AGC Preferred Stock for the then current distribution period). If AGC partially redeems the AGC Preferred Stock held by a Custodial Trust, the redemption proceeds will be distributed pro rata to the holders of the CCS Securities (and a corresponding reduction in the aggregate face amount of CCS Securities); provided that AGC must redeem all of the AGC Preferred Stock if after giving effect to a partial redemption, the aggregate liquidation preference amount of the AGC Preferred Stock held by such Custodial Trust immediately following such redemption would be less than $20,000,000. If a Fixed Rate Distribution Event occurs, AGC may not redeem the AGC Preferred Stock for a period of two years from the date of such Fixed Rate Distribution Event.

Guarantee of FSAH’s Debt

Investment Portfolio

Our investment portfolio consisted of $3,413.3 million of fixed maturity securities, $1,171.0 million of short-term investments and a duration of 3.3 years as of June 30, 2009, compared with $3,154.1 million of fixed maturity securities, $477.2 million of short-term investments and a duration of 4.1 years as of December 31, 2008. Our fixed maturity securities are designated as available-for-sale in accordance with FAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”). Fixed maturity securities are reported at their fair value in accordance with FAS 115, and the change in fair value is reported as part of accumulated other comprehensive income. If we believe the decline in fair value is “other than temporary,” we write down the carrying value of the investment and record a realized loss in our statement of operations.

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investment portfolio does not include any non-publicly traded securities. For a detailed description of our valuation of investments see “—Critical Accounting Estimates.”

We review our investment portfolio for possible impairment losses. For additional information, see “—Critical Accounting Estimates.”

The following table summarizes the ratings distributions of our investment portfolio as of June 30, 2009 and December 31, 2008. Ratings are represented by the lower of the Moody’s Investors Service and Standard & Poor’s Inc., a division of The McGraw-Hill Companies, Inc., classifications.

	As of June 30, 2009		As of December 31, 2008

AAA or equivalent	60.3	%	59.0	%
AA	22.3	%	23.8	%
A	13.4	%	15.5	%
BBB	1.3	%	1.7	%
Below investment grade(1)	2.7	%	—

Total	100.0	%	100.0	%

(1) Represents $1.0 million, or less than 0.1%, of the investment portfolio at December 31, 2008.

As of June 30, 2009, our investment portfolio contained 14 securities that were not rated or rated below investment grade compared to three securities as of December 31, 2008. As of both June 30, 2009 and December 31, 2008, the weighted average credit quality of our entire investment portfolio was AA+.

As of June 30, 2009, $529.8 million of the Company’s $3,413.3 million of fixed maturity securities were guaranteed by third parties. The following table presents the credit rating of these $529.8 million of securities without the third-party guaranty:

Rating	Amount (in millions)

AAA	$	14.7
AA	301.6
A	184.1
BBB	7.3
Not Available	22.1
Total (1)	$	529.8

(1) Excludes $51.6 million of fixed maturity securities wrapped by Assured Guaranty Corp. and rated below investment grade.

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As of June 30, 2009, the distribution by third-party guarantor of the $529.8 million is presented in the following table:

Guarantor	Amount (in millions)

Ambac	$	177.6
MBIA	158.1
FSA	137.4
FGIC	56.7
Total (1)	$	529.8

(1) Excludes $51.6 million of fixed maturity securities wrapped by Assured Guaranty Corp. and rated below investment grade.

As of June 30, 2009 and to date, the Company has had no investments in or asset positions with any of these guarantors.

Short-term investments include securities with maturity dates equal to or less than one year from the original issue date. Our short-term investments are composed of money market funds, discounted notes and certain time deposits for foreign cash portfolios. Short-term investments are reported at cost, which approximates the fair value of these securities due to the short maturity of these investments.

Under agreements with our cedants and in accordance with statutory requirements, we maintain fixed maturity securities in trust accounts for the benefit of reinsured companies and for the protection of policyholders, generally in states where we or our subsidiaries, as applicable, are not licensed or accredited. The carrying value of such restricted balances as of June 30, 2009 and December 31, 2008 was $1,346.7 million and $1,233.4 million, respectively.

Liquidity Arrangements with respect to the Guaranteed Investment Contract Business:

In connection with the acquisition of FSAH by AGUS, Dexia SA (“Dexia”), the ultimate parent of Dexia Holdings, and certain of its affiliates have entered into a number of agreements to protect the Company and FSA against ongoing risk related to “GICs” issued by, and the GIC business conducted by, former subsidiaries of FSAH. These agreements include a guarantee jointly and severally issued by Dexia and DCL to FSA that guarantees the payment obligations of FSA under its policies related to the GIC business and an indemnification agreement between FSA, Dexia and DCL that protects FSA against other losses arising out of or as a result of the GIC business, as well as the liquidity facilities and the swap agreements described below.

On June 30, 2009, affiliates of Dexia increased their existing aggregate liquidity commitment to FSA Asset Management LLC (“FSAM”), a former FSAH subsidiary, from $8.5 billion to $11.5 billion in order to support the payment obligations of FSAM and the three former FSAH subsidiaries that issued GICs (collectively, the “GIC Issuers”) in respect of the GICs and the GIC business. The term of the commitment will generally extend until the GICs have been paid in full. The liquidity commitments are comprised of an amended and restated revolving credit agreement (the “Liquidity Facility”) pursuant to which DCL and Dexia Bank Belgium SA (“DBB”) commit to provide funds to FSAM in an amount up to $8.0 billion (approximately $4.2 billion of which was outstanding under the previously existing revolving credit facility as of June 30, 2009), and a master repurchase agreement (the “Repurchase Facility Agreement” and, together with the Liquidity Facility, the “Guaranteed Liquidity Facilities”) pursuant to which DCL will provide up to $3.5 billion (based on market value) of eligible collateral to satisfy collateralization obligations of the GIC Issuers under the GICs or of FSAM under derivative hedging arrangements entered into by FSAM to convert fixed-rate FSAM investment assets and GIC liabilities into London Interbank

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offered rate -based floating rate assets and liabilities, and to convert non-US dollar-denominated FSAM assets to US dollar-denominated assets. As of June 30, 2009, no amounts were outstanding under the Repurchase Facility Agreement.

On June 30, 2009, to support the payment obligations of FSAM and the GIC Issuers related to the GICs and the GIC business, each of Dexia and DCL entered into two separate ISDA Master Agreements, each with its associated schedule, confirmation and credit support annex (the “Guaranteed Put Contract” and the “Non-Guaranteed Put Contract” respectively, and collectively, the “Dexia Put Contracts”), pursuant to which Dexia and DCL jointly and severally guarantee the scheduled payments of interest and principal in relation to each FSAM asset, as well as any failure of Dexia or its affiliates to provide liquidity or liquid collateral under the Guaranteed Liquidity Facilities. The Dexia Put Contracts reference separate portfolios of FSAM assets to which assets owned by FSAM as of September 30, 2008 were allocated, with the less liquid assets and the assets with the lowest market-to-market values generally being allocated to the Guaranteed Put Contract. As of June 30, 2009, the initial aggregate principal balance of FSAM assets related to the Guaranteed Put Contract was equal to approximately $11.8 billion and the aggregate principal balance of FSAM assets related to the Non-Guaranteed Put Contract was equal to approximately $4.4 billion.

Pursuant to the Dexia Put Contracts, FSAM may put an amount of FSAM assets to Dexia and DCL:

· in exchange for funds in an amount generally equal to the lesser of (A) the outstanding principal balance of the GICs and (B) the shortfall related to (i) the failure of a Dexia party to provide liquidity or collateral as required under the Guaranteed Liquidity Facilities (a “Liquidity Default Trigger”) or (ii) the failure by either Dexia or DCL to transfer the required amount of eligible collateral under the credit support annex of the applicable Dexia Put Contract (a “Collateral Default Trigger”);

· in exchange for funds in an amount equal to the outstanding principal amount of an FSAM asset with respect to which (i) the issuer of such FSAM asset fails to pay the full amount of the expected interest when due or to pay the full amount of the expected principal when due (following expiration of any grace period) or within five business days following the scheduled due date, (ii) a writedown or applied loss results in a reduction of the outstanding principal amount, or (iii) the attribution of a principal deficiency or realized loss results in a reduction or subordination of the current interest payable on such FSAM asset (a “Asset Default Trigger”); provided, that Dexia and DCL have the right to elect to pay only the difference between the amount of the expected principal or interest payment and the amount of the actual principal or interest payment, in each case, as such amounts come due, rather than paying an amount equal to the outstanding principal amount of applicable FSAM asset; and/or

· in exchange for funds in an amount equal to the lesser of (i) the aggregate outstanding principal amount of all FSAM assets in the relevant portfolio and (ii) the aggregate outstanding principal balance of all of the GICs, upon the occurrence of an insolvency event with respect to Dexia as set forth in the Dexia Put Contracts (a “Bankruptcy Trigger”).

To secure each Dexia Put Contract, Dexia and DCL will, pursuant to the related credit support annex, post eligible highly liquid collateral having an aggregate value (subject to agreed reductions) equal to at least the excess of (i) the aggregate principal amount of all outstanding GICs over (ii) the aggregate mark-to-market value of FSAM’s assets. Prior to September 29, 2011 (the “Expected First Collateral Posting Date”), the aggregate mark-to-market value of the FSAM assets related to the Guaranteed Put Contract will be deemed to be equal to the aggregate unpaid principal balance of such assets for purposes of calculating their mark-to-market value. As a result, it is expected that Dexia and DCL will not be required to post collateral until the Expected First Collateral Posting Date. Additional collateralization is required in respect of certain other liabilities of FSAM.

On June 30, 2009, the States of Belgium and France (the “States”) issued a guarantee (the “Sovereign Guarantee”) to FSAM pursuant to which the States guarantee, severally but not jointly, Dexia’s payment obligations under the Guaranteed Put Contract, subject to certain limitations set forth therein. The States’ guarantee with respect to payment demands arising from Liquidity Default Triggers and Collateral Default Triggers is scheduled to expire on October 31, 2011, and the States’ guarantee with respect to payment demands arising from an Asset

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Default Trigger or a Bankruptcy Trigger is scheduled to expire on the earlier of (x) the final maturity of the latest maturing of the remaining FSAM assets related to the Guaranteed Put Contract, and (y) March 30, 2035.

Liquidity Arrangements with respect to the MTN Business:

In connection with the Company’s acquisition of FSAH, DCL has issued a funding guaranty (the “Funding Guaranty”) pursuant to which DCL has guaranteed, for the benefit of FSA and Financial Security Assurance International, Ltd. (the “Beneficiaries” or the “FSA Parties”), the payment to or on behalf of the relevant Beneficiary of an amount equal to the payment required to be made under an FSA Policy (as defined below) by that Beneficiary has issued and a reimbursement guaranty (the “Reimbursement Guaranty” and, together with the Funding Guaranty, the “DCL Guarantees”) pursuant to which DCL has guaranteed, for the benefit of each Beneficiary, the payment to the applicable Beneficiary of reimbursement amounts related to payments made by that Beneficiary following a claim for payment under an obligation insured by an FSA Policy. Under a Separation Agreement dated as of July 1, 2009 among DCL, the FSA Parties, FSA Global Funding Limited (“FSA Global”) and Premier International Funding Co. (“Premier”), and the DCL Guarantees, DCL agreed to fund, on behalf of the FSA Parties, 100% of all policy claims made under the financial guaranty insurance policies issued by the FSA Parties (the “FSA Policies”) in relation to the medium-term note issuance program of FSA Global (the “MTN Business”). Without limiting DCL’s obligation to fund 100% of all policy claims under those FSA Policies, the FSA Parties will have a separate obligation to remit to DCL a certain percentage (ranging from 0% to 25%) of those policy claims. FSA, the Company and related parties are also protected against losses arising out of or as a result of the MTN Business through an indemnification agreement with DCL.

Liquidity Arrangements with respect to the Leveraged Tax Lease Business:

On July 1, 2009, DCL, acting through its New York Branch (“DCL (NY)”), and FSA entered into a Strip Coverage Liquidity and Security Agreement (the “Strip Agreement”) pursuant to which DCL (NY) agreed to make loans to FSA, for the purpose of financing the payment of claims under certain financial guaranty insurance policies (“Strip Policies”) that were outstanding as of November 13, 2008 and issued by FSA, or an affiliate or a subsidiary of FSA, relating to the equity strip portion of a leveraged tax lease transaction. The “equity strip portion” refers to the amount by which the equity portion of the termination payment owed by the lessee to the lessor trust following the early termination of the related lease exceeds the accreted value of the related equity payment undertaking agreement. FSA may request advances under the Strip Agreement without any explicit limit on the number of loan requests, provided that the aggregate principal amount of loans outstanding as of any date may not exceed $1 billion (the “Commitment Amount”). The Commitment Amount (i) may be reduced at the option of FSA without a premium or penalty and (ii) will be reduced in the amounts and on the dates described in the Strip Agreement either in connection with the scheduled amortization of the Commitment Amount or to $750 million if FSA’s consolidated net worth as of June 30, 2014 is less than a specified consolidated net worth. As of June 30, 2009, no advances were outstanding under the Strip Agreement.

DCL (NY)’s commitment to make advances under the Strip Agreement is subject to the satisfaction by FSA of customary conditions precedent, including compliance with certain financial covenants, and will terminate at the earlier of (A) the occurrence of a change of control with respect to FSA, (B) the reduction of the Commitment Amount to $0 and (C) January 31, 2042.

Credit Risk

The recent credit crisis and related turmoil in the global financial system has had and may continue to have an impact on our business. On September 15, 2008, Lehman Brothers Holdings Inc. filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York and its subsidiary LBIE was placed into administration in the United Kingdom. As of June 30, 2009, we had CDS contracts covering $5.5 billion of par insured outstanding with LBIE with future installment payments totaling $31.3 million ($26.7 million present value). We have not received payment since September 15, 2008. In July 2009, we terminated our master agreement with LBIE.

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As of June 30, 2009, the present value of future installments (“PVI”) of our CDS contracts with counterparties in the financial services industry is approximately $537.1 million. The largest counterparties are:

Counterparty	PVI Amount (in millions)

Deutsche Bank AG	$	170.4
RBS/ABN AMRO	43.4
Barclays Capital	38.9
Dexia Bank	34.9
Others (1)	249.5
Total	$	537.1

(1) Each counterparty within the “Other” category represents less than 5% of the total.

Recent Accounting Pronouncements

In October 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of FAS 157, “Fair Value Measurements” (“FAS 157”), in a market that is not active. FSP 157-3 was effective when issued. It did not have an impact on the Company’s current results of operations or financial position.

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In April 2009, the FASB issued FSP No. FAS 115-2. FSP 115-2 provides new guidance on the recognition and presentation of an other than temporary impairment (“OTTI”) for debt securities classified as available-for-sale and held-to-maturity and provides some new disclosure requirements for both debt and equity securities. FSP 115-2 mandates new disclosure requirements that affect both debt and equity securities and extend the disclosure requirements (both new and existing) to interim periods. The Company adopted FSP 115-2 effective with Company’s financial statements for the quarter ended June 30, 2009 and increased the April 1, 2009 balance of retained earnings by $62.2 million ($57.7 million after tax) with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in previous periods on securities in the Company’s portfolio at April 1, 2009, that would not have been required had the FSP been effective for those periods. See Note 6 of Part I, Item1, “Notes to Consolidated Financial Statements (Unaudited).”

In June 2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R) (“FAS 167”). FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. FAS 167 will require a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. FAS 167 will become effective for the Company’s fiscal year beginning January 1, 2010. The Company is currently evaluating the effect, if any, the adoption of FAS 167 will have on its consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the potential for losses that may result from changes in the value of a financial instrument as a result of changes in market conditions. The primary market risks that impact the value of our financial instruments are interest rate risk, basis risk, such as taxable interest rates relative to tax-exempt interest rates, and credit spread risk. Each of these risks and the specific types of financial instruments impacted are described below. Senior managers in our surveillance department are responsible for monitoring risk limits and applying risk measurement methodologies. The estimation of potential losses arising from adverse changes in market conditions is a key element in managing market risk. We use various systems, models and stress test scenarios to monitor and manage market risk. These models include estimates made by management that use current and historic market information. The valuation results from these models could differ materially from amounts that actually are realized in the market. See “—Critical Accounting Estimates—Valuation of Investments.”

Financial instruments that may be adversely affected by changes in interest rates consist primarily of investment securities. The primary objective in managing our investment portfolio is generation of an optimal level of after-tax investment income while preserving capital and maintaining adequate liquidity. Investment strategies are based on many factors, including our tax position, fluctuation in interest rates, regulatory and rating agency criteria and other market factors. As of January 1, 2005 we have retained BlackRock Financial Management, Inc. to manage our investment portfolio. These investment managers manage our fixed maturity investment portfolio in accordance with investment guidelines approved by our Board of Directors.

Financial instruments that may be adversely affected by changes in credit spreads consist primarily of Assured Guaranty’s outstanding credit derivative contracts. We enter into credit derivative contracts which require us to make payments upon the occurrence of certain defined credit events relating to an underlying obligation (generally a fixed income obligation). The Company’s credit derivative exposures are substantially similar to its financial guaranty insurance contracts and provide for credit protection against payment default, and are generally not subject to collateral calls due to changes in market value. In general, the Company structures credit derivative transactions such that the circumstances giving rise to our obligation to make loss payments is similar to that for financial guaranty insurance policies and only occurs as losses are realized on the underlying reference obligation. Nonetheless, credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. (“ISDA”) documentation and operate differently from financial guaranty insurance policies. For example, our control rights with respect to a reference obligation under a credit derivative may be more limited than when we issue a financial guaranty policy on a direct primary basis. In addition, while our exposure under credit derivatives, like our exposure under financial guaranty policies, is generally for as long as the reference obligation remains outstanding, unlike financial guaranty insurance policies, a credit derivative may be terminated for a breach of the ISDA documentation or other specific events. Under certain documents, the Company may have the right to cure the termination event by posting collateral, assigning its rights and obligations in respect of the transactions to a third party or seeking a third party guarantee of the obligations of the Company.

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secure its potential payment obligations under those CDS contracts, which cover approximately $18.6 billion of par insured. The collateral posting requirement would increase to $375 million if AGC were downgraded to below AA- or A2. The posting of this collateral has no impact on the Company’s net income or shareholders’ equity under U.S. GAAP nor does it impact AGC’s statutory surplus or net income. In addition, in July 2009, we terminated an ISDA master agreement with Lehman Brothers International (Europe) (“LBIE”) due to its default under the agreement. The Company has discussed with several other CDS counterparties to further reduce its exposure to possible termination payments. The Company can give no assurance that any agreement will be reached with any such CDS counterparty.

In addition to the collateral posting described in the previous paragraph, under a limited number of other CDS contracts, the Company may be required to post eligible securities as collateral -- generally cash or U.S. government or agency securities. This requirement is based generally on a mark-to-market valuation in excess of contractual thresholds which decline if the Company’s ratings decline. As of the date of this filing, the Company is posting approximately $160.2 million of collateral in respect of approximately $1.5 billion of par insured. Any amounts required to be posted as collateral in the future will depend on changes in the market values of these transactions. The amount the Company could be required to post upon any downgrade cannot be quantified at this time, but could be substantial and could have a material adverse effect on the Company’s liquidity. If AGC were downgraded below A- or A3, certain of the contractual thresholds would be reduced or eliminated and the amount of par that could be subject to collateral posting requirements would be approximately $1.8 billion. If AG Re or AGRO were downgraded below BBB or Baa2, certain of the contractual thresholds would be reduced or eliminated and the amount of par that could be subject to collateral posting requirements would be $11.5 million in the case of AG Re and $290.7 million in the case of AGRO.

The total notional amount of credit derivative exposure outstanding as of June 30, 2009 and December 31, 2008 and included in our financial guaranty exposure was $73.5 billion and $75.1 billion, respectively.

We generally hold these credit derivative contracts to maturity. The unrealized gains and losses on derivative financial instruments will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure or early termination.

The following table summarizes the estimated change in fair values on the net balance of Assured Guaranty’s credit derivative positions assuming immediate parallel shifts in credit spreads on AGC and on the risks that it assumes at June 30, 2009:

(Dollars in millions)

Credit Spreads	Estimated Net Fair Value (Pre-Tax)			Estimated Pre-Tax Change in Gain / (Loss)
June 30, 2009:
100% widening in spreads	$	(1,973.4	)	$	(1,234.0	)
50% widening in spreads	(1,376.2		)	(636.8		)
25% widening in spreads	(1,061.3		)	(321.9		)
10% widening in spreads	(869.0		)	(129.6		)
Base Scenario	(739.4		)	—
10% narrowing in spreads	(657.3		)	82.1
25% narrowing in spreads	(532.4		)	207.0
50% narrowing in spreads	(318.8		)	420.6

Item 4. Controls and Procedures

Assured Guaranty Ltd.’s management, with the participation of Assured Guaranty Ltd.’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Assured Guaranty Ltd.’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as

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amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, Assured Guaranty Ltd.’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Assured Guaranty Ltd.’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Assured Guaranty Ltd. (including its consolidated subsidiaries) in the reports that it files or submits under the Exchange Act.

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended June 30, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Litigation

Litigation Involving Assured Guaranty Mortgage Insurance Company

Effective January 1, 2004, Assured Guaranty Mortgage Insurance Company (“AGMIC”) reinsured a private mortgage insurer (the “Reinsured”) under a Mortgage Insurance Stop Loss Excess of Loss Reinsurance Agreement (the “Agreement”). Under the Agreement, AGMIC agreed to cover the Reinsured’s aggregate mortgage guaranty insurance losses in excess of a $25 million retention and subject to a $95 million limit. Coverage under the Agreement was triggered only when the Reinsured’s: (1) combined loss ratio exceeded 100%; and (2) risk to capital ratio exceeded 25 to 1, according to insurance statutory accounting. In April 2008, AGMIC notified the Reinsured it was terminating the Agreement because of its breach of the terms of the Agreement. This matter went to arbitration and on June 4, 2009, the arbitration panel issued a Final Interim Award with respect to this Agreement in which the majority of the panel concluded that the Reinsured breached a covenant in the Agreement. AGMIC and the Reinsured executed an agreement on June 17, 2009 to settle the matter in full in exchange for a payment by AGMIC to the Reinsured of $10 million The final settlement agreement resolves all disputes between the parties and concludes all remaining rights and obligations of the parties under the Agreement.

Litigation Involving FSAH and its Subsidiaries

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FSAH and FSA have received various regulatory inquiries and requests for information regarding a variety of subjects. These include (i) 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 and (ii) subpoenas duces tecum and interrogatories from the Attorney General of the States of Connecticut and West Virginia and antitrust civil investigative demands from the Attorney General of the State of Florida relating to their investigations of alleged bid rigging of municipal GICs. FSAH has satisfied or is in the process of satisfying such requests. FSAH may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future.

Proceedings Related to FSAH’s Former Financial Products Business

The MDL 1950 court has determined that it will handle federal claims alleged in the consolidated class action complaint before addressing state claims. In April 2009, the MDL 1950 court granted the defendants’ motion to dismiss on the federal claims, but granted leave for the plaintiffs to file a second amended complaint. On June 18, 2009, interim lead plaintiffs’ counsel filed a Second Consolidated Amended Class Action Complaint. The complaints in these lawsuits generally seek unspecified monetary damages, interest, attorneys’ fees and other costs. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits ; although the Second Consolidated Amended Class Action Complaint currently describes some of FSAH’s and FSA’s activities, it does not name those entities as defendants.

FSAH and FSA also are named in five non-class action lawsuits originally filed in the California Superior Courts alleging violations of California law related to the municipal derivatives industry:

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Proceedings Relating to FSAH’s Financial Guaranty Business

Reinsurance

The Company is party to reinsurance agreements with most of the major monoline primary financial guaranty insurance companies. The Company’s facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) 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 (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, 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

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respect to the ceded business. Upon the occurrence of the conditions set forth in (ii) 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.

Item 1A — Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, and our Quarterly Report on Form 10-Q for the three months ended March 31, 2009, and the risk factors contained in Item 8.01 of our Current Report on Form 8-K filed on July 8, 2009, which could materially affect our business, financial condition or future results. The following risk factors supplement, but do not replace, any risk factor on a similar subject referred to above.

A downgrade of the financial strength or financial enhancement ratings of the Company or any of its insurance subsidiaries by any of the rating agencies would adversely affect our business prospects and consequently, our results of operations and financial condition.

On May 4, 2009, Fitch, Inc. (Fitch) downgraded Assured Guaranty Ltd.’s debt and financial strength ratings based on Fitch’s concerns related to their downgrade of mortgage—related and trust preferred securities collateralized debt obligations (TruPS CDO’s) in the Company’s insured portfolio. At the same time, Fitch downgraded the insurer financial strength rating of AGC and AG(UK) to “AA” from “AAA” and placed such rating on Rating Watch Evolving, and lowered the insurer financial strength rating of AG Re to “AA- (Rating Watch Evolving)” from “AA (stable).” On May 11, 2009, Fitch downgraded the insurer financial strength rating of Financial Security Assurance Inc. to “AA+” from “AAA” and placed such rating on Ratings Watch Negative. On August 10, 2009, Fitch placed the debt and insurer financial strength ratings of the Company and its subsidiaries on Rating Watch Negative, a change from Rating Watch Evolving. It confirmed that the ratings of FSAH and its subsidiaries remained on Rating Watch Negative. Fitch reported that it is currently in the process of analyzing the insured portfolios and overall capital adequacy of AGC, AG Re and FSA, and that the Rating Watch Negative reflects concerns with respect to further credit deterioration in mortgage-related exposures, which could negatively impact the capital positions of the companies. It noted that credit deterioration in other areas of the insured portfolios, including TruPS CDOs and public finance exposures, could also place additional pressure on claims paying resources, as could ratings-based triggers which could force termination or collateralization of insured exposures at AGC or the claw-back of certain businesses underwritten by AG Re. Fitch notes that it expects to complete its rating review over the next four to six weeks. There can be no assurance that Fitch will not take further action on our ratings.

On July 1, 2009, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) published a Research Update in which it affirmed its “AAA” counterparty credit and financial strength ratings on AGC and FSA. At the same time, S&P revised its outlook on AGC and AG(UK) to negative from stable and continued its negative outlook on FSA . S&P cited as a rationale for its actions the large single risk concentration exposure that Assured Guaranty Ltd. and FSA retain to Belgium and France prior to the posting of collateral by Dexia S.A. in October 2011, all in connection with the acquisition of FSAH by a subsidiary of Assured Guaranty Ltd. In addition, the outlook also reflects S&P’s view that the change in the competitive dynamics of the industry — with the potential entrance of new competitors, alternative forms of credit enhancement and limited insurance penetration in the U.S. public finance market — could hurt the companies’ business prospects. There can be no assurance that S&P will not take further action on our ratings.

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We have exposure through financial guaranty insurance policies to FSAH’s financial products business, which we did not acquire.

FSAH, through its financial products subsidiaries (the “Financial Products Companies”), offered FSA-insured GICs and other investment agreements, including medium-term notes (“MTNs”). In connection with the acquisition, FSAH transferred to Dexia Holdings the ownership interests in the Financial Products Companies that it held. Even though FSAH no longer owns the Financial Products Companies, FSA’s guarantees of the GICs and MTNs and other guarantees related to FSA’s MTN business and leveraged tax lease business generally remain in place. While Dexia and/or certain of its affiliates and FSAH have entered into a number of agreements pursuant to which Dexia and certain of its affiliates have assumed the credit and liquidity risks associated with FSAH’s former financial products business, as further described in our July 8, 2009 8-K, FSA may still be subject to certain of these risks (as further described below). To the extent FSA is required to pay any amounts on financial products issued or executed by the Financial Products Companies, FSA is subject to the risk that it will not receive the guarantee payment from Dexia and/or its affiliates or that the GICs will not be paid from funds received from Dexia or the Belgian state and/or the French state before it is required to make the payment under its financial guarantee policies or that it will not receive the guarantee payment at all.

We have substantial credit and liquidity exposure to Dexia and the Belgian and French states.

As described in our July 8, 2009 8-K, Dexia and its affiliates have entered into a number of agreements pursuant to which Dexia and/or certain of its affiliates have agreed to guarantee certain amounts, lend certain amounts or post liquid collateral to or in respect of FSAH’s former financial products business. In addition, as described in our July 8, 2009 8-K and under “Liquidity and Capital Resources — Liquidity Arrangements with respect to the Leveraged Tax Lease Business”, Dexia has agreed (directly or through an affiliate) to provide a liquidity facility to FSA in an amount not to exceed $1 billion for the purpose of covering the liquidity risk arising out of claims payable in respect of “strip coverages” included in FSAH’s leveraged tax lease business. While these various agreements are intended to shield the Company from paying any amounts in respect of the liabilities of the financial products business, the Company remains subject to the risk that Dexia and/or various affiliates, and even the Belgian state and/or the French state, may not make such amounts or securities available (a) on a timely basis, which is referred to as “liquidity risk,” or (b) at all, which is referred to as “credit risk,” because of the risk of default. Even if Dexia and its affiliates and/or the Belgian state or French state have sufficient assets to pay all amounts when due, concerns regarding Dexia’s or such states’ financial condition could cause one or more rating agencies to view negatively the ability of Dexia and its affiliates or such states to perform under their various agreements and could negatively affect FSA’s ratings.

Dexia and FSAH have entered into a number of agreements pursuant to which Dexia and/or certain of its affiliates have agreed to guarantee the assets and liabilities of the GIC Issuers and FSAM and its subsidiary for the benefit of FSA. Certain of these obligations also benefit from a guarantee from the Belgian and French states. As of June 30, 2009, the accreted value of the liabilities of the GIC Issuers and FSAM and its subsidiary exceeded the market value of their assets by approximately $4.1 billion (before any tax effects). To the extent FSA is required to pay any amounts in respect of the liabilities of these companies, FSA is subject to the risk that it will not receive the guarantee payment from Dexia and/or its affiliates or that the GICs will not be paid from funds received from Dexia or the Belgian state and/or the French state before it is required to make the payment under its financial guarantee policies or that it will not receive the guarantee payment at all.

In addition, if a Dexia event of default were to occur, we may be required to direct the administration and management of the assets and liabilities of the GIC subsidiaries and could be delayed in our ability to cause the GIC subsidiaries to utilize the collateral posted by Dexia and its affiliate under the credit support annexes. Any delay in the GIC subsidiaries paying amounts due and payable in connection with the GIC business related to our assuming the obligation to direct the administration and management of the GIC subsidiaries’ assets and liabilities or related to a delay in our access to the collateral posted by Dexia and its affiliate could require FSA to pay claims, and in some cases significant claims, under the FSA guarantees related to FSAH’s financial products business in a relatively short period of time. Any failure of FSA to satisfy these obligations under its guarantees could negatively affect FSA’s rating. See “—A downgrade of the financial strength or financial enhancement ratings of the Company or any of our insurance subsidiaries by any of the rating agencies could adversely affect our business and prospects and, consequently, our results of operations and financial condition.”

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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

Issuer’s Purchases of Equity Securities

The following table reflects purchases made by the Company during the three months ended June 30, 2009. All shares repurchased were for the payment of employee withholding taxes due in connection with the vesting of restricted stock awards:

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Program	(d) Maximum Number of Shares that May Yet Be Purchased Under the Program

April 1 – April 30	2,562	$	9.83	2,562	707,350
May 1 – May 31	389	$	13.72	389	707,350
June 1 – June 30	292	$	15.26	292	707,350
Total	3,243	$	10.78	3,243

For the restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the statutory withholding requirements that the Company pays on behalf of its employees. These withheld shares are not included in the common stock repurchase table above. During the three months ended June 30, 2009 we withheld approximately 434 shares to satisfy $6,200 of employee tax obligations.

Items 3, 4 and 5 are omitted either because they are inapplicable or because the answer to such question is negative.

Item 6 - Exhibits

See Exhibit Index for a list of exhibits filed with this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	Assured Guaranty Ltd.(Registrant)

Dated: August 10, 2009	By:	/S/ Robert B. Mills


		Robert B. Mills
		Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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EXHIBIT INDEX

Exhibit Number		Description

10.1		Amended and Restated Revolving Credit Agreement dated as of June 30, 2009 among FSA Asset Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium SA. (Incorporated by reference to Exhibit 10.1 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.2.1		Master Repurchase Agreement (September 1996 Version) dated as of June 30, 2009 between Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.2.1 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.2.2		Annex I — Committed Term Repurchase Agreement Annex dated as of June 30, 2009 between Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.2.2 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.3.1		ISDA Master Agreement (Multicurrency — Cross Border) dated as of June 30, 2009 among Dexia SA, Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.1 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.3.2		Schedule to the 1992 Master Agreement, Guaranteed Put Contract, dated as of June 30, 2009 among Dexia Crédit Local S.A., Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.2 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.3.3		Put Option Confirmation, Guaranteed Put Contract, dated June 30, 2009 to FSA Asset Management LLC from Dexia SA and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.3.3 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.3.4		ISDA Credit Support Annex (New York Law) to the Schedule to the ISDA Master Agreement, Guaranteed Put Contract, dated as of June 30, 2009 between Dexia Crédit Local S.A. and Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.4 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.4.1		ISDA Master Agreement (Multicurrency — Cross Border) dated as of June 30, 2009 among Dexia SA, Dexia Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.1 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.4.2		Schedule to the 1992 Master Agreement, Non-Guaranteed Put Contract, dated as of June 30, 2009 among Dexia Crédit Local S.A., Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.2 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.4.3		Put Option Confirmation, Non-Guaranteed Put Contract, dated June 30, 2009 to FSA Asset Management LLC from Dexia SA and Dexia Crédit Local S.A. (Incorporated by reference to

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		Exhibit 10.4.3 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.4.4		ISDA Credit Support Annex (New York Law) to the Schedule to the ISDA Master Agreement, Non-Guaranteed Put Contract, dated as of June 30, 2009 between Dexia Crédit Local S.A. and Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.4 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.5		First Demand Guarantee Relating to the “Financial Products” Portfolio of FSA Asset Management LLC issued by the Belgian State and the French State and executed as of June 30, 2009 (Incorporated by reference to Exhibit 10.5 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.6		Guaranty, dated as of June 30, 2009, made jointly and severally by Dexia SA and Dexia Crédit Local S.A., in favor of Financial Security Assurance Inc. (Incorporated by reference to Exhibit 10.6 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.7		Indemnification Agreement (GIC Business) dated as of June 30, 2009 by and among Financial Security Assurance Inc., Dexia Crédit Local S.A. and Dexia SA (Incorporated by reference to Exhibit 10.7 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.8		Pledge and Administration Agreement, dated as of June 30, 2009, among Dexia SA, Dexia Crédit Local S.A., Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSA Asset Management LLC, FSA Portfolio Asset Limited, FSA Capital Markets Services LLC, FSA Capital Markets Services (Caymans) Ltd., FSA Capital Management Services LLC and The Bank of New York Mellon Trust Company, National Association (Incorporated by reference to Exhibit 10.8 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.9		Separation Agreement, dated as of July 1, 2009, among Dexia Crédit Local S.A., Financial Security Assurance Inc., Financial Security Assurance International, Ltd., FSA Global Funding Limited and Premier International Funding Co. (Incorporated by reference to Exhibit 10.9 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.10		Funding Guaranty, dated as of July 1, 2009, made by Dexia Crédit Local S.A. in favor of Financial Security Assurance Inc. and Financial Security Assurance International, Ltd. (Incorporated by reference to Exhibit 10.10 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.11		Reimbursement Guaranty, dated as of July 1, 2009, made by Dexia Crédit Local S.A. in favor of Financial Security Assurance Inc. and Financial Security Assurance International, Ltd. (Incorporated by reference to Exhibit 10.11 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.12		Strip Coverage Liquidity and Security Agreement, dated as of July 1, 2009, between Financial Security Assurance Inc. and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.12 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.13		Indemnification Agreement (FSA Global Business), dated as of July 1, 2009, by and between Financial Security Assurance Inc., Assured Guaranty Ltd. and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.13 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.14		Pledge and Administration Annex Amendment Agreement dated as of July 1, 2009 among Dexia SA, Dexia Crédit Local S.A., Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSA Asset Management LLC, FSA Portfolio Asset Limited, FSA Capital Markets Services LLC, FSA Capital Markets Services (Caymans) Ltd.,

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		FSA Capital Management Services LLC and The Bank of New York Mellon Trust Company, National Association (Incorporated by reference to Exhibit 10.14 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.15		Put Confirmation Annex Amendment Agreement dated as of July 1, 2009 among Dexia SA and Dexia Crédit Local S.A. and FSA Asset Management LLC and Financial Security Assurance Inc. (Incorporated by reference to Exhibit 10.15 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).

10.16		Settlement Agreement and Plan by and between Financial Security Assurance Holdings, Ltd., Assured Guaranty Ltd., Dexia Holdings, Inc., Dexia Crédit Local, S.A. and Sean W. McCarthy (Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No. 333-160-367)).*

10.17		Employment Agreement dated as of July 1, 2009 between Assured Guaranty US Holdings, Inc. and Sean McCarthy (Incorporated by reference to Exhibit 10.17 to Assured Guaranty Ltd.’s Current Report on Form 8-K for July 1, 2009).*

10.18		Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan*

10.19		Non-Qualified Stock Option Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan*

10.20		Master Repurchase Agreement between FSA Capital Management Services LLC and FSA Capital Markets Services LLC

10.21		Confirmation to Master Repurchase Agreement

10.22		Master Repurchase Agreement Annex I

10.23		$300.0 million five-year unsecured revolving credit facility, dated as of November 6, 2006, for which ABN AMRO Incorporated and Bank of America Securities LLC acted as lead arrangers, between Assured Guaranty Ltd. Assured Guaranty Corp., Assured Guaranty (UK) Ltd., Assured Guaranty Re Ltd, and Assured Guaranty Re Overseas Ltd., as amended through the second amendment.

10.24		First Amendment to Assured Guaranty Ltd. Supplemental Employee Retirement Plan Furnished herewith (Incorporated by reference to Exhibit 4.5 of Assured Guaranty Ltd.’s Registration Statement on Form S-8 (No. No. 333-160008)).*

10.25		Second Amendment to Assured Guaranty Ltd. Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 4.6 of Assured Guaranty Ltd.’s Registration Statement on Form S-8 (No. No. 333-160008)).*

10.26		First Amendment to Assured Guaranty Corp. Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 4.8 of Assured Guaranty Ltd.’s Registration Statement on Form S-8 (No. No. 333-160008)).*

10.27		Second Amendment to Assured Guaranty Corp. Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 4.9 of Assured Guaranty Ltd.’s Registration Statement on Form S-8 (No. No. 333-160008)).*

10.28		Financial Security Assurance Holdings Ltd. 1989 Supplemental Executive Retirement Plan (amended and restated as of December 17, 2004) (Incorporated by reference to Exhibit 10.4 to Financial Security Assurance Holdings Ltd. Current Report on Form 8-K (Commission

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		File No. 1-12644) dated December 17, 2004 and filed on December 17, 2004)*

10.29		Amendment to the Financial Security Assurance Holdings Ltd. 1989 Supplemental Employee Retirement Plan*

31.1		Certification of CEO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1		Assured Guaranty Corp.’s Consolidated Unaudited Financial Statements as of June 30, 2009 and December 31, 2008 and for the Three and Six Months Ended June 30, 2009 and 2008

* - Management contract or compensatory plan

Exhibit 10.18

Restricted Stock Agreement for

Outside Directors under

Assured Guaranty Ltd. 2004 Long-Term Incentive Plan

THIS AGREEMENT, entered into as of the Grant Date (as defined in paragraph 1), by and between the Director and Assured Guaranty Ltd. (the “Company”):

WITNESSETH THAT:

WHEREAS, the Company maintains the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended and restated as of May 7, 2009 , and as further amended thereafter from time to time (the “Plan”), and the Director has been selected by the committee administering the Plan (the “Committee”) to receive a Restricted Stock Award under the Plan; and

NOW, THEREFORE, IT IS AGREED, by and between the Company and the Director, as follows:

1. Terms of Award . The following words and phrases used in this Agreement shall have the meanings set forth in this paragraph 1:

(a) The “Director” is .

(b) The “Grant Date” is .

Other words and phrases used in this Agreement are defined pursuant to paragraph 15 or elsewhere in this Agreement.

2. Restricted Stock Award . This Agreement specifies the terms of the “Restricted Stock Award” granted to the Director.

3. Restricted Period . Subject to the limitations of this Agreement, the “Restricted Period” for the Covered Shares of the Restricted Stock Award shall begin on the Grant Date and end on the day immediately prior to the next annual shareholders meeting during which elections for directors are held following the Grant Date.

The Restricted Period shall end prior to the date specified above to the extent set forth below:

(a) The Restricted Period shall end on the date the Director ceases to be a director of the Company (and is not otherwise employed by the Company or its Subsidiaries), if the Director ceases to be a director by reason of his Disability or death. The Director shall be considered to have a “Disability” if the Nominating and Governance Committee of the Board of Directors determines that he is unable to serve as a Director as a result of a medically determinable physical or mental impairment.

(b) The Restricted Period shall end upon a Change in Control (as defined in the Plan), provided that such Change in Control occurs on or before the date the Director ceases to be a director of the Company.

4. Transfer and Forfeiture of Shares . If the Restricted Period with respect to the Covered Shares ends on or before the date the Director ceases to be a director of the Company, then at the end of such Restricted Period, the Covered Shares shall be transferred to the Director free of all restrictions. If the Restricted Period with respect to the Covered Shares does not end on or before the date the Director ceases to be a director of the Company, then as of the date the Director ceases to be a director of the Company, the Director shall forfeit all Covered Shares.

5. Transferability . Except as otherwise provided by the Committee, the Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period.

6. Dividends . The Director shall be entitled to receive any dividends paid with respect to the Covered Shares that become payable during the Restricted Period. Any dividends shall be payable to the Director in cash. The Director shall not be prevented from receiving dividends and distributions paid on the Covered Shares of Restricted Stock merely because those shares are subject to the restrictions imposed by this Agreement and the Plan; provided, however that no dividends or distributions shall be payable to or for the benefit of the Director with respect to record dates for such dividends or distributions for any Covered Shares occurring on or after the date, if any, on which the Director has forfeited those shares.

7. Voting . The Director shall be entitled to vote the Covered Shares during the Restricted Period to the same extent as would have been applicable to the Director if the Director was then vested in the shares; provided, however, that the Director shall not be entitled to vote Covered Shares with respect to record dates for any Covered Shares occurring on or after the date, if any, on which the Director has forfeited those shares.

8. Registration of Restricted Stock Award . Each certificate issued in respect of the Covered Shares awarded under this Agreement shall be registered in the name of the Director.

9. Heirs and Successors . This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business. If any benefits deliverable to the Director under this Agreement have not been delivered at the time of the Director’s death, such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of this Agreement and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Director in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Director fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Director, any rights that would have been exercisable by the Director and any benefits distributable to the Director shall be distributed to the legal representative of the estate of the Director. If a deceased Director designates a beneficiary and the Designated Beneficiary survives the Director but dies before the complete distribution of benefits to the Designated

Beneficiary under this Agreement, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.

10. Administration . The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of this Agreement by the Committee and any decision made by it with respect to this Agreement is final and binding on all persons.

11. Plan Governs . Notwithstanding anything in this Agreement to the contrary, this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Director from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.

12. Notices . Any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Director, at the Director’s address indicated by the Company’s records, or if to the Company, at the Company’s principal executive office.

13. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock Award pursuant to the Plan or otherwise, the Company will be entitled to pay to the Director an amount equal to the fair market value of such fractional share.

14. Amendment . This Agreement may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Director and the Company without the consent of any other person.

15. Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement.

IN WITNESS WHEREOF, the Director has executed the Agreement, and the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.

Assured Guaranty Ltd.



By:	James Michener
Its:	General Counsel


Director:

Exhibit 10.19

Non-Qualified Stock Option Agreement for

Outside Directors under

Assured Guaranty Ltd. 2004 Long-Term Incentive Plan

THIS AGREEMENT, entered into as of the Grant Date (as defined in paragraph 1), by and between the Director and Assured Guaranty Ltd. (the “Company”):

WITNESSETH THAT:

NOW, THEREFORE, IT IS AGREED, by and between the Company and the Director, as follows:

1. Terms of Award . The following words and phrases used in this Agreement shall have the meanings set forth in this paragraph 1:

(a) The “Director” is .

(b) The “Grant Date” is .

(d) The “Exercise Price” is $ per share.

Other words and phrases used in this Agreement are defined pursuant to the Plan or elsewhere in this Agreement.

2. Non-Qualified Stock Option . This Agreement specifies the terms of the option (the “Option”) granted to the Director to purchase the number of Covered Shares of Stock at the Exercise Price per share as set forth in paragraph 1. The Option is granted for the Plan Year (as defined below) beginning with the Annual General Meeting occurring in 2009. The Option is not intended to constitute an “incentive stock option” as that term is used in Code section 422.

3. Date of Exercise . Subject to the limitations of this Agreement, the Option shall be exercisable with respect to all Covered Shares on the last day of the Plan Year for which it is granted, provided that the Director is a director of the Company or an employee of the Company or a Subsidiary on that date. The Option shall become exercisable with respect to all Covered Shares prior to the date specified above to the extent set forth below:

(a) The Option shall be exercisable with respect to all Covered Shares on the date the Director ceases to be a director of the Company (and is not otherwise employed by the Company or its Subsidiaries), if the Director ceases to be a director by reason of his Retirement, Disability or death.

(b) The Option shall be exercisable with respect to all Covered Shares upon a Change in Control (as defined in the Plan), provided that such Change in Control occurs on or before the date the Director ceases to be a director of the Company and an employee of the Company or a Subsidiary.

The application of this paragraph 3 and paragraph 4 shall be subject to the following:

(A) The Director shall be considered to have ceased to be a director of the Company by reason of “Retirement” if the Director has satisfied both of the following requirements (i) the Director has served as a director of the Company for five full Plan Years (or partial years as may be permitted by the Nominating and Governance Committee of the Board of Directors); and (ii) the Director ceases to be a member of the Board on the last day of his Term. The last day of the Director’s Term is the date on which the Director’s tenure as a member of the Board is scheduled to cease under the Company’s bye-laws in the absence of reelection.

(B) The Director shall be considered to have a “Disability” if the Nominating and Governance Committee of the Board of Directors determines that he is unable to serve as a director of the Company as a result of a medically determinable physical or mental impairment.

(C) For purposes of this Agreement, the term “Plan Year” means the period beginning on the date of an Annual General Meeting and ending on the date immediately preceding the next Annual General Meeting.

(D) The Option may be exercised on or after the date the Director ceases to be a director of the Company and an employee of the Company or a Subsidiary only as to that portion of the Covered Shares for which it was exercisable immediately prior to (or became exercisable on) the date the Director ceases to be a director of the Company and an employee of the Company or a Subsidiary.

4. Expiration . The Option shall not be exercisable after the Company’s close of business on the last business day that occurs prior to the Expiration Date. The “Expiration Date” shall be the earliest to occur of:

(a) the ten-year anniversary of the Grant Date;

(b) if the Director ceases to be a director of the Company and an employee of the Company or a Subsidiary by reason of Retirement, Disability, or death, the two-year anniversary of such cessation date; or

(c) if the Director ceases to be a director of the Company and an employee of the Company or a Subsidiary for any reason other than those listed in paragraph (b) above, the 30 day anniversary of the date the Director ceases to be a director of the Company and an employee of the Company or a Subsidiary.

5. Method of Option Exercise . Subject to this Agreement and the Plan, the Option may be exercised in whole or in part by filing a written notice with the Secretary of the Company at

its corporate headquarters prior to the Company’s close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Stock which the Director elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Stock indicated by the Director’s election. Payment shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Director by delivery of shares of Stock owned by the Director and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Director may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price. The Option shall not be exercisable if and to the extent the Company determines that such exercise would violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.

6. Transferability . Except as otherwise provided by the Committee, the Option is not transferable other than as designated by the Director by will or by the laws of descent and distribution, and during the Director’s life, may be exercised only by the Director.

7. Heirs and Successors . This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business. If any rights exercisable by the Director or benefits deliverable to the Director under this Agreement have not been exercised or delivered, respectively, at the time of the Director’s death, such rights shall be exercisable by the Designated Beneficiary, and such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of this Agreement and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Director in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Director fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Director, any rights that would have been exercisable by the Director and any benefits distributable to the Director shall be exercised by or distributed to the legal representative of the estate of the Director. If a deceased Director designates a beneficiary and the Designated Beneficiary survives the Director but dies before the Designated Beneficiary’s exercise of all rights under this Agreement or before the complete distribution of benefits to the Designated Beneficiary under this Agreement, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.

8. Administration . The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of this

Agreement by the Committee and any decision made by it with respect to this Agreement is final and binding on all persons.

9. Plan Governs . Notwithstanding anything in this Agreement to the contrary, this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Director from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.

10. Notices . Any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Director, at the Director’s address indicated by the Company’s records, or if to the Company, at the Company’s principal executive office.

11. Fractional Shares . In lieu of issuing a fraction of a share upon any exercise of the Option, resulting from an adjustment of the Option pursuant to the Plan or otherwise, the Company will be entitled to pay to the Director an amount equal to the fair market value of such fractional share.

12. No Rights As Shareholder . The Director shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein.

13. Amendment . This Agreement may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Director and the Company without the consent of any other person.

14. Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement.

IN WITNESS WHEREOF, the Director has executed the Agreement, and the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.

Assured Guaranty Ltd.


By:	James Michener
Its:	General Counsel

Director:

Exhibit 10.20



		September 1996 Version

Dated as of	June 30, 2009

Between:	FSA Capital Management Services LLC and FSA Capital Markets Services LLC

and	FSA Asset Management LLC

1. Applicability

From time to time the parties hereto may enter into transactions in which one party (“Seller”) agrees to transfer to the other (“Buyer”) securities or other assets (“Securities”) against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a “Transaction” and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder.

2. Definitions

(a) “Act of Insolvency”, with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party’s inability to pay such party’s debts as they become due;

(b) “Additional Purchased Securities”, Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof;

(c) “Buyer’s Margin Amount”, with respect to any Transaction as of any date, the amount obtained by application of the Buyer’s Margin Percentage to the Repurchase Price for such Transaction as of such date;

(d) “Buyer’s Margin Percentage”, with respect to any Transaction as of any date, a percentage (which may be equal to the Seller’s Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction;

(e) “Confirmation”, the meaning specified in Paragraph 3(b) hereof;

(f) “Income”, with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon;

(g) “Margin Deficit”, the meaning specified in Paragraph 4(a) hereof;

(h) “Margin Excess”, the meaning specified in Paragraph 4(b) hereof;

(i) “Margin Notice Deadline”, the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice);

(j) “Market Value”, with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities);

(k) “Price Differential”, with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction);

(l) “Pricing Rate”, the per annum percentage rate for determination of the Price Differential;

(m) “Prime Rate”, the prime rate of U.S. commercial banks as published in The Wall Street Journal (or, if more than one such rate is published, the average of such rates);

(n) “Purchase Date”, the date on which Purchased Securities are to be transferred by Seller to Buyer;

(o) “Purchase Price”, (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller’s obligations under clause (ii) of Paragraph 5 hereof;

(p) “Purchased Securities”, the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term “Purchased Securities” with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof;

(q) “Repurchase Date”, the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof;

(r) “Repurchase Price”, the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination;

(s) “Seller’s Margin Amount”, with respect to any Transaction as of any date, the amount obtained by application of the Seller’s Margin Percentage to the Repurchase Price for such Transaction as of such date;

(t) “Seller’s Margin Percentage”, with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer’s Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction.

3. Initiation; Confirmation; Termination

(a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller.

(b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a “Confirmation”). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with

respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail.

(c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer.

4. Margin Maintenance

(a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer’s Margin Amount for all such Transactions (a “Margin Deficit”), then Buyer may by notice to Seller require Seller in such Transactions, at Seller’s option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer (“Additional Purchased Securities”), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer’s Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller).

(b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller’s Margin Amount for all such Transactions at such time (a “Margin Excess”), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer’s option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller’s Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer).

(c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice.

(d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller.

(e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions).

(f) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement).

5. Income Payments

Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would be so entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed.

6. Security Interest

Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all Income thereon and other proceeds thereof.

7. Payment and Transfer

Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer.

8. Segregation of Purchased Securities

To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller’s interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer’s obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof.

Required Disclosure for Transactions in Which the Seller Retains Custody of the Purchased Securities

Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer’s securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer’s securities will likely be commingled with Seller’s own securities during the trading day. Buyer is advised that, during any trading day that Buyer’s securities are commingled with Seller’s securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller’s ability to resegregate substitute securities for Buyer will be subject to Seller’s ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities.

* Language to be used under 17 C.F.R. ß403.4(e) if Seller is a government securities broker or dealer other than a financial institution.

** Language to be used under 17 C.F.R. ß403.5(d) if Seller is a financial institution.

9. Substitution

(a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities.

(b) In Transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted.

10. Representations

Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, bylaw or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it.

11. Events of Default

In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day’s notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an “Event of Default”):

(a) The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Insolvency) give notice to the defaulting party of the exercise of such option as promptly as practicable.

(b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party’s obligations in such Transactions to repurchase all Purchased Securities, at the Repurchase Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party’s possession or control.

(c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party.

(d) If the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may:

(i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and

(ii) as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities (“Replacement Securities”) of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source.

Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities).

(e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder.

(f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the

amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph.

(g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction.

(h) To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party’s rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate.

(i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law.

12. Single Agreement

Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted.

13. Notices and Other Communications

Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence.

14. Entire Agreement; Severability

This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.

15. Non-assignability; Termination

(a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding.

(b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof.

16. Governing Law

This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof.

17. No Waivers, Etc.

No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure here-from shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date.

18. Use of Employee Plan Assets

(a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 (“ERISA”) are intended to be used by either party hereto (the “Plan Party”) in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed.

(b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition.

(c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller’s latest such financial statements, there has been no material adverse change in Seller’s financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party.

19. Intent

(a) The parties recognize that each Transaction is a “repurchase agreement” as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a “securities contract” as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).

(b) It is understood that either party’s right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended.

(c) The parties agree and acknowledge that if a party hereto is an “insured depository institution,” as such term is defined in the Federal Deposit Insurance Act, as amended (“FDIA”), then each Transaction hereunder is a “qualified financial contract,” as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).

(d) It is understood that this Agreement constitutes a “netting contract” as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a “covered contractual payment entitlement” or “covered contractual payment obligation”, respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a “financial institution” as that term is defined in FDICIA).

20. Disclosure Relating to Certain Federal Protections

The parties acknowledge that they have been advised that:

(a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission (“SEC”) under Section 15 of the Securities Exchange Act of 1934 (“1934 Act”), the Securities Investor Protection Corporation has

taken the position that the provisions of the Securities Investor Protection Act of 1970 (“SIPA”) do not protect the other party with respect to any Transaction hereunder;

(b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and

(c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.

FSA Capital Management Services LLC			FSA Capital markets Services LLC

By:			By:

Title:			Title:

Date:			Date:


FSA Asset Management LLC

By:

Title:

Date:

Intercompany Repurchase Master

Exhibit 10.21

Execution Version

CONFIRMATION TO MASTER REPURCHASE AGREEMENT

The purpose of this communication (this “ Confirmation ”), dated June 30, 2009, is to amend the terms and conditions of certain repurchase transactions entered into prior to the date hereof as well as set forth the terms and conditions of a new repurchase transaction entered into on the initial Purchase Date specified below, in each case between FSA Capital Management Services LLC (“ FSA Capital Management ”), FSA Capital Markets Services LLC (“ FSA Capital Markets ”) and FSA Asset Management LLC (“ FSAM ”). This Confirmation constitutes a “Confirmation” as referred to in the Master Repurchase Agreement (defined below).

Prior to the date hereof and pursuant to the Original Master Repurchase Agreements, the parties hereto entered into certain repurchase transactions related to the issuance of secured guaranteed investment contracts (each, a “ Secured GIC Repurchase Transaction ”). This Confirmation shall amend the terms of each such Secured GIC Repurchase Transaction as set forth below and as a result each such Secured GIC Repurchase Transaction shall be replaced by the single portfolio repurchase transaction between the parties having the terms set forth in this Confirmation (the “ Transaction ”).

This Confirmation supplements, forms a part of and is subject to the Master Repurchase Agreement and all provisions contained in, or incorporated by reference in, the Master Repurchase Agreement shall govern this Confirmation, except as expressly modified below. In the event of any conflict between the terms and provisions of this Confirmation and the Master Repurchase Agreement, the terms and provisions of this Confirmation shall prevail.

Terms used but not defined herein shall have the meanings assigned such terms in the Master Repurchase Agreement or the Pledge and Administration Agreement referred to in the Master Repurchase Agreement.

The terms of the Transaction to which this Confirmation relates are as follows:

1. GENERAL TERMS

Purchase Date:		June 30, 2009 or any date of renewal of this Transaction as contemplated by “Repurchase Date” below.

Buyer:		Each of FSA Capital Management and FSA Capital Markets, severally but not jointly. Notwithstanding anything contrary in the Master Repurchase Agreement but subject to the terms of this Confirmation, this Transaction constitutes a single agreement between the Seller and each Buyer having the terms set forth in this Confirmation.

Seller:		FSAM

Purchase Price:		The aggregate outstanding principal balance of all GIC Contracts issued by the Buyers as of the Purchase Date.

GIC Contract:		Each guaranteed investment contract of a Buyer outstanding on the Purchase Date.

Scheduled Repurchase Date:		The date that is eight months after the Purchase Date (or if such date is not a Business Day, the immediately preceding Business Day), subject to the terms of “Transaction Renewal” below.

Transaction Renewal:		If a Buyer and Seller (or, as described below, FSA as Secured Party Representative, on all of their behalfs) agree to renew this Transaction on or prior to any Scheduled Repurchase Date, then (i) a new Purchase Date shall occur on the Scheduled Repurchase Date and (ii) a new Scheduled Repurchase Date will occur on the date that is eight months after the prior Scheduled Repurchase Date (or if such date is not a Business Day, the immediately preceding Business Day). On any such new Purchase Date, the transfers of Purchased Securities to Seller on the Scheduled Repurchase Date and to Buyer on the new Purchase Date, and the payments of the Repurchase Price and GIC Carry Amount (if applicable) by Seller and of Purchase Price and GIC Carry Amount (if applicable) by Buyer, respectively shall each be netted and deemed set off and satisfied in full. Unless any party notifies each of the other parties hereto of its intent not to renew this Transaction, (i) the delivery by the Administrator of the monthly report scheduled to be delivered in accordance with Section 10.5(a) of the Pledge and Administration Agreement on the first calendar day of the month which precedes the month in which the Scheduled Repurchase Date is to occur shall constitute an offer by the Administrator on behalf of each Buyer to renew this Transaction on the coming Scheduled Repurchase Date and (ii) the delivery by the Administrator of the monthly report scheduled to be delivered in accordance with Section 10.5(a) of the Pledge and Administration Agreement on the first calendar day of the month in which the Scheduled Repurchase Date is to occur shall constitute an acceptance by the Administrator on behalf of the Seller of the Buyers’ offer to renew this Transaction on the coming Scheduled Repurchase Date. FSA as the Secured Party Representative may elect to renew this Transaction on each party’s behalf on

		or after the second Business Day prior the Scheduled Repurchase Date, unless an FSAM Lien Release Date has occurred. The foregoing provisions are without prejudice to the rights of the parties to renew this Transaction in any other manner or to elect not to renew this Transaction.

GIC Carry Amount Payment by Seller:		On any Scheduled Repurchase Date other than a Scheduled Repurchase Date that occurs on or after a date on which an FSAM Lien Release Date has occurred, Seller shall pay to Buyer, in addition to the Repurchase Price, the GIC Carry Amount determined on such Repurchase Date.

GIC Carry Amount Payment by Buyer:		On any Purchase Date occurring pursuant to “Transaction Renewal” above and on a Scheduled Repurchase Date on which Seller is required to make payment of the GIC Carry Amount, Buyer shall make a corresponding payment of the GIC Carry Amount to Seller.

GIC Carry Amount:		On any Scheduled Repurchase Date other than a Scheduled Repurchase Date that occurs on or after a date on which an FSAM Lien Release Date has occurred, an amount equal to: (i) the Spread Component of the GIC Business Costs Amount that would be determined under the Dexia CSAs on the basis of Permitted Investments consisting solely of overnight investments of cash balances at the federal funds rate, as determined by the Secured Party Representative in a commercially reasonable manner, minus (ii) the actual Spread Component of the GIC Business Costs Amount determined under the Dexia CSAs, as most recently determined on such Repurchase Date. For the avoidance of doubt, a GIC Carry Amount shall not be payable on any Repurchase Date (including, but not limited to, a Repurchase Date occurring as a result of any acceleration or early termination of the Transaction following a Dexia Event of Default or otherwise), other than a Scheduled Repurchase Date occurring prior to a FSAM Lien Release Date.

Repurchase Date:		Each of (i) the Scheduled Repurchase Date and (ii) any GIC Contract Business Day on which a payment of principal is due to be made under one or more GIC Contracts. The obligation of a Buyer to transfer the Purchased Securities on the Repurchase Date shall be understood to be such Buyer’s obligation to transfer (A) in the case of (i) in the definition of Repurchase Date, a par amount of Purchased Securities selected by Buyer having a Market Value Percentage equal to the relevant GIC Principal Percentage and (B) in the case of (ii) in the definition of Repurchase Date, a par amount of Purchased Securities (selected by the Secured Party Representative) having a Market Value Percentage equal to the relevant GIC Principal Repayment Percentage.

Market Value Percentage:		With respect to any Purchased Securities on any date, a percentage figure equal to (i) the aggregate FSAM Asset Value for such Purchased Securities divided by (ii) the aggregate FSAM Asset Value of all Purchased Securities not yet repurchased by the Seller hereunder, with such FSAM Asset Values to be based on the FSAM Asset Values most recently determined in accordance with the Dexia CSAs. If the Dexia Put Contracts have been terminated, the FSAM Asset Value of the relevant Purchased Securities shall be determined by the Administrator or FSA if the Administrator does not make such determination within one Business Day, pursuant to the procedures set forth in the Dexia CSAs as if such Dexia Put Contracts had not been terminated.

GIC Principal Repayment Percentage:		With respect to a Buyer and a Repurchase Date, a percentage equal to (i) the aggregate payments of principal due to be made on such Repurchase Date in respect of all GIC Contracts issued by such Buyer divided by (ii) aggregate payments of principal due to be made on such Repurchase Date in respect of all GIC Contracts.

GIC Principal Percentage:		With respect to a Buyer and any date of determination, a percentage equal to (i) the outstanding principal balance of all GIC Contracts issued by such Buyer divided by (ii) the aggregate outstanding principal balance of all GIC Contracts.

GIC Contract Business Day:		In respect of a GIC Contract, each day which is a business day under such GIC Contract.

Periodic Payment of Price Differential:		On any date on which a payment of interest is payable in respect of one or more GIC Contracts, a payment of Price Differential in relation to this Transaction shall be payable by Seller in an amount equal to, with respect to each Buyer, the aggregate interest payable in respect of each such GIC Contract issued by such Buyer. For the avoidance of doubt, such amount shall not be included in the Repurchase Price payable upon termination of this Transaction in whole or in part. In case Seller fails to pay the Repurchase Price on a Repurchase Date, Seller shall continue to pay the Price Differential as if the Transaction had not been terminated (whether in part or in full), until such time as Seller has paid the Repurchase Price in full.

Repurchase Price:		In relation to each Buyer, the Seller shall pay (A) in the case of (i) in the definition of Repurchase Date, the aggregate outstanding principal balance on the Repurchase Date of all GIC Contracts issued by such Buyer, and (B) in the case of (ii) in the definition of Repurchase Date, the aggregate amount of principal payable on such Repurchase Date under the GIC Contracts issued by such Buyer.

Additional GIC Principal Amount:		If the principal amount of a GIC Contract increases as a result of the exercise of a right of a holder of such GIC Contract to invest additional amounts in such GIC Contract, the relevant Buyer shall transfer such additional investment amount in respect of a GIC Contract on the first Business Day after the receipt thereof from a holder of such GIC Contract, and the Purchase Price hereunder shall be deemed increased by such amount.

Purchased Securities:		All securities owned by Seller on the Purchase Date, including, without duplication, with respect to the initial Purchase Date, all securities that have been purchased by the Buyers under the Secured GIC Repurchase Transactions (notwithstanding that Seller may own such securities for accounting purposes). With respect to the portion of the Transaction

entered into on the initial Purchase Date and related to the Secured GIC Repurchase Transactions, the obligations of the Buyer and Seller to transfer the Purchase Price to Seller against the transfer of the Purchased Securities shall be deemed to have been satisfied by prior transfers of Purchased Securities from Seller to each Buyer and prior payments of Purchase Price from each Buyer to Seller under the applicable Original Master Repurchase Agreement (the Purchased Securities previously transferred under Secured GIC Repurchase Transactions the “ Existing Purchased Securities ”) with respect to such Secured GIC Repurchase Transactions.

Subject to Section 2 below, on the initial Purchase Date, the Seller shall sell to each Buyer a par amount of Purchased Securities equal to (A) the aggregate par amount of all Purchased Securities other than the Existing Purchased Securities multiplied by (B) such Buyer’s Applicable Note Percentage (with respect to each Buyer, the “ Non-Secured GIC Purchased Securities ”).

Applicable Note Percentage:

With respect to a Buyer, a percentage equal to (i) the principal balance of Notes (as defined in Section 2 below) held by such Buyer on the initial Purchase Date divided by (ii) the aggregate principal balance of the Notes.

2. OTHER ADDITIONAL PROVISIONS

(a) The parties agree and acknowledge that Seller and each Buyer has granted a security interest in its rights under this Transaction (including in respect of transfers of the Purchased Securities and the Repurchase Price) to the Collateral Agent pursuant to the Pledge and Administration Agreement.

(b) The parties agree that they are entering into this Transaction in connection with the repayment of the aggregate outstanding principal amount of the Master Notes Series A and B, each dated October 29, 2001 and each issued by FSAM (together, the “ Notes ”), together with any accrued and unpaid interest thereon. Upon entering into this Confirmation, each Buyer and FSAM agree that on the date hereof (i) the Notes shall become due and payable, (ii) each Buyer’s payment of the Purchase Price to Seller with respect to the Non-Secured GIC Purchased Securities on the initial Purchase Date shall be deemed to have been netted and set off against Seller’s obligation to redeem and repay the Notes; and (iii) the outstanding principal of and interest on the Notes shall be deemed paid in full.

Seller shall retain custody of the Non-Secured GIC Purchased Securities as well as any other Purchased Securities, including any Existing Purchased Securities, that are held by Seller on the initial Purchase Date, with such securities to be held in the FSAM Collateral Account, or in the case of assets that have been pledged to secure that FSA PAL Loan, the FSA PAL Account, in each case, established

pursuant to the Pledge and Administration Agreement (and subject to rehypothecation from time to time in accordance therewith).

(c) In addition to the acknowledgements made in Paragraph 19 of the Master Repurchase Agreement, the parties agree and acknowledge that this Confirmation is intended to be a “securities contract,” as such term is defined in Section 741(7) of the United States Bankruptcy Code, with respect to which: (1) the contractual rights of a party hereunder to cause the liquidation, termination or acceleration of a securities contract are intended to be among those protected under Section 555 of the United States Bankruptcy Code; (2) the termination, netting and collateral liquidation provisions of the Master Repurchase Agreement are intended to be among those excepted from the automatic stay under Section 362(b)(6) of the United States Bankruptcy Code; and (3) each transfer, payment and delivery hereunder or in connection herewith is intended to be a “margin payment”, as defined in Section 741(5) of the United States Bankruptcy Code, and/or a “settlement payment” as defined in Section 741(8) of the United States Bankruptcy Code, under a securities contract, and is therefore, under Section 546(e) of the United States Bankruptcy Code, not avoidable.

Please confirm your agreement to be bound by the terms of the foregoing by executing a copy of this Confirmation and returning it to us at the contact information listed above.

Very truly yours,

FSA ASSET MANAGEMENT LLC

By:
Title:

FSA CAPITAL MANAGEMENT SERVICES LLC

By:
Title:

FSA CAPITAL MARKETS SERVICES LLC

By:
Title:

Exhbit 10.22

Execution Version

ANNEX I
Supplemental Terms and Conditions

This Annex I, dated as of June 30, 2009, supplements and forms a part of the Master Repurchase Agreement dated as of June 30, 2009, (the “ Master Repurchase Agreement ”), between FSA CAPITAL MANAGEMENT SERVICES LLC (“ FSA Capital Management ”), FSA CAPITAL MARKETS SERVICES LLC (“ FSA Capital Markets ”) and FSA ASSET MANAGEMENT LLC (“ FSAM ”). Capitalized terms used but not defined in this Annex I shall have the meanings ascribed to them in the Master Repurchase Agreement or if not defined therein in the Confirmation dated as of June 30, 2009 (the “ Confirmation ”) setting forth the terms of a portfolio repurchase agreement Transaction (the “ Transaction ”) under the Master Repurchase Agreement, or in the Pledge and Administration Agreement (as defined below).

The parties agree that the Master Repurchase Agreement, including this Annex I, amends and restates in its entirety the terms and conditions of (i) Master Repurchase Agreement I, including Annex I and II thereto, dated as of October 29, 2001 between FSA Capital Management and FSAM and (ii) Master Repurchase Agreement II, including Annex I and II thereto dated as of October 29, 2001 between FSA Capital Markets and FSAM (each of (i) and (ii), the “ Original Master Repurchase Agreements ”).

1. Definitions . For purposes of the Master Repurchase Agreement, including this Annex 1, the following terms shall have the following meanings:

“ Acceleration Payment ” means each of the payments referred to in Section 9(a) and (b) of this Annex I.

“ Acceleration Payment Percentage ” means with respect to a Buyer (i) if an FSAM Successor has not succeeded to the rights and obligations of FSAM as Seller under the Transaction or if such FSAM Successor is not a Buyer, the GIC Principal Percentage for such Buyer and (ii) if an FSAM Successor has succeeded to the rights and obligations of FSAM as Seller under the Transaction and such FSAM Successor is a Buyer hereunder, 0% as to the Buyer which is the FSAM Successor and 100% as to the other Buyer.

“ Business Day ” has the meaning set out in the Pledge and Administration Agreement.

“ Pledge and Administration Agreement ” means the Pledge and Administration Agreement, dated as of June 30, 2009, among Dexia SA, Dexia Crédit Local S.A., Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSAM, FSA Portfolio Asset Limited, FSA Capital Markets, FSA Capital Management, FSA Capital Markets Services (Caymans) Ltd., and The Bank of New York Mellon Trust Company, National Association, as the same may be amended, supplemented or modified from time to time.

2. Single Transaction

Notwithstanding Paragraph 3 of the Master Repurchase Agreement, the only transaction under the Master Repurchase Agreement, including this Annex I, shall be

the Transaction documented pursuant to the Confirmation (including as such Transaction may be renewed thereunder).

3. Margin Maintenance

Paragraphs 4(a), (b) and (c) shall be amended as follows:

(a) For purposes of Paragraph 4(a) of the Master Repurchase Agreement, a Margin Deficit shall be deemed to exist on any date on which a Buyer elects or is required to post collateral on a GIC Contract, in an amount equal to the market value of the collateral elected or required to be posted on such GIC Contract, unless the Administrator under the Pledge and Administration Agreement makes a determination pursuant to Section 11.2 of the Pledge and Administration Agreement not to post such amount of collateral.

(b) For purposes of Paragraph 4(b) of the Master Repurchase Agreement, a Margin Excess shall be deemed to exist with respect to a Buyer on any date on which such Buyer is entitled to receive and actually receives a return of collateral on a GIC Contract, in an amount equal to the market value of the collateral returned to such Buyer on such GIC Contract.

(c) Any notice requirements pursuant to Paragraph 4(c) of the Master Repurchase Agreement shall be deemed to be satisfied by the Seller or any Buyer, as applicable, upon a Buyer, in respect of a GIC Contract, receiving notice of an obligation to post collateral, providing notice of an election to post collateral or providing an entitlement to receive a return of collateral.

Paragraphs 4(d)-(f) of the Master Repurchase Agreement shall not apply.

4. Income Payments .

(a) The obligation of a Buyer to transfer Income to Seller pursuant to Paragraph 5 of the Master Repurchase Agreement shall be understood to be such Buyer’s obligation to transfer an amount of Income equal to (i) all Income paid or distributed and actually received by such Buyer in respect of the collateral posted to secure GIC Contracts issued by such Buyer plus (ii) without duplication, such Buyer’s GIC Principal Percentage multiplied by the aggregate amount of any Income paid or distributed and actually received in respect of Purchased Securities not posted as collateral to secure GIC Contracts. Such transfers of Income shall not reduce the amount to be transferred to a Buyer by Seller upon termination of the Transaction pursuant to Paragraph 5(ii) of the Master Repurchase Agreement. Any Income in respect of Purchased Securities paid directly to Seller shall be deemed to have been transferred by a Buyer in accordance with this Paragraph.

(b) Notwithstanding the definition of Purchase Price in Paragraph 2 of the Master Repurchase Agreement and the provisions of Paragraph 4 of the Master Repurchase Agreement (as amended by Section 3 of this Annex I), the parties agree (i) that the Purchase Price will not be increased or decreased by the amount of any cash or other

Securities transferred by one party to the other pursuant to Paragraph 4 of the Master Repurchase Agreement and (ii) that transfer of cash shall be treated as if it constituted a transfer of Securities (with a Market Value equal to the U.S. dollar amount of such cash) pursuant to Paragraph 4(a) or (b), as the case may be (including for purposes of the definition of “ Additional Purchased Securities ”).

5. Security Interest

The security interest referred to in Paragraph 6 of the Master Repurchase Agreement shall be the security interest in the FSAM Collateral granted by Seller to the Collateral Agent pursuant to the Pledge and Administration Agreement and no further security interest in respect of the Purchased Securities shall be deemed to be granted pursuant to the Master Repurchase Agreement.

6. Payments and Transfers of Securities

(a) Payments and transfers of Securities to Seller under the Transaction shall be made to the FSAM Cash Account or FSAM Collateral Account, as applicable, unless a novation or transfer to an FSAM Successor has occurred in which case payments shall be made to the Collateral Agent Cash Account or Collateral Agent Collateral Account, as applicable, in accordance with the Pledge and Administration Agreement.

(b) Upon an FSAM Lien Release Date or Dexia Event of Default amounts or Securities due to be transferred to the Buyers (other than any Accelerated Payments) that are not then due and payable to in respect of any GIC Contracts will be paid or transferred to the Collateral Agent Cash Account or Collateral Agent Collateral Account, as applicable, in accordance with the Pledge and Administration Agreement.

7. Substitution

Paragraph 9 of the Master Repurchase Agreement shall not apply.

8. Events Of Default

(a) Events of Default.

The first sentence (ending at the colon before subparagraph (a)) of Paragraph 11 of the Master Repurchase Agreement (“Events of Default”) is hereby amended to read as follows:

“In the event that a Dexia Event of Default as defined in the Pledge and Administration Agreement occurs (with respect to Seller, an “ Event of Default ”):”

For the avoidance of doubt, (x) no Events of Default shall apply to a Buyer and the provisions of Paragraph 11 referring to circumstances where the Buyer is the defaulting party shall be disregarded, and (y) all rights granted to the Buyers under Paragraph 11 may only be exercised by FSA, as Secured Party Representative, or by

the Liquidation Agent and/or the Collateral Agent, in each case at the direction of FSA, as Secured Party Representative.

(b) Remedies

Subparagraph (a) of Paragraph 11 shall be amended by deleting the phrases “(which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency)” and “(except upon the occurrence of an Act of Insolvency)” and adding the following at the end thereof: “Any Event of Default may only be waived by FSA, as Secured Party Representative.”

Subparagraphs (c) through (i) of Paragraph 11 shall not apply.

Notwithstanding disapplication of subparagraph (d) of Paragraph 11, FSA, or the Liquidation Agent or the Collateral Agent at the direction of FSA, on behalf of each Buyer, shall have the right to sell Purchased Securities and to apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by Seller (including any unpaid Acceleration Payment that is due and payable), but in lieu of the provisions of subparagraph (d) of Paragraph 11, such right and any other related rights and remedies shall be exercised subject to and in accordance with Section 5.2(d) of the Pledge and Administration Agreement. For the avoidance of doubt, liquidation of Collateral by FSA as the Secured Party Representative or the Liquidation Agent or Collateral Agent, as applicable, in accordance with Section 5.2(d) of the Pledge and Administration Agreement shall be considered an exercise of the foregoing right by a Buyer.

The rights of the Collateral Agent and/or FSA as the Secured Party Representative pursuant to Section 5.2(a)(i) of the Pledge and Administration Agreement and as specified above may be exercised in whole or in part, with any acceleration and settlement terminating in part a corresponding portion of the Transaction having a Repurchase Price equal to (i) (A) the Repurchase Price of the entire Transaction multiplied by the (B) the Market Value Percentage of the Purchased Securities selected by the Collateral Agent and/or FSA as the Secured Party Representative and (ii) thereafter, the Purchased Securities so selected shall no longer constitute “Purchased Securities” under the Transaction.

The remedies available to each Buyer upon an Event of Default by Seller shall include all those available to the Collateral Agent and/or FSA, as the Secured Party Representative, under Sections 5.2(a)(i) to 5.2(a)(vii) of the Pledge and Administration Agreement following such Event of Default. To the extent that the Collateral Agent and/or FSA, as the Secured Party Representative, has the right to retain all or any portion of the Purchased Securities in the exercise of such remedies set forth in the Pledge and Administration Agreement, each Buyer shall have the right under the Master Repurchase Agreement to retain all or any portion of such Purchased Securities in satisfaction of the Repurchase Price to the same extent.

9. Acceleration Payment

(a) On and after any date on which an Early Termination Date has been designated with respect to the Dexia Guaranteed Put Contract, and in consideration of the Buyers’

agreement to enter into the Transaction, Seller shall pay to each Buyer (i) such Buyer’s Acceleration Payment Percentage multiplied by (ii) an amount equal to the termination payment received by Seller under Section 6(e) of such Dexia Guaranteed Put Contract, which payment may be made in cash or satisfied in kind by delivery of Eligible Collateral posted under the Credit Support Annex securing such Dexia Guaranteed Put Contract.

(b) On and after any date on which an Early Termination Date has been designated with respect to the Dexia Non-Guaranteed Put Contract, and in consideration of the Buyers’ agreement to enter into the Transaction, Seller shall pay to each Buyer (i) such Buyer’s Acceleration Payment Percentage multiplied by (ii) an amount equal to the termination payment received by Seller under Section 6(e) of such Dexia Non-Guaranteed Put Contract, which payment may be made in cash or satisfied in kind by delivery of Eligible Collateral posted under the Credit Support Annex securing such Dexia Non-Guaranteed Put Contract.

(c) The obligation of Seller to pay an Acceleration Payment to each Buyer shall survive until the Senior Release Date notwithstanding the occurrence of any Repurchase Date of the Transaction and/or any acceleration, non-renewal or termination of the Transaction, in whole or in part.

(d) If a Buyer has received an Acceleration Payment from Seller, such Buyer shall pay to Seller (or pay to the Dexia Guarantors on behalf of Seller) (i) such Buyer’s Acceleration Payment Percentage multiplied by (ii) the amount determined under Section 11.1(b)(x) of the Pledge and Administration Agreement and permitted to be paid in accordance with the Priority of Payments set forth therein (the “ Subordinated Collateral Payment ”), when such Subordinated Collateral Payment is due and owing by FSAM to the Dexia Guarantors.

10. Novation of the Master Repurchase Agreement

(a) If a Dexia Event of Default has occurred, Seller may (with the prior written consent of FSA), and at the direction of FSA, shall transfer all of its rights and obligations under the Master Repurchase Agreement to an FSAM Successor, such that (x) the relevant FSAM Successor shall succeed to all rights, obligations and security interests in favor of FSAM provided in the Pledge and Administration Agreement and the other Transaction Documents and (y) each Buyer shall continue to be secured by all FSAM Collateral notwithstanding such novation to the FSAM Successor.

(b) If any such novation occurs, and whether such payment amounts are determined before or after such novation, (i) FSAM shall pay to the FSAM Successor an amount equal to each Acceleration Payment that becomes payable to a Buyer from time to time (which payment may be made in cash or satisfied in kind by delivery of Eligible Collateral posted under the Credit Support Annex securing the Dexia Guaranteed Put Contract or Dexia Non-Guaranteed Put Contract as applicable) and (ii) to the extent of any such Acceleration Payment by FSAM, the FSAM Successor shall

pay to FSAM the Subordinated Collateral Payment on the date such Subordinated Collateral Payment is paid by a Buyer.

(c) Each Buyer and Seller agrees that the FSAM Successor shall be secured by the FSAM Collateral in relation to such Acceleration Payment obligation of FSAM under Section 10(b) above, following a novation contemplated by Section 10(a) above, to the same extent that a Buyer is secured by the FSAM Collateral in relation to such Acceleration Payment obligation prior to such novation.

(d) In connection with effecting an FSAM Lien Release Date, Seller may (with the prior written consent of Dexia) and at the direction of Dexia shall transfer all of its rights and obligations under the Master Repurchase Agreement to an FSAM Successor as defined in the Pledge and Administration Agreement, such that (x) the relevant FSAM Successor shall succeed to all rights, obligations and security interests in favor of FSAM provided in the Pledge and Administration Agreement and the other Transaction Documents and (y) Seller shall post as margin from time to time in respect of the Master Repurchase Agreement “Eligible Collateral” as defined in the Dexia Guaranteed Put Contract such that (A) the sum of (i) the “FSAM Asset Value” of the Purchased Securities in the form of Permitted Investments and (ii) the FSAM Asset Value of the additional Permitted Investments posted as margin hereunder is at least equal to (B) the CSA Collateralized Liabilities plus 25% of the GIC Business Costs Amount determined from to time to time under the Pledge and Administration Agreement (notwithstanding that the FSAM Lien Release Date has occurred and the Dexia Guaranteed Put Contract may have been released or terminated).

(e) If an FSAM Successor has succeeded to the rights and obligations of FSAM as Seller under the Transaction and the FSAM Successor is one of the Buyers hereunder, a portion of the Transaction corresponding to the outstanding principal balance of all GIC Contracts issued by such Buyer (which has become Seller hereunder) shall be deemed netted and offset and no longer outstanding; and the references to the “GIC Contracts” herein and in the Confirmation shall thereafter refer only to the GIC Contracts of the Buyer which is not the FSAM Successor; provided , however , that if the FSAM Successor is a Buyer the obligations of the FSAM Successor and the other Buyer in relation to any Acceleration Payment shall be as set forth in Section 9 of this Annex I and the definition of “Acceleration Payment Percentage”.

(f) Dexia shall be a third party beneficiary of the provisions of Section 10(d), entitled to enforce such provisions directly so long as it is the Secured Party Representative under the Pledge and Administration Agreement.

11. Submission to Jurisdiction and Waiver of Immunity

Each of the parties hereto hereby irrevocably submits to the exclusive jurisdiction of any U.S. federal or state court in The City of New York for the purpose of any suit, action, proceeding or judgment arising out of or relating to the Master Repurchase Agreement. Each of the parties hereto hereby consents to the laying of venue in any

such suit, action or proceeding in New York County, New York, and hereby irrevocably waives any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum and agrees not to plead or claim the same. Notwithstanding the foregoing, nothing contained herein or in the Master Repurchase Agreement shall limit or affect the rights of any party hereto to exercise remedies under the Master Repurchase Agreement or any of the other Transaction Documents, or to enforce any judgment with respect thereto, in any jurisdiction or venue. Any process in any such action shall be duly served if mailed by registered mail, postage prepaid, to the applicable party at its respective address designated pursuant to Paragraph 13 of the Master Repurchase Agreement.

To the extent that any party or any of its respective properties, assets or revenues may have or may hereafter become entitled to, or have attributed to them, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any respect thereof, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution of judgment, or from execution of judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any jurisdiction in which proceedings may at any time be commenced, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with the Master Repurchase Agreement, each party hereto hereby irrevocably and unconditionally waives, and agrees not to plead or claim, to the fullest extent permitted by applicable law, any such immunity and consent to such relief and enforcement.

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATING TO THE MASTER REPURCHASE AGREEMENT OR THE TRANSACTION. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION.

12. Resale of Purchased Securities .

The parties hereto acknowledge that from time to time the Purchased Securities may consist of Securities that have not been registered under the United States Securities Act of 1933 (the “ Securities Act ”). Accordingly, each Buyer agrees that if any Purchased Securities consist of Securities that have not been registered under the Securities Act, each Buyer will not resell or otherwise transfer such Purchased Securities except in accordance with Regulation S or Rule 144A or other available exemption under the Securities Act and in accordance with all applicable laws and regulations in each jurisdiction in which it offers, sells or delivers Purchased Securities. In addition, if any Purchased Securities consist of bearer debt securities issued by a non-U.S. entity and if a Buyer resells or otherwise transfers any such obligations, such Buyer agrees that it will do so only under procedures adequate to satisfy the restrictions of applicable U.S. Treasury regulations relating to an original issuance of bearer bonds.

13. Financial Participant Rights of FSA

Following any Event of Default, Financial Security Assurance Inc. (“ FSA ”) shall be entitled as Secured Party Representative to exercise, and/or direct the exercise by the Collateral Agent of, the rights and remedies of the Buyer hereunder in the manner provided for under the Pledge and Administration Agreement. FSA has executed this Annex below solely for the purpose of securing to itself the rights contemplated by this Section 13, its rights under Sections 8, 9 and 10 hereof, and its rights under the Confirmation, and shall have no other rights and no obligations under this Agreement. Buyer and Seller each acknowledge such rights of FSA and acknowledge and agree that FSA has entered into this Agreement as, and in exercising such rights FSA will act as, a “financial participant” within the meaning of Section 101(22A) of the United States Bankruptcy Code.

14. Limitation of Liability .

No party shall be required to pay or be liable to the other party for any consequential, indirect or punitive damages, opportunity costs or lost profits (whether or not arising from its negligence).

15. Accounting

It is Seller’s intent to account for the Transaction as a secured financing under GAAP and/or IFRS. Notwithstanding Paragraph 8 of the Master Repurchase Agreement, each Buyer agrees to use its good faith, commercially reasonable efforts to enter into any restriction on such Buyer’s rights under Paragraph 8 of the Master Repurchase Agreement which Seller shall demonstrate, to be required in order for Seller to properly account for the Transaction as a secured borrowing.

16. Limited Recourse

(a) The obligations of Seller in relation to the Master Repurchase Agreement and the Transaction are limited recourse obligations, payable solely from the proceeds of the FSAM Collateral available under and applied in accordance with the Priority of Payments set forth in Section 11.1(b) of the Pledge and Administration Agreement. Upon application of the FSAM Collateral and proceeds thereof available to satisfy the obligations of Seller hereunder in accordance with the Pledge and Administration Agreement, a Buyer and FSA shall not be entitled to take any further steps against Seller to recover any sums due and shall not constitute a claim against Seller to the extent of any insufficiency. No recourse shall be had for the payment of any amounts owing in respect of the Master Repurchase Agreement against any officer, director, employee, stockholder, member or incorporator of Seller.

(b) The obligations of each of the Buyers in relation to the Master Repurchase Agreement and the Transaction are limited recourse obligations, payable solely from the proceeds of the GIC Issuers Collateral available under and applied in accordance with the Priority of Payments set forth in Section 11.1(b) of the Pledge and

Administration Agreement. Upon application of the GIC Issuers Collateral and proceeds thereof available to satisfy the obligations of the related Buyer hereunder in accordance with the Pledge and Administration Agreement, Seller and FSA shall not be entitled to take any further steps against such Buyer to recover any sums due and shall not constitute a claim against such Buyer to the extent of any insufficiency. No recourse shall be had for the payment of any amounts owing in respect of the Master Repurchase Agreement against any officer, director, employee, stockholder, member or incorporator of Seller. This provision shall survive the termination of the Master Repurchase Agreement for any reason.

17. Non-Petition

Each party agrees that it will not, prior to the Senior Release Date, acquiesce, petition or otherwise institute against, or join any other person in instituting against, any other party or any of its properties any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any federal or state bankruptcy, or similar law, including without limitations proceedings seeking to appoint a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of such party or any substantial part of its property; provided , that this provision shall not restrict or prohibit a party from joining any such proceedings which shall have already commenced under applicable laws and not in violation of this provision. This provision shall survive the termination of the Master Repurchase Agreement for any reason.

18. Interpretation

In the event of any inconsistency between the provisions of this Annex and the provisions of the Master Repurchase Agreement attached hereto, the terms contained in this Annex shall prevail. In the event of any inconsistency between the provisions of a Confirmation and the provisions of the Master Repurchase Agreement or this Annex, the provisions contained in the Confirmation shall prevail.

19. Governing Law

Paragraph 16 of the Master Repurchase Agreement is hereby amended to read as follows:

“THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK AND THE MANDATORY CHOICE OF LAW RULES CONTAINED IN THE UCC.”

FSA CAPITAL MANAGEMENT SERVICES LLC			FSA ASSET MANAGEMENT LLC

By:			By:

By:			By:
Title:			Title:

FSA CAPITAL MARKETS SERVICES LLC			FINANCIAL SECURITY ASSURANCE INC.

By:			By:

By:			By:
Title:			Title:

Intercompany repo annex

ANNEX II

Names and Addresses for Communications Between Parties

With respect to each party, as set forth in the Pledge and Administration Agreement

Exhibit 10.23

[CONFORMED COPY

(THROUGH SECOND AMENDMENT)]

$300,000,000

5-YEAR REVOLVING CREDIT FACILITY

CREDIT AGREEMENT

Among

ASSURED GUARANTY LTD.,

ASSURED GUARANTY CORP.,

ASSURED GUARANTY (UK) LTD.,

ASSURED GUARANTY RE LTD.,

ASSURED GUARANTY RE OVERSEAS LTD.

and

THE BANKS PARTY HERETO

and

ABN AMRO BANK N.V.,

As Administrative Agent

Dated as of November 6, 2006

ABN AMRO INCORPORATED AND BANK OF AMERICA SECURITIES LLC,
as Lead Arrangers

and

BANK OF AMERICA, N.A. AND KEY BANK, N.A.,
As Syndication Agents,

TABLE OF CONTENTS

	Page

ARTICLE I CERTAIN DEFINITIONS	1

Section 1.01 Certain Definitions	1
Section 1.02 Construction	21
Section 1.03 Accounting Principles; Computations	22

ARTICLE II REVOLVING CREDIT AND LETTER OF CREDIT FACILITY	23

Section 2.01 Credit Commitments	23
Section 2.02 Nature of Banks’ Obligations with Respect to Revolving Credit Loans	23
Section 2.03 Facility Fee; Letter of Credit Fee	24
Section 2.04 Utilization Fee	24
Section 2.05 Revolving Credit Loan Requests	24
Section 2.06 Making Revolving Credit Loans	25
Section 2.07 Use of Proceeds	25
Section 2.08 Bid Loan Facility	25
Section 2.09 Restriction on Loans and Letters of Credit	28
Section 2.10 Letters of Credit	28
Section 2.11 Conditions to the Issuance of all Letters of Credit	30
Section 2.12 Letter of Credit Requests	32
Section 2.13 Agreement to Repay Letter of Credit Drawings	32
Section 2.14 Letter of Credit Expiration Extensions	33
Section 2.15 Changes to Stated Amount	33
Section 2.16 Incremental Commitments	33

ARTICLE III INTEREST RATES	35

Section 3.01 Interest Rate Options	35
Section 3.02 Revolving Credit Loans Interest Periods	36
Section 3.03 Interest After Default	36
Section 3.04 LIBOR Unascertainable; Illegality; Increased Costs; Deposits Not Available	37
Section 3.05 Selection of Interest Rate Options	38

ARTICLE IV PAYMENTS	38

Section 4.01 Payments	38
Section 4.02 Pro Rata Treatment of Banks	38
Section 4.03 Interest Payment Dates	39
Section 4.04 Voluntary Prepayments	39
Section 4.05 Reduction or Termination of Commitments	41
Section 4.06 Additional Compensation in Certain Circumstances	41
Section 4.07 Taxes	43
Section 4.08 Judgment Currency	44

	Page

Section 4.09 Notes, Maturity	44
Section 4.10 Mandatory Prepayments	44

ARTICLE V REPRESENTATIONS AND WARRANTIES	45

Section 5.01 Representations and Warranties	46
Section 5.02 Continuation of Representations	51

ARTICLE VI CONDITIONS OF LENDING	51

Section 6.01 Closing Date	51
Section 6.02 Each Credit Event	53

ARTICLE VII COVENANTS	53

Section 7.01 Affirmative Covenants	53
Section 7.02 Negative Covenants	56
Section 7.03 Reporting Requirements	62
Section 7.04 Bermuda Law Event	64

ARTICLE VIII DEFAULT	64

Section 8.01 Events of Default	64
Section 8.02 Consequences of Event of Default	67
Section 8.03 Right of Competitive Bid Loan Banks	69

ARTICLE IX THE AGENT	69

Section 9.01 Appointment	69
Section 9.02 Delegation of Duties	70
Section 9.03 Nature of Duties; Independent Credit Investigation	70
Section 9.04 Actions in Discretion of Agent; Instructions From the Banks	70
Section 9.05 Reimbursement and Indemnification of Agent by the Borrowers	70
Section 9.06 Exculpatory Provisions; Limitation of Liability	71
Section 9.07 Reimbursement and Indemnification of Agent and Issuing Banks by Banks	72
Section 9.08 Reliance by Agent and Issuing Banks	72
Section 9.09 Notice of Default	72
Section 9.10 Notices	73
Section 9.11 Banks in Their Individual Capacities; Agents in Its Individual Capacity	73
Section 9.12 Holders of Notes	73
Section 9.13 Equalization of Banks	73
Section 9.14 Successor Agent	74
Section 9.15 Agent’s Fee	74
Section 9.16 Availability of Funds	74
Section 9.17 Calculations	75
Section 9.18 Beneficiaries	75

	Page

ARTICLE X MISCELLANEOUS	75

Section 10.01 Modifications, Amendments, or Waivers	75
Section 10.02 No Implied Waivers; Cumulative Remedies; Writing Required	76
Section 10.03 Reimbursement and Indemnification of Banks by the Borrowers; Taxes	76
Section 10.04 Holidays	77
Section 10.05 Funding by Branch, Subsidiary, or Affiliate	77
Section 10.06 Notices	78
Section 10.07 Severability	79
Section 10.08 Governing Law	79
Section 10.09 Prior Understanding	79
Section 10.10 Duration; Survival	79
Section 10.11 Successors and Assigns	79
Section 10.12 Confidentiality	81
Section 10.13 Counterparts	81
Section 10.14 Agent’s or Bank’s Consent	81
Section 10.15 Exceptions	82
Section 10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL	82
Section 10.17 Tax Withholding Clause	82
Section 10.18 Joinder of Guarantors	83
Section 10.19 Limited Recourse	83
Section 10.20 Change of Lending Office	84
Section 10.21 USA Patriot Act	84

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES

SCHEDULE 1.01(A)	-	PRICING GRID
SCHEDULE 1.01(B)	-	COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES
SCHEDULE 1.01(M)	-	MATERIAL SUBSIDIARIES
SCHEDULE 1.01(P)	-	EXISTING LIENS
SCHEDULE 2.10(a)	-	EXISTING LETTERS OF CREDIT
SCHEDULE 5.01(b)	-	SUBSIDIARIES
SCHEDULE 5.01(h)	-	REINSURANCE COVERAGE
SCHEDULE 7.02(a)	-	EXISTING INDEBTEDNESS

EXHIBITS

EXHIBIT 1.01(A)	-	ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT 1.01(B)	-	BID NOTE
EXHIBIT 1.01(G)(1)	-	GUARANTOR JOINDER

iii

EXHIBIT 1.01(G)(2)-1	-	GUARANTY AGREEMENT OF MATERIAL NON-AGC SUBSIDIARIES
EXHIBIT 1.01(G)(2)-2	-	GUARANTY AGREEMENT OF ASSURED GUARANTY CORP.
EXHIBIT 1.01(G)(2)-3	-	GUARANTY AGREEMENT OF ASSURED GUARANTY LTD.
EXHIBIT 1.01(R)	-	REVOLVING CREDIT NOTE
EXHIBIT 2.05	-	REVOLVING CREDIT LOAN REQUEST
EXHIBIT 2.08(a)	-	BID LOAN REQUEST
EXHIBIT 2.12	-	LETTER OF CREDIT REQUEST
EXHIBIT 2.16	-	INCREMENTAL COMMITMENT AGREEMENT
EXHIBIT 6.01(d)	-	OPINION(S) OF COUNSEL
EXHIBIT 7.03(c)	-	QUARTERLY COMPLIANCE CERTIFICATE

CREDIT AGREEMENT

THIS CREDIT AGREEMENT is dated as of November 6, 2006, and is made by and among ASSURED GUARANTY LTD., a company organized under the laws of Bermuda, ASSURED GUARANTY CORP., a Maryland corporation, ASSURED GUARANTY (UK) LTD., a company organized under the laws of England and Wales, ASSURED GUARANTY RE LTD., a company organized under the laws of Bermuda, ASSURED GUARANTY RE OVERSEAS LTD., a company organized under the laws of Bermuda, the BANKS (as hereinafter defined), and ABN AMRO BANK N.V., in its capacity as administrative agent for the Banks under this Agreement and sole bookrunner.

W I T N E S S E T H :

WHEREAS, the Borrowers have requested the Banks to provide a five-year revolving credit facility, including the issuance of letters of credit, to the Borrowers in an aggregate principal amount not to exceed the Commitments of the Banks; and

WHEREAS, the Commitments may be increased from time to time as provided herein;

WHEREAS, such revolving credit facility shall be used for the general corporate purposes of the Borrowers; and

WHEREAS, the Banks are willing to provide such credit upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth, hereby covenant and agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

Section 1.01 Certain Definitions . In addition to words and terms defined elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise:

ABN AMRO Bank or ABN AMRO shall mean ABN AMRO Bank N.V., its successors and assigns.

ACE shall mean ACE Limited, a Cayman Islands company.

Affiliate as to any Person shall mean any other Person (i) which directly or indirectly controls, is controlled by, or is under common control with, such Person, (ii) which beneficially owns or holds 5% or more of any class of the voting or other equity interests of such

Person, or (iii) 5% or more of any class of voting interests or other equity interests of which is beneficially owned or held, directly or indirectly, by such Person. Control, as used in this definition, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be.

Agent shall mean ABN AMRO Bank N.V., and its successors and permitted assigns, in their respective capacities as administrative agent for the Banks under this Agreement.

Agent’s Fee shall have the meaning assigned to that term in Section 9.15.

Agent’s Letter shall have the meaning assigned to that term in Section 9.15.

Aggregate Outstandings shall have the meaning assigned to that term in Section 4.10(a).

Agreement shall mean this Credit Agreement, as the same may be supplemented or amended from time to time, including all schedules and exhibits.

AGRI shall mean Assured Guaranty Re Ltd., a Bermuda company.

AGRO shall mean Assured Guaranty Re Overseas Ltd., a Bermuda company.

Alternate Currency shall mean each of Euros and Pounds Sterling.

Alternate Currency Loan shall mean any Loan denominated in an Alternate Currency.

Applicable Facility Fee Rate shall mean the percentage rate per annum corresponding to the indicated level of the Holdings Debt Rating in the pricing grid on Schedule 1.01(A) below the heading “Facility Fee.” The Applicable Facility Fee Rate shall be computed in accordance with the parameters set forth on Schedule 1.01(A) .

Applicable Margin shall mean, as applicable:

(A) in the case of Base Rate Loans, the percentage spread to be added to the Base Rate under the Base Rate Option corresponding to the indicated level of Holdings Debt Rating in the pricing grid on Schedule 1.01(A) below the heading “Applicable Margin for Base Rate Loans”, or

(B) in the case of LIBOR Loans, the percentage spread to be added to LIBOR under the Revolving Credit LIBOR Option corresponding to the indicated level of Holdings Debt Rating in the pricing grid on Schedule 1.01(A) below the heading “Applicable Margin for LIBOR Loans.”

The Applicable Margin shall be computed in accordance with the parameters set forth on Schedule 1.01(A) .

Approved Currency shall mean each of Dollars and each Alternate Currency.

Assignment and Assumption Agreement shall mean an Assignment and Assumption Agreement by and among a Purchasing Bank, a Transferor Bank and the Agent, as Agent and on behalf of the remaining Banks, substantially in the form of Exhibit 1.01(A) .

Associated Cost Rate shall mean, with respect to any Interest Period for Pounds Sterling denominated Loans, the amount (expressed as a percentage rate per annum, rounded up to the nearest four decimal places, as determined by the Agent on the first day of such Interest Period) required to compensate the Banks lending from facility offices in the United Kingdom for the portion of the cost of each such Bank of complying with the cash ratio and special deposit requirements of the Bank of England and/or capital adequacy requirements and banking supervision or other fees imposed by the United Kingdom Financial Services Authority, which, in the reasonable determination of such Bank, is attributable to the Loans made by such Bank from its facility office in the United Kingdom and outstanding during such Interest Period.

Authorized Officer shall mean those individuals, designated by written notice to the Agent from each Borrower, authorized to execute notices, reports and other documents required hereunder on behalf of such Borrower. Each Borrower may amend such list of individuals from time to time by giving written notice of such amendment to the Agent.

Banks shall mean the financial institutions named on Schedule 1.01(B) and their respective successors and assigns as permitted hereunder, each of which is referred to herein as a “Bank”.

Base Rate shall mean (i) the greatest of (a) the interest rate per annum announced from time to time by the Agent at its Principal Office as its then prime rate, which rate may not be the lowest rate then being charged commercial borrowers by the Agent, (b) the Federal Funds Effective Rate plus 0.5% per annum and (c) the sum of 1.00% plus the one-month Eurodollar Rate for such day. For purposes of this definition, Eurodollar Rate shall be determined using Eurodollar Rate as otherwise determined by the Agent in accordance with the definition of Eurodollar Rate, except that (x) if a given day is a Business Day, such determination shall be made on such day (rather than two Business Days prior to the commencement of an Interest Period) and (y) if a given day is not a Business Day, the Eurodollar Rate for such day shall be the rate determined by the Agent pursuant to preceding clause (x) for the most recent Business Day preceding such day.

Base Rate Loan shall mean each Loan designated or deemed designated as such by any Borrower at the time of incurrence thereof or conversion thereto.

Base Rate Option shall mean the option of the Borrowers to have Revolving Credit Loans bear interest at the rate and under the terms and conditions set forth in Section 3.01(a)(i).

Benefit Arrangement shall mean at any time an “employee benefit plan,” within the meaning of Section 3(3) of ERISA, which is neither a Plan nor a Multiemployer Plan and which is maintained, sponsored or otherwise contributed to by any member of the ERISA Group.

Bermuda Law Event shall have the meaning assigned to that term in Section 7.04.

Bid shall have the meaning assigned to such term in Section 2.08(b).

Bid Deadline shall have the meaning assigned to such term in Section 2.08(b).

Bid Loan Borrowing Date shall mean, with respect to any Bid Loan, the date for the making thereof, which date shall be a Business Day.

Bid Loan Fixed Rate Option shall mean the option of each Borrower to request that the Banks submit Bids to make Bid Loans bearing interest at a fixed rate per annum quoted by such Banks as a numerical percentage (and not as a spread over another rate such as the LIBOR).

Bid Loan Interest Period shall have the meaning assigned to such term in Section 2.08(a).

Bid Loan LIBOR Rate Option shall mean the option of each Borrower to request that the Banks submit Bids to make Bid Loans bearing interest at a rate per annum quoted by such Banks at the LIBOR in effect two Business Days before the Borrowing Date of such Bid Loan plus a LIBOR Bid Loan Spread.

Bid Loan Request shall have the meaning assigned to such term in Section 2.08(a).

Bid Loans shall mean collectively all of the Bid Loans and Bid Loan shall mean separately any Bid Loan, made by any of the Banks to either Borrower pursuant to Section 2.08.

Bid Notes shall mean collectively all of the Bid Notes and Bid Note shall mean separately any Bid Note, of each Borrower in the form of Exhibit 1.01(B) evidencing the Bid Loans made to such Borrower together with all amendments, extensions, renewals, replacements, refinancings or refunds thereof in whole or in part.

Borrower shall mean the Company, the UK Borrower and, at all times after the conditions precedent set forth in Section 6.02(b) have been satisfied, Holdings, AGRI and AGRO.

Borrowing Date shall mean, with respect to any Loan, the date for the making thereof or the renewal or conversion thereof at or to the same or a different Interest Rate Option, which date shall be a Business Day.

Borrowing Tranche shall mean specified portions of Loans outstanding as follows: (i) any Loans to which a LIBOR Option or a Bid Loan Fixed Rate Option applies which become subject to the same Interest Rate Option under the same Loan Request by a Borrower

and which have the same Interest Period shall constitute one Borrowing Tranche, and (ii) all Loans to which a Base Rate Option applies shall constitute one Borrowing Tranche.

Business Day shall mean any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required to be closed for business in New York, New York and, if the applicable Business Day (i) relates to any Loan to which the LIBOR Option applies, such day must also be a day on which dealings are carried on in the London interbank market and, with respect to any payments due by Holdings, AGRI or AGRO, such day must also be a day which is not a national or public holiday in Bermuda, and (ii) any Letter of Credit Outstandings due from the UK Borrower, such day must also be a day other than a legal holiday on which commercial banks are authorized or required to be closed for business in London, England.

Cash Collateral Account shall have the meaning assigned to such term in Section 4.10.

Closing Date shall mean the date on which the conditions precedent set forth in Section 6.01 have been satisfied.

Commitment shall mean as to any Bank its Revolving Credit Commitment, and Commitments shall mean the aggregate of the Revolving Credit Commitments of all of the Banks.

Company shall mean Assured Guaranty Corp., a Maryland corporation.

Company Consolidated Assets shall mean, at any time, the assets of the Company and its Subsidiaries at such time, determined on a consolidated basis in accordance with GAAP; provided that the foregoing shall be calculated without giving effect to Financial Accounting Standards Board Statements No. 115 and 133.

Compliance Certificate shall have the meaning assigned to such term in Section 7.03(c).

Consideration shall mean a greater than de minimis monetary return for the sale or provision of a service or product or for the undertaking of an obligation or liability, except that with respect to a Permitted Acquisition, Consideration shall mean the aggregate of (i) the cash paid by any of the Company or any Material Subsidiary, as buyer, directly or indirectly, to the seller in connection with such Permitted Acquisition, (ii) the Indebtedness incurred or assumed by the Company or any of the Material Subsidiaries, as buyer, with respect to such Permitted Acquisition, whether in favor of the seller or otherwise and whether fixed or contingent, (iii) any Guaranty given or incurred by the Company or any Material Subsidiary in connection therewith, and (iv) any other consideration given or obligation incurred by the Company or any of the Material Subsidiaries in connection with such Permitted Acquisition.

Consolidated Debt shall mean, at any time, an amount equal to the sum (without duplication) of the then outstanding Indebtedness of Holdings or the Company, as the case may be, and of each Subsidiary of Holdings or the Company, as the case may be, (excluding, however, (i) the amount of all Insurance-Related Guaranties, (ii) the amount of any Soft Capital,

(iii) the obligations of Holdings with respect to any preferred stock of Holdings, (iv) the obligations of any of Holdings or its Subsidiaries under Guaranteed Investment Contracts, (v) the amount of any preferred stock issued in connection with the Contingent Capital Facility and (vi) the aggregate outstanding Indebtedness evidenced by all outstanding Hybrid Securities to the extent (x) the accreted value of such Indebtedness does not exceed the HS Exclusion Amount and (y) S&P does not include such Indebtedness under such Hybrid Securities as financial leverage), determined and consolidated in accordance with GAAP (but without giving effect to any fair value adjustments of any Indebtedness otherwise permitted or required under GAAP).

Consolidated Net Income shall mean, for any period, the net income for such period for Holdings and its Subsidiaries, determined on a consolidated basis in accordance with GAAP.

Consolidated Net Worth shall mean, at any time, the net worth of Holdings and its Subsidiaries at such time, determined on a consolidated basis in accordance with GAAP; provided that, the nominal value of any securities issued in respect of any Hybrid Securities (without giving effect to any fair value adjustments thereof permitted or required under GAAP) shall constitute stockholders equity to the extent (x) the accreted value of such securities does not exceed the HS Exclusion Amount and (y) S&P does not include such securities as financial leverage.

Contingent Capital Facility shall mean, collectively (i) the put agreement between the Company and Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV pursuant to which the Company has the right to cause each of such trusts to purchase up to $50 million of preferred stock of the Company and (ii) similar put agreements between the Company or such other Subsidiary and a trust, pursuant to which the Company or such Subsidiary has the right to cause such trusts to purchase, in an aggregate amount for all such trusts, up to $200 million of preferred stock of the Company or such Subsidiary.

Credit Derivative Guaranties shall have the meaning assigned to such term in Section 7.02(c).

Credit Event shall mean the incurrence of each Loan and the issuance of each Letter of Credit.

Dollar , Dollars , U.S. Dollars and the symbol $ shall mean lawful money of the United States of America.

Dollar Equivalent shall mean, at any time for the determination thereof, the amount of Dollars which could be purchased with the amount of the relevant Alternate Currency involved in such computation at the spot exchange rate therefor as quoted by the Administrative Agent as of 11:00 A.M., London time, on the date two Business Days prior to the date of any determination thereof for purchase on such date.

Eligible Transferee shall have the meaning assigned to such term in Section 2.16(a).

ERISA shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect.

ERISA Group shall mean, at any time, Holdings and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with Holdings, are treated as a single employer under Section 414 of the Internal Revenue Code.

Euro shall mean the single currency of participating member states of the European Union.

Eurodollar Rate shall mean, with respect to the Loans comprising any Borrowing Tranche denominated in Dollars to which the LIBOR Option applies for any Interest Period, an interest rate per annum determined on the basis of the rate for deposits in Dollars for a period comparable to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), the Eurodollar Rate shall be determined by reference to such other publicly available service for displaying eurodollar rates as may be agreed upon by the Agent and the Borrowers or, in the absence of such agreement, the Eurodollar Rate shall be the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) equal to the rate per annum at which Dollar deposits approximately equal in principal amount to such Borrowing Tranche for a period and with a maturity comparable to such Interest Period are offered to the principal London office of Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. The Agent shall give prompt notice to the Borrowers of the Eurodollar Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.

Eurodollar Reserve Percentage shall mean as of any day and with respect to any Bank or the Agent, the maximum percentage in effect on such day for such Bank or the Agent, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements as it affects such Bank or the Agent (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as “Eurocurrency Liabilities”).

Euro-LIBOR shall mean, with respect to the Loans comprising any Borrowing Tranche denominated in Euros to which the LIBOR Option applies for any Interest Period, an interest rate per annum determined on the basis of the rate for deposits in Euros for a period comparable to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), Euro LIBOR shall be determined by reference to such other publicly available service for displaying Euro-denominated rates as may be agreed upon by the Agent and the Borrowers or, in the

absence of such agreement, the Euro LIBOR shall be the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) equal to the rate per annum at which Euro deposits approximately equal in principal amount to such Borrowing Tranche for a period and with a maturity comparable to such Interest Period are offered to the principal London office of Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. The Agent shall give prompt notice to the Borrowers of the Euro LIBOR as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.

Event of Default shall mean any of the events described in Section 8.01 and referred to therein as an “Event of Default.”

Existing Credit Agreement shall mean the Credit Agreement, dated as of April 15, 2005, among Holdings, the Company, the UK Borrower, AGRI, AGRO, the banks party thereto and ABN AMRO Bank N.V., as administrative agent.

Existing Letters of Credit shall have the meaning assigned to such term in Section 2.10(a).

Existing Reinsurance Coverage shall have the meaning assigned to such term in Section 5.01(h)(C).

Expiration Date shall mean the fifth anniversary of the Closing Date.

Facility Fee shall have the meaning assigned to such term in Section 2.03(a).

Federal Funds Effective Rate for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the “Federal Funds Effective Rate” as of the date of this Agreement; provided , if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the “Federal Funds Effective Rate” for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced.

Fixed Rate shall mean a fixed interest rate quoted by a Bank in its Bid to apply to such Bank’s Bid Loan over the term of such Bid Loan if such Bank’s Bid is accepted.

Fixed Rate Bid Loan shall mean a Bid Loan that bears interest under the Bid Loan Fixed Rate Option.

Fronting Fee shall have the meaning assigned to such term in Section 2.03(c).

FSA shall mean Financial Security Assurance Inc., a corporation organized under the laws of New York.

FSAH shall mean Financial Security Assurance Holdings Ltd., a corporation organized under the laws of New York.

FSAH Acquisition shall mean the acquisition by Holdings of all or substantially all of the outstanding capital stock of FSAH from Dexia Holdings, Inc.

FSAH Purchase Agreement shall mean the purchase agreement, dated as of November 14, 2008, among Assured Guaranty Ltd., Dexia Holdings, Inc. and Dexia Credit Local S.A.

FSAH Hybrid Securities shall mean the 6.40% Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 issued by FSAH on November 22, 2006, without giving effect to any amendment or modification thereof after the Second Amendment Effective Date.

GAAP shall mean generally accepted accounting principles as in effect from time to time in the United States, subject to the provisions of Section 1.03, applied on a consistent basis both as to classification of items and amounts.

Guaranteed Investment Contract shall mean, with respect to any Person, a guaranteed investment contract, funding agreement or similar agreement issued or entered into by such Person wherein such Person guarantees a rate of return on invested capital over the term of such contract or agreement.

Guarantor shall mean Holdings, the Company and each Material Subsidiary which hereafter becomes a Guarantor after the date hereof pursuant to Section 10.18.

Guarantor Joinder shall mean a joinder by a Person as a Guarantor under this Agreement, the Guaranty Agreement and the other Loan Documents in the form of Exhibit 1.01(G)(1) .

Guaranty of any Person shall mean any obligation of such Person guarantying or in effect guarantying any liability or obligation of any other Person in any manner, whether directly or indirectly, including any agreement to indemnify or hold harmless any other Person (other than as an incidental part of another transaction), any performance bond or other suretyship arrangement and any other form of assurance against loss, except endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business.

Guaranty Agreement shall mean one or more Guaranty Agreements in substantially the form of Exhibit 1.01(G)(2)-1 , Exhibit 1.01(G)(2)-2 or Exhibit 1.01(G)(2)-3 , or otherwise entered into pursuant to Section 7.01(l), and in each case executed and delivered by a Guarantor to the Agent for the benefit of the Banks.

Historical Statements shall have the meaning assigned to that term in Section 5.01(h)(A).

Holdings shall mean Assured Guaranty Ltd., a company organized under the laws of Bermuda.

Holdings Debt Rating shall mean the senior unsecured debt rating of Holdings as determined by either of Standard & Poor’s or Moody’s.

Holdings Sub-Limit shall mean an amount equal to $100,000,000; provided that at any time when all Commitments hereunder have been terminated, the Holdings Sub-Limit shall mean an amount equal to zero.

HS Exclusion Amount shall mean, on the date of determination, an amount equal to 15% of Total Capitalization.

Hybrid Securities shall mean an offering of junior subordinated debentures or other subordinated securities of Holdings either directly or through a Subsidiary that is a special purpose vehicle created in connection with such offering, and, in any event, including the FSAH Hybrid Securities.

Incremental Bank shall have the meaning assigned to that term in Section 2.16(b).

Incremental Commitment shall mean, for any Bank, any commitment by such Bank pursuant to Section 2.16, as agreed to by such Bank in the respective Incremental Commitment Agreement; it being understood, however , that on each date upon which an Incremental Commitment of any Bank becomes effective, such Incremental Commitment of such Bank shall be added to (and thereafter become a part of) the Revolving Credit Commitment of such Bank for all purposes of this Agreement as contemplated by Section 2.16.

Incremental Commitment Agreement shall mean an agreement in the form of Exhibit 2.16 executed in accordance with Section 2.16.

Incremental Commitment Date shall have the meaning provided in Section 2.16(b).

Incremental Commitment Request Requirements shall mean, with respect to any request for an Incremental Commitment made pursuant to Section 2.16, the satisfaction of each of the following conditions on the date of such request: (i) no Potential Default or Event of Default then exists or would result therefrom and (ii) all of the representations and warranties contained herein and in the other Loan Documents are true and correct in all material respects at such time (unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date).

Incremental Loan Commitment Requirements shall mean, with respect to any provision of an Incremental Commitment on a given Incremental Loan Commitment Date (as defined in Section 2.16(b)), the satisfaction of each of the following conditions on or prior to the effective date of the respective Incremental Loan Commitment Agreement: (i) no Potential Default or Event of Default then exists or would result therefrom, (ii) all of the representations and warranties contained herein and in the other Loan Documents are true and correct in all material respects at such time (unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date), (iii) the delivery by each of the Borrowers to the Agent of an officer’s certificate executed by an Authorized Officer of such Borrower and certifying as to compliance with preceding

clauses (i) and (ii), (iv) the delivery by the Borrowers to the Agent of an opinion, in form and substance reasonably satisfactory to the Agent, from counsel to the Borrowers and dated such date, covering such of the matters set forth in the opinions of counsel delivered to the Agent on the Closing Date pursuant to Section 6.01(d) as may be reasonably requested by the Agent, and such other matters incident to the transactions contemplated thereby as the Agent may reasonably request, (v) the delivery by the Borrowers to the Agent of such other officers’ certificates and evidence of good standing as the Agent shall reasonably request and (vi) the completion by the Borrowers of such other actions as the Agent may reasonably request in connection with such Incremental Commitment.

Indebtedness shall mean, as to any Person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such Person for or in respect of: (i) borrowed money, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) payment obligations (contingent or otherwise) under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device, (iv) any other transaction (including forward sale or purchase agreements, capitalized leases and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such Person to finance its operations or capital requirements (but not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness and which are not more than ninety (90) days past due), (v) any Guaranteed Investment Contract, or (vi) any Guaranty of Indebtedness.

Insolvency Proceeding shall mean, with respect to any Person, (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of Holdings or any Material Subsidiary, or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other similar arrangement in respect of such Person’s creditors generally or any substantial portion of its creditors, undertaken under any Law.

Insurance-Related Guaranties shall have the meaning assigned to that term in Section 7.02(c).

Insurer Financial Strength Rating shall mean the insurer financial strength rating of the Company as determined by either of Standard & Poor’s and Moody’s.

Interest Period shall mean either a Revolving Credit Loan Interest Period or a Bid Loan Interest Period.

Interest Rate Hedge shall mean an interest rate exchange, collar, cap, swap, adjustable strike cap, adjustable strike corridor, or similar agreement entered into by Holdings or any Material Subsidiary in order to provide protection to, or minimize the impact upon, Holdings or any Material Subsidiary of increasing floating rates of interest applicable to Indebtedness.

Interest Rate Option shall mean any Revolving Credit LIBOR Option, Bid Loan LIBOR Option, Bid Loan Fixed Rate Option, or Base Rate Option.

Internal Revenue Code shall mean the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect.

Issuing Bank shall mean (a) ABN AMRO Bank N.V. and (b) PNC Bank, National Association.

Law shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree, bond, judgment, authorization, or approval, lien or award of or settlement agreement with any Official Body.

Letter of Credit shall have the meaning assigned to such term in Section 2.10(a).

Letter of Credit Fee shall have the meaning assigned to such term in Section 2.03(b).

Letter of Credit Outstandings shall mean, at any time, the sum of (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit at such time.

Letter of Credit Request shall have the meaning assigned to such term in Section 2.12(a).

LIBOR shall mean, with respect to any Borrowing Tranche of Loans, the relevant interest rate, i.e. , Eurodollar Rate, Euro LIBOR or Sterling LIBOR.

LIBOR Bid Loan shall mean any Bid Loan that bears interest under the Bid Loan LIBOR Option.

LIBOR Bid Loan Spread shall mean the spread quoted by a Bank in its Bid to apply to such Bank’s Bid Loan if such Bank’s Bid is accepted. The LIBOR Bid Loan Spread shall be quoted as a percentage rate per annum and expressed in multiples of 1/1000th of one percentage point to be either added to (if it is positive) or subtracted from (if it is negative) the LIBOR in effect two (2) Business Days before the Borrowing Date with respect to such Bid Loan. Interest on LIBOR Bid Loans shall be computed based on a year of 360 days for the actual days elapsed.

LIBOR Interest Period shall mean the Interest Period applicable to a LIBOR Bid Loan or a Revolving Credit Loan that is subject to the Revolving Credit LIBOR Option.

LIBOR Loan shall mean each Loan designated or deemed designated as such by any Borrower at the time of incurrence thereof or conversion thereto.

LIBOR Option shall mean either the Revolving Credit LIBOR Option or the Bid Loan LIBOR-Rate Option.

Lien shall mean any mortgage, deed of trust, pledge, lien, security interest, charge, or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including any conditional sale or title retention arrangement, and any assignment, deposit arrangement, or lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing).

Loan Documents shall mean this Agreement, the Agent’s Letter, each Guaranty Agreement, and any other instruments, certificates, or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may be supplemented or amended from time to time in accordance herewith or therewith, and “Loan Document” shall mean any of the Loan Documents.

Loan Request shall mean either a Bid Loan Request or a Revolving Credit Loan Request.

Loans shall mean collectively all Revolving Credit Loans and Bid Loans and Loan shall mean separately any Revolving Credit Loan or Bid Loan.

Material Adverse Change shall mean any set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition, results of operations or prospects of Holdings and its Material Subsidiaries taken as a whole or the Company and its Material Subsidiaries taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of Holdings and the Material Subsidiaries taken as a whole duly and punctually to pay or to perform their respective obligations under the Loan Documents, or (d) impairs materially or could reasonably be expected to impair materially the ability of the Agent or any of the Banks, to the extent permitted, to enforce their legal remedies pursuant to this Agreement or any other Loan Document.

Material Non-AGC Subsidiary shall mean any Material Subsidiary of Holdings other than (a) Assured Guaranty US Holdings Inc. and its Subsidiaries (including the Company and its Subsidiaries), (b) any Material Subsidiary of Holdings which is regulated by a state insurance regulatory authority in the U.S. and (c) Assured Guaranty Barbados Holdings Ltd.

Material Subsidiary shall mean (i) any Subsidiary of Holdings which has at any time, or which will have after giving effect to any contemplated transaction, acquisition, loan or investment, a net worth equal to or greater than an amount which is the greater of five percent (5%) of the consolidated tangible net worth of Holdings and its Subsidiaries or $25,000,000, (ii) any Subsidiary of Holdings as to which Holdings requests in writing that it be a Material Subsidiary, and (iii) any Subsidiary or Subsidiaries of Holdings which own(s) in the aggregate 30% or more of any Material Subsidiary; and Material Subsidiaries shall mean all such Subsidiaries. Notwithstanding the foregoing, each of the Company, AGRI, AGRO and the

UK Borrower shall be deemed to be a Material Subsidiary for all purposes of this Agreement and the other Loan Documents; provided , however , that neither the Company nor the UK Borrower shall be required to be a Guarantor (except for the requirement that the Company guaranty all obligations of the UK Borrower). As of the date hereof, “Material Subsidiary” shall include, without limitation, the Subsidiaries listed on Schedule 1.01(M) .

Month , with respect to an Interest Period under the LIBOR Option, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Interest Period. If any LIBOR Interest Period begins on a day of a calendar month for which there is no numerically corresponding day in the month in which such Interest Period is to end, the final month of such Interest Period shall be deemed to end on the last Business Day of such final month.

Moody’s shall mean Moody’s Investors Service, Inc. and its successors.

Multiemployer Plan shall mean any employee benefit plan which is a “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA and to which Holdings or any member of the ERISA Group is then making or accruing an obligation to make contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions.

Multiple Employer Plan shall mean a Plan which has two or more contributing sponsors (including Holdings or any member of the ERISA Group) at least two of whom are not under common control, as such a plan is described in Sections 4063 and 4064 of ERISA.

Net Par shall mean the aggregate maximum par amount of insurance and reinsurance coverage under all obligations of insurance or reinsurance (or similar arrangements) provided by a Person less the aggregate maximum par amount of reinsurance (or similar arrangements including hedging arrangements) coverage in favor of such Person with respect to its insurance or reinsurance obligations.

Notes shall mean the Revolving Credit Notes and Bid Notes.

Notice of Non-Extension shall have the meaning assigned to such term in Section 2.14.

Notices shall have the meaning assigned to that term in Section 10.06.

Obligation shall mean any obligation or liability of any Borrower, any Guarantor or any Material Subsidiary to the Agent or any of the Banks, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, under or in connection with this Agreement, any Notes, the Agent’s Letter or any other Loan Document.

Off-Balance Sheet Transactions shall have the meaning assigned to that term in Section 7.03(e).

Offered Amount shall have the meaning assigned to such term in Section 2.08(b).

Official Body shall mean any national, federal, state, local, or other government or political subdivision or any agency, authority, board, bureau, central bank, commission, department, or instrumentality of either, or any court, tribunal, grand jury, or arbitrator, in each case whether foreign or domestic.

Participant shall have the meaning assigned to such term in Section 2.10(b).

PBGC shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor.

Permitted Acquisitions shall have the meaning assigned to such term in Section 7.02(f).

Permitted Investments shall mean:

(i) direct obligations of the United States of America or the United Kingdom or any agency or instrumentality thereof or obligations backed by the full faith and credit of the United States of America or the United Kingdom maturing in twelve (12) months or less from the date of acquisition;

(ii) commercial paper maturing in 180 days or less rated not lower than A-1, by Standard & Poor’s or P-1 by Moody’s on the date of acquisition;

(iii) demand deposits, time deposits or certificates of deposit maturing within one year in commercial banks whose obligations are rated A-1, A or the equivalent or better by Standard & Poor’s on the date of acquisition;

(iv) fixed income securities with a weighted average credit quality of A by Standard & Poor’s or A2 by Moody’s on the date of acquisition; and

(v) investments of the types specified in Sections 1402(b) and 1404(a)(1), (2), (3), (8), and (10) of the New York Insurance Law.

Permitted Liens shall mean:

(i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and which are not yet due and payable;

(ii) Liens and pledges or deposits made in the ordinary course of business of Holdings or any Material Subsidiary with respect to employee’s salaries and benefits, to secure payment of workmen’s compensation, or to participate in any fund in connection with workmen’s compensation, unemployment insurance, old-age pensions or other social security programs with respect to such Person’s officers or employees;

(iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default;

(iv) Good-faith pledges or deposits made in the ordinary course of business of Holdings or any Material Subsidiary to secure statutory or regulatory obligations of Holdings or any Material Subsidiary;

(v) Encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use;

(vi) Liens, security interests and mortgages in favor of the Agent for the benefit of the Banks securing the Obligations;

(vii) Liens on property leased by Holdings or any Material Subsidiary under capital and operating leases;

(viii) Any Lien described on Schedule 1.01(P) , provided that the principal amount secured thereby is not hereafter increased;

(ix) Purchase Money Security Interests;

(x) Liens on assets received by any Borrower from a third Person and held in trust by any Borrower in respect of liabilities assumed by any Borrower in the course of the reinsurance business of such Borrower;

(xi) Liens securing Credit Derivative Guaranties;

(xii) To the extent that they would constitute “Liens”, Insurance-Related Guaranties;

(xiii) The following, (A) if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed or (B) if a final judgment is entered and such judgment is discharged within thirty (30) days of entry, and they do not in the aggregate materially impair the ability of any Borrower or any Material Subsidiary to perform its Obligations hereunder or under the other Loan Documents:

(1) Claims or Liens for taxes, assessments or charges due and payable and subject to interest or penalty, provided that the applicable Borrower or applicable Material Subsidiary maintains such reserves or other appropriate provisions as shall be required by GAAP and pays all such taxes, assessments or charges forthwith upon the commencement of proceedings to foreclose any such Lien;

(2) Claims, Liens, or encumbrances upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits;

(3) Claims or Liens of mechanics, materialmen, warehousemen, carriers, or other statutory nonconsensual Liens; or

(4) Liens resulting from final judgments or orders described in Section 8.01(f);

(xiv) Liens securing any Soft Capital facility on the recoveries, future premiums and related assets relating to the portfolio covered by such Soft Capital facility; and

(xv) Liens securing the Strip Liquidity Coverage Facility on the recoveries with respect to any strip policy claim in respect of which a loan has been made thereunder and any related assets.

Person shall mean any individual, company, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization, joint venture, government or political subdivision or agency thereof, or any other entity.

Plan shall mean at any time an employee pension benefit plan (including a Multiple Employer Plan, but not a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained by any entity which was at such time a member of the ERISA Group for employees of any entity which was at such time a member of the ERISA Group.

Potential Default shall mean any event or condition which with notice, passage of time or a determination by the Agent or the Required Banks, or any combination of the foregoing, would constitute an Event of Default.

Pounds Sterling shall mean freely transferable lawful money of the United Kingdom.

Principal Amount shall mean (i) the stated principal amount of each Loan denominated in Dollars, and/or (ii) the Dollar Equivalent of the stated principal amount of each Alternate Currency Loan, as the context may require.

Principal Office shall mean the main banking office of the Agent in New York, New York.

Prohibited Transaction shall mean any “prohibited transaction” as defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA for which neither an individual nor a class exemption has been issued by the United States Department of Labor.

Property shall mean all real property, both owned and leased, of Holdings or any Material Subsidiary.

Purchase Money Security Interest shall mean Liens upon tangible personal property securing loans to the Company or any Material Subsidiary, or deferred payments by such Person, in either case for the purchase of such tangible personal property.

Purchasing Bank shall mean a Bank which becomes a party to this Agreement by executing an Assignment and Assumption Agreement.

Ratable Share shall mean the proportion that a Bank’s Commitment bears to the Commitments (or, if the Commitments have terminated, the proportion that a Bank’s Commitment immediately prior to such termination bears to the Commitments immediately prior to such termination).

Regulation U shall mean any of Regulations T, U, or X as promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time.

Reportable Event shall mean a reportable event described in Section 4043 of ERISA and regulations thereunder with respect to a Plan or Multiemployer Plan.

Requested Amount shall have the meaning assigned to such term in Section 2.08(a).

Required Banks shall mean

(A) if there are no Loans, Required Banks shall mean Banks whose Commitments aggregate greater than 50% of the Commitments of all of the Banks, or

(B) if there are Loans, Required Banks shall mean:

(i) prior to a termination of the Commitments hereunder pursuant to Section 8.02(a) or Section 8.02(b), any Bank or group of Banks if the sum of (x) the Principal Amount of the Revolving Credit Loans of such Banks then outstanding plus (y) such Banks’ participating interests in the Letter of Credit Outstandings at such time aggregates greater than 50% of the sum of (x) the total Principal Amount of all of the Revolving Credit Loans then outstanding plus (y) all Letter of Credit Outstandings at such time; and

(ii) after a termination of the Commitments hereunder pursuant to Section 8.02(a) or Section 8.02(b), any Bank or group of Banks if the sum of (x) the Principal Amount of the Loans of such Banks then outstanding plus (y) such Banks’ participating interests in the Letter of Credit Outstandings at such time aggregates greater than 50% of the sum of (x) the total principal amount of all of the Loans then outstanding plus (y) all Letter of Credit Outstandings at such time.

Revolving Credit Commitment shall mean, as to any Bank at any time, the amount initially set forth opposite its name on Schedule 1.01(B) in the column labeled “Amount of Commitment for Revolving Credit Loans,” and thereafter on Schedule I to the most recent Assignment and Assumption Agreement, as the same may be increased pursuant to Section 2.16

and/or reduced pursuant to Section 4.05, and Revolving Credit Commitments shall mean the aggregate Revolving Credit Commitments of all of the Banks.

Revolving Credit LIBOR Option shall mean the option of the Borrowers to have Revolving Credit Loans bear interest at the rate and under the terms and conditions set forth in Section 3.01(a)(ii).

Revolving Credit Loan Interest Period shall mean the period of time selected by a Borrower in connection with (and to apply to) any election permitted hereunder by such Borrower to have Revolving Credit Loans bear interest under the LIBOR Option. Subject to the last sentence of this definition, such period shall be one, two, three or six Months or, subject to availability to each Bank, nine or twelve Months. Such Interest Period shall commence on the effective date of borrowing of any Loan bearing interest at a rate determined with reference to the LIBOR Option, which shall be (i) the Borrowing Date if the respective Borrower is requesting new Loans, or (ii) the date of renewal of or conversion to the LIBOR Option if the respective Borrower is renewing or converting to the LIBOR Option applicable to outstanding Loans. Notwithstanding the second sentence hereof: (A) any Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the directly preceding Business Day, and (B) such Borrower shall not select, convert to or renew an Interest Period for any portion of the Loans that would end after the Expiration Date.

Revolving Credit Loan Request shall mean a request for a Revolving Credit Loan or a request to select, convert to or renew a Base Rate Option or LIBOR Option with respect to an outstanding Revolving Credit Loan in accordance with Section 2.05, Section 3.01 and Section 3.02.

Revolving Credit Loans shall mean collectively all Revolving Credit Loans made by the Banks to the Borrowers and Revolving Credit Loan shall mean separately any Revolving Credit Loan, made by one of the Banks to a Borrower, pursuant to Section 2.01. A Bid Loan is not a Revolving Credit Loan, except that it will be treated as a Revolving Credit Loan following a termination of the Commitments hereunder pursuant to Section 8.02(a) or Section 8.02(b) as provided in Section 8.03.

Revolving Credit Note shall mean any Revolving Credit Note of a Borrower in the form of Exhibit 1.01(R) issued by such Borrower to a Bank evidencing the Revolving Credit Loans of such Bank to such Borrower, together with all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part.

SEC shall mean the Securities and Exchange Commission or any governmental agencies substituted therefor.

Second Amendment Effective Date shall mean the effective date of the Second Amendment to this Agreement dated as of April 2, 2009.

Soft Capital shall have the meaning assigned to that term in Section 7.02(a).

Standard & Poor’s shall mean Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.

Stated Amount shall mean, at any time, (i) the maximum amount available to be drawn under any Letter of Credit denominated in Dollars (regardless of whether any conditions for drawing could then be met) and (ii) the Dollar Equivalent of the maximum amount available to be drawn under any Letter of Credit denominated in an Alternate Currency (regardless of whether any conditions for drawing could then be met).

Statutory Capital shall mean the aggregate of policyholders’ surplus of the Company and the contingency reserve of the Company, each determined in a manner consistent with that used in preparing the Historical Statements referred to in Section 5.01(h)(A) [Historical Statements].

Sterling LIBOR shall mean, with respect to the Loans comprising any Borrowing Tranche denominated in Pounds Sterling to which the LIBOR Option applies for any Interest Period, (A) an interest rate per annum determined on the basis of the rate for deposits in Pounds Sterling for a period comparable to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period plus (B) the Associated Cost Rate for such Loans for such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), Sterling LIBOR shall be determined by reference to such other publicly available service for displaying Pounds Sterling-denominated rates as may be agreed upon by the Agent and the Borrowers or, in the absence of such agreement, Sterling LIBOR shall be the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) equal to the rate per annum at which Pounds Sterling deposits approximately equal in principal amount to such Borrowing Tranche for a period and with a maturity comparable to such Interest Period are offered to the principal London office of Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. The Agent shall give prompt notice to the Borrowers of the Sterling LIBOR as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.

Strip Coverage Liquidity Facility shall mean the $1.0 billion liquidity facility to be provided by Dexia S.A. and/or one or more affiliates thereof to FSA as contemplated by Section 6.13(e) of the FSAH Purchase Agreement.

Subsidiary of any Person at any time shall mean (i) any corporation, company or trust of which 50% or more (by number of shares or number of votes) of the outstanding capital stock or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person’s Subsidiaries, (ii) any partnership of which such Person is a general partner or of which 50% or more of the partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person’s Subsidiaries, (iii) any limited liability company of which such Person is a member or of which 50% or more of the limited liability company interests is at

the time directly or indirectly owned by such Person or one or more of such Person’s Subsidiaries or (iv) any corporation, trust, partnership, limited liability company or other entity which is controlled or capable of being controlled by such Person or one or more of such Person’s Subsidiaries. Notwithstanding the foregoing, the Company, AGRI, AGRO and the UK Borrower shall be deemed to be a “Subsidiary” of Holdings and, with respect to the UK Borrower, of the Company, for all purposes in this Agreement and the other Loan Documents; provided , however , that neither the Company nor the UK Borrower shall be required to be a Guarantor (except for the requirement that the Company guaranty all obligations of the UK Borrower).

Test Period shall mean each period of four consecutive fiscal quarters of Holdings (taken as one accounting period) ending after the date hereof.

Total Capitalization shall mean, at any time, an amount (without duplication) equal to (i) the then outstanding Consolidated Debt of Holdings and its Subsidiaries, plus (ii) Consolidated Net Worth of Holdings and its Subsidiaries.

Transferor Bank shall mean the selling Bank pursuant to an Assignment and Assumption Agreement.

UK Borrower shall mean Assured Guaranty (UK) Ltd., a company organized under the laws of England and Wales.

Unpaid Drawing has the meaning provided in Section 2.13(a).

US Holdco shall mean Assured Guaranty US Holdings Inc., a Delaware corporation which is a direct wholly-owned Subsidiary of Holdings and which owns, inter alia , 100% of the capital stock of the Company.

Section 1.02 Construction . Unless the context of this Agreement otherwise clearly requires, the following rules of construction shall apply to this Agreement and each of the other Loan Documents:

(a) Number; Inclusion . References to the plural include the singular, the plural, the part and the whole; “or” has the inclusive meaning represented by the phrase “and/or,” and “including” is not a term of limitation and has the meaning represented by the phrase “including without limitation”;

(b) Determination . References to “determination” of or by the Agent or the Banks shall be deemed to include good-faith estimates by the Agent or the Banks (in the case of quantitative determinations) and good-faith beliefs by the Agent or the Banks (in the case of qualitative determinations) and such determination shall be conclusive absent manifest error;

(c) Agent’s Discretion and Consent . Whenever the Agent or the Banks are granted the right herein to act in its or their sole discretion or to grant or withhold consent such right shall be exercised in good faith;

(d) Documents Taken as a Whole . The words “hereof,” “herein,” “hereunder,” “hereto” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document as a whole and not to any particular provision of this Agreement or such other Loan Document;

(e) Headings . The section and other headings contained in this Agreement or such other Loan Document and the Table of Contents (if any), preceding this Agreement or such other Loan Document are for reference purposes only and shall not control or affect the construction of this Agreement or such other Loan Document or the interpretation thereof in any respect;

(f) Implied References to this Agreement . Article, section, subsection, clause, schedule and exhibit references are to this Agreement or other Loan Document, as the case may be, unless otherwise specified;

(g) Persons . Reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement or such other Loan Document, as the case may be, and reference to a Person in a particular capacity excludes such Person in any other capacity;

(h) Modifications to Documents . Reference to any agreement (including this Agreement and any other Loan Document together with the schedules and exhibits hereto or thereto), document or instrument means such agreement, document or instrument as amended, modified, replaced, substituted for, superseded or restated;

(i) From, To and Through . Relative to the determination of any period of time, “from” means “from and including,” “to” means “to but excluding,” and “through” means “through and including”; and

(j) Shall; Will . References to “shall” and “will” are intended to have the same meaning.

Section 1.03 Accounting Principles; Computations . (a) Except as otherwise provided in this Agreement (as, for example, where reference is made to statutory or regulatory financial matters), all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP as in effect on the date hereof applied on a basis consistent with that used in preparing the Historical Statements referred to in Section 5.01(h)(A) [Historical Statements]; provided that all such computations and determinations shall be made, and all such accounting and financial terms shall be interpreted, without giving effect to the consolidation of any variable interest entities that would otherwise be required to be consolidated with Holdings and its Subsidiaries in accordance with Financial Accounting Standards Board Interpretation No. 46R. In the event of any change after the date hereof in GAAP, and if such change would result in the inability to determine compliance with the financial covenants set forth in Section 7.02 based upon Holdings’ regularly prepared financial statements by reason of the preceding sentence, then the parties hereto agree

to endeavor, in good faith, to agree upon an amendment to this Agreement that would adjust such financial covenants in a manner that would not affect the substance thereof, but would allow compliance therewith to be determined in accordance with Holdings’ financial statements at that time.

(b) For purposes of this Agreement, the Dollar Equivalent of each Loan that is an Alternate Currency Loan and the Stated Amount of each Letter of Credit denominated in an Alternate Currency shall be calculated on the date when any such Loan is made or Letter of Credit is issued, on the second Business Day of each month, or such date as a Borrower may request and at such other times as designated by the Agent at any time when a Potential Default or an Event of Default exists. Such Dollar Equivalent shall remain in effect until the same is recalculated by the Agent as provided above and notice of such recalculation is received by the Borrowers, it being understood that until such notice is received, the Dollar Equivalent shall be that Dollar Equivalent as last reported to the Borrowers by the Agent. The Agent shall promptly notify the Borrowers and the Banks of each such determination of the Dollar Equivalent.

ARTICLE II

REVOLVING CREDIT AND LETTER OF CREDIT FACILITY

Section 2.01 Credit Commitments . Subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, each Bank severally agrees to make Revolving Credit Loans to any Borrower (on a several basis) at any time or from time to time on or after the date hereof to the Expiration Date, which Revolving Credit Loans (i) may be made and maintained in such Approved Currency as is requested by the applicable Borrower; (ii) shall not exceed in aggregate Principal Amount outstanding an amount which, when added to the aggregate outstanding Principal Amount of all Bid Loans and the Letter of Credit Outstandings at such time, is equal to the sum of the Revolving Credit Commitments at such time; (iii) shall not, in the case of Revolving Credit Loans incurred by Holdings, AGRI and AGRO, exceed in aggregate Principal Amount outstanding an amount which, when added to the outstanding Principal Amount of all Bid Loans incurred by all such Borrowers in the aggregate and the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all such Borrowers in the aggregate, is equal to the Holdings Sub-Limit; and (iv) shall not, in the case of Revolving Credit Loans incurred by the UK Borrower, exceed in aggregate Principal Amount outstanding an amount which, when added to the outstanding Principal Amount of all Bid Loans incurred by the UK Borrower and the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower, is equal to $20,000,000. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrowers may borrow, repay, and reborrow Revolving Credit Loans pursuant to this Section 2.01.

Section 2.02 Nature of Banks’ Obligations with Respect to Revolving Credit Loans . Each Bank shall be obligated to participate in each request for Revolving Credit Loans pursuant to Section 2.05 [Revolving Credit Loan Requests] in accordance with its Ratable Share. The aggregate Principal Amount of each Bank’s Revolving Credit Loans outstanding hereunder to the Borrowers at any time shall never exceed its Revolving Credit Commitment. The

obligations of each Bank hereunder are several and not joint. The failure of any Bank to perform its obligations hereunder shall not affect the Obligations of the Borrowers to any other party nor shall any other party be liable for the failure of such Bank to perform its obligations hereunder. The Banks shall have no obligation to make Revolving Credit Loans hereunder on or after the Expiration Date.

Section 2.03 Facility Fee; Letter of Credit Fee . (a) Accruing from the date hereof until but not including the Expiration Date, Holdings and the Company agree to pay, on a joint and several basis, to the Agent for the account of each Bank, as consideration for such Bank’s Revolving Credit Commitment hereunder, an amount equal to such Bank’s Ratable Share of a non-refundable facility fee (the “Facility Fee”) equal to the product of (A) the Applicable Facility Fee Rate (computed on the basis of a year of 360 days for the actual days elapsed) and (B) an amount equal to the average daily amount of the total Revolving Credit Commitments, as the same may be constituted from time to time, regardless of usage. The Facility Fee shall be payable in arrears on the first Business Day of each June, September, December, and March after the date hereof and on the Expiration Date or upon acceleration of the Loans.

(b) Each Borrower severally agrees to pay to the Agent for pro rata distribution to each Bank (based on their respective Ratable Share) a non-refundable letter of credit fee (the “Letter of Credit Fee”) equal to the product of (i) a rate per annum equal to the Applicable Margin with respect to Revolving Credit Loans outstanding as LIBOR Loans and (ii) the average daily Stated Amount of all Letters of Credit issued for the account of such Borrower. Accrued Letter of Credit Fees shall be due and payable in arrears on the first Business Day of each June, September, December and March after the date hereof and upon the first Business Day on or after the termination of the Commitments upon which no Letters of Credit remain outstanding.

(c) Each Borrower severally agrees to pay to each Issuing Bank, for its own account, a fronting fee (the “Fronting Fee”) in respect of each Letter of Credit issued by such Issuing Bank for the account of such Borrower in an amount and on dates as shall have separately been agreed to by such Borrower and such Issuing Bank.

Section 2.04 [Intentionally Omitted].

Section 2.05 Revolving Credit Loan Requests . Except as otherwise provided herein, a Borrower may from time to time prior to the Expiration Date request the Banks to make Revolving Credit Loans in Dollars, or renew or convert the Interest Rate Option applicable to existing Revolving Credit Loans pursuant to Section 3.01(a) [Revolving Credit Interest Rate Options], by delivering to the Agent, not later than 10:00 a.m., New York time, (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Revolving Credit Loans to which the LIBOR Option applies, or with respect to the conversion to or the renewal of the LIBOR Option for any Loans, provided that at any time when an Event of Default shall have occurred and be continuing, a LIBOR Option shall not be available to a Borrower if the Required Banks have so notified the Borrower; and (ii) one (1) Business Day prior to either the proposed Borrowing Date with respect to the making of a Revolving Credit Loan to which the Base Rate Option applies or the last day of the preceding Revolving Credit Loan Interest Period with respect to the conversion to the Base Rate Option for any Loan, of a duly completed

Revolving Credit Loan Request therefor substantially in the form of Exhibit 2.05 or a Revolving Credit Loan Request by telephone immediately confirmed in writing by letter, facsimile, email, or telex in the form of such Exhibit. In addition, a Borrower may from time to time prior to the Expiration Date request to make Revolving Credit Loans in Alternate Currencies by delivering to the Agent, not later than 1:00 P.M., New York time, at least four Business Days prior to the Borrowing Date a duly completed Revolving Credit Loan Request substantially in the form of Exhibit 2.05 or a Revolving Credit Loan Request by telephone immediately confirmed in writing by letter, facsimile, email or telex in the form of such Exhibit. Each Revolving Credit Loan Request shall be irrevocable and shall specify (i) the identity of the applicable Borrower; (ii) the respective Approved Currency for such Loan; (iii) the proposed Borrowing Date; (iv) the aggregate amount of the proposed Loans comprising each Borrowing Tranche (stated in the applicable Approved Currency), which shall be (A) for all Loans made to Holdings, the Company, AGRI and AGRO, in integral multiples of $1,000,000 and not less than $10,000,000 for each Borrowing Tranche to which the LIBOR Option applies and not less than the lesser of $500,000 or the maximum amount available for Borrowing Tranches to which the Base Rate Option applies and (B) for all Loans made to the UK Borrower, in integral multiples of $1,000,000 for each Borrowing Tranche to which the LIBOR Option applies and not less than $500,000 or the maximum amount available for Borrowing Tranches to which the Base Rate Option applies; (v) whether Revolving Credit LIBOR Option or Base Rate Option shall apply to the proposed Loans comprising the applicable Borrowing Tranche; and (vi) in the case of a Borrowing Tranche to which the Revolving Credit LIBOR Option applies, an appropriate Revolving Credit Interest Period for the Loans comprising such Borrowing Tranche.

Section 2.06 Making Revolving Credit Loans . The Agent shall, promptly after receipt by it of a Revolving Credit Loan Request pursuant to Section 2.05 [Revolving Credit Loan Requests], notify the Banks of its receipt of such Loan Request specifying: (i) the applicable Borrower making the Loan Request; (ii) the proposed Borrowing Date and the time and method of disbursement of the Revolving Credit Loans requested thereby; (iii) the amount and type of each such Revolving Credit Loan (stated in the applicable Approved Currency) and the applicable Interest Period (if any); and (iv) the apportionment among the Banks of such Revolving Credit Loans as determined by the Agent in accordance with Section 2.02 [Nature of Banks’ Obligations]. Each Bank shall remit the principal amount of each Revolving Credit Loan to the Agent such that the Agent is able to, and the Agent shall, to the extent the Banks have made funds available to it for such purpose and subject to Section 6.02 [Each Additional Loan], fund such Revolving Credit Loans to the applicable Borrower in the applicable Approved Currency and immediately available funds at the Principal Office prior to 2:00 p.m., New York time, on the applicable Borrowing Date, provided that if any Bank fails to remit such funds to the Agent in a timely manner, the Agent may elect in its sole discretion to fund with its own funds the Revolving Credit Loans of such Bank on such Borrowing Date, and such Bank shall be subject to the repayment obligation in Section 9.16 [Availability of Funds].

Section 2.07 Use of Proceeds . The proceeds of the Loans and Letters of Credit shall be used for the working capital and other general corporate purposes of the Borrowers and in accordance with Section 7.01(j) [Use of Proceeds].

Section 2.08 Bid Loan Facility . (a) Bid Loan Requests . Except as otherwise provided herein, any Borrower may from time to time prior to the Expiration Date request that

the Banks make Bid Loans by delivery to the Agent not later than 10:00 A.M., New York time, of a duly completed request therefor substantially in the form of Exhibit 2.08(a) hereto or a request by telephone immediately confirmed in writing by letter, facsimile, email, or telex (each, a “Bid Loan Request”) at least three (3) Business Days prior to the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting Fixed Rate Bid Loans and four (4) Business Days prior to the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting Bid Loans with the Bid Loan LIBOR Rate Option of one, two, three, or six months’ duration. Each Bid Loan Request shall be irrevocable and shall specify (i) the identity of the applicable Borrower; (ii) the respective Approved Currency for such Loan; (iii) the proposed Bid Loan Borrowing Date; (iv) whether the applicable Borrower is electing the Bid Loan Fixed Rate Option or the Bid Loan LIBOR Option; (v) the term of the proposed Bid Loan (the “Bid Loan Interest Period”), which may be no less than seven (7) day(s) and no longer than one hundred eighty (180) days if the applicable Borrower is requesting a Fixed Rate Bid Loan and one, two, three, or six months if the applicable Borrower is requesting a LIBOR Bid Loan; and (vi) the maximum principal amount (the “Requested Amount”) of such Bid Loan, which (x) in the case of Bid Loans to Holdings, the Company, AGRI and AGRO, shall be not less than $10,000,000 and shall be an integral multiple of $1,000,000 and (y) in the case of Bid Loans to the UK Borrower, shall be not less than $1,000,000 and shall be an integral multiple of $1,000,000. After giving effect to such Bid Loan and any other Loan made on or before the Bid Loan Borrowing Date, the sum of the aggregate Principal Amount of all Revolving Credit Loans and Bid Loans outstanding plus the Letter of Credit Outstandings shall not exceed the aggregate amount of the Revolving Credit Commitments of the Banks. In addition, after giving effect to any such Bid Loan incurred by (i) Holdings, AGRI and AGRO and any other Loan made on or before the Bid Loan Borrowing Date, the aggregate outstanding Principal Amount of all Bid Loans and Revolving Credit Loans incurred by all such Borrowers plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all such Borrowers shall not exceed the Holdings Sub-Limit; and (ii) the UK Borrower and any other Loan made on or before the Bid Loan Borrowing Date, the aggregate outstanding Principal Amount of all Bid Loans and Revolving Credit Loans incurred by the UK Borrower plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower shall not exceed $20,000,000. Notwithstanding any provision hereof to the contrary, no Bid Loan may be requested for a period that would end beyond the Expiration Date.

(b) Bidding . The Agent shall promptly after receipt by it of a Bid Loan Request pursuant to Section 2.08(a) notify the Banks of its receipt of such Bid Loan Request specifying (i) the identity of the applicable Borrower, (ii) the proposed Bid Loan Borrowing Date, (iii) whether the proposed Bid Loan shall be a Fixed Rate Bid Loan or a LIBOR Bid Loan, (iv) the Bid Loan Interest Period, (v) the principal amount of the proposed Bid Loan and (vi) the Approved Currency for such Bid Loan. Each Bank may submit a bid (a “Bid”) to the Agent by telephone (immediately confirmed in writing by letter, facsimile, email, or telex) not later than the following (each, as applicable, a “Bid Deadline”): 10:00 A.M. New York time two (2) Business Day before the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting a Fixed Rate Bid Loan or 10:00 A.M. New York time three (3) Business Days before the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting a LIBOR Bid Loan of one, two, three, or six months’ duration. Each Bid shall specify: (A) the principal amount of proposed Bid Loans offered by such Bank (the “Offered Amount”) which (i) may be less than, but shall not exceed, the Requested Amount, (ii) shall be at least $1,000,000 and shall

be an integral multiple of $1,000,000 and (iii) may exceed such Bank’s Revolving Credit Commitment; and (B) the Fixed Rate which shall apply to such proposed Bid Loan if the applicable Borrower has requested a Fixed Rate Bid Loan or the LIBOR Bid Loan Spread which shall apply to such proposed Bid Loan if the applicable Borrower has requested a LIBOR Bid Loan and which may be a positive or negative number. If any Bid omits information required hereunder, the Agent may in its sole discretion attempt to notify the Bank submitting such Bid. If the Agent so notifies a Bank, such Bank may resubmit its Bid, provided that it does so prior to the applicable Bid Deadline. The Agent shall promptly notify the applicable Borrower of the Bids which it timely received from the Banks. If the Agent in its capacity as a Bank shall, in its sole discretion, make a Bid, it shall notify the Borrower of such Bid at least one-half hour before the applicable Bid Deadline.

(c) Accepting Bids . The applicable Borrower, at its option, shall irrevocably accept or reject Bids by notifying the Agent of such acceptance or rejection by telephone (immediately confirmed in writing by letter, facsimile, email, or telex) not later than one hour after the applicable Bid Deadline. If the applicable Borrower elects to accept any Bids, its acceptance must meet the following conditions: (1) the total amount which (A) Holdings, the Company, AGRI and AGRO accepts from all Banks must not be less than $10,000,000 and shall be in integral multiples of $1,000,000 and (B) the UK Borrower accepts from all Banks shall be in integral multiples of $1,000,000, and may not exceed the Requested Amount; (2) the applicable Borrower must accept Bids based solely on the amount of the Fixed Rates or LIBOR Bid Loan Spreads, as the case may be, which each of the Banks quoted in their Bids in ascending order of the amount of Fixed Rates or LIBOR Bid Loan Spreads; (3) the applicable Borrower may not borrow Bid Loans from any Bank on the Bid Loan Borrowing Date in an amount exceeding such Bank’s Offered Amount; (4) if two or more Banks make Bids at the same Fixed Rate (if the applicable Borrower Requested a Fixed Rate Bid Loan) or LIBOR Bid Loan Spread (if the applicable Borrower Requested a LIBOR Bid Loan) and the applicable Borrower desires to accept a portion but not all of the Bids at such Fixed Rate or LIBOR Bid Loan Spread, as the case may be, the applicable Borrower shall accept a portion of each Bid equal to the product of the Offered Amount of such Bid times the fraction obtained by dividing the total amount of Bids which the applicable Borrower desires to accept at such Fixed Rate or LIBOR Bid Loan Spread, as the case may be, by the sum of the Offered Amounts of the Bids at such Fixed Rate or LIBOR Bid Loan Spread, provided that the applicable Borrower shall round the Bid Loans allocated to each such Bank upward or downward as the applicable Borrower may select to integral multiples of $1,000,000. The Agent shall (i) promptly notify a Bank that has made a Bid of the amount of its Bid that was accepted or rejected by the applicable Borrower and (ii) as promptly as practical notify all of the Banks of all Bids submitted and those which have been accepted.

(d) Funding Bid Loans . Each Bank whose Bid or portion thereof is accepted shall remit the principal amount of its Bid Loan to the Agent by 12:00 Noon on the Bid Loan Borrowing Date. The Agent shall make such funds available to the applicable Borrower on or before 1:00 P.M. on the Borrowing Date, provided that the conditions precedent to the making of such Bid Loan set forth in Section 6.02 have been satisfied not later than 10:00 A.M. New York time on the proposed Bid Loan Borrowing Date. If such conditions precedent have not been satisfied prior to such time, then (i) the Agent shall not make such funds available to the applicable Borrower, (ii) the Bid Loan Request shall be deemed to be canceled, (iii) the Agent shall return the amount previously funded to the Agent by each applicable Bank no later than the

next following Business Day, and (iv) the applicable Borrower shall be obligated to each such Bank for any loss, costs, and expenses applicable pursuant to Section 4.06(b) [Indemnity]. The applicable Borrower shall immediately notify the Agent of any failure to satisfy the conditions precedent to the making of Bid Loans under Section 6.02. The Agent may assume that the applicable Borrower has satisfied such conditions precedent if the applicable Borrower (i) has delivered to the Agent any documents required to be delivered under Section 6.02, (ii) the applicable Borrower has not notified the Agent that any other conditions precedent have not been satisfied, and (iii) the Agent has no actual notice of such a failure.

(e) Several Obligations . The obligations of the Banks to make Bid Loans after their Bids have been accepted are several. No Bank shall be responsible for the failure of any other Bank to make any Bid Loan which another Bank has agreed to make.

(f) Bid Notes . The obligation of the applicable Borrower to repay the aggregate unpaid principal amount of the Bid Loans made to it by each Bank, together with interest thereon, shall be evidenced by a Bid Note dated as of the Closing Date payable to the order of such Bank in a face amount equal to the aggregate Revolving Credit Commitments of all of the Banks.

Section 2.09 Restriction on Loans and Letters of Credit . Notwithstanding anything to the contrary in this Agreement, none of AGRO, AGRI nor the UK Borrower will be permitted to borrow or incur any new Loans hereunder or have any new Letters of Credit issued for its account at any time after such Person ceases to be a wholly-owned Subsidiary of Holdings.

Section 2.10 Letters of Credit . (a) Subject to and upon the terms and conditions set forth herein, each Borrower may request that any Issuing Bank issue at any time and from time to time on or after the Closing Date and prior to the Expiration Date one or more letters of credit for the account of such Borrower or any of its Subsidiaries to any other Person and in support of, on a standby basis, obligations of such Borrower to any other Person and subject to and upon the terms and conditions herein set forth each Issuing Bank agrees to issue at any time and from time to time on or after the Closing Date and prior to the Expiration Date one or more irrevocable standby letters of credit in such form as may be approved by such Issuing Bank, which approval shall not be unreasonably withheld (each such letter of credit, a “Letter of Credit” and, collectively, the “Letters of Credit”). It is hereby acknowledged and agreed that each of the letters of credit described in Schedule 2.10(a) (the “Existing Letters of Credit”), which were issued by ABN Amro Bank N.V. under the Existing Credit Agreement and remain outstanding on the Closing Date, shall constitute a “Letter of Credit” for all purposes of this Agreement and shall be deemed issued under this Agreement on the Closing Date.

(b) Immediately upon the issuance by any Issuing Bank of any Letter of Credit, such Issuing Bank shall be deemed to have sold and transferred to each Bank other than such Issuing Bank (each such Bank, in its capacity under this Section 2.10(b), a “Participant”), and each such Participant shall be deemed irrevocably and unconditionally to have purchased

and received from such Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Participant’s Ratable Share, in such Letter of Credit, each drawing made thereunder and the obligations of each Borrower under this Agreement with respect thereto, and any security therefor or guaranty pertaining thereto. Upon any change in the Commitments or Ratable Shares of the Banks pursuant to this Agreement, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participation amounts pursuant to this Section 2.10 to reflect the new Ratable Shares of the assignor and assignee Bank or of all Banks with Commitments, as the case may be.

(c) In the event that any Issuing Bank makes any payment under any Letter of Credit and the respective Borrower shall not have reimbursed such amount in full to such Issuing Bank pursuant to Section 2.13, such Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Participant, of such failure, and each Participant shall promptly and unconditionally pay to such Issuing Bank the amount of such Participant’s Ratable Share of such unreimbursed payment in the respective Approved Currency and in immediately available funds. If, prior to 11:00 a.m., New York time, on any Business Day, the Administrative Agent so notifies any Participant required to fund a payment under a Letter of Credit, such Participant shall make available to such Issuing Bank in the respective Approved Currency and in immediately available funds such Participant’s Ratable Share of the amount of such payment on such Business Day (or, if notice is given after 11:00 a.m., New York time, on any Business Day, on the next Business Day). If and to the extent such Participant shall not have so made its Ratable Share of the amount of such payment available to such Issuing Bank, such Participant agrees to pay to such Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day from such date to but excluding the date such amount is paid to such Issuing Bank at the overnight Base Rate. The failure of any Participant to make available to such Issuing Bank its Ratable Share of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to such Issuing Bank its Ratable Share of any payment on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to such Issuing Bank such other Participant’s Ratable Share of any such payment.

(d) Whenever any Issuing Bank receives any payment by any Borrower as to which it has also received payments from the Participants pursuant to paragraph (c) above, such Issuing Bank shall forward such payment to the Agent, which in turn shall distribute to each Participant which has paid its Ratable Share thereof, in the respective Approved Currency and in immediately available funds, an amount equal to such Participant’s share (based upon the amount funded by such Participant to the aggregate amount funded by all Participants and retained by the Issuing Bank) of the principal amount of such payment and interest thereon accruing after the purchase of the respective participations.

(e) The obligations of the Participants to make payments to each Issuing Bank with respect to Letters of Credit issued by it shall be irrevocable and not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances:

(i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents or any amendment, supplement or modification to any of the foregoing;

(ii) the existence of any claim, setoff, defense or other right which the Participant or any of its Affiliates may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Issuing Bank, any Participant, any Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between any Borrower or any of its Affiliates and the beneficiary named in any such Letter of Credit);

(iii) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

(iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or

(v) the occurrence of any Event of Default or Potential Default; or

(vi) any matter or event set forth in subsection 2.13(b).

(b) Upon the request of any Participant, each Issuing Bank shall furnish to such Participant copies of any Letter of Credit issued by it and such other documentation as may reasonably be requested by such Participant.

Section 2.11 Conditions to the Issuance of all Letters of Credit . (a) Notwithstanding anything to the contrary set forth in this Article II, no Issuing Bank shall be under any obligation to issue any Letter of Credit if at the time of such issuance:

(i) any order, judgment or decree of any Official Body or arbitrator shall purport by its terms to enjoin or restrain such Issuing Bank from issuing such Letter of Credit or any requirement of law applicable to such Issuing Bank or any Bank or any request or directive (whether or not having the force of law) from any Official Body with jurisdiction over such Issuing Bank or any Bank shall prohibit, or request that such Issuing Bank or any Banks refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Bank or any Bank with respect to such Letter of Credit any restriction or reserve or capital requirement (for which such Issuing Bank is not otherwise compensated) not in effect on the Closing Date, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to such Issuing Bank as of the Closing Date;

(ii) the conditions precedent set forth in Section 6.02 are not satisfied at that time; or

(iii) such Issuing Bank shall have received notice from any Borrower or the Required Banks prior to the issuance of such Letter of Credit of the type described in clause (vi) of Section 2.11(b).

(b) Notwithstanding anything to the contrary set forth in this Article II;

(i) Letters of Credit may only be denominated in Approved Currencies;

(ii) no Letter of Credit shall be issued if after giving effect thereto the Letter of Credit Outstandings, when added to the aggregate outstanding Principal Amount of all Revolving Credit Loans and Bid Loans at such time, would exceed the Revolving Credit Commitments at such time;

(iii) no Letter of Credit shall be issued at any time if after giving effect thereto the Letter of Credit Outstandings in respect of all Letters of Credit would exceed $100,000,000;

(iv) no Letter of Credit shall be issued if after giving effect to any such Letter of Credit issued for the account of (i) Holdings, AGRI and AGRO and any other Loan made on or before the issuance of such Letter of Credit, the aggregate Principal Amount of all Bid Loans and Revolving Credit Loans incurred by all such Borrowers and the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all such Borrowers would exceed the Holdings Sub-Limit and (ii) the UK Borrower and any other Loan made on or before the issuance of such Letter of Credit, the aggregate Principal Amount of all Bid Loans and Revolving Credit Loans incurred by the UK Borrower and the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower would exceed $20,000,000;

(v) each Letter of Credit shall have an expiry date occurring not later than one year after such Letter of Credit’s date of issuance, provided that each such Letter of Credit may by its terms automatically renew annually for one additional year unless the respective Issuing Bank notifies the beneficiary thereof, in accordance with the terms of such Letter of Credit, that such Letter of Credit will not be renewed; and

(vi) no Issuing Bank will issue any Letter of Credit after it has received written notice from any Borrower or the Required Banks stating that an Event of Default or a Potential Default exists until such time as the Issuing Bank shall have received a written notice of (x) rescission of such notice from the party or parties originally delivering the same or (y) a waiver of such Event of Default or Potential Default by the Required Banks.

(c) Subject to and on the terms and conditions set forth herein, each Issuing Bank is hereby authorized by each Borrower and the Banks to arrange for the issuance of any Letter of Credit pursuant to Section 2.10 and the amendment of any Letter of Credit pursuant to Section 2.15 and/or 10.01 by:

(i) completing the commencement date and the expiry date of such Letter of Credit; and

(ii) (in the case of an amendment increasing or reducing the amount thereof) amending such Letter of Credit in such manner as such Issuing Bank and the respective beneficiary may agree.

Section 2.12 Letter of Credit Requests . (a) Whenever a Borrower desires that a Letter of Credit be issued for its account, such Borrower shall give the Agent and the respective Issuing Bank written notice (including by way of facsimile transmission, immediately confirmed in writing by submission of the original of such request by mail to the Issuing Bank) thereof prior to 12:00 Noon, New York time, at least three Business Days prior to the proposed date of issuance (which shall be a Business Day), which written notice shall be in the form of Exhibit 2.12 (each, a “Letter of Credit Request”). Each Letter of Credit Request shall include any other documents as the respective Issuing Bank customarily requires in connection therewith.

(b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the respective Borrower that such Letter of Credit may be issued in accordance with, and it will not violate the requirements applicable to such Borrower and/or such Letter of Credit of, Sections 2.10 and 2.11.

(c) Upon its issuance of, or amendment to, any Letter of Credit, the respective Issuing Bank shall promptly notify the respective Borrower and each Bank of such issuance or amendment, which notice shall include a summary description of the Letter of Credit actually issued and any amendments thereto.

(d) The Stated Amount of each Letter of Credit upon issuance shall be not less than $1,000,000.

Section 2.13 Agreement to Repay Letter of Credit Drawings . (a) Each Borrower severally agrees to reimburse the respective Issuing Bank directly for any payment or disbursement made by such Issuing Bank under any Letter of Credit issued for the account of such Borrower (each such amount so paid or disbursed until reimbursed, an “ Unpaid Drawing ”), in each case, no later than one Business Day following the date of such payment or disbursement, with interest on the amount so paid or disbursed by such Issuing Bank, to the extent not reimbursed prior to 3:00 p.m., New York time, on the date of such payment or disbursement, from and including the date paid or disbursed to but not including the date such Issuing Bank is reimbursed therefor at a rate per annum which shall be the Base Rate as in effect from time to time plus the Applicable Margin for Base Rate Loans incurred by such Borrower (plus an additional 2% per annum, payable on demand, if not reimbursed by the third Business Day after the date on which the respective Borrower receives notice from the respective Issuing Bank of such payment or disbursement).

(b) Each Borrower’s obligation under this Section 2.13 to reimburse each Issuing Bank with respect to Unpaid Drawings of such Borrower (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which such Borrower may have or have had against such Issuing Bank, or any Issuing Bank, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit to conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds

of such drawing; provided , however , that no Borrower shall be obligated to reimburse any Issuing Bank for any wrongful payment made by such Issuing Bank under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Issuing Bank (as determined by a court of competent jurisdiction in a final and non-appealable decision).

(c) In determining whether to pay under any Letter of Credit, no Issuing Bank shall have any obligation relative to the other Banks other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Issuing Bank under or in connection with any Letter of Credit, if taken or omitted in the absence of such Issuing Bank’s gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final and non-appealable decision), shall not create for such Issuing Bank any resulting liability to any Borrower or any of its Affiliates or any Bank.

Section 2.14 Letter of Credit Expiration Extensions . Each Bank acknowledges that to the extent provided under the terms of any Letter of Credit, the expiration date of such Letter of Credit will be automatically extended for an additional year, without written amendment, unless within a set period of time prior to the expiration date of such Letter of Credit, notice is given by the respective Issuing Bank in accordance with the terms of the respective Letter of Credit (a “Notice of Non-Extension”) that the expiration date of such Letter of Credit will not be extended beyond its current expiration date. The respective Issuing Bank will give Notices of Non-Extension as to any or all outstanding Letters of Credit issued by it if requested to do so by the Required Banks pursuant to Article VIII. In addition, the respective Issuing Bank will give Notices of Non-Extension as to all outstanding Letters of Credit issued by it if the Expiration Date has occurred. The respective Issuing Bank will send a copy of each Notice of Non-Extension to the respective Borrower concurrently with delivery thereof to the respective beneficiary, unless prohibited by law from doing so.

Section 2.15 Changes to Stated Amount . At any time when any Letter of Credit is outstanding, at the request of the respective Borrower, the Issuing Bank will enter into an amendment increasing or reducing the Stated Amount of such Letter of Credit, provided that (i) the Stated Amount of a Letter of Credit may not be increased at any time if the conditions set forth in Sections 2.10 and 2.11 or the conditions precedent set forth in Section 6.02 are not satisfied at such time, and (ii) the Stated Amount of a Letter of Credit may not be increased at any time after the Expiration Date.

Section 2.16 Incremental Commitments . (a) So long as the Incremental Commitment Request Requirements are satisfied at the time of the delivery of the request referred to below, Holdings shall have the right, with the consent of, and in coordination with, the Agent, but without requiring the consent of any of the Banks (save as provided in Section 2.16(b) below), to request at any time and from time to time after the Closing Date and prior to the Expiration Date, that one or more Banks (and/or one or more other banks or financial institutions which are acceptable to each of the Agent and Holdings (each an “Eligible Transferee”) and which will become Banks as provided below) provide Incremental Commitments and, subject to the applicable terms and conditions contained in this Agreement,

make Loans pursuant thereto; it being understood and agreed, however, that (i) no Bank shall be obligated to provide an Incremental Commitment as a result of any such request by the Borrowers, and until such time, if any, as such Bank has agreed in its sole discretion to provide an Incremental Commitment and executed and delivered to the Agent an Incremental Commitment Agreement in respect thereof as provided in Section 2.16(b), such Bank shall not be obligated to fund any Loans in excess of its Commitment as in effect prior to giving effect to such Incremental Commitment provided pursuant to Section 2.16(b) below, (ii) any Bank (including any Eligible Transferee who will become a Bank) may so provide an Incremental Commitment without the consent of any other Bank, (iii) each provision of Incremental Commitments on a given date pursuant to Section 2.16(b) below shall be in a minimum aggregate amount (for all Banks (including any Eligible Transferee who will become a Bank)) of at least $25,000,000 and in integral multiples of $5,000,000 in excess thereof, (iv) the aggregate amount of all Incremental Commitments provided pursuant to Section 2.16(b) below, shall not exceed $100,000,000 and (v) all Loans made and Letters of Credit issued pursuant to Incremental Commitments (and all interest, fees and other amounts payable thereon) shall be Obligations under this Agreement and the other applicable Loan Documents.

(b) At the time of the provision of Incremental Commitments pursuant to this Section 2.16, the Borrowers, the Agent and each such Bank or other Eligible Transferee which agrees to provide an Incremental Commitment (each, an “Incremental Bank”) shall execute and deliver to the Administrative Agent an Incremental Commitment Agreement, with the effectiveness of such Incremental Bank’s Incremental Commitment to occur on the date (the “Incremental Loan Commitment Date”) set forth in such Incremental Commitment Agreement, which date in any event shall be no earlier than the date on which (w) all fees required to be paid in connection therewith at the time of such effectiveness shall have been paid (including, without limitation, any agreed upon up-front or arrangement fees owing to the Agent (or any affiliate thereof)), (x) all Incremental Loan Commitment Requirements are satisfied, (y) all other conditions set forth in this Section 2.16(b) shall have been satisfied, and (z) all other conditions precedent that may be set forth in such Incremental Commitment Agreement shall have been satisfied. The Agent shall promptly notify each Bank as to the effectiveness of each Incremental Commitment Agreement, and at such time, (i) the Commitments under, and for all purposes of, this Agreement shall be increased by the aggregate amount of such Incremental Commitments, (ii) Schedule 1.01(B) shall be deemed modified to reflect the revised Revolving Credit Commitments of the affected Banks and (iii) to the extent requested by any Incremental Bank, Notes will be issued, at the Borrowers’ expense, to such Incremental Bank.

(c) At the time of any provision of Incremental Commitments pursuant to this Section 2.16, the Borrowers shall, in coordination with the Agent, repay outstanding Loans of certain of the Banks, and incur additional Loans from certain other Banks (including the Incremental Banks), in each case to the extent necessary so that all of the Banks participate in each outstanding Borrowing Tranche of Loans pro rata on the basis of their respective Commitments (after giving effect to any increase in the Commitments pursuant to this Section 2.16 above) and with the Borrowers being obligated to pay to the respective Banks any costs of the type referred to in Section 3.04 herein in connection with any such repayment and/or Loans.

ARTICLE III

INTEREST RATES

Section 3.01 Interest Rate Options . Each Borrower shall pay interest in respect of the outstanding unpaid principal amount of the Revolving Credit Loans as selected by it from the Base Rate Option or Revolving Credit LIBOR Option set forth below applicable to the Revolving Credit Loans, it being understood that, subject to the provisions of this Agreement, the Borrowers may select different Interest Rate Options and different Interest Periods to apply to different Borrowing Tranches of the Revolving Credit Loans, and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the Revolving Credit Loans comprising any Borrowing Tranche, provided that there shall not be at any one time outstanding more than eight (8) Borrowing Tranches in the aggregate among all of the Revolving Credit Loans. If at any time the designated rate applicable to any Revolving Credit Loan made by any Bank exceeds such Bank’s highest lawful rate, the rate of interest on such Bank’s Revolving Credit Loan shall be limited to such Bank’s highest lawful rate.

(a) Revolving Credit Interest Rate Options . Each Borrower shall have the right to select from the following Interest Rate Options applicable to the Revolving Credit Loans incurred by it:

(i) Revolving Credit Base Rate Option : A fluctuating rate per annum (computed on the basis of a year of 365 or 366 days, as the case may be, for the actual days elapsed) equal to the Base Rate plus the Applicable Margin, such interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate; or

(ii) Revolving Credit LIBOR Option : A rate per annum (computed on the basis of a year of 360 days for the actual days elapsed) equal to the applicable LIBOR plus the Applicable Margin.

(b) Rate Quotations . The Borrowers may call the Agent on or before the date on which a Revolving Credit Loan Request is to be delivered to receive an indication of the rates then in effect, but it is acknowledged that such projection shall not be binding on the Agent or the Banks nor affect the rate of interest which thereafter is actually in effect when the election is otherwise made in accordance with the terms of this Agreement.

(c) Change in Fees or Interest Rates . If the Applicable Margin or Applicable Facility Fee Rate is increased or reduced with respect to any period for which any Borrower has already paid interest or the Facility Fee, the Agent shall recalculate the additional interest or the Facility Fee due from, or the amount of the refund of interest or the Facility Fee due to, such Borrower and shall, within fifteen (15) Business Days after the Agent received the information which gave rise to such increase or decrease, give the applicable Borrower and the Banks notice of such recalculation.

(i) Any additional interest or Facility Fee due from any Borrower shall be paid to the Agent for the account of the Banks on the next date on which an interest or fee payment is due; provided , however , that if there are no Loans

outstanding or if the Loans are due and payable, such additional interest or Facility Fee shall be paid promptly after receipt of written request for payment from the Agent.

(ii) Any interest or Facility Fee refund due to any Borrower shall be credited against payments otherwise due from such Borrower on the next interest or fee payment date or, if the Loans have been repaid and the Banks are no longer committed to lend under this Agreement, the Banks shall pay the Agent for the account of such Borrower such interest or Facility Fee refund not later than five Business Days after written notice from the Agent to the Banks.

Section 3.02 Revolving Credit Loans Interest Periods . At any time when any Borrower shall select, convert to, or renew a Revolving Credit Loan LIBOR Option, the applicable Borrower shall notify the Agent thereof at least three (3) Business Days prior to the effective date of such LIBOR Option by delivering a Loan Request. The notice shall specify a Revolving Credit Loan Interest Period during which such Interest Rate Option shall apply. Notwithstanding the preceding sentence, the following provisions shall apply to any selection of, renewal of, or conversion to a Revolving Credit Loan LIBOR Option:

(a) Amount of Borrowing Tranche . Each Borrowing Tranche of Revolving Credit Loans shall be in integral multiples of $1,000,000 and not less than $5,000,000 (or, in the case of Borrowing Tranches of Revolving Credit Loans to the UK Borrower, not less than $1,000,000); and

(b) Renewals . In the case of the renewal of a Revolving Credit Loan LIBOR Option at the end of an Interest Period, the first day of the new Interest Period shall be the last day of the preceding Interest Period, without duplication in payment of interest for such day.

Section 3.03 Interest After Default . To the extent permitted by Law, upon the occurrence of an Event of Default and until such time such Event of Default shall have been cured or waived:

(a) Interest Rate . The rate of interest otherwise applicable for each Loan pursuant to Section 3.01 [Interest Rate Options] shall be increased by 2.0% per annum; and

(b) Other Obligations . Each other Obligation hereunder if not paid when due shall bear interest at a rate per annum equal to the sum of the rate of interest applicable under the Base Rate Option plus an additional 2.0% per annum from the time such Obligation becomes due and payable and until it is paid in full.

(c) Acknowledgment . The Borrowers acknowledge that the increase in rates referred to in this Section 3.03 reflects, among other things, the fact that such Loans or other amounts have become a substantially greater risk given their default status and that the Banks are entitled to additional compensation for such risk; and all such interest referred to in this Section 3.03 shall be payable by the Borrowers upon demand by the Agent.

Section 3.04 LIBOR Unascertainable; Illegality; Increased Costs; Deposits Not Available . (a) Unascertainable . If on any date on which LIBOR would otherwise be determined with respect to Revolving Credit Loans or Bid Loans, the Agent shall have determined that:

(i) adequate and fair means do not exist for ascertaining such LIBOR, or

(ii) a contingency has occurred which materially and adversely affects the respective London interbank market relating to LIBOR, the Agent shall have the rights specified in Section 3.04(c).

(b) Illegality; Increased Costs; Deposits Not Available . If at any time any Bank shall have determined that:

(i) the making, maintenance or funding of any Loan to which a LIBOR Option applies has been made unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Official Body or with any request or directive of any such Official Body (whether or not having the force of Law), or

(ii) such LIBOR Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of any such Loan, or

(iii) after making all reasonable efforts, deposits of the relevant amount in the relevant Approved Currency for the relevant Interest Period for a Loan to which a LIBOR Option applies are not available to such Bank with respect to such Loan in the respective London interbank market,

then the Agent shall have the rights specified in Section 3.04(c).

(c) Agent’s and Bank’s Rights . In the case of any event specified in Section 3.04(a) above, the Agent shall promptly so notify the Banks and the Borrowers thereof, and in the case of an event specified in Section 3.04(b) above, such Bank shall promptly so notify the Agent and endorse a certificate to such notice as to the specific circumstances of such notice, and the Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrowers. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given), the obligation of (A) the Banks, in the case of such notice given by the Agent, or (B) such Bank, in the case of such notice given by such Bank, to allow the Borrowers to select, convert to or renew a LIBOR Option shall be suspended until the Agent shall have later notified the Borrowers, or such Bank shall have later notified the Agent, of the Agent’s or such Bank’s, as the case may be, determination that the circumstances giving rise to such previous determination no longer exist. If at any time the Agent makes a determination under Section 3.04(a) and any Borrower has previously notified the Agent of its selection of, conversion to or renewal of a LIBOR Option and such Interest Rate Option has not yet gone into effect, such notification shall be deemed to provide for the termination of the applicable Borrower’s Bid Loan request (without penalty) for such Loans if the applicable Borrower has requested Bid Loans under the Bid Loan LIBOR Option and for the selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to such Loans if the applicable

Borrower has requested the Revolving Credit Loan LIBOR Option. If any Bank notifies the Agent of a determination under Section 3.04(b), the Borrowers shall, subject to the Borrowers’ indemnification Obligations under Section 4.06(b) [Indemnity], as to any Loan of the Bank to which a LIBOR Option applies, on the date specified in such notice either convert such Loan to the Base Rate Option otherwise available with respect to such Loan (in the case of Dollar-denominated Loans) or prepay such Loan in accordance with Section 4.04 [Voluntary Prepayments]. Absent due notice from the Borrowers of conversion or prepayment, such Loan shall automatically be converted to the Base Rate Option otherwise available with respect to such Loan upon such specified date in the case of Dollar-denominated Loans, or prepaid on such date in the case of all other Loans.

Section 3.05 Selection of Interest Rate Options . If any Borrower fails to select a new Interest Period to apply to any Borrowing Tranche of Revolving Credit Loans under the Revolving Credit Loan LIBOR Option at the expiration of an existing Interest Period applicable to such Borrowing Tranche in accordance with the provisions of Section 3.01(a) [Revolving Credit Interest Rate Options], the applicable Borrower shall be deemed to have (i) in the case of Dollar-denominated Loans, converted such Borrowing Tranche to the Base Rate Option commencing upon the last day of the existing Interest Period and (ii) in the case of Alternate Currency Loans, selected a one-month Interest Period commencing upon the last day of the existing Interest Period.

ARTICLE IV

PAYMENTS

Section 4.01 Payments . All payments and prepayments to be made in respect of principal, interest, Facility Fees, Letter of Credit Fees, Fronting Fees, Agent’s Fee, or other fees or amounts due from the Borrowers hereunder shall be payable prior to 11:00 A.M., New York time, on the date when due without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by the Borrowers, and without set-off, counterclaim, or other deduction of any nature, and an action therefor shall immediately accrue. Such payments shall be made to the Agent at the Principal Office for the ratable accounts of the Banks with respect to the Revolving Credit Loans and Letters of Credit and for the account of the lending Bank with respect to the Bid Loans, in the applicable Approved Currency and in immediately available funds, and the Agent shall promptly distribute such amounts to the Banks in immediately available funds, provided that in the event payments are received by 11:00 A.M., New York time, by the Agent with respect to the Loans and such payments are not distributed to the Banks on the same day received by the Agent, the Agent shall pay the Banks the Federal Funds Effective Rate with respect to the amount of such payments for each day held by the Agent and not distributed to the Banks. The Agent’s and each Bank’s statement of account, ledger, or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement.

Section 4.02 Pro Rata Treatment of Banks . Each borrowing of Revolving Credit Loans shall be allocated to each Bank according to its Ratable Share (irrespective of the amount of Bid Loans outstanding), and each selection of, conversion to or renewal of any Interest Rate

Option applicable to Revolving Credit Loans and each payment or prepayment by the Borrowers with respect to principal or interest on the Revolving Credit Loans, Facility Fees or Letter of Credit Fees or other fees (except for the Agent’s Fee, the Bid Loan Processing Fee and the Fronting Fees) or amounts due from the Borrowers hereunder to the Banks with respect to the Revolving Credit Loans shall (except as provided in Section 3.04(c) [Agent’s and Bank’s Rights] in the case of an event specified in Section 3.04 [Euro-Rate Unascertainable; Etc.], Section 4.04 [Replacement of a Bank] or Section 4.06 [Additional Compensation in Certain Circumstances]) be made in proportion to the applicable Revolving Credit Loans outstanding from each Bank and, if no such Loans are then outstanding, in proportion to the Ratable Share of each Bank. Each borrowing of a Bid Loan shall be made according to the provisions in Section 2.08 hereof and each payment or prepayment by the Borrowers of principal, interest, fees, or other amounts from the Borrowers with respect to Bid Loans shall be made to the Banks in proportion to the amounts due to such Banks with respect to Bid Loans then outstanding.

Section 4.03 Interest Payment Dates . Interest on Revolving Credit Loans to which the Base Rate Option applies shall be due and payable in arrears on the first Business Day of each June, September, December, and March after the date hereof and on the Expiration Date or upon acceleration of the Loan. Interest on Revolving Credit Loans and Bid Loans to which the LIBOR Option applies and Bid Loans to which the Bid Loan Fixed Rate Option applies shall be due and payable on the last day of each Interest Period for those Loans and, if such Interest Period is longer than three (3) Months, also at the end of the third Month of such Interest Period. Interest on payments of principal and other monetary Obligations shall be due on the date such payment is due (whether on the stated maturity date, upon acceleration, or otherwise) or if principal or such other Obligation is paid earlier than the date when due, then on the date when paid.

Section 4.04 Voluntary Prepayments . (a) Right to Prepay . Each Borrower shall have the right at its option from time to time to prepay the Revolving Credit Loans incurred by it in whole or in part without premium or penalty (except as provided in Section 4.04(b) below or in Section 4.06 [Additional Compensation in Certain Circumstances]):

(i) at any time with respect to any Revolving Credit Loan to which the Base Rate Option applies,

(ii) on the last day of the applicable Interest Period with respect to Revolving Credit Loans to which a LIBOR Option applies,

(iii) on the date specified in a notice by any Bank pursuant to Section 3.04 [LIBOR Unascertainable, Etc.] with respect to any Revolving Credit Loan to which a LIBOR Option applies.

Whenever any Borrower desires to prepay any part of the Revolving Credit Loans, it shall provide a prepayment notice to the Agent by 12:00 Noon, New York time, at least one (1) Business Day prior to the date of prepayment of Revolving Credit Loans to which a Base Rate Option applies and at least three (3) Business Days prior to the date of prepayment of Revolving Credit Loans to which a LIBOR Option applies setting forth the following information:

(x) the date, which shall be a Business Day, on which the proposed prepayment is to be made;

(y) a statement indicating the application of the prepayment among the Borrowing Tranches of such Loans; and

(z) the total principal amount of such prepayment, which shall not be less than $1,000,000 or such lesser amount as may be outstanding under the Borrowing Tranche to be prepaid.

The principal amount of the Revolving Credit Loans for which a prepayment notice is given, together with such interest and fees as have accrued on such principal amount, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made; provided , however , that failure of any Borrower to make payment in accordance with a prepayment notice given by it shall not be an Event of Default in and of itself. Except as provided in Section 3.04(c) [Agent’s and Bank’s rights], if any Borrower prepays a Revolving Credit Loan, but fails to specify the applicable Borrowing Tranche which the applicable Borrower is prepaying, the prepayment shall be applied first to Revolving Credit Loans to which the Base Rate Option applies, then to Loans to which the Revolving Credit Loan LIBOR Option applies. Any prepayment hereunder and any failure of the applicable Borrower to make payment in accordance with a prepayment notice provided by it shall be subject to the applicable Borrower’s Obligation to indemnify the Banks under Section 4.06(b) [Indemnity].

(b) Replacement of a Bank . In the event any Bank (i) gives notice under Section 3.04 [LIBOR Unascertainable, Etc.] or Section 4.06 [Additional Compensation in Certain Circumstances], (ii) does not fund Revolving Credit Loans, Bid Loans or Unpaid Drawings because the making of such Loans would contravene any Law applicable to such Bank, or (iii) becomes subject to the control of an Official Body (other than normal and customary supervision), then Holdings or the Company shall have the right at its option, with the consent of the Agent and each Issuing Bank, which shall not be unreasonably withheld, to prepay the Loans of such Bank in whole, together with all interest accrued thereon, and terminate such Bank’s Commitment at any time after (x) receipt of such Bank’s notice under Section 3.04 [LIBOR Unascertainable, Etc.] or Section 4.06(a) [Increased Costs, Etc.], (y) the date such Bank has failed to fund Revolving Credit Loans, Bid Loans or Unpaid Drawings because the making of such Loans would contravene Law applicable to such Bank, or (z) the date such Bank became subject to the control of an Official Body, as applicable; provided that the applicable Borrower shall also pay to such Bank at the time of such prepayment any amounts required under Section 4.06 [Additional Compensation in Certain Circumstances] and any accrued interest due on such amount and any related fees; provided , however , that the Commitment and any Bid Loan of such Bank shall be provided by one or more of the remaining Banks or a replacement bank acceptable to the Agent and each Issuing Bank; provided , further , the remaining Banks shall have no obligation hereunder to increase their Commitments or provide the Bid Loan of such Bank. Notwithstanding the foregoing, the Agent may only be replaced subject to the requirements of Section 9.14 [Successor Agent].

(c) Change of Lending Office . Each Bank agrees that, upon the occurrence of any event giving rise to increased costs or other special payments under Section 3.04(b)

[Illegality, Etc.] or Section 4.06(a) [Increased Costs, Etc.] with respect to such Bank, it will, if requested by Holdings or the Company, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans affected by such event, provided that such designation is made on terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of such Section. Nothing in this Section 4.04(c) shall affect or postpone any of the Obligations or the rights of the Agent or any Bank provided in this Agreement.

Section 4.05 Reduction or Termination of Commitments . The aggregate amount of the Commitments shall be automatically reduced to zero on the Expiration Date. The aggregate amount of Commitments shall be automatically reduced to zero on the 90 th day following the date hereof unless the Closing Date has occurred by such time. In addition, the Borrower shall have the right to terminate or reduce the then unused portion of Commitments at any time or from time to time; provided that (a) each partial reduction shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof; (b) at no time shall the total amount of the Commitments be less than the sum of the current Loans outstanding and the Letter of Credit Outstandings at such time (except following the Expiration Date to the extent no Loans are outstanding and all Letters of Credit are cash collateralized in accordance with Section 4.10); and (c) any Borrower shall provide at least five (5) Business Days’ prior written notice of each such termination or reduction to the Agent specifying the amount of the Commitments to be reduced or terminated. Each such notice shall be irrevocable, and Commitments once terminated or reduced may not be reinstated. Any partial reduction of Commitments pursuant to this Section 4.05 will apply ratably to all Banks based upon each such Bank’s Commitment.

Section 4.06 Additional Compensation in Certain Circumstances . (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law, guideline or interpretation or any change in any Law, guideline or interpretation or application thereof by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of Law) of any central bank or other Official Body:

(i) subjects any Bank or Issuing Bank to any tax or changes the basis of taxation with respect to this Agreement, the Revolving Credit Loans, the Bid Loans or Letters of Credit or payments by any Borrower of principal, interest, Facility Fees, Letter of Credit Fees, Unpaid Drawings or other amounts due from the Borrowers hereunder (except for taxes on the overall net income of such Bank or Issuing Bank),

(ii) imposes, modifies or deems applicable any reserve (including the Eurodollar Reserve Percentage), special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank or Issuing Bank, or

(iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or letters of credit, other credits or commitments to extend credit extended by, any Bank or Issuing Bank, or

(B) otherwise applicable to the obligations of any Bank or Issuing Bank under this Agreement,

and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or Issuing Bank with respect to this Agreement, or the making, maintenance or funding of any part of the Revolving Credit Loans or the Bid Loans, or the issuance of or participation in any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on any Bank’s capital or Issuing Bank, taking into consideration such Bank’s or Issuing Bank’s customary policies with respect to capital adequacy) by an amount which such Bank or Issuing Bank in its sole discretion deems to be material, such Bank or Issuing Bank shall from time to time notify the Borrowers and the Agent of the amount determined in good faith (using any averaging and attribution methods employed in good faith) by such Bank or Issuing Bank to be necessary to compensate such Bank or Issuing Bank for such increase in cost, reduction of income, additional expense or reduced rate of return. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the applicable Borrower to such Bank or Issuing Bank ten (10) Business Days after such notice is given.

(b) Indemnity . In addition to the compensation required by Section 4.06 (a) [Increased Costs, Etc.], each Borrower, with respect to Loans incurred or requests therefor made by such Borrower, shall indemnify each Bank against all liabilities, losses, or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Loans subject to a LIBOR Option or the Bid Loan Fixed Rate Option) which such Bank sustains or incurs as a consequence of any

(i) payment, prepayment, conversion, or renewal of any Loan to which a LIBOR Option or the Bid Loan Fixed Rate Option applies on a day other than the last day of the corresponding Interest Period (whether or not such payment or prepayment is mandatory, voluntary, or automatic and whether or not such payment or prepayment is then due),

(ii) attempt by such Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any Loan Requests under Section 2.05 [Revolving Credit Loan Requests], Section 2.08 [Bid Loan Facility] or Section 3.02 [Interest Periods] or notice relating to prepayments under Section 4.04 [Voluntary Prepayments],

(iii) default by such Borrower in the performance or observance of any covenant or condition contained in this Agreement or any other Loan Document, including any failure of such Borrower to pay when due (by acceleration or otherwise) any principal of or interest on the Revolving Credit Loans or the Bid Loans, Facility Fee, Letter of Credit Fee or any other amount due hereunder, or

(iv) payment or prepayment of any Bid Loan on a day other than the maturity date thereof (whether or not such payment or prepayment is mandatory or voluntary).

If any Bank sustains or incurs any such loss or expense, it shall from time to time notify the applicable Borrower of the amount determined in good faith by such Bank (which determination may include such assumptions, allocations of costs and expenses, and averaging or attribution methods as such Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by such Borrower to such Bank ten (10) Business Days after such notice is given.

Section 4.07 Taxes . (a) No Deductions . All payments made by each Borrower hereunder and under each Note or for Unpaid Drawings shall be made free and clear of and without deduction for any present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the net income of any Bank or Issuing Bank and all income and franchise taxes applicable to any Bank or Issuing Bank of the United States (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as “Taxes”). If any Borrower shall be required by Law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note or for Unpaid Drawings, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.07(a)) each Bank or Issuing Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the applicable Borrower shall make such deductions, and (iii) the applicable Borrower shall timely pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable Law.

(b) Stamp Taxes . In addition, each Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made by such Borrower hereunder or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or any Note executed and delivered by such Borrower (hereinafter referred to as “Other Taxes”).

(c) Indemnification for Taxes Paid by a Bank . Each Borrower, with respect to Loans incurred or requests therefor made by such Borrower, shall indemnify each Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.07(c)) paid by any Bank and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date a Bank makes written demand therefor.

(d) Certificate . Within 30 days after the date of any payment of any Taxes by any Borrower, the applicable Borrower shall furnish to each Bank, at its address referred to herein, the original or a certified copy of a receipt evidencing payment thereof.

(e) Survival . Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers contained in this Section 4.07 shall survive the payment in full of principal and interest hereunder and under any instrument delivered hereunder.

Section 4.08 Judgment Currency . (a) Currency Conversion Procedures for Judgments . If for the purposes of obtaining judgment in any court it is necessary to convert a sum due hereunder or under a Note in any currency (the “Original Currency”) into another currency (the “Other Currency”), the parties hereby agree, to the fullest extent permitted by Law, that the rate of exchange used shall be that at which in accordance with normal banking procedures each Bank could purchase the Original Currency with the Other Currency after any premium and costs of exchange on the Business Day preceding that on which final judgment is given.

(b) Indemnity in Certain Events . The obligation of each Borrower in respect of any sum due from such Borrower to any Bank hereunder shall, notwithstanding any judgment in an Other Currency, whether pursuant to a judgment or otherwise, be discharged only to the extent that, on the Business Day following receipt by any Bank of any sum adjudged to be so due in such Other Currency, such Bank may in accordance with normal banking procedures purchase the Original Currency with such Other Currency. If the amount of the Original Currency so purchased is less than the sum originally due to such Bank in the Original Currency, each Borrower agrees, with respect to Loans incurred and requests therefor made by such Borrower, as a separate obligation and notwithstanding any such judgment or payment, to indemnify such Bank against such loss.

Section 4.09 Notes, Maturity . The Revolving Credit Loans made by each Bank shall be evidenced by a Revolving Credit Note in the form of Exhibit 1.01(R) . Notwithstanding anything to the contrary contained elsewhere in this Agreement, all outstanding Revolving Credit Loans shall be repaid in full on the Expiration Date.

Section 4.10 Mandatory Prepayments . (a) If on any date (including, without limitation, (i) any date on which Dollar Equivalents are determined and (ii) the Expiration Date) the sum of the aggregate outstanding Principal Amount of Revolving Credit Loans and Bid Loans plus the Letter of Credit Outstandings (all the foregoing, collectively, the “Aggregate Outstandings”) exceeds the Commitments as then in effect, Holdings, the Company, AGRI, AGRO and/or the UK Borrower (as they shall determine) shall repay no later than the next following Business Day the principal amount of Revolving Credit Loans in an aggregate Principal Amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Credit Loans as set forth above, the remaining Aggregate Outstandings exceed the Commitments, Holdings, the Company, AGRI, AGRO and/or the UK Borrower (as they shall determine) shall repay on such date the principal of Bid Loans in an aggregate amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Credit loans and Bid Loans as set forth above, the remaining Aggregate Outstandings exceed the Commitment, the Borrowers shall (i) establish an account in the name and for the benefit of the Agent, as Agent for the Banks (the “Cash Collateral Account”), (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent, and (iii) fund the Cash Collateral Account with cash to be held as security for the Borrowers’ reimbursement obligations in respect of Letters of Credit then outstanding, equal to the Letter of Credit Outstandings in excess of the Commitment at such time. In addition, at all times on and after the 90 th day prior to the Expiration Date and continuing until all Letters of Credit have been terminated and all Obligations paid in full, the Borrowers will maintain in the Cash Collateral Account an amount of cash equal to the Letter of Credit Outstandings at such time.

(b) If on any date (including, without limitation, any date on which Dollar Equivalents are determined) the aggregate Principal Amount of Revolving Credit Loans and Bid Loans incurred by the UK Borrower plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower exceeds $20,000,000, the UK Borrower shall repay no later than the next following Business Day the principal amount of Revolving Credit Loans in an aggregate Principal Amount equal to such excess. If, after giving effect to the repayment of all outstanding Revolving Credit Loans incurred by the UK Borrower as set forth above, the sum of the outstanding Bid Loans incurred by the UK Borrower plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower exceeds $20,000,000, the UK Borrower shall repay on such date the principal of Bid Loans in an aggregate amount equal to such excess. If, after giving effect to the repayment of all Revolving Credit Loans and Bid Loans incurred by the UK Borrower as set forth above, the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower exceed $20,000,000, the UK Borrower shall on such day (i) establish a Cash Collateral Account, (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent and (iii) fund such Cash Collateral Account with cash to be held as security for the UK Borrower’s reimbursement obligations in respect of Letters of Credit equal to such excess.

(c) If on any date (including, without limitation, any date on which Dollar Equivalents are determined) the aggregate outstanding Principal Amount of Revolving Credit Loans and Bid Loans incurred by any of Holdings, AGRI or AGRO plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all of such Borrowers exceeds the Holdings Sub-Limit, Holdings, AGRI and/or AGRO shall repay no later than the next following Business Day the principal amount of Revolving Credit Loans in an aggregate Principal Amount equal to such excess. If, after giving effect to the repayment of all outstanding Revolving Credit Loans incurred by Holdings, AGRI and AGRO plus the Letter of Credit Outstandings in respect of Letter of Credit issued for the account of such Borrowers, in the aggregate, exceeds the Holdings Sub-Limit, Holdings, AGRI and/or AGRO shall repay on such date the principal of Bid Loans in an aggregate amount equal to such excess. If, after giving effect to the repayment of all Revolving Credit Loans and Bid Loans incurred by Holdings, AGRI and AGRO, in the aggregate, as set forth above, the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of such Borrowers, in the aggregate, exceeds the Holdings Sub-Limit, Holdings, AGRI and/or AGRO shall on such day (i) establish a Cash Collateral Account, (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent and (iii) fund such Cash Collateral Account with cash to be held as security for such Borrowers’ reimbursement obligations in respect of Letters of Credit equal to such excess.

(d) If on any date (including, without limitation, any date on which Dollar Equivalents are determined) the Letter of Credit Outstandings exceed $100,000,000, the Borrowers shall (i) establish a Cash Collateral Account, (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent and (iii) fund such Cash Collateral Account with cash to be held as security for the Borrowers’ reimbursement obligations in respect of Letters of Credit equal to such excess.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

Section 5.01 Representations and Warranties . Each Borrower represents and warrants (in each case solely as to itself and its Subsidiaries) to the Agent and each of the Banks as follows:

(a) Organization and Qualification . Such Borrower is a corporation duly incorporated, validly existing, and in good standing under the laws of its jurisdiction of organization. Such Borrower has the lawful power to own or lease its properties and to engage in the business it presently conducts. Such Borrower is duly licensed or qualified and in good standing in each jurisdiction where the property owned or leased by it or the nature of the business transacted by it or both makes such licensing or qualification necessary.

(b) Capitalization and Subsidiaries . As of the Closing Date, Holdings has no Subsidiaries other than those Subsidiaries listed on Schedule 5.01(b) . Assured Value Insurance Company is an inactive corporation having no material liabilities or Indebtedness. All of the issued and outstanding share capital of Holdings has been validly issued and is fully paid and nonassessable.

(c) Power and Authority . Such Borrower has full power to enter into, execute, deliver, and carry out this Agreement and the other Loan Documents to which it is a party, to incur the Indebtedness contemplated by the Loan Documents, and to perform its Obligations under the Loan Documents to which it is a party, and all such actions have been duly authorized by all necessary proceedings on its part.

(d) Validity and Binding Effect . This Agreement has been duly and validly executed and delivered by such Borrower, and each other Loan Document which such Borrower is required to execute and deliver as of the date hereof has been duly executed and delivered by such Borrower. Assuming the due execution and delivery by Agent and the Banks of those Loan Documents to which they are a party, this Agreement and each other Loan Document to which such Borrower is a party constitute the legal, valid and binding obligations of such Borrower on and after its date of delivery thereof, enforceable against such Borrower in accordance with its terms, except to the extent that enforceability of any of such Loan Document may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforceability of creditors’ rights generally or limiting the right of specific performance.

(e) No Conflict . Neither the execution and delivery of this Agreement or the other Loan Documents by such Borrower nor the consummation of the transactions herein or therein contemplated or compliance with the terms and provisions hereof or thereof will conflict with, constitute a default under or result in any breach of (i) the terms and conditions of the certificate or articles of incorporation, bylaws, memorandum of association or other organizational or constitutional documents of such Borrower, or (ii) any Law or any material agreement or instrument or order, writ, judgment, injunction, or decree to which such Borrower is a party or by which it is bound or to which it is subject, or result in the creation or enforcement of any Lien, charge or encumbrance

whatsoever upon any property (now or hereafter acquired) of such Borrower (other than Permitted Liens).

(f) Litigation . Except as disclosed under the Legal Proceedings heading of the Annual Report on Form 10-K filed by Holdings with the SEC on March 2, 2006, there are no actions, suits, proceedings, or investigations pending or, to the knowledge of such Borrower, threatened against such Borrower at law or in equity before any Official Body which individually or in the aggregate may result in any Material Adverse Change. Such Borrower is not in violation of any order, writ, injunction, or any decree of any Official Body which may result in any Material Adverse Change.

(g) Title to Properties . Such Borrower has good and marketable title to or valid leasehold interests in all properties, assets, and other rights which it purports to own or lease or which are reflected as owned or leased on its books and records, free and clear of all Liens and encumbrances except Permitted Liens. All leases of property are in full force and effect and are subject only to the terms and conditions of the applicable leases.

(h) Financial Statements, Reinsurance Coverage .

(A) Historical Statements . The Company has delivered to the Agent copies of its audited consolidated year-end financial statements for and as of the end of the three (3) fiscal years ended December 31, 2003, 2004 and 2005 (the “Historical Statements”). The Historical Statements were compiled from the books and records maintained by the Company’s management, are correct and complete and fairly represent the consolidated financial condition of the Company and its Subsidiaries as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP and statutory requirements consistently applied.

(B) Accuracy of Financial Statements . As of the Closing Date, neither the Company nor any Subsidiary of the Company has any liabilities, contingent or otherwise, or forward or long-term commitments or Off-Balance Sheet Transactions that are not disclosed in the Historical Statements or in the notes thereto, and except as disclosed therein there are no unrealized or anticipated losses from any commitments of the Company or any Subsidiary of the Company which may cause a Material Adverse Change. Since December 31, 2005 , no Material Adverse Change has occurred.

(C) Reinsurance Coverage . The Company has delivered Schedule 5.01(h) to the Agent setting forth the amount, terms, and provider(s) to the Company of reinsurance and the extent of the Company’s insurance or reinsurance exposure covered thereby; as of December 31, 2005, Schedule 5.01(h) is correct and complete and fairly represents the reinsurance coverage pertaining to the business of the Company and its Subsidiaries (“Existing Reinsurance Coverage”).

(i) Use of Proceeds; Margin Stock . Such Borrower intends to use the proceeds of the Loans and Letters of Credit in accordance with Section 2.07 and Section 7.01(j). Such Borrower does not engage or intend to engage principally, or as one of its important activities, in the business of extending credit for the purpose, immediately, incidentally or ultimately, of purchasing or carrying margin stock (such term used herein within the meaning of Regulation U). No part of the proceeds of any Loan has been or will be used, immediately, incidentally or ultimately, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of or which is inconsistent with the provisions of the regulations of the Board of Governors of the Federal Reserve System. Such Borrower does not hold or intend to hold margin stock in such amounts that more than 25% of the reasonable value of its assets are or will be represented by margin stock.

(j) Full Disclosure . Neither this Agreement nor any other Loan Document, nor any certificate, statement, agreement, or other document furnished to the Agent or any Bank by either of Holdings or the Company in connection herewith or therewith, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading. There is no fact known to either of Holdings or the Company which materially adversely affects the business, property, assets, financial condition, results of operations, or prospects of Holdings and its Subsidiaries taken as a whole or the Company and its Subsidiaries taken as a whole which has not been set forth in this Agreement or in the certificates, statements, agreements, or other documents furnished in writing to the Agent and the Banks by either Holdings or the Company prior to or at the date hereof in connection with the transactions contemplated hereby.

(k) Taxes . All federal, state, local, and other tax returns required to have been filed with respect to such Borrower have been filed, and payment or adequate provision has been made for the payment of all taxes, fees, assessments, and other governmental charges which have or may become due pursuant to said returns or to assessments received, except to the extent that such taxes, fees, assessments, and other charges are being contested in good faith by appropriate proceedings diligently conducted and for which such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made. There are no agreements or waivers extending the statutory period of limitations applicable to any federal income tax return of such Borrower for any period.

(l) Consents and Approvals . No consent, approval, exemption, order, or authorization of, or a registration or filing with, any Official Body or any other Person is required by any Law or any agreement in connection with the execution, delivery, or carrying out of this Agreement or any of the other Loan Documents by such Borrower, except such as have been obtained or made on or prior to the Closing Date.

(m) No Event of Default; Compliance With Instruments . No event has occurred and is continuing and no condition exists or will exist after giving effect to the

borrowings or other extensions of credit to be made under or pursuant to the Loan Documents which constitutes an Event of Default or Potential Default. Such Borrower is not in violation of (i) any term of its certificate or articles of incorporation, bylaws, memorandum of association or other organizational or constitutional documents or (ii) any material agreement or instrument to which it is a party or by which it or any of its properties may be subject or bound, in each such case where such violation would constitute a Material Adverse Change.

(n) Licenses, Etc . Such Borrower owns or possesses all the material licenses, registrations, franchises, permits, and rights necessary to own and operate its properties and to carry on its business as presently conducted by such Borrower, without conflict with the rights of others.

(o) Insurance . No notice has been given or claim made and no grounds exist to cancel or avoid any insurance policy or bond in favor of such Borrower or any of its property, or to reduce the coverage provided thereby. Such policies and bonds provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of such Borrower in accordance with prudent business practice in the industry of such Borrower.

(p) Compliance With Laws . Such Borrower is in compliance in all material respects with all applicable Laws in all jurisdictions in which such Borrower is doing business, except where the failure to do so would not constitute a Material Adverse Change.

(q) Material Contracts; Burdensome Restrictions . All material contracts relating to the business operations of such Borrower are valid, binding, and enforceable upon such Borrower and, to the knowledge of such Borrower, each of the other parties thereto in accordance with their respective terms, and there is no default thereunder, to such Borrower’s knowledge, with respect to parties other than such Borrower. Such Borrower is not bound by any contractual obligation, or subject to any restriction in any organizational document or any requirement of Law, which in and of itself is material and adverse to such Borrower.

(r) Investment Companies; Regulated Entities . Such Borrower is not an “investment company” registered or required to be registered under the Investment Company Act of 1940 or under the “control” of an “investment company” as such terms are defined in the Investment Company Act of 1940 and shall not become such an “investment company” or under such “control.” Such Borrower is not subject to any other Federal or state statute or regulation limiting its ability to incur Indebtedness for borrowed money.

(s) Plans and Benefit Arrangements . To the extent of any Benefit Arrangement, Plan or Multiemployer Plan in place during the term of this Agreement, Holdings and each other member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans, and Multiemployer Plans. There has been no Prohibited

Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of the Borrowers, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of Holdings or any other member of the ERISA Group. To the extent of any Benefit Arrangement, Plan or Multiemployer Plan in place during the term of this Agreement, Holdings and all other members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan and Multiemployer Plan, if any, Holdings and each other member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC other than PBGC premiums due but not delinquent under Section 4007 of ERISA, and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. All Plans, Benefit Arrangements and Multiemployer Plans, if any, have been administered in accordance with their terms and applicable Law.

Holdings and each other member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans, and Multiemployer Plans, if any. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of Holdings, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of Holdings or any other member of the ERISA Group. To the extent of any Benefit Arrangement, Plan or Multiemployer Plan in place during the term of this Agreement, Holdings and all other members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan and Multiemployer Plan, if any, Holdings and each other member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC other than PBGC premiums due but not delinquent under Section 4007 of ERISA, and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. All Plans, Benefit Arrangements and Multiemployer Plans have been administered in accordance with their terms and applicable Law.

(A) No event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with respect to any Plan, and no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made to any Plan.

(B) Neither Holdings nor any other member of the ERISA Group has incurred or reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither Holdings nor any other member of the ERISA Group has been notified by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been terminated within the meaning of Title IV of ERISA and, to the best knowledge of Holdings, no Multiemployer Plan or Multiple

Employer Plan is reasonably expected to be reorganized or terminated, within the meaning of Title IV of ERISA.

(t) Senior Debt Status . The Obligations of such Borrower under this Agreement and each of the other Loan Documents to which it is a party do rank and will rank at least pari passu in priority of payment with all other Indebtedness of the such Borrower except (i) Indebtedness of such Borrower to the extent secured by Permitted Liens, and (ii) Indebtedness which constitutes a “preferred claim” under Section 9-227 of the Maryland Insurance Law (or any analogous provision of United Kingdom or Bermuda law) in the event of the liquidation, rehabilitation, reorganization, or conservation of the such Borrower. There is no Lien upon or with respect to any of the properties or income of such Borrower which secures indebtedness or other obligations of any Person except for Permitted Liens.

(u) Holdings . Holdings was created on August 21, 2003 for the purpose of holding the capital stock of the Company and its other subsidiaries (but it is recognized that Holdings has the corporate capacity to carry on other business under the objects expressed in its Memorandum of Association).

Section 5.02 Continuation of Representations . Each Borrower makes the representations and warranties in this ARTICLE V on the date hereof and on the Closing Date and each date thereafter on which a Loan is made to such Borrower or a Letter of Credit is issued for the account of such Borrower as provided in and subject to Section 6.01 and Section 6.02.

ARTICLE VI

CONDITIONS OF LENDING

The obligation of each Bank to make Loans hereunder and the obligation of each Issuing Bank to issue Letters of Credit hereunder is subject to the performance by the Borrowers of their Obligations to be performed hereunder at or prior to the occurrence of each such Credit Event, and to the satisfaction of the following further conditions:

Section 6.01 Closing Date . The Closing Date shall occur when the following conditions have been satisfied:

(a) Representations and Warranties True and Complete, No Defaults . The representations and warranties of the Borrowers contained in Article V shall be true, complete, and accurate on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein), and the Borrowers shall have performed and complied with all covenants and conditions hereof and thereof, no Event of Default or Potential Default shall have occurred and be continuing.

(b) Secretary’s Certificate . There shall be delivered to the Agent for the benefit of each Bank certificates dated the Closing Date and signed by the Secretary or an Assistant Secretary of Holdings, the Company, AGRI, AGRO and the UK Borrower certifying as appropriate as to:

(i) resolutions approving all actions taken by Holdings, the Company, AGRI, AGRO and the UK Borrower in connection with this Agreement and the other Loan Documents;

(ii) the names of the officer or officers authorized to sign this Agreement and the other Loan Documents and the true signatures of such officer or officers and specifying certain Authorized Officers of Holdings, the Company, AGRI, AGRO and the UK Borrower for purposes of this Agreement and the true signatures of such officers, on which the Agent and each Bank may conclusively rely; and

(iii) copies of its organizational or constitutional documents, including its certificate or articles of incorporation and bylaws as in effect on the Closing Date, certified as true and correct, together with certificates from the appropriate state officials as to the continued existence and good standing of Holdings, the Company, AGRI, AGRO and the UK Borrower in each jurisdiction where organized to the extent applicable.

(c) Delivery of Notes, Guaranty Agreements, and Loan Request . The Notes, the Guaranty Agreement to be entered into by Holdings, the Guaranty Agreement to be entered into by the Company and the Guaranty Agreement to be entered into by the Material Non-AGC Subsidiaries shall have been duly executed and delivered to the Agent for the benefit of the Banks.

(d) Opinion of Counsel . There shall be delivered to the Agent for the benefit of each Bank party hereto on the Closing Date one or more written opinions of counsel for Holdings, the Company, AGRI, AGRO and the UK Borrower dated the Closing Date and in form and substance satisfactory to the Agent and its counsel:

(i) as to the matters set forth in Exhibit 6.01(d) ; and

(ii) as to such other matters incident to the transactions contemplated herein as the Agent may reasonably request.

(e) Legal Details . All legal details and proceedings in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be in form and substance satisfactory to the Agent and counsel for the Agent, and the Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agent and said counsel, as the Agent or said counsel may reasonably request.

(f) Payment of Fees . The Borrowers shall have paid or caused to be paid to the Agent for itself and for the account of the Banks to the extent not previously paid the Facility Fees, all other fees accrued through the Closing Date and the costs and expenses for which the Agent and the Banks are entitled to be reimbursed.

(g) No Material Adverse Change . There has not occurred a Material Adverse Change since the date of the Historical Statements.

(h) Existing Agreement . The commitments under the Existing Credit Agreement shall have been terminated, all loans thereunder shall have been repaid in full, together with all accrued and unpaid interest thereon, all accrued and unpaid fees thereon shall have been paid in full, and all other amounts then owing pursuant to the Existing Credit Agreement shall have been repaid in full, and the Agent shall have received evidence in form, scope and substance reasonably satisfactory to it that the matters set forth in this Section 6.01(h) have been satisfied at such time.

Section 6.02 Each Credit Event . At the time of each Credit Event, and after giving effect to the proposed extensions of credit: the Closing Date shall have occurred; the representations and warranties of the Borrowers contained in ARTICLE V and in the other Loan Documents and the representations and warranties of each Material Non-AGC Subsidiary contained or incorporated in the Guarantor Joinder given by such Material Non-AGC Subsidiary pursuant to Section 10.18 shall be true on and as of the date of such additional Loan with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein) and the Borrowers shall have performed and complied with all covenants and conditions hereof that are required to be performed or complied with as of the date of such Credit Event and each Material Non-AGC Subsidiary shall have complied with Section 10.18 and all other covenants and conditions that are required to be performed or complied with as of the date of such Loan and which are set forth in or incorporated into the Guarantor Joinder given by such Material Non-AGC Subsidiary pursuant to Section 10.18; no Event of Default or Potential Default shall have occurred and be continuing or shall exist; and the applicable Borrower shall have delivered to the Agent a duly executed and completed Loan Request.

ARTICLE VII

COVENANTS

Section 7.01 Affirmative Covenants . Subject to Section 7.04, each Borrower covenants and agrees (in each case solely on behalf of itself and its Subsidiaries) that, until payment in full of the Loans, and interest thereon, satisfaction of all of the other Obligations under the Loan Documents, expiration of all Letters of Credit and termination of the Commitments, each Borrower shall comply at all times with the following affirmative covenants:

(a) Preservation of Existence, Etc . Holdings shall, and shall cause each of its Material Subsidiaries to, maintain its legal existence as a corporation, limited partnership, or limited liability company and its license or qualification and good standing in each

jurisdiction in which its ownership or lease of property or the nature of its business makes such license or qualification necessary, except as otherwise expressly permitted in Section 7.02(f) [Liquidations, Mergers, Etc.].

(b) Payment of Liabilities, Including Taxes, Etc. Holdings shall, and shall cause each of its Material Subsidiaries to, duly pay and discharge all liabilities to which it is subject or which are asserted against it, promptly as and when the same shall become due and payable, including all taxes, assessments, and governmental charges upon it or any of its properties, assets, income or profits, prior to the date on which penalties attach thereto, except to the extent that such liabilities, including taxes, assessments or charges, are being contested in good faith and by appropriate and lawful proceedings diligently conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made, provided that Holdings will pay, and cause its Material Subsidiaries to pay, all such liabilities forthwith upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor.

(c) Maintenance of Insurance . Holdings shall, and shall cause each of its Material Subsidiaries to, insure its properties and assets against loss or damage by insurable hazards as such assets are commonly insured (including, to the extent applicable to the respective industry of Holdings or any Subsidiary thereof, fire, extended coverage, property damage, workers’ compensation, public liability, and business interruption insurance) and against other risks (including errors and omissions) in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self-insurance to the extent customary.

(d) Maintenance of Properties and Leases . Holdings shall, and shall cause each of its Material Subsidiaries to, maintain in good repair, working order, and condition (ordinary wear and tear excepted) in accordance with the general practice of other businesses of similar character and size, all of those properties useful or necessary to its business, and from time to time Holdings will make or cause to be made all appropriate repairs, renewals, or replacements thereof.

(e) Maintenance of Licenses, Etc. Holdings shall, and shall cause each of its Material Subsidiaries to, maintain in full force and effect all licenses, franchises, permits, rights, and other authorizations necessary for the ownership and operation of its properties and business if the failure so to maintain the same would constitute a Material Adverse Change.

(f) Visitation Rights . Holdings shall, and shall cause each of its Material Subsidiaries to, permit any of the officers or authorized employees or representatives of the Agent or any Bank to visit and inspect any of its properties and to examine and make excerpts from its books and records and discuss its business affairs, finances and accounts with its officers, all in such detail and at such times and as often as the Agent or any such Bank may reasonably request and at the pro rata expense of the Banks (if requested by the Required Banks), the requesting Bank or, if the request has not come from any Bank, the Agent, provided that the Agent or such Bank shall provide the Company with

reasonable notice prior to any visit or inspection, provided further no Bank shall be permitted more than one visit per one year period and provided further that during the continuation of any Event of Default, (i) the limitation on visits in the immediately preceding proviso shall not apply and (ii) all such visits and inspections by Agent and or Bank shall be at the expense of the Borrowers. In the event any Bank desires to conduct a visitation or inspection as contemplated hereby of Holdings or any Subsidiary, such Bank shall make a reasonable effort to conduct such visitation and inspection contemporaneously with any visitation or inspection to be performed by the Agent.

(g) Keeping of Records and Books of Account . Holdings shall, and shall cause each Subsidiary of Holdings to, maintain and keep proper books of record and account which enable Holdings and its Material Subsidiaries to issue financial statements in accordance with GAAP and as otherwise required by applicable Laws of any Official Body having jurisdiction over Holdings or any Subsidiary of Holdings, and in which full, true and correct entries shall be made in all material respects of all its dealings and business and financial affairs.

(h) Plans and Benefit Arrangements . Holdings shall, and shall cause each other member of the ERISA Group to, comply with ERISA, the Internal Revenue Code and other Laws applicable to any Plans and Benefit Arrangements except where such failure, alone or in conjunction with any other failure, would not result in a Material Adverse Change. Without limiting the generality of the foregoing, Holdings shall cause all of its Plans and all Plans maintained by any member of the ERISA Group, if any, to be funded in accordance with the minimum funding requirements of ERISA and, to the extent applicable shall make, and cause each member of the ERISA Group to make, in a timely manner, all contributions due to Plans, Benefit Arrangements and Multiemployer Plans.

(i) Compliance With Laws . Holdings shall, and shall cause each of its Material Subsidiaries to, comply with all applicable Laws in all respects, provided that it shall not be deemed to be a violation of this Section 7.01(i) if any failure to comply with any Law would not result in fines, penalties, remediation costs, other similar liabilities or injunctive relief which in the aggregate would constitute a Material Adverse Change.

(j) Use of Proceeds . Each Borrower will use the proceeds of the Loans and Letters of Credit only for the general corporate purposes and working capital needs of the such Borrower. No Borrower shall use the proceeds of the Loans or Letters of Credit for any purposes which contravenes any applicable Law or any provision hereof.

(k) Senior Debt Status . Holdings shall ensure that the Obligations of Holdings and any Material Subsidiary under this Agreement, a Guarantor Joinder, any Guaranty Agreement, and each of the other Loan Documents to which it is a party shall at all times rank at least pari passu in priority of payment with all other senior unsecured Indebtedness of Holdings or such Material Subsidiary (except to the extent of any Indebtedness which has a “preferred” status under any Law governing the bankruptcy, liquidation, insolvency, rehabilitation, reorganization, conservation, or like circumstance of Holdings or such Material Subsidiary) and no such other senior unsecured

Indebtedness of Holdings or such Material Subsidiary shall at any time be governed by or subject to covenants, defaults, or other provisions that are more restrictive on Holdings or such Material Subsidiary than those set forth herein; and provided that if payment of any present or future Indebtedness of Holdings or any Material Subsidiary, except Indebtedness of Holdings or any Material Subsidiary to the extent secured by Permitted Liens, shall at any time hereafter become secured by any Lien on any property, Holdings or such Material Subsidiary shall secure payment of the Obligations with a Lien of like priority on the same or substantially similar property of the same or greater value (but, in any event, such Lien shall secure an amount of Obligations not to exceed the amount secured by the Lien given to secure payment of such other Indebtedness).

(l) Company Consolidated Assets . If at any time the Company Consolidated Assets is less than $1,200,000,000, within 15 days following such occurrence Holdings will enter into a Guaranty Agreement in form and substance satisfactory to the Agent pursuant to which Holdings will unconditionally and irrevocably guaranty all Obligations of the Company and the UK Borrower.

Section 7.02 Negative Covenants . Subject to Section 7.04, each Borrower covenants and agrees (in each case on behalf of itself and its Subsidiaries) that until payment in full of the Loans and interest thereon, satisfaction of all of the other Obligations hereunder, expiration of all Letters of Credit and termination of the Commitments, such Borrower shall comply with the following negative covenants:

(a) Indebtedness . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time create, incur, assume, or suffer to exist any Indebtedness, except:

(i) Indebtedness under the Loan Documents;

(ii) Existing Indebtedness as set forth on Schedule 7.02(a) (including any extensions or renewals thereof, provided there is no increase in the amount thereof or other significant change in the terms thereof unless otherwise specified on Schedule 7.02(a) ;

(iii) Capitalized leases;

(iv) Indebtedness secured by Purchase Money Security Interests;

(v) Indebtedness of Holdings or any Material Subsidiary to the Company or any other Material Subsidiary, or any of their respective Affiliates;

(vi) Any Interest Rate Hedge;

(vii) Any Guaranties permitted pursuant to Section 7.02(c);

(viii) Other Indebtedness of AGRI or FSA which is limited recourse to AGRI or FSA, as the case may be, and in the nature (as to its purpose and limited recourse structure) of that existing Indebtedness of AGRI in favor of Deutsche

Bank shown on Exhibit 7.02(a) and Indebtedness of FSA under the $350,000,000 soft capital facility provided pursuant to the Third Amended and Restated Credit Agreement, dated as of April 30, 2005 (as amended) among FSA, FSA Insurance Company, various banks and Bayerische Landesbank acting through its New York Branch individually and as Agent (all such Indebtedness under this Section 7.02(a)(viii) being “Soft Capital”);

(ix) Other Indebtedness of Material Subsidiaries which are regulated insurance companies consisting of letters of credit, trust accounts and similar collateral support required in the ordinary course of business either by statute or by rating agencies to support the insurance and/or reinsurance businesses of such Material Subsidiaries;

(x) [Intentionally Omitted];

(xi) Other Indebtedness of Holdings, US Holdco, AGRI, AGRO or FSAH from time to time, and Indebtedness constituting Hybrid Securities from time to time, in each case so long as such Indebtedness is permitted at such time by the other provisions of this Agreement;

(xii) Any obligations pursuant to the Contingent Capital Facility; and

(xiii) Indebtedness of (A) FSAH existing at the time of consummation of the FSAH Acquisition in an aggregate face amount of up to $430,000,000 and (B) of FSA under the Strip Coverage Liquidity Facility.

(b) Liens . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time create, incur, assume, or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired, or agree or become liable to do so, except Permitted Liens.

(c) Guaranties . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time, directly or indirectly, become or be liable in respect of any Guaranty, or assume, guaranty, become surety for, endorse or otherwise agree, become or remain directly or contingently liable upon or with respect to any obligation or liability of any other Person, except for Guaranties of that Indebtedness of Holdings and the Material Subsidiaries, Guaranties of operating leases of Holdings and the Material Subsidiaries permitted hereunder and (the following, collectively, “Insurance-Related Guaranties”): (i) reinsurance and insurance agreements and policies and Guaranties which Holdings or any Material Subsidiary is authorized or licensed to provide in the ordinary course of its reinsurance or insurance business, (ii) Guaranties given by the Company to support credit derivative transactions entered into by AG Financial Products Inc., a Delaware corporation and Affiliate of the Company (“Credit Derivative Guaranties”), (iii) Guaranties given by the Company to support the obligations of any Subsidiary of Holdings pursuant to Guaranteed Investment Contracts issued by such Subsidiary; (iv) keepwell and similar agreements between and among various Subsidiaries of Holdings, the purpose and effect of which is to transfer the financial strength ratings of either of the

Company or Assured Guaranty Re Ltd. to its Subsidiaries, and (v) letters of credit, trust accounts or similar collateral support procured by Subsidiaries of Holdings which are required in the ordinary course of business either by statute or by rating agencies in order to support the respective reinsurance or insurance business of such Subsidiaries.

(d) Loans and Investments . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time make or suffer to remain outstanding any loan or advance to, or purchase, acquire or own any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) or limited liability company interest in, or any other investment or interest in, or make any capital contribution to, any other Person, or agree, become, or remain liable to do any of the foregoing, except:

(i) trade credit extended on usual and customary terms in the ordinary course of business;

(ii) advances to employees to meet expenses incurred by such employees in the ordinary course of business;

(iii) Permitted Investments and Permitted Acquisitions; and

(iv) loans, advances and investments in Holdings and any Subsidiary of Holdings; provided that the Company may not make any loans, advances and investments in Holdings or any Subsidiary of Holdings which is not a Subsidiary of the Company (other than any such Subsidiary of Holdings which issues or proposes to issue Guaranteed Investment Contracts).

(e) Dividends and Related Distributions . Holdings shall not, and shall not permit any of its Material Subsidiaries to, make or pay, or agree to become or remain liable to make or pay, any dividend or other distribution of any nature (whether in cash, property, securities or otherwise) on account of or in respect of its shares of capital stock, partnership interests, or limited liability company interests or on account of the purchase, redemption, retirement, or acquisition of its shares of capital stock (or warrants, options or rights therefor), partnership interests or limited liability company interests, except (i) dividends or other distributions payable to Holdings or any Material Subsidiary, (ii) so long as there shall exist no Potential Default or Event of Default (both before and after giving effect to the payment thereof), dividends payable by Holdings, and (iii) so long as there shall exist no Potential Default or Event of Default (both before and after giving effect to the payment thereof), the repurchase of shares of Holdings.

(f) Liquidations, Mergers, Consolidations, Acquisitions . Holdings shall not, and shall not permit any of its Material Subsidiaries to, dissolve, liquidate, or wind-up its affairs, or become a party to any amalgamation, merger or consolidation, or acquire by purchase, lease, or otherwise all or substantially all of the assets or capital stock of or other ownership interest in any other Person, provided that

(1) any Material Subsidiary may consolidate, amalgamate or merge into Holdings or any other Material Subsidiary provided that the Company may not merge, amalgamate or consolidate with Holdings, and the Company may only

merge, amalgamate or consolidate with another Material Subsidiary if the Company is the surviving entity of such merger, amalgamation or consolidation; and

(2) Holdings or any Material Subsidiary may acquire, whether by purchase, by amalgamation or by merger, (A) all of the ownership interests of another Person or (B) substantially all of the assets of another Person or of a business or division of another Person (each a “Permitted Acquisition”), provided that each of the following requirements is met:

(i) if Holdings or any Material Subsidiary is acquiring the ownership interests in such Person and such Person meets the criteria for a Material Subsidiary set forth in the definition of such term at Section 1.01, such Person shall execute a Guarantor Joinder and join this Agreement as a Guarantor pursuant to Section 10.18 [Joinder of Guarantors] on or before the date of such Permitted Acquisition;

(ii) the board of directors or other equivalent governing body of such Person shall have approved such Permitted Acquisition and Holdings or the relevant Material Subsidiary shall have delivered to the Banks written evidence of such approval of the board of directors (or equivalent body) of such Person for such Permitted Acquisition;

(iii) the business acquired, or the business conducted by the Person whose ownership interests are being acquired, as applicable, shall be substantially the same as, or otherwise complementary or related to, one or more lines of business conducted by Holdings or any Material Subsidiary, or otherwise incidental to the business of a financial services company, and shall comply with Section 7.02(j) [Continuation of or Change in Business];

(iv) no Potential Default or Event of Default shall exist immediately prior to and after giving effect to such Permitted Acquisition; and

(v) upon the reasonable request of Agent, Holdings or the relevant Material Subsidiary shall deliver to the Agent at least five (5) Business Days before such Permitted Acquisition such information about such Person or its assets as Agent may reasonably require.

(g) Dispositions of Assets or Subsidiaries . Holdings shall not, and shall not permit any of its Material Subsidiaries to, sell, convey, assign, lease, abandon, or otherwise transfer or dispose of, voluntarily or involuntarily, any of its properties or assets, tangible or intangible (including by sale, assignment, discount, or other disposition of accounts, contract rights, chattel paper, equipment, or general intangibles with or without recourse or of capital stock, shares of beneficial interest, partnership interests or limited liability company interests of a Subsidiary of Holdings), except:

(i) transactions involving the sale of inventory, if any, in the ordinary course of business;

(ii) any sale, transfer, or lease of assets, including any sale of investment assets, in the ordinary course of business which are no longer necessary or required in the conduct of Holdings’ or such Subsidiary’s business or which are incidental to the management of Holdings’ or its Subsidiary’s investment portfolio in a manner consistent with past practices;

(iii) any sale, transfer, lease or assignment of assets or novation of rights by any wholly owned Subsidiary of Holdings to Holdings or any Material Subsidiary;

(iv) any sale, transfer or lease of assets in the ordinary course of business which are replaced by reasonably equivalent substitute assets; or

(v) any sale, transfer or lease of assets, other than those specifically excepted pursuant to clauses (i) through (iv) above, provided that (A) at the time of any disposition, no Event of Default shall exist or shall result from such disposition, and (B) the aggregate value of all assets so sold by (x) Holdings shall not exceed in any fiscal year fifteen percent (15%) of the consolidated tangible net worth of Holdings and its Subsidiaries or (y) any Material Subsidiary in any fiscal year shall not exceed a material portion of such Material Subsidiary’s tangible net worth.

(h) Affiliate Transactions . Holdings shall not, and shall not permit any of its Material Subsidiaries to, enter into or carry out any transaction (including purchasing property or services from or selling property or services to any Affiliate of Holdings or any Material Subsidiary or other Person) unless such transaction is not otherwise prohibited by this Agreement, is entered into upon fair and reasonable arm’s-length terms and conditions which are fully disclosed to the Agent, and is in accordance with all applicable Law and accounting standards.

(i) Subsidiaries, Partnerships and Joint Ventures . Holdings shall not, and shall not permit any of its Material Subsidiaries to, own, acquire, or create directly or indirectly any Material Non-AGC Subsidiary other than Material Non-AGC Subsidiaries each of which has joined this Agreement as a Guarantor at any time after the Closing Date in accordance with Section 10.18 [Joinder of Guarantors]. Each of Holdings and its Material Subsidiaries shall not become or agree to become (1) a general or limited partner in any general or limited partnership, except that Holdings or any of its Material Subsidiaries may be general or limited partners in any other Material Subsidiary, (2) a member or manager of, or hold a limited liability company interest in, a limited liability company, except that Holdings or any of its Material Subsidiaries may be members or managers of, or hold limited liability company interests in, other Material Subsidiaries, or (3) a joint venturer or hold a joint venture interest in any joint venture except that Holdings or any of its Material Subsidiaries may be a party to a joint venture (A) that

would not otherwise be a Material Subsidiary were it a Subsidiary of Holdings, and (B) as to which neither Holdings nor any Material Subsidiary is directly or indirectly jointly or severally liable for any act or omission of the joint venture beyond the amount of its investment therein.

(j) Continuation of or Change in Business . Holdings shall not, and shall not permit any of its Material Subsidiaries to, make a material change in the nature of its business as substantially conducted and operated by Holdings or such Subsidiary as of the Closing Date; provided , however , that (A) it shall not be a material change hereunder for Holdings or any of its Material Subsidiaries to alter the concentration percentages of products offered or business conducted as of the Closing Date, nor to enter into any business incidental to the offering of such products or the conduct of such business and it shall not be a material change hereunder for a Material Subsidiary to engage in any business incidental to the conduct of a financial services company and (B) the parties hereto hereby acknowledge and agree that the issuance of Guaranteed Investment Contracts is a business incidental to the conduct of a financial services company.

(k) Plans and Benefit Arrangements . Holdings shall not, and shall not permit any of its Material Subsidiaries to, engage in a Prohibited Transaction with any Plan, Benefit Arrangement, or Multiemployer Plan which, alone or in conjunction with any other circumstance or set of circumstances, would result in a material liability under ERISA or otherwise violate ERISA in a material respect.

(l) Fiscal Year . Holdings shall not, and shall not permit any Subsidiary of Holdings to, change its fiscal year from the twelve-month period beginning January 1 and ending December 31 unless Holdings has (i) provided thirty (30) days’ prior written notice to the Agent and the Banks of the proposed change accompanied by an explanation in reasonable detail of the effect thereof on Holdings and its Subsidiaries in general and on Holdings’ or its Material Subsidiary’s financial reporting and covenant compliance hereunder, and (ii) agreed to amend the covenants contained herein (including the financial covenants set forth below) if reasonably requested by the Agent and the Required Banks to maintain the continuity of the such covenants.

(m) Minimum Statutory Capital . The Company shall not at any time permit the Statutory Capital of the Company to be less than seventy-five percent (75%) of the Statutory Capital of the Company as of the most recent fiscal quarter of the Company prior to the Closing Date.

(n) Maximum Debt to Total Capitalization Ratio (Holdings) . Holdings shall maintain at all times a ratio of Consolidated Debt to Total Capitalization of not more than 0.30 to 1.0.

(o) Minimum Net Worth . Holdings shall not permit at any time its Consolidated Net Worth to be less than seventy-five percent (75%) of the Consolidated Net Worth of Holdings as of the most recent fiscal quarter of Holdings prior to the Closing Date; provided that on and after the date of consummation of the FSAH Acquisition, Holdings shall not permit at any time its Consolidated Net Worth to be less

than seventy-five percent (75%) of the Consolidated Net Worth of Holdings as of the last day of the most recent fiscal quarter of Holdings ended prior to the date of consummation of such acquisition determined on a pro forma basis as if the FSAH Acquisition had been consummated on such date.

Section 7.03 Reporting Requirements . Subject to Section 7.04, each Borrower covenants and agrees (in each case solely on behalf of itself and its Subsidiaries) that until payment in full of the Loans and interest thereon, satisfaction of all other Obligations hereunder and under the other Loan Documents, expiration of all Letters of Credit and termination of the Commitments, Holdings will furnish or cause to be furnished to the Agent (which shall promptly furnish the same to each of the Banks):

(a) Quarterly Financial Statements . As soon as available and in any event within forty-five (45) calendar days after the end of each of the first three fiscal quarters in each fiscal year, the Form 10-Q of Holdings as filed with the SEC and two sets of financial statements of Holdings and the Company, each consisting of a consolidated balance sheet as of the end of such fiscal quarter and related consolidated statements of income, stockholders’ equity, and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified (subject to normal year-end audit adjustments) by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of Holdings or the Company, as the case may be, as having been prepared as the set of financial statements of Holdings in accordance with GAAP, consistently applied, and as to the set of financial statements of the Company as having been prepared in accordance with statutory accounting principles required by the State of Maryland.

(b) Annual Financial Statements . As soon as available and in any event within ninety (90) days after the end of each fiscal year of Holdings, the Form 10-K of Holdings as filed with the SEC and two sets of financial statements of Holdings and the Company, each consisting of a consolidated balance sheet as of the end of such fiscal year, and related consolidated statements of income, stockholders’ equity, and cash flows for the fiscal year then ended, all in reasonable detail with the set relating to Holdings being prepared in accordance with GAAP, consistently applied, and the set relating to the Company being prepared in accordance with statutory accounting principles required by the State of Maryland, and, in each case, certified by independent certified public accountants of nationally recognized standing satisfactory to the Agent. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall not indicate the occurrence or existence of any event, condition, or contingency which would materially impair the prospect of payment or performance of any covenant, agreement, or duty of Holdings and/or any Material Subsidiary under any of the Loan Documents.

(c) Certificate of the Company . Concurrently with the financial statements of Holdings and the Company furnished to the Agent and to the Banks pursuant to Section 7.03(a) [Quarterly Financial Statements] and Section 7.03(b) [Annual Financial Statements], a certificate (each a “Compliance Certificate”) of each of Holdings and the

Company signed by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of Holdings or the Company, in the form of Exhibit 7.03(c) , to the effect that, except as described pursuant to Section 7.03(d) [Notice of Default], (i) the representations and warranties of the Borrowers contained in ARTICLE V and in the other Loan Documents and the representations and warranties of each Material Non-AGC Subsidiary, if any, contained or incorporated in the Guarantor Joinder given by such Non-AGC Material Subsidiary pursuant to Section 10.18 are true on and as of the date of such certificate with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time) and each Borrower has performed and complied with all covenants and conditions hereof and each Material Subsidiary, if any, shall have complied with all covenants and conditions of or incorporated into the Guarantor Joinder given by such Non-AGC Material Subsidiary pursuant to Section 10.18, (ii) no Event of Default or Potential Default exists and is continuing on the date of such certificate, and (iii) containing calculations in sufficient detail to demonstrate compliance as of the date of such financial statements with all applicable financial covenants contained in Section 7.02 [Negative Covenants].

(d) Notice of Default . Promptly after any officer of a Borrower has learned of: (i) the occurrence of an Event of Default or Potential Default, a certificate signed by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of such Borrower setting forth the details of such Event of Default or Potential Default and the action which such Borrower proposes to take with respect thereto, or (ii) the creation or acquisition of a Material Subsidiary (or the existence of a Material Non-AGC Subsidiary other than AGRI or AGRO which has not executed and delivered a Guaranty Agreement to Agent for the benefit of the Banks), a certificate signed by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of Holdings setting forth the legal name, jurisdiction of organization, and such other relevant information reasonably requested by Agent.

(e) Off-Balance Sheet Financing . None of Holdings or any of its Material Subsidiaries shall engage in any off-balance sheet transaction ( i.e. , the liabilities in respect of which do not appear on the liability side of the balance sheet) providing the functional equivalent of material Indebtedness or otherwise providing for a material liability of Holdings or any of its Material Subsidiaries (collectively, “Off-Balance Sheet Transactions”), except the Contingent Capital Facility and such other Off-Balance Sheet Transactions as are fully disclosed to the Banks and Agent prior to their creation.

(f) Notice of Litigation . Promptly after the commencement thereof, notice of all actions, suits, proceedings or investigations before or by any Official Body or any other Person against Holdings or any Material Subsidiary of Holdings, which involve a claim or series of claims in excess of $20,000,000 or which, if adversely determined, would constitute a Material Adverse Change.

(g) Notice of Change in Insurer Financial Strength Rating . Within two (2) Business Days after Standard & Poor’s or Moody’s announces a change in the

Company’s Insurer Financial Strength Rating, notice of such change. Holdings will deliver together with such notice a copy of any written notification which the Company received from the applicable rating agency regarding such change of its Insurer Financial Strength Rating.

(h) Sale of Assets . At least fifteen (15) calendar days prior thereto, notice with respect to any proposed sale or transfer of material assets pursuant to Section 7.02(g)(v).

(i) Budgets, Other Reports and Information . Promptly upon their becoming available to Holdings or the Company, such reports and information as any of the Banks may from time to time reasonably request. Each Borrower shall also notify the Banks and Agent promptly of the enactment, enforcement, or adoption of any Law which may result in a Material Adverse Change with respect to such Borrower.

Section 7.04 Bermuda Law Event . To the extent that the making by Holdings, the Company or any Guarantor of any covenant set forth in Sections 7.01, 7.02 or 7.03 or in any of the Loan Documents is for such Person not permitted by, or is unlawful under or is in violation of, any Bermuda Law pertaining to fetters on statutory powers, then such covenant shall be deemed not made by nor applicable to such Person, but if such Person shall take or fail to take any action which would have breached such covenant had the same been applicable to such Person, the action or failure to take action shall constitute a “Bermuda Law Event”.

ARTICLE VIII

DEFAULT

Section 8.01 Events of Default . An Event of Default shall mean the occurrence or existence of any one or more of the following events or conditions (whatever the reason therefor and whether voluntary, involuntary, or effected by operation of Law):

(a) Payments Under Loan Documents . Any Borrower shall fail to pay (i) any principal of any Loan (including scheduled installments or mandatory prepayments, if any, or the payment due at maturity) when such principal is due hereunder or any reimbursement obligation in respect of any Letter of Credit when due hereunder or (ii) any interest on any Loan or any other amount owing hereunder or under the other Loan Documents within five (5) Business Days after such interest or other amount becomes due in accordance with the terms hereof or thereof;

(b) Breach of Warranty . Any representation or warranty made at any time by any of Holdings and the Material Subsidiaries herein or by any of Holdings and the Material Subsidiaries in any other Loan Document, or in any certificate, other instrument, or statement furnished by Holdings or a Material Subsidiary pursuant to the provisions hereof or thereof, shall prove to have been false or misleading in any material respect as of the time it was made or furnished;

(c) Breach of Negative Covenants or Visitation Rights . Holdings or any Material Subsidiary shall default in the observance or performance of any covenant

contained in Section 7.02 [Negative Covenants] or Section 7.01(l) or shall default for a period of ten (10) days or more in the observance or performance of any covenant contained in Section 7.01(f);

(d) Breach of Other Covenants . Holdings or any Material Subsidiary shall default in the observance or performance of any other covenant, condition, or provision hereof or of any other Loan Document and such default shall continue unremedied for a period of thirty (30) days (such grace period to be applicable only in the event such default can be remedied by corrective action);

(e) Defaults in Other Agreements or Indebtedness . A default or event of default shall occur at any time under the terms of any other agreement involving borrowed money or the extension of credit or any other Indebtedness under which Holdings or any Material Subsidiary of Holdings may be obligated as a borrower or guarantor in excess of $20,000,000 in the aggregate, and either (1) such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any Indebtedness when due (whether at stated maturity, by acceleration or otherwise) or (2) such breach or default causes (or permits the holder or holders of such Indebtedness to cause) the acceleration of any Indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend;

(f) Final Judgments or Orders . Any final judgments or orders for the payment of money which results in an uninsured liability to pay in excess of $20,000,000 in the aggregate shall be entered against Holdings or any Material Subsidiary by a court having jurisdiction in the premises, which judgment is not discharged, vacated, bonded, or stayed pending appeal within a period of forty-five (45) days from the date of entry;

(g) Loan Document Unenforceable . Any of the Loan Documents shall cease to be legal, valid, and binding agreements enforceable against the party executing the same or such party’s successors and assigns (as permitted under the Loan Documents) in accordance with the respective terms thereof or shall in any way be terminated (except in accordance with its terms) or become or be declared stayed, ineffective, or inoperative or shall cease to give or provide the respective Liens or security interests intended to be created thereby; provided , however , if any of the foregoing is a result of an involuntary proceeding of the type described in Section 8.01(m), such proceeding has not been contested by the affected party or has not been dismissed after the passage of more than sixty (60) days;

(h) Losses; Proceedings Against Assets . Any of Holdings’ or the Company’s assets having an aggregate value (reasonably determined) in excess of five (5%) of the tangible net worth of Holdings and its Subsidiaries or the Company and the Subsidiaries, as the case may be, or any of its Material Subsidiaries’ assets having an aggregate value (reasonably determined) in excess of a material amount of such Material Subsidiary’s tangible net worth, are attached, seized, levied upon or subjected to a writ or distress warrant; or such come within the possession of any receiver, trustee, custodian or

assignee for the benefit of creditors and the same is not cured within sixty (60) days thereafter;

(i) Notice of Lien or Assessment . A notice of Lien or assessment in excess of $20,000,000 which is not a Permitted Lien is filed of record with respect to all or any part of the Holdings’ or any of its Material Subsidiaries’ assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or other governmental agency, including the PBGC, or any taxes or debts owing at any time or times hereafter to any one of these becomes payable and the same is not paid within thirty (30) days after the same becomes payable;

(j) Insolvency . Holdings or any Material Subsidiary of Holdings ceases to be solvent or admits in writing its inability to pay its debts as they mature;

(k) Events Relating to Plans and Benefit Arrangements . Any of the following occurs: (i) any Reportable Event, which the Agent determines in good faith constitutes grounds for the termination of any Plan by the PBGC or the appointment of a trustee to administer or liquidate any Plan, shall have occurred and be continuing; (ii) proceedings shall have been instituted or other action taken to terminate any Plan, or a termination notice shall have been filed with respect to any Plan; (iii) a trustee shall be appointed to administer or liquidate any Plan; (iv) the PBGC shall give notice of its intent to institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer or liquidate any Plan; and, in the case of the occurrence of (i), (ii), (iii) or (iv) above, the Agent determines in good faith that the amount of Holdings’ liability is likely to exceed 10% of its Consolidated Net Worth; (v) Holdings or any member of the ERISA Group shall fail to make any contributions when due to a Plan or a Multiemployer Plan; (vi) Holdings or any other member of the ERISA Group shall make any amendment to a Plan with respect to which security is required under Section 307 of ERISA; (vii) Holdings or any other member of the ERISA Group shall withdraw completely or partially from a Multiemployer Plan; (viii) Holdings or any other member of the ERISA Group shall withdraw (or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any applicable Law is adopted, changed or interpreted by any Official Body with respect to or otherwise affecting one or more Plans, Multiemployer Plans or Benefit Arrangements and, with respect to any of the events specified in (v), (vi), (vii), (viii) or (ix), the Agent determines in good faith that any such occurrence would be reasonably likely to materially and adversely affect the total enterprise represented by Holdings and the other members of the ERISA Group;

(l) Change of Control . (i) Any person or group of persons (within the meaning of Sections 13(d) or 14(a) of the Securities Exchange Act of 1934, as amended), other than ACE or an Affiliate of ACE, shall have acquired beneficial ownership of (within the meaning of Rule 13d-3 promulgated by the SEC under said Act) 30% or more of the voting capital stock of Holdings; or (ii) within a period of twelve (12) consecutive calendar months, individuals who were directors of Holdings on the first day of such period and individuals approved by the existing board of directors of Holdings shall cease to constitute a majority of the board of directors of Holdings; or (iii) the Company, AGRI or AGRO shall cease to be a wholly-owned Subsidiary of Holdings; provided , however ,

any issuance of preferred stock in connection with the Contingent Capital Facility shall not be a violation of this Section 8.01(l) and shall not be deemed an Event of Default; or (iv) the UK Borrower shall cease to be a subsidiary of the Company at any time when any Loans are outstanding to the UK Borrower or, Letters of Credit have been issued for the account of the UK Borrower;

(m) Involuntary Proceedings . A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of Holdings or any Material Subsidiary of Holdings in an involuntary case under any applicable bankruptcy, insolvency, reorganization, or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, or conservator (or similar official) of Holdings or any Material Subsidiary of Holdings or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of sixty (60) consecutive days or such court shall enter a decree or order granting any of the relief sought in such proceeding;

(n) Voluntary Proceedings . Holdings or any Material Subsidiary of Holdings shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization, or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or conservator (or other similar official) of itself or for any substantial part of its property or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing; or

(o) Bermuda Law Event . A Bermuda Law Event shall occur and be continuing, provided that any grace period provided under the provisions of this Section 8 or otherwise under this Agreement or under the other Loan Documents applicable to an equivalent breach of covenant under Section 7 shall apply to this Section 8.01(o).

Section 8.02 Consequences of Event of Default . (a) Events of Default Other Than Bankruptcy, Insolvency or Reorganization Proceedings . If an Event of Default or Potential Default specified under Section 8.01(a) through Section 8.01(l) or Section 8.01(o) shall occur and be continuing, the Banks, the Issuing Banks and the Agent shall be under no further obligation to make Revolving Credit Loans or Bid Loans or issue Letters of Credit, as the case may be, and if any such Event of Default shall occur and be continuing, the Agent may, and upon the request of the Required Banks, shall by written notice to the Borrowers, take any of the following actions: (i) terminate the Commitments and thereupon the Commitments shall be terminated and of no further force or effect, (ii) terminate any Letter of Credit which may be terminated in accordance with its terms, (iii) declare the unpaid principal amount of the Revolving Credit Notes and Bid Notes then outstanding and all interest accrued thereon, any unpaid fees, and all other Indebtedness of the Borrowers to the Banks or the Issuing Banks hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable to the Agent for the benefit of each Bank without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly

waived or (iv) require the respective Borrowers to cash collateralize all Letters of Credit issued to the account of such Borrower; and

(b) Bankruptcy, Insolvency or Reorganization Proceedings . If an Event of Default specified under Section 8.01(m) [Involuntary Proceedings] or Section 8.01(n) [Voluntary Proceedings] shall occur, the Commitments shall automatically terminate and be of no further force and effect, the Banks and the Issuing Banks shall be under no further obligations to make Revolving Credit Loans, Bid Loans, or issue Letters of Credit hereunder and the unpaid principal amount of the Loans then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrowers to the Banks or the Issuing Bank hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; and

(c) Set-off . If an Event of Default shall occur and be continuing, any Bank or any Issuing Bank to whom any Obligation is owed by any Borrower or any Material Subsidiary hereunder or under any other Loan Document or any participant of such Bank or Issuing Bank which has agreed in writing to be bound by the provisions of Section 9.13 [Equalization of Banks] and any branch, Subsidiary, or Affiliate of such Bank or participant anywhere shall have the right, in addition to all other rights and remedies available to it, without notice to any Borrower or any Material Subsidiary, to set-off against and apply to the then unpaid balance of all the Loans and all other Obligations hereunder or under any other Loan Document any debt owing to, and any other funds held in any manner for the account of, such Borrower or such Material Subsidiary by such Bank or participant or by such branch, Subsidiary or Affiliate, including all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by such Borrower or such Material Subsidiary for its own account (but not including funds of others held in custodian or trust accounts maintained by any Borrower or any of its Material Subsidiaries) with such Bank or participant or such branch, Subsidiary, or Affiliate. Such right shall exist whether or not any Bank or the Agent shall have made any demand under this Agreement or any other Loan Document, whether or not such debt owing to or funds held for the account of such Borrower or such Material Subsidiary is or are matured or unmatured and regardless of the existence or adequacy of any Guaranty or any other security, right, or remedy available to any Bank or the Agent; and

(d) Suits, Actions, Proceedings . If an Event of Default shall occur and be continuing, and whether or not the Agent shall have accelerated the maturity of Committed Loans pursuant to any of the foregoing provisions of this Section 8.02, the Agent or any Bank or Issuing Bank, upon the request or consent of the Required Banks, may proceed to protect and enforce the Agent’s or any one or more Banks’ or Issuing Banks’ rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the other Loan Documents, including as permitted by applicable Law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Agent, such Bank or such Issuing Bank; and

(e) Application of Proceeds . From and after the date on which the Agent has taken any action pursuant to this Section 8.02 and until all Obligations have been paid in full,

any and all proceeds received by the Agent from the exercise of any remedy by the Agent, shall be applied as follows:

(A) first, to reimburse the Agent, the Banks and the Issuing Banks for out-of-pocket costs, expenses and disbursements, including reasonable attorneys’ fees and legal expenses, incurred by the Agent, the Banks or the Issuing Banks in connection with collection of any Obligations under any of the Loan Documents;

(B) second, to the repayment of all Indebtedness then due and unpaid of any Borrower or any Material Subsidiary to the Banks or the Issuing Banks incurred under this Agreement or any of the other Loan Documents, with such repayments to be applied in the following order: (i) interest, (ii) principal, (iii) fees and (iv) expenses and other amounts owing to the Banks; and

(f) Other Rights and Remedies . In addition to all of the rights and remedies contained in this Agreement or in any of the other Loan Documents, the Agent shall have all of the rights and remedies under applicable Law, all of which rights and remedies shall be cumulative and non-exclusive, to the extent permitted by Law. The Agent may, and upon the request of the Required Banks shall, exercise all post-default rights granted to the Agent, the Banks and the Issuing Banks under the Loan Documents or applicable Law.

Section 8.03 Right of Competitive Bid Loan Banks . If any Event of Default shall occur and be continuing, the Banks which have any Bid Loans then outstanding to the Borrowers (the “Bid Loan Banks”) shall not be entitled to accelerate payment of the Bid Loans or to exercise any right or remedy related to the collection of the Bid Loans until the Commitments shall be terminated hereunder pursuant to Section 8.02. Upon such a termination of the Commitments: (i) references to Revolving Credit Loans in Section 8.02 shall be deemed to apply also to the Bid Loans and the Bid Loan Banks shall be entitled to all enforcement rights given to a holder of a Revolving Credit Loan in Section 8.02, and (ii) the definition of Required Banks shall be changed as provided in Section 1.01 so that each Bank shall have voting rights hereunder in proportion to its share of the total Loans outstanding.

ARTICLE IX

THE AGENT

Section 9.01 Appointment . Each Bank hereby irrevocably designates, appoints and authorizes ABN AMRO Bank N.V. to act as Agent for such Bank under this Agreement and to execute and deliver or accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to herein, and to exercise such powers and to perform such duties hereunder as are specifically delegated to or required of the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. ABN AMRO Bank N.V. agrees to act as the Agent on behalf of the Banks to the extent provided in this Agreement.

Section 9.02 Delegation of Duties . The Agent may perform any of its duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of its duties as Agent) and, subject to Section 9.05 [Reimbursement of Agent by Borrower, Etc.] and Section 9.06, shall be entitled to engage and pay for the advice or services of any attorneys, accountants or other experts concerning all matters pertaining to its duties hereunder and to rely upon any advice so obtained.

Section 9.03 Nature of Duties; Independent Credit Investigation . The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement a fiduciary or trust relationship in respect of any Bank; and nothing in this Agreement, expressed or implied, is intended to or shall be construed as to impose upon the Agent any obligations in respect of this Agreement except as expressly set forth herein. Without limiting the generality of the foregoing, the use of the term “agent” in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. Each Bank expressly acknowledges (i) that the Agent has not made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of any of Holdings or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Bank; (ii) that it has made and will continue to make, without reliance upon the Agent, its own independent investigation of the financial condition and affairs and its own appraisal of the creditworthiness of each of Holdings and its Subsidiaries in connection with this Agreement and the making and continuance of the Loans hereunder; and (iii) except as expressly provided herein, that the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of any Loan or at any time or times thereafter.

Section 9.04 Actions in Discretion of Agent; Instructions From the Banks . The Agent agrees, upon the written request of the Required Banks, to take or refrain from taking any action of the type specified as being within the Agent’s rights, powers or discretion herein, provided that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable Law. In the absence of a request by the Required Banks, the Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Banks or all of the Banks. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Banks, subject to Section 9.06 [Exculpatory Provisions, Etc.]. Subject to the provisions of Section 9.06, no Bank shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Banks, or in the absence of such instructions, in the absolute discretion of the Agent.

Section 9.05 Reimbursement and Indemnification of Agent by the Borrowers . Each Borrower (other than AGRI and AGRO) unconditionally, jointly and severally, agrees to

pay or reimburse the Agent and hold the Agent harmless against (a) liability for the payment of all reasonable out-of-pocket costs, expenses, and disbursements (including fees and expenses of counsel) incurred by the Agent (i) in connection with the development, negotiation, preparation, printing, execution, administration, syndication, interpretation and performance of this Agreement and the other Loan Documents, (ii) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (iii) in connection with the enforcement of this Agreement or any other Loan Document or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (iv) in any workout or restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, and (b) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent hereunder or thereunder, provided that the Borrowers shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Agent’s gross negligence or willful misconduct, or if the Borrowers were not given notice of the subject claim and the opportunity to participate in the defense thereof, at their expense (except that the Borrowers shall remain liable to the extent such failure to give notice does not result in a loss to the Borrowers), or if the same results from a compromise or settlement agreement entered into without the consent of the Borrowers, which shall not be unreasonably withheld.

Section 9.06 Exculpatory Provisions; Limitation of Liability . Neither the Agent nor any of its directors, officers, employees, agents, attorneys or Affiliates shall (a) be liable to any Bank for any action taken or omitted to be taken by it or them hereunder, or in connection herewith including pursuant to any Loan Document, unless caused by its or their own gross negligence or willful misconduct, (b) be responsible in any manner to any of the Banks for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement or any other Loan Documents or for any recital, representation, warranty, document, certificate, report or statement herein or made or furnished under or in connection with this Agreement or any other Loan Documents, or (c) be under any obligation to any of the Banks to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Borrowers or any of their Subsidiaries, or the financial condition of the Borrowers or any of their Subsidiaries, or the existence or possible existence of any Event of Default or Potential Default. No claim may be made by the Borrowers or any of their Subsidiaries, any Bank, the Agent or any of their respective Subsidiaries against the Agent, any Bank or any of their respective directors, officers, employees, agents, attorneys or Affiliates, or any of them, for any special, indirect or consequential damages or, to the fullest extent permitted by Law, for any punitive damages in respect of any claim or cause of action (whether based on contract, tort, statutory liability, or any other ground) based on, arising out of or related to any Loan Document or the transactions contemplated hereby or any act, omission or event occurring in connection therewith, including the negotiation, documentation, administration or collection of the Loans, and the Borrowers (for themselves and on behalf of each of their Subsidiaries), the Agent and each Bank hereby waive, release and agree never to sue upon any claim for any such

damages, whether such claim now exists or hereafter arises and whether or not it is now known or suspected to exist in their favor. Each Bank agrees that, except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder or given to the Agent for the account of or with copies for the Banks, the Agent and each of its directors, officers, employees, agents, attorneys or Affiliates shall not have any duty or responsibility to provide any Bank with an credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrowers or any of their Subsidiaries which may come into the possession of the Agent or any of its directors, officers, employees, agents, attorneys or Affiliates.

Section 9.07 Reimbursement and Indemnification of Agent and Issuing Banks by Banks . Each Bank agrees to reimburse and indemnify the Agent and the Issuing Banks (to the extent not reimbursed by the Borrowers and without limiting the Obligation of the Borrowers to do so) in proportion to its Ratable Share from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements, including attorneys’ fees and disbursements (including the allocated costs of staff counsel), and costs of appraisers and environmental consultants, of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent or the Issuing Banks, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent or Issuing Banks hereunder or thereunder, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (a) if the same results from the Agent’s or such Issuing Bank’s gross negligence or willful misconduct, or (b) if such Bank was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense (except that such Bank shall remain liable to the extent such failure to give notice does not result in a loss to the Bank), or (c) if the same results from a compromise and settlement agreement entered into without the consent of such Bank, which shall not be unreasonably withheld. In addition, each Bank agrees promptly upon demand to reimburse the Agent (to the extent not reimbursed by the Borrowers and without limiting the Obligation of the Borrowers to do so) in proportion to its Ratable Share for all amounts due and payable by the Borrowers to the Agent in connection with the Agent’s periodic audit of the Company’s or any of its respective Material Subsidiaries’ books, records and business properties.

Section 9.08 Reliance by Agent and Issuing Banks . The Agent and Issuing Banks shall be entitled to rely upon any writing, telegram, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, order or other document or conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon the advice and opinions of counsel and other professional advisers selected by the Agent or the Issuing Banks. The Agent and Issuing Banks shall be fully justified in failing or refusing to take any action hereunder unless it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action.

Section 9.09 Notice of Default . The Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default unless the Agent has received written notice from a Bank or a Borrower referring to this Agreement,

describing such Potential Default or Event of Default and stating that such notice is a “notice of default.”

Section 9.10 Notices . The Agent shall promptly send to each Bank a copy of all notices received from any Borrower pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Agent shall promptly notify the Borrowers and the other Banks of each change in the Base Rate and the effective date thereof.

Section 9.11 Banks in Their Individual Capacities; Agents in Its Individual Capacity . With respect to its Revolving Credit Commitment, the Revolving Credit Loans and any Bid Loans made by it and any other rights and powers given to it as a Bank hereunder or under any of the other Loan Documents, the Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Agent, and the term “Bank” and “Banks” shall, unless the context otherwise indicates, include the Agent in its individual capacity. ABN AMRO Bank and its Affiliates and each of the Banks and their respective Affiliates may, without liability to account, except as prohibited herein, make loans to, issue letters of credit for the account of, acquire equity interests in, accept deposits from, discount drafts for, act as trustee under indentures of, and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with, Holdings and its Subsidiaries and their Affiliates, in the case of the Agent, as though it were not acting as Agent hereunder and in the case of each Bank, as though such Bank were not a Bank hereunder, in each case without notice to or consent of the other Banks. The Banks acknowledge that, pursuant to such activities, the Agent or its Affiliates may (i) receive information regarding Holdings and any of its Subsidiaries or Affiliates (including information that may be subject to confidentiality obligations in favor of Holdings or any of its Subsidiaries or Affiliates) and acknowledge that the Agent shall be under no obligation to provide such information to them, and (ii) accept fees and other consideration from Holdings and any of its Subsidiaries for services in connection with this Agreement and otherwise without having to account for the same to the Banks.

Section 9.12 Holders of Notes . The Agent may deem and treat any payee of any Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor.

Section 9.13 Equalization of Banks . The Banks and the holders of any participations in any Commitments, Loans or Letters of Credit or other rights or obligations of a Bank hereunder agree among themselves that, with respect to all amounts received by any Bank or any such holder for application on any Obligation hereunder or under any such participation, whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker’s lien, by counterclaim, or by any other non- pro rata source, equitable adjustment will be made in the manner stated in the following sentence so that, in effect, all such excess amounts will be shared ratably among the Banks and such holders in proportion to their interests in payments on the Loans and the Letters of Credit, except as otherwise provided in Section 3.04(c) [Agent’s and Bank’s Rights], Section 4.04(b) [Replacement of a Bank] or Section 4.06 [Additional Compensation in Certain Circumstances]. The Banks or any such

holder receiving any such amount shall purchase for cash from each of the other Banks an interest in such Bank’s Loans in such amount as shall result in a ratable participation by the Banks and each such holder in the aggregate unpaid amount of the Loans, provided that if all or any portion of such excess amount is thereafter recovered from the Bank or the holder making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by law (including court order) to be paid by the Bank or the holder making such purchase.

Section 9.14 Successor Agent . The Agent (i) may resign as Agent or (ii) shall resign if such resignation is required by Section 4.04(b) [Replacement of a Bank], in either case of (i) or (ii) by giving not less than thirty (30) days’ prior written notice to the Borrowers. If the Agent shall resign under this Agreement, then either (a) the Required Banks shall appoint from among the Banks a successor agent for the Banks, subject to the consent of the Borrowers, such consent not to be unreasonably withheld, or (b) if a successor agent shall not be so appointed and approved within the thirty (30) day period following the Agent’s notice to the Banks of its resignation, then the Agent shall appoint, with the consent of the Borrowers, such consent not to be unreasonably withheld, a successor agent who shall serve as Agent until such time as the Required Banks appoint and the Borrowers consent to the appointment of a successor agent. Upon its appointment pursuant to either clause (a) or (b) above, such successor agent shall succeed to the rights, powers and duties of the Agent, and the term “Agent” shall mean such successor agent, effective upon its appointment, and the former Agent’s rights, powers and duties as Agent shall be terminated without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the resignation of any Agent hereunder, the provisions of this ARTICLE IX shall inure to the benefit of such former Agent and such former Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was an Agent under this Agreement.

Section 9.15 Agent’s Fee . The Borrowers shall pay to the Agent a nonrefundable fee (the “Agent’s Fee”) for Agent’s services hereunder under the terms of a letter (the “Agent’s Letter”) between the Borrowers and Agent, as amended from time to time.

Section 9.16 Availability of Funds . The Agent may assume that each Bank has made or will make the proceeds of a Loan available to the Agent unless the Agent shall have been notified by such Bank on or before the later of (1) the close of Business on the Business Day preceding the Borrowing Date with respect to such Loan or (2) two hours before the time on which the Agent actually funds the proceeds of such Loan to the respective Borrower (whether using its own funds pursuant to this Section 9.16 or using proceeds deposited with the Agent by the Banks and whether such funding occurs before or after the time on which Banks are required to deposit the proceeds of such Loan with the Agent). The Agent may, in reliance upon such assumption (but shall not be required to), make available to the respective Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand from the Borrowers) together with interest thereon, in respect of each day during the period commencing on the date such amount was made available to the Borrowers and ending on the date the Agent recovers such amount, at a rate per annum equal to (i) the Federal Funds Effective Rate during the first

three (3) days after such interest shall begin to accrue and (ii) the applicable interest rate in respect of such Loan after the end of such three-day period.

Section 9.17 Calculations . In the absence of gross negligence or willful misconduct, the Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Loans, fees or any other amounts due to the Banks under this Agreement. In the event an error in computing any amount payable to any Bank is made, the Agent, the Borrowers and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate.

Section 9.18 Beneficiaries . Except as expressly provided herein, the provisions of this ARTICLE IX are solely for the benefit of the Agent and the Banks, and Holdings and its Subsidiaries shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Company or any of its Subsidiaries.

ARTICLE X

MISCELLANEOUS

Section 10.01 Modifications, Amendments, or Waivers . With the written consent of the Required Banks, the Agent, acting on behalf of all the Banks, and the Borrowers may from time to time enter into written agreements amending or changing any provision of this Agreement or any other Loan Document or the rights of the Banks or the Borrowers hereunder or thereunder, or may grant written waivers or consents to a departure from the due performance of the Obligations hereunder or thereunder. Any such agreement, waiver or consent made with such written consent shall be effective to bind all the Banks and the Borrowers; provided that, without the written consent of all the Banks, no such agreement, waiver, or consent may be made which will:

(a) Increase of Commitment; Extension of Expiration Date . Increase the amount of the Revolving Credit Commitment of any Bank hereunder or extend the Expiration Date;

(b) Extension of Payment; Reduction of Principal Interest or Fees; Modification of Terms of Payment . Whether or not any Loans are outstanding, extend the time for payment of principal or interest of any Loan (excluding the due date of any mandatory prepayment of a Loan or any mandatory Commitment reduction in connection with such a mandatory prepayment hereunder except for mandatory reductions of the Commitments on the Expiration Date), the Facility Fee, the Letter of Credit Fee or any other fee payable to any Bank, or reduce the principal amount of or the rate of interest borne by any Loan or reduce the Facility Fee, the Letter of Credit Fee or any other fee payable to any Bank, or otherwise affect the terms of payment of the principal of or interest of any Loan, the Facility Fee or any other fee payable to any Bank;

(c) Release of Collateral or Guarantor . Release any Guarantor from its Obligations under any Guaranty Agreement or any other security for any of the Obligations except as otherwise may be permitted by the terms hereof or of the instrument establishing the Lien; or

(d) Miscellaneous . Amend Section 4.02 [Pro Rata Treatment of Banks], Section 9.06 [Exculpatory Provisions, Etc.] or Section 9.13 [Equalization of Banks] or this Section 10.01, alter any provision regarding the pro rata treatment of the Banks, change the definition of Required Banks, or change any requirement providing for the Banks or the Required Banks to authorize the taking of any action hereunder;

provided , further , that (i) no agreement, waiver or consent which would modify the interests, rights or obligations of the Agent in its capacity as Agent shall be effective without the written consent of the Agent and (ii) no agreement, waiver or consent which would modify the interests, rights or obligations of any Issuing Bank in its capacity as an Issuing Bank shall be effective without the written consent of such Issuing Bank.

Section 10.02 No Implied Waivers; Cumulative Remedies; Writing Required . No course of dealing and no delay or failure of the Agent or any Bank in exercising any right, power, remedy or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or operate as a waiver thereof, nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of the Agent and the Banks under this Agreement and any other Loan Documents are cumulative and not exclusive of any rights or remedies which they would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing.

Section 10.03 Reimbursement and Indemnification of Banks by the Borrowers; Taxes . Each Borrower jointly and severally agrees unconditionally upon demand to pay or reimburse to each Bank (other than the Agent, as to which the Borrowers’ Obligations are set forth in Section 9.05 [Reimbursement of Agent By Borrower, Etc.]) and to save such Bank harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements (including fees and expenses of counsel for each Bank except with respect to (a) and (b) below), incurred by such Bank (a) in connection with the review, execution, delivery, administration, or interpretation of this Agreement, and other instruments and documents to be delivered hereunder, (b) relating to any amendments, waivers, or consents pursuant to the provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout or restructuring or in connection with the protection, preservation, exercise, or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection, or bankruptcy proceedings, or (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature

whatsoever which may be imposed on, incurred by or asserted against such Bank (including such Bank’s officers, directors and employees), in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents, use of proceeds of the Loans or the transactions contemplated by the Loan Documents or any action taken or omitted by such Bank (including such Bank’s officers, directors and employees) hereunder or thereunder, provided that the Borrowers shall not be liable to a Bank (including such Bank’s officers, directors and employees) for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements (A) if the same results from such Bank’s or its officer’s, director’s or employee’s gross negligence or willful misconduct, or (B) if the Borrowers were not given notice of the subject claim and the opportunity to participate in the defense thereof, at their expense (except that the Borrowers shall remain liable to the extent such failure to give notice does not result in a loss to the Borrowers), or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrowers, which shall not be unreasonably withheld. The Banks will attempt to minimize the fees and expenses of legal counsel for the Banks which are subject to reimbursement by the Borrowers on a joint and several basis hereunder by considering the usage of one law firm to represent the Banks and the Agent if appropriate under the circumstances. The Borrowers, jointly and severally, agree unconditionally to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection with this Agreement or any other Loan Document, and the Borrowers, jointly and severally, agree unconditionally to save the Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions.

Section 10.04 Holidays . Whenever payment of a Loan to be made or taken hereunder shall be due on a day which is not a Business Day such payment shall be due on the next Business Day (except as provided in the definition of Committed Loan Interest Period with respect to Interest Periods under the LIBOR Option) and such extension of time shall be included in computing interest and fees, except that the Loans shall be due on the Business Day preceding the Expiration Date if the Expiration Date is not a Business Day. Whenever any payment or action to be made or taken hereunder (other than payment of the Loans) shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day, and such extension of time shall not be included in computing interest or fees, if any, in connection with such payment or action.

Section 10.05 Funding by Branch, Subsidiary, or Affiliate . (a) Notional Funding . Each Bank shall have the right from time to time, without notice to the Borrowers, to deem any branch, Subsidiary, or Affiliate (which for the purposes of this Section 10.05 shall mean any corporation or association which is directly or indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained, or funded any Loan to which the LIBOR Option applies at any time, provided that immediately following (on the assumption that a payment was then due from the Borrowers to such other office), and as a result of such change, the Borrowers will not be under any greater financial obligation pursuant to Section 4.06 [Additional Compensation in Certain Circumstances] than they would have been in the absence of such change. Notional funding offices may be selected by each Bank without

regard to such Bank’s actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank.

(b) Actual Funding . Each Bank shall have the right from time to time to make or maintain any Loan by arranging for a branch, Subsidiary or Affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 10.05(b). If any Bank causes a branch, Subsidiary or Affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Bank, but in no event shall any Bank’s use of such a branch, Subsidiary or Affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, Subsidiary or Affiliate to incur any cost or expenses payable by any Borrower hereunder or require any Borrower to pay any other compensation to any Bank (including any expenses incurred or payable pursuant to Section 4.06 [Additional Compensation in Certain Circumstances]) which would otherwise not be incurred.

Section 10.06 Notices . Any notice, request, demand, direction, or other communication (for purposes of this Section 10.06 only, a “Notice”) to be given to or made upon any party hereto under any provision of this Agreement shall be given or made by telephone or in writing (which includes means of electronic transmission ( i.e. , “e-mail”) or facsimile transmission in accordance with this Section 10.06. Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth under their respective names on Schedule 1.01(B) hereof or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 10.06. Any Notice shall be effective:

(A) In the case of hand-delivery, when delivered;

(B) If given by mail, four days after such Notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested;

(C) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later than the next Business Day by hand delivery, a facsimile or electronic transmission, a Website Posting or overnight courier delivery of a confirmatory notice (received at or before noon on such next Business Day);

(D) In the case of a facsimile transmission, when sent to the applicable party’s facsimile machine’s telephone number if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine;

(E) In the case of electronic transmission, when actually received;

(F) In the case of a Website Posting, upon delivery of a Notice of such posting (including the information necessary to access such web site) by another means set forth in this Section 10.06; and

(G) If given by any other means (including by overnight courier), when actually received.

Any Bank giving a Notice to any Borrower or any Material Subsidiary shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Banks of its receipt of such Notice.

Section 10.07 Severability . The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction.

Section 10.08 Governing Law . This Agreement and any other documents delivered herewith and the rights and obligations of the parties hereto and thereto shall be for all purposes governed by, and construed and enforced in accordance with the internal Laws of the State of New York, without giving effect to its conflicts of law principles.

Section 10.09 Prior Understanding . This Agreement and the other Loan Documents supersede all prior understandings and agreements, whether written or oral, between the parties hereto and thereto relating to the transactions provided for herein and therein, including any prior confidentiality agreements and commitments.

Section 10.10 Duration; Survival . All representations and warranties of the Borrowers and the Material Subsidiaries contained herein or made in connection herewith shall survive the making of Loans and the issuance of Letters of Credit and shall not be waived by the execution and delivery of this Agreement, any investigation by the Agent or the Banks, the making of Loans, the issuance of Letters of Credit, or payment in full of the Loans. All covenants and agreements of the Borrowers contained in Section 7.01 [Affirmative Covenants], Section 7.02 [Negative Covenants] and Section 7.03 [Reporting Requirements], and all comparable covenants and agreements contained in or incorporated into the Guarantor Joinder given by each Material Non-AGC Subsidiary pursuant to Section 10.18, shall continue in full force and effect from and after the date hereof so long as the Borrowers may borrow hereunder and until termination of the Commitments, expiration of all Letters of Credit and payment in full of the Loans. All covenants and agreements of the Borrowers contained herein relating to the payment of principal, interest, premiums, additional compensation or expenses and indemnification, including those set forth in ARTICLE IV [Payments] and Section 9.05 [Reimbursement of Agent by Borrowers, Etc.], Section 9.07 [Reimbursement of Agent by Banks, Etc.] and Section 10.03 [Reimbursement of Banks by Borrowers; Etc.], and all comparable covenants and agreements contained in or incorporated into the Guarantor Joinder given by each Material Non-AGC Subsidiary pursuant to Section 10.18, shall survive payment in full of the Loans, expiration of all Letters of Credit and termination of the Commitments.

Section 10.11 Successors and Assigns . (a) This Agreement shall be binding upon and shall inure to the benefit of the Banks, the Agent, the Borrowers and, when party to this Agreement, each of the Material Subsidiaries, and their respective successors and assigns, except that no Borrowers or any Material Subsidiary may assign or transfer any of its rights or Obligations or any interest herein or in any other Loan Document, except as may be permitted by the terms hereof or otherwise approved by each Bank. Each Bank may, at its own cost, make

assignments of or sell participations in all or any part of its Revolving Credit Commitments and the Loans made by it to one or more banks or other entities, subject to the consent of the Borrowers, the Agent and each Issuing Bank with respect to any assignee, such consent not to be unreasonably withheld, provided that (1) no consent of the Borrowers shall be required (A) if an Event of Default exists and is continuing, or (B) in the case of an assignment by a Bank to an Affiliate of such Bank, (2) any assignment by a Bank to a Person other than an Affiliate of such Bank may not be made in amounts less than the lesser of $5,000,000 or the amount of the assigning Bank’s Commitment, (3) a Bank may assign an interest or sell a participation in less than 100% of its Commitments, Revolving Credit Loans, or Bid Loans, provided that such Bank sells an equal percentage interest or participation in each of its Revolving Credit Commitment and Revolving Credit Loans, (4) a Bank may assign a Bid Loan to another Person without assigning any portion of its Commitment to such Person and (5) no consent of the Agent or any Issuing Bank shall be required in the case of an assignment by a Bank to an Affiliate of such Bank or to another Bank already party to this Agreement. In the case of an assignment, upon receipt by the Agent of the Assignment and Assumption Agreement, the assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights, benefits and obligations as it would have if it had been a signatory Bank hereunder, the Commitments shall be adjusted accordingly, and upon surrender of any Revolving Credit Note subject to such assignment, the applicable Borrower shall execute and deliver a new Revolving Credit Note to the assignee, if such assignee requests such a Note in an amount equal to the amount of the Revolving Credit Commitment assumed by it and a new Revolving Credit Note to the assigning Bank, if the assigning Bank requests such a Note with respect to the Commitment it has retained. The assigning Bank shall surrender its Bid Note and the respective Borrower shall execute and deliver to the assignee (and to the assignor if the assignor is assigning less than all of its Revolving Credit Commitments and Bid Loans) a new Bid Note in the form of Exhibit 1.01(B) as appropriate. Any Bank which assigns any or all of its Commitment or Loans to a Person other than an Affiliate of such Bank shall pay to the Agent a service fee in the amount of $3,500 for each assignment. In the case of a participation, the participant shall only have the rights specified in Section 8.02 [Set-off] (the participant’s rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto and not to include any voting rights except with respect to changes of the type referenced in Section 10.01(a) [Increase of Commitment, Etc.], Section 10.01(b) [Extension of Payment, Etc.], or Section 10.01(c) [Release of Collateral or Guarantor]), all of such Bank’s obligations under this Agreement or any other Loan Document shall remain unchanged, and all amounts payable by any Borrower or any Material Subsidiary hereunder or thereunder shall be determined as if such Bank had not sold such participation.

(b) Any assignee or participant which is not incorporated under the Laws of the United States of America or a state thereof shall deliver to the Borrowers and the Agent the form of certificate described in Section 10.17 [Tax Withholding Clause] relating to federal income tax withholding. Each Bank may furnish any publicly available information concerning the Borrowers or its Subsidiaries and any other information concerning the Borrowers or its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees or participants), provided that such assignees and participants agree to be bound by the provisions of Section 10.12 [Confidentiality].

(c) Notwithstanding any other provision in this Agreement, any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement, its Note (if any) and the other Loan Documents to any Federal Reserve Bank without notice to or consent of the Borrowers or the Agent. No such pledge or grant of a security interest shall release the transferor Bank of its obligations hereunder or under any other Loan Document.

Section 10.12 Confidentiality . (a) General . The Agent and the Banks each agree to keep confidential all information obtained from the Borrowers or their Subsidiaries which is nonpublic and confidential or proprietary in nature (including any information the Borrowers specifically designate as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the administration and enforcement of this Agreement, subject to agreement of such Persons to maintain the confidentiality of such information as provided herein, (ii) to assignees and participants as contemplated by Section 10.11, and prospective assignees and participants, provided that Agent or such Bank, as the case may be, exercises its best efforts to obtain the agreement of such prospective assignees and participants to be bound by the confidentiality provisions hereof, (iii) to the extent requested by any bank regulatory authority, any self-regulatory body or, to the extent permissible and practicable, with notice to the Borrowers, as otherwise required by applicable Law or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not known to be subject to confidentiality restrictions, or (v) if the Borrowers shall have consented to such disclosure.

(b) Sharing Information With Affiliates of the Banks . The Borrowers acknowledge that from time to time financial advisory, investment banking, and other services may be offered or provided to the Borrowers or one or more of their Affiliates (in connection with this Agreement or otherwise) by any Bank or by one or more Subsidiaries or Affiliates of such Bank and the Borrowers hereby authorize each Bank to share any information delivered to such Bank by the Borrowers or any of their Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such Subsidiary or Affiliate of such Bank, it being understood that any such Subsidiary or Affiliate of any Bank receiving such information shall be bound by the provisions of Section 10.12 as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans and other Obligations and the termination of the Commitments.

Section 10.13 Counterparts . This Agreement may be executed by different parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument.

Section 10.14 Agent’s or Bank’s Consent . Whenever the Agent’s or any Bank’s consent is required to be obtained under this Agreement or any of the other Loan Documents as a condition to any action, inaction, condition or event, the Agent and each Bank shall be

authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral, the payment of money or any other matter.

Section 10.15 Exceptions . The representations, warranties and covenants contained herein shall be independent of each other, and no exception to any representation, warranty or covenant shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exceptions be deemed to permit any action or omission that would be in contravention of applicable Law.

Section 10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL . EACH OF THE BORROWERS HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN NEW YORK CITY, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT. THE COMPANY CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE COMPANY AT THE ADDRESS PROVIDED FOR IN SECTION 10.06 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. HOLDINGS AND THE UK BORROWER CONSENTS THAT ALL SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE COMPANY AT THE ADDRESS PROVIDED IN SECTION 10.06 (AND HOLDINGS AND THE UK BORROWER HEREBY IRREVOCABLY APPOINTS THE COMPANY AS ITS AGENT TO RECEIVE SUCH SERVICE OF PROCESS), AND SERVICE SO MADE SHALL BE COMPLETED UPON ACTUAL RECEIPT THEREOF. EACH OF THE BORROWERS WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE.

EACH BORROWER, THE AGENT, AND EACH OF THE BANKS HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW.

Section 10.17 Tax Withholding Clause . Each Bank or assignee or participant of a Bank that is not incorporated under the Laws of the United States of America or a state thereof (and, upon the written request of the Agent, each other Bank or assignee or participant of a Bank) agrees that it will deliver to each of the Borrowers and the Agent two (2) duly completed appropriate valid Withholding Certificates (as defined under § 1.1441-1(c)(16) of the Income Tax Regulations (the “Regulations”)) certifying its status ( i.e. , U.S. or foreign person) and, if appropriate, making a claim of reduced, or exemption from, U.S. withholding tax on the basis of an income tax treaty or an exemption provided by the Internal Revenue Code. The term “Withholding Certificate” means a Form W-9; a Form W-8BEN; a Form W-8ECI; a Form W-8IMY and the related statements and certifications as required under § 1.1441-1(e)(2) and/or (3) of the Regulations; a statement described in § 1.871-14(c)(2)(v) of the Regulations; or any other certificates under the Internal Revenue Code or Regulations that certify or establish the status of a payee or beneficial owner as a U.S. or foreign person. Each Bank, assignee or

participant required to deliver to the Borrowers and the Agent a Withholding Certificate pursuant to the preceding sentence shall deliver such valid Withholding Certificate as follows: (A) each Bank which is a party hereto on the Closing Date shall deliver such valid Withholding Certificate at least five (5) Business Days prior to the first date on which any interest or fees are payable by the Borrowers hereunder for the account of such Bank; (B) each assignee or participant shall deliver such valid Withholding Certificate at least five (5) Business Days before the effective date of such assignment or participation (unless the Agent in its sole discretion shall permit such assignee or participant to deliver such valid Withholding Certificate less than five (5) Business Days before such date in which case it shall be due on the date specified by the Agent). Each Bank, assignee or participant which so delivers a valid Withholding Certificate further undertakes to deliver to each of the Borrowers and the Agent two (2) additional copies of such Withholding Certificate (or a successor form) on or before the date that such Withholding Certificate expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent Withholding Certificate so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrowers or the Agent. Notwithstanding the submission of a Withholding Certificate claiming a reduced rate of or exemption from U.S. withholding tax, the Agent shall be entitled to withhold United States federal income taxes at the full 30% withholding rate if in its reasonable judgment it is required to do so under the due diligence requirements imposed upon a withholding agent under § 1.1441-7(b) of the Regulations. Further, the Agent is indemnified under § 1.1461-1(e) of the Regulations against any claims and demands of any Bank or assignee or participant of a Bank for the amount of any tax it deducts and withholds in accordance with regulations under § 1441 of the Internal Revenue Code.

Section 10.18 Joinder of Guarantors . Any Material Non-AGC Subsidiary of Holdings which is required to be a Guarantor pursuant to Section 7.02(i) [Subsidiaries, Partnerships and Joint Ventures] shall execute and deliver to the Agent (i) a Guarantor Joinder in substantially the form attached hereto as Exhibit 1.01(G)(1) pursuant to which it shall join as a Guarantor each of the documents to which the Guarantors are parties; and (ii) documents in the forms described in Section 6.01 [Closing Date] modified as appropriate to relate to such Subsidiary. Holdings shall deliver such Guarantor Joinder and related documents to the Agent within five (5) Business Days after, as the case may be, the date of the acquisition of such Subsidiary, the date upon which a Subsidiary meets the criteria for a Material Non-AGC Subsidiary as set forth in the definition thereof in Section 1.01, or the date the filing of such Subsidiary’s certificate or articles of incorporation if the Subsidiary is a corporation, the date of the filing of its certificate of limited partnership if it is a limited partnership or the date of its organization if it is an entity other than a limited partnership or corporation.

Section 10.19 Limited Recourse . Notwithstanding anything contained in this Agreement or any other Loan Document, except as expressly provided herein and therein the obligations of the Borrowers hereunder and thereunder are several and not joint, and in no event shall the Banks or the Agent have legal recourse to (i) Holdings with respect to Loans incurred by or Letters of Credit issued for the account of the Company or the UK Borrower and (ii) the Company or the UK Borrower with respect to Loans incurred by or Letters of Credit for the account of Holdings, AGRI or AGRO (it being understood and agreed that the Banks and the Agent shall have legal recourse to the Company with respect to Loans incurred by and Letters of

Credit issued for the account of the UK Borrower in accordance with the terms of the Guaranty Agreement entered into by the Company).

Section 10.20 Change of Lending Office . Each Bank may transfer and carry its Loans and/or Commitments at, to or for the account of any branch office, subsidiary or affiliate of such Bank; provided that no Borrower shall be responsible for costs arising under Sections 3.04, 4.06 or 4.07 resulting from any such transfer to the extent such costs would not otherwise be applicable to such Bank in the absence of such transfer.

Section 10.21 USA Patriot Act . Each Bank hereby notifies the Borrowers and Guarantors that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Borrowers and Guarantors, which information includes the name and address of each Borrower and Guarantor and other information that will allow such Bank to identify such Borrower and Guarantor in accordance with the Act, and each Borrower and each Guarantor agrees to provide such information from time to time to each Bank.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written.

ASSURED GUARANTY LTD.


By:	/s/ Robert B. Mills
	Title: Chief Financial Officer


ASSURED GUARANTY CORP.


By:	/s/ Robert B. Mills
	Title: Chief Financial Officer


ASSURED GUARANTY (UK) LTD.


By:	/s/ Robert B. Mills
	Title: Director


ASSURED GUARANTY RE LTD.


By:	/s/ David Penchoff
	Title: President


ASSURED GUARANTY RE OVERSEAS LTD.


By:	/s/ Robert B. Mills
	Title:	Deputy Chairman and
		Chief Financial Officer

	ABN AMRO BANK N.V., Individually and as Agent


	By:	/s/ Neil R. Stein
		Title: Director


	By:	/s/ Michael DeMarco
		Title: Vice President


	BANK OF AMERICA N.A.


	By:	/s/ Shelly K. Brown
		Title: Senior Vice President


	THE BANK OF NEW YORK


	By:	/s/ Richard G. Shaw
		Title: Vice President


	DEUTSCHE BANK AG NEW YORK BRANCH


	By:	/s/ Ruth Leung
		Title: Director


	By:	/s/ John S. McGill
		Title: Director


	WACHOVIA BANK, NATIONAL ASSOCIATION


	By:	/s/ Joan Anderson
		Title: Director

	MERRILL LYNCH BANK USA


	By:	/s/ Louis Alder
		Title: Director


	JPMORGAN CHASE BANK, N.A.


	By:	/s/ Lawrence Palumbo, Jr.
		Title: Vice President


	KEYBANK NATIONAL ASSOCIATION


	By:	/s/ Mary K. Young
		Title: Senior Vice President


	CITIBANK N.A.


	By:	/s/ Thomas Fontana
		Title: Managing Director


	PNC BANK, NATIONAL ASSOCIATION


	By:	/s/ Edward J. Chidiac
		Title: Managing Director

Exhibit 10.29

AMENDMENT TO THE FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. 1989
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN

(AS AMENDED AND RESTATED EFFECTIVE DECEMBER 17, 2004)

WHEREAS, Financial Security Assurance Holdings Ltd. (the “Company”) maintains the Financial Security Assurance Holdings Ltd. 1989 Supplemental Employee Retirement Plan, as amended and restated effective December 17, 2004 (the “Plan”);

WHEREAS, Assured Guaranty Ltd. (“AGL”) entered into a stock purchase agreement dated November 14, 2008 to purchase the stock of Financial Security Assurance Holdings Ltd. (the “Company”) from Dexia Credit Local S.A. and Dexia Holdings, Inc. (“Dexia”) (such purchase referred to below as the “Transaction”);

WHEREAS, effective upon the closing of the Transaction, the Company desires to amend the Plan to appoint the Board of Directors of the Company to administer the Plan and to add AGL common shares as an investment benchmark under the Plan for Sean McCarthy’s account; and

WHEREAS, no Company stock or AGL common shares will be held in such employer stock fund.

NOW, THEREFORE, the Plan is hereby amended effective as of the closing of the Transaction as follows:

1. By substituting the following for Section 2.7 of the Plan:

“‘ Committee ’ shall mean the Board.”

2. By adding the following at the end of subsection 4.3(a) of the Plan:

“The Employer Stock Fund (as defined in Exhibit A) is available as an investment benchmark subject to the rules and regulations set forth in Exhibit A.”

3. By adding the following as a new Exhibit A to the Plan:

“ Exhibit A

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
1989 SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN

Employer Stock Fund Rules and Regulations

Effective upon the closing of the Transaction (as defined below), an “Employer Stock Fund” shall be established as an investment benchmark for the Account of Sean McCarthy (“McCarthy”). Such Account will be credited with 130,000 AGL Units, with each such AGL Unit representing the right to receive one share of common stock of Assured Guaranty Ltd. (“Shares”) upon a distribution from the Plan pursuant to Section 4.4 of the Plan. Upon the

occurrence of such crediting of the 130,000 AGL Units, the 22,306 Company units credited to his account (representing a deemed investment in a corresponding number of shares of Company common stock) will be canceled. Except as otherwise provided by the Committee, no additional AGL Units may be credited to McCarthy’s account. The term “Transaction” means the purchase of the stock of Financial Security Assurance Holdings Ltd. (the “Company”) from Dexia Credit Local S.A. and Dexia Holdings, Inc. pursuant to the stock purchase agreement dated November 14, 2008.

A-1. Eligibility . McCarthy is the only Participant eligible to invest all or a portion of his Account in the Employer Stock Fund.

A-2. Allocations to and from Employer Stock Fund . McCarthy’s investment in the 130,000 AGL Units shall be irrevocable, and such portion of McCarthy’s Account shall remain credited with such 130,000 AGL Units until such time as he is entitled to a distribution pursuant to Section 4.4 of the Plan with the number of Shares to be distributed to McCarthy equal to the number of AGL Units held in McCarthy’s Account.

A-3. Dividends . To the extent that any record date for dividends on Shares occurs during the period in which all or a portion of a McCarthy’s Account is allocated to the Employer Stock Fund, McCarthy’s Account will be credited with an amount equal to the dividends that would be payable with respect to such AGL Units, determined as though each AGL Unit credited to the Participant’s Account was a Share (the “Deemed Dividends”). The Deemed Dividends shall be credited to an investment benchmark that is a money market fund or other similar investment benchmark selected by the Committee.”

EXHIBIT 31.1

Assured Guaranty Ltd.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dominic J. Frederico, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Assured Guaranty Ltd.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared ;

	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting .

	By:	/S/ Dominic J. Frederico
		Dominic J. Frederico
		President and Chief Executive Officer

D ate: August 10, 2009

EXHIBIT 31.2

Assured Guaranty Ltd.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert B. Mills, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Assured Guaranty Ltd.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared ;

	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting .

	By:	/S/ Robert B. Mills
		Robert B. Mills
		Chief Financial Officer

Date: August 10, 2009

EXHIBIT 32.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Assured Guaranty Ltd. (the “Company”) for the period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dominic J. Frederico, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/S/ Dominic J. Frederico

Name:	Dominic J. Frederico
Title:	President and Chief Executive Officer
Date:	August 10, 2009

EXHIBIT 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Assured Guaranty Ltd. (the “Company”) for the period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Robert B. Mills, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/S/ Robert B. Mills


Name:	Robert B. Mills
Title:	Chief Financial Officer
Date:	August 10, 2009

EXHIBIT 99.1

ASSURED GUARANTY CORP.

INDEX

	Page
Financial Statements:
Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008	2
Consolidated Statements of Operations and Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2009 and 2008	3
Consolidated Statements of Shareholder’s Equity (unaudited) for Six Months Ended June 30, 2009	4
Consolidated Statements of Cash Flows (unaudited) for Six Months Ended June 30, 2009 and 2008	5
Notes to Consolidated Financial Statements (unaudited)	6

Assured Guaranty Corp.
Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)

(Unaudited)

	June 30,			December 31,
	2009			2008
Assets
Fixed maturity securities, at fair value (amortized cost: $1,700,491 in 2009 and $1,521,994 in 2008)	$	1,706,521		$	1,511,329
Short-term investments, at cost which approximates fair value	119,181			109,986
Total investments	1,825,702			1,621,315
Cash and cash equivalents	2,821			7,823
Accrued investment income	19,680			20,205
Deferred acquisition costs	56,887			78,989
Prepaid reinsurance premiums	397,013			206,453
Reinsurance recoverable on ceded losses	45,690			22,014
Premiums receivable	419,496			12,445
Goodwill	85,417			85,417
Credit derivative assets	134,260			139,494
Deferred tax asset	197,431			110,336
Current income taxes receivable	10,837			17,382
Salvage recoverable	167,147			70,884
Committed capital securities at fair value	10,158			51,062
Other assets	11,900			10,651
Total assets	$	3,384,439		$	2,454,470

Liabilities and shareholder’s equity
Liabilities
Unearned premium reserves	$	1,308,643		$	707,957
Reserves for losses and loss adjustment expenses	146,073			133,710
Profit commissions payable	4,749			3,971
Reinsurance balances payable	221,150			23,725
Funds held by Company under reinsurance contracts	5,491			5,493
Credit derivative liabilities	714,303			481,040
Other liabilities	59,781			52,548
Total liabilities	2,460,190			1,408,444
Commitments and contingencies
Shareholder’s equity
Preferred stock ($1,000 liquidation preference, 200,004 shares authorized; none issued and outstanding in 2009 and 2008)	—			—
Common stock ($720.00 par value, 200,000 shares authorized; 20,834 shares issued and outstanding in 2009 and 2008)	15,000			15,000
Additional paid-in capital	480,375			480,375
Retained earnings	431,128			561,598
Accumulated other comprehensive loss	(2,254		)	(10,947		)
Total shareholder’s equity	924,249			1,046,026
Total liabilities and shareholder’s equity	$	3,384,439		$	2,454,470

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

Assured Guaranty Corp.
Consolidated Statements of Operations and Comprehensive Income
(in thousands of U.S. dollars)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues
Net earned premiums	$	26,666		$	19,021		$	94,391		$	35,055
Net investment income	19,713			17,442			39,014			33,546
Net realized investment gains (includes impairment losses of $1,760, consisting of $5,162 of total other-than temporary impairment losses, net of $3,402 recognized in other comprehensive income, for the quarter ended June 30, 2009)	5,356			1,557			5,594			2,224
Change in fair value of credit derivatives
Realized gains and other settlements on credit derivatives	22,004			24,042			44,973			44,865
Unrealized (losses) gains on credit derivatives	(225,010		)	610,556			(248,033		)	394,169
Net change in fair value of credit derivatives	(203,006		)	634,598			(203,060		)	439,034
Fair value (loss) gain on committed capital securities	(60,570		)	8,896			(40,904		)	17,407
Other income	481			153			1,133			178
Total revenues	(211,360		)	681,667			(103,832		)	527,444

Expenses
Loss and loss adjustment expenses	46,427			23,495			67,809			47,020
Profit commission expense	827			(24		)	827			407
Acquisition costs	3,099			3,271			2,756			6,815
Other operating expenses	13,426			12,920			28,617			27,463
FSAH acquisition-related expenses	16,077			—			16,077			—
Other expenses	1,868			1,715			3,268			2,450
Total expenses	81,724			41,377			119,354			84,155

(Loss) income before (benefit) provision for income taxes	(293,084		)	640,290			(223,186		)	443,289
(Benefit) provision for income taxes
Current	(4,851		)	8,595			13,144			20,621
Deferred	(103,532		)	211,566			(101,002		)	127,191
Total (benefit) provision for income taxes	(108,383		)	220,161			(87,858		)	147,812
Net (loss) income	(184,701		)	420,129			(135,328		)	295,477

Other comprehensive income (loss), net of taxes
Unrealized holding gains (losses) on fixed maturity securities arising during the year	11,971			(9,850		)	19,196			(19,128		)
Reclassification adjustment for realized (gains) losses included in net income	(211		)	(1,012		)	(366		)	(1,446		)
Change in net unrealized gains on fixed maturity securities	11,760			(10,862		)	18,830			(20,574		)
Unrealized losses on fixed maturity securities related to factors other than credit	(2,212		)	—			(2,212		)	—
Change in cumulative translation adjustment	6,174			(424		)	(2,159		)	(94		)
Other comprehensive income (loss), net of taxes	15,722			(11,286		)	14,459			(20,668		)
Comprehensive (loss) income	$	(168,979	)	$	408,843		$	(120,869	)	$	274,809

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

Assured Guaranty Corp.
Consolidated Statements of Shareholder’s Equity
For the Six Months Ended June 30, 2009
(in thousands of U.S. dollars)

(Unaudited)

	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholder’s Equity
Balance, December 31, 2008	$	—	$	15,000	$	480,375	$	561,598		$	(10,947	)	$	1,046,026
Cumulative effect of accounting change - Adoption of FAS 163 effective January 1, 2009	—		—		—		9,801			—			9,801
Cumulative effect of accounting change - Adoption of FSP 115-2 effective April 1, 2009	—		—		—		5,766			(5,766		)	—
Net loss	—		—		—		(135,328		)	—			(135,328		)
Dividends	—		—		—		(10,709		)	—			(10,709		)
Change in cumulative translation adjustment	—		—		—		—			(2,159		)	(2,159		)
Unrealized losses related to factors other than credit, net of tax of $(1,191)	—		—		—		—			(2,212		)	(2,212		)
All other unrealized gains on fixed maturity securities, net of tax of $10,139	—		—		—		—			18,830			18,830
Balance, June 30, 2009	$	—	$	15,000	$	480,375	$	431,128		$	(2,254	)	$	924,249

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

Assured Guaranty Corp.
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
Operating activities
Net (loss) income	$	(135,325	)	$	295,477
Adjustments to reconcile net (loss) income to net cash flows provided by operating activities:
Non-cash operating expenses	5,987			6,267
Net amortization of premium on fixed maturity securities	1			1,758
Accretion of discount on premium receivable	(2,938		)	—
(Benefit) provision for deferred income taxes	(101,002		)	127,191
Net realized investment gains	(5,594		)	(2,224		)
Unrealized losses (gains) on credit derivatives	248,033			(394,169		)
Fair value (loss) gain on committed capital securities	40,904			(17,407		)
Change in deferred acquisition costs	(3,057		)	4,906
Change in accrued investment income	525			(2,917		)
Change in premiums receivable	(43,630		)	(2,196		)
Change in prepaid reinsurance premiums	(62,055		)	(89,444		)
Change in unearned premium reserves	232,673			295,180
Change in reserves for losses and loss adjustment expenses, net	9,111			55,421
Change in profit commissions payable	778			343
Change in funds held by Company under reinsurance contracts	(2		)	(2		)
Change in current income taxes	6,545			(2,711		)
Tax benefit for stock options exercised	—			(10		)
Other changes in credit derivatives assets and liabilities, net	(9,536		)	(1,188		)
Other	(10,627		)	(9,995		)
Net cash flows provided by operating activities	170,791			264,280

Investing activities
Fixed maturity securities:
Purchases	(543,322		)	(309,615		)
Sales	387,149			124,897
Maturities	—			—
Purchases sales of short-term investments, net	(9,122		)	(171,324		)
Net cash flows used in investing activities	(165,295		)	(356,042		)

Financing activities
Capital contribution	—			100,000
Dividends paid	(10,709		)	(7,313		)
Tax benefit for stock options exercised	—			10
Net cash flows (used in) provided by investing activities	(10,709		)	92,697
Effect of exchange rate changes	211			47

(Decrease) increase in cash and cash equivalents	(5,002		)	982
Cash and cash equivalents at beginning of period	7,823			1,785

Cash and cash equivalents at end of period	$	2,821		$	2,767

Supplementary cash flow information
Cash paid during the period for:
Income taxes	$	6,992		$	23,336

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

Assured Guaranty Corp.
Notes to Consolidated Financial Statements

June 30, 2009

(Unaudited)

1. Business and Organization

Assured Guaranty Corp. (the “Company” or “AGC”) is a Maryland domiciled company, which commenced operations in January 1988 and provides insurance and reinsurance of investment grade financial guaranty exposures, including municipal and nonmunicipal reinsurance and credit default swap (“CDS”) transactions. The Company’s ultimate parent is Assured Guaranty Ltd., a Bermuda-based insurance holding company, which is publicly traded on the New York Stock Exchange. The Company owns 100% of Assured Guaranty (UK) Ltd. (“AG (UK)”), a company organized under the laws of the United Kingdom.

Certain of the Company’s financial guaranty insurance contracts include derivatives. A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying security. Derivatives are discussed in more detail in Note 4.

The Company’s financial results include three principal business segments: financial guaranty direct, financial guaranty reinsurance and other. These segments are further discussed in Note 13.

AGC is licensed in 52 jurisdictions. AGC and its subsidiary have been assigned the following insurance financial strength ratings as of the date of this filing. These ratings are subject to continuous review.

	Moody’s		S&P		Fitch
Assured Guaranty Corp.	Aa2(Excellent	)	AAA(Extremely Strong	)	AA(Very Strong	)
Assured Guaranty (UK) Ltd	Aa2(Excellent	)	AAA(Extremely Strong	)	AA(Very Strong	)

On May 4, 2009, Fitch Ratings Inc. (“Fitch”) downgraded the debt and insurer financial strength ratings of Assured Guaranty Ltd. and its subsidiaries. Fitch’s insurer financial strength ratings for Assured Guaranty Corp. and Assured Guaranty (UK) Ltd. are now AA (rating watch evolving), down from AAA (stable). On August 10, 2009, Fitch placed the debt and insurer financial strength ratings of the Company Rating Watch Negative, a change from Rating Watch Evolving. Fitch reported that it is currently in the process of analyzing the insured portfolios and overall capital adequacy of the Company. Rating Watch Negative reflects concerns with respect to further credit deterioration in mortgage-related exposures, which could negatively impact the capital positions of the companies. It noted that credit deterioration in other areas of the insured portfolios, including TruPS CDOs and public finance exposures, could also place additional pressure on claims paying resources, as could ratings-based triggers which could force termination or collateralization of insured exposures of the Company. Fitch notes that it expects to complete its rating review over the next four to six weeks.

On May 20, 2009, Moody’s Investors Service (‘‘Moody’s’’) placed under review for possible downgrade the Aa2 insurance financial strength rating of the Company. In its public announcement of the rating action, Moody’s stated that this action reflects its view that despite recent improvements in the Company’s market position, the expected performance of its insured portfolio—particularly the mortgage-related risks—has substantially worsened. In the press release, Moody’s noted that it has taken a more negative view of mortgage related exposures and the Company’s pooled corporate exposures in light of worse-than-expected performance trends, and recognized the continued susceptibility of the insured portfolio to the weak economic environment. Moody’s also commented that the deterioration in the insured portfolios could have negative implications for the companies’ franchise value, profitability and financial flexibility given the likely sensitivity of those business attributes to its capital position. Moody’s also noted that the market dislocation caused by the declining financial strength of financial guaranty insurers may alter the competitive dynamics of the industry by encouraging the entry of new participants or the growth of alternative forms of execution. There can be no assurance as to the outcome of Moody’s review. On July 24, 2009, Moody’s announced that it expects to conclude its ratings review of the Company by mid-August 2009.

On July 1, 2009, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) published a Research Update in which it affirmed its “AAA” counterparty credit and financial strength ratings on AGC. At the same time, S&P revised its outlook on AGC to negative from stable. S&P cited as a rationale for its actions the large single risk concentration exposure that the Company’s ultimate parent, Assured Guaranty Ltd., retains to Belgium and France prior to the posting of collateral by Dexia S.A. in October 2011, all in connection with the acquisition of FSAH by a subsidiary of Assured Guaranty Ltd. In addition, the outlook also reflects S&P’s view that the change in the competitive dynamics of the industry — with the potential entrance of new competitors, alternative forms of credit enhancement and limited insurance penetration in the U.S. public finance market — could hurt the companies’ business prospects. There can be no assurance that S&P will not take further action on our ratings.

2. Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements, which include the accounts of the Company, 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 June 30, 2009 (“Second Quarter 2009”), the three-month period ended June 30, 2008 (“Second Quarter 2008”), the six-month period ended June 30, 2009 (“Six Months 2008”) and the six-month period ended June 30, 2008 (“Six Months 2008”). Operating results for the three- and six-month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for a full year.

Certain prior year items have been reclassified to conform to the current year presentation. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements included in the audited consolidated financial statements of Assured Guaranty Ltd. (“Assured Guaranty”) as of December 31, 2008 and 2007, and for each of the years in the three-year period ended December 31, 2008 which was filed with the Securities and Exchange Commission as Exhibit 99.1. All intercompany accounts and transactions have been eliminated. The Company has evaluated all subsequent events through August 10, 2009, the date the financial statements were issued.

Assured Guaranty Corp. and its U.K. subsidiary are subject to U.S. and U.K. income tax. The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards (“FAS”) No. 109, “Accounting for Income Taxes”. The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its credit derivatives , which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year of 2009. A discrete calculation of the provision is calculated for each interim period.

Adoption of FAS 163

Statement of Financial Accounting Standards (“FAS”) No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“FAS 163”). FAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. FAS 163 also clarifies the methodology to be used for financial guaranty premium revenue recognition and claim liability measurement, as well as requiring expanded disclosures about the insurance enterprise’s risk management activities. FAS 163 has been applied to all existing and future financial guaranty insurance contracts written by the Company.

The accounting changes proscribed by the statement were recognized by the Company as a cumulative effect adjustment to retained earnings as of January 1, 2009.

Premium Revenue Recognition

Premiums are received either upfront or in installments.

Upon Adoption of FAS 163

Premiums receivable, net of ceding commissions (end of period) (1)	$	379,469
Unearned premium reserves (end of period) (2)	$	434,891
Accretion of discount on premium receivable	$	2,938
Weighted-average risk-free rate to discount premiums	2.3		%
Weighted-average period of premiums receivable (in years)	8.7

(1) Includes $9.1 million of ceding commissions due on future installment premiums receivable.

(2) Includes unearned premium related to the upfront portion of premiums received on bi-furcated deals.

The premiums receivable expected to be collected are:

(dollars in thousands)
2009 (July 1 – September 30)	$	51,134
2009 (October 1 – December 31)	11,330
2010 (January 1 – March 31)	11,421
2010 (April 1 – June 30)	10,565
2010 (July 1 – December 31)	18,408
2011	32,379
2012	27,852
2013	24,836
2014 - 2018	90,192
2019 - 2023	59,952
2024 - 2028	38,773
2029 - 2033	25,209
2034 - 2038	11,429
2039 - 2043	4,981
2044 - 2048	992
2049 - 2053	43
Total premiums receivable, net of ceding commissions	$	419,496

The following table provides a reconciliation of the beginning and ending balances of premium receivable:

(dollars in thousands)
Balance as of January 1, 2009	$	372,928
Add: premiums written - net	259,087
Add: accretion of premium receivable discount	2,938
Less: premium payments received	(215,457		)
Balance as of June 30, 2009	$	419,496

The accretion of premium receivable discount is included in earned premium in the Company’s statement of operations. The above amounts are presented net of applicable ceding commissions.

The future expected financial guarantee premium revenue that the Company expects to recognize are:

(dollars in thousands)
2009 (July 1 – September 30)	$	32,021
2009 (October 1 – December 31)	31,326
2010 (January 1 – March 31)	30,283
2010 (April 1 – June 30)	29,374
2010 (July 1 – December 31)	56,014
2011	103,447
2012	91,181
2013	83,123
2014 - 2018	327,194
2019 - 2023	220,551
2024 - 2028	142,401
After 2028	163,710
Total future expected financial guarantee premium revenue	$	1,310,625

Prior to Adoption of FAS 163

Prior to January 1, 2009, upfront premiums are earned in proportion to the expiration of the amount at risk. Each installment premium is earned ratably over its installment period, generally one year or less. Premium earnings under both the upfront and installment revenue recognition methods are based upon and are in proportion to the principal amount guaranteed and therefore result in higher premium earnings during periods where guaranteed principal is higher. For insured bonds for which the par value outstanding is declining during the insurance period, upfront premium earnings are greater in the earlier periods thus matching revenue recognition with the underlying risk. The premiums are allocated in accordance with the principal amortization schedule of the related bond issue and are earned ratably over the amortization period. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the remaining unearned premium reserves are earned at that time. Unearned premium reserves represent the portion of premiums written that is applicable to the unexpired amount at risk of insured bonds.

Deferred Acquisition Costs

Acquisition costs incurred, other than those associated with financial guarantees written in credit derivative form, that vary with and are directly related to the production of new business are deferred in proportion to written premium and amortized in relation to earned premiums. These costs include direct and indirect expenses such as ceding commissions, brokerage expenses and the cost of underwriting and marketing personnel. Management uses its judgment in determining what types of costs should be deferred, as well as what percentage of these costs should be deferred. The Company annually conducts a study to determine which operating costs vary with, and are directly related to, the acquisition of new business and qualify for deferral. Ceding commissions received on premiums the Company cedes to other reinsurers reduce acquisition costs. Anticipated losses, loss adjustment expenses and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of acquisition costs. Acquisition costs associated with credit derivative products are expensed as incurred. When an insured issue is retired early, as discussed above in the Premium Revenue Recognition section, the remaining related deferred acquisition cost is expensed at that time. Ceding commissions, calculated at their contractually defined rate, associated future installment premiums on assumed and ceded reinsurance business were recorded in deferred acquisition costs upon the adoption of FAS 163.

Reserves for Losses and Loss Adjustment Expenses

Financial Guaranty Contracts Upon Adoption of FAS 163

The Company, subsequent to the adoption of FAS 163 on January 1, 2009, recognizes a reserve for losses and loss adjustment expenses on a financial guarantee insurance contract when the Company expects that a claim loss will exceed the unearned premium revenue for that contract based on the present value of expected net cash outflows to be paid under the insurance contract. The unearned premium revenue represents the insurance enterprise’s stand-ready obligation under a financial guarantee insurance contract at initial recognition. Subsequently, if the likelihood of a default (insured event) increases so that the present value of the expected net cash outflows expected to be paid under the insurance contract exceeds the unearned premium revenue, the Company recognizes a reserve for losses and loss adjustment expenses in addition to the unearned premium revenue.

outflows (cash outflows, net of potential recoveries, expected to be paid to the holder of the insured financial obligation, excluding reinsurance) are probability-weighted cash flows that reflect the likelihood of possible outcomes. The Company estimates the expected net cash outflows using the internal assumptions about the likelihood of possible outcomes based on all information available. Those assumptions consider all relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk-management activities.

Financial Guaranty Contracts Prior to Adoption of FAS 163

Prior to January 1, 2009, reserves for losses and loss adjustment expenses for non-derivative transactions in the Company’s financial guaranty direct and financial guaranty assumed reinsurance, prior to the adoption of FAS 163, included case reserves and portfolio reserves. Case reserves were established when there was significant credit deterioration on specific insured obligations and the obligations were in default or default was probable, not necessarily upon non-payment of principal or interest by an insured. Case reserves represented the present value of expected future loss payments and loss adjustment expenses, net of estimated recoveries, but before considering ceded reinsurance. This reserving method was different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish incurred but not reported reserves (“IBNR”) for the difference between actuarially estimated ultimate losses and recorded case reserves. Financial guaranty insurance and assumed reinsurance case reserves and related salvage and subrogation, if any, were discounted at the taxable equivalent yield on the Company’s investment portfolio, which was approximately 6%, during 2008.

Portfolio reserves were not established based on a specific event, rather they are calculated by aggregating the portfolio reserve calculated for each individual transaction. Individual transaction reserves were calculated on a quarterly basis by multiplying the par in-force by the product of the ultimate loss and earning factors without regard to discounting. The ultimate loss factor was defined as the frequency of loss multiplied by the severity of loss, where the frequency was defined as the probability of default for each individual issue. The earning factor was inception to date earned premium divided by the estimated ultimate written premium for each transaction. The probability of default was estimated from rating agency data and was based on the transaction’s credit rating, industry sector and time until maturity. The severity was defined as the complement of recovery/salvage rates gathered by the rating agencies of defaulting issues and was based on the industry sector.

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

Other Lines of Business

Due to the inherent uncertainties of estimating loss and loss adjustment expenses reserves, actual experience may differ from the estimates reflected in the Company’s consolidated financial statements, and the differences may be material.

Reinsurance

In the ordinary course of business, the Company’s insurance subsidiaries assume and retrocede business with other insurance and reinsurance companies. These agreements provide greater diversification of business and may minimize the net potential loss from large risks. Retrocessional contracts do not relieve the Company of its obligation to the reinsured. Reinsurance recoverable on ceded losses includes balances due from reinsurance companies for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force, and is presented net of any provision for estimated uncollectible reinsurance. Any change in the provision for uncollectible reinsurance is included in loss and loss adjustment expenses. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers relating to the unexpired terms of the reinsurance contracts in force.

Salvage Recoverable

When the Company becomes entitled to the underlying collateral (generally a future stream of cash flows or pool assets) of an insured credit under salvage and subrogation rights as a result of a claim payment or estimates recoveries from disputed claim payments on contractual grounds, it reduces the corresponding loss reserve for a particular financial guaranty insurance policy for the estimated salve and subrogation, in accordance with FAS No. 60, “Accounting and Reporting by Insurance Enterprises.” If the expected salvage and subrogation exceeds the estimated loss reserve for a policy, such amounts are recorded as a salvage recoverable asset in the Company’s balances sheets.

Goodwill

The Company has concluded that it is reasonably likely that the goodwill associated with our reinsurance line of business could become impaired in future periods if the volume of new business in the financial guaranty reinsurance market does not return to levels experienced in prior years or if the Company is not able to continue to execute portfolio based reinsurance contracts on blocks of business for other financial guarantors in financial distress. The acquisition of Financial Security Assurance Holdings, Ltd. (“FSAH”) by Assured Guaranty US Holdings Inc. on July 1, 2009, will cause management to reassess its goodwill amounts related to its reinsurance line of business during the Third Quarter 2009 due to its impact on the volume of third party reinsurance business that the Company is expected to assume going forward. If management determines in a future reporting period that goodwill is impaired, the Company would recognize a non-cash impairment charge in its statement of operations and comprehensive income in an amount up to $85.4 million, the current carrying value of goodwill. This charge would not have any adverse effect on the Company’s debt agreements or its overall compliance with the covenants of its debt agreements.

3. Recent Accounting Pronouncements

FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. FSP 157-4 did not have an impact on the Company’s current results of operations or financial position. The disclosures related to FSP 157-4 are included in Note 5.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”). FSP 115-2 provides new guidance on the recognition and presentation of an other than temporary impairment (“OTTI”) for debt securities classified as available-for-sale and held-to-maturity and provides some new disclosure requirements for both debt and equity securities. FSP 115-2 mandates new disclosure requirements that affect both debt and equity securities and extend the disclosure requirements (both new and existing) to interim periods. The Company adopted FSP 115-2 effective with Company’s financial statements for the quarter ended June 30, 2009 and increased the April 1, 2009 balance of retained earnings by $8.9 million ($5.8 million after tax) with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in previous periods on securities in the Company’s portfolio at April 1, 2009, that would not have been required had the FSP been effective for those periods. See Note 6.

4. Credit Derivatives

Financial guarantees written in credit derivative form issued by the Company, principally in the form of CDS contracts, have been deemed to meet the definition of a derivative under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”) and FAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“FAS 155”). FAS 133 and FAS 149 require that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a fair value, cash flow or foreign currency hedge. FAS 155 requires companies to recognize freestanding or embedded derivatives relating to beneficial interests in securitized financial instruments. This recognition was not required prior to January 1, 2007. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

contracts to maturity except for early termination for risk management purposes or as a result of a decision to exit a line of business. In certain circumstances such as for the downgrade of AGC, the CDS counterparty may decide to terminate a credit derivative contract prior to maturity.

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Realized gains and other settlements on credit derivatives
Net credit derivative premiums received and receivable	$	19,970	$	21,592	$	40,720	$	40,455
Net credit derivative losses (paid and payable) recovered and recoverable	—		—		—		—
Ceding commissions received/receivable (paid/payable), net	2,034		2,450		4,253		4,410
Total realized gains and other settlements on credit derivatives	$	22,004	$	24,042	$	44,973	$	44,865

The Company determines the fair value of its credit derivative contracts primarily through modeling that uses various inputs such as credit spreads, based on observable market indices and on recent pricing for similar contracts, and expected contractual life to derive an estimate of the value of our contracts in our principal market (see Note 5). Credit spreads capture the impact of recovery rates and performance of underlying assets, among other factors, on these contracts. The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affects pricing, but also how the Company’s own credit spread affects the pricing of its deals. If credit spreads of the underlying obligations change, the fair value of the related credit derivative changes. Market liquidity could also impact valuations of the underlying obligations.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structure terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. During Second Quarter 2009 and Six Months 2009, the Company incurred net pre-tax unrealized losses on credit derivative contracts of $(225.0) million and $(248.0) million, respectively. As of June 30, 2009 the net credit liability includes a reduction in the liability of $3,340.8 million representing the widening of AGC’s credit value adjustment, which is based on the market cost of AGC’s credit protection of 1,544 basis points. Management believes that the widening of AGC’s credit spread is due to the correlation between AGC’s risk profile and that experienced currently by the broader financial markets and increased demand for credit protection against AGC as the result of its direct segment financial guarantee volume as well as the overall lack of liquidity in the CDS market. Offsetting the gain attributable to the significant increase in AGC’s credit spread were declines in fixed income security market prices primarily attributable to widening spreads in certain markets as a result of the continued deterioration in credit markets and some credit rating downgrades. The higher credit spreads in the fixed income security market are primarily due to the recent lack of liquidity in the high yield collateralized debt obligation and collateralized loan obligation markets as well as continuing market concerns over the

most recent vintages of subprime residential mortgage backed securities and commercial mortgage backed securities.

During Second Quarter 2008 and Six Months 2008, the Company incurred net pre-tax unrealized gains on credit derivative contracts of $610.6 million and $394.2 million, respectively. The Second Quarter gain includes a gain of $958.7 million associated with the change in AGC’s credit spread, which widened substantially from 540 basis points at March 31, 2008 to 900 basis points at June 30, 2008.

The total notional amount of credit derivative exposure outstanding as of June 30, 2009 and December 31, 2008 and included in the Company’s financial guaranty exposure was $53.0 billion and $54.4 billion, respectively.

The components of the Company’s unrealized gain (loss) on credit derivatives as of June 30, 2009 are:

	As of June 30, 2009			Second Quarter 2009			Six Months 2009
Asset Type	Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Unrealized Gain (Loss) (in millions)			Unrealized Gain (Loss) (in millions)
Corporate collateralized loan obligations	$	20.4	AAA	$	3.1		$	(60.2	)
Market value CDOs of corporate obligations	3.0		AAA	(0.2		)	(6.1		)
Trust preferred securities	4.7		A-	(60.8		)	0.3
Total pooled corporate obligations	28.0		AA+	(58.0		)	(66.0		)
Commercial mortgage-backed securities	4.6		AAA	0.8			(24.5		)
Residential mortgage-backed securities	13.9		A+	(176.0		)	(262.0		)
Other	6.4		AA-	8.2			104.5
Total	$	53.0	AA	$	(225.0	)	$	(248.0	)

(1) Based on the Company’s internal rating, which is on a comparable scale to that of the nationally recognized rating agencies.

Corporate collateralized loan obligations, market value collateralized debt obligations (“CDOs”), and trust preferred securities, which comprise the Company’s pooled corporate exposures, include all U.S. structured finance pooled corporate obligations and international pooled corporate obligations. Commercial mortgage-backed securities are comprised of commercial U.S. structured finance and commercial international mortgage backed securities. Residential mortgage-backed securities are comprised of prime and subprime U.S. mortgage-backed and home equity securities, international residential mortgage-backed and international home equity securities. Other includes all other U.S. and international asset classes, such as commercial receivables, and international infrastructure and pooled infrastructure securities.

The Company’s $6.4 billion exposure to Other CDS contracts is also highly diversified. It includes $2.6 billion of exposure to four pooled infrastructure transactions comprised of diversified pools of international infrastructure project transactions and loans to regulated utilities. These pools were all structured with underlying credit enhancement sufficient for the Company to attach at super senior AAA levels. The remaining $3.8 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, infrastructure, regulated utilities and consumer receivables. Substantially all of this $6.4 billion of exposure is rated investment grade and the weighted average credit rating is AA-.

The unrealized gain of $8.2 million in Second Quarter 2009 and $104.5 million in Six Months 2009 on Other CDS contracts is primarily attributable to implied spread narrowing during Six Months 2009 on several UK public

finance infrastructure transactions and a film securitization transaction.

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

The Company’s exposure to the mortgage industry is discussed in Note 7.

Asset Type	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
High yield corporate obligations	35.5	%	29.3	%	$	17.8	AAA	$	1.2		$	(61.2	)
Trust preferred	46.6	%	38.7	%	4.7		A-	(60.8		)	0.3
Market value CDOs of corporate obligations	41.3	%	34.9	%	3.0		AAA	(0.2		)	(6.1		)
Investment grade corporate obligations	28.7	%	29.8	%	1.8		AAA	1.3			2.9
Commercial real estate	49.2	%	48.0	%	0.6		AAA	0.1			(1.7		)
CDO of CDOs (corporate obligations)	1.7	%	5.5	%	0.1		AAA	0.5			(0.2		)
Total	37.8	%	31.9	%	$	28.0	AA+	$	(58.0	)	$	(66.0	)

(1) Based on the Company’s internal rating, which is on a comparable scale to that of the nationally recognized rating agencies.

(2) 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

Vintage	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
2004 and Prior	19.8	%	22.0	%	$	0.3	AAA	$	—		$	(0.5	)
2005	27.8	%	29.0	%	2.7		AAA	0.6			(15.1		)
2006	27.5	%	28.3	%	1.5		AAA	0.2			(7.6		)
2007	35.8	%	36.0	%	0.2		AAA	(0.1		)	(1.3		)
2008	—		—		—		—	—			—
2009	—		—		—		—	—			—
Total	27.7	%	28.8	%	$	4.6	AAA	$	0.8		$	(24.5	)

Vintage	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
2004 and Prior	5.6	%	15.7	%	$	0.2	BBB+	$	0.3		$	(3.2	)
2005	26.5	%	59.8	%	3.1		AA-	(1.0		)	—
2006	16.2	%	22.8	%	4.3		AA	(2.0		)	(0.6		)
2007	16.3	%	18.2	%	6.3		A	(173.4		)	(258.2		)
2008	—		—		—		—	—			—
2009	—		—		—		—	—			—
Total	18.2	%	28.2	%	$	13.9	A+	$	(176.0	)	$	(262.0	)

Asset Type	Original Subordination (2)		Current Subordination (2)		Net Par Outstanding (in billions)		Weighted Average Credit Rating (1)	Second Quarter 2009 Unrealized Gain (Loss) (in millions)			Six Months 2009 Unrealized Gain (Loss) (in millions)
Alt-A loans	20.3	%	22.9	%	$	4.6	BBB+	$	(160.2	)	$	(200.4	)
Prime first lien	9.6	%	12.1	%	4.9		AA+	(16.3		)	(58.9		)
Subprime lien	26.9	%	54.8	%	4.4		A+	0.5			(2.8		)
Total	18.2	%	28.2	%	$	13.9	A+	$	(176.0	)	$	(262.0	)

As of June 30, 2009 and December 31, 2008, the Company considered the impact of its own credit risk, in combination with credit spreads on risk that it assumes through CDS contracts, in determining the fair value of its credit derivatives. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance sheet date. The quoted price of CDS contracts traded on AGC at June 30, 2009 and December 31, 2008 was 1,544 basis points and 1,775 basis points, respectively. Historically, the price of CDS traded on AGC moves directionally the same as general market spreads. 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. At June 30, 2009, the values of our CDS contracts before and after considering implications of our credit spreads were $(3,893.1) million and $(552.3) million, respectively. At December 31, 2008, the values of our CDS contracts before and after considering implications of our credit spreads were $(3,569.1) million and $(331.3) million, respectively.

If certain of its credit derivative contracts are terminated the Company could be required to make a termination payment as determined under the relevant documentation. As of the date of this filing, if AGC’s ratings are downgraded to levels between BBB or Baa2 and BB+ or Ba1, certain CDS counterparties could terminate certain CDS contracts covering approximately $7.7 billion par insured, compared to $16.6 billion as of March 31, 2009. Given current market conditions, the Company does not believe that it can accurately estimate the termination payments it could be required to make if, as a result of any such downgrade, a CDS counterparty terminated its CDS contracts with the Company. These payments could have a material adverse effect on the Company’s liquidity and financial condition.

GAAP nor does it impact AGC’s statutory surplus or net income. In addition, in July 2009, we terminated an ISDA master agreement with Lehman Brothers International (Europe) (“LBIE”) due to its default under the agreement. The Company has discussed with several other CDS counterparties the reduction of its exposure to possible termination payments. The Company can give no assurance that any agreement will be reached with any such CDS counterparty.

The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivatives positions assuming immediate parallel shifts in credit spreads on the Company and on the risks that it assumes at June 30, 2009:

(Dollars in millions)

Credit Spreads( 1)	Estimated Net Fair Value (Pre-Tax)			Estimated Pre-Tax Change in Gain / (Loss)
June 30, 2009:
100% widening in spreads	$	(1,486.2	)	$	(934.1	)
50% widening in spreads	(1,034.4		)	(482.3		)
25% widening in spreads	(796.0		)	(243.9		)
10% widening in spreads	(650.3		)	(98.2		)
Base Scenario	(552.1		)	—
10% narrowing in spreads	(489.2		)	62.9
25% narrowing in spreads	(393.7		)	158.4
50% narrowing in spreads	(230.2		)	321.9

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

The Company had no derivatives designated as hedges during 2009 and 2008.

5. Fair Value of Financial Instruments

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

	As of June 30, 2009				As of December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands of U.S. dollars)
Assets:
Fixed maturity securities	$	1,706,521	$	1,706,521	$	1,511,329	$	1,511,329
Cash and short-term investments	122,022		122,022		117,809		117,809
Credit derivative assets	134,260		134,260		139,494		139,494
Liabilities:
Unearned premium reserves	1,308,643		1,520,337		707,957		739,117
Credit derivative liabilities	714,303		714,303		481,040		481,040
Off-Balance Sheet Instruments:
Future installment premiums	—		—		—		190,970

Background

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

· Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available.

An asset or liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

Effect on the Company’s financial statements

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity securities:
U.S. government and agencies	$	434.0	$	—	$	434.0	$	—
Obligations of state and political subdivisions	999.4		—		999.4		—
Corporate securities	85.2		—		85.2		—
Mortgage-backed securities:
Residential mortgage-backed securities	31.1		—		31.1		—
Commercial mortgage-backed securities	72.5		—		72.5		—
Asset-backed securities	0.1		—		0.1		—
Foreign government securities	84.4		—		84.4		—
Short-term investments	119.2		26.8		92.4		—
Credit derivative assets	134.3		—		—		134.3
CCS Securities	10.2		—		10.2		—
Total assets	$	1,970.4	$	26.8	$	1,809.3	$	134.3
Liabilities
Credit derivative liabilities	$	714.3	$	—	$	—	$	714.3
Total liabilities	$	714.3	$	—	$	—	$	714.3

The fair value of these items as of December 31, 2008 is summarized in the following table(1).

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity securities:
U.S. government and agencies	$	73.3	$	—	$	73.3	$	—
Obligations of state and political subdivisions	1,114.4		—		1,114.4		—
Corporate securities	87.5		—		87.5		—
Mortgage-backed securities:
Residential mortgage-backed securities	85.9		—		85.9		—
Commercial mortgage-backed securities	68.2		—		68.2		—
Asset-backed securities	22.5		—		22.5		—
Foreign government securities	54.3		—		54.3		—
Preferred stock	5.3		—		5.3		—
Short-term investments	110.0		23.8		86.2		—
Credit derivative assets	139.5		—		—		139.5
CCS Securities	51.1		—		51.1		—
Total assets	$	1,811.9	$	23.8	$	1,648.6	$	139.5
Liabilities
Credit derivative liabilities	$	481.0	$	—	$	—	$	481.0
Total liabilities	$	481.0	$	—	$	—	$	481.0

(1) Reclassified to conform to the current period’s presentation. Some amounts ma y not add due to rounding.

Fixed Maturity Securities and Short-term Investments

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate FAS 157 fair value hierarchy level based upon trading activity and observability of market inputs. Based on this evaluation, each price was classified as Level 1, 2 or 3. Prices provided by third party pricing services with market observable inputs are classified as Level 2. Prices on the money fund portion of short-term investments are classified as Level 1. No investments were classified as Level 3 as of or for the three- and six-month periods ended June 30, 2009.

Committed Capital Securities (“CCS Securities”)

Level 3 Valuation Techniques

Credit Derivatives

The Company’s credit derivatives consist of insured CDS contracts (see Note 4). As discussed in Note 4, the Company does not typically exit its credit derivative contracts, and there are no quoted prices for its instruments or for similar instruments. Observable inputs other than quoted market prices exist, however, these inputs reflect contracts that do not contain terms and conditions similar to the credit derivative contracts issued by the Company. Therefore, the valuation of credit derivative contracts requires the use of models that contain significant, unobservable inputs. Thus, we believe the credit derivative valuations are in Level 3 in the fair value hierarchy discussed above.

value of premiums that a comparable financial guarantor would hypothetically charge the Company for the same protection at the balance sheet date. The fair value of the Company’s credit derivatives depends on a number of factors including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. Contractual cash flows, which are included in the “Realized gains and other settlements on credit derivatives” fair value component of credit derivatives, are the most readily observable variables of the fair value of credit derivative contracts since they are based on contractual terms. These variables include (i) net premiums received and receivable on written credit derivative contracts, (ii) net premiums paid and payable on purchased contracts, (iii) losses paid and payable to credit derivative contract counterparties and (iv) losses recovered and recoverable on purchased contracts. The remaining key variables described above impact “Unrealized gains (losses) on credit derivatives”.

Listed below are various inputs and assumptions that are key to the establishment of our fair value for CDS contracts.

Assumptions

The key assumptions of our internally developed model include:

deals that the Company captures and, hence, their fair value. As the cost to acquire CDS protection sold on AGC increases the amount of premium we capture on a deal generally decreases. As the cost to acquire CDS protection sold on AGC decreases the amount of premium we capture on a deal generally increases. In our model, the premium we capture is not permitted to go below the minimum rate that we would currently charge to assume similar risks. This has 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 net spread for the remaining duration of each contract to the notional value of its CDS contracts.

· Actual transactions are used to validate the model results and to explain the correlation between various market indices and indicative CDS market prices.

Inputs

The specific model inputs are listed below, including how we derive inputs for market credit spreads on the underlying transaction collateral.

· Credit spreads on the Company’s name—The Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties.

	Scenario 1			Scenario 2
	bps	% of Total		bps	% of Total
Original Gross Spread / Cash Bond Price (in Bps)	185			500
Bank Profit (in Bps)	115	62	%	50	10	%
Hedge Cost (in Bps)	30	16	%	440	88	%
AGC Premium Received Per Annum (in Bps)	40	22	%	10	2	%

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

spreads for a given type of collateral. This can happen, for example, if transaction volume changes such that a previously used spread index is no longer viewed as being reflective of current market levels.

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

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

· The Company is able to use actual transactions to validate its model results and to explain the correlation between various market indices and indicative CDS market prices.

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

· There is no exit market or actual exit transactions. Thus our exit market is a hypothetical one based on our entry market.

· There is a very limited market in which to verify the fair values developed by the Company’s model.

not reflective of a representative sample, management compares modeled results to premium bids offered by the Company to provide credit protection on new transactions within the reporting period, the premium the Company has received on historical transactions to provide credit protection in net tight and wide credit environments and/or the premium on transactions closed by other financial guaranty insurance companies during the reporting period.

The net par outstanding of the Company’s credit derivative contracts was $53.0 billion and $54.4 billion at June 30, 2009 and December 31, 2008, respectively. The estimated remaining average life of these contracts at June 30, 2009 was 8.1 years.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Second Quarter 2009			Second Quarter 2008
(Dollars in millions)	Credit Derivative Liability (Asset), net			Credit Derivative Liability (Asset), net

Beginning Balance	$	369,951		$	680,788
Total gains or losses realized and unrealized
Unrealized losses (gains) on credit derivatives	225,010			(610,556		)
Realized gains and other settlements on credit derivatives	(22,004		)	(24,042		)
Current period net effect of purchases, settlements and other activity included in unrealized portion of beginning balance	7,086			27,763
Transfers in and/or out of Level 3	—			—
Ending Balance	$	580,043		$	73,953

Gains and losses (realized and unrealized) included in earnings for the period are reported as follows:
Total realized and unrealized (gains) losses included in earnings for the period	$	203,006		$	634,598

Change in unrealized (gains) losses on credit derivatives still held at the reporting date	$	275,065		$	607,706

The table below presents a reconciliation of the Company’s credit derivatives whose fair value included significant unobservable inputs (Level 3) during the six months ended June 30, 2009 and 2008.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Six Months 2009			Six Months 2008
(Dollars in millions)	Credit Derivative Liability (Asset), net			Credit Derivative Liability (Asset), net
Beginning Balance	$	341,546		$	469,310
Total gains or losses realized and unrealized
Unrealized losses (gains) on credit derivatives	248,033			(394,169		)
Realized gains and other settlements on credit derivatives	(44,973		)	(44,865		)
Current period net effect of purchases, settlements and other activity included in unrealized portion of beginning balance	35,437			43,677
Transfers in and/or out of Level 3	—			—
Ending Balance	$	580,043		$	73,953

Gains and losses (realized and unrealized) included in earnings for the period are reported as follows:
Total realized and unrealized (gains) losses included in earnings for the period	$	203,006		$	439,034

Change in unrealized (gains) losses on credit derivatives still held at the reporting date	$	247,883		$	388,846

Items in the Company’s financial statements measured at fair value but carried at historical cost are unearned premiums reserve and financial guaranty installment premiums (prior to adoption of FAS 163) The fair values of these items as of June 30, 2009 and December 31, 2008 are summarized in the following table.

As of June 30, 2009

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Liabilities
Unearned premium reserves	$	1,520.3	$	—	$	—	$	1,520.3	$	(211.7	)
Total liabilities	$	1,520.3	$	—	$	—	$	1,520.3	$	(211.7	)

Off-Balance Sheet Instruments
Future installment premiums	$	—	$	—	$	—	$	—	$	—

As of December 31, 2008

			Fair Value Measurements Using
(Dollars in millions)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Liabilities
Unearned premium reserves	$	739.1	$	—	$	—	$	739.1	$	(31.2	)
Total liabilities	$	739.1	$	—	$	—	$	739.1	$	(31.2	)

Off-Balance Sheet Instruments
Future installment premiums	$	191.0	$	—	$	191.0	$	—	$	—

Unearned Premium Reserves

Future Installment Premiums

6. Investments

The following table summarizes the Company’s aggregate investment portfolio as of June 30, 2009:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		OTTI in OCI
	(in thousands of U.S. dollars)
Fixed maturity securities
U.S. government and agencies	$	430,362	$	5,866	$	(2,265	)	$	433,963	$	—
Obligations of state and political subdivisions	986,885		29,776		(17,282		)	999,379		—
Corporate securities	85,601		2,576		(3,010		)	85,167		1,335
Mortgage-backed securities:
Residential mortgage-backed securities	33,738		1,512		(4,188		)	31,062		6,369
Commercial mortgage-backed securities	82,788		179		(10,511		)	72,456		4,569
Asset-backed securities	143		—		—			143		—
Foreign government securities	80,974		3,548		(171		)	84,351		—
Preferred stock	—		—		—			—		—
Total fixed maturity securities	1,700,491		43,457		(37,427		)	1,706,521		12,273
Short-term investments	119,181		—		—			119,181		—
Total investments	$	1,819,672	$	43,457	$	(37,427	)	$	1,825,702	$	12,273

The following table summarizes the Company’s aggregate investment portfolio as of December 31, 2008(1):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands of U.S. dollars)
Fixed maturity securities
U.S. government and agencies	$	63,788	$	9,518	$	—		$	73,306
Obligations of state and political subdivisions	1,126,770		31,306		(43,639		)	1,114,437
Corporate securities	89,209		2,129		(3,874		)	87,464
Mortgage-backed securities:
Residential mortgage-backed securities	83,919		2,566		(565		)	85,920
Commercial mortgage-backed securities	78,443		—		(10,286		)	68,157
Asset-backed securities	24,308		—		(1,826		)	22,482
Foreign government securities	50,182		4,116		—			54,298
Preferred stock	5,375		—		(110		)	5,265
Total fixed maturity securities	1,521,994		49,635		(60,300		)	1,511,329
Short-term investments	109,986		—		—			109,986
Total investments	$	1,631,980	$	49,635	$	(60,300	)	$	1,621,315

(1) Reclassified to conform to the current period’s presentation.

Approximately 6% and 10% of the Company’s total investment portfolio as of June 30, 2009 and December 31, 2008, respectively, was composed of mortgage backed securities, including collateralized mortgage obligations and commercial mortgage backed securities. As of June 30, 2009 and December 31, 2008, respectively, approximately 0% and 51% of the Company’s total mortgage backed securities were government agency obligations. As of both June 30, 2009 and December 31, 2008, the weighted average credit quality of the Company’s entire investment portfolio was AA. The Company’s portfolio is comprised primarily of high-quality, liquid instruments. The Company continues to

receive sufficient information to value its investments and has not had to modify its approach due to the current market conditions.

	Amortized Cost		Estimated Fair Value
	(in thousands of U.S. dollars)
Due within one year	$	21,031	$	21,535
Due after one year through five years	455,164		460,129
Due after five years through ten years	322,104		333,073
Due after ten years	785,666		788,266
Mortgage-backed securities:
Residential mortgage-backed securities	33,738		31,062
Commercial mortgage-backed securities	82,788		72,456
Total	$	1,700,491	$	1,706,521

Proceeds from the sale of available-for-sale fixed maturity securities were $387.1 million and $124.9 million for the six months ended June 30, 2009 and 2008, respectively.

Net realized investment gains (losses) consisted of the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands of U.S. dollars)

Gains	$	7,441		$	2,075		$	13,644		$	3,090
Losses	(325		)	(255		)	(3,781		)	(603		)
Other than temporary impairments	(1,760		)	(263		)	(4,269		)	(263		)
Net realized investment gains	$	5,356		$	1,557		$	5,594		$	2,224

The change in net unrealized gains (losses) of un-impaired available-for-sale fixed maturity securities consists of:

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
	(in thousands of U.S. dollars)

Fixed maturity securities	$	18,090	$	(16,710	)	$	28,969	$	(31,649	)
Less: Deferred income tax expense (benefit)	6,330		(5,848		)	10,139		(11,075		)
Change in net unrealized gains (losses) on fixed maturity securities	$	11,760	$	(10,862	)	$	18,830	$	(20,574	)

Net investment income is derived from the following sources:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands of U.S. dollars)
Income from fixed maturity securities	$	19,956	$	17,057	$	39,153	$	32,720
Income from short-term investments	172		746		691		1,563
Gross investment income	20,128		17,803		39,844		34,283
Less: investment expenses	415		361		830		737
Net investment income	$	19,713	$	17,442	$	39,014	$	33,546

Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts of $18.1 million and $18.7 million as of June 30, 2009 and December 31, 2008, respectively, for the benefit of reinsured companies and for the protection of policyholders, generally in states in which the Company or its subsidiaries, as applicable, are not licensed or accredited.

Under certain derivative contracts, the Company is required to post eligible securities as collateral, generally cash or U.S. government or agency securities. The need to post collateral under these transactions is generally based on mark-to-market valuation in excess of contractual thresholds. The fair market value of the Company’s pledged securities totaled $517.7 million and $134.2 million as of June 30, 2009 and December 31, 2008, respectively.

The Company is not exposed to significant concentrations of credit risk within its investment portfolio.

No material investments of the Company were non-income producing for the three and six months ended June 30, 2009 and 2008.

Other-Than Temporary Impairment (“OTTI”) Methodology

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

· a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;

· a decline in the market value of a security for a continuous period of 12 months;

· recent credit downgrades of the applicable security or the issuer by rating agencies;

· the financial condition of the applicable issuer;

· whether loss of investment principal is anticipated;

· whether scheduled interest payments are past due; and

· whether the Company has the intent to sell a security prior to its recovery in fair value.

Effective with the adoption of FSP 115-2 guidance the Company recognizes an OTTI loss in earnings for a debt security in an unrealized loss position when either (a) the Company has the intent to sell the debt security or (b) it is more likely than not the Company will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the Company analyzes the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the net present value is less than the amortized cost of the investment, an OTTI loss is recorded. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company’s estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis of an investment, as mentioned above, and market observable data, such as industry analyst reports and forecast, sector credit ratings and other data relevant to the collectability of the security. For mortgage-backed and asset-backed securities, cash flow estimates also include prepayment assumptions and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The determination of the assumptions used in these projections requires the use of significant management judgment.

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

During the three and six months ended June 30, 2009, the Company recorded OTTI losses on fixed maturity securities as follows:

	Three Months Ended			Six Months Ended
	June 30, 2009
	(in thousands of U.S. dollars)

Total OTTI impairment losses	$	(5,163	)	$	(7,672	)
Less: Portion of OTTI loss recognized in OCI (before taxes)	(3,403		)	(3,403		)
Net impairment losses recognized in statements of operations	$	(1,760	)	$	(4,269	)

(in thousands of U.S. dollars)	Three Months Ended June 30, 2009
Balance, beginning of period	$	28
Additions for credit losses on securities for which an OTTI was not previously recognized:	1,760
Balance, end of period	$	1,788

As of June 30, 2009, amounts, net of tax, in AOCI include $(5.2) million for securities for which we have recognized OTTI and $9.1 million for securities for which we have not recognized OTTI. As of December 31, 2008, substantially all of AOCI related to unrealized gains and losses on securities.

	As of June 30, 2009
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(in millions of U.S. dollars)
U.S. government and agencies	$	252.1	$	(2.3	)	$	—	$	—		$	252.1	$	(2.3	)
Obligations of state and political subdivisions	91.6		(0.8		)	268.4		(16.5		)	360.0		(17.3		)
Corporate securities	14.8		(1.5		)	25.5		(1.5		)	40.3		(3.0		)
Mortgage-backed securities:
Residential mortgage-backed securities	23.5		(4.2		)	—		—			23.5		(4.2		)
Commercial mortgage-backed securities	25.2		(4.3		)	34.3		(6.2		)	59.5		(10.5		)
Asset-backed securities
Foreign government securities	25.0		(0.2		)	—		—			25.0		(0.2		)
Preferred stock	—		—			—		—			—		—
Total	$	432.1	$	(13.2	)	$	328.2	$	(24.2	)	$	760.3	$	(37.4	)

	As of December 31, 2008(1)
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(in millions of U.S. dollars)
U.S. government and agencies	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of state and political subdivisions	429.3		(24.6		)	116.6		(19.1		)	545.9		(43.6		)
Corporate securities	29.4		(3.1		)	5.3		(0.8		)	34.6		(3.9		)
Mortgage-backed securities
Residential mortgage-backed securities	2.1		(0.5		)	2.2		—			4.3		(0.6		)
Commercial mortgage-backed securities	53.8		(10.3		)						53.8		(10.3		)
Asset-backed securities	22.4		(1.8		)	—		—			22.4		(1.8		)
Foreign government securities	—		—			—		—			—		—
Preferred stock	5.3		(0.1		)	—		—			5.3		(0.1		)
Total	$	542.2	$	(40.4	)	$	124.0	$	(19.9	)	$	666.2	$	(60.3	)

(1) Reclassified to conform to the current period’s presentation.

The above unrealized loss balances are comprised of 103 and 132 fixed maturity securities as of June 30, 2009 and December 31, 2008, respectively. As of June 30, 2009, the Company’s gross unrealized loss position stood at $37.4 million compared to $60.3 million at December 31, 2008. The $22.9 million decrease in gross unrealized losses was primarily attributable to municipal securities, $26.3 million, offset by an increase in gross unrealized losses in mortgage backed securities, $3.8 million. The decrease in gross unrealized losses during the six months ended June 30, 2009 was related to the recovery of liquidity in the financial markets offset in part by a $8.9 million transition adjustment for adoption of FSP 115-2.

As of June 30, 2009, the Company had 58 securities in an unrealized loss position for greater than 12 months, representing a gross unrealized loss of $24.2 million. Of these securities, 13 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2009 was $11.8 million. This unrealized loss is primarily attributable to the market illiquidity and volatility in the U.S. economy mentioned above and not specific to individual issuer credit. Except as noted below, the Company has recognized no other than temporary impairment losses and has the ability and intent to hold these securities until a recovery in value.

The Company recognized $1.8 million and $4.3 million of other than temporary impairment losses substantially related to mortgage backed and corporate securities for the three and six months ended June 30, 2009, respectively. The 2009 OTTI represents the credit component of the changes in unrealized losses for impaired securities. The Company intends to hold these securities until there is a recovery in their value. The Company continues to monitor the value of these investments. Future events may result in further impairment of the Company’s investments. The Company wrote down $0.3 million of investments for other than temporary impairment losses for the three- and six-month periods ended June 30, 2008.

7. Significant Risk Management Activities

Below Investment Grade Credits

· Category 1 (below investment grade credit with no expected losses);

· Category 2 (below investment grade credit with a loss reserve established prior to an event of default);

· Category 3 (below investment grade credit with a loss reserve established and where an event of default has occurred or is imminent).

The following table provides financial guaranty net par outstanding by BIG category as of June 30, 2009 (dollars in millions):

	BIG Credits
	Category 1		Category 2		Category 3			Total

Number of policies	35		188		160			383
Remaining weighted-average contract period (in years)	9.6		9.4		9.3			9.3
Insured contractual payments outstanding:
Principal	$	125.1	$	886.0	$	1,835.5		$	2,846.6
Interest	39.6		276.5		557.7			873.9
Total	$	164.8	$	1,162.5	$	2,393.2		$	3,720.5

Gross reserves for loss and loss adjustment expenses	$	—	$	16.4	$	269.1		$	285.5
Less:
Gross potential recoveries	—		1.2		165.9			167.1
Discount, net	—		5.8		118.3			124.2
Net reserves for loss and loss adjustment expenses	$	—	$	9.4	$	(15.2	)	$	(5.8	)
Unearned premium reserves	$	—	$	3.5	$	14.7		$	18.3
Net reserves for loss and loss adjustment expenses reported in the balance sheet	$	—	$	5.8	$	(29.9	)	$	(24.1	)
Reinsurance recoverable	$	—	$	—	$	(4.4	)	$	(4.4	)

The Company’s loss adjustment expense reserves for mitigating claim liabilities were $0.9 million as of June 30, 2009.

The Company used weighted-average risk free discount rate of 2.3% to discount reserves for loss and loss adjustment expenses.

Overview of Significant Risk Management Activities

The Company insures various types of residential mortgage backed securitizations (“RMBS”). Such transactions may include obligations backed by closed-end first mortgage loans and closed and open-end second mortgage loans or home equity loans on one-to-four family residential properties, including condominiums and cooperative apartments. An RMBS transaction where the underlying collateral is comprised of revolving home equity lines of credit is generally referred to as a “HELOC” transaction. In general, the collateral supporting HELOC securitizations are second lien loans made to prime borrowers. As of June 30, 2009, the Company had net par outstanding of $0.8 billion related to HELOC securitizations, of which $0.7 billion were written in the Company’s financial guaranty direct segment. As of June 30, 2009, the Company had net par outstanding of $0.7 billion for transactions with Countrywide, of which $0.7 billion were written in the Company’s financial guaranty direct segment (“direct Countrywide transactions” or “Countrywide 2005-J” and “Countrywide 2007-D”). As of December 31, 2008,

the Company had net par outstanding of $0.9 billion related to HELOC securitizations, of which $0.8 billion were transactions with Countrywide.

Key Variables
Constant payment rate (CPR)		3-month average, 6.83–10.92% as of June 30, 2009
Constant default rate (CDR)		6-month average CDR of approximately 17–21% used for our initial default projections, ramping down to a steady state CDR of 1.0%
Draw rate		3-month average, 0.76–1% as of June 30, 2009
Excess spread		250 bps per annum
Repurchases of Ineligible loans by Countrywide		$195.0 million; or approximately 8.1% of original pool balance of $2.4 billion
Loss Severity		100%

As a result of this modeling and analysis, the Company incurred loss and loss adjustment expenses of $3.3 million and $1.9 million for its direct Countrywide transactions during Second Quarter 2009 and Six Months 2009, respectively. The Company’s cumulative incurred loss and loss adjustment expenses on the direct Countrywide transactions as of June 30, 2009 were $60.9 million ($39.6 million after-tax). During 2009, the Company paid losses and loss adjustment expenses for its direct Countrywide transactions of $58.0 million, compared to $41.0 million paid during 2008. The Company expects to recover a significant amount of these paid losses through excess spread from future cash flows as well as funding of future draws and recoverables from breaches of representations and warranties with respect to the underlying collateral inappropriately included in the pool by the originator. The excess of paid losses and loss adjustment exponses over expected losses, including amounts related to these recoveries above, results in a recovery of $109.4 million is included in “salvage recoverable” on the balance sheet as of June 30, 2009.

For the three months ended June 30, 2009, the Company incurred loss and loss adjustment expenses of $7.2 million for its HELOC exposures, of which $7.0 million related to the Company’s financial guaranty direct segment.

For the six months ended June 30, 2009, the Company incurred loss and loss adjustment expenses of $9.7 million for its HELOC exposures, of which $9.5 million related to the Company’s financial guaranty direct segment.

A summary of the Company’s exposure to these two transactions and their actual performance statistics through June 30, 2009 are as follows:

($ in millions)

	Countrywide 2005J			Countrywide 2007D
Original principal balance	$	1,500		$	900
Remaining principal balance	$	461.0		$	527.5
Cumulative losses (% of original principal balance)(1)	13.7		%	21.2		%
Total delinquencies (% of current balance)(2)	19.2		%	15.2		%
Average initial FICO score of borrowers(3)	709			712
Interest margin over prime(4)	2.0		%	1.8		%
Revolving period(5)	10			10
Repayment period(6)	15			15
Average draw rate(7)	1.0		%	0.8		%
Average constant payment rate(8)	6.8		%	10.9		%
Excess spread(9)	286		bps	275		bps
Expected collateral loss(10)	20.4		%	36.0		%