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Restatement of Previously Issued Financial Statements

6 Months Ended

Jun. 30, 2011

Restatement of Previously Issued Financial Statements

Restatement of Previously Issued Financial Statements

2. Restatement of Previously Issued Financial Statements

AGL, through its insurance subsidiaries, has provided financial guaranties with respect to debt obligations issued by special purpose entities, including FG VIEs. Assured Guaranty does not sponsor such FG VIEs nor does it act as the servicer or collateral manager for any FG 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 FG VIE. Assured Guaranty is required under GAAP to consolidate the FG VIE in its financial statements when it is the primary beneficiary. See Note 8. When such consolidation occurs, Assured Guaranty must eliminate the intercompany transactions between the relevant Assured Guaranty insurance subsidiary and the consolidated FG VIE. Assured Guaranty discovered errors in the elimination of such intercompany transactions, which resulted in the restatement of the consolidated financial statements for the three and six months ended June 30, 2011 and 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 FG 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 period in which they arose.

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

	As of June 30, 2011
	As Previously Filed		(1) FG VIE Eliminations			(2) Other Adjustments			Restated
	(in millions)
Assets
Total investment portfolio	$	11,186.7	$	35.2		$	—		$	11,221.9
Cash	159.2		6.3			—			165.5
Premiums receivable, net of ceding commissions payable	1,059.5		—			—			1,059.5
Ceded unearned premium reserve	773.3		—			—			773.3
Deferred acquisition costs	232.3		—			—			232.3
Reinsurance recoverable on unpaid losses	26.0		—			—			26.0
Salvage and subrogation recoverable	307.1		—			—			307.1
Credit derivative assets	603.9		—			—			603.9
Deferred tax asset, net	1,012.0		18.3			1.1			1,031.4
Current income tax receivable	188.0		—			—			188.0
Financial guaranty variable interest entities’ assets, at fair value	3,492.2		—			—			3,492.2
Other assets	198.7		—			—			198.7
Total assets	$	19,238.9	$	59.8		$	1.1		$	19,299.8
Liabilities and shareholders’ equity
Unearned premium reserve	$	6,315.4	$	—		$	—		$	6,315.4
Loss and loss adjustment expense reserve	518.1		—			—			518.1
Reinsurance balances payable, net	175.9		—			—			175.9
Long-term debt	1,046.4		—			—			1,046.4
Credit derivative liabilities	2,788.2		—			3.2			2,791.4
Financial guaranty variable interest entities’ liabilities with recourse, at fair value	2,755.1		93.8			—			2,848.9
Financial guaranty variable interest entities’ liabilities without recourse, at fair value	1,282.5		—			—			1,282.5
Other liabilities	407.3		—			—			407.3
Total liabilities	15,288.9		93.8			3.2			15,385.9
Commitments and contingencies
Common stock	1.8		—			—			1.8
Additional paid-in capital	2,590.7		—			—			2,590.7
Retained earnings	1,149.9		(34.0		)	(2.1		)	1,113.8
Accumulated other comprehensive income, net of tax provision (benefit)	205.6		—			—			205.6
Deferred equity compensation	2.0		—			—			2.0
Total shareholders’ equity	3,950.0		(34.0		)	(2.1		)	3,913.9
Total liabilities and shareholders’ equity	$	19,238.9	$	59.8		$	1.1		$	19,299.8

	As of December 31, 2010
	As Previously Filed		(1) FG 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	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

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

	Three Months Ended June 30, 2011
	As Previously Filed			(1) FG VIE Eliminations		(2) Other Adjustments			Restated
	(in millions except per share amounts)
Revenues
Net earned premiums	$	230.0		$	—	$	—		$	230.0
Net investment income	100.8			0.3		—			101.1
Net realized investment gains (losses)	(5.1		)	—		—			(5.1		)
Net change in fair value of credit derivatives	(59.4		)	—		(5.4		)	(64.8		)
Fair value gain (loss) on committed capital securities	0.6			—		—			0.6
Net change in financial guaranty variable interest entities	(193.7		)	19.4		—			(174.3		)
Other income	28.8			—		—			28.8
Total revenues	102.0			19.7		(5.4		)	116.3
Expenses
Loss and loss adjustment expenses	132.9			2.7		(11.7		)	123.9
Interest and other operating expenses	82.7			—		—			82.7
Total expenses	215.6			2.7		(11.7		)	206.6
Income (loss) before income taxes	(113.6		)	17.0		6.3			(90.3		)
Provision (benefit) for income taxes
Current	9.9			—		—			9.9
Deferred	(65.8		)	6.0		2.2			(57.6		)
Total provision (benefit) for income taxes	(55.9		)	6.0		2.2			(47.7		)
Net income (loss)	$	(57.7	)	$	11.0	$	4.1		$	(42.6	)
Earnings per share:
Basic	$	(0.31	)						$	(0.23	)
Diluted	$	(0.31	)						$	(0.23	)

	Three Months Ended June 30, 2010
	As Previously Filed			(1) FG VIE Eliminations			(2) Other Adjustments			Restated
	(in millions except per share amounts)
Revenues
Net earned premiums	$	292.1		$	4.9		$	—		$	297.0
Net investment income	90.9			—			—			90.9
Net realized investment gains (losses)	(8.4		)	—			—			(8.4		)
Net change in fair value of credit derivatives	73.5			—			—			73.5
Fair value gain (loss) on committed capital securities	12.6			—			—			12.6
Net change in financial guaranty variable interest entities	0.5			(27.9		)	—			(27.4		)
Other income	(13.5		)	—			—			(13.5		)
Total revenues	447.7			(23.0		)	—			424.7
Expenses
Loss and loss adjustment expenses	71.2			14.3			0.2			85.7
Interest and other operating expenses	82.0			—			—			82.0
Total expenses	153.2			14.3			0.2			167.7
Income (loss) before income taxes	294.5			(37.3		)	(0.2		)	257.0
Provision (benefit) for income taxes
Current	44.9			—			—			44.9
Deferred	46.1			(13.1		)	—			33.0
Total provision (benefit) for income taxes	91.0			(13.1		)	—			77.9
Net income (loss)	$	203.5		$	(24.2	)	$	(0.2	)	$	179.1
Earnings per share:
Basic	$	1.10								$	0.97
Diluted	$	1.08								$	0.95

	Six Months Ended June 30, 2011
	As Previously Filed			(1) FG VIE Eliminations		(2) Other Adjustments			Restated
	(in millions except per share amounts)
Revenues
Net earned premiums	$	484.0		$	—	$	—		$	484.0
Net investment income	197.2			—		—			197.2
Net realized investment gains (losses)	(2.3		)	—		—			(2.3		)
Net change in fair value of credit derivatives	(295.1		)	—		(5.9		)	(301.0		)
Fair value gain (loss) on committed capital securities	1.1			—		—			1.1
Net change in financial guaranty variable interest entities	(99.8		)	45.1		—			(54.7		)
Other income	71.0			—		—			71.0
Total revenues	356.1			45.1		(5.9		)	395.3
Expenses
Loss and loss adjustment expenses	105.9			3.9		(11.4		)	98.4
Interest and other operating expenses	171.7			—		—			171.7
Total expenses	277.6			3.9		(11.4		)	270.1
Income (loss) before income taxes	78.5			41.2		5.5			125.2
Provision (benefit) for income taxes
Current	(187.7		)	—		—			(187.7		)
Deferred	198.5			14.5		1.9			214.9
Total provision (benefit) for income taxes	10.8			14.5		1.9			27.2
Net income (loss)	$	67.7		$	26.7	$	3.6		$	98.0
Earnings per share:
Basic	$	0.37							$	0.53
Diluted	$	0.36							$	0.52

	Six Months Ended June 30, 2010
	As Previously Filed			(1) FG VIE Eliminations			(2) Other Adjustments			Restated
	(in millions except per share amounts)
Revenues
Net earned premiums	$	611.7		$	—		$	—		$	611.7
Net investment income	175.2			—			—			175.2
Net realized investment gains (losses)	1.0			—			—			1.0
Net change in fair value of credit derivatives	352.3			—			—			352.3
Fair value gain (loss) on committed capital securities	11.3			—			—			11.3
Net change in financial guaranty variable interest entities	(10.1		)	(26.2		)	—			(36.3		)
Other income	(26.4		)	—			—			(26.4		)
Total revenues	1,115.0			(26.2		)	—			1,088.8
Expenses
Loss and loss adjustment expenses	201.7			0.1			(5.2		)	196.6
Interest and other operating expenses	181.9			—			—			181.9
Total expenses	383.6			0.1			(5.2		)	378.5
Income (loss) before income taxes	731.4			(26.3		)	5.2			710.3
Provision (benefit) for income taxes
Current	5.9			—			—			5.9
Deferred	200.0			(9.2		)	1.0			191.8
Total provision (benefit) for income taxes	205.9			(9.2		)	1.0			197.7
Net income (loss)	$	525.5		$	(17.1	)	$	4.2		$	512.6
Earnings per share:
Basic	$	2.85								$	2.78
Diluted	$	2.77								$	2.70

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

	Three Months Ended June 30, 2011
	As Previously Filed			(1) FG VIE Eliminations			(2) Other Adjustments		Restated
	(in millions)
Net income (loss)	$	(57.7	)	$	11.0		$	4.1	$	(42.6	)
Unrealized holding gains (losses) arising during the period	115.6			(0.8		)	—		114.8
Less: reclassification adjustment for gains (losses)	(4.2		)	—			—		(4.2		)
Change in net unrealized gains on investments	119.8			(0.8		)	—		119.0
Change in cumulative translation adjustment	0.4			—			—		0.4
Change in cash flow hedge	(0.1		)	—			—		(0.1		)
Other comprehensive income(loss)	120.1			(0.8		)	—		119.3
Comprehensive income (loss)	$	62.4		$	10.2		$	4.1	$	76.7

	Three Months Ended June 30, 2010
	As Previously Filed			(1) FG VIE Eliminations			(2) Other Adjustments			Restated
	(in millions)
Net income (loss)	$	203.5		$	(24.2	)	$	(0.2	)	$	179.1
Unrealized holding gains (losses) arising during the period	48.2			—			—			48.2
Less: reclassification adjustment for gains (losses)	(4.2		)	—			—			(4.2		)
Change in net unrealized gains on investments	52.4			—			—			52.4
Change in cumulative translation adjustment	(1.4		)	—			—			(1.4		)
Change in cash flow hedge	(0.1		)	—			—			(0.1		)
Other comprehensive income(loss)	50.9			—			—			50.9
Comprehensive income (loss)	$	254.4		$	(24.2	)	$	(0.2	)	$	230.0

	Six Months Ended June 30, 2011
	As Previously Filed			(1) FG VIE Eliminations			(2) Other Adjustments		Restated
	(in millions)
Net income (loss)	$	67.7		$	26.7		$	3.6	$	98.0
Unrealized holding gains (losses) arising during the period	90.4			(1.1		)	—		89.3
Less: reclassification adjustment for gains (losses)	(3.2		)	—			—		(3.2		)
Change in net unrealized gains on investments	93.6			(1.1		)	—		92.5
Change in cumulative translation adjustment	1.6			—			—		1.6
Change in cash flow hedge	(0.2		)	—			—		(0.2		)
Other comprehensive income(loss)	95.0			(1.1		)	—		93.9
Comprehensive income (loss)	$	162.7		$	25.6		$	3.6	$	191.9

	Six Months Ended June 30, 2010
	As Previously Filed			(1) FG VIE Eliminations			(2) Other Adjustments		Restated
	(in millions)
Net income (loss)	$	525.5		$	(17.1	)	$	4.2	512.6
Unrealized holding gains (losses) arising during the period	57.4			—			—		57.4
Less: reclassification adjustment for gains (losses)	2.4			—			—		2.4
Change in net unrealized gains on investments	55.0			—			—		55.0
Change in cumulative translation adjustment	(5.3		)	—			—		(5.3	)
Change in cash flow hedge	(0.2		)	—			—		(0.2	)
Other comprehensive income(loss)	49.5			—			—		49.5
Comprehensive income (loss)	$	575.0		$	(17.1	)	$	4.2	562.1

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

	Six Months Ended June 30, 2011
	As Previously Filed			(1) FG VIE Eliminations			Restated

Net cash flows provided by (used in) operating activities	$	614.4		$	17.5		$	631.9
Investing activities
Fixed maturity securities:
Purchases	(1,349.7		)	—			(1,349.7		)
Sales	686.0			—			686.0
Maturities	326.9			(1.2		)	325.7
Net sales (purchases) of short-term investments	(38.7		)	(11.2		)	(49.9		)
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	424.0			—			424.0
Other	8.7			—			8.7
Net cash flows provided by (used in) investing activities	57.2			(12.4		)	44.8
Financing activities
Dividends paid	(16.6		)	—			(16.6		)
Share activity under option and incentive plans	(2.6		)	—			(2.6		)
Net paydowns of financial guarantyvariable interest entities’ liabilities	(593.3		)	—			(593.3		)
Repayment of long-term debt	(10.3		)	—			(10.3		)
Net cash flows provided by (used in) financing activities	(622.8		)	—			(622.8		)
Effect of exchange rate changes	3.2			—			3.2
Increase (decrease) in cash	52.0			5.1			57.1
Cash at beginning of period	107.2			1.2			108.4
Cash at end of period	$	159.2		$	6.3		$	165.5

	Six Months Ended June 30, 2010
	As Previously Filed			(1) FG VIE Eliminations			Restated

Net cash flows provided by (used in) operating activities	$	(249.5	)	$	31.9		$	(217.6	)
Investing activities
Fixed maturity securities:
Purchases	(1,166.3		)	—			(1,166.3		)
Sales	780.8			—			780.8
Maturities	488.6			—			488.6
Net sales (purchases) of short-term investments	276.6			(27.9		)	248.7
Net proceeds from paydowns on financial guarantyvariable interest entities’ assets	217.3			—			217.3
Other	8.3			—			8.3
Net cash flows provided by (used in) investing activities	605.3			(27.9		)	577.4
Financing activities
Dividends paid	(16.6		)	—			(16.6		)
Share repurchases	(10.5		)				(10.5		)
Share activity under option and incentive plans	(2.3		)	—			(2.3		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(259.4		)	—			(259.4		)
Repayment of long-term debt	(10.8		)	—			(10.8		)
Net cash flows provided by (used in) financing activities	(299.6		)	—			(299.6		)
Effect of exchange rate changes	(3.1		)	—			(3.1		)
Increase (decrease) in cash	53.1			4.0			57.1
Cash at beginning of period	44.1			—			44.1
Cash at end of period	$	97.2		$	4.0		$	101.2

(1) Represents adjustments related to the correction of FG 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 FG VIE assets and liabilities that resulted from a misinterpretation of a trustee report.

The Company also revised certain disclosures in Note 16 as part of the restatement of these financial statements.

- Definition

The entire disclosure for reporting accounting changes and error corrections. It includes the conveyance of information necessary for a user of the Company's financial information to understand all aspects and required disclosure information concerning all changes and error corrections reported in the Company's financial statements for the period.

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