Restatement of Previously Issued Financial Statements

12 Months Ended

Dec. 31, 2010

Restatement of Previously Issued Financial Statements

Restatement of Previously Issued Financial Statements

2. Restatement of Previously Issued Financial Statements

        Assured Guaranty Ltd., through its insurance subsidiaries, has provided financial guaranties with respect to debt obligations issued by special purpose entities, including financial guaranty VIEs. Assured Guaranty does not sponsor such financial guaranty VIEs nor does it act as the servicer or collateral manager for any financial guaranty VIE debt obligations that it insures. However, when Assured Guaranty provides such financial guaranties, it can obtain certain control rights through the transaction structure which make Assured Guaranty the primary beneficiary of the financial guaranty VIE. Assured Guaranty is required under GAAP to consolidate the financial guaranty VIE in its financial statements when it is the primary beneficiary. See Note 9. When such consolidation occurs, Assured Guaranty must eliminate the intercompany transactions between the relevant Assured Guaranty insurance subsidiary and the consolidated financial guaranty VIE. Assured Guaranty discovered errors in the elimination of such intercompany transactions, which resulted in the restatement of the consolidated financial statements for the year ended December 31, 2010.

        In addition, the Company was required to correct certain unrelated, immaterial errors as part of the restatement which affected expected losses, the fair value of credit derivatives, and the classification of financial guaranty VIE assets and liabilities, which affected the years ended December 31, 2010 and 2009. While these immaterial errors were corrected at the time they were identified, these restated financial statements reflect the correction of such errors in the period in which they arose.

        The effect of the restatement on the balance sheet is shown in the tables below.

		As of December 31, 2010
		As Previously Filed		(1) Financial Guaranty VIE Eliminations			(2) Other Adjustments			Restated
		(in millions)
Assets
Total investment portfolio		$	10,729.9	$	11.0		$	—		$	10,740.9
Cash			107.2		1.2			—			108.4
Premiums receivable, net of ceding commissions payable			1,167.6		—			—			1,167.6
Ceded unearned premium reserve			821.8		—			—			821.8
Deferred acquisition costs			239.8		—			—			239.8
Reinsurance recoverable on unpaid losses			22.3		—			—			22.3
Salvage and subrogation recoverable			1,032.4		—			—			1,032.4
Credit derivative assets			592.9		—			—			592.9
Deferred tax asset, net			1,224.0		32.1			3.0			1,259.1
Financial guaranty variable interest entities' assets, at fair value			4,334.4		—			(676.9	)		3,657.5
Other assets			199.2		—			—			199.2
	Total assets	$	20,471.5	$	44.3		$	(673.9	)	$	19,841.9
Liabilities and shareholders' equity
Unearned premium reserve		$	6,972.9	$	—		$	—		$	6,972.9
Loss and loss adjustment expense reserve			563.0		—			11.4			574.4
Reinsurance balances payable, net			274.4		—			—			274.4
Long-term debt			1,052.9		—			—			1,052.9
Credit derivative liabilities			2,465.5		—			(2.7	)		2,462.8
Current income tax payable			93.0		—			—			93.0
Financial guaranty variable interest entities' liabilities with recourse, at fair value			2,927.0		103.9			—			3,030.9
Financial guaranty variable interest entities' liabilities without recourse, at fair value			2,014.1		—			(676.9	)		1,337.2
Other liabilities			309.9		—			—			309.9
	Total liabilities		16,672.7		103.9			(668.2	)		16,108.4
Commitments and contingencies
Common stock			1.8		—			—			1.8
Additional paid-in capital			2,585.4		—			—			2,585.4
Retained earnings			1,098.9		(60.7	)		(5.7	)		1,032.5
Accumulated other comprehensive income, net of tax provision (benefit)			110.7		1.1			—			111.8
Deferred equity compensation			2.0		—			—			2.0
	Total shareholders' equity attributable to Assured Guaranty Ltd.		3,798.8		(59.6	)		(5.7	)		3,733.5
Non-controlling interest of financial guaranty variable interest entities			—		—			—			—
	Total shareholders' equity		3,798.8		(59.6	)		(5.7	)		3,733.5
	Total liabilities and shareholders' equity	$	20,471.5	$	44.3		$	(673.9	)	$	19,841.9

		As of December 31, 2009
		As Previously Filed			(2) Other Adjustments			Restated
		(in millions)
Assets
Total investment portfolio		$	10,968.4		$	—		$	10,968.4
Cash			44.1			—			44.1
Premiums receivable, net of ceding commissions payable			1,418.2			—			1,418.2
Ceded unearned premium reserve			1,080.5			(2.4	)		1,078.1
Deferred acquisition costs			242.0			—			242.0
Reinsurance recoverable on unpaid losses			14.1			—			14.1
Salvage and subrogation recoverable			420.3			(25.7	)		394.6
Credit derivative assets			492.5			—			492.5
Deferred tax asset, net			1,158.2			4.8			1,163.0
Financial guaranty variable interest entities' assets, at fair value			762.3			—			762.3
Other assets			202.1			—			202.1
	Total assets	$	16,802.7		$	(23.3	)	$	16,779.4
Liabilities and shareholders' equity
Unearned premium reserve		$	8,400.2		$	(19.2	)	$	8,381.0
Loss and loss adjustment expense reserve			289.5			10.2			299.7
Reinsurance balances payable, net			215.2			(3.1	)		212.1
Long-term debt			1,066.5			—			1,066.5
Credit derivative liabilities			2,034.6			—			2,034.6
Current income tax payable			154.5			—			154.5
Financial guaranty variable interest entities' liabilities with recourse, at fair value			762.7			—			762.7
Financial guaranty variable interest entities' liabilities without recourse, at fair value			—			—			—
Other liabilities			359.4			—			359.4
	Total liabilities		13,282.6			(12.1	)		13,270.5
Commitments and contingencies
Common stock			1.8			—			1.8
Additional paid-in capital			2,585.0			—			2,585.0
Retained earnings			789.9			(11.2	)		778.7
Accumulated other comprehensive income, net of tax provision (benefit)			141.8			—			141.8
Deferred equity compensation			2.0			—			2.0
	Total shareholders' equity attributable to Assured Guaranty Ltd.		3,520.5			(11.2	)		3,509.3
Non-controlling interest of financial guaranty variable interest entities			(0.4	)		—			(0.4	)
	Total shareholders' equity		3,520.1			(11.2	)		3,508.9
	Total liabilities and shareholders' equity	$	16,802.7		$	(23.3	)	$	16,779.4

        The effect of the restatement on the consolidated statements of operations is shown in the tables below.

			Year Ended December 31, 2010
			As Previously Filed			(1) Financial Guaranty VIE Eliminations			(2) Other Adjustments			Restated
			(in millions, except per share amounts)
Revenues
Net earned premiums			$	1,186.7		$	—		$	—		$	1,186.7
Net investment income				354.7			—			—			354.7
Net realized investment gains (losses)				(2.0	)		—			—			(2.0	)
Net change in fair value of credit derivatives				(4.3	)		—			2.7			(1.6	)
Fair value gain (loss) on committed capital securities				9.2			—			—			9.2
Net change in financial guaranty variable interest entities				(183.1	)		(90.5	)		—			(273.6	)
Other income				40.1			—			—			40.1
		Total revenues		1,401.3			(90.5	)		2.7			1,313.5
Expenses
Loss and loss adjustment expenses				413.8			2.9			(4.5	)		412.2
Interest and other operating expenses				352.0			—			—			352.0
		Total expenses		765.8			2.9			(4.5	)		764.2
Income (loss) before income taxes				635.5			(93.4	)		7.2			549.3
Provision (benefit) for income taxes
	Current			(25.2	)		—			—			(25.2	)
	Deferred			111.8			(32.7	)		1.7			80.8
		Total provision (benefit) for income taxes		86.6			(32.7	)		1.7			55.6
Net income (loss)				548.9			(60.7	)		5.5			493.7
Less: Non-controlling interest of variable interest entities				—			—			—			—
Net income (loss) attributable to Assured Guaranty Ltd.			$	548.9		$	(60.7	)	$	5.5		$	493.7
Earnings per share:
	Basic		$	2.98								$	2.68
	Diluted		$	2.90								$	2.61

			Year Ended December 31, 2009
			As Previously Filed			(2) Other Adjustments			Restated
			(in millions except per share amounts)
Revenues
Net earned premiums			$	930.4		$	—		$	930.4
Net investment income				259.2			—			259.2
Net realized investment gains (losses)				(32.7	)		—			(32.7	)
Net change in fair value of credit derivatives				(174.2	)		—			(174.2	)
Fair value gain (loss) on committed capital securities				(122.9	)		—			(122.9	)
Net change in financial guaranty variable interest entities				(1.2	)		—			(1.2	)
Other income				58.5			—			58.5
		Total revenues		917.1			—			917.1
Expenses
Loss and loss adjustment expenses				377.8			16.0			393.8
Interest and other operating expenses				406.4			—			406.4
		Total expenses		784.2			16.0			800.2
Income (loss) before income taxes				132.9			(16.0	)		116.9
Provision (benefit) for income taxes
	Current			217.3			—			217.3
	Deferred			(180.4	)		(4.8	)		(185.2	)
		Total provision (benefit) for income taxes		36.9			(4.8	)		32.1
Net income (loss)				96.0			(11.2	)		84.8
Less: Non-controlling interest of variable interest entities				(1.2	)		—			(1.2	)
Net income (loss) attributable to Assured Guaranty Ltd.			$	97.2		$	(11.2	)	$	86.0
Earnings per share:
	Basic		$	0.77					$	0.68
	Diluted		$	0.75					$	0.66

        The effect of the restatement on the consolidated statements of comprehensive income is shown in the tables below.

	Year Ended December 31, 2010
	As Previously Filed			(1) Financial Guaranty VIE Eliminations			(2) Other Adjustments		Restated
	(in millions)
Net income	$	548.9		$	(60.7	)	$	5.5	$	493.7
Unrealized holding gains (losses) arising during the period		(28.8	)		1.1			—		(27.7	)
Less: reclassification adjustment for gains (losses)		1.5			—			—		1.5
Change in net unrealized gains on investments		(30.3	)		1.1			—		(29.2	)
Change in cumulative translation adjustment		(0.4	)		—			—		(0.4	)
Change in cash flow hedge		(0.4	)		—			—		(0.4	)
Other comprehensive income (loss)		(31.1	)		1.1			—		(30.0	)
Comprehensive income (loss)		517.8			(59.6	)		5.5		463.7
Less: Comprehensive income (loss) attributable to non-controlling interest of variable interest entities		—			—			—		—
Comprehensive income (loss) of Assured Guaranty Ltd.	$	517.8		$	(59.6	)	$	5.5	$	463.7

	Year Ended December 31, 2009
	As Previously Filed			(2) Other Adjustments			Restated
	(in millions)
Net income	$	96.0		$	(11.2	)	$	84.8
Unrealized holding gains (losses) arising during the period		165.9			—			165.9
Less: reclassification adjustment for gains (losses)		(34.1	)		—			(34.1	)
Change in net unrealized gains on investments		200.0			—			200.0
Change in cumulative translation adjustment		(3.0	)		—			(3.0	)
Change in cash flow hedge		(0.4	)		—			(0.4	)
Other comprehensive income(loss)		196.6			—			196.6
Comprehensive income (loss)		292.6			(11.2	)		281.4
Less: Comprehensive income (loss) attributable to non-controlling interest of variable interest entities		(1.2	)		—			(1.2	)
Comprehensive income (loss) of Assured Guaranty Ltd.	$	293.8		$	(11.2	)	$	282.6

        The effect of the restatement on the consolidated statements of cash flows is shown in the tables below.

		Year Ended December 31, 2010
		As Previously Filed			(1) Financial Guaranty VIE Eliminations			(2) Other Adjustments			Restated
		(in millions)
Operating activities
Net income		$	548.9		$	(60.7	)	$	5.5		$	493.7
Non-cash interest and operating expenses			24.4			—			—			24.4
	Net amortization of premium on fixed maturity securities		46.3			—			—			46.3
	Provision (benefit) for deferred income taxes		111.8			(32.7	)		1.7			80.8
	Net realized investment losses (gains)		2.0			—			—			2.0
	Net unrealized losses (gains) on credit derivatives		157.8			—			(2.7	)		155.1
	Fair value loss (gain) on committed capital securities		(9.2	)		—			—			(9.2	)
	Non-cash items in other income		4.3			—			—			4.3
	Change in deferred acquisition costs		2.2			—			—			2.2
	Change in premiums receivable, net of ceding commissions.		376.5			—			—			376.5
	Change in ceded unearned premium reserves		258.6			—			(2.4	)		256.2
	Change in unearned premium reserve		(1,297.4	)		—			19.2			(1,278.2	)
	Change in loss and loss adjustment expense reserve, net		(449.5	)		—			(21.3	)		(470.8	)
	Change in current income taxes		(87.2	)		—			—			(87.2	)
	Other changes in credit derivatives assets and liabilities, net		33.7			—			—			33.7
	Change in financial guaranty variable interest entities' assets and liabilities		422.0			118.6			—			540.6
	Other		(41.2	)		—			—			(41.2	)
Net cash flows provided by (used in) operating activities		$	104.0		$	25.2		$	—		$	129.2
Investing activities
Fixed maturity securities:
	Purchases		(2,461.7	)		—			—			(2,461.7	)
	Sales		1,063.6			—			—			1,063.6
	Maturities		994.4			—			—			994.4
Net sales (purchases) of short-term investments			637.3			(24.0	)		—			613.3
Net proceeds from paydowns on financial guaranty variable interest entities' assets			424.0			—			—			424.0
Other			19.7			—			—			19.7
Net cash flows provided by (used in) investing activities			677.3			(24.0	)		—			653.3
Financing activities
	Dividends paid		(33.2	)		—			—			(33.2	)
	Repurchases of common stock		(10.5	)		—			—			(10.5	)
	Share activity under option and incentive plans		(2.0	)		—			—			(2.0	)
	Net paydowns of financial guaranty variable interest entities' liabilities		(650.8	)		—			—			(650.8	)
	Repayment of long-term debt		(20.9	)		—			—			(20.9	)
Net cash flows provided by (used in) financing activities			(717.4	)		—			—			(717.4	)
Effect of exchange rate changes			(0.8	)		—			—			(0.8	)
Increase in cash			63.1			1.2			—			64.3
Cash at beginning of year			44.1			—			—			44.1
Cash at end of year		$	107.2		$	1.2		$	—		$	108.4

	Year Ended December 31, 2009
	As Previously Filed			(2) Other Adjustments			Restated
	(in millions)
Net income	$	96.0		$	(11.2	)	$	84.8
Non-cash interest and operating expenses		16.3			—			16.3
Net amortization of premium on fixed maturity securities		22.0			—			22.0
Provision (benefit) for deferred income taxes		(180.4	)		(4.8	)		(185.2	)
Net realized investment losses (gains)		32.7			—			32.7
Net unrealized losses (gains) on credit derivatives		337.8			—			337.8
Fair value loss (gain) on committed capital securities		122.9			—			122.9
Goodwill and settlements of pre-existing relationship		23.3			—			23.3
Non-cash items in other income		(20.7	)		—			(20.7	)
Change in deferred acquisition costs		31.6			—			31.6
Change in premiums receivable, net of ceding commissions.		119.7			—			119.7
Change in ceded unearned premium reserves		200.7			2.4			203.1
Change in unearned premium reserve		(711.9	)		(19.2	)		(731.1	)
Change in loss and loss adjustment expense reserve, net		(31.6	)		32.8			1.2
Change in current income taxes		175.9			—			175.9
Other changes in credit derivatives assets and liabilities, net		15.8			—			15.8
Other		29.1			—			29.1
Net cash flows provided by (used in) operating activities	$	279.2		$	—		$	279.2

(1)

Represents adjustments related to the correction of financial guaranty VIE intercompany eliminations.

(2)

Represents other adjustments of immaterial errors. These corrections related to (a) errors in expected losses that had previously been corrected by the Company in the period such errors were identified, but which are now being recorded in the period in which they arose, (b) an error related to one credit derivative contract that resulted from the use of an incorrect par outstanding balance in the pricing model and (c) the correction of an error related to the classification of financial guaranty VIE assets and liabilities that resulted from a misinterpretation of a trustee report.

        The Company also revised certain disclosures in Note 21 as part of the restatement of these financial statements.