Exhibit 99.2

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

FINANCIAL STATEMENTS

As of December 31, 2009 and 2008

and for the years ended

December 31, 2009, 2008 and 2007

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

INDEX

	PAGE
Report of Independent Registered Public Accounting Firm	2
Balance Sheets as of December 31, 2009 and 2008	3
Statements of Operations for the years ended December 31, 2009, 2008 and 2007	4
Statement of Changes in Shareholder’s Equity for the years ended December 31, 2009, 2008 and 2007	5
Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	6
Notes to Financial Statements	7-38

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of

National Public Finance Guarantee Corporation:

In our opinion, the accompanying balance sheets and the related statements of operations, of changes in shareholder’s equity and cash flows present fairly, in all material respects, the financial position of National Public Finance Guarantee Corporation (the “Company”) as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial statements, in 2009, after receiving regulatory approvals, the Company received capital from its parent and entered into a quota share reinsurance agreement with an affiliate. Further, as discussed in Note 1 to the financial statements, in 2009, the Company did not write any material new business.

/s/ PricewaterhouseCoopers LLP

New York, NY

March 1, 2010

2

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

BALANCE SHEETS

(In thousands except per share amounts)

	December 31, 2009		December 31, 2008
Assets
Investments:
Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $3,316,336 and $98,827)	$	3,314,987	$	105,467
Investments pledged as collateral, at fair value (amortized cost $1,710,620 and $0)		1,724,548		—
Short-term investments, at fair value (amortized cost $230,350 and $80,984)		232,275		81,675
Total investments		5,271,810		187,142
Cash and cash equivalents		27,629		6,386
Securities purchased under agreements to resell		1,675,000		—
Accrued investment income		64,855		1,156
Deferred acquisition costs		661,790		—
Premiums receivable		344,604		—
Prepaid reinsurance premiums		8		453
Insurance loss recoverable		31,049		—
Goodwill		31,371		—
Receivable for investments sold		529		3
Current income taxes		3,297		—
Deferred income taxes, net		—		3,197
Other assets		2,710		56
Total assets	$	8,114,652	$	198,393
Liabilities and shareholder’s equity
Liabilities:
Unearned premium revenue	$	3,280,962	$	453
Loss and loss adjustment expense reserves		172,879		—
Securities sold under agreements to repurchase		1,676,284		—
Current income taxes		—		1,162
Deferred income taxes, net		167,225		—
Payable for investments purchased		25,453		—
Derivative liabilities		8,667		—
Other liabilities		17,667		25
Total liabilities		5,349,137		1,640
Commitments and contingencies (See Note 16)
Shareholder’s equity:
Common stock, par value $30 per share; authorized, issued and outstanding shares - 500,000 shares		15,000		5,000
Additional paid-in capital		2,368,831		200,897
Retained earnings (deficit)		372,256		(13,909	)
Accumulated other comprehensive income (loss), net of deferred income tax of $5,076 and $2,566		9,428		4,765
Total shareholder’s equity		2,765,515		196,753
Total liabilities and shareholder’s equity	$	8,114,652	$	198,393

The accompanying notes are an integral part of the financial statements.

3

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

STATEMENTS OF OPERATIONS

(In thousands except per share amounts)

	For the Years Ended December 31,
	2009			2008		2007
Revenues:
Premiums earned:
Scheduled premiums earned	$	409,101		$	—	$	—
Refunding premiums earned		153,618			—		—
Premiums earned (net of ceded premiums of $47, $124 and $160)		562,719			—		—
Net investment income		217,116			7,406		8,608
Fees and reimbursements		15,568			—		—
Change in fair value of insured derivatives:
Realized gains (losses) and other settlements on insured derivatives		929			—		—
Unrealized gains (losses) on insured derivatives		(143	)		—		—
Net change in fair value of insured derivatives		786			—		—
Net realized gains (losses)		23,224			1,118		928
Total revenues		819,413			8,524		9,536
Expenses:
Losses and loss adjustment		93,901			—		—
Amortization of deferred acquisition costs		116,130			—		—
Operating		58,403			566		468
Total expenses		268,434			566		468
Income before income taxes		550,979			7,958		9,068
Provision for income taxes		164,814			1,177		1,882
Net income	$	386,165		$	6,781	$	7,186

The accompanying notes are an integral part of the financial statements.

4

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands except per share amounts)

	Common Stock			Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)		Total Shareholder’s Equity
	Shares	Amount
Balance, January 1, 2007	500,000	$	5,000	$	200,897	$	(9,876	)	$	1,391	$	197,412
Increase in par value of common shares	—		—		—		—			—		—
Comprehensive income:
Net income	—		—		—		7,186			—		7,186
Other comprehensive loss:
Change in unrealized gains and losses on investment, net of deferred income taxes of $502	—		—		—		—			933		933
Total comprehensive income												8,119
Cash dividends (declared and paid per common share $36)	—		—		—		(18,000	)		—		(18,000	)
Balance, December 31, 2007	500,000	$	5,000	$	200,897	$	(20,690	)	$	2,324	$	187,531
Increase in par value of common shares	—		—		—		—			—		—
Comprehensive income:
Net income	—		—		—		6,781			—		6,781
Other comprehensive loss:
Change in unrealized gains and losses on investment, net of deferred income taxes of $1,315	—		—		—		—			2,441		2,441
Total comprehensive income												9,222
Balance, December 31, 2008	500,000	$	5,000	$	200,897	$	(13,909	)	$	4,765	$	196,753
Increase in par value of common shares	—		10,000		—		—			—		10,000
Comprehensive income:
Net income	—		—		—		386,165			—		386,165
Other comprehensive loss:
Change in unrealized gains and losses on investment, net of deferred income taxes of $2,510	—		—		—		—			4,663		4,663
Total comprehensive income												390,828
Capital contribution from parent	—		—		2,167,798		—			—		2,167,798
Share-based compensation net of deferred income taxes of $147	—		—		136		—			—		136
Balance, December 31, 2009	500,000	$	15,000	$	2,368,831	$	372,256		$	9,428	$	2,765,515

	2009			2008			2007
Disclosure of reclassification amount:
Change in unrealized appreciation of investments arising during the period, net of taxes	$	4,891		$	91,240		$	1,073
Reclassification adjustment, net of taxes		(228	)		(88,799	)		(140	)
Change in net unrealized appreciation, net of taxes	$	4,663		$	2,441		$	933

The accompanying notes are an integral part of the financial statements.

5

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

STATEMENTS OF CASH FLOWS

(In thousands)

	For the Years Ended December 31,
	2009			2008			2007
Cash flows from operating activities:
Net income (loss)	$	386,165		$	6,781		$	7,186
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Amortization of bond discounts (premiums), net		15,660			174			(172	)
(Increase) decrease in accrued investment income		(63,699	)		743			95
Increase in deferred acquisition costs		(661,790	)		—			—
Increase (decrease) in unearned premium revenue		3,280,509			(118	)		(152	)
Decrease in prepaid reinsurance premiums		445			118			152
Increase in premiums receivable		(344,604	)		—			—
Increase in loss and loss adjustment expense reserves		172,879			—			—
Increase in payable to affiliates		8,567			(369	)		8,594
Increase in insurance loss recoverable		(31,049	)		—			—
Increase (decrease) in accrued expenses		9,520			—			—
Net realized gains		(23,224	)		(1,118	)		(928	)
Unrealized losses on insured derivatives		143			—			—
(Decrease) increase in current income taxes		(4,606	)		(467	)		1,607
Deferred income tax provision (benefit)		167,912			(144	)		275
Share-based compensation		283			—			—
Other operating		6,159			(25	)		7
Total adjustments to net income		2,533,105			(1,206	)		9,478
Net cash provided by operating activities		2,919,270			5,575			16,664
Cash flows from investing activities:
Purchase of fixed-maturity securities		(6,841,103	)		(52,847	)		(139,946	)
Increase in payable for investments purchased		25,453			—			—
Sale of fixed-maturity securities		1,808,572			106,138			100,216
(Increase) decrease in receivable for investments sold		(526	)		8			(8	)
Redemption of fixed-maturity securities		232			63			32
Purchase (sale) of short-term investments, net		(37,082	)		(52,559	)		41,034
Net cash used by investing activities		(5,044,454	)		803			1,328
Cash flows from financing activities:
Capital contribution from parent		2,146,427			—			—
Net cash provided by financing activities		2,146,427			—			—
Net increase (decrease) in cash and cash equivalents		21,243			6,378			(8	)
Cash and cash equivalents—beginning of period		6,386			8			16
Cash and cash equivalents—end of period	$	27,629		$	6,386		$	8
Supplemental cash flow disclosures:
Income taxes paid, net	$	1,509		$	—		$	—
Interest paid:
Securities sold under agreements to repurchase	$	3,063		$	—		$	—
Other	$	992		$	—		$	—
Non cash items:
Share-based compensation	$	213		$	—		$	—

The accompanying notes are an integral part of the financial statements.

6

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 1: Business and Organization

National Public Finance Guarantee Corporation (“National”) is a wholly owned subsidiary of MBIA Inc. through an intermediary holding company, National Public Finance Guarantee Holdings, Inc. (“National Holdings”). Prior to February 17, 2009, National, previously named MBIA Insurance Corporation of Illinois (“MBIA Illinois”), was a wholly-owned subsidiary of MBIA Insurance Corporation. In February 2009, after receiving the required regulatory approvals, MBIA Insurance Corporation transferred the stock of MBIA Illinois to National Holdings. Additionally, National was further capitalized with approximately $2.1 billion from funds distributed by MBIA Insurance Corporation to MBIA Inc. as a dividend and return of capital, which MBIA Inc. contributed to National through National Holdings. Additionally, National increased par value of its common stock from $10 per share to $30 per share. As of December 31, 2009, National was rated A with a developing outlook by Standard & Poor’s Corporation (“S&P”) and Baa1 with a developing outlook by Moody’s Investors Service, Inc. (“Moody’s”).

In February 2009, National and MBIA Insurance Corporation (“MBIA Corp.”) entered into a quota share reinsurance agreement effective January 1, 2009 pursuant to which MBIA Insurance Corporation ceded all of its United States (“U.S.”) public finance exposure to National and into an assignment agreement under which MBIA Insurance Corporation assigned its rights and obligations with respect to the U.S. public finance business that MBIA Insurance Corporation had assumed from Financial Guaranty Insurance Corporation (“FGIC”). The exposure transferred to National under the reinsurance and assignment agreements totaled $553.7 billion of net par outstanding. The reinsurance and assignment enables covered policyholders and certain ceding reinsurers to make claims for payment directly against National in accordance with the terms of these agreements.

To provide additional protection to its policyholders, National also issued second-to-pay policies for the benefit of the policyholders covered by the above reinsurance and assignment agreements. These second-to-pay policies, which are direct obligations of National, are held by a trustee and provide that if MBIA Insurance Corporation or FGIC, as applicable, do not pay valid claims of their policyholders, the policyholders will then be able to make claims directly against National.

National provides unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event National has the right at its discretion to accelerate insured obligations upon default or otherwise, upon National’s acceleration. National’s guarantees insure municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams. In 2009, National began publishing periodic comprehensive studies on select public finance sectors, including sectors in which it has exposure.

During the year ended December 31, 2009, National did not write any material new business. The lack of insurance writings in 2009 reflects the insurance financial strength credit ratings assigned to National in 2009. National firmly believes that with the resolution of pending litigation it will be able to obtain the highest possible credit ratings and the market acceptance necessary to meet its stated objectives. The timing of any such upgrade is uncertain and will depend on a variety of quantitative and qualitative factors used by the rating agencies in their evaluation of National, including the resolution of pending litigation. Refer to “Note 16: Commitments and Contingencies” for further discussion of pending litigation.

Liquidity

Liquidity risk arises in National’s operations when claims on insured exposures result in payment obligations, when operating cash inflows fall due to depressed new business writings, lower investment income, unanticipated expenses, or when invested assets experience credit defaults or significant declines in fair value.

National’s financial guarantee contracts generally cannot be accelerated without the insurers’ approval/consent/direction, thereby mitigating liquidity risk. However, defaults, credit impairments and adverse capital markets conditions can create payment requirements as National has made irrevocable pledges to pay principal and interest, or other amounts owing on insured obligations, as they mature. Additionally, National requires cash for

7

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 1: Business and Organization (continued)

the payment of operating expenses. Finally, National also provides liquid assets to MBIA Inc.’s asset/liability products segment through matched repurchase and reverse repurchase agreements to support its business operations and liquidity position.

Note 2: Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results. Actual results could differ from those estimates.

The 2008 and 2007 financial statement information was derived from the financial statements of MBIA Illinois.

In addition, National evaluated all events subsequent to December 31, 2009 through March 1, 2010 for inclusion in National’s financial statements and/or accompanying notes.

Financial Guarantee Insurance Premiums

Unearned Premium Revenue and Receivable for Future Premiums

National recognizes a liability for unearned premium revenue at the inception of financial guarantee insurance and reinsurance contracts on a contract-by-contract basis. Unearned premium revenue recognized at inception of a contract is measured at the present value of the premium due. For most financial guarantee insurance contracts, National receives the entire premium due at the inception of the contract, and recognizes unearned premium revenue liability at that time. For certain other financial guarantee contracts, National receives premiums in installments over the term of the contract. Unearned premium revenue and a receivable for future premiums is recognized at the inception of an installment contract, and measured at the present value of premiums expected to be collected over the contract period or expected period using a risk-free discount rate. The expected period is used in the present value determination of unearned premium revenue and receivable for future premiums for contracts where (a) the insured obligation is contractually prepayable, (b) prepayments are probable, (c) the amount and timing of prepayments are reasonably estimable, and (d) a homogenous pool of assets is the underlying collateral for the insured obligation. National has calculated that substantially all of its installment contracts do not meet the conditions required to be treated as expected period contracts and are treated as contractual period contracts. The receivable for future premiums is reduced as installment premiums are collected. National reports the accretion of the discount on installment premiums receivable as premium revenue and discloses the amount recognized in “Note 4: Insurance Premiums.” National assesses the receivable for future premiums for collectability each reporting period, adjusts the receivable for uncollectible amounts and recognizes any write-off as operating expense and discloses the amount recognized in “Note 4: Insurance Premiums.” As premium revenue is recognized, the unearned premium revenue liability is reduced.

Premium Revenue Recognition

National recognizes and measures premium revenue over the period of the insurance contract in proportion to the amount of insurance protection provided. Premium revenue is measured by applying a constant rate to the insured principal amount outstanding in a given period to recognize a proportionate share of the premium received or expected to be received on a financial guarantee insurance contract. A constant rate for each respective financial guarantee insurance contract is determined as the ratio of (a) the present value of premium received or expected to be received over the period of the contract to (b) the sum of all insured principal amounts outstanding during each period over the term of the contract.

An issuer of an insured financial obligation may retire the obligation prior to its scheduled maturity through legal defeasance in satisfaction of the obligation according to its indenture, which results in National’s obligation being

8

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 2: Significant Accounting Policies (continued)

extinguished under the financial guarantee contract. National recognizes any remaining unearned premium revenue on the insured obligation as premium revenue in the period the contract is extinguished to the extent the unearned premium revenue has been collected.

Non-refundable commitment fees are considered insurance premiums and are initially recorded under unearned premium revenue in National’s balance sheets when received. Once the related financial guarantee insurance policy is issued, the commitment fees are recognized as premium written and earned using the constant rate method. If the commitment agreement expires before the related financial guarantee is issued, the non-refundable commitment fee is immediately recognized as premium written and earned at that time.

Loss and Loss Adjustment Expenses

National recognizes claim liabilities (loss reserves) on a contract-by-contract basis when the present value of expected net cash outflows to be paid under the contract using a risk-free rate as of the measurement date exceeds the unearned premium revenue. A claim liability is subsequently remeasured each reporting period for expected increases or decreases due to changes in the likelihood of default and potential recoveries. Subsequent changes to the measurement of the claim liability are recognized as claim expense in the period of change. Measurement and recognition of the claim liability is reported gross of any reinsurance. National estimates the likelihood of possible claims payments and possible recoveries using probability-weighted expected cash flows based on information available as of the measurement date, including market information. Accretion of the discount on a claim liability is included in claim expense.

National recognizes potential recoveries on paid claims based on probability-weighted net cash inflows present valued at applicable risk free rates as of the measurement date. Such amounts are reported within “Insurance loss recoverable” on its balance sheet. To the extent National had recorded potential recoveries in its claim liability previous to a claim payment, such recoveries are reclassified to “Insurance loss recoverable” upon payment of the related claim and remeasured each reporting period.

National’s claim liability, insurance loss recoverable, and accruals for loss adjustment expenses (“LAE”) incurred are disclosed in “Note 8: Loss and Loss Adjustment Expense Reserves.”

Investments

National classifies its fixed-maturity investments as available-for-sale. Available-for-sale investments are reported in the balance sheets at fair value with unrealized gains and losses, net of deferred taxes, reflected in accumulated other comprehensive income (loss) in shareholder’s equity. Bond discounts and premiums are amortized using the effective yield method over the remaining term of the securities. For bonds purchased at a price above par value that also have call features, premiums are amortized to the call date that produces the lowest yield. For mortgage-backed and asset-backed securities (“ABSs”), discounts and premiums are adjusted quarterly for the effects of actual and expected prepayments on a retrospective basis. For pre-refunded bonds, the remaining term is determined based on the contractual refunding date. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by utilizing the first-in, first-out method to identify the investments sold and are included as a separate component of revenues.

Short-term investments are carried at fair value, and include all fixed-maturity securities with a remaining effective term to maturity of less than one year, commercial paper and money market securities.

Other-Than-Temporary Impairments on Investment Securities

National’s statements of operations reflects the full impairment (the difference between a security’s amortized cost basis and fair value) on debt securities that National intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale debt securities that management has no intent to sell and believes that it is more likely than not such securities will not be required to be sold prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the rest of the fair value loss is recognized in accumulated other comprehensive income.

9

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 2: Significant Accounting Policies (continued)

National’s investment portfolios containing all of its securities are reviewed no less than quarterly in order to determine whether a credit loss exists. National’s investments are available-for-sale securities for which an impairment evaluation is subject to, but not limited by, the following criteria:

1) the security’s current fair value is less than current book value by a magnitude of 5% or greater, and the fair value has been less than book value for a period of greater than twelve months; or

2) the security’s fair value is less than current book value by a magnitude of 20% or greater.

If any of the above criteria are met, further analysis is performed to determine whether a credit loss exists. In assessing whether a decline in value is related to a credit loss, National considers several factors, including but not limited to (a) the magnitude and duration of the decline, (b) credit indicators and the reasons for the decline, such as general interest rate or credit spread movements, credit rating downgrades, issuer-specific changes in credit spreads and the financial condition of the issuer and (c) any guarantees associated with a security such as those provided by investment-grade financial guarantee insurance companies. Credit loss expectations for ABSs are assessed using discounted cash flow modeling and the recoverability of amortized cost for corporate obligations is generally assessed using issuer-specific credit analyses.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and demand deposits with banks with original maturities of less than 90 days.

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at contract value plus accrued interest.

These transactions are entered into with MBIA Inc. in connection with MBIA Inc.’s asset/liability products activity. It is National’s policy to take possession of securities used to collateralize such transactions with MBIA Inc. National minimizes the credit risk that MBIA Inc. might be unable to fulfill its contractual obligations by monitoring MBIA Inc.’s credit exposure and collateral value and requiring additional collateral to be deposited with National when deemed necessary.

Deferred Acquisition Costs

Deferred acquisition costs include those expenses that relate primarily to, and vary with, the acquisition of new insurance business. National periodically conducts a study to determine which operating costs have been incurred to acquire new insurance business and qualify for deferral. For business produced directly by National, such costs include compensation of employees involved in underwriting and deferred issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Deferred acquisition costs also include ceding commissions paid by National in connection with assuming business from other financial guarantors. Deferred acquisition costs, net of ceding commissions received, related to non-derivative insured financial guarantee transactions are deferred and amortized over the period in which the related premiums are earned.

Goodwill

Goodwill represents the excess of the cost of acquiring a business enterprise over the fair value of the net assets acquired. Goodwill is tested for impairment at least annually. An impairment loss is triggered if the estimated fair value of a reporting unit is less than its carrying value.

As a result of the aforementioned capitalization of National and the reinsurance and assignment agreements executed with MBIA Insurance Corporation in February 2009, $31 million of goodwill was allocated to National based on the relative fair values of National and MBIA Insurance Corporation.

10

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 2: Significant Accounting Policies (continued)

National performed its annual impairment testing of goodwill as of January 1, 2010. The fair value of National’s reporting unit exceeded its carrying value indicating that goodwill is not impaired. In performing the impairment test of goodwill as of January 1, 2010, National calculated the fair value of its reporting unit using the discounted cash flow method by incorporating market participant assumptions and other estimates to estimate the present value of future cash flows.

Fair Value Measurements – Definition and Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, National uses various valuation approaches, including both market and income approaches. The accounting guidance for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those National believes that market participants would use in pricing the asset or liability developed based on market data. Unobservable inputs are those that reflect National’s beliefs about the assumptions market participants would use in pricing the asset or liability developed based on the best information available. The hierarchy is broken down into three levels based on the observability and reliability of inputs as follows:

• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that National has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail any degree of judgment. Assets utilizing Level 1 inputs generally include U.S. Treasuries and money market securities.

• Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Assets and liabilities utilizing Level 2 inputs include: U.S. government and agency mortgage-backed securities (“MBS”); foreign government bonds; derivatives; corporate and municipal bonds; and other certain MBSs.

• Level 3—Valuations based on inputs that are unobservable and supported by little or no market activity and that are significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The level of activity in a market contributes to the determination of whether an input is observable. An active market is one in which transactions for an asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. In determining whether a market is active or inactive, National considers the following traits to be indicative of an active market:

• transactions are frequent and observable;

• prices in the market are current;

• price quotes among dealers do not vary significantly over time; and

• sufficient information relevant to valuation is publicly available.

The availability of observable inputs can vary from product to product and period to period and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels

11

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 2: Significant Accounting Policies (continued)

of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, National’s own assumptions are set to reflect those that it believes market participants would use in pricing the asset or liability at the measurement date. National uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3. National has also taken into account its own nonperformance risk and that of its counterparties when measuring fair value.

Refer to “Note 5: Fair Value Measurements” for additional fair value disclosures.

Income Taxes

National is included in the consolidated tax return of MBIA Inc. The tax provision for National for financial reporting purposes is determined on a stand-alone basis.

Deferred income taxes are recorded with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in National’s financial statements that will result in deductible or taxable amounts in future years when the reported amounts of assets and liabilities are recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs, unrealized appreciation or depreciation of investments and derivatives, and National’s statutory contingency reserve. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates in the period in which changes are approved by the relevant authority.

Refer to “Note 9: Income Taxes” for additional information about National’s income taxes.

Fee and Reimbursement Revenue Recognition

National collects insurance related fees for services performed in connection with certain transactions. In addition, National may be entitled to reimbursement of third-party insurance expenses that it incurs in connection with certain transactions. Depending upon the type of fee received and whether it is related to an insurance policy, the fee is either earned when it is received or deferred and earned over the life of the related transaction. Work, waiver and consent, termination, administrative and management fees are earned when the related services are completed and the fee is received. Structuring fees are earned on a straight-line basis over the life of the related insurance policy. Amounts received from reinsurers in excess of those which are contractually due to National upon the termination of reinsurance agreements are recorded as fees and earned when received.

Note 3: Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Measuring Liabilities at Fair Value (Accounting Standards Update 2009-05)

In August 2009, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) for measuring liabilities at fair value to clarify that, in circumstances in which a quoted price in an active market for the identical liability is not available, National should not make an adjustment to fair value for restrictions that prevent the transfer of a liability. National adopted this standard as of the fourth quarter of 2009. The adoption of this standard did not have a material effect on National’s balance sheets, results of operations or cash flows.

12

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 3: Recent Accounting Pronouncements (continued)

FASB Accounting Standards Codification

In July 2009, the FASB launched the FASB Accounting Standards Codification (“ASC”) as the single source of GAAP. While the Codification did not change GAAP, it introduced a new structure to the accounting literature and changed references to accounting standards and other authoritative accounting guidance. National adopted this guidance as of the third quarter of 2009 and all references to authoritative GAAP literature in National’s financial statements have been updated to reflect new Codification references.

Subsequent Events (ASC 855)

In May 2009, the FASB issued accounting guidance for subsequent events (subsequently amended in February 2010) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. National adopted this standard as of the second quarter of 2009. The adoption of this guidance did not have an effect on National’s balance sheets, results of operations or cash flows.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820)

In April 2009, the FASB issued accounting guidance that amends fair value measurements and disclosures for determining the fair value when the volume and level of activity for the asset or liability have significantly decreased and for identifying transactions that are not orderly. This standard provides additional guidance to highlight and expand on the factors that should be considered when there has been a significant decrease in market activity for a financial asset or financial liability being measured. The accounting guidance also provides additional factors that entities should consider to determine whether events or circumstances indicate that a transaction is or is not orderly (i.e., distressed). National adopted this standard as of the second quarter of 2009. The adoption of this standard did not have a material effect on National’s balance sheets, results of operations or cash flows.

Recognition and Presentation of Other-Than-Temporary Impairments (ASC 320)

In April 2009, the FASB issued accounting guidance related to the recognition and presentation of other-than-temporary impairments. These amended principles prescribe that only the portion of an other-than-temporary impairment on a debt security related to credit loss is recognized in current period earnings, with the remainder recognized in other comprehensive income, if the holder does not intend to sell the security and it is more likely than not that the holder will not be required to sell the security prior to recovery. Previously, the entire other-than-temporary impairment was recognized in current period earnings. National adopted this standard as of the second quarter of 2009. The adoption of this guidance did not result in a cumulative-effect adjustment nor did it have a material effect on National’s balance sheets, results of operations or cash flows. Refer to “Note 7: Investment Income and Gains and Losses” for further information on National’s investment securities and other-than-temporary impairments.

Interim Disclosures About Fair Value of Financial Instruments (ASC 825)

In April 2009, the FASB issued amended accounting guidance to require disclosures about the fair value of financial instruments in interim and annual financial statements, including the method(s) and significant assumptions used to estimate the fair value of those financial instruments. National adopted this standard in the second quarter of 2009. As the guidance requires only additional disclosures, the adoption did not have an impact on National’s balance sheets, results of operations or cash flows. Refer to “Note 5: Fair Value Measurements” for further information.

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 3: Recent Accounting Pronouncements (continued)

Disclosures About Transfers of Financial Assets and Interests in Variable Interest Entities (ASC 860 and ASC 810)

In December 2008, the FASB issued accounting guidance that requires enhanced disclosures about transfers of financial assets and involvement with variable interest entities (“VIEs”). National adopted this guidance for financial statements prepared as of December 31, 2008. Since the guidance only requires additional disclosures concerning transfers of financial assets and interests in VIEs, the adoption did not affect National’s balance sheets, results of operations or cash flows.

Financial Guarantee Insurance and Reinsurance Contracts (ASC 944-20)

In May 2008, the FASB issued accounting guidance for financial guarantee insurance and reinsurance contracts issued by insurance enterprises effective prospectively as of January 1, 2009. This accounting guidance amends accounting and reporting by insurance enterprises to clarify how existing guidance applies to financial guarantee insurance and reinsurance contracts. The accounting guidance amends the recognition and measurement of premium revenue and claim liabilities, and expands disclosure requirements. Recognition and measurement of unearned premium revenue and receivable for future premiums are also amended. The accounting guidance does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of derivatives and hedging (ASC 815-15). Refer to “Note 4: Insurance Premiums” for disclosures related to premiums and “Note 8: Loss and Loss Adjustment Expense Reserves” for disclosures related to loss reserves.

Fair Value Measurements and Disclosures – Delayed Effective Date (ASC 820)

In February 2008, the FASB issued accounting guidance that delayed the effective date for fair value measurements and disclosures to fiscal years beginning after November 15, 2008, for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption on January 1, 2009 did not have a material impact on National’s balance sheets, results of operations or cash flows.

Recent Accounting Developments

Improving Disclosures About Fair Value Measurements (ASU 2010-06)

In January 2010, the FASB issued accounting guidance to improve disclosures about fair value measurements that requires additional disclosures about transfers into and out of Levels 1 and 2 and to clarify existing disclosures about the level of disaggregation, valuation techniques and inputs to fair value measurements. The new guidance is effective for National as of January 1, 2010. Since the guidance only requires improved disclosures about fair value measurements, the adoption will not affect National’s balance sheet, results of operations or cash flows.

Consolidation of Variable Interest Entities (ASU 2009-17)

In December 2009, the FASB issued accounting guidance to require the holder of a variable interest(s) in a VIE to determine whether it holds a controlling financial interest in a VIE. A holder of a variable interest (or combination of variable interests) that provides a controlling financial interest in a VIE is considered the primary beneficiary and is required to consolidate the VIE. The accounting guidance deems controlling financial interest as both a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and b) the obligation to absorb losses or the rights to receive benefits of the VIE that could potentially be significant to the VIE. The accounting guidance eliminates the quantitative approach for determining the primary beneficiary of a VIE. The accounting guidance will require an ongoing reassessment of whether a holder of a variable interest is the primary beneficiary of a VIE. The accounting guidance is effective for National as of January 1, 2010 and will not be material to National.

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 3: Recent Accounting Pronouncements (continued)

Transfers of Financial Assets (ASU 2009-16)

In June 2009, the FASB issued accounting guidance to remove the concept of a qualified special-purpose entity. The accounting guidance also clarifies whether a transferor has surrendered control over transferred financial assets and meets the conditions to derecognize transferred financial assets or a portion of an entire financial asset that meets the definition of a participating interest. The accounting guidance requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. The accounting guidance is effective for National as of January 1, 2010 and will not be material to National.

Note 4: Insurance Premiums

National recognizes and measures premiums related to financial guarantee (non-derivative) insurance and reinsurance contracts in accordance with the accounting principles for financial guarantee insurance contracts. Refer to “Note 2: Significant Accounting Policies” and “Note 3: Recent Accounting Pronouncements” for a description of National’s accounting policy for insurance premiums.

As of December 31, 2009, National reported premiums receivable of approximately $345 million primarily related to installment policies for which premiums will generally be collected over the contractual term of the contracts. Premiums receivable for installment policies are initially measured at the present value of premiums expected to be collected over the expected period or contract period of the policy using a risk-free discount rate. Premiums receivable for policies that use the expected period of risk due to expected prepayments are adjusted in subsequent measurement periods when prepayment assumptions change using the risk-free discount rate as of remeasurement date. The weighted average risk-free rate used to discount future installment premiums was 2.76% and the weighted average expected collection term of the premiums receivable was 14.18 years. For the year ended December 31, 2009, the accretion of the premiums receivable was $10 million and is reported in “Scheduled premiums earned” on National’s statements of operations.

The following table presents a roll forward of National’s premiums receivable for the year ended December 31, 2009:

In millions
							Adjustments
Premiums Receivable as of December 31, 2008		Premium Payments Received			Premiums from New Business Written		Changes in Expected Term of Policies			Accretion of Premiums Receivable Discount		Other			Premiums Receivable as of December 31, 2009		Reinsurance Premiums Payable as of December 31, 2009
$	—	$	(22	)	$	403	$	(26	)	$	10	$	(20	)	$	345	$	—

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 4: Insurance Premiums (continued)

The following table presents the undiscounted future amount of premiums expected to be collected and the period in which those collections are expected to occur:

In millions	Expected Collection of Premiums
Three months ended:
March 31, 2010	$	3
June 30, 2010		6
September 30, 2010		5
December 31, 2010		8
Twelve months ended:
December 31, 2011		22
December 31, 2012		23
December 31, 2013		21
December 31, 2014		20
Five years ended:
December 31, 2019		96
December 31, 2024		82
December 31, 2029 and thereafter		206
Total	$	492

For the year ended December 31, 2009, National reported premiums earned of $563 million which includes $409 million of scheduled premiums earned and $154 million of refunding premiums earned. Refunding premiums earned represent premiums earned on policies for which the underlying insured obligations have been refunded, called, or terminated and for which National’s obligation has been extinguished.

The following table presents the unearned premium revenue balance and the future expected premiums earned revenue as of and for the periods presented:

			Expected Future Premium Earnings
In millions	Unearned Premium Revenue		Upfront		Installments		Accretion		Total Expected Future Premium Earnings
December 31, 2009	$	3,281
Three months ended:
March 31, 2010		3,193	$	83	$	5	$	2	$	90
June 30, 2010		3,108		80		5		2		87
September 30, 2010		3,027		76		5		2		83
December 31, 2010		2,948		74		5		2		81
Twelve months ended:
December 31, 2011		2,649		280		19		9		308
December 31, 2012		2,379		251		19		9		279
December 31, 2013		2,134		227		18		8		253
December 31, 2014		1,910		206		18		8		232
Five years ended:
December 31, 2019		1,056		775		79		35		889
December 31, 2024		535		457		64		26		547
December 31, 2029 and thereafter		—		394		141		44		579
Total			$	2,903	$	378	$	147	$	3,428

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 5: Fair Value Measurements

Financial Instruments

The following table presents the carrying value and fair value of financial instruments reported on National’s balance sheets as of December 31, 2009 and 2008:

	As of December 31,
	2009				2008
In millions	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Fixed-maturity securities (including short-term investments) held as available-for-sale, and investments pledged as collateral	$	5,272	$	5,272	$	187	$	187
Cash and cash equivalents		28		28		6		6
Securities purchased under agreements to resell		1,675		1,675		—		—
Receivable for investments sold		1		1		—		—
Liabilities:
Securities sold under agreements to repurchase		1,675		1,675		—		—
Payable for investments purchased		25		25		—		—
Derivative liabilities		9		9		—		—
Financial Guarantees:
Gross		3,454		2,672		—		—
Ceded		0		70		—		—

Valuation Techniques

The valuation techniques for fair valuing financial instruments included in the preceding table are described below. National’s assets and liabilities recorded at fair value have been categorized according to the fair value hierarchy prescribed by fair value measurements and disclosures. Refer to “Note 2: Significant Accounting Policies” for a description of the fair value hierarchy.

Fixed-Maturity Securities Held As Available-for-Sale

U.S. Treasury and government agency - U.S. Treasury securities are liquid and have quoted market prices. Fair value of U.S. Treasuries is based on live trading feeds. U.S. Treasury securities are categorized in Level 1 of the fair value hierarchy. Government agency securities include debentures and other agency mortgage pass-through certificates as well as to-be-announced (“TBA”) securities. TBA securities are liquid and have quoted market prices based on live data feeds. Fair value of mortgage pass-through certificates is obtained via a simulation model, which considers different rate scenarios and historical activity to calculate a spread to the comparable TBA security. Government agency securities use market-based and observable inputs. As such, these securities are classified as Level 2 of the fair value hierarchy.

Corporate obligations - The fair value of corporate bonds is obtained using recently executed transactions or market price quotations where observable. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swaps (“CDS”) spreads and diversity scores as key inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.

Mortgage-backed securities and asset-backed securities - MBSs and ABSs are valued based on recently executed prices. When position-specific external price data is not observable, the valuation is based on prices of comparable securities. In the absence of market prices, MBSs and ABSs are valued as a function of cash flow models with observable market-based inputs (e.g., yield curves, spreads, prepayments and volatilities). MBSs and ABSs are categorized in Level 2 as all significant inputs are observable.

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 5: Fair Value Measurements (continued)

State and municipal bonds - The fair value of state and municipal bonds is estimated using recently executed transactions, market price quotations and pricing models that factor in, where applicable, interest rates, bond or CDS spreads and volatility. These bonds are categorized in Level 2 of the fair value hierarchy.

Money market securities - The fair value of money market securities is based on quoted prices in an active market. These money market securities are categorized in Level 1 of the fair value hierarchy.

Cash and Cash Equivalents, Receivable for Investments Sold, Payable for Investments Purchased

The carrying amounts of cash and cash equivalents, receivable for investments sold and payable for investments purchased approximate their fair value as they are short-term in nature.

Securities Purchased Under Agreements to Resell

The fair value of securities purchased under agreements to resell are determined based on the underlying securities received that back the resell agreements.

Securities Sold Under Agreements to Repurchase

The fair value of securities sold under agreements to repurchase are determined based on the underlying securities that back the repurchase agreements.

Derivatives

For insured swaps, the fair value is calculated using internally and vendor developed models with market-based inputs (e.g., interest rate, foreign exchange rate, spreads), and are classified as Level 2 within the fair value hierarchy.

Financial Guarantees

Gross Financial Guarantees - National estimates the fair value of its gross financial guarantee liability using a discounted cash flow model with significant inputs that include (i) an assumption of expected loss on financial guarantee policies for which case basis reserves have not been established, (ii) the amount of loss expected on financial guarantee policies for which case basis reserves have been established, (iii) the cost of capital reserves required to support the financial guarantee liability and (iv) the discount rate. The Assured Guaranty Corporation CDS spread and recovery rates are used as the discount rate for National and incorporates the nonperformance risk of National. As National’s gross financial guarantee liability represents its obligation to pay claims under its insurance policies, National’s calculation of fair value does not consider future installment premium receipts or returns on invested upfront premiums as inputs.

The carrying value of National’s gross financial guarantee liability consists of deferred premium revenue and loss and LAE reserves as reported on the National’s balance sheets.

Ceded Financial Guarantees - National estimates the fair value of its ceded financial guarantee liability by calculating the portion of the gross financial guarantee liability that has been ceded to reinsurers. The carrying value of ceded financial guarantee liability consists of prepaid reinsurance premiums and reinsurance recoverable on paid and unpaid losses as reported on National’s balance sheets.

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 5: Fair Value Measurements (continued)

Fair Value Measurements

The following fair value hierarchy tables present information about National’s assets (including short-term investments) and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008:

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2009
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	199	$	12	$	—	$	211
Corporate obligations		—		346		—		346
Mortgage-backed securities:
Residential mortgage-backed agency		—		1,492		—		1,492
Asset-backed securities:
Other asset-backed		—		12		—		12
Total		199		1,862		—		2,061
State and municipal bonds:
Tax-exempt bonds		—		2,702		—		2,702
Taxable bonds		—		411		—		411
Total state and municipal bonds		—		3,113		—		3,113
Total fixed-maturity investments		199		4,975		—		5,174
Other investments:
Money market securities		98		—		—		98
Total other investments		98		—		—		98
Derivative assets		—		—		—		—
Total assets	$	297	$	4,975	$	—	$	5,272
Liabilities:
Derivative liabilities	$	—	$	9	$	—	$	9
Total liabilities	$	—	$	9	$	—	$	9

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 5: Fair Value Measurements (continued)

	Fair Value Measurements at Reporting Date Using						Balance as of December 31, 2008
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	115	$	—	$	—	$	115
Corporate obligations		—		1		—		1
Mortgage-backed securities:
Residential mortgage-backed non-agency		—		9		—		9
Total		115		10		—		125
State and municipal bonds:
Tax-exempt bonds		—		62		—		62
Other investments:
Money market securities		—		—		—		—
Total other investments		—		—		—		—
Total assets	$	115	$	72	$	—	$	187
Liabilities:
Total liabilities	$	—	$	—	$	—	$	—

Note 6: Investments

National’s fixed-maturity portfolio consists of high-quality (average rating double-A) taxable and tax-exempt investments of diversified maturities. Other investments comprise money market securities. The following tables present the amortized cost and fair value of available-for-sale fixed-maturity and other investments included in the investment portfolio of National as of December 31, 2009 and 2008:

	December 31, 2009
In millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	215	$	1	$	(5	)	$	211
Corporate obligations		336		11		(1	)		346
Mortgage-backed securities:
Residential mortgage-backed non-agency		1,457		37		(2	)		1,492
Asset-backed securities:
Other asset-backed		12		—		—			12
Total		2,020		49		(8	)		2,061
State and municipal bonds:
Tax-exempt bonds		2,715		27		(40	)		2,702
Taxable bonds		424		1		(14	)		411
Total state and municipal bonds		3,139		28		(54	)		3,113
Total fixed-maturity investments		5,159		77		(62	)		5,174
Other investments:
Money market securities		98		—		—			98
Total other investments		98		—		—			98
Total available-for-sale investments	$	5,257	$	77	$	(62	)	$	5,272

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 6: Investments (continued)

	December 31, 2008
In millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	106	$	9	$	—		$	115
Corporate obligations		1		—		—			1
Mortgage-backed securities:
Residential mortgage-backed agency		9		—		—			9
Total		116		9		—			125
State and municipal bonds:
Tax-exempt bonds		64		1		(3	)		62
Total state and municipal bonds		64		1		(3	)		62
Total available-for-sale investments	$	180	$	10	$	(3	)	$	187

Fixed-maturity investments carried at fair value of $8 million and $4 million as of December 31, 2009 and 2008, respectively, were on deposit with various regulatory authorities to comply with insurance laws.

The following table presents the distribution by contractual maturity of available-for-sale fixed-maturity investments at amortized cost and fair value as of December 31, 2009. Contractual maturity may differ from expected maturity because borrowers may have the right to call or prepay obligations.

In millions	Amortized Cost		Fair Value
Due in one year or less	$	111	$	113
Due after one year through five years		550		564
Due after five years through ten years		237		242
Due after ten years through fifteen years		225		224
Due after fifteen years		2,567		2,527
Mortgage-backed		1,457		1,492
Asset-backed		12		12
Total fixed-maturity investments	$	5,159	$	5,174

Included in the preceding tables are investments that have been insured by National and MBIA Insurance Corp. (“Insured Investments”). As of December 31, 2009, Insured Investments at fair value represented $329 million or 6% of National’s total portfolio. Without giving effect to the guarantee of the Insured Investments, the underlying ratings (those given to an investment without the benefit of the guarantee) of the Insured Investments as of December 31, 2009 are reflected in the following table. Amounts represent the fair value of such investments including the benefit of the guarantee. The ratings in the following table are based on ratings from Moody’s. Alternate rating sources, such as S&P, are used for a small percentage of securities that are not rated by Moody’s. When an external underlying rating is not available, the underlying rating is based on National’s best estimate of the rating of such investment.

In millions Underlying Ratings Scale	Fair Value
Aaa	$	1
Aa		88
A		156
Baa		83
Below investment grade		1
Total	$	329

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 6: Investments (continued)

As of December 31, 2009 and 2008, National recorded net unrealized gains of $15 million and $7 million, respectively, on available-for-sale fixed-maturity and other investments, which included $62 million and $3 million, respectively, of gross unrealized losses. The following tables present the gross unrealized losses included in accumulated other comprehensive income (loss) as of December 31, 2009 and 2008 related to available-for-sale fixed-maturity investments. These tables segregate investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.

	December 31, 2009
	Less than 12 Months					12 Months or Longer					Total
In millions	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Taxable bonds:
U.S. Treasury and government agency	$	186	$	(5	)	$	—	$	—		$	186	$	(5	)
Corporate obligations		23		(1	)		22		—			45		(1	)
Mortgage-backed securities:
Residential mortgage-backed agency		275		(2	)		2		—			277		(2	)
Asset-backed securities:
Other asset-backed		—		—			—		—			—		—
Total		484		(8	)		24		—			508		(8	)
State and municipal bonds:
Tax-exempt bonds		1,071		(16	)		324		(24	)		1,395		(40	)
Taxable bonds		309		(13	)		21		(1	)		330		(14	)
Total state and municipal bonds		1,380		(29	)		345		(25	)		1,725		(54	)
Total	$	1,864	$	(37	)	$	369	$	(25	)	$	2,233	$	(62	)

	December 31, 2008
	Less than 12 Months					12 Months or Longer					Total
In millions	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal bonds:
Tax-exempt bonds		24		(1	)		19		(2	)		43		(3	)
Total	$	24	$	(1	)	$	19	$	(2	)	$	43	$	(3	)

As of December 31, 2009 and 2008, National’s available-for-sale fixed-maturity and other investment portfolios’ gross unrealized losses totaled $62 million and $3 million, respectively. The weighted average contractual maturity of securities in an unrealized loss position as of December 31, 2009 and 2008 was 22 years and 18 years, respectively. As of December 31, 2009, there were 59 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $25 million. Among the 59 securities, the book value of 32 securities exceeded market value by more than 5%. As of December 31, 2008, there were 5 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $2 million. Among the 5 securities, the book value of 4 securities exceeded market value by more than 5%.

National has evaluated whether the unrealized losses in its investment portfolios were other-than-temporary considering the circumstances that gave rise to the unrealized losses, and whether National has the intent to sell the securities or more likely than not will be required to sell the securities before their anticipated recovery. Based on its evaluation, National determined that the unrealized losses on these securities were temporary in nature because its impairment analysis, including projected future cash flows, indicated that National would be able to recover the amortized cost of impaired assets. National also concluded that it does not have the intent to sell

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 6: Investments (continued)

these securities and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. In making this conclusion, National examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management, or other plans as of December 31, 2009 that would require the sale of impaired securities. On a quarterly basis, National will reevaluate the unrealized losses in its investment portfolios and determine whether an impairment loss should be realized in current earnings. Refer to “Note 2: Significant Accounting Policies” for a description of the process used by National to determine other-than-temporary impairments.

Note 7: Investment Income and Gains and Losses

The following table includes National’s total investment income:

	Years ended December 31,
In millions	2009			2008			2007
Fixed-maturity	$	197		$	7		$	8
Short-term investments		0			0			1
Other investments		25			—			—
Gross investment income		222			7			9
Investment expenses		5			0			0
Net investment income		217			7			9
Fixed-maturity:
Gains		34			3			2
Losses		(11	)		(2	)		(1	)
Net		23			1			1
Total investment income	$	240		$	8		$	10

Net realized gains (losses) from fixed-maturity investments are generated as a result of the ongoing management of all of National’s investment portfolios for the years ended December 31, 2009, 2008 and 2007.

Net unrealized gains (losses), including related deferred income taxes, reported in accumulated other comprehensive income (loss) within shareholder’s equity consisted of:

	As of December 31,
In millions	2009			2008
Fixed-maturity:
Gains	$	77		$	10
Losses		(62	)		(3	)
Net		15			7
Deferred income taxes provision (benefit)		5			2
Unrealized gains (losses), net	$	10		$	5

The change in net unrealized gains (losses), presented in the table above, consisted of:

	As of December 31,
In millions	2009		2008
Fixed-maturity	$	8	$	4
Deferred income tax charged (credited)		3		1
Change in unrealized gains (losses), net	$	5	$	3

23

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 8: Loss and Loss Adjustment Expense Reserves

For the year ended December 31, 2009, National incurred $94 million of loss and LAE principally related to an affordable housing transaction and a student loan transaction. Total net paid activity for the year ended December 31, 2009 of $137 million primarily related to the remediation of an affordable housing transaction. Total expected insurance loss recoveries on paid losses for the year ended December 31, 2009 were $31 million and related to an affordable housing transaction.

National’s Portfolio Surveillance Division (“PSD”) monitors National’s outstanding insured obligations with the objective of minimizing losses. PSD meets this objective by identifying issuers that, because of deterioration in credit quality or changes in the economic, regulatory or political environment, are at a heightened risk of defaulting on debt service of obligations insured by National. In such cases, PSD works with the issuer, trustee, bond counsel, servicer, underwriter and other interested parties in an attempt to alleviate or remedy the problem and avoid defaults on debt service payments. PSD works closely with National’s Risk Management function and the applicable business unit to analyze insured obligation performance and credit risk parameters, both before and after an obligation is insured.

Once an obligation is insured, National typically requires the issuer, servicer (if applicable) and the trustee to furnish periodic financial and asset related information, including audited financial statements, to PSD for review. PSD also monitors publicly available information related to insured obligations. Potential problems uncovered through this review include poor financial results, low fund balances, covenant violations and trustee or servicer problems or other events that could have an adverse impact on the insured obligation. Any one of these problems may trigger an immediate surveillance review and an evaluation of possible remedial actions. PSD also monitors and evaluates the impact on issuers of general economic conditions, current and proposed legislation and regulations, as well as state and municipal finances and budget developments.

Insured obligations are monitored periodically. The frequency and extent of such monitoring is based on the criteria and categories described below. Insured obligations that are judged to merit more frequent and extensive monitoring or remediation activities due to a deterioration in the underlying credit quality of the insured obligation or the occurrence of adverse events related to the underlying credit of the issuer are assigned to a surveillance category (“Caution List-Low,” “Caution List-Medium,” “Caution List-High,” or “Classified List”) depending on the extent of credit deterioration or the nature of the adverse events. PSD monitors insured obligations assigned to a surveillance category more frequently and, if needed, develops a remediation plan to address any credit deterioration.

National does not establish any case basis reserves for insured obligations that are assigned to “Caution List-Low,” “Caution List-Medium,” or “Caution List-High”, as credits assigned to those classifications do not result in loss expectations, if any, that exceed the unearned premium revenue for the respective credits. In the event National expects to pay a claim in excess of the unearned premium revenue with respect to an insured transaction, it places the insured transaction on its “Classified List” and establishes a case basis reserve. The following provides a description of each surveillance category:

“Caution List – Low” - Includes issuers where debt service protection is adequate under current and anticipated circumstances. However, debt service protection and other measures of credit support and stability may have declined since the transaction was underwritten and the issuer is less able to withstand further adverse events. Transactions in this category generally require more frequent monitoring than transactions that do not appear within a surveillance category. PSD subjects issuers in this category to heightened scrutiny.

“Caution List – Medium” - Includes issuers where debt service protection is adequate under current and anticipated circumstances, although adverse trends have developed and are more pronounced than for “Caution List – Low.” Issuers in this category may have breached one or more covenants or triggers. These issuers are more closely monitored by PSD but generally take remedial action on their own.

“Caution List – High” - Includes issuers where more proactive remedial action is needed but where no defaults on debt service payments are expected. Issuers in this category exhibit more significant weaknesses, such as low debt service coverage, reduced or insufficient collateral protection or inadequate

24

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 8: Loss and Loss Adjustment Expense Reserves (continued)

liquidity, which could lead to debt service defaults in the future. Issuers in this category have breached one or more covenants or triggers and have not taken conclusive remedial action. For these issuers PSD adopts a remediation plan and takes more proactive remedial actions.

“Classified List” - Includes all insured obligations where National has paid a claim or where a claim payment is expected to exceed its unearned premium revenue. Generally, PSD is actively remediating these credits where possible, including restructurings through legal proceedings, often with the assistance of specialist counsel and advisors.

The following table provides information about the financial guarantees and related claim liability included in each of National’s surveillance categories as of December 31, 2009:

	Surveillance Categories
$ in millions	Caution List Low		Caution List Medium		Caution List High		Classified List		Total
Number of policies		164		57		6		18		245
Number of issues (1)		11		13		4		10		38
Remaining weighted average contract period (in years)		14.9		12.1		5.8		2.4		11.8
Gross insured contractual payments outstanding (2) :
Principal	$	1,254	$	1,513	$	274	$	307	$	3,348
Interest		1,751		1,386		92		119		3,348
Total	$	3,005	$	2,899	$	366	$	426	$	6,696
Gross claim liability	$	—	$	—	$	—	$	202	$	202
Less:
Gross potential recoveries		—		—		—		28		28
Discount, net		—		—		—		1		1
Net claim liability (recoverable)	$	—	$	—	$	—	$	173	$	173
Unearned premium revenue	$	18	$	26	$	4	$	2	$	50

(1)—An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.

(2)—Represents contractual principal and interest payments are due by the issuer of the obligations.

The following table provides information about the components of National’s insurance loss reserves and recoverable included in each of National’s surveillance categories as of December 31, 2009:

	Surveillance Categories
$ in millions	Caution List Low		Caution List Medium		Caution List High		Classified List		Total
Loss reserves (claim liability)	$	—	$	—	$	—	$	172	$	172
LAE reserves		—		—		—		1		1
Loss and LAE reserves	$	—	$	—	$	—	$	173	$	173
Insurance claim loss recoverable	$	—	$	—	$	—	$	—	$	—
LAE insurance loss recoverable		—		—		—		31		31
Insurance loss recoverable	$	—	$	—	$	—	$	31	$	31

25

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 8: Loss and Loss Adjustment Expense Reserves (continued)

The following table presents changes in National’s loss and LAE reserve for the year ended December 31, 2009. Changes in the loss and LAE reserve attributable to the accretion of the discount on the loss reserves, changes in discount rates, and changes in the timing and amounts of estimated payments and recoveries are recorded in “Losses and loss adjustment expenses” in National’s statements of operations. LAE reserves are expected to be settled within a one year period and are not discounted. As of December 31, 2009, the weighted average risk-free rate used to discount the claim liability was 0.93%.

In millions
Gross Loss and LAE Reserve as of December 31, 2008	Gross Loss Payments for Cases with Reserves			Accretion of Claim Liability Discount		Changes in Discount Rates		Changes in Timing of Payments		Changes in Amount of Net Payments			Changes in Assumptions		Changes in Unearned Premium Revenue			Change in LAE Reserves		Gross Loss and LAE Reserve as of December 31, 2009
$—	$	(26	)	$	2	$	1	$	5	$	(2	)	$	193	$	(1	)	$	1	$	173

The following table presents changes in National’s insurance loss recoverable for the year ended December 31, 2009. Changes in the insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, and changes in the timing and amounts of estimated collections are recorded in “Loss and loss adjustment expenses” in National’s statements of operations.

In millions
Insurance Loss Recoverable as of December 31, 2008	Collections for Cases with Recoverables			Accretion of Insurance Loss Recoverable		Changes in Discount Rates		Changes in Timing of Collections		Changes in Assumptions		Change in LAE Recoverable		Insurance Loss Recoverable as of December 31, 2009
$—	$	(1	)	$	—	$	—	$	—	$	1	$	31	$	31

Remediation actions may involve, among other things, waivers or renegotiations of financial covenants or triggers, waivers of contractual provisions, the granting of consents, transfer of servicing, consideration of restructuring plans, acceleration, security or collateral enforcement, actions in bankruptcy or receivership, litigation and similar actions. The types of remedial actions pursued are based on the insured obligation’s risk type and the nature and scope of the event giving rise to the remediation. As part of any such remedial actions, National seeks to improve its security position and to obtain concessions from the issuer of the insured obligation. From time to time, the issuer of a National-insured obligation may, with the consent of National, restructure the insured obligation by extending the term, increasing or decreasing the par amount or decreasing the related interest rate, with National insuring the restructured obligation.

Costs associated with remediating insured obligations assigned to National’s “Caution List—Low,” “Caution List—Medium,” “Caution List—High” and “Classified List” are recorded as LAE. LAE is recorded as part of National’s provision for its loss reserves and included in “Losses and loss adjustment expense” on National’s statements of operations. The following table provides information about the expenses (gross and net of reinsurance) related to remedial actions for insured obligations included in National’s surveillance categories:

	Years ended December 31,
In millions	2009		2008		2007
Loss adjustment expense incurred, gross	$	86	$	—	$	—
Loss adjustment expense incurred, net	$	86	$	—	$	—

26

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 9: Income Taxes

Income tax expense (benefit) on income (loss) and shareholders’ equity consisted of:

	Years ended December 31,
In millions	2009			2008		2007
Current taxes:
Federal	$	(3	)	$	1	$	2
Deferred taxes:
Federal		168			—		—
Provision for income tax expense (benefit)		165			1		2
Income taxes charged (credited) to shareholders’ equity:
Unrealized gains (losses) on investment securities		3			1		1
Exercise of stock options and vested restricted stock		0			—		—
Total income taxes charged (credited) to shareholders’ equity		3			1		1
Total effect of income taxes	$	168		$	2	$	3

The provision for income tax expense (benefit) gives effect to permanent differences between financial and taxable income. Accordingly, National’s effective income tax rate differs from the statutory rate due to the tax effect of the following permanent differences:

	Years ended December 31,
	2009		2008		2007
Income tax expense (benefit) computed on pre-tax financial income (loss) at statutory rates	35.0	%	35.0	%	35.0	%
Increase (reduction) in taxes resulting from:
Tax-exempt interest	-5.4	%	-20.4	%	-14.2	%
Other	0.3	%	0.2	%	0.0	%
Effective tax rate	29.9	%	14.8	%	20.8	%

National recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on tax assets and liabilities is recognized in income in the period that includes the enactment date.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2009 and 2008 are presented in the following table:

	As of December 31,
In millions	2009			2008
Deferred tax liabilities:
Deferred acquisition costs	$	230		$	—
Accrual of market discount		—			1
Net unrealized gain on investments		5			3
Other		7			0
Total gross deferred tax liabilities		242			4
Deferred tax assets:
Unearned premium reserves		48			—
Net operating loss carryforward		19			—
Compensation and employee benefits		1			—
Goodwill		7			7
Other		(0	)		—
Total gross deferred tax assets:		75			7
Net deferred tax liability (asset)	$	167		$	(3	)

27

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 9: Income Taxes (continued)

As of December 31, 2009 and 2008, National does not have any uncertain tax positions and corresponding interest or penalties related to income taxes. National is a member of MBIA Inc.’s consolidated U.S. tax group and its only tax jurisdiction is the U.S. The IRS is currently examining tax years 2005 through 2008.

In connection with MBIA Inc.’s five year net operating loss carryback claim, National’s share of the tax refund under the tax sharing agreement is approximately $3 million.

Note 10: Net Insurance in Force

National’s net insurance in force represents the aggregate amount of the insured principal of, and interest or other amounts owing on insured obligations, net of cessions to reinsurers. National’s ultimate exposure to credit loss in the event of nonperformance by the issuer of the insured obligation is represented by the net insurance in force in the tables that follow.

The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The obligations are not subject to acceleration, except that National may have the right, at its discretion, to accelerate insured obligations upon default or otherwise. The creditworthiness of each issuer of an insured obligation is evaluated prior to the issuance of insurance, and each insured obligation must comply with National’s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such funds or collateral would typically become National’s upon the payment of a claim by National.

National maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. These include economic and social trends, debt and financial management, adequacy of anticipated cash flow, satisfactory legal structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility. National also analyzes the historical and projected performance of pledged revenue and relevant financial covenants. Such guidelines are subject to periodic review by a risk oversight committee, which is responsible for establishing the criteria for National’s underwriting standards, as well as maintaining these standards in its insurance operations.

28

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 10: Net Insurance in Force (continued)

In 2008, insurance policies of National were either ceded to MBIA Corp. or the third-party reinsurer and therefore, there was no net insurance in force as of December 31, 2008. As of December 31, 2009, net insurance in force had an expected maturity range of 1-47 years. The distribution of net insurance in force by geographic location respectively, is presented in the following table:

	As of December 31, 2009
In billions Geographic Location	Net Insurance in Force		% of Net Insurance in Force
California	$	149.4	18.2	%
New York		76.3	9.3	%
Florida		62.7	7.6	%
Texas		51.3	6.2	%
Illinois		48.2	5.9	%
New Jersey		37.3	4.5	%
Pennsylvania		28.7	3.5	%
Washington		28.4	3.5	%
Michigan		25.0	3.0	%
Massachusetts		21.2	2.6	%
Subtotal		528.5	64.3	%
Nationally diversified		9.6	1.2	%
Other states		283.6	34.5	%
Total	$	821.7	100.0	%

The net insurance in force by type of bond is presented in the following table:

	As of December 31, 2009
In billions Bond Type	Net Insurance in Force		% of Net Insurance in Force
General obligations	$	296.6	36.1	%
General obligations—lease		62.8	7.6	%
Municipal utilities		147.5	18.0	%
Tax-backed		103.3	12.6	%
Transportation		84.2	10.2	%
Higher education		46.0	5.6	%
Health care		26.1	3.2	%
Military housing		21.3	2.6	%
Investor-owned utilities (1)		14.4	1.8	%
Municipal housing		11.9	1.4	%
Student loans		3.7	0.4	%
Other (2)		3.9	0.5	%
Total	$	821.7	100.0	%

(1)—Includes investor owned utilities, industrial development and pollution control revenue bonds.

(2)—Includes certain non-profit enterprises and stadium related financing.

Under National’s reinsurance agreement with MBIA Insurance Corporation, if a reinsurer of MBIA Insurance Corporation is unable to pay claims ceded by MBIA Insurance Corporation, National will assume liability for such ceded claim payments. As of December 31, 2009, the total amount for which National would be liable in the event that the reinsurers of MBIA Insurance Corporation are unable to meet their obligations is $24.0 billion. For FGIC policies assigned to National from MBIA Insurance Corporation, National maintains the right to receive third-party reinsurance totaling $19.8 billion.

29

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 10: Net Insurance in Force (continued)

National has entered into certain guarantees of derivative contracts, included in the preceding tables, which do not qualify for the financial guarantee scope exception under the provisions of fair value measurements and disclosures. National’s guarantees of derivative contracts, generally guaranteeing the interest rate swap obligations of public sector issuers, have a legal maximum maturity range of 1-37 years. In accordance with the guidance, the fair values of these guarantees as of December 31, 2009 are recorded on National’s balance sheet as derivative liabilities, representing gross losses of $9 million.

Note 11: Reinsurance

Ceded Exposure

Reinsurance enables National to cede exposure for purposes of syndicating risk and increasing its capacity to write new business while complying with its single risk and credit guidelines. When a reinsurer is downgraded by one or more of the rating agencies, less capital credit is given to National under rating agency models and the overall value of the reinsurance to National is reduced. National generally retains the right to reassume the business ceded to reinsurers under certain circumstances, including a reinsurer’s rating downgrade below specified thresholds.

The aggregate amount of insurance in force ceded by National directly to reinsurers under reinsurance agreements was $9 million and $244 million as of December 31, 2009 and 2008, respectively.

The following table presents the credit ratings and ratings status, percentage of outstanding par ceded, the reinsurance recoverable, and the derivative asset by reinsurers as of December 31, 2009:

In millions
Reinsurers	Standard & Poor’s Rating (Status)	Moody’s Rating (Status)	Ceded Par Outstanding		LOC / Trust Accounts		Reinsurance Recoverable		Estimated Credit Impairments on Insured Derivatives		Derivative Asset
Assured Guaranty Corp.	AAA (Negative Outlook)	Aa3 (Negative Outlook)	$	3	$	—	$	—	$	—	$	—
Total			$	3	$	—	$	—	$	—	$	—

Premium Summary

The components of financial guarantee net premiums earned, including premiums assumed from and ceded to other companies, are presented in the following table:

	Years Ended December 31,
In millions	2009		2008		2007
Net premiums earned:
Direct	$	1	$	—	$	—
Assumed		562		—		—
Gross		563		—		—
Ceded		—		—		—
Net	$	563	$	—	$	—

30

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 12: Insurance Regulations and Dividends

Effective December 1, 2009, National was redomesticated to the State of New York and is subject to insurance regulations and supervision of the State of New York (its state of incorporation) and all U.S. and non-U.S. jurisdictions in which it is licensed to conduct insurance business. The extent of insurance regulation and supervision varies by jurisdiction, but New York and most other jurisdictions have laws and regulations prescribing minimum standards of solvency and business conduct, which must be maintained by insurance companies. Among other things, these laws prescribe permitted classes and concentrations of investments and limit both the aggregate and individual securities risks that National may insure on a net basis based on the type of obligations insured. In addition, some insurance laws and regulations require the approval or filing of policy forms and rates. National is required to file detailed annual financial statements with the New York State Insurance Department (“NYSID”) and similar supervisory agencies in other jurisdictions in which it is licensed. The operations and accounts of National are subject to examination by regulatory agencies at regular intervals.

New York State insurance law regulates the payment of dividends by financial guarantee insurance companies and provides that such companies may not declare or distribute dividends except out of statutory earned surplus. Under New York State insurance law, the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders’ surplus, as shown by the most recent statutory financial statement on file with the NYSID or (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the Superintendent of the NYSID approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations.

In connection with the separation of the insurance operations, National entered into the previously disclosed reinsurance agreement with MBIA Corp. whereby National assumed all of MBIA Corp’s outstanding U.S. public finance business. As a consequence of the reinsurance transaction, National recorded a $1.3 billion contingency reserve, which contributed to an earned surplus to a deficit of $2.0 billion. National is subject to New York State insurance law with respect to the payment of dividends as described above. Consistent with MBIA Inc.’s plan to transform its insurance business, National has submitted an application to the NYSID requesting approval to reset its unassigned surplus, of which earned surplus is a component. National did not declare or pay any dividends during 2009. National is not expected to be able to pay dividends following its year end 2009 statutory financial statement filing due to a projected earned surplus deficit as of December 31, 2009.

As a result of the establishment of National and the reinsurance of the MBIA Corp. and FGIC portfolios by National, National exceeded as of the closing date certain single and aggregate risk limits under New York and Illinois insurance law. National obtained a waiver of such limits from the insurance department of its domiciliary state. In connection with the waiver, National submitted a plan to the applicable insurance departments to achieve compliance with the applicable regulatory limits. Under the plan, it agreed not to write new financial guarantee insurance for certain issuers until they were in compliance with their single risk limits and agreed to take commercially reasonable steps, including considering reinsurance, the addition of capital and other risk mitigation strategies, in order to comply with the regulatory single and aggregate risk limits. As a condition to granting the waiver, the NYSID required that, upon written notice from the NYSID, National would cease writing new financial guarantee insurance if it were not in compliance with the risk limitation requirements by December 31, 2009. National continues to work with the NYSID to achieve compliance with the single and aggregate risk limits.

Note 13: Statutory Accounting Practices

These financial statements have been prepared on a GAAP basis, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities of National. Statutory accounting practices differ from GAAP in the following respects:

• upfront premiums are earned on a statutory accounting principles (“SAP”) basis proportionate to the scheduled periodic maturity of principal and payment of interest (“debt service”) to the original total principal and interest insured. Additionally, under SAP, installment premiums are earned on a straight-

31

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 13: Statutory Accounting Practices (continued)

line basis over each installment period generally one year or less. Under GAAP, National recognizes and measures premium revenue over the period of the contract in proportion to the amount of insurance protection provided. Upfront and installment premium revenue is measured by applying a constant rate to the insured principal amount outstanding in a given period to recognize a proportionate share of the premium received or expected to be received on a financial guarantee insurance contract. Additionally, under GAAP, installment premiums receivable are recorded at the present value of the premiums due or expected to be collected over the period of the insurance contract using a discount rate which reflects the risk-free rate at the inception of the contract;

• acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned;

• fixed-maturity investments are generally reported at amortized cost rather than fair value;

• a contingency reserve is computed on the basis of statutory requirements, and is not permitted under GAAP;

• reserves for losses and LAE for financial guarantee and insured derivatives are established at present value for specific insured issues that are identified as currently or likely to be in default, net of insurance loss recoverables. Incurred losses and LAE are discounted using a rate equal to the yield-to-maturity of National’s fixed-income portfolio, excluding investments in money market funds and including intercompany loans under repurchase agreements. Under GAAP, a claim liability (loss reserve) is recognized for financial guarantees only on a contract-by-contract basis when the present value of expected net cash outflows to be paid under the contract using a risk-free rate as of the measurement date exceeds the unearned premium revenue and is shown gross of insurance recoverables which are reported as assets;

• guarantees of derivatives are not recorded at fair value, while under GAAP, guarantees that do not qualify for the financial guarantee scope exception under accounting principles for derivative instruments and hedging activities are recorded at fair value;

• changes in net deferred income taxes are recognized as a separate component of gains and losses in surplus. Under GAAP, changes in National’s net deferred income tax balances are either recognized as a component of net income or other comprehensive income depending on how the underlying pre-tax impact is reflected;

• for the year ended December 31, 2009 and the year ending December 31, 2010, the National Association of Insurance Commissioners (“NAIC”) has temporarily replaced Statement of Statutory Accounting Principles (“SSAP”) No. 10, Income Taxes, with the enactment of SSAP No. 10R, Income Taxes –Revised, which loosened the limitations placed on the admissibility of deferred tax assets. Under SSAP No. 10, the amount of deferred tax assets that an insurance company could admit was limited to the lesser of deferred tax assets expected to reverse in one year or 10% of adjusted statutory policyholders’ surplus. In accordance with the revised SSAP No. 10R, the amount of deferred tax asset that an insurance company may admit is now limited to the lesser of deferred tax assets expected to reverse in three years or 15% of adjusted statutory policyholders’ surplus. The incremental difference between the two pronouncements must be set aside in a special surplus account that is not part of unassigned surplus. SSAP No. 10R is effective for 2009 annual financial statements and 2010 interim and annual financial statements only. Unless there is further action by the NAIC, SSAP No. 10 will be reinstated as authoritative guidance for accounting and reporting of income taxes for statutory financial statements after 2010.

• the IRS permits financial guarantee insurance companies a tax deduction for increases to the statutory contingency reserve specifically relating to the issuance of U.S. state and local obligations, as defined under section 103 of the Internal Revenue Code of 1986, as amended. Such deduction is allowable provided that the financial guarantee insurance company purchase a special series Tax and Loss bonds (“T&L bonds”) issued by the U.S. Treasury equal to the tax benefit derived. When purchased, National records the T&L bonds as admitted assets and they are credited to surplus;

32

National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 13: Statutory Accounting Practices (continued)

• the transformation of National was recorded at statutory book value, therefore, no goodwill was recorded. Under GAAP, goodwill is allocated to National affected using a relative fair value allocation approach when an entity reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units; and

• certain assets designated as “non-admitted assets” are charged directly against surplus but are reflected as assets under GAAP.

The results of National determined in accordance with statutory accounting practices for the years ended December 31, 2009 and 2008 were a net loss of $299 million and net income of $7 million, respectively. Consolidated statutory policyholders’ surplus of National determined in accordance with statutory accounting practices as of December 31, 2009 and 2008 was $653 million and $185 million, respectively.

The following is a reconciliation of the GAAP shareholder’s equity of National to the statutory policyholder’s surplus of National:

	As of December 31,
In millions	2009			2008
National’s GAAP shareholder’s equity	$	2,766		$	197
Premium revenue recognition (financial guarantee)		(189	)		—
Deferral of acquisition costs		(662	)		—
Investments, including unrealized gains (losses)		(95	)		(7	)
Contingency reserve		(1,356	)		—
Loss reserves		6			—
Deferred income tax liabilities, net		768			(4	)
Goodwill		(31	)		—
Derivative assets and liabilities		9			—
Non-admitted assets and other items		(563	)		(1	)
Statutory policyholders’ surplus	$	653		$	185

The statutory financial statements of National are presented on the basis of accounting practices prescribed or permitted by the NAIC Accounting Practices and Procedures Manual. In September 2009, the NYSID became accredited under the NAIC’s Financial Regulations Standards and Accreditation Program. Therefore, as per Regulation Number 172 of the New York State Insurance Law, NYSID has adopted the NAIC’s Accounting Practices and Procedures Manual in its entirety subject to any conflicts with state regulations, or where the state statutes or regulations are silent.

Note 14: Employee Benefits

National participates in MBIA Inc.’s pension plan, which cover substantially all employees. In February 2009, employees from MBIA Insurance Corporation were transferred to National. Prior to February 2009, National did not have any employees and, therefore, compensation expense related to the employee benefit plans was zero.

MBIA Inc. maintains a pension plan in which National participates. The pension plan is a qualified non-contributory defined contribution pension plan to which National contributes 10% of each eligible employee’s annual compensation. Annual compensation for determining such contributions consists of base salary, and bonus, as applicable. Pension benefits vest over a five-year period with 20% vested after two years, 60% vested after three years, 80% vested after four years and 100% vested after five years. Pension expense related to the qualified pension plan for the year ended December 31, 2009 was $673 thousand.

MBIA Inc. also maintains a qualified profit-sharing/401(k) plan in which National participates. The plan is a voluntary contributory plan that allows eligible employees to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may contribute, through

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Notes to Financial Statements

Note 14: Employee Benefits (continued)

payroll deductions, up to 25% of eligible compensation. National matches employee contributions up to the first 5% of such compensation and are made in the form of cash, whereby participants may direct the match to an investment of their choice. The benefit of National’s contributions vest over a five-year period with 20% vested after two years, 60% vested after three years, 80% vested after four years and 100% vested after five years. Generally, a participating employee is entitled to distributions from the plan upon termination of employment, retirement, death or disability. Participants who qualify for distribution may receive a single lump sum, transfer the assets to another qualified plan or individual retirement account, or receive a series of specified installment payments. Profit-sharing/401(k) expense related to the qualified profit-sharing/401(k) plan for the year ended December 31, 2009 was $306 thousand.

In addition to the above two plans, National also participates in MBIA Inc.’s non-qualified deferred compensation plan. Contributions to the above qualified plans that exceed limitations established by federal regulations are then contributed to the non-qualified deferred compensation plan. The non-qualified pension expense for the year ended December 31, 2009 was $214 thousand. The non-qualified profit-sharing/401(k) expense for the year ended December 31, 2009 was $120 thousand.

National participates in the MBIA Inc. 2005 Omnibus Incentive Plan (the “Omnibus Plan”), as amended on May 7, 2009. The Omnibus Plan may grant any type of an award including stock options, performance shares, performance units, restricted stock, restricted stock units and dividend equivalents. Following the effective date of the Omnibus Plan, no new options or awards were granted under any of the prior plans authorized by the MBIA Inc. shareholders.

The stock option component of the Omnibus Plan enables key employees to acquire shares of MBIA Inc. common stock. The stock option grants, which may be awarded every year, provide the right to purchase shares of MBIA Inc. common stock at the fair value of the stock on the date of grant. Options granted will either be Incentive Stock Options (“ISOs”), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (“NQSOs”). ISOs and NQSOs are granted at a price not less than 100% of the fair value, defined as the closing price on the grant date, of MBIA Inc. common stock. Options are exercisable as specified at the time of grant depending on the level of the recipient (generally four or five years) and expire either seven or ten years from the date of grant (or shorter if specified or following termination of employment).

Under the restricted stock component of the Omnibus Plan, certain employees are granted restricted shares of MBIA Inc.’s common stock. These awards have a restriction period lasting three, four or five years depending on the type of award, after which time the awards fully vest. During the vesting period these shares may not be sold. Restricted stock may be granted to all employees. The majority of restricted stock is granted to employees from the vice-president level up to and including the chief executive officer.

In accordance with the accounting guidance for share-based payments, MBIA Inc. expenses the fair value of employee stock options and other forms of stock-based compensation. In addition, the guidance classifies share-based payment awards as either liability awards, which are remeasured at fair value at each balance sheet date, or equity awards, which are measured on the grant date and not subsequently remeasured. Generally, awards with cash-based settlement, repurchase features or that are settled at a fixed dollar amount are classified as liability awards, and changes in fair value will be reported in earnings. Awards with net-settlement features or that permit a cashless exercise with third-party brokers are classified as equity awards and changes in fair value are not reported in earnings. MBIA Inc.’s long-term incentive plans include features which result in both liability and equity awards. For liability awards, MBIA Inc. remeasures these awards at each balance sheet date. In addition, the guidance requires the use of a forfeiture estimate. MBIA Inc. uses historical employee termination information to estimate the forfeiture rate applied to current stock-based awards.

MBIA Inc. maintains voluntary retirement benefits, which provide certain benefits to eligible employees of National upon retirement. A description of these benefits is included in MBIA Inc.’s proxy statement. One of the components of the retirement program for those employees that are retirement eligible is to continue to vest all outstanding stock options and performance-based restricted shares beyond the retirement date in accordance

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 14: Employee Benefits (continued)

with the original vesting terms and to immediately vest all outstanding time-based restricted share grants. The accounting guidance for share-based payments requires compensation costs for those employees to be recognized from the date of grant through the retirement eligible date, unless there is a risk of forfeiture, in which case the compensation cost is recognized in accordance with the original vesting schedule. Accelerated expense, if any, relating to this retirement benefit for both stock option awards and restricted stock awards has been included in the disclosed compensation expense amounts.

In accordance with the accounting guidance for share-based payments, MBIA Inc. valued all stock options granted using an option-pricing model. The value is recognized as an expense over the period in which the options vest. National’s proportionate share of compensation cost for employee stock options for the year ended December 31, 2009 totaled $284 thousand. National’s proportionate share of compensation cost for restricted stock awards was $298 thousand for the year ended December 31, 2009.

Note 15: Related Party Transactions

Related parties are defined as the following:

• Affiliates of National: An affiliate is a party that directly or indirectly controls, is controlled by or is under common control with National. Control is defined as having, either directly or indirectly, the power to direct the management and operating policies of a company through ownership, by contract or otherwise.

• Entities for which investments are accounted for using the equity method by National.

• Trusts for the benefit of employees, such as pension and profit-sharing trusts, that are managed by or under the trusteeship of management.

• Principal owners of National defined as owners of record or known beneficial owners of more than 10 percent of the voting interests of National.

• Management of National which includes persons who are responsible for achieving the objectives of National and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management normally includes members of the Board of Directors, the Chief Executive Officer, Chief Operating Officer, Vice President in charge of principal business functions and other persons who perform similar policymaking functions.

• Members of the immediate families of principal owners of National and its management. This includes family members whom a principal owner or a member of management might control or influence or by whom they may be controlled or influenced because of the family relationship.

• Other parties with which National may deal if one party controls or can significantly influence the management or policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

• Other parties that can significantly influence the management or policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to the extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

From time to time National may enter into transactions with related parties that National deems immaterial or which occur in the normal course of business and are deemed to be transacted at “arm’s length” by management.

As of December 31, 2009 and 2008, included in other liabilities were $9 million and $25 thousand, respectively of net payables to MBIA Inc. and other subsidiaries.

National’s investment portfolio is managed by Cutwater Asset Management Corp. (“Cutwater-AMC”), a wholly owned subsidiary of MBIA Inc., which provides fixed-income investment management services for MBIA Inc. and its affiliates, as well as third-party institutional clients. For the years ended December 31, 2009, 2008 and 2007, Cutwater-AMC charged fees of $5 million, $206 thousand and $199 thousand, respectively to National based on the performance of its investment portfolio.

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National Public Finance Guarantee Corporation

Notes to Financial Statements

Note 15: Related Party Transactions (continued)

During the first quarter of 2009, National entered into an agreement with MBIA Inc. whereby National held securities under agreements to resell of $1.7 billion as of December 31, 2009. National also transferred securities under agreements to repurchase of $1.7 billion as of December 31, 2009. These agreements reset on a quarterly basis. The interest income and expense related to these agreements were $29 million and $4 million, respectively, for the year ended December 31, 2009.

National had no loans outstanding to any executive officers or directors in 2009 and 2008.

Note 16: Commitments and Contingencies

In the normal course of operating its business, National may be involved in various legal proceedings. Additionally, MBIA Inc. may be involved in various legal proceedings that directly or indirectly impact National.

MBIA Inc. has received subpoenas or informal inquiries from a variety of regulators, including the SEC, the Securities Division of the Secretary of the Commonwealth of Massachusetts, the Attorney General of the State of California, and other states’ regulatory authorities, regarding a variety of subjects, including soft capital instruments, disclosures regarding MBIA Inc.’s structured finance exposure, trading and valuation of managed collateral, MBIA Inc.’s communications with rating agencies, and the methodologies used by rating agencies for determining the credit rating of municipal debt. MBIA Inc. is cooperating fully with each of these regulators and is in the process of satisfying all such requests. MBIA Inc. may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future.

On July 23, 2008, the City of Los Angeles filed two complaints in the Superior Court of the State of California, County of Los Angeles, against MBIA Inc. and others. The first complaint, against MBIA Inc., AMBAC Financial Group, Inc., XL Capital Assurance Inc., ACA Financial Guaranty Corp., Financial Guaranty Insurance Company, and CIFG Assurance North America, Inc., alleged (i) participation in a conspiracy in violation of California’s antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance and (ii) participation in risky financial transactions in other lines of business that damaged each bond insurer’s financial condition (thereby undermining the value of each of their guaranties), and a failure to adequately disclose the impact of those transactions on their financial condition. These latter allegations form the predicate for five separate causes of action against each of the Insurers: breach of contract, breach of the covenant of good faith and fair dealing, fraud, negligence and negligent misrepresentation. Complaints making the same allegations against MBIA Inc. and nearly all of the same co-defendants were filed in Superior Court, San Francisco County, by the City of Stockton, the City of Oakland, the City and County of San Francisco, the County of San Mateo, the County of Alameda, the City of Los Angeles Department of Water and Power, by the Sacramento Municipal Utility District, and the City of Sacramento between July 23, 2008 and January 6, 2009. These cases are now part of a coordinated proceeding referred to as Ambac Bond Insurance Cases. On April 8, 2009, The Olympic Club filed a complaint against MBIA Inc. in the Superior Court of the State of California, County of San Francisco, making similar allegations of participation in risky financial transactions in other lines of business that allegedly damaged MBIA Inc.’s financial condition, and of a failure to adequately disclose the impact of those transactions on MBIA Inc.’s financial condition. These allegations form the predicate for the same initial five common law causes of action as those in the Ambac Bond Insurance Cases, as well as a California unfair competition cause of action. The Olympic Club does not include an antitrust or unjust enrichment cause of action. The Olympic Club case is being coordinated with the Ambac Bond Insurance Cases in San Francisco Superior Court. On August 31, 2009, the aforementioned plaintiffs, excluding the City of Sacramento and the Olympic Club, filed amended complaints identifying specific variable rate bond transactions with respect to the existing contract, fraud and negligence claims, and adding claims for unjust enrichment with respect to insured bonds issued by the plaintiffs during an unspecified period of time. A similar complaint alleging the same causes of action was filed by the City of Riverside. On the same day, the County of Contra Costa and Los Angeles World Airports filed new complaints and the City of Sacramento filed an amended complaint alleging the antitrust violation and unjust enrichment causes of action only. MBIA’s demurrers and other responsive pleadings were filed on November 13, 2009 and plaintiff’s opposition papers were filed on January 8, 2010. MBIA Inc.’s reply papers were filed on February 5, 2010. Oral argument is scheduled for March 1, 2010.

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Notes to Financial Statements

Note 16: Commitments and Contingencies (continued)

MBIA’s reply papers were filed on February 5, 2010. A Case Management Conference and Hearing on Demurrers is scheduled for March 1, 2010. These cases are now coordinated as Ambac Bond Insurance Cases in San Francisco Superior Court.

The City of Los Angeles’s second complaint named as defendants certain other financial institutions as well as bond insurers, including MBIA Inc., AMBAC Financial Group, Inc., Financial Security Assurance, Inc., Financial Guaranty Insurance Company and Security Capital Assurance Inc., and alleged fraud and violations of California’s antitrust laws through bid-rigging in the sale of municipal derivatives to municipal bond issuers. Complaints making the same allegations against MBIA Inc. and nearly all of the same co-defendants were filed in Superior Court, Los Angeles County, by the County of San Diego on August 28, 2008, and in Superior Court, San Francisco County, by the City of Stockton on July 23, 2008, by the County of San Mateo on October 7, 2008, and by the County of Contra Costa on October 8, 2008. The City of Los Angeles and City of Stockton actions were removed to federal court and transferred by order dated November 26, 2008, to the Southern District of New York for inclusion in the multidistrict litigation In re Municipal Derivatives Antitrust Litigation, M.D.L. No. 1950; the San Diego County, San Mateo County, and Contra Costa County actions were removed to federal court and transferred to the Southern District of New York for inclusion in that proceeding by order dated February 4, 2009. All five plaintiffs filed amended complaints on September 15, 2009 alleging violations of both federal and California state antitrust laws. On December 10, 2009, four additional complaints were filed against MBIA and the other defendants by the Los Angeles World Airports, the Redevelopment Agency of the City of Stockton and the Public Financing Authority of the City of Stockton (filed jointly), the County of Tulare and the Sacramento Suburban Water District. On February 8, 2010, MBIA and the other defendants filed their motions to dismiss.

On March 11, 2009, a complaint was filed in the United States District Court of the Southern District of New York against MBIA Inc. and its subsidiaries, MBIA Corp. and National, entitled Aurelius Capital Master, Ltd. et al. v. MBIA Inc. et al., 09-cv-2242 (S.D.N.Y.). The lead plaintiffs, Aurelius Capital Master, Ltd., Aurelius Capital Partners, LP, Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., and Fir Tree Mortgage Opportunity Master Fund, L.P., purport to be acting as representatives for a class consisting of all holders of securities, instruments, or other obligations for which MBIA Corp., before February 18, 2009, issued financial guarantee insurance other than United States municipal/governmental bond securities. The complaint alleges that certain of the terms of the transactions entered into by MBIA Inc. and its subsidiaries, which were approved by the New York State Department of Insurance, constituted fraudulent conveyances under §§ 273, 274 and 276 of New York Debtor and Creditor Law and a breach of the implied covenant of good faith and fair dealing under New York common law. The Complaint seeks, inter alia, (a) a declaration that the alleged fraudulent conveyances are null and void and set aside, (b) a declaration that National is responsible for the insurance polices issued by MBIA Insurance Corporation up to February 17, 2009, and (c) an award of damages in an unspecified amount together with costs, expenses and attorneys’ fees in connection with the action. On February 11, 2010, Judge Sullivan entered an order denying MBIA Inc.’s motion to dismiss.

On April 6, 2009, a complaint was filed in the Court of Chancery for the State of Delaware entitled Third Avenue Trust and Third Avenue Variable Series Trust v. MBIA Insurance Corp. and MBIA Insurance Corp. of Illinois, CA 4486-UCL. Plaintiffs allege that they are holders of approximately $400 million of surplus notes issued by MBIA Corp. (for purposes of this section, the “Notes”) in January 2008. The complaint alleges (Count I) that certain of the Transactions breached the terms of the Notes and the Fiscal Agency Agreement dated January 16, 2008 pursuant to which the Notes were issued. The complaint also alleges that certain transfers under the Transactions were fraudulent in that they allegedly left MBIA Corp. with “unreasonably small capital” (Count II), “insolvent” (Count III), and were made with an “actual intent to defraud” (Count IV). The complaint seeks a judgment (a) ordering the defendants to unwind the Transactions (b) declaring that the Transactions constituted a fraudulent conveyance, and (c) damages in an unspecified amount. On October 28, 2009, Vice Chancellor Strine entered an order dismissing the case without prejudice. On December 21, 2009, plaintiffs re-commenced the action in New York State Supreme Court, and it has been assigned to Justice Yates.

On May 13, 2009, a complaint was filed in the New York State Supreme Court against MBIA Inc. and its subsidiaries, MBIA Corp. and National, entitled ABN AMRO Bank N.V. et al. v. MBIA Inc. et al. The plaintiffs, a

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Notes to Financial Statements

Note 16: Commitments and Contingencies (continued)

group of 19 domestic and international financial institutions, purport to be acting as holders of insurance policies issued by MBIA Corp. directly or indirectly guaranteeing the repayment of structured finance products. The complaint alleges that certain of the terms of the transactions entered into by MBIA Inc. and its subsidiaries, which were approved by the New York State Department of Insurance, constituted fraudulent conveyances and a breach of the implied covenant of good faith and fair dealing under New York law. The complaint seeks a judgment (a) ordering the defendants to unwind the Transactions, (b) declaring that the Transactions constituted a fraudulent conveyance, (c) declaring that MBIA Inc. and National are jointly and severally liable for the insurance policies issued by MBIA Corp., and (d) ordering damages in an unspecified amount. On February 17, 2010, Justice Yates denied defendants’ motion to dismiss. On February 25, 2010, the Company filed its Notice of Appeal of the denial to the Appellate Division of the New York State Supreme Court.

On June 15, 2009, the same group of 19 domestic and international financial institutions who filed the above described plenary action in New York State Supreme Court filed a proceeding pursuant to Article 78 of New York’s Civil Practice Law & Rules in New York State Supreme Court, entitled ABN AMRO Bank N.V. et al. v. Eric Dinallo, in his capacity as Superintendent of the New York Insurance Department, the New York State Insurance Department, MBIA Inc. et al. In its motions to dismiss the three above-referenced plenary actions, MBIA Inc. argued that an Article 78 proceeding is the exclusive forum in which a plaintiff may raise any challenge to the Transformation approved by the Superintendent of the Department of Insurance. The petition seeks a judgment (a) declaring void and to annul the approval letter of the Superintendent of the Department of Insurance, (b) to recover dividends paid in connection with the Transactions and (c) declaring that the approval letter does not extinguish plaintiffs’ direct claims against MBIA Inc. and its subsidiaries in the plenary action described above. MBIA Inc, and the New York State Insurance Department filed their answering papers to the Article 78 Petition on November 24, 2009 and argued that based on the record and facts, approval of Transformation and its constituent transactions was neither arbitrary nor capricious nor in violation of New York Insurance Law. Limited discovery is proceeding.

MBIA Inc. and National are defending against the aforementioned actions and expect ultimately to prevail on the merits. There is no assurance, however, that they will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on National’s ability to implement its strategy and on its business, results of operations and financial condition.

There are no other material lawsuits pending or, to the knowledge of National, threatened, to which National is a party.

Note 17: Subsequent Events

Refer to “Note 16, Commitments and Contingencies” for information about legal proceedings that developed after December 31, 2009.

On March 1, 2010, National purchased from MBIA Corp. an interest in real estate that it intends to hold for purposes of conducting its business and leasing to certain affiliates. The purchase price of $65 million was based on the fair value of the real estate at the time of purchase as determined, in part, through assessments made by independent third parties. Concurrent to the purchase, National entered into lease arrangements with MBIA Corp. and certain other affiliates. The lease rates are based on market rates a third party would charge for similar arrangements as determined, in part, through assessments made by independent third parties. The purchase by National and sale by MBIA Corp., as well as the lease arrangements, were approved by the NYSID.

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