Business Changes, Risks, Uncertainties and Accounting Developments

3 Months Ended

Mar. 31, 2011

Business Changes, Risks, Uncertainties and Accounting Developments

Business Changes, Risks, Uncertainties and Accounting Developments

3. Business Changes, Risks, Uncertainties and Accounting Developments

Summarized below are updates of the most significant events since the year-end 2010 that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company.

Bank of America Agreement

On April 14, 2011, Assured Guaranty reached a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, “Bank of America”), regarding their liabilities with respect to 29 RMBS transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of representations and warranties (“R&W”) and historical loan servicing issues (“Bank of America Agreement”). Of the 29 RMBS transactions, eight are second lien transactions and 21 are first lien transactions. The Bank of America Agreement covers Bank of America sponsored securitizations that AGM or AGC has insured, as well as certain other securitizations containing concentrations of Countrywide originated loans that AGM or AGC has insured. The transactions covered by the Bank of America Agreement have a gross par outstanding of $5.2 billion ($4.8 billion net par outstanding) as of March 31, 2011, or 29% of Assured Guaranty’s total below investment grade (“BIG”) RMBS net par outstanding.

Bank of America paid Assured Guaranty $850 million on April 14, 2011 and is obligated to pay another $250 million by March 2012. In addition, Bank of America will reimburse Assured Guaranty 80% of claims Assured Guaranty pays on the 21 first lien transactions, up to collateral losses of $6.6 billion. On April 14, 2011, Bank of America placed $1 billion of eligible assets into trust in order to collateralize the reimbursement obligation relating to the first lien transactions. The amount of assets required to be posted may increase or decrease from time to time, as determined by rating agency requirements. As of March 31, 2011, cumulative collateral losses on these first lien RMBS transactions were approximately $1.5 billion, AGM had paid $2.0 million in claims and the Company’s estimated gross economic loss before considering R&W benefit on these transactions was $538.3 million, which assumes cumulative projected collateral losses of $4.8 billion.

The execution of the Bank of America Agreement is considered a Type 1 subsequent event, meaning that the terms of the Bank of America Agreement provide additional evidence about the estimates inherent in the loss estimation process at March 31, 2011. A Type 1 subsequent event requires that such additional information obtained subsequent to the reporting date be used when preparing the financial statements if financial statements have not yet been issued for the previous reporting period. Therefore, the March 31, 2011 loss estimates incorporate updated assumptions and estimates reflecting the terms of the Bank of America Agreement. The First Quarter 2011 benefit for R&W reflects higher expected recoveries across all transactions as a result of the Bank of America Agreement. For transactions covered under the Bank of America Agreement, the R&W benefit has been updated to reflect amounts collected and expected to be collected subsequent to March 31, 2011 under the terms of the Bank of America Agreement. For transactions with other sponsors of U.S. RMBS, against which the Company is pursuing R&W claims, the Company has increased the benefit for R&W to reflect the probability that actual recovery rates may be higher than originally expected. For transactions with counterparties other than Bank of America, the Company has continued to review additional loan files and has found breach rates consistent with those in the Bank of America and Countrywide transactions. Therefore, the Company assumed higher recovery rates in First Quarter 2011.