Restatement of Previously Issued Financial Statements

9 Months Ended

Sep. 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 Third Quarter 2010, Nine Months 2010 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 primarily affected Third Quarter 2010, Nine Months 2010 and the year ended December 31, 2010. While these immaterial errors were corrected at the time they were identified, these restated financial statements reflect the correction of such errors in the period in which they arose.

	As of December 31, 2010
	AsPreviously Filed		(1)  FG VIE  Eliminations			(2)OtherAdjustments			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 September 30, 2010
	AsPreviously Filed			Reclassifications		Subtotal			(1) FG VIE Eliminations			(2) OtherAdjustments		Restated
	(in millions, except per share amounts)
Revenues
Net earned premiums	$	288.7		$	—	$	288.7		$	—		$	—	$	288.7
Net investment income	85.6			—		85.6			—			—		85.6
Net realized investment gains (losses)	(2.4		)	—		(2.4		)	—			—		(2.4		)
Net change in fair value of credit derivatives	(232.5		)	—		(232.5		)	—			8.5		(224.0		)
Fair value gain (loss) on committed capital securities	(5.5		)	—		(5.5		)	—			—		(5.5		)
Net change in financial guaranty variable interest entities	76.5			126.7		203.2			(31.9		)	—		171.3
Other income	33.8			—		33.8			—			—		33.8
Total revenues	244.2			126.7		370.9			(31.9		)	8.5		347.5
Expenses
Loss and loss adjustment expenses	109.1			—		109.1			1.3			0.4		110.8
Interest and other operating expenses	(41.6		)	126.7		85.1			—			—		85.1
Total expenses	67.5			126.7		194.2			1.3			0.4		195.9
Income (loss) before income taxes	176.7			—		176.7			(33.2		)	8.1		151.6
Provision (benefit) for income taxes
Current	(191.9		)	—		(191.9		)	—			—		(191.9		)
Deferred	187.7			—		187.7			(11.6		)	2.8		178.9
Total provision (benefit) for income taxes	(4.2		)	—		(4.2		)	(11.6		)	2.8		(13.0		)
Net income (loss)	$	180.9		$	—	$	180.9		$	(21.6	)	$	5.3	$	164.6
Earnings per share:
Basic	$	0.98				$	0.98							$	0.89
Diluted	$	0.96				$	0.96							$	0.88

	Nine Months Ended September 30, 2010
	AsPreviously Filed			Reclassifications		Subtotal			(1)FG VIE Eliminations			(2) Other Adjustments			Restated
	(in millions except per share amounts)
Revenues
Net earned premiums	$	900.4		$	—	$	900.4		$	—		$	—		$	900.4
Net investment income	260.8			—		260.8			—			—			260.8
Net realized investment gains (losses)	(1.4		)	—		(1.4		)	—			—			(1.4		)
Net change in fair value of credit derivatives	119.8			—		119.8			—			8.5			128.3
Fair value gain (loss) on committed capital securities	5.8			—		5.8			—			—			5.8
Net change in financial guaranty variable interest entities	61.6			131.5		193.1			(58.1		)	—			135.0
Other income	7.4			—		7.4			—			—			7.4
Total revenues	1,354.4			131.5		1,485.9			(58.1		)	8.5			1,436.3
Expenses
Loss and loss adjustment expenses	310.8			—		310.8			1.4			(4.8		)	307.4
Interest and other operating expenses	135.5			131.5		267.0			—			—			267.0
Total expenses	446.3			131.5		577.8			1.4			(4.8		)	574.4
Income (loss) before income taxes	908.1			—		908.1			(59.5		)	13.3			861.9
Provision (benefit) for income taxes
Current	(186.0		)	—		(186.0		)	—			—			(186.0		)
Deferred	387.7			—		387.7			(20.8		)	3.8			370.7
Total provision (benefit) for income taxes	201.7			—		201.7			(20.8		)	3.8			184.7
Net income (loss)	$	706.4		$	—	$	706.4		$	(38.7	)	$	9.5		$	677.2
Earnings per share:
Basic	$	3.83				$	3.83								$	3.67
Diluted	$	3.73				$	3.73								$	3.58

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

	Three Months Ended September 30, 2010
	AsPreviously Filed			(1) FG VIE Eliminations			(2)OtherAdjustments		Restated
	(in millions)
Net income	$	180.9		$	(21.6	)	$	5.3	$	164.6
Unrealized holding gains (losses) arising during the period	139.6			—			—		139.6
Less: reclassification adjustment for gains (losses)	(1.3		)	—			—		(1.3		)
Change in net unrealized gains on investments	140.9			—			—		140.9
Change in cumulative translation adjustment	5.4			—			—		5.4
Change in cash flow hedge	(0.1		)	—			—		(0.1		)
Other comprehensive income(loss)	146.2			—			—		146.2
Comprehensive income (loss)	$	327.1		$	(21.6	)	$	5.3	$	310.8

	Nine Months Ended September 30, 2010
	AsPreviously Filed			(1)  FG VIE  Eliminations			(2)OtherAdjustments		Restated
	(in millions)
Net income	$	706.4		$	(38.7	)	$	9.5	$	677.2
Unrealized holding gains (losses) arising during the period	197.0			—			—		197.0
Less: reclassification adjustment for gains (losses)	1.2			—			—		1.2
Change in net unrealized gains on investments	195.8			—			—		195.8
Change in cumulative translation adjustment	0.2			—			—		0.2
Change in cash flow hedge	(0.3		)	—			—		(0.3		)
Other comprehensive income(loss)	195.7			—			—		195.7
Comprehensive income (loss)	$	902.1		$	(38.7	)	$	9.5	$	872.9

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

	Nine Months Ended September 30, 2010
	AsPreviously Filed			(1)  FG VIE  Eliminations			Restated
	(in millions)
Net cash flows provided by (used in) operating activities	$	(140.0	)	$	35.7		$	(104.3	)
Investing activities
Fixed maturity securities:
Purchases	(1,928.7		)	—			(1,928.7		)
Sales	835.7			—			835.7
Maturities	729.6			—			729.6
Net sales (purchases) of short-term investments	759.9			(28.7		)	731.2
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	323.6			—			323.6
Other	15.7			—			15.7
Net cash flows provided by (used in) investing activities	735.8			(28.7		)	707.1
Financing activities
Dividends paid	(24.9		)	—			(24.9		)
Repurchases of common stock	(10.5		)	—			(10.5		)
Share activity under option and incentive plans	(2.2		)	—			(2.2		)
Net paydowns of financial guaranty variable interest entities’ liabilities	(497.3		)	—			(497.3		)
Repayment of long-term debt	(16.1		)	—			(16.1		)
Net cash flows provided by (used in) financing activities	(551.0		)	—			(551.0		)
Effect of exchange rate changes	(1.5		)	—			(1.5		)
Increase in cash	43.3			7.0			50.3
Cash at beginning of year	44.1			—			44.1
Cash at end of year	$	87.4		$	7.0		$	94.4

(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.