Premiums are received either upfront at inception or in installments over the life of the contract. Accounting policies for financial guaranty contracts accounted for as insurance are consistent whether the contract was written on a direct basis, assumed from another financial guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty or acquired in a business combination. The Financial Accounting Standards Board ("FASB") issued an authoritative standard, effective January 1, 2009, that changed premium revenue recognition and loss recognition for contracts accounted for as financial guaranty insurance. Contracts accounted for as credit derivatives are excluded from this standard.

"Unearned premium reserve" or "unearned premium revenue" represents "deferred premium revenue" net of paid claims that have not yet been expensed, or "contra-paid". See loss and LAE reserve accounting policy note below for a description of "contra-paid".

The amount of deferred premium revenue at contract inception is determined as follows:

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

In the Company's assumed businesses, the Company estimates the ultimate written and earned premiums to be received from a ceding company at the end of each quarter and the end of each year. A portion of the premiums must be estimated because some of the Company's ceding companies report premium data between 30 and 90 days after the end of the reporting period. Earned premium reported in the Company's consolidated statements of operations are based upon reports received from ceding companies supplemented by the Company's own estimates of premium for which ceding company reports have not yet been received. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined.

Deferred premium revenue ceded to reinsurers is recorded as an asset called "ceded unearned premium reserve". The corresponding income statement recognition is included with the direct and assumed business in "net earned premiums".

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

Under financial guaranty insurance accounting, unearned premium reserve and loss and LAE reserves represent the Company's combined stand-ready obligation. At contract inception, the entire stand-ready obligation is represented by unearned premium reserve. Loss and LAE reserves are only recorded when expected losses to be paid exceed the deferred premium revenue less contra-paid on a contract by contract basis.

"Expected loss to be paid" represents the Company's discounted expected future cash outflows for claim payments, net of expected salvage and subrogation expected to be recovered. See "—Salvage and Subrogation" below.

When a claim payment is made on a contract it first reduces any recorded "loss and LAE reserves". To the extent a "loss and LAE reserve" is not recorded on a contract, which occurs when "total losses" (contra-paid plus expected loss to be paid) are less than deferred premium revenue, claim payments are recorded as "contra-paid," which reduce the unearned premium reserve. The contra-paid is recognized in the line item "loss and LAE" in the consolidated statement of operations when and for the amount that total losses exceed the remaining deferred premium revenue on the contract.

The contra-paid is recognized in the line item "loss and LAE expense" in the consolidated statement of operations in when total losses exceeds remaining deferred premium revenue on the contract.

The "expected loss to be paid" is equal to the present value of expected future net cash outflows to be paid under the contract discounted using the current risk-free rate. That current risk-free rate is based on the remaining period of the contract used in the premium revenue recognition calculation (i.e., the contractual or expected period, as applicable). The Company updates the discount rate each quarter and reports the effect of such changes in loss development. Expected net cash outflows (cash outflows expected to be paid to the holder of the insured financial obligation, net of potential recoveries, excluding reinsurance) are probability weighted cash flows that reflect the likelihood of all possible outcomes. The Company estimates the expected net cash outflows using management's assumptions about the likelihood of all possible outcomes based on all information available to it. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company's risk-management activities.

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

The Company recorded a portfolio reserve for its financial guaranty business prior to 2009. Portfolio reserves were established with respect to the portion of the Company's business for which case reserves were not established. Portfolio reserves were not established based on a specific event. Instead, they were calculated by aggregating the portfolio reserve calculated for each individual transaction. Individual transaction reserves were calculated on a quarterly basis by multiplying the par in-force by the product of the ultimate loss and earning factors without regard to discounting. The ultimate loss factor was defined as the frequency of loss multiplied by the severity of loss, where the frequency was defined as the probability of default for each individual issue. The earning factor was inception to date earned premium divided by the estimated ultimate written premium for each transaction. The probability of default was estimated from rating agency data and was based on the transaction's credit rating, industry sector and time until maturity. The severity was defined as the complement of recovery/salvage rates gathered by the rating agencies of defaulting issues and was based on the industry sector. Portfolio reserves were recorded gross of reinsurance. The Company did not cede any amounts under these reinsurance contracts, as the Company's recorded portfolio reserves did not exceed the Company's contractual retentions, required by said contracts.

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

When the Company becomes entitled to the cash flow from the underlying collateral of an insured credit under salvage and subrogation rights as a result of a claim payment or estimated recoveries from disputed claim payments on contractual grounds, it reduces the "expected loss to be paid" on the contract. Such reduction in expected to be paid can result in one of the following:

The Company recognizes the expected recovery of AGMH claim payments made prior to the Acquisition consistent with its policy for recognizing recoveries on all financial guaranty insurance contracts. To the extent that the estimated amount of recoveries increases or decreases, due to changes in facts and circumstances, including the examination of additional loan files and our experience in recovering loans put back to the originator, the Company would recognize a benefit or expense consistent with the manner it records changes in the expected recovery of all other claim payments.

Costs that vary with and are directly related to the production of new financial guaranty contracts accounted for as insurance are deferred and amortized in relation to earned premiums. These costs include direct and indirect expenses such as ceding commissions, and the cost of underwriting and marketing personnel. Management uses its judgment in determining the type and amount of cost to be deferred. The Company conducts an annual study to determine which operating costs vary with, and are directly related to, the acquisition of new business, and therefore qualify for deferral. Ceding commission income on business ceded to third party reinsurers reduce policy acquisition costs and are deferred. Expected losses, LAE and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of DAC. When an insured issue is retired early, the remaining related DAC is expensed at that time. Beginning January 1, 2009, ceding commission expense and income associated with future installment premiums on assumed and ceded business, respectively, are calculated at their contractually defined rates and recorded in deferred acquisition costs on the consolidated balance sheets with a corresponding offset to net premium receivable or payable.

In October 2010, the FASB adopted Accounting Standards Update ("Update") No. 2010-26. This amendment in the Update specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. These costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. Costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and product development as well as all overhead type costs should be charged to expense as incurred. The amendment in the Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in this Update will be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. Early adoption is permitted, but only at the beginning of an entity's annual reporting period. The Company, which is not early adopting, is currently evaluating the impact the amendment in the Update will have on its consolidated financial statements in 2012.

The following table presents the effect of adopting the new financial guaranty accounting standard on January 1, 2009 on the Company's consolidated balance sheet. The new financial guaranty accounting standard changed the premium revenue and loss recognition methodologies.

	December 31, 2008 As reported		Transition Adjustment			January 1, 2009

	(in millions)
ASSETS:
Deferred acquisition costs	$	288.6	$	101.8		$	390.4
Ceded unearned premium reserve		18.9		6.6			25.5
Reinsurance recoverable on ceded losses		6.5		(1.2	)		5.3
Premiums receivable, net of ceding commissions payable		15.7		721.5			737.2
Deferred tax asset, net		129.1		(7.7	)		121.4
Salvage recoverable		80.2		6.9			87.1
Total assets		4,555.7		827.9			5,383.6
LIABILITIES AND SHAREHOLDERS' EQUITY:
Unearned premium reserves	$	1,233.7	$	827.7		$	2,061.4
Loss and LAE reserve		196.8		(25.4	)		171.4
Reinsurance balances payable, net		17.9		6.2			24.1
Total liabilities		2,629.5		808.5			3,438.0
Retained earnings		638.1		19.4			657.5
Total shareholders' equity		1,926.2		19.4			1,945.6
Total liabilities and shareholders' equity		4,555.7		827.9			5,383.6

A summary of the effects on the consolidated balance sheet amounts above is as follows:

Application of Financial Guaranty Insurance Accounting to the AGMH Acquisition

Acquisition accounting required that the fair value of each of the financial guaranty contracts in AGMH's insured portfolio be recorded on the Company's consolidated balance sheet. The fair value of AGMH's direct contracts was recorded on the line items "premium receivable, net of ceding commissions payable" and "unearned premium reserve" and the fair value of its ceded contracts was recorded within "other liabilities" and "ceded unearned premium reserves" on the consolidated balance sheet.

At the Acquisition Date, the acquired AGMH financial guaranty insurance contracts were recorded at fair value. Due to the unprecedented credit crisis, the Company acquired AGMH at a significant discount to its book value primarily because the fair value of the obligation associated with its financial guaranty insurance contracts was significantly in excess of the obligation's historical carrying value. The Company, taking into account then current market spreads and risk premiums, recorded the fair value of these contracts based on what a hypothetical similarly rated financial guaranty insurer would have charged for each contract at the Acquisition Date and not the actual cash flows under the insurance contract. This resulted in some AGMH acquired contracts having a significantly higher unearned premium reserve and, subsequently, premium earnings compared to the contractual premium cash flows for the policy.

On the Acquisition Date, there were limited financial guaranty contracts being written in the structured finance market, particularly in the U.S. RMBS asset class. Therefore, for certain asset classes, significant judgment was required to determine the estimated fair value of the acquired contracts. The Company determined the fair value of these contracts by taking into account the rating of the insured obligation, expectation of loss, estimate risk premiums, sector and term. The AGMH financial guaranty insurance and reinsurance contracts were recorded as follows:

	AGMH Carrying Value As of June 30, 2009(1)		Acquisition Accounting Adjustment(2)			Assured Guaranty Carrying Value As of July 1, 2009(3)

	(in millions)
Premiums receivable, net of ceding commissions payable	$	854.1	$	—		$	854.1
Ceded unearned premium reserve		1,299.2		428.4			1,727.6
Reinsurance recoverable on unpaid losses		279.9		(279.9	)		—
Reinsurance balances payable, net of commissions		249.6		—			249.6
Unearned premium reserve		3,778.7		3,507.7			7,286.4
Loss and LAE reserves		1,821.3		(1,821.3	)		—
Deferred acquisition costs		289.3		(289.3	)		—

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

		Year Ended December 31,

		2010		2009		2008
		(in millions)
Scheduled net earned premiums		$	1,054.4	$	724.9	$	193.8
Acceleration of premium earnings(1)			90.0		173.8		61.9
Accretion of discount on net premiums receivable			39.9		28.7		—

Total financial guaranty			1,184.3		927.4		255.7
Other			2.4		3.0		5.7

	Total net earned premiums(2)	$	1,186.7	$	930.4	$	261.4

		Year Ended December 31,

		2010			2009
		(in millions)
Gross premium receivable, net of ceding commissions payable:
Balance beginning of period		$	1,418.2		$	15.7
Change in accounting			(19.0	)		721.5

Balance beginning of the period, adjusted			1,399.2			737.2
Premiums receivable purchased in AGMH Acquisition on July 1, 2009 after intercompany eliminations			—			800.9
Premium written, net			347.1			594.5
Premium payments received, net			(486.8	)		(736.4	)
Adjustments to the premium receivable:
	Changes in the expected term of financial guaranty insurance contracts		(101.8	)		(37.5	)
	Accretion of the discount		43.1			27.7
	Foreign exchange translation		(31.4	)		37.0
	Other adjustments		(1.8	)		(5.2	)

Balance, end of period(1)		$	1,167.6		$	1,418.2

Gains or losses due to foreign exchange rate changes relate to installment premium receivables denominated in currencies other than the U.S. dollar. Approximately 42% and 45% of the Company's installment premiums at December 31, 2010 and 2009, respectively, are denominated in currencies other than the U.S. dollar, primarily in euro and British Pound Sterling ("GBP").

For premiums received in installments, the Company records premiums receivable as the present value of premiums due or expected to be collected over the life of the contracts. Installment premiums typically related to structured finance deals, where the insurance premium rate is determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the deal. Premium payments to the Company are typically made from deal cash flows that are senior to payments made to the deal noteholders. Updates are made periodically to the amount of installment premiums due or expected to be collected when the Company believes there are significant changes to recorded amounts, as required under financial guaranty insurance accounting. The offset to any change in premiums receivable is a corresponding change to unearned premium revenues. When these installment premiums are related to assumed reinsurance amounts, the Company also assesses the credit quality and liquidity of the Company that the premiums are assumed from as well as the impact of any potential regulatory constraints to determine the collectability of such amounts. The Company had no premiums receivable amounts that it considers to be uncollectible as of December 31, 2010.

		December 31, 2010(1)

		(in millions)
Gross premium collections expected:
2011 (January 1 – March 31)		$	55.9
2011 (April 1 – June 30)			42.8
2011 (July 1 – September 30)			33.6
2011 (October 1 – December 31)			57.1
2012			119.2
2013			105.7
2014			94.3
2015			86.6
2016-2020			350.0
2021-2025			247.0
2026-2030			178.5
After 2030			217.2

	Total gross expected collections	$	1,587.9

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

		As of December 31, 2010									As of December 31, 2009 (restated)

		Gross Unearned Premium Reserve			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve			Gross Unearned Premium Reserve			Ceded Unearned Premium Reserve			Net Unearned Premium Reserve
		(in millions)
Deferred premium revenue		$	7,108.6		$	846.6		$	6,262.0		$	8,536.7		$	1,095.6		$	7,441.1
Contra-paid			(146.1	)		(24.8	)		(121.3	)		(168.4	)		(17.5	)		(150.9	)

	Total financial guaranty		6,962.5			821.8			6,140.7			8,368.3			1,078.1		$	7,290.2
Other			10.4			—			10.4			12.7			—			12.7

	Total	$	6,972.9		$	821.8		$	6,151.1		$	8,381.0		$	1,078.1		$	7,302.9

As of December 31, 2010, net deferred premium revenue recorded on the consolidated balance sheet was $6.3 billion, which will be recognized as net earned premiums in the statement of operations. Amounts expected to be recognized in net earned premiums differ significantly from expected cash collections due primarily to amounts in deferred premium revenue representing cash already collected on policies paid upfront and fair value adjustments recorded in connection with the AGMH Acquisition.

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

		As of December 31, 2010

		Scheduled Net Earned Premium		Net Expected Loss to be Expensed(1)		Net
		(in millions)
				(restated)		(restated)
2011 (January 1–March 31)		$	199.4	$	51.6	$	147.8
2011 (April 1–June 30)			186.3		42.3		144.0
2011 (July 1–September 30)			174.0		34.0		140.0
2011 (October 1–December 31)			164.4		28.7		135.7
2012			578.3		84.9		493.4
2013			501.7		78.9		422.8
2014			448.3		68.8		379.5
2015			399.1		54.9		344.2
2016 - 2020			1,492.4		185.2		1,307.2
2021 - 2025			934.2		95.4		838.80
2026 - 2030			575.6		55.0		520.6
After 2030			608.3		54.2		554.1

	Total present value basis(2)(3)		6,262.0		833.9		5,428.1
Discount			367.5		785.5		(418.0	)

	Total future value	$	6,629.5	$	1,619.4	$	5,010.1

(1): These amounts reflect the Company's estimate as of December 31, 2010 of expected losses to be expensed and are not included in loss and LAE reserve because these losses are less than deferred premium revenue determined on a contract-by-contract basis.
(2): Balances represent discounted amounts.
(3): The effect of consolidating financial guaranty VIEs resulted in a reduction of $315.1 million in future scheduled net earned premium and $211.9 million in net expected loss and LAE, excluding accretion of discount.

	As of December 31,

	2010		2009
	(dollars in millions)
Premiums receivable, net of ceding commission payable	$	1,167.6	$	1,418.2
Gross deferred premium revenue		2,933.6		4,227.2
Weighted-average risk-free rate used to discount premiums		3.5		3.4
Weighted-average period of premiums receivable (in years)		10.1		10.4

			Year Ended December 31,

			2010			2009			2008
			(in millions)
Balance, beginning of period			$	242.0		$	288.6		$	259.3
Change in accounting				—			101.8			—
Settlement of pre-existing relationships(1)				—			(114.0	)		—
Costs deferred during the period:
	Ceded and assumed commissions			(18.2	)		(10.2	)		34.7
	Premium taxes			11.6			14.2			14.0
	Compensation and other acquisition costs			39.4			25.9			33.4

		Total		32.8			29.9			82.1
Costs amortized during the period				(34.1	)		(53.9	)		(61.2	)
Foreign exchange translation				(0.9	)		(10.4	)		9.5
Other				—			—			(1.1	)

Balance, end of period			$	239.8		$	242.0		$	288.6

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

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

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

				Expected Loss to be Paid as of December 31, 2009			Development and Accretion of Discount			Less: Paid Losses		Expected Loss to be Paid as of December 31, 2010

				(in millions)
				(restated)			(restated)					(restated)
U.S. RMBS:
	First lien:
		Prime first lien		$	—		$	1.4		$	—	$	1.4
		Alt-A first lien			204.4			40.0			60.0		184.4
		Alt-A option ARM			545.2			160.1			181.6		523.7
		Subprime			77.5			126.3			3.4		200.4

			Total first lien		827.1			327.8			245.0		909.9
	Second lien:
		CES			199.3			(73.3	)		69.4		56.6
		HELOCs			(206.6	)		(86.3	)		512.8		(805.7	)

			Total second lien		(7.3	)		(159.6	)		582.2		(749.1	)

Total U.S. RMBS					819.8			168.2			827.2		160.8
Other structured finance					115.7			52.0			8.6		159.1
Public finance					130.9			9.6			51.6		88.9

			Total	$	1,066.4		$	229.8		$	887.4	$	408.8

			Loss and LAE Reserve as of December 31, 2008			Change in Accounting (2)			Expected Loss to be Paid as of January 1, 2009			Expected Loss of AGMH at July 1, 2009		Development and Accretion of Discount			Less: Paid Losses		Expected Loss to be Paid as of December 31, 2009

			(in millions)
												(restated)		(restated)					(restated)
U.S. RMBS:
First lien:
	Prime first lien		$	2.4		$	(2.4	)	$	—		$	—	$	—		$	—	$	—
	Alt-A first lien			5.4			4.4			9.8			223.1		(27.5	)		1.0		204.4
	Alt-A option ARM			4.5			8.7			13.2			477.6		55.1			0.7		545.2
	Subprime			15.1			(5.4	)		9.7			72.4		(2.0	)		2.6		77.5

		Total first lien		27.4			5.3			32.7			773.1		25.6			4.3		827.1
Second lien:
	Closed end second lien			39.5			(0.7	)		38.8			227.4		34.2			101.1		199.3
	HELOC			(43.1	)		(13.0	)		(56.1	)		347.3		30.3			528.1		(206.6	)

		Total second lien		(3.6	)		(13.7	)		(17.3	)		574.7		64.5			629.2		(7.3	)

Total U.S. RMBS				23.8			(8.4	)		15.4			1,347.8		90.1			633.5		819.8
Other structured finance				51.7			7.1			58.8			9.9		47.8			0.8		115.7
Public finance				38.3			(4.0	)		34.3			81.2		38.6			23.2		130.9

Total			$	113.8		$	(5.3	)	$	108.5		$	1,438.9	$	176.5		$	657.5	$	1,066.4

The Company's expected LAE for mitigating claim liabilities were $17.2 million and $12.6 million as of December 31, 2010 and 2009, respectively. The Company used weighted-average risk free rates ranging from 0% to 5.34% and 0.07% to 5.21% to discount expected losses as of December 31, 2010 and 2009, respectively.

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

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

		As of December 31, 2010 (restated)

		(in millions)
Net expected to be paid		$	408.8
Less: net expected to be paid for financial guaranty VIEs			49.2

	Total		359.6
Contra-paid, net			121.3
Salvage and subrogation recoverable, net(1)			903.0
Loss and LAE reserve, net(2)			(550.0	)

Net expected to be expensed(3)		$	833.9

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

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

Mortgage borrowers that are a single payment or less behind (generally considered performing borrowers) have demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how much of the currently performing loans will default and when by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates, then projecting how the conditional default rates will develop over time. Loans that are defaulted pursuant to the conditional default rate after the liquidation of currently delinquent loans represent defaults of currently performing loans. A conditional default rate is the outstanding principal amount of loans defaulting in a given month divided by the remaining outstanding amount of the whole pool of loans (or "collateral pool balance"). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal repayments, and defaults.

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

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

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

The Company's RMBS projection methodology assumes that the housing and mortgage markets will eventually recover. So, to the extent it retains the shape of the curves and probability weightings used in the previous quarter, the Company essentially assumes the recovery in the housing and mortgage markets will be delayed by another three months.

The scenarios used to project RMBS collateral losses in first quarter of 2010, with the exception of an increase to the subprime loss severity, were the same as those employed at year-end 2009. In the second quarter 2010 the Company changed how scenarios were run as compared to the first quarter 2010 to reflect the Company's view that it was observing the beginning of an improvement in the housing and mortgage markets. In the third and fourth quarters 2010 early stage delinquencies did not trend down as much as the Company had anticipated in the second quarter, so the Company adjusted its curves to reflect the observed early stage delinquencies. Additionally, in the fourth quarter 2010, due to the Company's concerns about the timing and strength of any recovery in the mortgage and housing markets, the probability weightings were adjusted to reflect a somewhat more pessimistic view. Also in the fourth quarter 2010 the Company increased its initial subprime loss severity assumption to reflect recent experience. Taken together, the changes in the assumptions between year-end 2009 and 2010 had the effect of (a) reflecting a slower recovery in the housing market than had been assumed at the beginning of the year, and (b) increasing the assumed initial loss severities for subprime transactions from 70% to 80%.

The methodology the Company used to project RMBS losses prior to the AGMH Acquisition on July 1, 2009 was somewhat different that that used by AGMH. For the Third Quarter 2009 the Company adopted a methodology to project RMBS losses that was based on a combination of the approaches used by the Company and AGMH prior to the AGMH Acquisition, and so the methodology used prior to the Third Quarter 2009 was somewhat different than that described here. In addition, the methodology the Company used prior to the Third Quarter 2009 was applied to the smaller pre-acquisition RMBS portfolio. For these reasons, the results are not directly comparable. However, that Company's second lien methodology utilized many of the same assumptions as those used at year-end 2009 and year-end 2010, so the year-end 2008 second lien assumptions are provided below for comparative purposes.

The Company also used generally the same methodology to project the credit received by the RMBS issuers for recoveries on R&W at year-end 2010 as it used at year-end 2009. Other than the impact of the increase in projected collateral defaults on the calculation of the credit, the primary difference relates to the population of transactions the Company included in its R&W credits. The Company added credits for four second lien transactions: two transactions where a capital infusion of the provider of the R&W made that company financially viable in the Company's opinion and another two transactions where the Company obtained loan files that it had not previously concluded were accessible. The Company added credits for four first lien transactions where it has obtained loan files that it had not previously concluded were accessible. The Company also refined some of the assumptions in the calculation of the amount of the credit to reflect actual experience.

Prior to the AGMH Acquisition the Company used a similar approach to calculate a credit for recoveries on R&W, but on its smaller RMBS portfolio and based on its projected losses at the time. The credit at year-end 2008 related primarily to two second lien transactions.

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

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

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

The following table shows the Company's key assumptions used in its calculation of estimated expected losses for the Company's direct vintage 2004 - 2008 second lien U.S. RMBS as of December 31, 2010, December 31, 2009 and December 31, 2008:

HELOC Key Variables	As of December 31, 2010	As of December 31, 2009	As of December 31, 2008

Plateau conditional default rate	4.2 – 22.1%	10.7 – 40.0%	19.0 – 21.0%
Final conditional default rate trended down to	0.4 – 3.2%	0.5 – 3.2%	1.0%
Expected period until final conditional default rate	24 months	21 months	15 months
Initial conditional prepayment rate	3.3 – 17.5%	1.9 – 14.9%	7.0 – 8.0%
Final conditional prepayment rate	10%	10%	7.0 – 8.0%
Loss severity	98%	95%	100%
Initial draw rate	0.0 – 6.8%	0.1 – 2.0%	1.0 – 2.0%

Closed end second lien Key Variables	As of December 31, 2010	As of December 31, 2009	As of December 31, 2008

Plateau conditional default rate	7.3 – 27.1%	21.5 – 44.2%	34.0 – 36.0%
Final conditional default rate trended down to	2.9 – 8.1%	3.3 – 8.1%	3.4 – 3.6%
Expected period until final conditional default rate achieved	24 months	21 months	24 months
Initial conditional prepayment rate	1.3 – 9.7%	0.8 – 3.6%	7.0%
Final conditional prepayment rate	10%	10%	7%
Loss severity	98%	95%	100%

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

As of December 31, 2010, in the base scenario, the conditional default rate (the "plateau conditional default rate") was held constant for one month. (At year-end 2009 the plateau default rate was held constant for four months.) Once the plateau period has ended, the conditional default rate is assumed to gradually trend down in uniform increments to its final long-term steady state conditional default rate. In the base scenario, the time over which the conditional default rate trends down to its final conditional default rate is eighteen months (compared to twelve months at year-end 2009). Therefore, the total stress period for second lien transactions would be twenty-four months which is comprised of: five months of delinquent data, a one month plateau period and an eighteen month decrease to the steady state conditional default rate. This is three month longer than the 21 months used at year-end 2009.The long-term steady state conditional default rates are calculated as the constant conditional default rates that would have yielded the amount of losses originally expected at underwriting. When a second lien loan defaults, there is generally very low recovery. Based on current expectations of future performance, the Company reduced its loss recovery assumption to 2% from 5% (thus increasing its severity from 95% to 98%) in the third quarter of 2010.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (which is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (which is the excess of the interest paid by the borrowers on the underlying loan over the amount of interest and expenses owed on the insured obligations). In the base case, the current conditional prepayment rate is assumed to continue until the end of the plateau before gradually increasing to the final conditional prepayment rate over the same period the conditional default rate decreases. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant. The final conditional prepayment rate is assumed to be 10% for both HELOC and closed end second lien transactions. This level is much higher than current rates, but lower than the historical average, which reflects the Company's continued uncertainty about performance of the borrowers in these transactions. This pattern is consistent with how the Company modeled the conditional prepayment rate at year-end 2009. To the extent that prepayments differ from projected levels it could materially change the Company's projected excess spread.

The Company uses a number of other variables in its second lien loss projections, including the spread between relevant interest rate indices, and HELOC draw rates (the amount of new advances provided on existing HELOCs expressed as a percent of current outstanding advances). For HELOC transactions, the draw rate is assumed to decline from the current level to the final draw rate over a period of three months. The final draw rates were assumed to range from 0.0% to 3.4%.

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

At year-end 2010, the Company's base case assumed a one month conditional default rate plateau and an 18 month ramp down. Increasing the conditional default rate plateau to 4 months and keeping the ramp down at 18 months would increase the expected loss by approximately $132.7 million for HELOC transactions and $18.2 million for closed end second lien transactions. On the other hand, keeping the conditional default rate plateau at one month but decreasing the length of the conditional default rate ramp down to the 12 month assumption used at year-end 2009 would decrease the expected loss by approximately $75.6 million for HELOC transactions and $10.4 million for closed end second lien transactions.

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

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

The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are delinquent, in foreclosure or where the loan has been foreclosed and the RMBS issuer owns the underlying real estate). An increase in non-performing loans beyond that projected in the previous period is one of the primary drivers of loss development in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various delinquency categories. The Company arrived at its liquidation rates based on data in loan performance and assumptions about how delays in the foreclosure process may ultimately affect the rate at which loans are liquidated. The following table shows the Company's liquidation assumptions for various delinquency categories as of December 31, 2010 and 2009. The liquidation rate is a standard industry measure that is used to estimate the number of loans in a given aging category that will default within a specified time period. The Company projects these liquidations to occur over two years.



30 – 59 Days Delinquent
	Alt-A first lien	50	%	50	%
	Alt-A option ARM	50		50
	Subprime	45		45
60 – 89 Days Delinquent
	Alt-A first lien	65		65
	Alt-A option ARM	65		65
	Subprime	65		65
90 – Bankruptcy
	Alt-A first lien	75		75
	Alt-A option ARM	75		75
	Subprime	70		70
Foreclosure
	Alt-A first lien	85		85
	Alt-A option ARM	85		85
	Subprime	85		85
Real Estate Owned
	Alt-A first lien	100		100
	Alt-A option ARM	100		100
	Subprime	100		100

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

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

Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien transactions have reached historical high levels and the Company is assuming that these historical high levels will continue for another year. The Company determines its initial loss severity based on actual recent experience. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning in December 2011, and in the base scenario decline over two years to 40%.

The following table shows the Company's key assumptions used in its calculation of expected losses for the Company's direct vintage 2004 – 2008 first lien U.S. RMBS as of December 31 2010 and December 31, 2009. The Company was not projecting any losses for first lien RMBS deals as of December 31, 2008.

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

		As of December 31, 2010	As of December 31, 2009

Alt-A First Lien
	Plateau conditional default rate	2.6% – 42.2%	1.5% – 35.7%
	Intermediate conditional default rate	0.4% – 6.3%	0.2% – 5.4%
	Final conditional default rate	0.1% – 2.1%	0.1% – 1.8%
	Initial loss severity	60%	60%
	Initial conditional prepayment rate	0.0% – 36.5%	0.0% – 20.5%
	Final conditional prepayment rate	10%	10%
Alt-A option ARM
	Plateau conditional default rate	11.7% – 32.7%	13.5% – 27.0%
	Intermediate conditional default rate	1.8% – 4.9%	2.0% – 4.1%
	Final conditional default rate	0.6% – 1.6%	0.7% – 1.4%
	Initial loss severity	60%	60%
	Initial conditional prepayment rate	0.0% – 17.7%	0.0% – 3.5%
	Final conditional prepayment rate	10%	10%
Subprime
	Plateau conditional default rate	9.0% – 34.6%	7.1% – 29.5%
	Intermediate conditional default rate	1.3% – 5.2%	1.1% – 4.4%
	Final conditional default rate	0.4% – 1.7%	0.4% – 1.5%
	Initial loss severity	80%	70%
	Initial conditional prepayment rate	0.0% – 13.5%	0.0% – 12.0%
	Final conditional prepayment rate	10%	10%

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected (since that amount is a function of the conditional default rate and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the conditional prepayment rate follows a similar pattern to that of the conditional default rate. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final conditional prepayment rate, which is assumed to be either 10% or 15% depending on the scenario run. For transactions where the initial conditional prepayment rate is higher than the final conditional prepayment rate, the initial conditional prepayment rate is held constant.

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

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast recovery is expected to occur. The primary variable when modeling sensitivities was how quickly the conditional default rate returned to its modeled equilibrium, which was defined as 5% of the current conditional default rate. The Company also stressed conditional prepayment rates and the speed of recovery of loss severity rates. In a somewhat more stressful environment than that of the base case, where the conditional default rate recovery was more gradual and the final conditional prepayment rate was 15% rather than 10%, the Company's expected losses would increase by approximately $8.7 million for Alt-A first liens, $104.8 million for Option ARMs, $18.5 million for subprime and $0.1 million for prime transactions. In an even more stressful scenario where the conditional default rate plateau was extended 3 months (to be 27 months long) before the same more gradual conditional default rate recovery and loss severities were assumed to recover over 4 rather than 2 years (and subprime loss severities were assumed to recover only to 55%), the Company's expected losses would increase by approximately $35.5 million for Alt-A first liens, $191.3 million for Option ARMs, $204.6 million for subprime and $0.8 million for prime transactions. The Company also considered a scenario where the recovery was faster than in its base case. In this scenario, where the conditional default rate plateau was 3 months shorter (21 months, effectively assuming that liquidation rates would improve) and the conditional default rate recovery was more pronounced, the Company's expected losses would decrease by approximately $24.4 million for Alt-A first liens, $78.0 million for Option ARMs, $37.2 million for subprime and $0.5 million for prime transactions.

The Company is pursuing reimbursements for breaches of R&W regarding loan characteristics. Performance of the collateral underlying certain first and second lien securitizations has substantially differed from the Company's original expectations. The Company has employed several loan file diligence firms and law firms as well as devoted internal resources to review the mortgage files surrounding many of the defaulted loans. As of December 31, 2010, the Company had performed a detailed review of approximately 37,500 second lien and 15,500 first lien defaulted loan files, representing nearly $2.8 billion in second lien and $5.7 billion in first lien outstanding par of defaulted loans underlying insured transactions. The Company identified approximately 33,100 second lien transaction loan files and approximately 14,500 first lien transaction loan files that breached one or more R&W regarding the characteristics of the loans, such as misrepresentation of income or employment of the borrower, occupancy, undisclosed debt and non-compliance with underwriting guidelines at loan origination. The Company continues to review new files as new loans default and as new loan files are made available to it. The Company generally obtains the loan files from the originators or servicers (including master servicers). In some cases, the Company requests loan files via the trustee, which then requests the loan files from the originators and/or servicers. On second lien loans, the Company requests loan files for all charged-off loans. On first lien loans, the Company requests loan files for all severely (60+ days) delinquent loans and all liquidated loans. Recently, the Company started requesting loan files for all the loans (both performing and non-performing) in certain deals to limit the number of requests for additional loan files as the transactions season and loans charge-off, become 60+ days delinquent or are liquidated. (The Company takes no repurchase credit for R&W breaches on loans that are expected to continue to perform.) Following negotiations with the providers of the R&W, as of December 31, 2010, the Company had reached agreement for providers to repurchase $323 million of second lien and $205 million of first lien loans. The $323 million for second lien loans represents the calculated repurchase price for 3,120 loans and the $205 million for first lien loans represents the calculated repurchase price for 547 loans. The repurchase proceeds are paid to the RMBS transactions and distributed in accordance with the payment priorities set out in the transaction agreements, so the proceeds are not necessarily allocated to the Company on a dollar-for-dollar basis. Proceeds projected to be reimbursed to the Company on transactions where the Company has already paid claims are viewed as a recovery on paid losses. For transactions where the Company has not already paid claims, projected recoveries reduce projected loss estimates. In either case, projected recoveries have no effect on the amount of the Company's exposure. These amounts reflect payments made pursuant to the negotiated transaction agreements and not payments made pursuant to legal settlements. See "Recovery Litigation" below for a description of the related legal proceedings the Company has commenced.

The Company has included in its net expected loss estimates as of December 31, 2010 an estimated benefit from repurchases of $1.6 billion. The amount of benefit recorded as a reduction of expected losses was calculated by extrapolating each transaction's breach rate on defaulted loans to projected defaults. The Company did not incorporate any gain contingencies or damages paid from potential litigation in its estimated repurchases. The amount the Company will ultimately recover related to contractual R&W is uncertain and subject to a number of factors including the counterparty's ability to pay, the number and loss amount of loans determined to have breached R&W and, potentially, negotiated settlements or litigation recoveries. As such, the Company's estimate of recoveries is uncertain and actual amounts realized may differ significantly from these estimates. In arriving at the expected recovery from breaches of R&W, the Company considered the credit worthiness of the provider of the R&W, the number of breaches found on defaulted loans, the success rate in resolving these breaches with the provider of the R&W and the potential amount of time until the recovery is realized.

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

The following table represents the Company's total estimated recoveries netted in expected loss to be paid, from defective mortgage loans included in certain first and second lien U.S. RMBS loan securitizations that it insures. The Company had $1.6 billion of estimated recoveries from ineligible loans as of December 31, 2010, of which $0.9 billion is reported in salvage and subrogation recoverable, $0.5 billion is netted in loss and LAE reserves and $0.2 billion is netted in unearned premium reserve. The Company had $1.2 billion of estimated recoveries from ineligible loans as of December 31, 2009 of which $0.3 billion was reported in salvage and subrogation recoverable, $0.6 billion netted in loss and LAE reserves and $0.3 billion included within the Company's unearned premium reserve portion of its stand-ready obligation reported on the Company's consolidated balance sheet.

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

		# of Insurance Policies as of December 31, 2010 with R&W Benefit Recorded		Outstanding Principal and Interest of Policies with R&W Benefit Recorded as of December 31, 2010		Future Net R&W Benefit at December 31, 2009		R&W Development and Accretion of Discount during Year		R&W Recovered During 2010(1)		Future Net R&W Benefit at December 31, 2010

		(dollars in millions)
Prime first lien			1	$	57.1	$	—	$	1.1	$	—	$	1.1
Alt-A first lien			17		1,882.8		64.2		16.8		—		81.0
Alt-A option ARM			11		1,909.8		203.7		166.6		61.0		309.3
Subprime			1		228.7		—		26.8		—		26.8
Closed end second lien			4		444.9		76.5		101.7		—		178.2
HELOC			13		2,969.8		828.7		303.5		128.1		1,004.1

	Total		47	$	7,493.1	$	1,173.1	$	616.5	$	189.1	$	1,600.5

		# of Insurance Policies as of December 31, 2009 with R&W Benefit Recorded		Outstanding Principal and Interest of Policies with R&W Benefit Recorded as of December 31, 2009		Future Net R&W Benefit at December 31, 2008		R&W Development and Accretion of Discount during Year		R&W Recovered During 2009		R&W Benefit from AGMH Acquisition		Future Net R&W Benefit at December 31, 2009

		(dollars in millions)
Prime first lien			—	$	—	$	—	$	—	$	—	$	—	$	—
Alt-A first lien			17		1,821.5		—		64.2		—		—		64.2
Alt-A option ARM			9		2,437.5		—		41.2		16.7		179.2		203.7
Subprime			—		—		—		—		—		—		—
Closed end second lien			2		224.0		—		76.5		—		—		76.5
HELOC			11		4,384.5		49.3		618.9		66.9		227.4		828.7

	Total		39	$	8,867.5	$	49.3	$	800.8	$	83.6	$	406.6	$	1,173.1

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

		Year Ended December 31, 2010

		(in millions)
Inclusion of new deals with breaches of R&W during period		$	170.5
Change in recovery assumptions as the result of additional file review and recovery success			253.5
Estimated increase in defaults that will result in additional breaches			188.1
Accretion of discount on balance			4.4

	Total	$	616.5

The $616.5 million R&W development and accretion of discount during 2010 in the above table primarily resulted from an increase in loan file reviews, increased success rates in putting back loans, and increased projected defaults on loans with breaches of R&W. This development primarily can be broken down into changes in calculation inputs, changes in the timing and amounts of defaults and the inclusion of additional deals during the year for which the Company expects to obtain these benefits. The Company has reflected eight additional transactions during 2010 which resulted in approximately $170.5 million of the development. The remainder of the development primarily relates to changes in assumptions and additional projected defaults. The accretion of discount was not a primary driver of the development. Changes in assumptions generally relate to an increase in loan file reviews and increased success rates in putting back loans. The Company assumes that recoveries on HELOC and closed end second lien loans will occur in two to four years from the balance sheet date depending on the scenarios and that recoveries on Alt-A, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions. The $800.8 million development and accretion of discount during 2009 in the above table primarily resulted from an increase in loan file reviews and extrapolation of expected recoveries. The Company assumes in the base case that recoveries on HELOC and CES loans will occur in two years from the balance sheet date and that recoveries on Alt-A, Option ARM and Subprime loans will occur as claims are paid over the life of the transactions.

The Company has insured $2.1 billion of net par in "XXX" life insurance reserve securitization transactions based on discrete blocks of individual life insurance business. In these transactions the monies raised by the sale of the bonds insured by the Company were used to capitalize a special purpose vehicle that provides reinsurance to a life insurer or reinsurer. The monies are invested at inception in accounts managed by third-party investment managers. In order for the Company to incur an ultimate net loss on these transactions, adverse experience on the underlying block of life insurance policies and/or credit losses in the investment portfolio would need to exceed the level of credit enhancement built into the transaction structures. In particular, such credit losses in the investment portfolio could be realized in the event that circumstances arise resulting in the early liquidation of assets at a time when their market value is less than their intrinsic value.

The Company's $2.1 billion net par of XXX life insurance transactions includes, as of December 31, 2010, includes a total of $882.5 million rated BIG, comprising Class A-2 Floating Rate Notes issued by Ballantyne Re p.l.c and Series A-1 Floating Rate Notes issued by Orkney Re II p.l.c ("Orkney Re II"). The Ballantyne Re and Orkney Re II XXX transactions had material amounts of their assets invested in U.S. RMBS transactions. Based on its analysis of the information currently available, including estimates of future investment performance provided by the current investment manager, and projected credit impairments on the invested assets and performance of the blocks of life insurance business at December 31, 2010, the Company's gross expected loss, prior to reinsurance or netting of unearned premium, for its two BIG XXX insurance transactions was $73.8 million and its net reserve was $57.7 million.

The Company has insured $458.0 billion of public finance transactions across a number of different sectors. Within that category, $4.5 billion is rated BIG, and the company is projecting $88.9 million of expected losses across the portfolio. Of these losses, $25.8 million are expected in relation to eight student loan transactions with $592.4 million of net par outstanding. The largest of these losses was $18.5 million and related to a transaction backed by a pool of government-guaranteed student loans ceded to AG Re by another monoline insurer. The guaranteed bonds were issued as variable rate demand obligations that have since been "put" to the bank liquidity providers and now bear a high rate of interest. Further the underlying loan collateral has performed below expectations. The Company has estimated its losses based upon a weighting of potential outcomes.

The Company has also projected estimated losses of $33 million on its total net par outstanding of $513.2 million on Jefferson County Alabama Sewer Authority exposure. This estimate is based primarily on the Company's view of how much debt the Authority should be able to support under certain probability-weighted scenarios.

The Company has projected expected loss to be paid of $14.0 million on one transaction from 2000 backed by manufactured housing loans with a net par of $70.8 million. The Company insures a total of $369.0 million net par of securities backed by manufactured housing loans, a total of $167.2 million rated BIG.

The Company has $164.5 million of net par exposure to the city of Harrisburg, Pennsylvania, of which $93.2 million is BIG. The Company has paid $2.9 million in net claims to date, and expects a full recovery.

The Company continues to closely monitor other sectors and individual financial guaranty insurance transactions it feels warrant the additional attention, including, as of December 31, 2010, its commercial real estate exposure of $584.2 million of net par, its trust preferred securities ("TruPS") collateralized debt obligations ("CDOs") exposure of $1.1 billion, its insurance on a financing of 78 train sets (one train set being composed of eight cars) for an Australian commuter railway for $616.5 million net par and its U.S. health care exposure of $21.4 billion of net par.

As of March 1, 2011, the Company had filed lawsuits with regard to four second lien U.S. RMBS transactions insured by the Company, alleging breaches of R&W both in respect of the underlying loans in the transactions and the accuracy of the information provided to the Company, and failure to cure or repurchase defective loans identified by the Company to such persons. These transactions consist of the ACE Securities Corp. Home Equity Loan Trust, Series 2006-GP1, the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL2 and the ACE Securities Corp. Home Equity Loan Trust, Series 2007-SL3 transactions (in each of which the Company has sued DB Structured Products, Inc. and its affiliate ACE Securities Corp.) and the SACO I Trust 2005-GP1 transaction (in which the Company has sued JPMorgan Chase & Co.'s affiliate EMC Mortgage Corporation).

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

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

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

In September 2010, the Company, together with TD Bank, National Association and Manufacturers and Traders Trust Company, filed a complaint in the Court of Common Pleas in the Supreme Court of Pennsylvania against The Harrisburg Authority, The City of Harrisburg, Pennsylvania (the "City"), and the Treasurer of the City in connection with certain Resource Recovery Facility bonds and notes issued by the Harrisburg Authority, alleging, among other claims, breach of contract by both the Harrisburg Authority and the City, and seeking remedies including an order compelling the Harrisburg Authority to pay all unpaid and past due principal and interest and to charge and collect sufficient rates, rental and other charges adequate to carry out its pledge of revenues and receipts; an order compelling the City to budget for, impose and collect taxes and revenues sufficient to satisfy its obligations; and the appointment of a receiver for the Harrisburg Authority.

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

				As of December 31, (restated)

				2010			2009
				(in millions)
U.S. RMBS:
	First lien:
		Prime first lien		$	1.2		$	—
		Alt-A first lien			39.2			25.5
		Alt-A option ARM			223.3			51.2
		Subprime			108.3			21.8

			Total first lien		372.0			98.5
	Second lien:
		Closed end second lien			7.7			21.2
		HELOC			7.1			18.2

			Total second lien		14.8			39.4

Total U.S. RMBS					386.8			137.9
Other structured finance					131.1			77.9
Public finance					81.6			67.7

Total financial guaranty					599.5			283.5
Other					2.1			2.1

		Subtotal			601.6			285.6
Effect of consolidating financial guaranty VIEs					(49.5	)		—

		Total(1)		$	552.1		$	285.6

The following table provides information on salvage and subrogation recoverable on financial guaranty insurance and reinsurance contracts recorded as an asset on the consolidated balance sheets.

				As of December 31, 2010			As of December 31, 2009

				(in millions)
							(restated)
U.S. RMBS:
	First lien:
		Alt-A first lien		$	2.7		$	—
		Alt-A option ARM			71.0			—
		Subprime			0.1			0.1

			Total first lien		73.8			0.1
	Second lien:
		Closed end second lien			51.8			0.1
		HELOC			956.8			390.9

			Total second lien		1,008.6			391.0

Total U.S. RMBS					1,082.4			391.1
Other structured finance					1.4			1.0
Public finance					40.8			2.5

Total					1,124.6			394.6
Effect of consolidating financial guaranty VIEs					(92.2	)		—

		Total gross recoverable			1,032.4			394.6
Less: Ceded recoverable(1)					129.4			39.0

		Net recoverable		$	903.0		$	355.6

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

					Year Ended December 31,

					2010			2009		2008
					(in millions)
					(restated)			(restated)
Financial Guaranty:
	U.S. RMBS:
		First lien:
			Prime first lien		$	0.9		$	—	$	0.1
			Alt-A first lien			37.4			21.1		5.1
			Alt-A option ARM			272.4			43.0		4.5
			Subprime			85.9			13.1		9.3

				Total first lien		396.6			77.2		19.0
		Second lien:
			Closed end second lien			5.2			47.8		56.8
			HELOC			(20.4	)		154.1		156.0

				Total second lien		(15.2	)		201.9		212.8

	Total U.S. RMBS					381.4			279.1		231.8
	Other structured finance					63.6			31.4		14.2
	Public finance					32.9			71.2		19.2

Total financial guaranty						477.9			381.7		265.2
Other						0.2			12.1		0.6

		Subtotal				478.1			393.8		265.8
Effect of consolidating financial guaranty VIEs						(65.9	)		—		—

		Total loss and LAE			$	412.2		$	393.8	$	265.8

				Year Ended December 31,

				2010			2009(1)		2008
				(in millions)
U.S. RMBS:
	First lien:
		Alt-A first lien		$	60.0		$	1.0	$	—
		Alt-A option ARM			181.6			0.7		—
		Subprime			3.4			2.6		1.8

			Total first lien		245.0			4.3		1.8
	Second lien:
		Closed end second lien			69.4			101.1		17.5
		HELOC			512.8			528.1		220.3

			Total second lien		582.2			629.2		237.8

Total U.S. RMBS					827.2			633.5		239.6
Other structured finance					8.6			0.8		2.5
Public finance					51.6			23.2		14.7

Total financial guaranty					887.4			657.5		256.8
Other					0.2			12.5		0.9

			Subtotal		887.6			670.0		257.7
Effect of consolidating financial guaranty VIEs					(143.4	)		—		—

			Total	$	744.2		$	670.0	$	257.7

The following table provides information on financial guaranty insurance and reinsurance contracts categorized as BIG as of December 31, 2010 and 2009:

			BIG Categories

			BIG 1						BIG 2						BIG 3
			Gross			Ceded			Gross			Ceded			Gross			Ceded			Total BIG, Net(1)			Effect of Consolidating VIEs			Total
			(dollars in millions)
			(restated)			(restated)			(restated)			(restated)									(restated)						(restated)
Number of risks(2)				119			(45	)		98			(42	)		115			(42	)		332			—			332
Remaining weighted-average contract period (in years)				11.7			16.0			8.4			7.9			8.8			6.0			9.6			—			9.6
Outstanding exposure:
	Principal		$	6,173.0		$	(723.3	)	$	5,899.3		$	(182.8	)	$	7,954.5		$	(673.6	)	$	18,447.1		$	—		$	18,447.1
	Interest			3,599.5			(580.4	)		2,601.6			(70.9	)		2,490.7			(186.3	)		7,854.2			—			7,854.2

		Total	$	9,772.5		$	(1,303.7	)	$	8,500.9		$	(253.7	)	$	10,445.2		$	(859.9	)	$	26,301.3		$	—		$	26,301.3

Expected cash outflows(inflows)			$	303.9		$	(20.2	)	$	2,036.6		$	(68.9	)	$	2,256.6		$	(133.2	)	$	4,374.8		$	(384.2	)	$	3,990.6
Potential recoveries(3)				(375.2	)		37.4			(533.0	)		16.6			(2,543.6	)		197.5			(3,200.3	)		354.8			(2,845.5	)

	Subtotal			(71.3	)		17.2			1,503.6			(52.3	)		(287.0	)		64.3			1,174.5			(29.4	)		1,145.1
	Discount			(21.0	)		(5.5	)		(613.2	)		21.5			(139.6	)		(7.9	)		(765.7	)		(19.8	)		(785.5	)

Present value of expected cash flows			$	(92.3	)	$	11.7		$	890.4		$	(30.8	)	$	(426.6	)	$	56.4		$	408.8		$	(49.2	)	$	359.6

Deferred premium revenue			$	169.9		$	(16.9	)	$	572.4		$	(30.3	)	$	995.9		$	(120.7	)	$	1,570.3		$	(263.9	)	$	1,306.4
Reserves (salvage)(4)			$	(112.9	)	$	12.4		$	424.4		$	(9.5	)	$	(815.9	)	$	105.8		$	(395.7	)	$	42.7		$	(353.0	)

			BIG Categories

			BIG 1						BIG 2						BIG 3
			Gross			Ceded			Gross			Ceded			Gross			Ceded			Total
			(dollars in millions)
									(restated)						(restated)			(restated)			(restated)
Number of risks(2)				97			(54	)		161			(46	)		37			(27	)		295
Remaining weighted-average contract period (in years)				9.1			12.2			7.6			7.4			8.9			5.5			8.5
Outstanding exposure:
	Principal		$	4,651.1		$	(420.2	)	$	7,116.3		$	(311.7	)	$	7,455.0		$	(783.4	)	$	17,707.1
	Interest			1,644.8			(112.5	)		2,804.8			(119.7	)		1,924.4			(195.2	)		5,946.6

		Total	$	6,295.9		$	(532.7	)	$	9,921.1		$	(431.4	)	$	9,379.4		$	(978.6	)	$	23,653.7

Expected cash outflows(inflows)			$	35.8		$	(20.5	)	$	1,961.9		$	(98.3	)	$	2,599.7		$	(245.5	)	$	4,233.1
	Potential recoveries(3)			(3.5	)		—			(506.6	)		15.7			(2,312.0	)		216.4			(2,590.0	)

	Subtotal			32.3			(20.5	)		1,455.3			(82.6	)		287.7			(29.1	)		1,643.1
	Discount			(18.3	)		11.3			(419.8	)		28.4			(161.4	)		(16.9	)		(576.7	)

Present value of expected cash flows			$	14.0		$	(9.2	)	$	1,035.5		$	(54.2	)	$	126.3		$	(46.0	)	$	1,066.4

Deferred premium revenue			$	49.3		$	—		$	1,190.2		$	(14.5	)	$	1,274.2		$	(141.9	)	$	2,357.3
Reserves (salvage)(4)(5)			$	(0.1	)	$	—		$	156.6		$	(4.6	)	$	(256.6	)	$	24.5		$	(80.2	)

		December 31, 2010			December 31, 2009

		(in millions)
		(restated)			(restated)
Loss and LAE reserve		$	574.4		$	299.7
Reinsurance recoverable on unpaid losses			(22.3	)		(14.1	)
Salvage and subrogation recoverable			(1,032.4	)		(394.6	)
Salvage and subrogation payable(1)			129.4			39.0

	Total		(350.9	)		(70.0	)
Less: other segment			2.1			2.1

Financial guaranty reserves, net of salvage and subrogation		$	(353.0	)	$	(72.1	)

A downgrade of one of the Company's insurance subsidiaries may result in increased claims under financial guaranties issued by the Company. In particular, with respect to variable rate demand obligations for which a bank has agreed to provide a liquidity facility, a downgrade of the insurer may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a "bank bond rate" that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% – 3.00%, often with a floor of 7%, and capped at the maximum legal limit). In the event that the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right additionally to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a claim could be submitted to the insurer under its financial guaranty. As of March 1, 2011, the Company had insured approximately $1.2 billion of par of variable rate demand obligations issued by municipal obligors rated BBB- or lower pursuant to the Company's internal rating. For a number of such obligations, a downgrade of the insurer below A+, in the case of S&P, or below A1, in the case of Moody's, triggers the ability of the bank to notify bondholders of the termination of the liquidity facility and to demand accelerated repayment of bond principal over a period of five to ten years. The specific terms relating to the rating levels that trigger the bank's termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.