AGO

Business Context and Reporting Period

This Form 8-K, filed on July 8, 2009, reports events occurring on July 1, 2009, for Assured Guaranty Ltd. (Assured). The filing details the completion of the acquisition of Financial Security Assurance Holdings Ltd. (FSAH) from Dexia Holdings, Inc. and Dexia Crédit Local S.A. (DCL). The transaction excludes FSAH's former financial products business (GICs, MTNs, and Leveraged Tax Leases), which was transferred to Dexia prior to closing, though Assured retains certain guarantee obligations.

Key Financial Metrics and Transaction Details

• Acquisition Consideration: Assured paid approximately $546 million in cash and issued approximately 21.8 million shares of its common stock (representing ~13.8% of outstanding shares) to Dexia Holdings. Additional shares were issued to former FSAH executives.
• Net Par Outstanding: The acquisition increased Assured's net par outstanding from approximately $237.2 billion to approximately $654.5 billion on a combined pro-forma basis as of March 31, 2009 (excluding the financial products business).
• Legacy Financial Products Exposure: As of March 31, 2009, the liabilities of the GIC Issuers and FSAM exceeded their assets by approximately $8.7 billion. Outstanding GIC obligations were approximately $13.5 billion. Outstanding MTNs were $1.6 billion, and A-Loans/Debt PUA Notes in the Leveraged Tax Lease Business were $6.2 billion each.
• Liquidity Facilities: Dexia affiliates increased their aggregate liquidity commitment to FSAM to $11.5 billion, comprising an $8.0 billion revolving credit facility and a $3.5 billion repurchase facility.
• Investment Income: For the three months ended March 31, 2009, Assured's net investment income was $43.6 million.

Material Changes and Agreements

The filing outlines a complex separation of FSAH's financial products business to mitigate credit and liquidity risks for Assured. Key agreements include:

• Dexia Put Contracts: Dexia and DCL guaranteed scheduled payments on FSAM assets. The "Guaranteed Put Contract" covers approximately $11.8 billion of assets and is backed by a Sovereign Guarantee from the States of Belgium and France. The "Non-Guaranteed Put Contract" covers approximately $4.4 billion.
• Sovereign Guarantee: The Belgian and French States guarantee Dexia's obligations under the Guaranteed Put Contract. Belgium is responsible for 60.5/97 of the guarantee, and France for 36.5/97.
• Separation Agreement: DCL assumed all rights and obligations for the MTN Business. Assured retained rights and obligations for the Leveraged Tax Lease Business (excluding Equity PUA Notes), while DCL indemnified Assured for losses related to the MTN Business.
• Strip Coverage Liquidity: DCL agreed to provide a liquidity facility up to $1 billion to cover claims related to "strip coverages" in the Leveraged Tax Lease Business.

Outlook, Risks, and Management Commentary

Management highlights significant risks related to the acquisition and the broader credit environment:

• Rating Agency Actions: As of July 1, 2009, FSA was rated AAA (negative outlook) by S&P, AA+ (rating watch negative) by Fitch, and Aa3 (on review for possible downgrade) by Moody's. Assured's own subsidiaries faced negative outlooks or reviews for downgrade from all three major agencies due to mortgage-related exposures.
• Loss Reserve Uncertainty: Management notes that loss reserve estimates are subjective and may not be adequate to cover potential paid claims, particularly in residential mortgage-backed securities (RMBS) where losses are far worse than originally expected.
• Counterparty Risk: Assured has substantial credit and liquidity exposure to Dexia and the Belgian and French states. If Dexia or the states fail to perform under their guarantees, Assured may be required to pay claims immediately.
• Operational Restrictions: Assured agreed to conduct FSA's business subject to restraints for three years, including limitations on writing new business types and restrictions on dividends unless specific rating thresholds are met.
• Collateral Posting: Assured has agreed to post $325 million in collateral to secure potential payment obligations under certain Credit Default Swap (CDS) contracts, with potential increases to $375 million if ratings decline further.

Investor Verification Checklist

• Verify the current credit ratings and outlooks of FSA and Assured subsidiaries from S&P, Moody's, and Fitch, noting any recent downgrades or negative watches.
• Confirm the status of Dexia Holdings and the financial stability of the Belgian and French states, as Assured's exposure to the legacy GIC business relies heavily on their guarantees.
• Review the specific terms of the Sovereign Guarantee and Dexia Put Contracts to understand the triggers for collateral posting and payment obligations.
• Assess the adequacy of Assured's loss reserves for RMBS and home equity loans, given the stated uncertainty in predicting future losses.
• Monitor the $11.5 billion liquidity facility provided by Dexia affiliates and the $1 billion strip coverage facility for any signs of stress or utilization.
• Check for any new regulatory actions by the New York Insurance Department regarding financial guaranty insurers that could impact Assured's ability to write new business.