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Exhibit 99.1

INDEX

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. ("FSA HOLDINGS") AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.     ORGANIZATION AND OWNERSHIP

        Financial Security Assurance Holdings Ltd., which has changed its name to Assured Guaranty Municipal Holdings Inc. as of March 25, 2010 ("FSA Holdings"), is a holding company incorporated in the State of New York. The Company, through its insurance company subsidiaries, provides financial guaranty insurance on public finance obligations in domestic and international markets. The Company's principal insurance company subsidiary is Assured Guaranty Municipal Corp. ("AGM"), formerly known as Financial Security Assurance Inc., a wholly owned New York insurance company. Historically, the Company also provided financial guaranty insurance on asset-backed obligations. In August 2008, the Company announced that it would cease insuring asset-backed obligations and instead participate exclusively in the global public finance financial guaranty business. References to the "Company" are to Financial Security Assurance Holdings Ltd. together with its subsidiaries.

        In addition to its financial guaranty business, the Company historically offered AGM-insured guaranteed investment contracts and other investment agreements ("GICs") as well as medium-term notes to municipalities and other market participants through consolidated entities in its financial products ("FP") segment. In November 2008, the Company ceased issuing GICs. While the Company has ceased new originations of asset-backed financial guaranty business and GICs, a substantial portfolio of such obligations remains outstanding.

        The Company's GICs were issued through non-insurance companies that had been indirect subsidiaries of FSA Holdings as of June 30, 2009: FSA Capital Management Services LLC ("FSACM"), FSA Capital Markets Services (Caymans) Ltd. and FSA Capital Markets Services LLC (collectively, the "GIC Subsidiaries"). The proceeds of GICs issued by the GIC Subsidiaries were loaned to FSA Asset Management LLC ("FSAM"), another entity that had been an indirect subsidiary of FSA Holdings as of June 30, 2009. FSAM invested the funds in fixed-income obligations that had satisfied the Company's investment criteria. FSAM wholly owns FSA Portfolio Asset Limited ("FSA-PAL"), a U.K. company that invests in non-U.S. securities.

        The terms governing FSAM's repayment of those proceeds to the GIC Subsidiaries matched the payment terms under the related GIC. FSAM invested the proceeds in securities and entered into derivative transactions to convert most fixed-rate assets and liabilities into London Interbank Offered Rate ("LIBOR")-based floating rate assets and liabilities. Most of FSAM's assets consisted of residential mortgage-backed securities ("RMBS") that had suffered significant market value declines and, in some cases, credit deterioration. The market value declines of FSAM's assets subjected FSAM to significant liquidity risk insofar as the GICs are in most cases subject to redemption or collateralization should AGM be downgraded below Aa3 by Moody's Investors Service, Inc. ("Moody's") (AGM's current Moody's rating) or below AA- by Standard & Poor's Ratings Services ("S&P").

        As a result of the significant decline in asset value and the November 2008 cessation of issuing GICs, the GIC business had changed from a business model managed by the Company and focused on attaining positive net interest margin to a run-off business managed by Dexia S.A. ("Dexia"), which was the ultimate parent of FSA Holdings as of June 30, 2009, and seeking to minimize liquidity risk and optimize asset recovery values.

        In February 2009, Dexia entered into several agreements that transferred credit and liquidity risks of the GIC operations to Dexia (the "FSAM Risk Transfer Transaction"). Each of the agreements executed under the FSAM Risk Transfer Transaction directly affected FSAM and the entities that absorbed the risks created by FSAM. These agreements provide for (i) the elimination of AGM's

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

1.     ORGANIZATION AND OWNERSHIP (Continued)

guaranty of repayment of FSAM's borrowings under the credit facilities provided by Dexia's bank subsidiaries; (ii) the elimination of AGM's guaranty of certain of FSAM's investments; and (iii) an increase in the credit facilities provided to FSAM by Dexia's bank subsidiaries from $5.0 billion to $8.0 billion.

        As a result, the FSAM Risk Transfer Transaction was deemed a reconsideration event for FSAM under accounting principles generally accepted in the United States of America ("GAAP"). There was no reconsideration event for any of the GIC Subsidiaries. Upon the reconsideration event, management determined that Dexia absorbed the majority of the variability of expected losses of FSAM, which resulted in deconsolidation of FSAM and its subsidiary FSA-PAL as of February 24, 2009 (the "FSAM Deconsolidation Date"), the effective date of the FSAM Risk Transfer Transaction. FSAM and FSA-PAL's assets and liabilities were deconsolidated at fair-value through the consolidated statements of operations with the difference recorded as a $7.4 billion gain on deconsolidation in additional paid in capital, net of tax.

        The GIC subsidiaries, unlike FSAM, remained part of the Company's consolidated financial statements at June 30, 2009, which meant that the GICs issued to third parties and the GIC Subsidiaries' note receivable from FSAM (the "Note Receivable from Affiliate") represented the liabilities and assets of the GIC business in the Company's consolidated financial statements. The Note Receivable from Affiliate was carried at net realizable value, which was periodically evaluated for impairment. Prior to the FSAM Deconsolidation Date the Note Receivable from Affiliate was eliminated in consolidation.

        Certain GICs were designated as fair value option and as a result, were marked to market. However, derivatives that hedge the interest rate risk of the GICs were maintained within FSAM, and therefore contracts meant to hedge the interest rate risk of those GICs were not included in the Company's consolidated financial statements. This results in an increase in the potential for volatility of the Company's results of operations.

        At June 30, 2009, the Company was a subsidiary of Dexia Holdings Inc. ("DHI"), which, in turn, is owned 90% by Dexia Crédit Local S.A. ("Dexia Crédit Local") and 10% by Dexia. Dexia is a Belgian corporation primarily engaged in the business of public finance, banking and investment management in France, Belgium, Luxembourg and other European countries, as well as in the United States. Dexia Crédit Local is a wholly owned subsidiary of Dexia.

        On July 1, 2009, FSA Holdings and its subsidiaries were acquired by Assured Guaranty US Holdings Inc., a wholly owned subsidiary of Assured Guaranty Ltd ("AGL") (the "Acquisition"). AGL (together with its subsidiaries, "Assured Guaranty") is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the public finance, infrastructure and structured finance markets in the United States as well as internationally. The Acquisition did not include the acquisition of FSA Holding's former GICs business, its medium term notes business or the equity payment agreements associated with FSA Holding's leveraged lease business (the "Financial Products Business"). The Companies subsidiaries that had conducted FSA Holdings' Financial Products Business were transferred to Dexia Holdings prior to completion of the Acquisition. In addition, Assured Guaranty has entered into various agreements with Dexia and its subsidiaries in order to transfer to Dexia and such subsidiaries the credit and liquidity risks associated with FSA Holdings' former Financial Products Business. See Note 19 for additional information on the Acquisition and its impact on the Company's consolidated financial statements.

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

1.     ORGANIZATION AND OWNERSHIP (Continued)

Segments

Financial Guaranty

        Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial debt obligation against non-payment of scheduled principal and interest payments when due. Upon an obligor's default on scheduled principal or interest payments due on the debt obligation, the Company is required under the financial guaranty or credit derivative contract to pay the investor or swap counterparty the principal or interest shortfall due.

        Obligations insured by the Company are generally assigned ratings on the basis of the financial strength ratings given to the Company's insurance company subsidiaries by the major securities rating agencies. On June 30, 2009, AGM was rated AAA (negative watch) by S&P, AA+ (negative watch) by Fitch Ratings ("Fitch") and Aa3 (developing outlook) by Moody's. As of March 24, 2010, AGM was rated AAA by S&P and Aa3 by Moody's. The outlooks of both ratings are negative. The Company is no longer rated by Fitch. On February 24, 2010, at the request of AGL, Fitch withdrew the insurer financial strength and debt ratings of all of Assured Guaranty's rated subsidiaries at their then current levels of AA for AGM and Assured Guaranty (Europe) Ltd. (formerly Financial Security Assurance (U.K.) Limited, A- for the senior debt of FSA Holdings and BBB for the junior subordinated debentures of FSA Holdings. All of such ratings had been on negative outlook.

        Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the issuers' taxing powers, tax-supported bonds and revenue bonds and other obligations of states, their political subdivisions and other municipal issuers supported by the issuers' or obligors' covenant to impose and collect fees and charges for public services or specific projects. Public finance obligations include obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including government office buildings, toll roads, health care facilities and utilities.

        Asset-backed obligations insured by the Company were generally issued in structured transactions and are backed by pools of assets such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. The Company insured synthetic asset-backed obligations that generally took the form of credit default swap ("CDS") obligations or credit-linked notes that reference asset-backed securities ("ABS") or pools of securities or other obligations, with a defined deductible to cover credit risks associated with the referenced securities or loans.

        The Company has refinanced certain poorly performing transactions by employing refinancing vehicles to raise funds, prepay the claim obligations and take control of the assets. These refinancing vehicles are consolidated with the Company and considered part of the financial guaranty segment.

Financial Products

        At June 30, 2009, the Company consolidated the results of certain variable interest entities ("VIEs"), which include FSA Global Funding Limited ("FSA Global") and Premier International Funding Co. ("Premier"). FSA Global is a special purpose funding vehicle that was partially owned at June 30, 2009 by a subsidiary of FSA Holdings. FSA Global issued AGM-insured medium term notes and generally invested the proceeds from the sale of its notes in AGM-insured GICs or other AGM-insured obligations with a view to realizing the yield difference between the notes issued and the

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

1.     ORGANIZATION AND OWNERSHIP (Continued)

obligations purchased with the note proceeds. Premier was principally engaged in leveraged lease transactions. Prior to completion of the Acquisition, the Company transferred its ownership interest in FSA Global to Dexia Holdings and resigned from the board of directors of Premier. Dexia currently has the ability to appoint a director to the board of Premier.

        The GIC Subsidiaries, FSA Global and Premier, and prior to February 24, 2009, FSAM and FSA-PAL, collectively comprise the "FP segment" for accounting purposes.

2.     BASIS OF PRESENTATION

        The accompanying Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments and entries required to record the FSAM Risk Transfer Transaction necessary for a fair statement of the financial position, results of operations and cash flows as of and for the period ended June 30, 2009 and for all periods presented. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. The accompanying Consolidated Financial Statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (United States). The December 31, 2008 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the periods ended June 30, 2009 and 2008 are not necessarily indicative of the operating results for the full year. Certain prior-year balances have been reclassified to conform to the 2009 presentation, including the presentation of noncontrolling interests (previously "minority interests").

        The preparation of financial statements in conformity with GAAP requires management to make extensive estimates and assumptions that affect the reported amounts of assets and liabilities in the Company's consolidated balance sheets at June 30, 2009 and December 31, 2008, the reported amounts of revenues and expenses in the consolidated statements of operations during the three and six months ended June 30, 2009 and 2008 and disclosure of contingent assets and liabilities. Such estimates and assumptions include, but are not limited to, loss and loss adjustment expenses ("LAE"), fair value of financial instruments, the determination of other-than-temporary impairment ("OTTI"), the deferral and amortization of policy acquisition costs, expected lives and debt service schedules of certain financial guaranty contracts and taxes. Actual results may differ from those estimates.

Special Purpose Entities

        Asset-backed and, to a lesser extent, public finance transactions insured by the Company may have employed special purpose entities for a variety of purposes. A typical asset-backed transaction, for example, employs a special purpose entity as the purchaser of the securitized assets and as the issuer of the insured obligations. Special purpose entities are typically owned by transaction sponsors or charitable trusts, although the Company may have an ownership interest in some cases. The Company generally maintains certain contractual rights and exercises varying degrees of influence over special purpose entity issuers of AGM-insured obligations.

        The Company also bears some of the "risks and rewards" associated with the performance of those special purpose entities' assets. Specifically, as issuer of the financial guaranty insurance policy

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

2.     BASIS OF PRESENTATION (Continued)

insuring a given special purpose entity's obligations, the Company bears the risk of asset performance (typically, but not always, after a significant depletion of overcollateralization, excess spread, a deductible or other credit protection).

        The Company's underwriting guidelines for public finance obligations generally require that a transaction be rated investment grade when the Company's insurance is applied. The Company's underwriting guidelines for asset-backed obligations, which it followed prior to its August 2008 decision to cease insuring such obligations, varied by obligation type in order to reflect different structures and types of credit support. The Company sought to insure asset-backed obligations that generally provided for one or more forms of overcollateralization or third-party protection. In addition, the special purpose entity typically pays a periodic premium to the Company in consideration of the issuance by the Company of its insurance policy, with the special purpose entity's assets typically serving as the source of payment of such premium, thereby providing some of the "rewards" of the special purpose entity's assets to the Company. Special purpose entities are also employed by the Company in connection with secondary market transactions and with refinancing underperforming, non-investment grade transactions insured by AGM.

        The degree of influence exercised by the Company over these special purpose entities varies from transaction to transaction, as does the degree to which "risks and rewards" associated with asset performance are assumed by AGM. In analyzing special purpose entities described above, the Company considers reinsurance to be an implicit variable interest. Where the Company determines it is required to consolidate the special purpose entity, the outstanding exposure is excluded from outstanding exposure amounts reported.

        The Company is required to consolidate special purpose entities that are considered VIEs where the Company is considered the primary beneficiary.

        In determining whether the Company is the Primary Beneficiary of a particular VIE, a number of factors are considered. The significant factors considered are: the design of the entity and the risks it was created to pass-along to variable interest holders; the extent of credit risk absorbed by the Company through its insurance contract and the extent to which credit protection provided by other variable interest holders reduces this exposure; the exposure that the Company cedes to third party reinsurers to reduce the extent of expected loss which the Company absorbs; and the portion of the VIE's total notional exposure covered by the Company's insurance policy. The Company's accounting policy was to first conduct a qualitative analysis based on the design of the VIE in order to identify whether it is the primary beneficiary. Should the qualitative analysis not provide a basis for conclusion, the Company performed a quantitative analysis in order to determine if it is the primary beneficiary of the VIE under review.

        In considering the significance of its interest in a particular VIE, the Company considers the extent to which both the variability it absorbs from the VIE and the Company's exposure to that VIE are material to the Company's own financial statements. The Company believed that its surveillance categories were an appropriate measure to use for identification of VIEs in which the Company absorbed other than insignificant variability. VIEs selected for this purpose are related to risks classified as surveillance Category IV, defined as "demonstrating sufficient deterioration to indicate that material credit losses are possible," or risks classified as surveillance Category V, defined as "transactions where losses are most probable." The Company believed that VIE-related risks classified as surveillance Categories IV and V are VIEs in which the Company absorbed a significant portion of

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

2.     BASIS OF PRESENTATION (Continued)

the variability created by the particular VIE. For a more detailed description of the surveillance categories used by the Company, see Note 3.

        AGM's interest in VIEs that are not consolidated are included in "loss and loss adjustment expense reserve" and "credit derivatives" in the Company's balance sheet.

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE

        Effective January 1, 2009, the Company adopted new GAAP accounting for financial guaranty insurance contracts. The new accounting changed the Company's premium revenue recognition and loss reserving methodology. The change in the premium recognition also changed the amount of deferred acquisition cost previously amortized, as such amortization is recognized in proportion to premium earnings. The cumulative effect of the adoption was a $63.2 million after-tax decrease to the opening retained earnings balance. The retained earnings adjustment was comprised of a $31.0 million after-tax increase in net loss reserves and a $32.2 million after-tax adjustment for inception-to-date premium earnings, net of the amortization of deferred acquisition costs. As a result of the adoption, premium earnings and loss LAE are not comparable between 2008 and 2009. See the Company's Annual Report on Form 10-K for the year ended December 31, 2008, for a description of accounting policies in effect prior to January 1, 2009.

Premium Revenue Recognition

        Under the new accounting, unearned premium revenue for premiums paid in installments is equal to the present value of premiums expected to be collected over the period of the financial guaranty contract based on either the expected or contractual life. The present value of uncollected premiums expected to be collected over the period of the financial guaranty contract is recorded as "premiums receivable" on the balance sheet. Accretion of the discount on premium receivable is recorded in "net premiums earned." The discount rate applied to discount premiums is the risk-free rate based on the country of exposure and the term to maturity of the policy. Discount rates are updated only when the debt repayment schedule changes on contracts where the expected lives are used. The term to maturity equals the expected period only if a homogeneous pool of assets underlies the insured financial obligation and the timing and amount of prepayments is reasonably estimated. When premiums receivable are determined to be uncollectible they are written off by recording a reduction of the premium receivable asset.

        If a single premium is paid at inception of the financial guaranty contract, the unearned premium at inception is measured as the amount received.

        Regardless of frequency and timing of payment, premiums are recognized in earnings over the period of the contract in proportion to the amount of insurance protection provided, with a corresponding decrease in unearned premium revenue. The amount of insurance protection provided is a function of the insured principal amount outstanding. Therefore, the proportionate share of premium revenue recognized in a given period is a constant rate calculated based on the relationship between the insured principal outstanding in a given reporting period compared with the sum of the insured principal amounts outstanding for all periods. Accordingly, the premium revenue for each reporting period is determined by multiplying the insured principal amount outstanding for that period by the ratio of (a) the total present value of the premium due or expected to be collected over the period of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE (Continued)

the contract to (b) the sum of all insured principal amounts outstanding during each reporting period over the contractual or expected period of the contract.

        Premium revenue and the related amortization of deferred acquisition costs are accelerated when the Company is legally released from its financial guaranty insurance contract.

        For premiums denominated in a foreign currency, premiums receivable are revalued at each reporting date based on foreign exchange rates in effect at the reporting date. Unearned premium revenue is recorded at historical rates.

        For financial guaranty insurance contracts where premiums are received over the period of the contract, rather than at inception, the table below presents the unearned premium revenue, the weighted-average risk-free rate used to discount the premiums expected to be collected and the weighted-average period of the premium receivable.

Unearned Premium Revenue for Policies Paid in Installments

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE (Continued)

        The tables below represent a schedule of premiums expected to be collected and earned in the future and a rollforward of premiums receivable.

Schedule of Projected Net Premium Earnings and Collections

Gross Premium Receivable Rollforward

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE (Continued)

        The following table presents the components of net premiums earned.

Premiums Earned

Loss and Loss Adjustment Expense Recognition

        Loss and LAE reserves are established at the policy level only when the Company's expected loss exceeds the unearned premium revenue. Expected loss is based on a calculation of the present value of expected net cash outflows, probability-weighted to reflect the likelihood of possible outcomes. The discount rates used are the risk-free rates based on the timing of expected cash flows, and are updated quarterly.

        The following table presents the activity in net loss and LAE reserves.

Reconciliation of Net Loss and Loss Adjustment Expense Reserve

        In the three months and six months ended June 30, 2009, losses and LAE was $79.3 million and $430.1 million, respectively. The expense was driven primarily by deteriorating credit performance in home equity line of credit ("HELOC"), Alt-A closed-end second-lien mortgage ("CES") securities, Option Adjustable Rate Mortgage ("Option ARM") transactions, Alt-A first lien mortgages and public finance transactions.

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE (Continued)

        Losses paid is primarily driven by HELOC transactions. Generally, once the overcollateralization is exhausted on an insured HELOC transaction, the Company pays a claim if losses in a period exceed excess spread for the period. To the extent excess spread exceeds losses, the Company is reimbursed for any losses paid to date. In the three and six months ended June 30, 2009, the Company paid net claims of $200.6 million and $383.0 on HELOC transactions, respectively. This brought the inception to date net claim payments on HELOC transactions to $1,008.3 million. There were no claims paid on most other classes of insured transactions through June 30, 2009. Most claim payments on Alt-A CES are not payable until 2036 or later. Option ARM claim payments are expected to start in 2010.

        The following tables present the components of transactions with loss and LAE reserves by sector. Because prior year information has not been restated in accordance with the new accounting guidance, the amounts are determined under different accounting methods.

Loss and Loss Adjustment Expense Reserve Summary by Sector

 

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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE (Continued)

        The Company assigned each insured credit to one of five designated surveillance categories to facilitate the appropriate allocation of resources to monitoring, loss mitigation efforts and rating the credit condition of each risk exposure. Such categorization is determined in part by the risk of loss and in part by the level of routine involvement required. The surveillance categories were organized as follows:

•

Categories I and II represent fundamentally sound transactions requiring routine monitoring, with Category II indicating that routine monitoring is more frequent, due, for example, to the sector or a need to monitor triggers.



•

Category III represents transactions with some deterioration in asset performance, financial health of the issuer or other factors. Active monitoring and intervention is employed for Category III transactions.



•

Category IV reflects transactions demonstrating sufficient deterioration to indicate that material credit losses are possible.



•

Category V reflects transactions where losses are most probable. This category includes (1) risks where claim payments have been made and where ultimate losses, net of recoveries, are expected, and (2) risks where claim payments are probable but none have yet been made and ultimate losses, net of recoveries, are expected. Category IV and Category V transactions are subject to intense monitoring and intervention.

        The tables below present the gross and net par and interest outstanding and unearned premium revenue in the insured portfolio for risks classified as described above:

Par and Interest Outstanding
(Excluding Credit Derivatives)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3.     ACCOUNTING FOR FINANCIAL GUARANTY INSURANCE (Continued)

        The table below represents undiscounted and discounted net cash flows for all obligations for which a loss reserve was established.

Loss and Loss Adjustment Expense Reserve by Surveillance Category

        Management periodically evaluates its estimates for losses and LAE and establishes reserves that management believes are adequate to cover the present value of the ultimate net cost of claims. The Company will continue, on an ongoing basis, to monitor these reserves and may periodically adjust the loss and probability of loss scenarios based on the Company's actual loss and recovery experience and economic conditions. However, because of the uncertainty involved in developing these estimates, the ultimate liability may differ materially from current estimates.

        The weighted average risk free rate used to discount the claim liability was between 0.20% and 4.85% at June 30, 2009 and between 0.37% and 2.83% at January 1, 2009.

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4.     FAIR VALUE MEASUREMENT

        Fair value is based upon pricing received from dealer quotes or alternative pricing sources with reasonable levels of price transparency, internally developed estimates that employ credit-spread algorithms or models that use market-based or independently sourced market data inputs, including yield curves, interest rates, volatilities, debt prices, foreign exchange rates and credit curves. In addition to market information, models also incorporate instrument-specific data, such as maturity date.

        Considerable judgment is necessary to interpret the data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair-value amounts.

Valuation Hierarchy

        GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•

Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.



•

Level 2—inputs to the valuation methodology include quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model- derived valuations in which all significant inputs and significant value drivers are observable in active markets.



•

Level 3—inputs to the valuation methodology are unobservable and significant drivers of the fair value measurement.

        A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Inputs to Valuation Techniques

        Inputs refer broadly to the assumptions that market participants use in pricing assets or liabilities, including assumptions about risk. Inputs may be observable or unobservable.

•

Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from independent sources.



•

Unobservable inputs are inputs that reflect the assumptions management makes about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.

Valuation Techniques

        Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types:

•

The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of comparables or matrix pricing. Market multiples might lie in ranges with a different multiple for each comparable. The

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

4.     FAIR VALUE MEASUREMENT (Continued)

selection of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.

•

The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. Income approach techniques rely on current market expectations of future amounts. Examples of income approach valuation techniques include present value techniques, option-pricing models that incorporate present value techniques, and the multi-period excess earnings method.



•

The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.

        The Company uses valuation techniques that it concludes are appropriate in the specific circumstances and for which sufficient data are available. In selecting the valuation technique to apply, management considers the definition of an exit price and considers the nature of the asset or liability being valued.

        The following is a description of the valuation methodologies the Company uses for financial instruments including the general classification of such instruments within the valuation hierarchy.

General Investment Portfolio

        The "General Investment Portfolio" consists of the investments attributable to the financial guaranty segment held by FSA Holdings, AGM and other subsidiaries, excluding investments held in the FP Segment Investment Portfolio. The fair value of bonds in the General Investment Portfolio is generally based on quoted market prices received from third party pricing services or alternative pricing sources with reasonable levels of price transparency. Such quotes generally consider a variety of factors, including recent trades of the same and similar securities. If quoted market prices are not available, the valuation is based on pricing models that use dealer price quotations, price activity for traded securities with similar attributes and other relevant market factors as inputs, including security type, rating, vintage, tenor and its position in the capital structure of the issuer. Assets in this category are primarily categorized as Level 2.

        At June 30, 2009, the Company's equity securities were comprised of common stock of Dexia. The fair value of the common stock is based upon quoted prices and is categorized as Level 1.

        For short-term investments in the General Investment Portfolio, which are those investments with a maturity of less than one year at time of purchase, the carrying amount approximates fair value. These short-term investments include money-market funds and other highly liquid short-term investments, which are categorized as Level 1 on the valuation hierarchy, and foreign government and agency securities, which are categorized as Level 2.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

4.     FAIR VALUE MEASUREMENT (Continued)

FP Segment Investment Portfolio

        The "FP Investment Portfolio" is comprised of investments made with the proceeds of AGM-insured GICs. The "VIE Investment Portfolio" is made up of the investments supporting the VIE liabilities. Prior to the FSAM Deconsolidation Date, the FP Investment Portfolio and VIE Investment Portfolio together formed the "FP Segment Investment Portfolio." As of the FSAM Deconsolidation Date, FSAM, the entity holding the FP Investment Portfolio, is no longer consolidated for accounting purposes with the Company, and therefore the VIE Investment Portfolio is the only component of the FP Segment Investment Portfolio.

        The available-for-sale FP Investment Portfolio is broadly comprised of short-term investments, non-agency RMBS, securities issued or guaranteed by U.S. government sponsored agencies, taxable municipal bonds, securities issued by utilities, infrastructure-related securities, collateralized debt obligations ("CDOs"), and other asset backed securities. In addition to its available-for-sale portfolio, prior to the FSAM Deconsolidation Date, the FP Investment Portfolio included foreign currency denominated securities classified as "trading."

        The fair value of bonds in the FP Segment Investment Portfolio was generally based on quoted market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Such quotes generally consider a variety of factors, including recent trades of the same and similar securities. If quoted market prices were not available, the valuation was based on pricing models that use dealer price quotations, price activity for traded securities with similar attributes and other relevant market factors as inputs, including security type, rating, vintage, tenor and its position in the capital structure of the issuer. For assets not valued by quoted market prices received from dealer quotes or alternative pricing sources, fair value was based on either internally developed models using market based inputs or based on broker quotes for identical or similar assets. Valuation results, particularly those derived from valuation models and quotes on certain mortgage and asset-backed securities, could differ materially from amounts that would actually be realized in the market. Non-agency mortgage-backed and other asset-backed investments were generally categorized as Level 3 due to the reduced liquidity that exists for such assets, which increases use of unobservable inputs.

        The trading portfolio was comprised of U.K. pound sterling-denominated inflation-linked bonds for which fair value was based on broker quotes derived from their internally-developed models that used observable market inputs to the extent possible. The investments are classified as Level 3. The trading portfolio is owned by FSAM and as a result is no longer consolidated with the Company as of the FSAM Deconsolidation Date.

Assets Acquired in Refinancing Transactions

        For certain assets acquired in refinancing transactions, fair value was either the present value of expected cash flows or a quoted market price as of the reporting date. This portfolio is comprised primarily of bonds, securitized loans, common stock, mortgage loans, real estate and short term investments, of which bonds, common stocks and certain securitized loans are carried at fair value. Mortgage loans are accounted for at fair value when lower than cost. The majority of the assets in this portfolio are categorized as Level 3 in the valuation hierarchy, except for the short-term investments, which are categorized as Level 2.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

4.     FAIR VALUE MEASUREMENT (Continued)

Credit Derivatives in the Insured Portfolio

        The Company's insured portfolio includes contracts accounted for as derivatives, namely,

•

CDS contracts in which the Company sells protection to various financial institutions, and in certain cases, purchases back-to-back credit protection on all or a portion of the risk written, primarily from reinsurance companies;



•

insured interest rate ("IR") swaps entered into by the issuer in connection with the issuance of certain public finance obligations, which guarantee the municipality's performance under the IR swap to the IR swap counterparty; and



•

insured net interest margin ("NIM") securitizations and other financial guaranty contracts that guarantee risks other than credit risk, such as interest rate basis risk ("FG contracts with embedded derivatives") issued after January 1, 2007.

        The Company considers all such agreements to be a normal part of its financial guaranty insurance business but, for accounting purposes, these contracts are deemed to be derivative instruments and therefore must be recorded at fair value, with changes in fair value recorded in the consolidated statements of operations in "net change in fair value of credit derivatives."

Credit Default Swap Contracts

        In the case of CDS contracts, a trust that is consolidated by the Company writes a derivative contract that provides for payments to be made if certain credit events occur related to certain specified reference obligations, in exchange for a fee. The insurance laws of the State of New York allow a financial guaranty insurer to guarantee special purpose entities that issue CDS. The trust's obligation on the CDS contracts it writes are guaranteed by a financial guaranty contract written by AGM that provides payments to the insured if the trust defaults on its payments under the derivative contract. In these transactions, AGM is considered the counterparty to a financial guaranty contract that is defined under GAAP as a derivative. The credit event is typically based upon failure to pay or the insolvency of a referenced obligation. In such cases, the claim represents payment for the shortfall amount.

        The Company's accounting policy regarding CDS contract valuations requires management to make numerous complex and subjective judgments relating to amounts that are inherently uncertain. CDS contracts are valued using proprietary models because such instruments are unique, complex and are typically highly customized transactions. Valuation models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based on market developments and improvements in modeling techniques and the availability of market observable data. Due to the significance of unobservable inputs required to value CDS contracts, they are considered to be Level 3 under the fair value hierarchy.

        Significant assumptions that, if changed, could result in materially different fair values include:

•

the assumed credit quality of the underlying referenced obligations,



•

the assumed credit spread attributable to credit risk of the underlying referenced obligations exclusive of funding costs,



•

the reference credit index used, which includes a market correlation factor for pooled corporate CDS contracts, and



•

the price source and credit spread attributable to the Company's own credit risk.

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4.     FAIR VALUE MEASUREMENT (Continued)

        Market perceptions of credit deterioration of the underlying referenced obligation would result in an increase in the expected exit value (the amount required to be paid to exit the transaction due to wider credit spreads).

Fair Value of CDS Contracts in which the Company Sells Protection

        Determination of Current Exit Value Premium:    The estimation of the current exit value premium is derived using a unique credit-spread algorithm for each defined CDS category that utilizes various publicly available credit indices, depending on the types of assets referenced by the CDS contract and the duration of the contract. The "exit price" derived is technically an "entry price" and not an "exit price" (i.e., the price that would be received to sell an asset or paid to transfer a liability). This is because a monoline insurer cannot observe "exit prices" for the CDS contract that it writes in a principal market since these contracts are not transferable. While GAAP provides that the transaction (entry) price and the exit price may not be equal if the transaction price includes transaction costs, the Company believes those transaction costs would be the same in an "entry" market and a hypothetical "exit" market and thus it would be inappropriate to record a day one gain when using the estimated "entry price" to determine the exit value premium.

        Management applies judgment when developing these estimates and considers factors such as current prices charged for similar agreements, if available, performance of underlying assets, changes in internal credit assessments or rating agency-based shadow ratings, and the level at which the deductible has been set. Estimates generated from the Company's valuation process may differ materially from values that may be realized in market transactions.

        In a financial guaranty insurance policy, a deductible is the portion of a loss under that policy that is not covered by the policy or, in other words, the amount of the loss for which the insurer is not responsible. In a CDS contract, the deductible is quoted as a percentage of the contract's notional amount, and is also referred to as the contract's attachment point. For example, for a CDS with a $1 billion notional amount and a 15% deductible, the Company would only be obligated to make a claim payment after the insured incurred more than $150 million (15% of $1 billion) of losses (net of recoveries). The attachment points for each of the Company's CDS contracts vary, as the deductibles are negotiated on a contract-by-contract basis.

        In the ordinary course, the Company does not post collateral to the counterparty as security for the Company's obligation under CDS contracts. As a result, the Company receives a smaller fee than it would for a CDS contract that required the posting of collateral. Prior to the second quarter of 2009, the Company applied a factor (the "non-collateral posting factor") to the indicated market premium for CDS contracts that require collateral to be posted in order to calculate the exit value premium for CDS that do not require collateral to be posted. As a result of the Company's acquisition by Assured, the methodology to estimate the fair value of CDS contracts in which the Company sells protection was modified, for the quarter ended June 30, 2009, and no longer relies on the non-collateral posting factor as a key input. Instead to account for their own credit, the Company determines the amount of exposure to the Company the counterparty hedges for new transactions within certain asset classes. This was deemed by AGM to be a more observable market indication than the non-collateral posting factor.

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4.     FAIR VALUE MEASUREMENT (Continued)

        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 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.

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

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4.     FAIR VALUE MEASUREMENT (Continued)

•

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. 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.



•

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 the 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. 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, management compares the relative change in price quotes received from one quarter to another, with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants 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 AGM from market data sources published by third parties.

        The underlying securities of the Company's CDS contracts are predominantly corporate obligations, specifically investment grade pooled corporate CDS, high yield pooled corporate CDS and collateralized loan obligations ("CLOs"). The Company's exposure to underlying securities such as those backed by domestic RMBS and CDOs of ABS was less than one percent of the total CDS par outstanding at June 30, 2009.

        Below is an explanation of how the Company determines the current exit value for each of the following types of CDS contracts:

•

Pooled Corporate CDS Contracts:



•

investment grade pooled corporate CDS;



•

high yield pooled corporate CDS; and



•

CDS of funded CDOs and CLOs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

4.     FAIR VALUE MEASUREMENT (Continued)

        Pooled Corporate CDS Contracts:    A pooled corporate CDS contract insures the default risk of a pool of referenced corporate entities. As there is no observable exchange trading of bespoke pooled corporate CDS, the Company values these contracts using an internal pricing model that uses the mid-point of the bid and ask prices (the "mid-market price") of dealer quotes on specific indexes as inputs to its pricing model, principally the Dow Jones CDX for domestic corporate CDS ("DJ CDX") and iTraxx for European corporate CDS ("iTraxx"). The mid-market price is a practical expedient for the fair-value measurement within a bid-ask spread. For those pooled corporate CDS contracts that include both domestic and foreign reference entities, the Company applies the iTraxx price in proportion to the pool of applicable foreign reference entities comprising the pool by calculating a weighted average of the DJ CDX and iTraxx quoted prices.

        The Company's valuation process for pooled corporate CDS involves stratifying the pools into either investment grade credits or high-yield credits and then by remaining term to maturity, consistent with the reference indexes. Within maturity bands, further distinction is made for contracts that have higher attachment points. Both the DJ CDX and iTraxx indices provide quoted prices for standard attachment and detachment points (or "tranches") for contracts with maturities of three, five, seven and ten years.

        Prices quoted for these tranches do not represent perfect pricing references, but are the only relevant market-based information available for this type of non-traded contract. The recent market volatility in the index tranches has had a significant impact on the estimated fair value of the Company's portfolio of pooled corporate CDS.

        Investment-Grade Pooled Corporate CDS Contracts:    The Company applies quoted prices to its investment-grade pooled corporate CDS contracts ("IG CDS") by stratifying its IG CDS contracts into four maturity bands: less than 3.5 years; 3.5 to 5.5 years; 5.5 to 7.5 years; and 7.5 to 10 years. Within the maturity bands, further distinction is made for contracts that have a significantly higher starting attachment point (usually 30% or higher).

        The CDX North America IG Index ("CDX IG Index") is comprised of prices sourced from 125 North American investment grade CDS quoted (each, an "Index CDS") and is supported by at least 10 of the largest CDS dealers. In addition to the full capital structure, the CDX IG Index also provides price quotes for various tranches delineated by attachment and detachment points: 0 to 3%; 3 to 7%; 7 to 10%; 10 to 15%; 15 to 30% and 30 to 100%. Approximately every six months, a new "series" of the CDX IG Index is published ("on-the-run") based on a new grouping of 125 Index CDS, which changes the composition of the 125 Index CDS of older ("off-the-run") series. Each quarter, the Company compares the composition of the 125 Index CDS in both the on-the-run and off-the run series of the CDX IG Index to the CDS pool referenced by the Company's IG CDS contracts (the "reference CDS pool") and uses the average of the series of the CDX IG Index and the comparable iTraxx Index that most closely relates to the credit characteristics of the Company's IG CDS contracts, mainly the Weighted-Average Rating Factor ("WARF"), of the Company's IG CDS contracts. The Company also remodels each of its contracts to determine if the credit quality remains comparable to that of the relevant index. WARF is a 10,000 point scale developed by Moody's that is used as an indicator of collateral pool risk. A higher WARF indicates a lower average collateral rating.

        The Company calibrates the quoted index price to the approximate attachment points for its IG CDS contracts by calculating the weighted average of the given quoted tranche prices for IG CDS of a given maturity using the CDX IG Index and iTraxx quoted tranche widths. The relevant widths of the

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4.     FAIR VALUE MEASUREMENT (Continued)

quoted tranches used by the two indices differ. DJ CDX uses tranches of 10 to 15%, 15 to 30%, and 30 to 100%, resulting in tranche widths of five, 15 and 70 percentage points, whereas iTraxx uses tranches of 9 to 12%, 12 to 22% and 22 to 100%, resulting in tranche widths of three, 10 and 78 percentage points.

        The Company's IG CDS contracts typically attach at 10% or higher. The following table indicates AGM's typical attachment points at origination and total tranche widths:

        To calculate the weighted average price for the entire tranche width of the Company's IG CDS (the "total tranche width"), a price is obtained for each quoted tranche comprising the total tranche width, and the sum of the weighted average prices is divided by the total tranche width. The price for each quoted tranche is the mid-market of the quoted price for that tranche, weighted by the width of that tranche. The following table illustrates the calculation of the weighted-average price of the Company's IG CDS contracts with a maturity of up to 3.5 years, given quoted CDX IG tranche prices of 134.5 basis points, 50.5 basis points and 22.4 basis points for the 10 to 15%, 15 to 30%, and 30 to 100% tranches, respectively.

        The Company applies a factor to the quoted prices (the "IG calibration factor"). The calibration factor is intended to calibrate the index price to each of the Company's pooled corporate investment grade CDS contracts, which reference pools of entities that are typically of lower average credit quality than those reflected in the CDX IG Index. The IG calibration factor is determined for each IG CDS contract by calibrating the WARF of the index so that it approximately equals the WARF of each IG CDS contract. To do so, the Company recalculates the index price after removing from the index the reference obligations that have the highest ratings. This recalculated index price is then divided by the unadjusted index price to arrive at the IG calibration factor. At June 30, 2009, the IG calibration factor applied to the Company's IG CDS contracts ranged from 126% to 573% of the WARF of the index.

        The Company's Transaction Oversight Group reviews the pooled corporate CDS portfolio regularly and no less than quarterly and factors in any rating changes. Any new reported credit events under a given CDS contract are factored into the contract's deductible level. As such credit events occur, the contract's attachment point is recalculated based on the revised deductible amount to determine if the attachment point for each contract in the portfolio continues to be at a "Super Triple-A" credit rating.

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4.     FAIR VALUE MEASUREMENT (Continued)

        To arrive at the exit value premium applied to each of the Company's IG CDS contracts, the Company:

(a)

determines the weighted average of the mid-market prices for the applicable tranches by (1) multiplying the mid-market price for each tranche by the tranche width and (2) dividing the total amount derived by the total tranche width, using CDX IG and iTraxx quoted prices (as shown above); and then



(b)

applies the IG calibration factor and the cost for counterparties to hedge the Company's name (approximately 25% of the Company's CDS spread of 1,047 bps) to the weighted-average market price determined for each maturity band (as shown below).

        Below is an example of the pricing algorithm that is applied to the Company's domestic IG CDS contracts with durations of 0.0 to 3.5 years, assuming an average IG calibration factor of 257%, and a cost to hedge the Company's name equaling 25% of the Company's 5 year CDS spread which was trading at 1,047 bps, to determine the exit premium value at June 30, 2009:

        In this example, the implied premium for this specific transaction was a negative (176.2) bps. Management deemed that the result was not meaningful, as the Company would never pay a counterparty to be put on risk. Therefore, the Company derived a floor, which is a price below which the Company would not close a new transaction. The floor is calculated using internal return on equity ("ROE") models, historical transactions closed in previous quarters, and management assumptions. In this example, the transaction was marked at a floor of 7.0 bps.

        High-Yield Pooled Corporate CDS Contracts:    In order to estimate the market price for high-yield pooled corporate CDS contracts ("HY CDS"), the Company uses the average of the dealer mid-market prices obtained for the most senior quoted of the respective three-year, five-year and seven-year tranches of the CDX North America High Yield Index ("CDX HY Index"). The CDX HY Index is comprised of prices sourced from 100 of the most liquid North American high yield CDS quoted (each, an "Index CDS") and is supported by more than 10 of the largest CDS dealers. In addition to the full capital structure, the CDX HY Index also provides price quotes for various tranches delineated by attachment and detachment points: 0 to 10%; 10 to 15%; 15 to 25%; 25 to 35%; and 35 to 100%. The Company uses an average of the dealer mid-market quotes of the index because the Company believes that dealer price quotes have historically been indicative of where trades have been executed in the high-yield market.

        The Company applies a factor to the quoted prices (the "HY calibration factor"). The HY calibration factor is intended to calibrate the index price to each of the Company's pooled corporate high-yield CDS contracts, which reference pools of entities that are typically of higher average credit quality than those reflected in the CDX HY Index. The HY calibration factor is determined for each HY CDS contract by calibrating the WARF of the index so that it approximately equals the WARF of each HY CDS contract. To do so, the Company recalculates the index price after removing from the index the reference obligations that have the lowest ratings. This recalculated index price is then

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4.     FAIR VALUE MEASUREMENT (Continued)

divided by the unadjusted index price to arrive at the HY calibration factor. At June 30, 2009, the HY calibration factor applied to the Company's HY CDS contracts ranged from 33% to 100% of the WARF of the index

        Approximately every six months, a new "series" of the CDX HY Index is published ("on-the-run") based on a new grouping of 100 single name CDS, which changes the composition of the Index of older ("off-the-run") series. The Company compares the composition of the Index in both the on-the-run and off-the-run series of the HY index to each CDS pool (i.e., "reference entities" or companies included in each contract) referenced by the Company's contracts (the "reference CDS pool"). Based on that comparison, the Company determines which of the actively quoted series most closely relates to the credit characteristics, mainly with reference to the WARF, of the Company's HY CDS contracts, and then uses the average of dealer quotes of that series. The Company also remodels each of its contracts to determine if the credit quality remains comparable to that of the relevant index.

        To arrive at the exit value premium that is applied to each of the Company's CDS contracts in a given maturity band, the cost to hedge the Company's name equaling 25% of the Company's 5 year CDS spread which was trading at 1,047 bps is applied to the weighted-average market price determined for that maturity band.

•

For purposes of this calculation, the Company's HY CDS contracts are stratified into three maturity bands: less than 3.5 years; 3.5 to 5.5 years; and 5.5 to 7.5 years.



•

Each quarter, the average of the series of the CDX HY or iTraxx that most closely relates to the credit characteristics of the CDS contracts in the Company's portfolio is used. In some cases it may be the most recently published series of those indices, but in other cases, it may be the previously published series to the extent that it is still being published.



•

The appropriate HY calibration factor and the cost to hedge the Company's name are applied to the average of the quotes received at June 30, 2009.

        Below is an example of the pricing algorithm that is applied to the Company's domestic HY CDS contracts with durations of 0.0 to 3.5 years, assuming an average HY calibration factor of 71% to determine the exit premium value at June 30, 2009:

        In this example, the implied premium for this specific transaction was a negative (125.5) bps. Management deemed that the result was not meaningful, as the Company would never pay a counterparty to be put on risk. Therefore, the Company derived a floor, which is a price below which the Company would not close a new transaction at. The floor is calculated using internal ROE models, historical transactions closed in previous quarters, and management assumptions. In this example, the transaction was marked at a floor of 7.0 bps.

        CDS of Funded CDOs and CLOs:    Prior to August 2008, the Company sold protection to financial institutions in a principal-to-principal market in which transactions are highly customized and negotiated independently. The Company therefore cannot observe "exit" prices for the CDS contracts

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4.     FAIR VALUE MEASUREMENT (Continued)

it writes in this market since these contracts are not transferable. In the absence of a principal exit market, the Company determines the fair value of a CDS contract it writes by using an internally-developed estimate of an "exit price" that a hypothetical market participant (i.e., a similarly rated monoline financial guarantee insurer, or "monoline insurer") would accept to assume the risk from the CDS writer on the measurement date, on terms identical to the contract written by the CDS writer. The Company believes this approach is reasonable because the hypothetical exit market has been defined as other monoline insurers. In essence, the exit market participants are the same as the monoline participants competing in the entry market.

        As with pooled corporate CDS, there is no observable exchange trading of CDS of funded CDOs and CLOs. The price of protection charged by a CDS writer is based on the "credit spread component" of the "all-in credit spread" of funded CLOs, as quoted by underwriter participants. As the all-in credit spread for a given CLO may not always be observable in the market, the CDS writer often utilizes an index, published by an underwriter participant, such as the "all-in" LIBOR spread for Triple-A rated cash-funded CLOs (the "Triple-A CLO Funded Rate") as published by J.P. Morgan Chase & Co. The Triple-A CLO Funded Rate is an all-in credit spread that includes both a funding and credit spread component.

        The CDS protection of a CLO provided by the Company is priced to capture only the credit spread component, as the CDS writer is not providing funding for the CLO, only credit protection. The contracts on which the Company has provided credit protection are regularly evaluated to ascertain whether or not the original Triple-A credit rating is still considered appropriate. The Company determines the exit value premium for all these CDS of CLO contracts in its portfolio that are rated Triple-A with reference to the Triple-A CLO Funded Rate, which is currently the only regularly and frequently quoted rate observable in the market. The Triple-A CLO Funded Rate was 600 bps at June 30, 2009. The Company applies a credit component factor to the Triple-A CLO Funded Rate as a means of estimating the fair value of its Triple-A rated contract, which only refers to the credit component. The credit and funding components were 50% each as of June 30, 2009. The components are determined judgmentally and can vary based on estimates provided to the Company by external market participants, specifically purchasers of CDS protection on Triple-A CLO risk and investors in Triple-A CLO bonds.

        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.

        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 AGM, when the CDS spread on AGM was

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300bps (300bps × 10% = 30bps). Under this scenario AGM 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 AGM, when the CDS spread on AGM was 1,760bps (1,760bps × 25% = 440bps). Under this scenario AGM would receive premium of 10bps, or 2% of the gross spread.

        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 AGM have resulted in the bank or deal originator hedging a greater portion of its exposure to AGM. This has the effect of reducing the amount of contractual cash flows AGM can capture for selling its protection.

        The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads. 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 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.

        Other Structured Obligations Valuation:    For CDS for which observable market value information is not available, management applies its best judgment to estimate the appropriate current exit value premium, and takes into consideration the Company's estimation of the price at which the Company would currently charge to provide similar protection, and other factors such as the nature of the underlying reference credit, the Company's attachment point, and the tenor of the CDS contract.

Fair Value of CDS Contracts in which the Company Purchases Protection

        When the Company reinsures its policies that insure CDS, GAAP characterizes such transactions as if the Company purchased protection for CDS contracts it wrote. The Company's use of reinsurance to mitigate risk exposures for CDS contracts and for financial guaranty insurance policies is identical as they involve the same reinsurers, the same underwriting process evaluating the reinsurers and the same credit risk management and surveillance processes supporting the reinsurance function. The Company enters into reinsurance agreements on policies insuring CDS contracts primarily on a quota share basis. Under a quota share reinsurance agreement with a reinsurer, the Company cedes to the reinsurer a proportionate share of the risk and premium.

        The determination of the hypothetical exit market is a key factor in determining the fair value of protection purchased (the "ceded" or "reinsurance" contract) with respect to a CDS contract insured by a financial guarantor (the "direct contract"). GAAP requires that the valuation premise, used to measure the fair value of an asset, must consider the asset's "highest and best use" from the perspective of market participants. Generally, the valuation premise used for a financial asset is "in-exchange" since this type of asset provides maximum value to market participants on a stand- alone basis. The maximum value of a ceded contract to the CDS writer's exit market participants is in

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combination with the CDS writer's direct contract. Therefore the appropriate valuation premise to use for a ceded contract is the "in-use" premise.

        The Company determines the fair value of a CDS contract in which it purchases protection from a reinsurer (the "ceded CDS contract") as the proportionate percentage of the fair value of the related written CDS contracts, adjusted for any ceding commission and consideration of counterparty risk. In quota share reinsurance agreements, the assuming reinsurer typically pays a ceding commission periodically over the life of the policy insuring the CDS contract to the ceding company that is intended to defray the ceding company's costs for the services it provides to the reinsurer, such as risk selection, underwriting activities and ongoing servicing and reporting. As an element of the fair value of the ceded CDS insurance policy, the ceding commission paid to the ceding company represents the ceding company's profit on the ceded CDS insurance policy after considering counterparty credit risk, (i.e., the difference between (a) the price of the protection the ceding company purchased from the reinsurer, which is net of the ceding commission, and (b) the price that the ceding company would receive to exit the ceded CDS insurance policy in its principal market, which is comprised of other ceding insurers of comparable credit standing). The Company applies a credit valuation adjustment to the fair value of a ceded insurance policy due from a reinsurer if the reinsurer's credit quality (as determined by CDS price if available, or if not, its credit rating) is less than that of the Company's based upon the premise that the exit market for these contracts would be another monoline financial guarantee insurer that has similar credit rating or spread as the Company.

Insured Interest Rate Swaps and Financial Guaranty Contracts Deemed to be Derivatives

        The Company insures IR swaps entered into in connection with the issuance of certain public finance obligations. Because the financial guaranty contract insures a derivative, the financial guaranty contract is deemed to be a derivative under GAAP. Therefore, the contract is required to be carried at fair value, with the change in fair value being recorded in the determination of net income (loss). As there is no observable market for these policies, the fair value of these contracts is determined by using an internally-developed model and, therefore, they are classified as Level 3 in the valuation hierarchy.

        Under GAAP, insured NIM securitizations issued in connection with certain mortgage-backed security financings and financial guaranty contracts with embedded derivatives are deemed to be hybrid instruments that contain an embedded derivative if they were issued after January 1, 2007. The Company elected to record these financial instruments at fair value. Changes in the fair value of these contracts are recorded in the consolidated statements of operations. As there is no observable market for these policies, the fair value of these contracts is based on internally-derived estimates and they are, therefore, classified as Level 3 in the valuation hierarchy.

FP Segment Derivatives

        Derivatives in the FP segment are valued using a pricing model that uses observable market inputs, such as interest rate curves, foreign exchange rates and inflation indices. These derivatives are therefore classified as Level 2 in the valuation hierarchy, except for exchange traded futures contracts, which are classified as Level 1 or Level 3 if any of the significant model inputs were not observable in the market.

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Other Assets and Other Liabilities

        Other assets primarily include receivables for securities sold and committed preferred trust securities ("CPS"). As there is no observable market for the Company's CPS, fair value of the CPS is based on internally-derived estimates and, therefore, is categorized as Level 3 in the fair value hierarchy.

        The Company determined the fair value of the CPS by estimating the fair value of a floating rate security with an estimated market yield reflective of the underlying committed preferred security structure and the relevant coupon based on the capped auction rate.

        Other liabilities include payables for securities purchased and derivative obligations. The carrying amount for receivables for securities sold and payable for securities purchased is cost, which approximates fair value because of the short maturity.

FP Segment Debt

        The fair value of the FP segment debt is determined based on a discounted cash flow model. Fair value calculated by these models includes assumptions for interest rate curves based on selected benchmark securities and weighted average expected lives. In addition, the valuation of the fair-valued liabilities includes an adjustment to reflect the credit quality of AGM that represents the impact of changes in market credit spreads on these liabilities. The fair-valued liabilities are categorized as Level 3 in the valuation hierarchy. See Note 5 for a description of the FP segment debt for which the Company elected the fair value option.

        The following tables present the financial instruments carried at fair value at June 30, 2009 and December 31, 2008, by caption on the consolidated balance sheet and its corresponding valuation hierarchy.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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