UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


S		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 OR
£		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number 001-32950

SYNCORA HOLDINGS LTD.
(Exact name of registrant as specified in its charter)


BERMUDA (State or other jurisdiction of incorporation or organization)		NOT APPLICABLE (I.R.S. Employer Identification No.)

Canon’s Court, 22 Victoria Street, Hamilton, Bermuda HM 12
(Address of principal executive offices and zip code)

(441) 279-7450
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None*

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No S

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes S No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer £ Non-accelerated filer S Smaller reporting company £
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of March 20, 2009, there were 65,151,297 outstanding common shares, $0.01 par value per share, of the registrant (includes 30,069,049 shares held by a trust. See Note 4 to the Consolidated Financial Statements included herein). The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second quarter based on the closing price of the stock on the New York Stock Exchange was $10,173,852.

Pursuant to a Form 12b-25 to be filed on or before April 1, 2009, Item 11 has been omitted from this report.

As of April 7, 2009. On January 7, 2009, the New York Stock Exchange filed a Form 25 delisting our common shares. The deregistration of our common shares under Section 12(b) of the Act will become effective 90 days after such filing.

SYNCORA HOLDINGS LTD.

TABLE OF CONTENTS


		Page No.

	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	30
Item 1B.	Unresolved Staff Comments	54
Item 2.	Properties	54
Item 3.	Legal Proceedings	54
Item 4.	Submission of Matters to a Vote of Security Holders	57
	Executive Officers of the Company	57
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	59
Item 6.	Selected Financial Information	62
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	64
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	129
Item 8.	Financial Statements	132
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	206
Item 9A.	Controls and Procedures	206
Item 9B.	Other Information	207
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	208
Item 11.	Executive Compensation	210
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	211
Item 13.	Certain Relationships and Related Transactions, and Director Independence	213
Item 14.	Principal Accounting Fees and Services	216
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	218

References to the “Company,” “we,” “us” and “our” mean Syncora Holdings Ltd. and, unless otherwise indicated, its subsidiaries. References to “Syncora Holdings” means our top-level holding company.

This Annual Report on Form 10-K contains “Forward-Looking Statements” as defined in the Private Securities Litigation Reform Act of 1995. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such Forward-Looking Statements is set forth herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Statements.”

All amounts presented in this part are in U.S. dollars except as otherwise noted.

PART I

ITEM 1. BUSINESS

Overview

On March 17, 2006, XL Capital Ltd (“XL Capital”) formed Syncora Holdings Ltd. (formerly known as Security Capital Assurance Ltd), as a wholly-owned Bermuda based subsidiary holding company. On July 1, 2006, XL Capital contributed all of its ownership interests in its financial guarantee insurance and financial guarantee reinsurance operating businesses indirectly to us. The aforementioned operating businesses consisted of: (i) Syncora Guarantee Inc. (“Syncora Guarantee”) (a New York domiciled financial guarantee insurance company formerly known as XL Capital Assurance Inc.) and its wholly-owned subsidiary, Syncora Guarantee (U.K.) Ltd. (“Syncora Guarantee-UK”, formerly known as XL Capital Assurance (U.K.) Limited) and (ii) Syncora Guarantee Re Ltd. (“Syncora Guarantee Re”) (a Bermuda domiciled financial guarantee reinsurance company formerly known as XL Financial Assurance Ltd.). Syncora Guarantee was an indirect wholly-owned subsidiary of XL Capital and all of Syncora Guarantee Re was indirectly owned by XL Capital, except for a preferred stock interest which was owned by Financial Security Assurance Holdings Ltd. or its subsidiaries (“FSA”), entities which are otherwise not related to XL Capital or the Company. On August 4, 2006, Syncora Holdings completed an initial public offering (the “IPO”). In addition, XL Capital sold common shares of Syncora Holdings from its holdings directly to the public in a secondary offering concurrent with the IPO. Immediately after the IPO and the secondary offering, XL Capital, through its wholly-owned subsidiary XL Insurance (Bermuda) Ltd (“XLI”), owned approximately a 63% economic interest in Syncora Holdings. In June 2007, XLI completed the sale of additional common shares of Syncora Holdings from its holdings. Immediately after such sale, XLI owned approximately a 46% voting and economic interest in Syncora Holdings. On August 5, 2008, we consummated the transactions comprising the 2008 MTA (as defined below), pursuant to which XL Capital transferred all of the common shares of Syncora Holdings it owned to be held in trust by CCRA Purpose Trust (the “SCA Shareholder Entity”). On September 4, 2008, Syncora Guarantee Re merged with and into Syncora Guarantee, with Syncora Guarantee being the surviving company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”.

Prior to January of 2008 (as more fully discussed below, under “—Recent Developments”), we provided credit enhancement and protection products to the public finance and structured finance markets throughout the United States and internationally through the issuance of financial guarantee insurance policies and credit default swap (“CDS”) contracts, as well as the reinsurance of financial guarantee insurance and CDS contracts written by other insurers. Financial guarantee insurance provides an unconditional and irrevocable guarantee to the holder of a debt obligation of full and timely payment of the guaranteed principal and interest. In the event of a default under the obligation, the insurer has recourse against the issuer or any related collateral (which is more common in the case of insured asset-backed obligations or other non-municipal debt) for amounts paid under the terms of the policy. CDS contracts are derivative contracts that offer credit protection relating to a particular security or pools of specified securities. Under the terms of a CDS contract, the seller of credit protection makes a specified payment to the buyer of credit protection upon the occurrence of one or more specified credit events with respect to a referenced security. Financial guarantee reinsurance provides a means by which financial guarantee insurance companies can manage and mitigate risks in their in-force business and/or increase their capacity to write such business.

Recent Developments

development of reserves for unpaid losses and loss adjustment expenses on our guarantees, under our insurance contracts, of residential mortgage-backed securities (“RMBS”), and (ii) downgrades of our insurance financial strength (“IFS”) ratings by Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings (“Fitch”) and Standard & Poor’s Ratings Services (“S&P”), which ratings had been fundamental to our ability to conduct business and which have caused us to cease writing substantially all new business since January of 2008, resulting in the loss of future incremental earnings and cash flow. As of March 30, 2009, Syncora Guarantee is rated “Ca” by Moody’s and “CC” by S&P; we have terminated our agreement for the provision of ratings with Fitch.

During the second quarter of 2008, we recorded a material increase in adverse development of anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS causing us to be unable to maintain Syncora Guarantee’s compliance with its $65 million minimum policyholders’ surplus requirement under New York Insurance Law as of June 30, 2008. In light of this material adverse development, and in accordance with our previously disclosed strategic plan, on July 28, 2008 we, certain financial institutions that are counterparties to CDS contracts with Syncora Guarantee (the “Counterparties”), Merrill Lynch & Co., Inc. (“Merrill Lynch”) and certain of its affiliates, and XL Capital and certain of its affiliates, entered into a Master Commutation, Release and Restructuring Agreement, dated July 28, 2008, as amended, and certain other related agreements (hereafter referred to collectively as the “2008 MTA”). The transactions comprising the 2008 MTA closed on August 5, 2008 (the “Closing Date”), except for the transactions comprising the FSA Master Agreement (as defined below), which closed on August 4, 2008. See “Management’s Discusssion and Analysis of Financial Condition and Results of Operations—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information” for a description of the transactions comprising the 2008 MTA and certain summary financial information presenting the effect of the transactions comprising the 2008 MTA on our financial position and results of operations as of and for the year ended December 31, 2008.

During the third quarter of 2008, we recorded further significant adverse development relating to anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS which would have caused Syncora Guarantee to be unable to maintain its compliance with its $65 million minimum policyholders’ surplus requirement under New York Insurance Law as of September 30, 2008. However, at our request, the New York State Insurance Department (the “NYID”), pursuant to section 6903 of New York Insurance Law, granted Syncora Guarantee approval in connection with the preparation of its statutory financial statements for the quarter ended September 30, 2008 to release statutory-basis contingency reserves on policies that have been terminated and on policies on which we have established case basis reserves for losses and loss adjustment expenses, which differs from accounting practices prescribed by the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual and adopted by the State of New York (“NAIC SAP”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Recent Developments” and the Consolidated Financial Statements for more information. As a result of such approval, Syncora Guarantee reported policyholders’ surplus of $83.3 million at September 30, 2008. Absent such approval, Syncora Guarantee would have reported a policyholders’ surplus at September 30, 2008 of $19.1 million. Policyholders’ surplus is based on statutory-basis accounting practices which differ from accounting principles generally accepted in the United States of America (“GAAP”). Such differences may be material. The aforementioned approval was also extended by the NYID in connection with the preparation of Syncora Guarantee’s statutory financial statements as of and for the year ended December 31, 2008.

policyholders’ surplus requirement permits the New York Superintendent of Insurance (the “New York Superintendent”) to seek court appointment as rehabilitator or liquidator of Syncora Guarantee. As a result of this material adverse development, and in accordance with our previously disclosed strategic plan, effective as of March 5, 2009, Syncora Guarantee signed a non-binding letter of intent with certain of the Counterparties (the “Letter of Intent”) whereby the parties agreed to negotiate in good faith to seek to promptly agree on mutually agreeable definitive documentation, in the form of a master transaction agreement and related agreements (hereafter referred to collectively as the “2009 MTA”). In addition, pursuant to the RMBS Transaction Agreement, dated as of March 5, 2009 (the “RMBS Transaction Agreement”), on March 11, 2009, the fund referenced therein (the “Fund”) commenced a tender offer to acquire certain residential mortgage-backed securities that are insured by Syncora Guarantee (the “RMBS Securities”). The 2009 MTA and tender offer represent the principal elements of the second phase of our strategic plan. See “Management’s Discusssion and Analysis of Financial Condition and Results of Operations—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions” for more information.

Ratings Downgrades and Other Actions

Prior to the first quarter of 2008, we had maintained triple-A ratings from Moody’s, Fitch and S&P, and these ratings had been fundamental to our historical business plan and business activities. However, in response to the deteriorating market conditions described above, the rating agencies updated their analyses and evaluations of the financial guarantee insurance industry including us. As a result, our IFS ratings have been downgraded by the rating agencies and the rating agencies have placed our IFS ratings on creditwatch/ratings watch negative or on review for further downgrade. Consequently, we suspended writing substantially all new business in January 2008.

Most recently, on March 9, 2009, Moody’s downgraded to “Ca” from “Caa1” the IFS ratings of Syncora Guarantee and Syncora Guarantee-UK, with the ratings placed on developing outlook, and on January 29, 2009, S&P downgraded to “CC” from “B” the IFS ratings of Syncora Guarantee and Syncora Guarantee-UK, with the ratings placed on negative outlook. Effective August 27, 2008, we terminated the agreement for the provision of ratings with Fitch. Since we have suspended writing substantially all new business, we believe ratings from two agencies are sufficient. This follows numerous downgrades by each of S&P, Moody’s and Fitch since each of them first downgraded our triple-A ratings in the first quarter of 2008.

In addition to the aforementioned downgrades of our IFS ratings, Moody’s, S&P and Fitch have also downgraded our debt and other ratings.

These rating agency actions reflect Moody’s, S&P’s and Fitch’s current assessment of our creditworthiness, business franchise and claims-paying ability. This assessment reflects our direct and indirect exposures to the U.S. residential mortgage market, which has precipitated our weakened financial position and business profile based on increased reserves for losses and loss adjustment expenses, realized and unrealized losses on credit derivatives and modeled capital shortfalls.

Ongoing Strategic Plan

Management is principally focused on: (i) seeking to successfully consummate the 2009 MTA and the tender offer (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions” for more information), (ii) maintaining or enhancing our liquidity, and (iii) remediating troubled credits to minimize claim payments, maximize recoveries and mitigate ultimate expected losses. We currently anticipate that in connection with the 2009 MTA Syncora Guarantee will agree, except in certain limited circumstances, not to recommence writing any new business.

In seeking to reduce exposure to CDS contracts and other guaranteed products and otherwise improve our financial position and liquidity, we may from time to time, directly or indirectly, seek to purchase (on the open market or otherwise) or commute our guaranteed exposures. The amount of exposure reduced and the nature of any such actions will depend on market conditions, pricing levels, our cash position, and other considerations. On March 11, 2009, the Fund commenced a

tender offer to acquire the RMBS Securities insured by Syncora Guarantee. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions.”

Description of Financial Guarantee Insurance and Credit Default Swaps

Financial guarantee insurance provides an unconditional and irrevocable guarantee to the holder of a financial obligation of full and timely payment of the guaranteed principal and interest thereon when due. Financial guarantee insurance enhances the credit quality of a financial obligation by adding another potential source of repayment of principal and interest for an investor, namely the credit quality of the financial guarantor. In addition to enhancing the credit quality of a financial obligation, financial guarantee insurance may also enhance the liquidity of the financial obligation and may reduce the price volatility of such a financial obligation for those investors that mark their portfolio to market. From an issuer’s perspective, all of these benefits can reduce the cost of debt issuance, as the interest rate on debt in the capital markets, all else being equal, is generally lower for debt of higher credit quality, which is generally more liquid and typically trades with less price volatility.

Generally, in the event of any default on an insured financial guarantee obligation, payments made pursuant to the applicable insurance policy may not be accelerated by the holder of the insured obligation without the approval of the insurer. While the holder of such an insured obligation continues to receive guaranteed payments of principal and interest on schedule, as if no default had occurred, and each subsequent purchaser of the obligation generally receives the benefit of such guarantee, the insurer normally retains the option to pay the obligation in full at any time. Also, the insurer generally has recourse against the issuer of the defaulted obligation and/or any related collateral for amounts paid under the terms of the insurance policy as well as pursuant to general rights of subrogation.

The issuer of an insured obligation generally pays the premium for financial guarantee insurance, either in full at the inception of the policy, as is the case in most public finance transactions, or in periodic installments funded by the cash flow generated by related pledged collateral, as is the case in most structured finance and international transactions. Typically, premium rates paid by an issuer are stated as a percentage of the total principal (in the case of structured finance and international transactions) or principal and interest (in the case of public finance transactions) of the insured obligation.

The establishment of a premium rate for a financial guarantee insurance policy for a transaction is determined by some or all of the following factors:

•

issuer-related factors, such as the credit strength of the issuer and its sources of income;

•

obligation-related factors, such as the type of an issue, the type and amount of collateral pledged, applicable revenue sources and amounts therefrom, governing restrictive covenants, rating agency capital charges and maturity; and

•

insurer and market-related factors, such as competition, if any, from other credit enhancement providers, investor demand for a certain bond insurer’s guarantee (driven, in part, by such insurer’s IFS rating) investor demand for bond insurance and the credit spreads in the market available to pay premiums.

Premiums are almost always non-refundable and are invested upon receipt.

In addition to financial guarantee insurance products described above, we have also provided customers credit enhancement products in the form of insurance for CDS contracts. CDS contracts provide credit protection relating to a particular security or pools of specified securities. Under the terms of a CDS contract, the seller of credit protection makes a specified payment to the buyer of credit protection upon the occurrence of one or more specified credit events with respect to a referenced security. CDS contracts typically provide protection to one beneficiary rather than a class of investors. Syncora Guarantee has provided its protection on CDS contracts through the establishment of common law trusts. For each transaction, Syncora Guarantee issued a financial guarantee policy guaranteeing the obligations of a particular common law trust formed by us, which

in turn entered into a CDS contract with the beneficiary with respect to a specified reference obligation, typically a pooled debt obligation, or CDO, a security backed by consumer assets such as mortgages, credit cards or student loans, a utility or municipal obligation or a security which has already been enhanced with a financial guarantee from another monoline bond insurance company. In accordance with GAAP, the Company is required to reflect in its results of operations gains or losses resulting from changes in the fair value of CDS contracts insured by Syncora Guarantee. For further description of the mark-to-market process and risks resulting from providing insurance for CDS contracts as compared to traditional financial guarantee insurance, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Valuation of Credit Default Swaps.”

Description of Financial Guarantee Reinsurance

Financial guarantee reinsurance indemnifies a primary insurance company against part or all of the loss that it may sustain under a policy that it has issued. A financial guarantee reinsurer may itself purchase reinsurance, referred to as “retrocessions,” from other reinsurers, thereby ceding a portion of its exposure to risks that have been ceded to it.

Reinsurance provides an important benefit to ceding companies by, among other benefits, allowing such companies to write greater single risks and greater aggregate risks than would otherwise be permitted under the risk limits and capital requirements applicable to the ceding company, including state insurance laws and rating agency guidelines. U.S. state insurance regulators generally allow ceding companies to record a credit for reinsurance as an asset or as a reduction from liabilities to the extent that they obtain such reinsurance from licensed reinsurers or, subject to certain requirements (including the provision of letters of credit or other security) from unlicensed, typically offshore reinsurers. Similarly, rating agencies generally take into account liability ceded under reinsurance agreements when calculating an insurer’s exposure, with the amount of credit accorded to such reinsurance based on the IFS rating and, in the case of one rating agency, the financial enhancement rating, of the relevant reinsurer.

Our Products

We have historically offered our clients financial guarantee insurance policies and CDS contracts. In addition, we historically have offered reinsurance of financial guarantee policies and CDS contracts issued by other monoline financial guarantee insurance companies. As discussed above (see “—Overview—Recent Developments”), we ceased writing substantially all new business in January of 2008.

Information About Our Operating Segments

For management and reporting purposes, prior to the 2008 MTA and the merger of Syncora Guarantee Re with and into Syncora Guarantee, our business was organized into two operating segments: our financial guarantee insurance segment and our financial guarantee reinsurance segment. Subsequent to the aforementioned merger, we manage our business in one operating segment.

In-Force Guarantees of Financial Guarantee Insurance Policies and CDS Contracts

Set forth below is certain historical information regarding our in-force guarantees of financial guarantee insurance policies and CDS contracts.

U.S. Public Finance—U.S. public finance obligations consist primarily of debt obligations issued by or on behalf of states or their political subdivisions (counties, cities, towns and villages, utility districts, public universities and hospitals, public housing and transportation authorities), other public and quasi-public entities (including non-U.S. sovereigns and subdivisions thereof) and private universities and hospitals. These obligations generally are supported by the taxing authority of the issuer, the issuer’s or underlying obligor’s ability to collect fees or assessments for certain projects or public services or revenues from operations. This market also includes project finance obligations, as well as other structured obligations supporting infrastructure and other public works projects, where

the underlying credit obligation is from a public source, such as a government or agency. See also “—Financial Guarantee In-Force Business” for additional information regarding the nature of debt obligations comprising the U.S. public finance market. We participated in most segments of the U.S. public finance market. As of December 31, 2008, $52.4 billion, or 39.2%, of our guaranteed net par outstanding represented insurance of public finance obligations.

U.S. Structured Finance—We define U.S. structured finance obligations as those debt obligations issued in the U.S., or consisting of predominantly U.S. assets, which are not public finance obligations. This includes CDOs, which are largely non-public transactions; financings for investor-owned utilities; financings for privately owned or leased infrastructure; asset-backed securities (“ABS”), which constitute the largest market of publicly offered (including Rule 144A) structured finance obligations and various other types of structured transactions. ABS are generally backed by pools of assets, such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. These pools of assets are generally held by a special purpose issuing entity which issues securities that may be guaranteed by a financial guarantor. ABS and CDO obligations can be “funded” or “synthetic.” Funded structured finance obligations generally have the benefit of one or more forms of credit enhancement, such as over-collateralization and excess cash flow, to reduce credit risks associated with the related assets. Financial guarantors’ participation in synthetic structured finance obligations generally take the form of CDS contracts that reference pools of assets, securities or loans, with a defined deductible to reduce credit risks associated with the referenced assets, securities or loans. See also “—Financial Guarantee In-Force Business” for additional information regarding the nature of debt obligations comprising the U.S. structured finance market. Prior to 2008, we were an active participant in the U.S. structured finance market, particularly in ABS and CDOs. As of December 31, 2008, $12.8 billion, or 9.5%, of our guaranteed net par outstanding, represented insurance of ABS (largely securities backed by pools of mortgages and automotive loans) and $38.7 billion, or 29.0%, of our guaranteed net par outstanding, represented insurance of CDOs. We have also provided guarantees and CDS contracts on a variety of other synthetic and funded obligations in the U.S. structured finance market, most notably guarantees of debt of investor owned utilities, obligations which already benefit from a financial guarantee from another bond insurance company, debt of privately owned or leased infrastructure assets and, through our bank deposit program, excess deposit insurance for the obligations of certain rated U.S. banks.

International Finance—International finance principally involves: (i) international public finance and structured securities, including ABS and CDOs (both funded and synthetic), (ii) investor-owned utilities in areas where the regulatory framework is supportive and (iii) public/private partnership transactions. A number of countries have established regulatory regimes for the sale of public assets to the private sector. These programs are known generally as public/private partnerships (“PPPs”) and provide a mechanism for funding major capital investments in public infrastructure. A PPP program will typically provide for a government entity to pay fees to a concessionaire in consideration for operating and maintaining an infrastructure asset. Over the last decade PPP programs have been the largest source of international business for financial guarantee companies.

The most significant portion of our international business had been guaranteeing the debt of essential public infrastructure and transportation projects, often under PPP programs, as well as debt of utilities located in jurisdictions with strong regulatory regimes, such as the U.K., Australia and New Zealand. We also were active in guaranteeing both synthetic and funded CDOs and ABS with assets located outside the U.S. We insured international public finance obligations, particularly structured transactions, as well as future flow securities, which are funded transactions generally in emerging market countries structured to minimize the related sovereign risk by utilizing cash flows generated from outside the relevant country to repay the debt we guarantee. Our international business comprises $23.2 billion, or 17.3%, of our guaranteed net par outstanding at December 31, 2008, with the largest concentration in the U.K. with $10.6 billion, or 7.9%, of our guaranteed net par outstanding. As of December 31, 2008, $9.1 billion, or 6.8%, of our guaranteed net par outstanding represented insurance of debt backed by essential public infrastructure and transportation projects located outside the U.S.; $6.7 billion, or 5.0%, of our guaranteed net par outstanding represented insurance of debt of utilities outside of the U.S.; and $7.4 billion, or 5.5%,

of our guaranteed net par outstanding represented insurance of other obligations originated either completely or predominately outside of the U.S. See “—Financial Guarantee In-Force Business—Financial Guarantee In-Force Business by Geographic Area” for a breakdown of our international exposures.

In-Force Reinsurance of Financial Guarantee Insurance Policies and CDS Contracts

Set forth below is certain historical information regarding our in-force reinsurance of financial guarantee insurance policies and CDS contracts issued by other financial guarantee companies.

The following table sets forth our net reinsured par outstanding by source as of December 31, 2008, 2007 and 2006:


(in millions, except percentages)	As of December 31,
	2008					2007					2006
FSA		$	3,860	73.7	%		$	7,532	75.1	%		$	6,545	71.5	%
Other primary insurance companies			777	14.8				1,744	17.4				1,873	20.5
XLI⁽¹⁾			600	11.5				748	7.5				730	8.0

Total		$	5,237	100.0	%		$	10,024	100.0	%		$	9,148	100.0	%

⁽¹⁾

Includes transactions where we have guaranteed obligations of XLI, a wholly owned subsidiary of XL Capital, to a client of XLI that originally required a triple-A-rated guarantee in addition to the lower-rated guarantee provided by XLI.

Financial Guarantee In-Force Business

Financial guarantee portfolio by product line

The following table sets forth our guaranteed net par outstanding by product line as of December 31, 2008, 2007 and 2006:

(in millions)

As of December 31,

2008

2007

2006

U.S. Public Finance

Direct

51,605

66,756

46,106

Reinsurance

806

2,572

2,140

Total Public Finance

52,411

69,328

48,246

U.S. Structured Finance

Direct

57,474

68,749

48,905

Reinsurance

658

1,312

2,003

Total Structured Finance

58,132

70,061

50,908

International Finance

Direct

19,418

19,483

13,853

Reinsurance

3,773

6,140

5,005

Total International Finance.

23,191

25,623

18,858

Total net par outstanding

133,734

165,012

118,012

Financial guarantee portfolio by size of underlying policies and contracts

The following table sets forth our guaranteed net par outstanding as of December 31, 2008 by size of underlying policies and contracts (multiple policies written for the same issuer have not been aggregated):


(in millions, except policies and percentages)	Number of Policies		Percent of Total
Net Par Exposure:
$0 – $24		3,614		81.0	%
$25 – $49		306		6.8
$50 – $74		111		2.5
$75 – $99		86		1.9
$100 – $199		181		4.1
$200 – $299		83		1.9
$300 – $399		31		0.7
$400 – $499		19		0.4
$500 – $599		11		0.2
$600 – $699		8		0.2
$700 – $799		5		0.1
$800 – $899		3		0.1
$900 – $999		1		0.0
≥$1,000		4		0.1

Total		4,463		100.0	%

Financial guarantee portfolio by type of obligation and information regarding concentrations of exposure

U.S. Public finance obligations. We provided guarantees of the payment of principal and interest on a number of different types of public finance obligations. As of December 31, 2008, U.S. public finance obligations made up 39.2% of our total net par outstanding. These obligations include the following:

General obligation and appropriation—General obligation bonds are supported by the full faith and credit of the obligated government entity and legally require taxes or other revenues to be raised as needed to repay debt. Also included are certain lease revenue bonds that are general fund obligations of a municipality or other governmental authority, which are subject to annual appropriation or abatement. Projects that are financed by such bonds ordinarily include real estate or equipment serving an essential public purpose. Bonds in this category also include moral obligation bonds issued by municipalities or governmental authorities, which are backed by the pledge, as opposed to the legal obligation, of a state government to appropriate funds in the event of a default thereunder.

Utilities—These include the obligations of every type of municipal utility and include electric, water and sewer utilities and resource recovery revenue bonds. Issuing utilities may be organized in various forms, including municipal enterprise systems, authorities or joint-action agencies.

Transportation—These include obligations relating to airports, bridges, parking, mass transit systems and ports as well as publicly owned toll roads located in the United States and related revenue bonds.

Non-ad valorem—These are obligations that are backed by specific revenue streams, such as those provided by receipts of sales tax, gas and motor vehicle registration tax, excise tax, hotel/motel tax or other types of taxes.

Higher education—These are obligations of private institutions of higher education.

Other—These obligations include obligations that provide funding for public housing; certain privatized properties that involve public sector tenants or are otherwise wholly or partially supported by public funding, including by the issuance of tax-exempt debt; and other forms of revenue secured bonds.

The following table sets forth our U.S. public finance guaranteed net par outstanding by type of obligation as of December 31, 2008, 2007 and 2006:


(in millions)	As of December 31,
	2008			2007			2006
General obligation & appropriation		$	28,985		$	33,274		$	21,161
Utilities			7,140			12,360			9,232
Non-ad valorem			4,956			6,774			5,349
Transportation			3,904			6,922			6,330
Higher education			3,830			6,579			5,071
Other			3,596			3,419			1,103

Total net par outstanding		$	52,411		$	69,328		$	48,246

The table below sets forth our five largest financial guarantee U.S. public finance guaranteed exposures by type and by net par outstanding as a percentage of our total net par outstanding as of December 31, 2008 (multiple policies written for the same issuer have been aggregated):


(in millions, except percentages)	Net Par Outstanding			Percent of Total Net Par Outstanding			S&P Rating
Utilities		$	1,017		0.8	%	D
General obligation			983		0.7		A+
General obligation			900		0.7		AA
General obligation			850		0.6		AAA
General obligation			810		0.6		AA

Total of five largest exposures		$	4,560		3.4	%

The following table sets forth the ten states to which we have the most guaranteed exposure for U.S. public finance transactions as of December 31, 2008:


(in billions, except percentages)	Net Par Outstanding⁽¹⁾			Percent of Total Public Finance Net Par Outstanding
California		$	8.0		15.3	%
New York			4.0		7.6
Texas			3.6		6.9
Illinois			3.4		6.5
Pennsylvania.			2.8		5.3
Alabama			2.5		4.8
Florida			2.3		4.4
New Jersey			2.0		3.8
Massachusetts.			1.6		3.1
Colorado.			1.4		2.7

Total of ten largest state exposures		$	31.6		60.2	%

⁽¹⁾

Includes U.S. public finance policies only.

U.S. Structured finance obligations. We provided guarantees of the payment of principal and interest on a number of different types of structured finance obligations. As of December 31, 2008, U.S. structured finance obligations made up 43.5% of our total net par outstanding. For the U.S. structured finance transactions, these obligations are divided into Pooled Debt Obligations, Consumer ABS, Financial Products, Power & Utilities, Commercial ABS, and Other, which constitute U.S. transactions that are non-public finance transactions and which do not fall into one of the other U.S. structured finance categories listed above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Exposure to Residential Mortgage Market.”

Pooled debt obligations—These include both synthetic and cash flow CDOs with underlying collateral generally consisting of corporate debt securities, RMBS, commercial mortgage-backed securities (“CMBS”), other ABS, and other CDOs. The collateral is generally pooled and held

by a special purpose entity which then issues multiple tranches of debt. These tranches of debt had ratings at inception ranging from triple-A and higher down to layers of risk that are rated triple-B and lower. Historically, we generally guaranteed the most senior, or risk remote, tranches of debt, in most cases rated at least triple-A or “super-senior” at the time of issuance. “Super-senior” means the collateral backing the tranche of debt we guaranteed is in excess of the amount needed to obtain a triple-A rating. In certain transactions, the tranche of debt we guaranteed, though super-senior, was not the most senior tranche of debt issued by the relevant CDO entity. As of December 31, 2008, approximately 33.3% of the pooled debt obligations guaranteed by us represented ABS CDOs with underlying collateral primarily consisting of prime, midprime and subprime RMBS. As a result of the dramatic increase in the rate of delinquencies and defaults on the underlying mortgage obligations backing these RMBS bonds beginning in the fourth quarter of 2007 and continuing through 2008, our internal ratings for the vast majority of our ABS CDO transactions have declined significantly below the initial triple-A level, in most cases to below investment grade, and with respect to most ABS CDOs we anticipate incurring claims (in some cases substantial) in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Exposure to Residential Mortgage Market” for further discussions of the losses expected to arise from our portfolio of pooled debt obligations.

Consumer ABS—These include the following obligations: consumer mortgages, automotive loans and leases, credit cards and student loans. The Company did not have any insured credit card exposure as of December 31, 2008.

Consumer mortgages—These include obligations backed by prime, Alt-A and subprime first and second lien home mortgages and home equity loans and lines of credit. Credit support is provided by the cash flows generated by the underlying obligations, as well as by the value of the property being financed, and in certain cases, reserve funds. As a result of the dramatic increase in the rate of delinquencies and defaults on the underlying mortgage obligations backing these securities in the fourth quarter of 2007 and through 2008, our internal ratings for many of the securities has declined significantly below their initial levels, in several cases to below investment grade, and we have set aside reserves for losses we expect to incur. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Exposure to Residential Mortgage Market” for further discussions of the losses expected to arise from our portfolio of ABS bonds that are backed by home equity lines of credit (“HELOC”), Alt-A and closed end second (“CES”)-backed mortgage securities.

Automotive loans—These include obligations backed by prime, near-prime and subprime pools of consumer auto loans. Credit support is generally provided by the cash flows generated by the underlying obligations, as well as by the value of the automobiles being financed, and in certain cases, reserve funds.

Credit cards—These include obligations backed by prime and non-prime consumer credit card programs. Credit support is provided by the cash flows generated by the underlying obligations, and in certain cases, reserve funds.

Student loans—These include obligations backed by private student loans. Credit support is generally provided by cash flows generated by the underlying obligations and in certain cases reserve funds and overcollateralization. Delinquencies and defaults have been historically linked to unemployment and income. If certain economic factors continue to deteriorate, we expect the performance of these obligations to continue to deteriorate.

Financial Products—These include the following obligations: financial products/insurance and bank deposit insurance.

Financial/insurance—These primarily involve closed block and embedded value life insurance transactions, as well as certain other structured transactions where the ultimate risk is to a financing or insurance company but is not a Consumer ABS or Commercial ABS transaction.

Bank deposit insurance—These include bank deposits with maturities of generally less than one year. The primary purpose of these obligations is to provide bank deposit insurance to municipal customers and other customers who, by law or regulation, cannot maintain deposits at deposit taking financial institutions unless separate insurance is arranged for deposit amounts in excess of that insured by the Federal Deposit Insurance Corporation.

Power & Utilities—These include obligations backed by investor-owned electric and gas utilities, oil and gas pipelines and gas distribution systems. This category also includes structured transactions involving the electric and gas utility industry, including project financings.

Commercial ABS—These include obligations backed by a variety of commercial exposures, including dealer floor plan financing, intellectual property, franchises and small business loans. Commercial ABS obligations also include debt backed by fleets of rental cars, which are often, but not always, supported by buy-back guarantees from the relevant car manufacturers. Credit support is provided by the cash flows generated by the underlying obligations, as well as by the value of the property or equipment being financed and, in certain cases, reserve funds.

Other structured finance—Other structured finance exposures in our portfolio include bonds or other securities backed by assets that generally do not fall into one of the five categories described above, including equipment loans and leases, enhanced equipment trust certificates and trade receivables. This category also includes debt of privately owned or leased infrastructure located within the U.S.

The following table sets forth our U.S. structured finance guaranteed net par outstanding and reserves for losses and loss adjustment expenses (“LAE”) by type as of December 31, 2008, 2007 and 2006:

(in millions)

As of December 31,

2008

2007

2006

Net Par
Outstanding

Net Reserves
for Losses
and LAE

Net Par
Outstanding

Net Reserves
for Losses
and LAE

Net Par
Outstanding

Net Reserves
for Losses
and LAE

Pooled Debt Obligations

38,727

26.8

41,507

651.5

23,480

1.6

Consumer ABS

10,246

1,557.9

12,833

37.2

10,240

3.3

Financial Product

946

—

6,332

—

6,070

—

Power & Utilities

4,749

41.3

5,653

8.7

5,184

8.7

Commercial ABS

2,520

—

2,648

—

2,674

—

Other

944

—

1,088

—

3,260

—

Total.

58,132

1,626.0

70,061

697.4

50,908

13.6

The table below sets forth our five largest U.S. structured finance guaranteed exposures by net par outstanding as a percentage of our total net par outstanding as of December 31, 2008 (multiple policies written for the same issuer have been aggregated):


(in billions, except percentages)	Net Par Outstanding			Percent of Total Net Par Outstanding			Type of CDO		S&P Rating
Pooled Debt Obligation		$	1.8		1.3	%		High Grade ABS CDO	CCC
Pooled Debt Obligation			1.3		1.0			High Grade ABS CDO	CCC
Pooled Debt Obligation			1.3		1.0			High Grade ABS CDO	B-
Pooled Debt Obligation			1.3		1.0			High Grade ABS CDO	AA/CC⁽¹⁾
Pooled Debt Obligation			1.2		0.9			High Grade ABS CDO	BB+/B-⁽²⁾

Total of five largest exposures		$	6.9		5.2	%

⁽¹⁾

$616 million of this exposure is rated “AA” and $645 million of this exposure is rated “CC.”

⁽²⁾

$1.1 billion of this exposure is rated “BB+” and $71.5 million of this exposure is rated “B-.”

The following table sets forth our five largest aggregate ABS seller servicer concentrations by net par outstanding as of December 31, 2008:


(in billions, except percentages)	Net Par Outstanding			Percent of Total Net Par Outstanding			S&P Rating⁽¹⁾
Countrywide Home Loans, Inc.		$	2.6		1.9	%	A+
EMC Mortgage Corporation			1.5		1.1		A+
Residential Capital LLC (f/k/a GMAC Mortgage)			1.2		0.9		CCC
IndyMac Bank FSB			0.9		0.7		D
AmeriCredit Financial Services Inc.			0.6		0.5		B+

Total of five largest seller servicers		$	6.8		5.1	%

⁽¹⁾

S&P Rating of ultimate parent of seller servicer.

International Finance—We provided guarantees of the payment of principal and interest on a number of different types of international finance obligations. As of December 31, 2008, international finance obligations made up 17.3% of our total net par outstanding. Our international transactions are divided into eight categories: Power & Utilities; Infrastructure; Transportation; Pooled Debt Obligations; Future Flow; Financial Products; Consumer ABS; and Other.

Power & Utilities—These generally are obligations of privately and publicly owned regulated water, gas and electric utilities located outside of the U.S., primarily in the U.K., Australia and New Zealand. This also includes structured transactions involving power and energy.

Infrastructure—These consist of essential public infrastructure such as schools, hospitals and government buildings which in most cases are being designed, built, operated and financed under a PPP project finance scheme. The majority of our infrastructure guarantees are of obligations originated in the U.K., though we have also guaranteed Infrastructure projects in Canada, Australia and Spain.

Transportation—These are generally international obligations relating to toll roads, airports, bridges, mass transit and parking facilities.

Pooled Debt Obligations—These consist of CDOs, in synthetic or funded form, where the collateral is primarily or substantially originated outside of the U.S. The liabilities for international Pooled Debt Obligations guaranteed by Syncora Guarantee are generally denominated in currencies other than U.S. dollars. Most international CDOs are collateralized loan obligations where the majority of underlying loans constituting the collateral are made to companies located outside of the U.S.

Future Flow—These are obligations backed by hard currency funds, usually generated by overseas entities that flow through offshore trust accounts to service the debt of companies located in emerging markets. These hard currency funds relate to the sale of certain commodity products, such as oil or iron ore, or hard currency credit card remittances or bank wire transfer payments. The funds backing the guaranteed future flow transaction are remitted directly to the offshore trust account instead of to the emerging market company which has sold the relevant goods or services for which hard currency payment is being made. With the support of liquidity facilities, debt service reserves and other forms of credit support, these transactions are often able to “pierce the sovereign ceiling” such that a particular obligation can obtain a higher rating than that assigned to the foreign debt obligations of the country in which an emerging market company resides.

Financial Products—These consist of other financial products where the underlying assets are located substantially outside of the U.S. or where the obligation guaranteed is denominated in a currency other than U.S. Dollars.

Consumer ABS—These include obligations backed by prime and subprime first lien home mortgages. Credit support is provided by cash flows generated by the underlying obligations, and in certain cases, reserve funds and overcollateralization.

Other—Other international finance exposures in our portfolio include bonds or other securities backed by assets that generally do not fall into one of the six categories described above and other types of generally international obligations, including international public finance transactions.

The following table sets forth our international finance guaranteed net par outstanding by type as of December 31, 2008, 2007 and 2006:

(in billions)

As of December 31,

2008

2007

2006

Power & Utilities

6.7

7.0

4.7

Transportation

6.3

5.0

2.9

Pooled Debt Obligations

3.9

4.0

1.7

Infrastructure

2.8

3.3

3.9

Future Flow

1.5

1.9

1.7

Financial Products

0.9

1.4

0.9

Consumer ABS

0.1

1.1

0.5

Other

1.0

1.9

2.6

Total net par outstanding.

23.2

25.6

18.9

The table below shows our five largest international finance guaranteed exposures by type and by net par outstanding as a percentage of our total net par outstanding as of December 31, 2008 (multiple policies written for the same issuer have been aggregated):


(in billions, except percentages)	Net Par Outstanding			Percent of Total Net Par Outstanding			S&P Rating
Transportation		$	1.4		1.1	%	AAA/AA/BBB⁽¹⁾
Power & Utilities			1.2		0.9		BBB
Power & Utilities			0.9		0.6		AAA/BBB+⁽²⁾
Transportation			0.8		0.6		BBB+/BBB-⁽³⁾
Pooled Debt Obligations			0.7		0.5		AAA

Total of five largest exposures		$	5.0		3.7	%

⁽¹⁾

$379.0 million of this exposure is rated “AAA,” $464.0 million of this exposure is rated “AA” and $565.0 million of this exposure is rated “BBB.”

⁽²⁾

$309.0 million of this exposure is rated “AAA” and $541.0 million of this exposure is rated “BBB+.”

⁽³⁾

$759 million of this exposure is rated “BBB+” and $35 million of this exposure is rated “BBB-.”

Financial Guarantee In-Force Business by S&P Rating

The following table sets forth our financial guarantee in-force business by S&P rating category as of December 31, 2008 and 2007:


(in billions, except percentages)	Net Par Outstanding December 31, 2008			Percent of Total Net Par Outstanding			Net Par Outstanding December 31, 2007			Percent of Total Net Par Outstanding
S&P Rating Category⁽¹⁾:
AAA		$	38.9		29.1	%		$	68.4		41.5	%
AA			18.1		13.5				24.5		14.8
A			32.6		24.4				41.0		24.8
BBB			23.0		17.2				30.0		18.2
Below investment grade			21.1		15.8				1.1		0.7

Total		$	133.7		100.0	%		$	165.0		100.0	%

⁽¹⁾

If unrated by S&P, an internal assessment of underlying credit quality is used to assign a rating category for purposes of this table and calculation of the weighted average S&P rating. At December 31, 2008 and 2007, the weighted average S&P credit rating of the obligations that we guarantee was “A+” and “AA-”, respectively.

Pre-Insured In-Force Financial Guarantee Exposure by Insurer

The following table sets forth our pre-insured guaranteed in-force business by guarantor as of December 31, 2008:

Guarantor

Net Par
Outstanding

Weighted Average
Underlying Rating(1)

(in billions)

MBIA Inc.

3.8

AAA/AA+

Financial Security Assurance Inc.

2.1

AAA

Ambac Financial Group, Inc.

2.0

Financial Guaranty Insurance Company

1.3

CIFG Holding

0.2

BBB

Radian Group Inc

0.0

BBB+

Total

9.4

⁽¹⁾

The weighted average rating of the underlying insured transaction is based upon the rating of S&P or Moody’s when available and our internal estimate of the rating when there is no public rating available.

Financial Guarantee In-Force Business by Geographic Area

The following table sets forth the geographic distribution of our guaranteed net par exposure as of December 31, 2008 and 2007:


(in millions, except percentages)	Net Par Outstanding December 31, 2008			Percent of Total Net Par Outstanding			Net Par Outstanding December 31, 2007			Percent of Total Net Par Outstanding
United States⁽¹⁾		$	110,545		82.7	%		$	139,389		84.5	%
United Kingdom			10,576		7.9				11,182		6.8
Australia			2,212		1.7				2,048		1.2
Ireland.			1,800		1.3				2,067		1.3
Spain			1,168		0.9				859		0.5
Turkey			1,109		0.8				1,054		0.6
Chile			911		0.7				989		0.6
Netherlands.			749		0.6				753		0.5
Multi-jurisdictional⁽²⁾			706		0.5				865		0.5
New Zealand			660		0.5				755		0.5
France			618		0.5				1,329		0.8
Canada			580		0.4				768		0.5
Norway			442		0.3				137		0.1
Portugal			345		0.3				283		0.2
Italy			279		0.2				669		0.4
Luxembourg			264		0.2				269		0.2
Mexico			259		0.2				455		0.3
Brazil			237		0.2				247		0.1
Qatar			100		0.1				96		0.0
Egypt.			83		0.0				135		0.1
Panama			67		0.0				87		0.0
El Salvador			24		0.0				122		0.1
Japan			—		0.0				286		0.2
Jamaica			—		0.0				161		0.0
Costa Rica			—		0.0				7		0.0

Total⁽¹⁾		$	133,734		100.0	%		$	165,012		100.0	%

⁽¹⁾

At December 31, 2008 and 2007, $1,089.0 million and $1,064.5 million, respectively, represented exposures in the Commonwealth of Puerto Rico, which constitutes approximately 1.0% of each of United States and total exposure at such dates, respectively.

⁽²⁾

Involves exposure to at least two international jurisdictions.

Information with Regard to Business Conducted in Non-U.S. Dollar Denominated Currencies

We primarily conducted our business in the United States. However, some of our clients are companies located in Europe, including the U.K., as well as Latin America, Australia and New Zealand. For the years ended December 31, 2008, 2007 and 2006, gross premiums written in currencies other than U.S. dollars were $35.3 million, $84.4 million and $7.3 million, respectively. For the years ended December 31, 2008, 2007 and 2006, reinsurance premiums assumed in currencies other than U.S. dollars were $2.3 million, $0 and $2.1 million, respectively. As of December 31, 2008, the aggregate net par outstanding of all exposures not denominated in U.S. dollars was 15.2% of our total net par outstanding. See “Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Fluctuation.”

Risk Management

Our risk management personnel are responsible for the surveillance of transactions in our in-force business management and claims administration. Tailored surveillance strategies have been developed for each type of exposure, depending upon the credit risk inherent in the exposure, with a view to determining credit trends in the insured book and making recommendations on portfolio management and risk mitigation strategies, to the extent appropriate, including enforcing rights and remedies provided to us under our insurance policy and transactional documents.

While more difficult in the recent market environment, we may also seek to mitigate the risk inherent in our exposures through the purchase of third-party reinsurance or retrocessions, and may also from time to time purchase derivative contracts to alleviate all or a portion of this risk.

Direct Businesses

We conduct procedures to closely track risk aggregations and monitor performance of each risk. For municipal risk, we have review schedules for each credit dependent on the underlying rating of the credit and the revenue type. Credits perceived to have greater risk profiles are reviewed more frequently than other credits or classes of credits which historically have had few defaults. In the event of credit deterioration of a particular exposure, we review the credit more frequently and take remedial action as permitted by the terms of the transaction.

For structured securities, we generally collect data, often monthly or quarterly, and compare actual default and delinquency statistics to those generated by our models. To the extent that a transaction is performing materially below expectations, we seek to take steps to mitigate the potential for loss. Such steps may include conducting loan put back reviews, demanding repurchase of loans for breaches of representations and warranties, meetings with servicers, re-evaluation of loan files and, in the most extreme cases, removal or replacement of the servicer.

We have created computerized data models to track performance of certain other large direct business lines including CDOs and credit derivatives on corporate debt. These systems incorporate risk tracking tools such as credit spreads and ratings which are obtained from third parties and incorporated into computerized risk tracking systems.

Reinsurance Businesses

Our risk management personnel take steps to help ensure that the primary insurer is managing risk pursuant to the terms of the applicable reinsurance agreement. To this end, we may conduct periodic reviews of ceding companies. We may conduct additional surveillance reviews during the year, at which time underwriting, surveillance and/or claim files of the ceding company may be reviewed.

Credit Monitoring

Our surveillance department is responsible for monitoring the performance of our in-force portfolio. They maintain a list of credits that they have determined need to be closely monitored and, for certain of those credits, they undertake remediation activities they determine to be appropriate in order to mitigate the likelihood and/or amount of any loss that we could incur with respect to such credits.

Our surveillance department focuses its review on monitoring the lower rated bond sectors and potentially troubled sectors, which have included RMBS, CMBS, CDOs and CLOs. It tracks performance monthly to try to ensure that covenants have not been breached. Once a covenant is breached we may have the right to put the transaction into rapid amortization so that all cash flow generated from that transaction is used to pay down principal and stay current with interest. Typically, we periodically review servicing and trustee reports to help track coverage levels, enhancement levels, delinquency levels, loss frequency, loss severity and total losses and compare these performance metrics with the metrics that were made available at the time the transaction was closed. If losses are above projections we will analyze the reasons for the deviation. In some cases it may be an indication of servicing problems where loans are delinquent and are not put into foreclosure in time to maximize recovery. Typically, once per year we review servicers of loans and other assets supporting our insured obligations to better understand their servicing practices and to identify potential servicing problems, if any. Management believes that this is an important safeguard, as servicers are required to indemnify us against failure to adhere to the servicing standards set forth in the servicing agreements.

Our surveillance department also analyzes whether a claim on our policy is probable. In some cases, we will engage an outside consultant with appropriate expertise in the underlying collateral assets and respective industries to assist management in examining the underlying collateral and determining the projected loss frequency and loss severity. In such case, we will use that information to run a cash flow model which includes enhancement levels and debt service to determine whether a claim is probable, possible or not likely.

The activities of our surveillance department are integral to the identification of specific credits that have experienced deterioration in credit quality and the assessment of whether losses on such credits are probable, as well as any estimation of the amount of loss expected to be incurred with respect to such credits. Closely monitored credits are divided into four categories: (i) Special Monitoring List—low investment grade credits where a material covenant or trigger may be breached and closer monitoring is warranted; (ii) Yellow Flag List—credits that we determine to be non-investment grade but a loss is unlikely, including credits where claims may have been paid or may be paid but reimbursement is likely; (iii) Red Flag List—credits where a loss is possible but not probable or reasonably estimable, including credits where claims may have been paid or may be paid but full recovery is in doubt; and (iv) Loss List—credits where a loss is probable and reasonably estimable. Credits that are not closely monitored credits are considered to be fundamentally sound, normal risk.

Our management establishes reserves for losses and loss adjustment expenses following consultation with our Loss Reserve Committee, which is comprised of senior members of management, including senior management of our surveillance department. See “—Risk Management” for further definition and discussion of credits designated as closely monitored credits. Both qualitative and quantitative factors are used in establishing such reserves. In determining the reserves, management considers all factors in the aggregate, and does not attribute the reserve provisions or any portion thereof to any specific factor. See “Management’s Discussion and Analysis

of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Reserves for Losses and Loss Adjustment Expenses” for further information regarding our reserves for losses and loss adjustment expenses.

The following table presents our in-force guaranteed net par outstanding by internal credit monitoring category as of December 31, 2008 and 2007:


(in billions, except percentages)	As of December 31, 2008						As of December 31, 2007
	Net Par Outstanding			Percent of Net Par Outstanding			Net Par Outstanding			Percent of Net Par Outstanding
Fundamentally sound, normal risk		$	101.1		75.6	%		$	145.2		88.0	%
Closely monitored credits:
Special monitoring			11.0		8.2				4.5		2.7
Yellow flag			1.0		0.8				2.4		1.4
Red flag			0.8		0.6				2.6		1.6
Loss list			19.8		14.8				10.3		6.3

Subtotal			32.6		24.4				19.8		12.0

Total		$	133.7		100.0	%		$	165.0		100.0	%

Investments

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Valuation of Investments” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investments” for information regarding our investments.

Ratings

The major rating agencies have developed and published rating guidelines for rating financial guarantee insurers and reinsurers. The IFS ratings assigned by S&P, Moody’s and Fitch are based upon factors relevant to policyholders and are not directed toward the protection of investors in our common or preferred shares. The rating criteria used by the rating agencies in establishing these ratings include consideration of the sufficiency of capital resources to meet projected losses and growth (as well as access to such additional capital as may be necessary to continue to meet applicable capital adequacy standards), a company’s overall financial strength, business plan and strategy, and demonstrated management expertise in financial guarantee and traditional reinsurance, credit analysis, systems development, marketing, capital markets and investment operations. See “—Overview—Ratings Downgrades and Other Actions”.

As of March 9, 2009, our insurance subsidiaries have been assigned the following IFS ratings:

Moody’s⁽¹⁾

S&P⁽²⁾

Syncora Guarantee

Syncora Guarantee-UK

⁽¹⁾

On March 9, 2009, Moody’s downgraded Syncora Guarantee’s IFS rating to “Ca (Developing Outlook)”. According to Moody’s, insurance companies rated “Ca” offer extremely poor financial security. Such companies are often in default on their policyholder obligations or have other marked shortcomings. The “Ca” rating is the second lowest-rated class of ratings issued by Moody’s, with the lowest class (or “C”) rating representing insurance companies regarded as having extremely poor prospects of ever offering financial security. Moody’s “Developing Outlook” qualification reflects the possibility of both positive and negative pressures on the Company’s financial strength ratings.

⁽²⁾

On January 29, 2009 S&P downgraded Syncora Guarantee’s IFS rating to “CC (Outlook Negative)”. According to S&P, an insurer rated “CC” has extremely weak financial security characteristics and is likely not to meet some of its financial commitments. This rating category is the lowest rating category outside of the “R” rating which is ascribed to companies under regulatory supervision. S&P’s “Negative Outlook” qualification reflects the possibility the rating may be lowered.

Business Locations

Our principal business operations are located at 1221 Avenue of the Americas, New York, New York. We also maintain offices in Norwalk, Connecticut and London, England.

Regulation

General

The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. Reinsurers are generally subject to less direct regulation than primary insurers. Syncora Guarantee is primarily subject to New York insurance regulations. As of December 31, 2008, Syncora Guarantee reported a policyholders’ deficit of $2.4 billion which would permit the New York Superintendent to seek to commence a rehabilitation or liquidation proceeding with respect to Syncora Guarantee. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Recent Developments.”

United States

Syncora Guarantee is a monoline financial guarantee insurance company incorporated under the laws of the State of New York and has the ratings described under “—Ratings.” Syncora Guarantee previously was licensed to write insurance business in, and is subject to the insurance regulation of and supervision by, all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Singapore. As of March 30, 2009, ten non-domiciliary states have suspended Syncora Guarantee’s license to write new business, though we anticipate that Syncora Guarantee will be able to continue to collect premiums on existing business in such states. As of March 30, 2009, Syncora Guarantee has had its license suspended, has had an order of impairment issued against it or has voluntarily agreed to cease writing business in the following states: Alabama, Alaska, Florida, Indiana, Kentucky, Missouri, New York, North Carolina, Ohio and Virginia. We expect that additional states may suspend Syncora Guarantee’s license to write new business in the future. Syncora Guarantee has in any event suspended the writing of substantially all new business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Recent Developments.”

Article 69 of the New York Insurance Law. Syncora Guarantee is licensed to provide financial guarantee insurance under Article 69 of the New York Insurance Law, but as noted above, has voluntarily agreed with the NYID not to write new business without the NYID’s consent. Article 69 defines financial guarantee insurance to include any guarantee under which loss is payable upon proof of occurrence of financial loss to an insured as a result of certain events. These events include the failure of any obligor on or any issuer of any debt instrument or other monetary obligation to pay principal, interest, premium, dividend or purchase price of or on such instrument or obligation when due. Article 69 limits both the aggregate and individual risks that Syncora Guarantee may insure on a net basis based on the type of obligations insured. Under Article 69, Syncora Guarantee is permitted to transact financial guarantee insurance, surety insurance and credit insurance and such other kinds of business to the extent necessarily or properly incidental to the kinds of insurance which Syncora Guarantee is authorized to transact. In addition, Syncora Guarantee is empowered to assume or reinsure the kinds of insurance described above.

Insurance Holding Company Regulation. Syncora Guarantee is subject to the insurance holding company laws of New York. These laws require Syncora Guarantee to register with the NYID and to furnish annually financial and other information about the operations of companies within its holding company system. Generally, all transactions among companies in the holding company system to which any insurance company subsidiary is a party (including sales, loans, reinsurance agreements and service agreements) must be fair and, if material or of a specified category, such as service agreements, require prior notice and approval or non-disapproval by the insurance department where the applicable subsidiary is domiciled.

Change of Control. Before a person can acquire control of a U.S. domestic insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the applicant’s plans for the management of the domestic insurer, the applicant’s plans for the future operations of the domestic insurer and any anti- competitive results that may arise from the consummation of the acquisition of control. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control involving us that some or all of our stockholders might consider to be desirable, including in particular unsolicited transactions.

State Insurance Regulation. State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including licensing these companies to transact business, accrediting reinsurers, admitting assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends, and, in certain instances, approving policy forms and related materials and approving premium rates. State insurance laws and regulations require Syncora Guarantee to file financial statements with insurance departments everywhere it is licensed, authorized or accredited to conduct insurance business, and its operations are subject to examination by those departments at any time. Syncora Guarantee prepares statutory financial statements in accordance with NAIC SAP as prescribed or permitted by the NYID. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their state, generally once every three to five years. Market-conduct examinations generally are carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC.

Financial examinations are conducted by the state of domicile of the insurer. The NYID, the regulatory authority of the domiciliary jurisdiction of Syncora Guarantee, conducts a periodic examination of insurance companies domiciled in New York at least once every five years. During 2008, the NYID commenced an examination of Syncora Guarantee for the years 2003 through 2007, but on January 7, 2009 the NYID suspended its examination.

The terms and conditions of reinsurance agreements generally are not subject to regulation by any U.S. state insurance department with respect to rates. As a practical matter, however, the rates charged by primary insurers do have an effect on the rates that can be charged by reinsurers.

New York State Dividend Limitations. Under New York Insurance Law, a New York-domiciled insurer may only pay dividends out of “earned surplus” and may not declare or distribute shareholder dividends during any 12-month period that would exceed the lesser of (a) 10% of policyholders’ surplus, as shown by the most recent statutory financial statement on file with the New York Superintendent 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 New York Superintendent approves a greater dividend based upon a finding that the insurer will retain sufficient surplus to support its obligations and writings. Currently, Syncora Guarantee has negative earned surplus and is unable to declare or distribute dividends. In connection with the NYID’s approval of a Form A filing by the SCA Shareholder Entity, which received the transfer of approximately 46% of our outstanding common shares formerly owned by XLI upon consummation of the transactions contemplated by the 2008 MTA, Syncora Guarantee agreed not to pay dividends on its capital stock for a period of two years from November 18, 2008.

Contingency Reserves. Under New York Insurance Law, Syncora Guarantee must establish and maintain a contingency reserve to protect policyholders against the effects of excessive losses occurring during adverse economic cycles. This reserve is established by quarterly contributions of unassigned surplus and is reflected in Syncora Guarantee’s statutory financial statements. The total reserve required is calculated as the greater of 50% of premiums written or a specified percentage

applied to the insured outstanding principal, net of collateral and reinsurance. Such specified percentage varies by the type of outstanding principal guaranteed. Contributions to the contingency reserve may be released after such reserve has been in existence for forty quarters unless an earlier withdrawal is approved by the New York Superintendent pursuant to the New York Insurance Law.

Investments. Syncora Guarantee is subject to laws and regulations that require diversification of its investment portfolio and limit the amount of investments in certain asset categories, such as below investment grade debt securities, equity real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring statutory surplus, and, in some instances, would require divestiture of such non-qualifying investments. We believe that the investments made by Syncora Guarantee complied with such regulations as of December 31, 2008. In addition, any investment must be authorized or approved by the insurance company’s board of directors or a committee thereof that is responsible for supervising or making such investment.

Operations of Our Non-U.S. Insurance Subsidiaries. The insurance laws of each state of the United States and of many other countries regulate or prohibit the sale of insurance and reinsurance within their jurisdictions by unlicensed or non-accredited insurers and reinsurers. Syncora Guarantee-UK is not admitted to do business in the United States. We do not intend that Syncora Guarantee-UK will maintain offices or solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction in the United States where the conduct of such activities would require it to be admitted or authorized.

Highly Regulated Industry. We are highly regulated and our business activities are subject to the review of regulators with broad power and authority. Under certain circumstances, a regulator could rehabilitate or liquidate our insurance subsidiaries, suspend our insurance subsidiaries’ licenses, restrict our insurance subsidiaries’ license authority, limit our dividend paying ability or limit the premiums our insurance subsidiaries can write. For example, under the New York Insurance Law, the New York Superintendent may apply for an order directing him to rehabilitate or liquidate a domestic insurance company under certain circumstances, including upon the insolvency of the company, if the company has willfully violated its charter or New York Insurance Law or if the company is found, after examination, to be in such condition that further transaction of business would be hazardous to its policyholders, creditors or the public. The New York Superintendent may also suspend an insurer’s license, restrict its license authority, limit our dividend paying ability or limit the amount of premiums written in New York if, after a hearing, he determines that the insurer’s surplus to a policyholders is not adequate in relation to its outstanding liabilities or financial needs. Syncora Guarantee reported policyholders’ deficit of $2.4 billion as of December 31, 2008 which would permit the NYID to take such action. If the New York Superintendent were to seek an order of rehabilitation or liquidation with respect to Syncora Guarantee, it would have a material adverse impact on our business, results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Recent Developments” for information regarding Syncora Guarantee not being in compliance with the minimum policyholders’ surplus requirement.

New York Financial Guaranty Insurance Rules. In light of the difficulties facing some financial guarantee insurers, on September 22, 2008, the New York Superintendent announced Circular Letter No. 19 that would redefine the “best practices” for future activities of financial guarantee insurers. However, Circular Letter No. 19 has not yet been enacted into law. Further, certain public officials have indicated that they may exercise their administrative authority to separate capital and insurance policies insuring municipal debt from capital and insurance policies for all other types of insured obligations. We cannot predict what the effect these new regulations or actions, if adopted or taken, will have on the Company.

Bermuda

Bermuda Companies Act. Under the Bermuda Companies Act 1981 (the “Companies Act”), a Bermuda company may not declare and pay a dividend or make a distribution out of contributed surplus, defined under the Companies Act, if there are reasonable grounds for believing that such

company is, and after the payment will be, unable to pay its liabilities as they become due or that the realizable value of such company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. The Companies Act also regulates and restricts the reduction and return of capital and paid-in share premium, including repurchase and redemption of shares. Syncora Holdings entered into an undertaking with the NYID pursuant to which we have agreed not to make any dividends or distributions to our shareholders during an eighteen- month period beginning on August 5, 2008. If dividends on the Syncora Holdings Series A Preference Shares are not paid in an aggregate amount equivalent to dividends for six full quarterly periods, whether or not declared or whether or not consecutive, holders of the Syncora Holdings Series A Preference Shares will have the right to elect two persons who will then be appointed as additional directors to the Board of Directors of Syncora Holdings. To date, dividends on the Syncora Holdings Series A Preference Shares have not been paid in an aggregate amount equivalent to six quarterly periods and therefore holders of the Syncora Holdings Series A Preference Shares have the right to elect two persons to serve on our Board of Directors. On September 4, 2008, Syncora Guarantee Re merged with and into Syncora Guarantee, with Syncora Guarantee being the surviving company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”.

Bermuda Exchange Control Act. The Bermuda Monetary Authority (the “BMA”) must approve all issuances and transfers of securities of a Bermuda exempted company like us unless one of the general permissions granted by the BMA is applicable. Since the suspension of trading of our common shares on the New York Stock Exchange (the “NYSE”), our common shares have been quoted on the Pink Sheets’ Pink Quote System (the “Pink Sheets”). Upon the suspension from trading of the common shares on the NYSE, which is an “Appointed Stock Exchange” under the Companies Act, the specific permission granted to us and the general permission of the BMA under the Exchange Control Act 1972 (the “Act”) and the Exchange Control Regulations 1973 (the “Regulations”) allowing issues and transfers of our common shares involving persons who are non-residents of Bermuda so long as our common shares were listed on the NYSE, ceased to apply. We submitted a request to the BMA for (1) a specific consent with respect to any issues or transfers which occurred since the suspension of trading of our common shares and received the BMA’s retroactive approval for such issues or transfers and (2) an umbrella consent permitting trading on the OTC Bulletin Board and the Pink Sheets without BMA consent on an individual basis but requiring that we submit certain information regarding a new shareholder acquiring 5% or more of our common shares. In response to our request for an umbrella consent, the BMA has advised that all common share transfers to any new or existing shareholders are approved on an ongoing basis provided that it will require us to obtain the BMA’s prior permission for common share transfers whereby persons are proposing to own 5% or more of our common shares. This consent will remain in place after the deregistration of our common shares. We are required to provide the BMA with a list of our shareholders annually commencing December 31, 2009. Pursuant to the BMA’s Notice to the Public dated June 1, 2005 (the “Policy”), the BMA has granted its general permission for transfers of equity securities (which includes our common shares) to existing shareholders provided that such transfers do not result in any such person holding 5% or more of the equity securities. Once such permission has been obtained for any person to hold 5% or more of the equity securities, the Policy grants a general permission for that person to obtain up to 50% of the equity securities of the company without the prior approval of the BMA, conditional upon subsequent notification to the BMA.

United Kingdom

General. The regulation of the financial services industry in the United Kingdom is consolidated under the Financial Services Authority (“FSA UK”). In addition, the regulatory regime in the United Kingdom must comply with certain European Union (“EU”) directives binding on all EU member states.

The FSA UK is the single statutory regulator responsible for regulating the financial services industry in the U.K., and has the authority to oversee the carrying on of “regulated activities”

(including deposit taking, insurance and reinsurance, investment management and most other financial services), with the purpose of maintaining confidence in the U.K. financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime. It is a criminal offense for any person to carry on a regulated activity in the U.K. unless that person is authorized by the FSA UK and has been granted permission to carry on that regulated activity, or otherwise falls under an exemption to such regulation.

The insurance business in the United Kingdom falls into two main categories: long-term insurance (which is primarily investment-related) and general insurance. These two categories are both divided into “classes” (for example: permanent health and pension fund management are two classes of long- term insurance; damage to property and motor vehicle liability are two classes of general insurance). Under the Financial Services and Markets Act 2000 (“FSMA”) effecting or carrying out contracts of insurance, within a class of general or long-term insurance, by way of business in the U.K., constitutes a “regulated activity” requiring authorization. An authorized insurance company must have permission for each class of insurance business it intends to write.

Syncora Guarantee-UK obtained authorization from the FSA UK to effect and carry out certain classes of non-life insurance, specifically: classes 14 (credit), 15 (suretyship) and 16 (miscellaneous financial loss). This scope of permission is sufficient to enable Syncora Guarantee-UK to effect and carry out financial guarantee insurance and reinsurance.

Syncora Guarantee-UK insurance business is subject to close supervision by the FSA UK. The FSA UK imposes requirements for senior management arrangements, systems and controls of insurance and reinsurance companies under its jurisdiction and places significant emphasis on risk identification and management in relation to the prudential regulation of insurance and reinsurance business in the United Kingdom. In recent years, the FSA UK has increased the scope of its regulation to include the regulation of the sale of general insurance, insurance mediation, capital adequacy and proposals aimed at ensuring adequate diversification of an insurer’s or reinsurer’s exposures to any credit risks of its reinsurers. Future changes in the scope of the FSA UK’s regulation may have an adverse impact on the potential business operations of Syncora Guarantee-UK.

Supervision. The FSA UK carries out the prudential supervision of insurance companies through a variety of methods, including the collection of information from statistical returns, review of accountants’ reports, visits to insurance companies and regular formal interviews.

The FSA UK has adopted a risk-based approach to the supervision of insurance companies. Under this approach, the FSA UK periodically performs a formal risk assessment of insurance companies or groups carrying on business in the U.K. which varies in scope according to the risk profile of the insurer. The FSA UK performs its risk assessment by analyzing information it receives during the normal course of its supervision, such as regular prudential returns on the financial position of the insurance company, or which it acquires through a series of meetings with senior management of the insurance company. After each risk assessment, the FSA UK will inform the insurer of its views on the insurer’s risk profile. This will include details of any remedial action that the FSA UK requires and the likely consequences if this action is not taken.

Solvency Requirements. The FSA UK Handbook, particularly the Prudential Sourcebook for Insurers, provides regulations requiring authorized insurers to maintain adequate financial resources. The adequacy of an insurer’s capital resources needs to be assessed both by the insurer and by FSA UK and FSA UK sets minimum capital resource requirements for authorized insurers. FSA UK also assesses whether such minimum capital resource requirements are appropriate by reviewing the insurers’ own assessment of its capital needs and the processes and systems by which that assessment has been made by the insurer. The FSA UK’s risk-based approach requires insurers to identify and assess risks to its being able to meet its liabilities as they come due, to assess how it intends to deal with those risks and to quantify the financial resources it considers necessary to mitigate those risks. The Rules require an insurer to carry out stress tests and scenario analysis for each of the major sources of risk identified, including credit risk, market risk, liquidity risk and operational risk.

FSA UK has introduced specific requirements for the capital and reporting provisions for related undertakings of insurance groups. Given the current structure of the group of which Syncora Guarantee-UK is a member, these regulatory obligations do not apply to Syncora Guarantee-UK’s parent, because it is incorporated in New York. The capital required to be deployed by Syncora Guarantee-UK will be formulated in accordance with FSA-UK’s Rules as to individual capital adequacy and in assessing the adequacy of an insurer’s capital resources the FSA will consider the individual capital adequacy report submitted by the insurer together with FSA-UK’s own assessment of the adequacy of insurers capital resources in determining the final amount of regulatory capital required by an insurer. In making capital adequacy determinations, FSA-UK will take into account matters such as whether the solvency of the authorized insurer is or may be jeopardized due to a group solvency position.

Syncora Guarantee has agreed with the FSA UK to maintain a minimum solvency margin at the greater of (i) $12.5 million or (ii) 200% of the FSA UK’s required minimum margin of solvency; as of December 31, 2008, Syncora Guarantee-UK’s capital was below this threshold.

Restrictions on Dividend Payments. U.K. company law prohibits Syncora Guarantee-UK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the FSA UK requires the maintenance of each insurance company’s regular capital requirements within its jurisdiction. The FSA UK’s rules require Syncora Guarantee-UK to notify the FSA UK of any proposed or actual payment of a dividend that is greater than forecast in the business plans submitted with their respective applications for authorization. Any such payment or proposal could result in regulatory intervention. In addition, the FSA UK requires authorized insurance companies to notify it in advance of any significant dividend payment.

Reporting Requirements. U.K. insurance companies must prepare their financial statements under the Companies Act of 1985 and the Companies Act of 2006, in each case, as amended, which requires the filing with Companies House of audited financial statements and related reports. In addition, U.K. insurance companies are required to file regulatory returns with the FSA UK, which include a revenue account, a profit and loss account and a balance sheet in prescribed forms.

Supervision of Management. The FSA UK closely supervises the management of insurance companies through the approved persons regime, by which any appointment of persons to perform certain specified “controlled functions” within a regulated entity must be approved by the FSA UK.

Change of Control. FSMA regulates the acquisition of “control” of any U.K. insurance company authorized under FSMA. Any company or individual that (together with its or his or her associates) directly or indirectly acquires 10% or more of the shares in a U.K.-authorized insurance company or its parent company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such authorized insurance company or its parent company, would be considered to have acquired “control” for the purposes of the relevant legislation, as would a person who had significant influence over the management of such authorized insurance company or its parent company by virtue of his or her shareholding or voting power in either.

Under FSMA, any person proposing to acquire “control” of a U.K. authorized insurance company must give prior notification to the FSA UK of its intention to do so. The FSA UK then has 60 days to consider that person’s application to acquire “control” although this is subject to the FSA UK’s ability to extend the period for an additional 20 days if required. In considering whether to approve such application, the FSA UK must be satisfied that the acquirer is a “fit and proper” person to have “control” and that the interests of consumers would not be threatened by such acquisition of “control.” “Consumers” in this context includes all persons who may use the services of the authorized insurance company. Failure to make the relevant prior application could result in action being taken by the FSA UK.

Intervention and Enforcement. The FSA UK has extensive powers to intervene in the affairs of an authorized person, culminating in the ultimate sanction of the removal of authorization to carry on a regulated activity. FSMA imposes on the FSA UK statutory obligations to monitor compliance

with the requirements imposed by FSMA, and to enforce the provisions of FSMA-related rules made by the FSA UK. The FSA UK has power, among other things, to enforce and take disciplinary measures in respect of breaches of both the Prudential Sourcebook for Insurers and breaches of the conduct of business rules generally applicable to authorized persons.

The FSA UK also has the power to prosecute criminal offenses arising under FSMA, and to prosecute insider dealing under Part V of the Criminal Justice Act of 1993, and breaches of money laundering regulations. The FSA UK’s stated policy is to pursue criminal prosecution in all appropriate cases.

“Passporting.” EU directives allow Syncora Guarantee-UK to conduct business in EU states other than the United Kingdom in compliance with the scope of permission granted these companies by FSA UK without the necessity of additional licensing or authorization in other EU jurisdictions. This ability to operate in other jurisdictions of the EU on the basis of home state authorization and supervision is sometimes referred to as “passporting.” Insurers may operate outside their home member state either on a “services” basis or on an “establishment” basis. Operating on a “services” basis means that a company conducts permitted businesses in the host state without having a physical presence there, while operating on an establishment basis means that a company has a branch or physical presence in the host state. In both cases, a company remains subject to regulation by its home regulator, and not by local regulatory authorities, although such company nonetheless may have to comply with certain local rules. In addition to EU member states, Norway, Iceland and Liechtenstein (members of the broader European Economic Area) are jurisdictions in which this passporting framework applies. Syncora Guarantee-UK is permitted to operate on a passport basis throughout the EU.

Fees and Levies. Syncora Guarantee-UK is subject to FSA UK fees and levies based on Syncora Guarantee-UK’s gross premiums written. The FSA UK also requires authorized insurers to participate in an investors’ protection fund, known as the Financial Services Compensation Scheme (“FSCS”). The FSCS was established to compensate consumers of financial services, including the buyers of insurance, against failures in the financial services industry. Individual policyholders and small businesses may be compensated by the FSCS when an authorized insurer is unable, or likely to be unable, to satisfy policyholder claims. Syncora Guarantee-UK has not and does not expect to write any insurance business that is protected by the FSCS.

Employees

As of December 31, 2008, we had approximately 65 employees. None of our employees are subject to a collective bargaining agreement.

Available Information

We have historically filed annual and quarterly reports and other information with the United States Securities and Exchange Commission (the “SEC”). You may read and copy any documents that we file at the SEC’s public reference room at 100 F Street, NE., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. In addition, the SEC maintains an Internet website (www.sec.gov) that contains reports and other information about issuers that file electronically with the SEC, including Syncora Holdings. You may also access, free of charge, our reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) indirectly through our Internet website (www.syncora.com/Holdings/Home.aspx). Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

ITEM 1A. RISK FACTORS

In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully when evaluating the Company, and its business, financial condition and results of operations. The Company’s business, financial condition and results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition and results of operations.

Risks Related to Our Company

We may be unable to enter into or close the 2009 MTA or close the tender offer on the terms contemplated, on different terms or at all, any of which would have a material adverse effect on our financial condition and results of operations.

Effective as of March 5, 2009, we entered into the Letter of Intent with certain of the Counterparties, which contemplates the entry into the 2009 MTA. The Letter of Intent contemplates the participation of all of the 23 Counterparties. However, one significant Counterparty has indicated that it is presently not contemplating entering into the transactions contemplated by the Letter of Intent. We are discussing with the remaining Counterparties alternative terms and conditions that would permit the consummation of the 2009 MTA without the participation of all of the Counterparties. In addition, pursuant to the RMBS Transaction Agreement, on March 11, 2009 the Fund commenced a tender offer to acquire or exchange the RMBS Securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions.” The 2009 MTA is subject to definitive documentation satisfactory to the parties. There can be no assurance the 2009 MTA will be entered into by a sufficient number of Counterparties or at all. In addition, consummation of the transactions contemplated by the 2009 MTA and the tender offer are subject to various closing conditions, including approval thereof by the NYID, and there can be no assurance that the transactions contemplated thereby will be consummated on the terms contemplated, on different terms or at all. There also can be no assurance that the NYID will approve the 2009 MTA or the tender offer.

During 2008, we recorded a material increase in adverse development of anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS, causing us to report a policyholders’ deficit in accordance with NAIC SAP of approximately $2.4 billion as of December 31, 2008 and, accordingly, not to be in compliance with the $65 million minimum policyholders’ surplus requirement under New York Insurance Law as of December 31, 2008. Under these circumstances, the New York Superintendent could seek court appointment as rehabilitator or liquidator of Syncora Guarantee. See “—We are highly regulated and a regulator could rehabilitate or liquidate us or take certain other actions.” In the absence of a successful restructuring that achieves remediation of RMBS exposures and CDS exposures of the magnitude contemplated by the Letter of Intent and the tender offer, Syncora Guarantee will continue to report a policyholders’ deficit and the New York Superintendent may seek court appointment as rehabilitator or liquidator of Syncora Guarantee. Moreover, in the absence of a successful restructuring and in the exercise of its fiduciary duties, Syncora Guarantee’s Board of Directors may request the New York Superintendent to seek such court appointment. In such circumstances, it is likely that the New York Superintendent would institute such proceedings.

If Syncora Guarantee should become subject to a regulatory proceeding, or, in limited cases, if Syncora Guarantee should become insolvent, the holders of certain of the CDS contracts Syncora Guarantee has insured may assert the right to terminate the contracts and require Syncora Guarantee to pay them the termination values, which under current market conditions would be in excess of Syncora Guarantee’s resources. See “—If Syncora Guarantee should become subject to a regulatory proceeding or becomes insolvent, the holders of certain of the CDS contracts Syncora Guarantee has insured may assert the right to terminate the contracts and require Syncora Guarantee to pay them the termination values, which under current market conditions would be in excess of Syncora Guarantee’s resources.” If Syncora Guarantee were required to pay the

termination values, Syncora Guarnatee would not have sufficient liquidity to fund its obligations as they come due.

Furthermore, in the event of a rehabilitation or liquidation of Syncora Guarantee, there is uncertainty surrounding the amount and timing of receipt of funds that would be available for holders of Syncora Guarantee policies. In the event of a rehabilitation or liquidation of Syncora Guarantee, the Superintendent, acting in his capacity as rehabilitator or liquidator, may seek a court order imposing a moratorium on the payment of claims and there could be a significant delay before any claims payments would be made out of the rehabilitation or liquidation.

Syncora Guarantee’s Board of Directors, in the exercise of its fiduciary duties, may determine that it is necessary to suspend claim payments to preserve assets for the benefit of all policyholders.

In light of Syncora Guarantee’s significant statutory policyholders’ deficit and significant anticipated near term claim payments, Syncora Guarantee’s Board of Directors is currently considering a suspension of, and may, in the exercise of its fiduciary duties, determine that it will suspend claim payments in order to preserve its assets for the benefit of all policyholders. If suspended, there can be no assurance when or if claim payments would recommence, although Syncora Guarantee’s Board of Directors could subsequently decide to recommence claim payments.

Any decision to suspend claim payments could have a number of material adverse consequences, including, but not limited to litigation, potential loss of control rights, the potential assertion of mark-to-market termination payments by counterparties to Syncora Guarantee’s CDS contracts with respect to CDS contracts on which Syncora Guarantee fails to pay a claim and adverse reaction from our regulators, including the NYID, FSA UK and the BMA, including, in the case of the NYID, a decision to seek to commence a rehabilitation or liquidation of Syncora Guarantee. There can be no assurance there would not be other material adverse consequences if Syncora Guarantee failed to pay claims.

Even if we consummate the transactions contemplated by the 2009 MTA and the tender offer, we may continue to report policyholders’ deficit or become insolvent in the future.

Our expected financial condition after the consummation of the transactions contemplated by the 2009 MTA and the tender offer is based on various assumptions concerning these transactions, including accounting and tax treatment. There can be no assurance that the assumptions will not differ materially from the ultimate treatment of such transactions and any differences may be material. In addition, while the transactions contemplated by the 2009 MTA and the tender offer were designed to improve our financial condition, we will continue to be subject to risks and uncertainties that could materially affect our financial position. Therefore, even if the transactions contemplated by the 2009 MTA and the tender offer are consummated, we may continue to report a policyholders’ deficit or not comply with the statutory minimum policyholders’ surplus, undergo additional restructuring, and, in addition, we may become insolvent in the future.

We are operating in an adverse business environment and have experienced higher than expected losses resulting from our exposure to the RMBS market and anticipated claims on CDOs, including

ABS CDOs, that have had, and may continue to have, material adverse effects on our business, results of operations and financial condition.

Adverse developments in the credit markets that began in the second half of 2007 and continued through 2008 have resulted in a significant deterioration and dislocation in those markets. This dislocation has resulted from many factors, including a broad deterioration in the quality of credit, increasing credit spreads across most bond sectors and significantly higher rates of delinquency, foreclosure and loss on residential mortgage loans and the interaction of these and other factors. We are materially impacted by these adverse developments and, partially as a result of these developments, have experienced higher than expected losses resulting from our exposure to RMBS and anticipated claims on CDOs. These factors, coupled with other adverse developments, such as the downgrade of our ratings and the ratings of certain of our competitors and changes in the regulatory landscape of our industry and the structured credit markets generally, have created an adverse environment for our business and have had, and are expected to continue to have, material adverse effects on our business, results of operation and financial condition. As a result of these factors:

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We have suspended writing substantially all new business. See “—We have suspended writing substantially all new business as of January 2008 and we do not expect to recommence writing new business.”

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We have been materially downgraded by the rating agencies, which has had a number of significant negative consequences for us.

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We are materially exposed to risks associated with the deterioration in the credit and housing markets, including risk associated with RMBS and ABS CDOs, and we have established significant case reserves related to our in-force business and expect to incur significant anticipated claims on our CDS contracts. See “—Adverse developments in the credit and mortgage markets and the negative impact those adverse developments have had, and may continue to have, on our in-force business has resulted in material adverse effects on our business, results of operations and financial condition,” and “—Loss reserve estimates are subject to uncertainties and our loss reserves may not be adequate to cover the ultimate amount of losses. If we establish additional loss reserves, it may have a material adverse effect on our financial condition and results of operations.”

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We reported a policyholders’ deficit of approximately $2.4 billion as of December 31, 2008. We face the risk that our regulators could decide to rehabilitate or liquidate our insurance subsidiary or take other actions against or with respect to our insurance subsidiary. See “—We are highly regulated and a regulator could rehabilitate or liquidate us or take certain other actions.” If Syncora Guarantee should become subject to a regulatory proceeding, the holders of certain of the CDS contracts that Syncora Guarantee has insured would have the right to terminate the contracts and may assert claims for the termination values, which under current market conditions would be in excess of Syncora Guarantee’s resources. See “—If Syncora Guarantee should become subject to a regulatory proceeding or becomes insolvent, the holders of certain of the CDS contracts Syncora Guarantee has insured may assert the right to terminate the contracts and require Syncora Guarantee to pay them the termination values, which under current market conditions would be in excess of Syncora Guarantee’s resources.”

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There is substantial doubt about our ability to continue as a going concern. See “There is substantial doubt about our ability to continue as a going concern.”

We have suspended writing substantially all new business as of January 2008 and we do not expect to recommence writing new business.

Each of Fitch, S&P and Moody’s have downgraded our ratings, which caused us to suspend writing substantially all new business in January of 2008. Most recently, on March 9, 2009, Moody’s downgraded to “Ca” from “Caa1” the IFS ratings of Syncora Guarantee and Syncora Guarantee-UK, with the ratings placed on developing outlook and on January 29, 2009, S&P downgraded to “CC” from “B” the IFS ratings of Syncora Guarantee and Syncora Guarantee-UK, with the ratings

placed on negative outlook. Effective August 27, 2008, we terminated the agreement for the provision of ratings with Fitch. The downgrades to our IFS ratings have had a material adverse effect on our business and, consequently, our results of operations and financial condition. See also “Business—Overview—Ratings Downgrades and Other Actions.”

The maintenance of triple-A ratings had been fundamental to our historical business plan and business activities. The downgrades to our ratings have caused us to suspend writing substantially all new business as of January 2008. We currently anticipate that in connection with the 2009 MTA Syncora Guarantee will agree, except in certain limited circumstances, not to recommence writing any new business. In addition, we have agreed with the NYID not to write new business without its consent. The suspension in writing new business has resulted in a significant loss of current and future income and has had and will continue to have material adverse effects on our business.

Adverse developments in the credit and mortgage markets and the negative impact those adverse developments have had, and may continue to have, on our in-force business has resulted in material adverse effects on our business, results of operations and financial condition.

We are materially exposed to risks associated with the continuing deterioration in the credit and mortgage markets, which have lead to erosion in the quality of assets and also the collection of cash flows from assets within structured securities that we have guaranteed. Credit spreads across most bond sectors have widened, reflecting broad concerns of credit erosion in U.S. residential mortgage loans, particularly to subprime borrowers, that are contained in the RMBS and ABS CDOs we guarantee and to which we have material business exposure. The credit erosion occurring in certain sectors of the economy, such as residential mortgage loans and the housing market, may worsen, spread to or negatively impact other sectors of the credit market and economy to which we have material business exposure. The concerns over the subprime segment of the mortgage-backed securities market have expanded to include a broad range of mortgage- and asset-backed and other fixed income securities, including those rated investment grade, and a wide range of financial institutions and markets, asset classes and sectors, which may impact our in-force business and our investment portfolio. The extent and duration of any future continued deterioration of the credit and residential housing markets is unknown, as is the impact, if any, on potential claim payments and ultimate losses of the securities within our investment portfolio. See “Business—Financial Guarantee In-Force Business—U.S. Structured finance obligations.”

Subprime residential mortgage loans, prime HELOCs, Alt-A and CES originated in periods subsequent to the second half of 2005 are performing significantly worse than similar loans made prior to mid-2005. We have established case reserves in connection with various of our insured RMBS transactions, including most of our post-2005 HELOC, Alt-A and CES mortgage-backed securities. While we sought to underwrite RMBS and ABS CDOs with levels of subordination designed to protect us from loss in the event of poor performance on the underlying collateral, no assurance can be given that such levels of subordination or our credit enhancements will prove to be adequate to protect us from incurring additional material losses in view of the significantly higher rates of delinquency, foreclosure and loss currently being observed among residential homeowners. In many cases such credit enhancements have been insufficient to prevent losses. In addition, there can be no assurance that we would be successful, or that we would not be delayed, in enforcing the subordination provisions, credit enhancements or other contractual provisions of the RMBS and ABS CDOs we guarantee in the event of litigation or the bankruptcy of other transaction parties. Many of the subordination provisions, credit enhancements and other contractual provisions of the RMBS and ABS CDOs we guarantee are untested in the market and, therefore, it is uncertain how such subordination provisions, credit enhancements and other contractual provisions will be interpreted in the event of an action for enforcement.

Loss reserve estimates are subject to uncertainties and our loss reserves for certain periods may not be adequate to cover the ultimate amount of losses. If we establish additional loss reserves, it may have a material adverse effect on our financial condition and results of operations.

Our results of operations and financial condition depend upon our ability to assess accurately and manage the potential losses associated with the risks inherent in our in-force business. As a

result of the deterioration in residential mortgage collateral supporting RMBS that we have guaranteed, we have recorded case basis reserves for loss and loss adjustment expenses as of December 31, 2008 of $1,558.4 million before reinsurance ($1,557.9 million net of reinsurance) based on our estimate of ultimate losses and loss adjustment expenses that we expect to incur on such guarantees, which has had a material adverse effect on our financial condition and results of operations. Further adverse development or deterioration in such collateral or other collateral supporting our in-force guaranteed obligations could cause us to establish additional reserves for losses and loss adjustment expenses, which may have a material adverse effect on our financial condition and results of operations.

Estimates of losses we expect to incur may vary from our actual ultimate losses due to the fact that such estimates are based on our judgments and estimates about events that have not yet occurred, as well as other factors including the accuracy of financial models and the state of the economy and the credit markets generally, and such variances could be material. The most significant assumption underlying our estimate of ultimate losses on our guarantees of ABS CDOs and first lien RMBS transactions is our assumption regarding the expected cumulative loss on mortgage loan collateral supporting such securities. The most uncertain component of that assumption is the future performance of currently performing (non-delinquent) mortgage loan collateral. If the actual rate at which currently performing loans become delinquent is materially greater than assumed, there will be a material adverse effect on our estimate of ultimate losses on the aforementioned guarantees and, accordingly, our financial position and results of operations. Our estimate of ultimate losses on our guarantees of obligations supported by HELOC and CES mortgage loan collateral is largely dependent on our default rate assumption. In this regard, we assumed that the default rate will begin to improve by early 2010. If actual loan performance improves later than assumed or does not improve as much as expected, there will be a material adverse effect on the ultimate losses on our guarantees of obligations supported by HELOCs and CES mortgage loan collateral and, accordingly, our financial position and results of operations. Our default assumptions for first lien RMBS transactions that we guarantee are based on current delinquent loans and analysis of historical defaults for loans with similar characteristics. A loss severity is applied to the first lien RMBS defaults ranging from 41 to 68% to determine the expected loss on the collateral in those transactions. We use traditional default and prepayment curves to model our unpaid losses. If loss severity is higher than the rates we applied, there will be a material adverse effect on our guarantees of first lien RMBS. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Reserves for Losses and Loss Adjustment Expenses” and Note 16 to the Consolidated Financial Statements.

The fair value of liabilities respecting our CDS contract guarantees may increase reflecting the market perception of losses on such securities. The fair value of our CDS contracts may also be adversely affected by any improvement in our Non-Performance Risk which is reflected in the fair value of our CDS contracts. Also, anticipated claims on our CDS contracts may continue to develop adversely. Each of the aforementioned factors may have a material adverse effect on our financial condition and results of operations.

In accordance with GAAP, derivatives must be accounted for as either assets or liabilities on the balance sheet and measured at fair value. Any event causing credit spreads on an underlying security referenced in our CDS contracts to either widen or tighten will affect the fair value of CDS contracts and may increase the volatility of our earnings. In addition, in accordance with GAAP, fair value must reflect the risk that the issuer of the derivative will not be financially able to honor its obligations as they become due (“Non-Performance Risk”) which, for our CDS contracts, we estimate based on the cost of buying credit protection on Syncora Guarantee. For example, when the market price of buying credit protection on us increases reflecting our deteriorating financial position, the Non-Performance Risk component of the fair value of our CDS contracts reduces our derivative liabilities and increases shareholders’ equity, whereas when the market price of buying credit protection on us decreases reflecting our improving financial position, the Non-Performance Risk component of the fair value of our CDS contracts increases our derivative liabilities and decreases shareholders’ equity. Although there is no cash flow effect from reporting our CDS

contracts at fair value, net changes in the fair value of our CDS contracts are reported in our statement of operations and therefore have affected and will continue to affect our reported earnings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Valuation of Credit Default Swaps.” If net changes in the fair value of our CDS contracts cause us to report a loss, our shareholders’ equity would potentially decrease to a negative amount.

Common events that may cause credit spreads on an underlying municipal bond or pool of corporate securities referenced in a CDS contract to fluctuate include changes in the state of national or regional economic conditions, industry cyclicality, changes to a company’s competitive position within an industry, management changes, changes in the ratings of the underlying security, movements in interest rates, default or failure to pay interest or other factors leading investors to revise expectations about the issuer’s ability to pay principal and interest on its debt obligations. Similarly, common events that may cause credit spreads on an underlying structured security referenced in a CDS contract to fluctuate may include the occurrence and severity of collateral defaults, rating changes, changes in interest rates or underlying cash flows or other factors leading investors to revise expectations about the sufficiency of the applicable collateral or the ability of the servicer to collect payments on the underlying assets sufficient to pay principal and interest when due.

While not required under GAAP, we also estimate the ultimate losses we expect to incur in connection with our CDS contracts assuming we hold them to maturity. We refer to such estimated ultimate losses as anticipated claims, which represent the equivalent of reserves for losses and loss adjustment expenses on our insurance guarantees. Further adverse loss development on securities referenced in our CDS contract will adversely affect our financial condition. Net unrealized and realized gains (losses) from our derivatives were $494.6 million, $(1,295.0) million and $13.2 million for the years ended December 31, 2008, 2007, and 2006, respectively. In addition, at December 31, 2008, our net derivative liability relating to our CDS contracts was $732.4 million, $14,954.4 million before Non-Performance Risk. Also, our best estimate of anticipated claims on our CDS contracts was $3,238.4 million and $645.1 million at December 31, 2008 and 2007, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Valuation of Credit Default Swaps” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Anticipated Claims Payable and Anticipated Recoveries On CDS Contracts.”

We are highly regulated and a regulator could rehabilitate or liquidate us or take certain other actions.

We are highly regulated and our business activities are subject to the review of regulators with broad power and authority. Under certain circumstances, a regulator could rehabilitate or liquidate our insurance subsidiaries, suspend our insurance subsidiaries’ licenses, restrict our insurance subsidiaries’ license authority or limit our dividend paying ability. As of December 31, 2008, Syncora Guarantee did not comply with its regulatory minimum policyholders’ surplus requirement. Under these circumstances, the New York Superintendent could seek court appointment as rehabilitator or liquidator of Syncora Guarantee, which would have a material adverse effect on our business, results of operations and financial condition. In addition, as of March 30, 2009, Syncora Guarantee has had its license suspended, has had an order of impairment issued against it or has voluntarily agreed to cease writing business in ten states, including New York. Finally, Syncora Guarantee’s dividend paying ability is restricted by an undertaking it entered into with the NYID, pursuant to which it agreed not to pay any dividends to its shareholders without the prior consent of the NYID. See “Because we are a holding company and substantially all of our operations are conducted by our subsidiaries, our ability to meet any ongoing cash requirements, including any debt service payments or other expenses, and to pay dividends on our common shares in the future will depend on our ability to obtain cash dividends or other cash payments or obtain loans from our subsidiaries, which are regulated insurance companies and whose ability to pay dividends, or make loans, to us is limited by regulatory constraints.”

In addition, under the New York Insurance Law, the New York Superintendent may apply for an order directing him to rehabilitate or liquidate a domestic insurance company under certain other circumstances, including upon the insolvency of the company, if the company has willfully violated its charter or New York State law or if the company is found, after examination, to be in such condition that further transaction of business would be hazardous to its policyholders, creditors or the public. The New York Superintendent may also suspend an insurer’s license, restrict its license authority or limit its dividend paying ability if, after a hearing, he determines that the insurer’s surplus to policyholders is not adequate in relation to its outstanding liabilities or financial needs. If the New York Superintendent were to rehabilitate or liquidate us, it would have a material adverse impact on our business, results of operations and financial condition.

Further, if Syncora Guarantee-UK, were facing financial difficulties and either was insolvent or was likely to become insolvent, the directors of Syncora Guarantee-UK would be expected to take appropriate action having regard to the interests of the creditors of Syncora Guarantee-UK as a whole. Such action may include an application for an administration order under the UK’s Insolvency Act 1986 or an application to place Syncora into liquidation. Furthermore, Syncora Guarantee-UK’s regulator, FSA UK, has jurisdiction under the FSMA to apply to the court for the making of an administration order or to petition the court for the winding up of an insurer in circumstances where FSA UK believes it necessary having regard to its statutory objectives to, among other things, secure the appropriate degree of protection for consumers and maintain confidence in the financial system. If an administration order or an order for the winding up of Syncora Guarantee-UK were granted by the court, one effect would be to impose a moratorium on any legal action by Syncora Guarantee-UK’s creditors for enforcement or recovery of their debts. Such a situation could result in a material adverse impact on our results of operations and financial condition.

If Syncora Guarantee should become subject to a regulatory proceeding or becomes insolvent, the holders of certain of the CDS contracts Syncora Guarantee has insured may assert the right to terminate the contracts and require Syncora Guarantee to pay them the termination values, which under current market conditions would be in excess of Syncora Guarantee’s resources.

It would be an event of default under substantially all of the CDS contracts insured by Syncora Guarantee if Syncora Guarantee should be placed into rehabilitation, receivership, liquidation or other similar proceeding by the NYID or, in limited cases, if Syncora Guarantee should become insolvent. If there were an event of default under these CDS contracts insured by Syncora Guarantee, while the event of default continued, the holders of these CDS contracts would have the right to terminate the CDS contracts and may assert a claim for a termination payment from the trust, guaranteed by Syncora Guarantee. Such mark-to-market termination payments for deals in which Syncora Guarantee would have to make a termination payment are generally calculated either based on “market quotation” or “loss” (each as defined in the ISDA Master Agreement). “Market quotation” is calculated as an amount (based on quotations received from dealers in the market) that the counterparty would have to pay another party other than monoline financial guarantee insurance companies to have such party takeover Syncora Guarantee’s position in the CDS contract. “Loss” is an amount that a counterparty reasonably determines in good faith to be its total losses and costs in connection with the CDS contract, including any loss of bargain, cost of funding or, at the election of such counterparty, but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position. There can be no assurance that counterparties to Syncora Guarantee’s CDS contracts, including the Counterparties, will not assert that events have occurred which require Syncora Guarantee to make mark-to-market termination payments. If such events were to occur, the aggregate termination payments that may be asserted against Syncora Guarantee would significantly exceed its resources and accordingly, would have a material adverse effect on our financial position and results of operations. The fair value of our CDS contracts recorded in our financial statements at December 31, 2008 does not reflect the effect of mark-to-market termination payments.

There is substantial doubt about our ability to continue as a going concern.

We believe the principal factors which affect our ability to continue as a going concern are: (i) whether we are successful in consummating the transactions contemplated by the 2009 MTA and the tender offer, as well as the effect of the consummation of such transactions on our financial position, (ii) non-assertion by certain counterparties to our CDS contracts of a mark-to-market termination event, (iii) the risk of adverse loss development on our remaining in-force business after the successful consummation of the transactions contemplated by the 2009 MTA and the tender offer that would cause Syncora Guarantee not to be in compliance with its $65 million minimum policyholders’ surplus requirement under New York Insurance Law, and (iv) the risk of intervention by the NYID as a result of the financial condition of Syncora Guarantee or the FSA UK as a result of Syncora Guarantee- UK’s financial condition. As a result of uncertainties associated with the aforementioned factors affecting our ability to continue as a going concern, management has concluded that there is substantial doubt about our ability to continue as a going concern. Our audited consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty with respect to our ability to continue as a going concern.

The poor performance of the debt and equity securities that we hold as investments may have a material adverse effect on our financial condition.

During the year ended December 31, 2008, we recorded other than temporary impairment charges of $238.9 million related to our debt securities and the XL Capital shares. In light of the significant risks and uncertainties that we face and due to the expectation that we would need to sell a significant amount of our invested assets to fund the transactions contemplated by the 2009 MTA, as of December 31, 2008 we are unable to continue to assert our intent and ability to hold our investments in debt and equity securities which are in an unrealized loss position until they recover in value and we are therefore required to recognize a charge to our earnings for the amount of such unrealized loss, which has had a material adverse effect on our results of operations. No assurance can be given that any sales of securities in connection with the 2009 MTA or otherwise will be at prices that are not materially different from their carrying value.

Payment of claims on our guaranteed obligations, including Jefferson County, Alabama and RMBS transactions could have a material adverse effect on our financial condition, cash flows and liquidity.

We insured the payment of scheduled debt service on sewer revenue warrants issued by the Jefferson County Alabama (the “County”) in 2002 and 2003 and have provided a surety bond policy. Through March 30, 2009, we have paid gross claims in an aggregate amount of approximately $165.5 million on the County’s warrants and surety policy. We estimate that we may be required to pay additional claims under our policies through 2009 of approximately $138.0 million. We have also guaranteed certain payments under our insured RMBS transactions. Through March 30, 2009, on our guaranteed RMBS transactions we have paid gross claims in an aggregate amount of approximately $684.2 million. We estimate that we may be required to pay additional claims under our RMBS policies through 2009 of approximately $630.7 million in the aggregate. The payment of the foregoing would have a material adverse impact on our financial condition, cash flows and liquidity. Actual amounts of the claims we may be required to pay may differ from such estimates and the differences could be material.

If counterparties to certain of the CDS contracts Syncora Guarantee has insured should become subject to a bankruptcy, insolvency or analogous regulatory proceeding, they may have the right to terminate the contracts and require Syncora Guarantee to make termination payments as a consequence of such termination, which under current market conditions would be in excess of Syncora Guarantee’s resources.

If a counterparty to a CDS contract insured by Syncora Guarantee should become insolvent, bankrupt or be placed into rehabilitation, receivership, liquidation or other similar proceeding by a regulator (a “Bankruptcy Event”), the bankruptcy trustee, receiver or debtor-in-possession of such counterparty may have the right to reject or otherwise terminate such CDS contracts and seek damages from the trust, payment of which is guaranteed by Syncora Guarantee. It is unclear

whether such CDS contracts may be so terminated as a consequence of a Bankruptcy Event, and if so terminated whether payment of such damages would be required, or how such damages would be calculated. However, if the calculation is based on the market value of the CDS contract, a termination of certain CDS contracts under current market conditions would result in a substantial liability to Syncora Guarantee in excess of its ability to pay, which would have a material adverse effect on our financial position.

Syncora Guarantee or Syncora Guarantee-UK may lose certain control rights under certain financial guarantee insurance policies if they fail to make a payment, or if either is insolvent or placed into receivership or liquidation.

Certain of the contracts relating to Syncora Guarantee’s financial guarantee insurance policies have provisions that provide that Syncora Guarantee, or Syncora Guarantee-UK, as the case may be, may lose certain control rights if such company fails to make a payment on its insured obligations, is insolvent or placed into receivership or liquidation by the NYID or FSA UK, as applicable. There can be no assurance that counterparties to these contracts will not assert that events have occurred that would result in Syncora Guarantee’s or Syncora Guarantee-UK’s loss of these control rights. Loss of these rights could interfere with Syncora Guarantee’s or Syncora Guarantee-UK’s ability to remediate these contracts, which could have a material adverse effect on Syncora Guarantee’s financial condition and results of operations.

Certain of our policyholders and counterparties may not pay premiums and makewholes owed to us or may seek to cancel their policies due to bankruptcy or other reasons.

Since we have suspended writing substantially all new business, we are no longer generating income from new business. As most of our transactions other than public finance call for payment of all or some premiums in installments, we have an embedded future revenue stream. In light of bankruptcy or the financial condition of certain financial institutions that are our counterparties and our own financial condition, in certain cases a part of or the full amount of such installment premiums and makewholes owed to us have not been paid, despite an obligation to do so. The terms of our contracts may not permit us to cancel our insurance even though we have not been paid. If non-payment becomes widespread, whether as a result of bankruptcy, lack of liquidity, adverse economic conditions, operational failure or otherwise, a significant decline in the realization of installment premiums could have a material adverse impact on our revenues, results of operations and financial condition. In addition, existing counterparties to our policies have sought to cancel their policies with us in light of our financial condition. The failure of our counterparties to maintain existing business with us, whether due to early termination of contracts or other factors, could materially and adversely impact our revenues, results of operations and financial condition.

We have agreed not to make any dividends or distributions to our shareholders for a period of time and failure by us to pay dividends on the Syncora Holdings Series A Preference Shares could have a material adverse effect on the common shareholders’ board representation.

Syncora Holdings entered into an undertaking with the NYID pursuant to which we have agreed not to make any dividends or distributions to our shareholders during an eighteen-month period beginning on August 5, 2008. If dividends on our Series A Perpetual Non-Cumulative Preference Shares (the “Syncora Holdings Series A Preference Shares”) are not paid in an aggregate amount equivalent to dividends for six full quarterly periods, whether or not declared or whether or not consecutive, holders of the Syncora Holdings Series A Preference Shares will have the right to elect two persons who will then be appointed as additional directors to the Board of Directors of Syncora Holdings. As of March 31, 2009, dividends on the Syncora Holdings Series A Preference Shares have not been paid in an aggregate amount equivalent to six quarterly periods and therefore holders of the Syncora Holdings Series A Preference Shares have the right to elect two persons to serve on our Board of Directors. Such right will cease upon the earlier to occur of the first date as of which full dividends have been paid for at least four consecutive quarterly periods and the date on which the Syncora Holdings Series A Preference Shares have been redeemed.

Portfolio modeling contains uncertainty over ultimate outcomes which makes it difficult to estimate our potential paid claims and loss reserves.

The securities we insure include highly complex structured transactions, the performance of which depends on a wide variety of factors outside of our control, and in such transactions we rely on sophisticated financial models, generated internally and supplemented by models generated by third parties, to estimate future credit performance of the underlying assets, and to evaluate structures, rights and our potential obligations over time. For example, the modeling of multi-sector CDOs requires analysis of both direct ABS as well as CDO collateral within the multi-sector CDOs, known as “inner securitizations,” and we do not consistently have access to all the detailed information necessary to project every component of each inner securitization. Therefore, in some cases we put greater reliance on the models and analysis of third party market participants and are not able to fully, independently and precisely verify each data point. In addition, many of these financial models include, and rely on, a number of assumptions, many of which are difficult to determine and are subject to change, and even small alterations in the underlying assumptions of the model can have a significant impact on its results. Moreover, the performance of the securities we insure depends on a wide variety of factors that are outside our control, including the liquidity and performance of the collateral underlying such securities, the correlation of assets within collateral pools, the performance or non-performance of other transaction participants (including third-party servicers) and the exercise of control or other rights held by other transaction participants.

We continually monitor portfolio and transaction data and adjust these credit risk models to reflect changes in expected and stressed outcomes over time. We use internal models for ongoing portfolio monitoring and to estimate case basis loss reserves and may review third-party models or use third- party experts to consult with our internal modeling specialists. However, modeling results from both internal and external models, whether for calculating estimates of case reserves on insurance contracts or anticipated claims on CDS contracts, can be sensitive to changes in inputs and general assumptions, including economic and credit market stability and financial health of key transaction parties. Such inputs, or specific performance metrics, have recently been volatile, making forecasting difficult and significantly altering model results. In addition, both internal and external models are subject to potential errors of estimation and to model risk and there can be no assurance that these estimates and models are accurate or comprehensive in estimating our potential future paid claims and related loss reserves.

We have reviewed reports on our CDS and RMBS securities from experienced third parties who evaluated expected losses on CDS and RMBS that we guarantee. These reports have relied upon different assumptions than those used by us and some of these reports have reflected significantly greater losses. All of these reports and models rely on assumptions and estimates extending many years into the future. Such estimates are subject to the inherent limitations on the ability to predict the accurate course of future events. It should, therefore, be expected that the actual emergence of losses will vary, perhaps materially, from our estimate or from such third party estimate. Among other things, the estimates could be affected by an increase in unemployment, decrease in house prices, increase in consumer costs, or other events or trends. We can not assure you that our estimates will prove to be more accurate than those of third parties.

Under the 2009 MTA contemplated by the Letter of Intent, Syncora Guarantee will contribute significant funds to capitalize Drop-Down Company and such funds may not be available to Syncora Guarantee.

Under the 2009 MTA contemplated by the Letter of Intent, Syncora Guarantee will form a new financial guarantee insurance subsidiary, Drop-Down Company. If Syncora Guarantee forms Drop-Down Company and capitalizes it as contemplated, then the assets contributed to Drop-Down Company may no longer be available to Syncora Guarantee. Payments on the Drop-Down Company surplus notes to be issued to Syncora Guarantee may only be made with the approval of the NYID and if Drop-Down Company experiences adverse development on the risks it reinsures or assumes from Syncora Guarantee, such approval may not be granted. Also, payments of dividends or other distributions on the common stock of Drop-Down Company held by Syncora Guarantee may only be made out of earned surplus and, unless certain statutory tests are met, only with the approval of

the NYID. In addition, in connection with the licensing of Drop-Down Company in New York, Drop-Down Company expects to enter into an undertaking with the NYID not to pay dividends for the first two years following its licensing. If Drop-Down Company were to experience adverse development on the business it reinsures or assumes from Syncora Guarantee, Drop-Down Company may not have earned surplus or may not meet such tests and any required approval from the NYID to permit the payment of dividends or distributions on the Drop Down Company common stock held by Syncora Guarantee may not be forthcoming, which would adversely affect Syncora Guarantee’s financial condition.

Under the 2009 MTA contemplated by the Letter of Intent, Syncora Guarantee will pay cash consideration and issue certain surplus notes to the Counterparties as part of the consideration for their agreement to commute their policies and such cash consideration and any payments made on such surplus notes will reduce the funds available to Syncora Guarantee.

Under the 2009 MTA contemplated by the Letter of Intent, Syncora Guarantee will pay cash consideration and issue certain surplus notes to the Counterparties as consideration for their agreement to commute certain of their policies. Any such payments will reduce the resources of Syncora Guarantee. While Syncora Guarantee will need the approval of the NYID to make payments on the Syncora Guarantee surplus notes, if such approval were granted and payments were made on the Syncora Guarantee surplus notes, such payments would reduce the resources of Syncora Guarantee. In addition, the surplus notes issued by Syncora Guarantee will be senior to the Non-Cumulative Perpetual Series B Preferred Shares of Syncora Guarantee (the “Series B Preferred Shares”), the Syncora Holdings Series A Preference Shares and Syncora Holdings’ common shares.

Under the 2009 MTA contemplated by the Letter of Intent, Syncora Guarantee will reinsure certain public finance and global infrastructure business to Drop-Down Company and Drop-Down Company will assume certain other risks on certain of its policies in CDS form with the Counterparties. If Drop-Down Company experiences adverse development on such business, the NYID may, under certain circumstances, require Syncora Guarantee to recapture such public finance business reinsured to Drop-Down Company and reinsure it with another financial guarantor, in which event, Drop-Down Company will have reduced resources available to pay claims on its remaining business, which may adversely affect Drop-Down Company and Syncora Guarantee in respect of its investment in Drop-Down Company.

Under the 2009 MTA contemplated by the Letter of Intent, Syncora Guarantee will reinsure certain of its public finance and selected global infrastructure business pursuant to a quota share reinsurance agreement to Drop-Down Company and that Drop-Down Company will assume certain of Syncora Guarantee’s non-public finance and non-commuted policies in CDS form with certain of the Counterparties. If Drop-Down Company were to experience adverse development on certain of the business it has reinsured or assumed, then the NYID may, under certain circumstances, require Syncora Guarantee to recapture the public finance business it has reinsured with Drop-Down Company and reinsure such business with another unrelated financial guarantor on terms which may require Drop-Down Company to transfer to Syncora Guarantee assets comprising the unearned premium reserves relating to such business less the ceding commission previously paid to Syncora Guarantee for the cession of such business. Any such recapture and related transfer of assets of Drop-Down Company would reduce the claims paying resources of Drop-Down Company available to pay claims on its remaining business, which may adversely affect Drop-Down Company and result in an impairment of Syncora Guarantee’s investment in Drop-Down Company, which may adversely affect Syncora Guarantee’s capital and surplus and may reduce the ability of Drop-Down Company to make payments to Syncora Guarantee on the surplus notes of Drop-Down Company or its common stock held by Syncora Guarantee, which may further adversely affect Syncora Guarantee.

If either Syncora Guarantee or Syncora Guarantee-UK should become insolvent or has a receiver appointed, Syncora Guarantee may have to forego the right to receive any future premiums from Syncora Guarantee-UK, Syncora Guarantee-UK may have a right to claim back all or a proportion

of any premiums already paid to Syncora Guarantee and the FSA UK may intervene in Syncora Guarantee-UK’s operations.

Under the terms of the Facultative Quota Share Reinsurance Treaty, effective June 30, 2002, between Syncora Guarantee and Syncora Guarantee-UK (the “Treaty”), Syncora Guarantee has agreed to accept and reinsure on a quota share basis, or such alternative basis as the parties may agree, 97% of the Net Liabilities (as that term is defined in the Treaty) in respect of each Policy (as that term is defined in the Treaty) of financial guarantee insurance and surety insurance accepted pursuant to the terms of the Treaty. In the event that, among other things, either of the parties becomes insolvent or has a receiver appointed, the other party shall have the right to terminate the Treaty. In the event of such termination, Syncora Guarantee will lose the right to receive any future premiums and the relevant reinsurance will enter a period of run-off whereby Syncora Guarantee-UK will continue to be liable for Net Liabilities in respect of Policies in force which have been accepted pursuant to the terms of the Treaty and with respect to which notice of occurrence, claim or circumstances which give rise to a claim is given by the insured to Syncora Guarantee-UK prior to natural expiration or termination or anniversary date of such Policies ceded to Syncora Guarantee under the Treaty and Syncora Guarantee-UK will remain contractually obligated to pay Syncora Guarantee installment premiums on the “in-force” book of business. Syncora Guarantee and Syncora Guarantee-UK believe that Syncora Guarantee-UK is unlikely to have a right to claim back all or a proportion of any premiums already paid to Syncora Guarantee under the Treaty in relation to the period after the date the Treaty is terminated. The FSA UK also, as the applicable regulator of Syncora Guarantee-UK in the United Kingdom, would have broad and extensive powers under the FSMA which could be exercised in the event that either Syncora Guarantee or Syncora Guarantee-UK became insolvent or had a receiver appointed, including to vary or cancel Syncora Guarantee-UK’s permission to carry on any of its regulated activities.

Syncora Guarantee is required to provide Syncora Guarantee-UK with funds to maintain its compliance with its minimum solvency margin and these amounts could be material.

In 2002, Syncora Guarantee-UK agreed with the FSA UK to maintain a minimum solvency margin at the greater of (i) $12.5 million or (ii) 200% of the FSA UK’s required minimum margin of solvency. Under a Surplus Maintenance Agreement, Syncora Guarantee agreed to provide Syncora Guarantee-UK with funds sufficient to maintain compliance with this test at all times. Syncora Guarantee-UK was in breach of its capital solvency margin as required by the FSA UK under U.K. GAAP by $4.4 million as of September 30, 2008 and $0.6 million as of December 31, 2008. Syncora Guarantee injected $4.4 million in cash into Syncora Guarantee-UK and has requested NYID approval to inject another $1.0 million. The NYID has verbally notified Syncora Guarantee that, until the 2009 MTA is consummated, it will not permit the $1.0 million capital injection to be made. Syncora Guarantee could be required to provide additional funds to Syncora Guarantee-UK and these amounts could be material. The payment of such funds will be subject to NYID approval. If the NYID does not approve capital contributions to Syncora Guarantee-UK, the FSA UK may take regulatory actions that adversely affect Syncora Guarantee’s financial position and results of operations, and may impact its ability to comply with its minimum policyholders’ surplus requirement.

There is a possibility that the 2008 MTA, or the 2009 MTA if entered into and consummated, the related commutations and releases could be challenged, which could have a material adverse effect on our financial condition.

Any creditor or, if Syncora Guarantee were placed into rehabilitation or liquidation, the New York Superintendent as rehabilitator or liquidator could challenge the 2008 MTA, or the 2009 MTA if entered into and consummated, and the related transactions. We obtained required approvals from the NYID, the BMA and the Delaware Department of Insurance in connection with the 2008 MTA and the transactions contemplated thereby. The NYID also approved the Merrill Agreement and the transactions contemplated thereby. The 2009 MTA will only be consummated with NYID approval. However, there can be no assurance regarding the enforceability of the 2008 MTA, or the 2009 MTA if entered into and consummated, and that the transactions contemplated thereunder will not be challenged, including under applicable fraudulent conveyance laws. If any challenge were

successful, the applicable transactions contemplated by the 2008 MTA, or the 2009 MTA if entered into and consummated, and the related commutations and releases could be unwound or otherwise affected and that could have a material adverse effect on our financial condition.

Ratings downgrades have triggered and withdrawal of ratings may trigger additional provisions in our business arrangements and agreements to which we are party or subject in a manner adverse to our business.

Downgrades to our ratings trigger provisions in arrangements and agreements to which we are a party (or are subject to) that entitle the other party or parties to the agreement to take actions that may have a material adverse effect on our business, financial condition, results of operations and liquidity.

We are party or subject to various agreements, including reinsurance treaties and agreements, that give the other party or parties to such agreement the right to terminate the agreement or take other action in the event our ratings are lowered below a specified level. In certain cases, we may elect to post collateral or take certain other actions in order to prevent certain agreements from being terminated. We cannot assure you that we would be able to raise additional capital or find alternative reinsurance arrangements on acceptable terms or at all. The ratings downgrades that have occurred have triggered the termination rights under certain reinsurance agreements, but the other parties to these agreements have not yet exercised their termination rights. If all these agreements were terminated on a cut-off basis we would have to return U.S. statutory unearned premiums, net of ceding commissions, and U.S. statutory reserves for losses and loss adjustment expenses of approximately $56 million as of December 31, 2008. Withdrawal of ratings could trigger additional termination rights. The exercise of these termination rights by the other parties would have a material adverse effect on our business, financial condition, results of operations and liquidity.

As a result of certain downgrades, some of our existing insurance products may be cancelled and, while we would no longer be obligated to insure the counterparty against loss, we would no longer be entitled to receive premiums in respect of such cancelled products. There have been a limited number of such cancellations to date. Installment premiums earned in 2008 on products where the counterparty presently has the right to cancel such product were approximately $10.9 million. Potential future cancellations of these products or refunds of premiums related to these products may have an adverse effect on our income and, consequently, our results of operations and financial condition. In addition, as a result of certain downgrades we have experienced a loss of control over, or a diminishment in, our rights and remedies in a particular business arrangement.

Primary companies reinsured by us may require us to provide collateral or letters of credit so they can receive reinsurance credit under certain U.S. state laws. In addition, under certain of our reinsurance agreements, we have the option to provide collateral or letters of credit in favor of the primary companies we reinsure in the event of a downgrade of our credit ratings or other events which would diminish the reinsurance credit provided to such primary companies by the rating agencies for our reinsurance. Although our credit ratings were downgraded, as of the date hereof, we have not received a request from any of the primary companies we reinsure to provide collateral or letters of credit and we have not made any determination whether we will provide collateral or letters of credit to such primary companies. As of December 31, 2008, we had no additional letter of credit capacity available.

The interest rate owed by many issuers of variable rate public finance obligations insured by Syncora Guarantee has been resetting at significantly higher levels following the rating agency downgrades of Syncora Guarantee and due to market conditions generally. As a result, some issuers are experiencing pressure on their ability to make debt service payments due to these higher than anticipated costs. In the event such an issuer should default on its obligation, Syncora Guarantee will be obligated to cover, under the terms of its financial guarantees, such issuers’ guaranteed payments. Some of these payments may be significant, and under the terms of certain of the contracts, the amortization periods may be shortened in certain circumstances.

If the counterparties to our reinsurance arrangements default on their obligations to us, we may be exposed to risks we had sought to mitigate, which could adversely affect our financial condition and results of operations.

We have used reinsurance to mitigate our risk of loss under the insurance policies we have sold. Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit risk with respect to our reinsurers. We cannot assure you that our reinsurers will pay the reinsurance recoverables owed to us on a timely basis or at all. A reinsurer’s insolvency or inability or unwillingness to make payments on a timely basis or at all under the terms of its reinsurance agreement with us could have a material adverse effect on our financial condition and results of operations. For example, on August 7, 2008, Blue Point Re Limited entered liquidation and accordingly we wrote down $20.7 million of reinsurance receivables. Should our other reinsurers be unable or unwilling to perform, in cases where we have ceded exposure that results in losses, we would bear the full liability for these losses, which may materially increase our losses.

Our insurance and reinsurance portfolio and financial guarantee products expose us to concentrations of risks, and a material adverse event or series of events with respect to one or more of these risks could result in significant losses to our business.

The breadth of our business exposes us to potential losses in a variety of our products, which may be correlated as to credit risk, market risk and sector risk. For example, we are significantly exposed to the risk of increases in default rates across a wide range of credit instruments, including but not limited to corporate debt securities within our CDO portfolio and residential mortgages underlying both our direct RMBS and ABS CDO transactions. While we track our aggregate exposure to credit problems at a single issuer or servicer, which we refer to as single name exposure, events with respect to single names have caused a significant loss across a number of transactions that we have guaranteed and may cause additional significant losses. In addition, we have a number of individual large exposures to single obligors in our public finance portfolio, concentrations of risk in infrastructure sectors, such as water and sewer utilities and transportation, and concentrations of risk in certain geographic areas. For example, we are significantly exposed to guaranteed obligations on sewer revenue warrants issued by the County and pension obligation bonds issued by the City of Detroit, Michigan. While the risk of a complete loss on such public finance obligations, where we are required to pay the entire principal amount of an issue of bonds and interest thereon with no recovery, is generally lower than for single corporate credits as most municipal bonds are backed by taxes or other revenue sources, there can be no assurance that a single default by a municipality or public authority would not have a material adverse effect on our results of operations or financial condition.

Some of our direct financial guarantee products differ from traditional financial guarantee insurance, principally because these less traditional products, including CDS contracts, may require us to make payments of the full guaranteed amount earlier than, or upon the occurrence of events not covered by, traditional products. In certain of these events, we may be required to pay amounts in excess of our current resources.

Some of our financial guarantee direct exposures has been written as financial guarantees of credit derivatives rather than traditional financial guarantee insurance policies. Traditional financial guarantee insurance provides an unconditional and irrevocable guarantee that protects the holder of a municipal finance or structured finance obligation against non-payment of scheduled principal and interest when due. In contrast, credit derivatives provide protection from the occurrence of specified credit events, which usually include non-payment of principal and interest, but may also include other events that would not typically trigger a payment obligation under traditional products. Credit derivative products may, in limited circumstances, provide for settlement of an entire exposure (i.e., the “out of the money” amount on the reference obligation at that time), rather than a missed payment obligation as in traditional financial guarantee insurance, upon the occurrence of a credit event, which could require us to sell assets or otherwise generate liquidity in advance of any potential recoveries. Because of the declines in our ratings, certain holders of our financial guarantees, including guarantees of CDS contracts, may elect to exercise their rights to terminate

our financial guarantees thereby decreasing future premiums due to us; in such instances, we are generally not obligated to make a termination payment. Our net earned premium on CDS contracts was $61.6 million and $47.1 million for the years ended December 31, 2008 and 2007, respectively, which represented 18.1% and 21.8% of total net earned premium for such years, respectively. Our notional exposure, net of reinsurance, from the issuance of CDS policies was $56.2 billion and $59.6 billion at December 31, 2008 and 2007, respectively, which represented 42.0% and 36.2% of our total net par outstanding at these dates.

Rules relating to certain accounting practices in the financial guarantee insurance industry have been changed and will cause us to de-recognize our reserves for unallocated losses and loss adjustment expenses, which has had a material adverse effect on our reported operating results and financial condition.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 163 (“SFAS 163”), Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”). SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS 163 clarifies how SFAS 60 applies to financial guarantee insurance contracts. SFAS 163, among other things, changes current industry practices with respect to the recognition of premium revenue and claim liabilities. Under SFAS 163, a claim liability on a financial guarantee insurance contract is recognized when the insurance enterprise expects that a claim loss will exceed the deferred premium revenue (liability) for that contract based on expected cash flows. The discount rate used to measure the claim liability is based on the risk-free market rate and must be updated each quarter. Premium revenue recognition under SFAS 163 is based on applying a fixed percentage of the premium to the amount of outstanding exposure at each reporting date (referred to as the level-yield approach). In addition, in regard to financial guarantee insurance contracts where premiums are received in installments, SFAS 163 requires that an insurance enterprise recognize an asset for the premium receivable and a liability for the unearned premium revenue at inception of a financial guarantee insurance contract and, that such recognition should be based on the following:

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the expected term of the financial guarantee insurance contract if (1) prepayments on the insured financial obligation are probable, (2) the timing and amount of prepayments can be reasonably estimated, and (3) the pool of assets underlying the insured financial obligation are homogeneous and are contractually prepayable. Any adjustments for subsequent changes in those prepayment assumptions would be made on a prospective basis. In all other instances, contractual terms would be used, and

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the discount rate used to measure the premium receivable (asset) and the deferred premium revenue (liability) should be the risk-free market rate.

We expect that the initial effect of applying SFAS 163 will be material to our financial statements. We cannot currently quantify the effect at this time because SFAS 163 involves significant changes to current accounting practice which we are currently in the midst of implementing. We expect, however, that implementation of SFAS 163 will cause us to de-recognize our reserves for unallocated losses and loss adjustment expenses and preclude us from providing such reserves in the future. See Note 6 to the Consolidated Financial Statements. If NAIC SAP were to adopt SFAS 163 for loss reserving, our statutory surplus would decline, perhaps materially.

Our valuation of our CDS contracts may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.

Our CDS contracts are reported at fair value on the consolidated balance sheet in accordance with Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), with changes in fair value during each period included in earnings. SFAS 157 establishes a three-level hierarchy based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical instruments (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s

classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. Quoted market prices are available only on a limited portion of our in-force portfolio of CDS contracts. Most of our CDS contracts are highly customized structured credit derivative transactions that are not traded and do not have observable market prices If quoted market prices are not available, fair value is estimated based on the use of valuation techniques involving management’s judgment. Due to the significance of unobservable inputs required to value such CDS contracts, they are considered to be Level 3 under the SFAS 157 fair value hierarchy.

Key variables used in the valuation of substantially all of our CDS contracts include the balance of unpaid notional, expected term, fair values of the underlying reference obligations, reference obligation credit ratings, assumptions about current financial guarantee CDS fee levels relative to reference obligation spreads, our credit spread and other factors. Fair values of the underlying reference obligations are obtained from broker quotes when available, or are derived from other market indications such as new issuance and secondary spreads and quoted values for similar transactions and indices, such as ABX or CDX. Implicit in the fair values obtained by us on the underlying reference obligations are the market’s assumptions about default probabilities, default timing, correlation, recovery rates and collateral values. In addition, we consider our Non-Performance Risk as implied by the market price of buying credit protection on Syncora Guarantee by incorporating the spread on CDS contracts traded on Syncora Guarantee into the discount rate used. Therefore, the fair value of our CDS contracts uses valuation methodologies which require a significant amount of subjectivity and management judgment. Such valuations include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation, thereby resulting in values which may be less than the value at which our CDS may be ultimately sold. Decreases in value may have a material adverse effect on our results of operations or financial condition. See Note 6 to the Consolidated Financial Statements.

If we are not able to retain key employees, we may be unable to successfully implement our strategic plan or operate our business.

Our suspension of writing new business, the restructuring of our business operations pursuant to the 2008 MTA and the 2009 MTA and the implementation of work force reductions as part of our strategic plan may lead us to fail to retain key employees despite short term incentives, which may in turn make us unable to successfully implement the remainder of our strategic plan or operate our business. Effective November 19, 2008, our Chief Financial Officer resigned and as of November 6, 2008, Goldin Associates, LLC agreed to provide temporary staffing, consulting and managerial services in connection with our financial functions. There can be no assurance we will be able to retain other key employees and what impact this may have on our ability to implement our strategic plan or operate our business.

Our shares have been de-listed from the New York Stock Exchange and will be deregistered under the Exchange Act.

On January 7, 2009, the NYSE notified us that it filed a notification of removal from listing on Form 25 pursuant to Rule 12d2-2(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC to delist our common shares as we were no longer in compliance with two NYSE listing standards because our average global market capitalization over a consecutive 30 trading-day period was less than $75 million and, at the same time, total shareholders’ equity was less than $75 million, and the average closing price of our common shares was less than $1.00 over a consecutive 30 trading-day period. The delisting of our shares could further reduce the price of our common shares and the liquidity of the trading market for our common shares. Our common shares are currently traded over the counter and quoted on the Pink Sheets quotation service.

In light of our suspension of writing substantially all new business and our strategic plan, we intend to deregister as soon as practicable our common shares and the Syncora Holdings Series A Preference Shares under the Exchange Act in order to reduce the costs of being a public company and prevent the diversion of management resources. After the deregistration of our shares, our shares will be subject to state blue sky laws and will only be able to be traded pursuant to an

exemption from applicable state blue sky laws. Therefore, the deregistration of our shares could inhibit the ability of our shareholders to trade the shares, thereby further limiting the liquidity of such shares. Furthermore, we will no longer be required to file current, annual and quarterly reports with the SEC and be subject to various substantive requirements of Exchange Act regulations, which will reduce the amount of information available to investors about us.

General economic factors, including those as a result of the current financial crisis, may adversely affect our loss experience and our investment portfolio.

Our loss experience could be materially adversely affected by extended national or regional economic recessions, business failures, rising unemployment rates, terrorist attacks, natural or other catastrophic events such as hurricanes and earthquakes, acts of war, or combinations of such factors. Markets in the United States and elsewhere have been experiencing extreme volatility and disruption for more than twelve months, due in part to the financial stresses affecting the liquidity of the banking system and the financial markets generally. In recent months, this volatility and disruption has reached unprecedented levels. This unprecedented market volatility and general decline in the debt markets has adversely affected our investment portfolio, including our ability to sell invested assets at desired prices. In order to consummate the transactions contemplated by the 2009 MTA, we will be required to sell a large portion of our invested assets. No assurance can be given that such sales will be at prices approximating their carrying value. In addition, concerns over availability and cost of credit, the U.S. real estate market, inflation, energy costs, geopolitical issues, declining business and consumer confidence and increasing unemployment have precipitated an economic slowdown and possibly a recession, all of which could have a material adverse effect on our loss experience, in particular with respect to their effect on the mortgage market.

In addition to exposure to general economic factors, we are exposed to the specific risks faced by the particular businesses, municipalities or pools of assets covered by our financial guarantee products. Recently, in light of the economic and financial crisis, various businesses and municipalities are facing financial difficulties. In addition, catastrophic events or terrorist acts could adversely affect the ability of public sector issuers to meet their obligations with respect to securities insured by us and we may incur material losses due to these exposures if the economic stress caused by these events is more severe than we currently foresee. Other events, such as interest rate changes or volatility, could materially decrease demand for financial guarantee insurance or the demand for financial guarantee reinsurance.

We face significant litigation risks.

We are involved in a number of legal proceedings, including class action and other litigation. In December 2007 and January 2008, three lawsuits were commenced in the United States District Court for the Southern District of New York and were subsequently consolidated under the caption In re Security Capital Assurance Securities Litigation. The consolidated amended complaint includes claims that defendants’ public statements contained false and misleading statements and omitted to disclose material facts necessary to make the statements contained therein not misleading in violation of federal securities laws. From April 2008 through October 2008, a number of lawsuits were commenced in Federal and California State courts against Syncora and a number of providers and brokers of municipal derivatives, alleging a conspiracy among the defendants to rig bids in municipal derivative auctions in violation of federal and California State antitrust law and California state common law. These actions have been consolidated under the caption In re Municipal Derivatives Antitrust Litigation, currently pending in the United States District Court for the Southern District of New York. From July 2008 through January 2009, lawsuits were filed by a number of California municipal entities in California State courts against several bond insurers, including Syncora Guarantee, and two individual defendants. The complaints include allegations that defendants failed to fully disclose their investments in subprime mortgage-backed securities and insurance of subprime instruments and that the defendants conspired to perpetuate and maintain a dual system of bond rating in violation of California State antitrust laws and California State common law. In June 2008, a class action was brought against us and numerous other defendants alleging wrongful conduct with respect to bonds issued by the County. In September 2008, Syncora Guarantee along with other plaintiffs, commenced a lawsuit against the County and its current

commissions in the United States District Court for the Northern District of Alabama seeking the appointment of a receiver of the County’s sewer system and the County, in turn, filed a counterclaim against the plaintiffs alleging negligence, breach of contract fraud and fraudulent suppression.

We cannot predict the outcomes of these legal proceedings and other contingencies with certainty. The outcome of some of these legal proceedings and other contingencies could require us to take or refrain from taking actions which could adversely affect our business or could require us to pay substantial amounts of money. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management’s attention and resources from other matters. See “Legal Proceedings.”

Legislative and regulatory changes and interpretations could materially affect our results of operations, financial condition and liquidity in ways that we cannot predict.

The financial guarantee industry is subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies, including foreign regulators, state insurance regulators, state securities administrators, the SEC, the Financial Industry Regulatory Authority, the NAIC, the FSA UK, the U.S. Department of Justice and state attorneys general. Changes in laws and regulations affecting insurance companies, the municipal and structured securities markets, the financial guarantee insurance and reinsurance markets and the credit derivatives markets, as well as other governmental regulations, may subject us to additional legal liability, impact the credit performance of the securities that we insure and otherwise impact our financial condition.

In light of the current financial crisis, some of these authorities are considering or may in the future consider enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. For example, on September 22, 2008, the New York Superintendent announced Circular Letter No. 19 that would redefine the “best practices” for the future activities of bond insurers. In addition, there have been various legislative initiatives proposed in response to the recent dislocation in the credit markets and the adverse changes in the residential mortgage loan sector. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. We cannot assure you that these changes or any other future legislative or regulatory action will not materially adversely affect our business or financial condition or our ability to successfully implement our strategic plan. In view of recent events involving certain financial institutions, it is possible that the U.S. Federal government will heighten its oversight of insurers such as us, including possibly through a federal system of insurance regulation. We cannot predict whether this or other proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, financial condition or results of operations.

State insurance regulators, such as the NYID, and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and, thus, could have a material adverse effect on our financial condition and results of operations.

We cannot predict whether or when regulatory actions may be taken that could adversely affect our operations. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements.

Because our financial guarantee insurance and reinsurance policies are unconditional and irrevocable, we may incur losses from fraudulent conduct relating to the securities that we insure or reinsure.

Issuers of obligations that we insure or reinsure may default on those obligations because of fraudulent or other intentional misconduct on the part of such issuers, their officers, directors, employees, agents or outside advisers or, in the case of public finance obligations, public officials. Financial guarantee insurance provided by Syncora Guarantee is unconditional and does not provide

for any defense to payment based on fraud or other misconduct, although such conduct may entitle us to terminate obligations under certain credit derivative agreements that we insure or to pursue actions for damages after making payment under our financial guarantee policies. Despite any risk analysis conducted by us or by the financial guarantors whose policies we reinsure, it is impossible to predict which, if any, of the obligations financial guarantee by us will result in claims against us because of fraudulent or other intentional misconduct involving the issuer or whether or to what extent we will have any remedy available to us against any party in connection with such conduct. Any such claims against us could have a material adverse effect on our financial condition and results of operations.

Servicer risk could adversely impact performance of our structured finance transactions.

Structured finance obligations contain certain risks including servicer risk, which relates to problems with the transaction servicer (the entity which is responsible for collecting the cash flow from the asset pool) that could affect the servicing of the underlying assets. Servicer risks primarily involve bankruptcy risks, such as whether the servicer of the assets may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings. Structured finance transactions are usually structured to reduce the risk to the investors from the bankruptcy or insolvency of the servicer. The ability of the servicer to properly service and collect on the underlying assets is a factor in determining future asset performance. We address these issues through our servicer due diligence and underwriting guidelines, our formal credit review and approval process and our post-closing servicing review and monitoring, however, no assurance can be given that the servicer will properly effect its duties.

Risks Related to Taxation

We are currently limited in our ability to utilize our tax losses to obtain tax benefits, including a limitation on our ability to fully utilize net operating loss carryforwards recognized as of August 5, 2008.

We have experienced and may continue to experience substantial tax losses in the conduct of our insurance businesses in the United States and the United Kingdom.

Section 382 of the Internal Revenue Code (“Section 382”) contains rules that limit the ability of a corporation that experiences an “ownership change” to utilize its net operating loss carryforwards (“NOLs”) and certain built-in losses recognized in periods following the ownership change. An ownership change is generally any change in ownership of more than 50 percentage points of a corporation’s stock over a 3-year period. These rules generally operate by focusing on ownership changes among shareholders owning directly or indirectly 5% or more of the stock of a corporation or any change in ownership arising from a new issuance of stock by the corporation.

On August 5, 2008, we experienced an ownership change for purposes of Section 382. As a result of this ownership change, our ability to utilize NOLs and certain built-in losses existing as of August 5, 2008 will be subject to an annual limitation in the future. This limitation is generally determined by multiplying the value of the Company as of the ownership change date by the applicable long-term tax-exempt rate.

Our NOLs could be substantially further limited if we experience another ownership change.

Following the August 5, 2008 ownership change, we have generated significant additional NOLs, and depending upon our operating performance in future periods, we may continue to generate additional NOLs. If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common shares, including purchases or sales of shares between five-percent shareholders, our ability to utilize our NOLs and recognize certain built-in losses would be subject to further limitations under Section 382.

Depending on the resulting limitation, a significant portion of our NOLs could be deferred or could expire before we would be able to use them to offset positive taxable income in current or future tax periods. Our inability to utilize our NOLs could have a negative impact on our financial position and results of operations.

To protect against an unanticipated subsequent ownership change, we have amended our bye-laws to provide for restrictions on our shareholders’ ability to transfer common shares of our shares if following such a transfer, a transferee would become a five-percent shareholder of the Company for purposes of Section 382 or the percentage of share ownership of an existing five percent shareholder would be increased.

The limitations imposed on our ability to utilize NOLs recognized prior to the August 5, 2008 ownership change or a subsequent ownership change will be more substantial, and will have an additional material negative impact on the Company, if the Internal Revenue Service does not grant our request to change our method of accounting for unpaid loss reserves.

Currently, the Company establishes unpaid loss reserves once a loss is deemed probable even if a technical event of default has not yet occurred. We believe, however, that the establishment of such reserves prior to an event of default represents an impermissible method of accounting for federal income tax purposes. To correct this mistreatment, the Company filed a protective change of accounting method request with the Internal Revenue Service (“IRS”) on December 30, 2008 (“change of accounting method request”) and also filed a ruling request under Section 381 of the Internal Revenue Code on February 2, 2009 to determine the appropriate method of accounting for these unpaid loss reserves (“Section 381 ruling request”).

We anticipate, but cannot be certain, that the IRS will grant our change of accounting method request or our Section 381 ruling request. In the event the IRS grants our Section 381 ruling request, we will withdraw our initial change of accounting method request. If the change of accounting method request or Section 381 ruling request is granted, any loss reserve deductions incorrectly recognized prior to an ownership change should not be subject to the limitations described above unless an event of default occurred requiring such losses to be recognized prior to a subsequent ownership change under Section 382. However, if the IRS denies our change of accounting method request and Section 381 ruling request with regard to unpaid loss reserves, then the Company’s ability to utilize NOLs attributable to loss reserve deductions recognized prior to an ownership change would be severely limited under Section 382. Furthermore, if the IRS denies our change of accounting method request and Section 381 ruling request, the amount of NOLs available may be insufficient to offset any taxable income or gain generated by the Company as a result of the 2009 MTA, which could result in a tax liability for the Company. If the 2009 MTA causes an ownership change, the ability of the Company to utilize pre-ownership change NOLs and built-in losses in subsequent periods would be severely limited.

The appropriate federal income tax treatment of guaranteed CDS contracts we have issued is currently unclear, which could negatively impact the character and timing of income, gain or loss recognized by us in connection with these contracts.

The IRS has indicated that it is considering the appropriate tax treatment of credit default swaps for federal income tax purposes, but has not issued any definitive guidance to date on whether such credit default swaps should be treated as insurance, derivatives or some other instrument for tax purposes.

Currently, the Company believes that our guaranteed CDS contracts should be treated as insurance for federal income tax purposes. If the IRS takes the position that these guaranteed CDS contracts are not treated as insurance for federal income tax purposes, but are instead treated as another type of financial instrument, we would no longer be able to establish reserves for anticipated losses and unearned premiums related to these CDS contracts. In such circumstances, we would experience an acceleration of income recognition for tax purposes and a corresponding deferral in our ability to recognize certain losses associated with these CDS contracts. Additionally, if the guaranteed CDS contracts were terminated as a result of the 2009 MTA such termination could result in a significant capital loss to the Company. Finally, if our CDS business was deemed to be more than 50% of the total activity of our business and is not treated as insurance, we would not qualify as an insurance company and no reserve deductions would be permitted.

Risks Related to Ownership of Our Common Shares

Because we are a holding company and substantially all of our operations are conducted by our subsidiaries, our ability to meet any ongoing cash requirements, including any debt service payments or other expenses, and to pay dividends on our preferred or common shares in the future will depend on our ability to obtain cash dividends or other cash payments or obtain loans from our subsidiaries, which are regulated insurance companies and whose ability to pay dividends or make loans to us is limited by regulatory constraints.

We conduct substantially all of our operations through our subsidiaries and our subsidiaries generate substantially all of our operating income and cash flow. Our ability to meet our ongoing cash requirements, including any debt service payments or other expenses, and pay dividends on our common shares in the future will depend on our ability to obtain cash dividends or other cash payments or obtain loans from our subsidiaries and will also depend on the financial condition of our subsidiaries. Our subsidiaries are separate and distinct legal entities that will have no obligation to pay any dividends or to lend or advance us funds and may be restricted from doing so by contract, including other financing arrangements, charter provisions or applicable legal, regulatory requirements of the various countries that they operate in, including the United States and the U.K.

Under New York Insurance Law, Syncora Guarantee may pay a shareholder dividend only if it files notice of its intention to declare such dividend and the amount thereof with the New York Superintendent and the New York Superintendent does not disapprove such dividend. New York Insurance law contains a test governing the amount of dividends that Syncora Guarantee can pay in any year and, as a result of the application of such test, Syncora Guarantee cannot currently pay dividends. In addition, Syncora Guarantee entered into an undertaking with the NYID pursuant to which it agreed not to pay any dividends to the shareholders of Syncora Guarantee, including Syncora Holdings and the holders of the Series B Preferred Shares without the prior consent of the NYID during a two-year period commencing on November 18, 2008. There can be no assurance that any dividends or advances will be approved and if required dividends or advances are not approved, Syncora Holdings has no other available sources of funding.

Syncora Guarantee-UK is also subject to significant regulatory restrictions limiting its ability to declare and pay dividends. See “Business—Regulation.”

The SCA Shareholder Entity owns approximately 46% of our outstanding common shares and has the ability to exert significant influence over us. In addition, conflicts may arise between us and the SCA Shareholder Entity that could be resolved in a manner unfavorable to us or investors in our securities.

The SCA Shareholder Entity has a significant economic and voting interest in us and, therefore, is able to exercise significant influence over us. This is primarily a result of the following factors:

•

The SCA Shareholder Entity beneficially owns approximately 46% of our outstanding common shares which are being held in trust for the benefit of Syncora Guarantee until such time as an agreement between Syncora Guarantee and the Counterparties is reached and thereafter such shares will be held for the benefit of the Counterparties or as otherwise provided in such agreement; and

•

Pursuant to a shareholder agreement between Syncora Private Trust Company Limited as trustee of the SCA Shareholder Entity and the Company, the SCA Shareholder Entity has the right to nominate for our Board of Directors (i) for so long as the Board consists of nine or fewer directors, such number of nominees as would equal one nominee less than a majority of the directors and (ii) for so long as the Board consists of ten or more directors, such number of nominees as would equal two nominees less than a majority of the directors; effective November 19, 2008, the SCA Shareholder Entity appointed four members to our Board of Directors.

The SCA Shareholder Entity may therefore exert significant influence over, among other things, election of our directors and determination of our business strategies, risk profile and underwriting limits. Further, conflicts of interest may arise between us and the SCA Shareholder Entity in a

number of areas. Because the SCA Shareholder Entity has the right to nominate such number of directors that would equal one or two nominees less than a majority of the directors, it has the ability to exert significant influence over us, including on matters requiring shareholder approval and our policy and affairs so long as the SCA Shareholder Entity continues to hold a significant amount of our common shares. We cannot assure you that the resolution of any matter that may involve the interests of both us and the SCA Shareholder Entity will be resolved in what investors would consider to be in our or their best interests. In addition, our bye-laws contain provisions providing indemnification, exculpation and other protections to our directors, officers and employees with respect to such matters.

Under the 2009 MTA as contemplated by the Letter of Intent, the Counterparties will own approximately 40% of our outstanding common shares upon the consummation of the transaction contemplated thereby and may exercise some level of control over our Board of Directors and they may have conflicts of interest with us.

In connection with the 2009 MTA as contemplated by the Letter of Intent, 40% of our outstanding common shares immediately after giving effect to the transactions contemplated by the 2009 MTA will be transferred from the SCA Shareholder Entity, which shares are currently accounted for as treasury shares, it being understood that effectively 36% of our common shares will be distributed to the commuting Counterparties and 10% of our common shares will be returned to us to be cancelled or held as treasury shares and not reissued. In addition, under the 2009 MTA, the Counterparties will also receive surplus notes of Syncora Guarantee, which has priority over equity. Furthermore, closing conditions to the 2009 MTA contemplate that we will agree with the Counterparties on a process for selecting members of the Board of Directors of each of Syncora Holdings, Syncora Guarantee and Drop-Down Company and certain of our officers. This selection process may provide the Counterparties with some level of control in selecting the members of the Board of Directors and certain officers. As a result of their shareholding and the selection process, the Counterparties may have influence over our and Syncora Guarantee’s policies and affairs. In their capacity as Counterparties, the Counterparties’ interests may differ significantly from our interest and those of Syncora Guarantee and our shareholders. Consequently, the Counterparties may exercise their rights in a manner that conflicts with our interests and our shareholders’ interests.

Our subsidiaries’ ratings are not evaluations directed to the protection of investors in our common or preferred shares.

The ratings of our subsidiary, Syncora Guarantee, and its subsidiary, Syncora Guarantee-UK, as described under “Business—Ratings” and elsewhere in this document, reflect each rating agency’s current opinion of these subsidiaries respective financial strength, operating performance and ability to meet obligations to policyholders and contract holders. These factors are of concern to policyholders, contract holders and lenders. Ratings are not evaluations directed to the protection of investors in our common or preferred shares. They are not ratings of our common or preferred shares and should not be relied upon when making a decision to buy, hold or sell our common or preferred shares or any other security. In addition, the standards used by rating agencies in determining financial strength are different from capital requirements set by state insurance regulators.

There are provisions in our bye-laws that, subject to certain exceptions, reduce the voting rights of common shares that are held by a person or group to the extent that such person or group holds more than 9.5% of the aggregate voting power of all common shares entitled to vote on a matter.

In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, if, and for so long as (and whenever), the common shares of a shareholder, including any votes conferred by “controlled shares” (as defined in our bye-laws), would otherwise represent more than 9.5% of the aggregate voting power of all common shares entitled to vote on a matter, including the election of directors, the votes conferred by such shares will be reduced by whatever amount is necessary such that, after giving effect to any such reduction (and any other reductions in voting power required by our bye-laws), the votes conferred by such shares represent 9.5% of the aggregate voting power of all common shares entitled to vote on such matter, provided that the foregoing restrictions do not

apply to common shares held by the SCA Shareholder Entity. “Controlled shares” include, among other things, all of our shares that a person is deemed to own directly, indirectly (applying the provisions of section 958(a)(2) of the Code) or constructively (applying the provisions of section 318(a) of the Code, as modified by the rules of section 958(b)(1) through (4) of the Code), or, as a result of such person being a member of a “group” under the applicable rules promulgated by the SEC.

There are provisions in our bye-laws which may limit a shareholder’s voting rights if our Board of Directors determines to do so to avoid certain material adverse legal, tax or regulatory consequences.

Our Board of Directors may limit a shareholder’s voting rights where it deems it appropriate to do so to avoid certain material adverse tax, legal, rating agency or regulatory consequences to us or any of our subsidiaries or any shareholder or its affiliates, provided that the foregoing restrictions do not apply to the SCA Shareholder Entity. These consequences may include subjecting us or our subsidiaries to insurance regulatory requirements in jurisdictions in which we would not otherwise be subject or subjecting us, or our subsidiaries or shareholders to adverse tax consequences due to a particular person’s ownership of our shares. We also have the authority under our bye-laws to request information from any shareholder for the purpose of determining ownership of controlled shares by such shareholder. It is expected that our Board of Directors would provide, to the extent they deem appropriate and without subjecting us or our shareholders to such material adverse consequences, appropriate notification to the applicable shareholder and an opportunity to make an appropriate presentation to our management or Board prior to so limiting any shareholders’ voting rights.

There are provisions in our bye-laws that may restrict shareholders’ ability to transfer common shares and, therefore, may affect the liquidity of common shares.

Our Board of Directors may decline to approve or register a transfer of any common shares (1) if it appears to the Board of Directors, after taking into account the limitations on voting rights contained in our bye-laws, that any adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders or their respective affiliates would result from such transfer (other than such as our Board of Directors considers to be de minimis), (2) unless otherwise required by any applicable requirements of an applicable stock exchange or applicable over-the-counter market, if the Board of Directors does not receive a written opinion from counsel supporting the legality of the transaction under U.S. securities laws, (3) if the transferee has not been approved by applicable governmental authorities (if such approval is required) or if the transfer is not in compliance with applicable consent, authorization or permission of any governmental body or agency in Bermuda or (4) if after such transfer, the transferee would become a five-percent shareholder of us or the percentage share ownership of an existing five-percent shareholder would be increased. These restrictions in our bye-laws could adversely affect the liquidity of the common shares that you own.

Bermuda Law and our bye-laws provide broad indemnity and exculpation protections for the benefit of our officers, directors and employees.

Under Bermuda law and our bye-laws, we will indemnify our officers, directors and employees to the full extent permitted by Bermuda law and none of our officers, directors or employees would be personally liable to us or our shareholders, unless in any such case such officer, director or employee is found, by a court of competent jurisdiction in a final judgment or decree not subject to appeal, guilty of any fraud or dishonesty in relation to us.

Provisions in our bye-laws could impede an attempt to replace or remove our directors or change our direction or policies, which could diminish the value of our common shares.

Our bye-laws contain provisions that may make it more difficult for shareholders to replace directors, or effect a change in corporate policy or direction, even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a

bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future.

For example, our bye-laws contain the following provisions that could have such an effect:

•

election of our directors is staggered, meaning that the members of only one of three classes of our directors are elected each year;

•

shareholders may not remove directors except for cause (as defined in our bye-laws) and only by the affirmative vote of at least 66²/₃% of the votes cast at a general meeting;

•

if the controlled shares (as defined in our bye-laws) of any person (other than the SCA Shareholder Entity or, in certain circumstances, up to three transferees thereof) confer votes representing more than 9.5% of the aggregate voting power of all common shares entitled to vote on a matter, including an election of directors, the number of such votes shall be reduced by whatever amount is necessary such that, after giving effect to any such reduction (and any other reductions in voting power required by our bye-laws), votes conferred by such shares represent 9.5% of the aggregate voting power of all common shares entitled to vote on such matter;

•

our Board of Directors may decline to approve or register the transfer of any common shares on our share register if it appears to the Board of Directors, after taking into account the limitations on voting rights contained in our bye-laws, that any adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders or their respective affiliates would result from such transfer (other than such as our Board of Directors considers to be de minimis) or, if the Board of Directors does not receive: (i) a written opinion from counsel supporting the legality of the transaction under U.S. securities laws, provided that no such opinion will be required if it is inconsistent with the applicable requirements of any applicable stock exchange and (ii) approval from appropriate governmental authorities if any such approval is required or if the transfer is not in compliance with applicable consent, authorization or permission of any governmental body or agency in Bermuda; and

•

shareholders may not pass a resolution in writing with respect to any matter and shall only pass a resolution at a duly called meeting of shareholders.

There are regulatory limitations on the ownership and transfer of our common shares.

The BMA must approve all issuances and transfers of securities of a Bermuda exempted company like us unless one of the general permissions granted by the BMA is applicable. Upon the suspension from trading of the common shares on the NYSE, which is an “Appointed Stock Exchange” under the Companies Act, the specific permission granted to us and the general permission of the BMA under the Act and the Regulations allowing issues and transfers of our common shares involving persons who are non-residents of Bermuda, so long as our common shares were listed on the NYSE, ceased to apply. We submitted a request to the BMA for (1) a specific consent with respect to any issues or transfers which occurred since the suspension of trading of our common shares and received the BMA’s retroactive approval for such issues or transfers and (2) an umbrella consent permitting trading on the OTC Bulletin Board and the Pink Sheets without BMA consent on an individual basis but requiring that we submit certain information regarding a new shareholder acquiring 5% or more of our common shares. In response to our request for an umbrella consent, the BMA has advised us that all common share transfers to any new or existing shareholders are approved on an ongoing basis provided that such transfers do not result in any such person holding 5% or more of our common shares. However, the BMA will require us to obtain permission for transfers whereby persons are proposing to own 5% or more of our common shares. This consent will remain in place after the deregistration of our common shares. In addition, pursuant to the Policy, the BMA granted general permission for transfers of equity securities (which include our common shares) to existing shareholders provided that such transfers do not result in any such person holding 5% or more of the equity securities. Once such permission has been obtained for any person to hold 5% or more of the equity securities, the Policy grants a general permission for that person to obtain up to 50% of the equity securities of the company without the prior approval of the BMA, conditional upon subsequent notification to the BMA.

Our Shareholders may have greater difficulties in protecting their interests than as a shareholder of a U.S. corporation.

The Companies Act, which applies to us as a Bermuda company, differs in material respects from laws generally applicable to U.S. corporations and their shareholders. Taken together with the provisions of our bye-laws, some of these differences may result in your having greater difficulties in protecting your interests as one of our shareholders than you would have as a shareholder of a U.S. corporation. This affects, among other things, the circumstances under which transactions involving an interested director are voidable, whether an interested director can be held accountable for any benefit realized in a transaction with us, what approvals are required for business combinations by us with a large shareholder or a wholly-owned subsidiary, what rights you may have as a shareholder to enforce specified provisions of the Companies Act or our bye-laws, and the circumstances under which we may indemnify our directors and officers.

We are a Bermuda company and it may be difficult for our shareholders to enforce judgments against us or against our directors and executive officers.

We were incorporated under the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and a portion of our assets and the assets of such persons may be located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda; however, a Bermuda court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

We have been advised by Bermuda counsel, that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers predicated upon the civil liability provisions of the U.S. federal securities laws, or original actions brought in Bermuda against us or such persons predicated solely upon U.S. federal securities laws. Further, we have been advised by Bermuda counsel that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which Bermuda courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to public policy in Bermuda. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We and our subsidiaries currently lease office space in New York, New York; Norwalk, Connecticut; San Francisco, California; and London.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, we are subject to litigation or other legal proceedings. It is the opinion of management, after consultation with legal counsel and based upon the information available, that the expected outcome of any outstanding litigation, individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. We intend to vigorously defend ourselves against all such actions.

In the ordinary course of business, we also receive subpoenas and other information requests from regulatory agencies or other governmental authorities. Although no action has been initiated against us, it is possible that one or more regulatory agencies or other governmental authorities may pursue action against us. As of March 30, 2009, Syncora Guarantee has had its license suspended, has had an order of impairment issued against it or has voluntarily agreed to cease writing business in ten states. If such an action is brought, it could materially adversely affect our business, results of operations and financial condition.

Set forth below is a description of certain legal proceedings to which we are a party.

Securities Litigation

In December 2007 and January 2008, three lawsuits were commenced in the United States District Court for the Southern District of New York. On April 24, 2008, an order was entered consolidating these actions under the caption In re Security Capital Assurance Ltd. Securities Litigation. On August 6, 2008, the plaintiffs filed a consolidated amended complaint. The complaint names Syncora Holdings, XL Capital Ltd, XL Insurance Ltd, the principal underwriters for the secondary offering, the financial advisors for the preferred share offering, Paul S. Giordano, David P. Shea, Edward B. Hubbard, and Richard P. Heberton as defendants. The complaint includes claims that defendants’ public statements, including the registration statement and prospectus related to the secondary offering, contained false and misleading statements and omitted to disclose material facts necessary to make the statements contained therein not misleading, in violation of the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act. The complaint seeks unspecified damages and other relief. Syncora Holdings filed a motion to dismiss on behalf of itself and the individual defendants.

Municipal Derivatives Antitrust Litigation

Syncora Guarantee is named as a defendant in related lawsuits, filed from April 2008 through October 2008, which have been consolidated for coordinated preliminary and pretrial proceedings under the caption In re Municipal Derivatives Antitrust Litigation, MDL No. 1950, currently pending in the United States District Court for the Southern District of New York. Syncora Guarantee was not named as a defendant in the consolidated amended complaint filed on August 22, 2008. Syncora Guarantee is named as a defendant in a number of complaints filed by California municipal entities against several providers and brokers of municipal derivatives. These complaints allege a conspiracy among the defendants to fix, raise, maintain or stabilize the price of, and to rig bids and allocate customers and market for, municipal derivatives in violation of Federal and/or California State antitrust law and California State common law. The complaints seek unspecified damages and other relief.

Bond Insurers Conspiracy Litigation

In July 2008 through January 2009, lawsuits were filed by a number of California municipal entities in California State court against several bond insurers, including Syncora Guarantee, and two individual defendants. The complaints include allegations that defendants failed to fully disclose their investments in subprime mortgage-backed securities and insurance of subprime instruments and that the defendants conspired to perpetuate and maintain a dual system of bond rating in violation of California State antitrust laws and California State common law. The complaints seek unspecified damages and other relief.

Jefferson County Litigation

On June 17, 2008, Charles Wilson, on behalf of himself and a class consisting of every Jefferson County, Alabama taxpayer and sewer ratepayer since January 1, 1993, filed suit against Syncora Guarantee and numerous other defendants. The suit alleges that through the wrongful conduct of the members of the Jefferson County Commission, most notably Larry Langford, the County incurred a bonded indebtedness of approximately $3.2 billion relating to improvements to its sewer system. The complaint alleges that the commissioners, in a conspiracy with several individuals, financial companies, law firms, and bond insurers, completed several swap transactions whereby the bonds, which were primarily fixed interest securities, were swapped to variable rate and auction rate

securities. These swaps, the complaint alleges, were done primarily to facilitate the inappropriate payment of exorbitant fees to several bond brokers and financial advisors. With respect to the bond insurers, including Syncora Guarantee, the complaint alleges that the insurers negligently insured the bonds while allowing themselves to become undercapitalized and downgraded by the rating services, which in turn downgraded the bonds. The plaintiffs allege damages on the ground that their sewer rates are much higher than they otherwise would have been without the wrongdoing of all parties. We have filed a motion to dismiss which is currently pending before the court. Plaintiffs have also voluntarily dismissed Jefferson County taxpayers as members of the putative class, leaving only the sewer system ratepayers. Several of the defendants have filed motion seeking recusal of the Judge based on his daughter being a Jefferson County ratepayer, and thus a member of the putative class of plaintiffs.

On August 28, 2008, a complaint was filed by Carnell E. Fowler, William Young, and Citizens for Sewer Accountability, on behalf of the State of Alabama, against Syncora Guarantee and many of the same defendants in the Wilson case above. This complaint asserts claims under Alabama’s quo warranto statutes, Ala. Code §§ 6-6-590, et seq. Quo warranto is an ancient and extraordinary remedy available to annul a corporation’s charter and/or preclude it from operating as a corporation in Alabama where the corporation has engaged in such actions as to warrant a forfeiture of its corporate rights and existence. The factual allegations of the complaint virtually mirror those in the Wilson case. We have filed a motion to dismiss. Prior to the court’s ruling on the motion, the plaintiffs voluntarily dismissed us, without prejudice, as a defendant. The court subsequently granted the motions to dismiss filed by several of the remaining defendants, but has granted leave for plaintiffs to file an amended complaint. The amended complaint has yet to be filed, and currently we are no longer a defendant to this lawsuit. See Note 18(a) for additional information.

On or around September 16, 2008, Syncora Guarantee, together with the trustee under the indenture for the Jefferson County, Alabama sewer warrants as well as Financial Guaranty Insurance Company, who also insures a portion of the warrants, commenced a lawsuit against the County and its current commissioners in the United States District Court for the Northern District of Alabama seeking, among other things, the appointment of a receiver over the County’s sewer system. A hearing on the plaintiff’s request for a receiver occurred on March 26, 2009. A decision on the emergency motion for the appointment of a receiver is currently pending. On September 25, 2008, the county filed a counterclaim against Syncora Guarantee and Financial Guaranty Insurance Company alleging negligence, breach of contract, fraud and fraudulent suppression. See Note 18(a) for additional information.

Other Litigation

On or around June 27, 2008, Syncora Guarantee filed suit against IndyMac Bank, F.S.B. in the United States District Court for the Southern District of New York seeking to specifically enforce the terms of a certain insurance and indemnity agreement to which they are parties. Subsequent to the filing of this suit, the Federal Deposit Insurance Corporation (“FDIC”) placed IndyMac Bank, F.S.B into conservatorship. We filed a proof of claim with the FDIC on October 10, 2008. This litigation has been stayed until June 2009 to allow the FDIC 180 days to determine whether to allow the proof of claim.

On January 29, 2009, Syncora Guarantee filed suit in the Supreme Court of the State of New York, New York County, against Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp. (collectively referred to as “Countrywide”), alleging that Countrywide made misrepresentations in connection with several securitizations of home equity mortgage loans originated and serviced by Countrywide, and for which Syncora Guarantee acted as credit enhancer, and seeking damages and other relief for fraud and breach of contract.

On February 5, 2009, Syncora Guarantee, together with co-plaintiffs U.S. Bank National Association and CIFG Assurance North America, Inc., filed suit in the Supreme Court of the State of New York, New York County, against GreenPoint Mortgage Funding, Inc. (“GreenPoint”), alleging that GreenPoint made misrepresentations and warranties in connection with a securitization of primarily home-equity mortgage loans originated by GreenPoint, and for which Syncora Guarantee acted as credit enhancer, and seeking damages and other relief for breach of contract.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On February 9, 2009, we held a special general meeting of holders of our common shares to obtain shareholder approval for the following matters, all of which were approved.

The votes cast as to each matter were as follows.


	For		Withhold		Abstain
The approval of an amendment to Company’s bye-laws (the “Bye-Laws”) so that the Chief Executive Officer need not serve as a Director of the Company		56,849,152		582,699		79,858
The approval of an amendment to the Bye-Laws so that remuneration and benefits of Directors will be determined by the Nominating & Governance Committee		54,081,772		3,245,503		184,434
The approval of amendments to the Bye-Laws to remove references to the XL Group to reflect that XL Capital is no longer a shareholder of the Company		57,269,058		190,400		52,251
The approval of amendments to the Bye-Laws to transfer certain of the original rights of the XL Group under the Bye-Laws to the SCA Shareholder Entity		56,828,038		327,722		355,949
The approval of an amendment to the Bye-Laws to prohibit shareholders of the Company from adopting resolutions by written consent		42,981,687		3,209,402		27,410
The approval of an amendment to the Bye-Laws to allow the Company to hold its own shares, i.e., treasury shares		43,449,167		2,758,600		10,732
The approval of amendments to the Bye-Laws to eliminate the requirement that certain deeds and other instruments be executed under the company seal		56,029,403		1,410,824		71,482
The approval of amendments to the Bye-Laws to specify certain documents to which the notice provisions apply, the methods and time periods for delivery and the proof of such delivery		56,333,392		1,138,089		40,228
The approval of an amendment to the Bye-Laws to impose a mandatory restriction on the transfer of the Company’s equity securities such that no person or group may become a “Five-Percent Shareholder” as therein defined and no existing “Five-Percent Shareholder” may increase its stock ownership		43,451,629		2,731,160		35,710
The approval of amendments to the Bye-Laws to remove references to the Company having to meet the requirements of the NYSE in connection with the delisting of the Company’s shares by the NYSE		56,116,777		1,135,952		258,980

Our Executive Officers

The following table provides information regarding our executive officers as of December 31, 2008:


Name	Age		Position(s)
Susan B. Comparato		39	Acting Chief Executive Officer, President and General Counsel
Claude L. LeBlanc		43	Special Advisor to the Board of Directors
Thomas W. Currie, CFA		49	Senior Vice President and Secretary
Drew D. Hoffman		49	Senior Vice President
Orlando Rivera		47	Head of Human Resources

Susan B. Comparato has been Acting Chief Executive Officer and President of Syncora Holdings and Acting Chief Executive Officer of Syncora Guarantee since August 2008. Ms Comparato continues her role as General Counsel for both companies. Ms. Comparato previously served as Senior Vice President and General Counsel of Syncora Holdings from February 2008 and has been General Counsel and Secretary of Syncora Guarantee since 2004. From 2001 to 2004, Ms. Comparato served as Associate General Counsel of Syncora Guarantee. Prior to Syncora Guarantee, Ms. Comparato served as an associate director, risk finance with Barclays Capital and practiced law with Sidley Austin as an associate attorney in the securitization group.

Claude L. LeBlanc has been special advisor to the Board of Directors since August 2008. Previously, Mr. LeBlanc was an Executive Vice President of Syncora Holdings. Mr. LeBlanc joined Syncora Holdings in November 2006 as Executive Vice President—Corporate Development and Strategy. Mr. LeBlanc previously served served as a member of the Executive Management Group and as Senior Vice President—Corporate Development for XL Capital from April 2002 to November 2006. Prior to joining XL Capital, Mr. LeBlanc served in a variety of senior financial and operating roles, including Chief Operating Officer for TransWorld Network International and Vice President Financial Advisory Services for PricewaterhouseCoopers where he advised on mergers and acquisitions, business restructurings and transaction advisory.

Thomas W. Currie, CFA has been Senior Vice President of Syncora Holdings since its formation. Mr. Currie previously served as Chief Risk Officer of Syncora Holdings and also served as Chief Underwriting Officer of Syncora Guarantee Re since February 2002. He is a member of our Executive Committee and is the Corporate Secretary and Director of Compliance for Syncora Holdings. Prior to joining Syncora Guarantee Re, Mr. Currie was a structured finance bond analyst in the new assets group at Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Drew D. Hoffman has been a Senior Vice President of Syncora Holdings and a member of our Executive Committee since 2008. He was appointed Executive Vice President of Syncora Guarantee in February 2009. He has led our Surveillance and Research Group since 2005. Prior to this position, Mr. Hoffman served as our primary credit officer supporting the Structured Single Risk Group. Prior to joining us in 2002, Mr. Hoffman was Managing Director and Head of a large part of MBIA’s Banking Relations Group, and served as Managing Director and Head of MBIA’s Insured Portfolio Management business including the Public Finance, Housing and Student Loan portfolios. Mr. Hoffman has also served as an Assistant Vice President in the Project Finance Group at Sumitomo Bank, and as a Public Finance Associate at Smith Barney.

Orlando Rivera is a Senior Vice President and has been Head of Human Resources of Syncora Holdings since its formation. Prior to being appointed to this role, Mr. Rivera served as Human Resources Global Generalist for XL Capital’s Financial Products & Services segment from October 2003 to August 2006. Before joining XL Capital, Mr. Rivera was head of Human Resources for Gen Re Securities’ U.S. business and has more than 20 years professional experience in human resources positions in the financial services industry.

PART II

All amounts presented in this part are in U.S. dollars except as otherwise noted.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

On January 7, 2009, the NYSE notified us that it filed a notification of removal from listing on Form 25 pursuant to Rule 12d2-2(b) of the Exchange Act, with the SEC to delist our common shares as we were no longer in compliance with two NYSE listing standards because our average global market capitalization over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders’ equity was less than $75 million, and the average closing price of our common shares was less than $1.00 over a consecutive 30 trading-day period. Our shares were delisted from the NYSE effective 10 days from the filing of Form 25. Our common shares are currently traded over the counter and quoted on the Pink Sheets quotation service under the symbol “SYCRF.”

The following table sets forth the high, low and closing sales prices per share, as reported on the NYSE Composite Tape, of our common shares per fiscal quarter through December 17, 2008, the date on which the NYSE suspended trading of our common shares.


	High			Low			Close
2007:
1st Quarter		$	32.40		$	27.02		$	28.23
2nd Quarter		$	34.58		$	27.27		$	30.87
3rd Quarter		$	31.32		$	16.31		$	22.84
4th Quarter		$	23.92		$	3.41		$	3.89

2008:
1st Quarter		$	3.79		$	0.52		$	0.52
2nd Quarter		$	1.05		$	0.25		$	0.29
3rd Quarter		$	2.91		$	0.27		$	1.35
4th Quarter (through December 17, 2008)		$	1.77		$	0.14		$	0.17

There were 99 record holders of our common shares as of December 31, 2008. This figure does not represent the actual number of beneficial owners of our common shares because such shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who may vote the shares.

The declaration and payment of future dividends by us will be at the discretion of the Board of Directors and will depend upon many factors, including our earnings, financial condition, business needs, capital and surplus requirements of our operating subsidiary and regulatory and contractual restrictions.

As a holding company, Syncora Holdings’ ability to meet its cash requirements (including any dividends on its common shares, if and when declared) depends upon the receipt of dividends from Syncora Guarantee, if declared and paid, and investment income on its invested assets, offset by expenses incurred for employee compensation and other expenses incurred as a stand-alone public company. The payment of dividends from Syncora Guarantee is subject to regulatory and other restrictions. See “Risk Factors—Risks Related to Ownership of Our Common Shares—Because we are a holding company and substantially all of our operations are conducted by our subsidiaries, our ability to meet any ongoing cash requirements, including any debt service payments or other expenses, and to pay dividends on our preferred or common shares in the future will depend on our ability to obtain cash dividends or other cash payments or obtain loans from our subsidiaries, which are regulated insurance companies and whose ability to pay dividends or make loans to us is limited by regulatory constraints.”

Series A Preference Shares in the aggregate amount of $8.4 million, which was paid on October 1, 2007. We did not declare a quarterly dividend with respect to our common shares or a semi-annual dividend with respect to the Syncora Holdings Series A Preference Shares during the year ended December 31, 2008 or at any time thereafter through to the filing date of this report. On August 5, 2008, Syncora Holdings entered into an undertaking with the NYID pursuant to which it agreed to not make dividends or distributions to its shareholders for eighteen months following such date without the NYID’s express written consent. Any future dividends will be subject to the discretion and approval of the Board of Directors, applicable law and regulatory and contractual requirements. If dividends on the Syncora Holdings Series A Preference Shares are not paid in an aggregate amount equivalent to dividends for six full quarterly periods, whether or not declared or whether or not consecutive, holders of the Syncora Holdings Series A Preference Shares, voting as a single class, will have the right to elect two persons who will then be appointed as additional directors to the Board of Directors of Syncora Holdings. As of March 31, 2009, dividends on the Syncora Holdings Series A Preference Shares have not been paid in an aggregate amount equivalent to six quarterly periods and therefore holders of the Syncora Holdings Series A Preference Shares have the right to elect two persons to serve on our Board of Directors.

Deregistration

In light of our suspension of writing substantially all new business, as soon as a practicable after the filing of this Annual Report on Form 10-K for the year ended December 31, 2008, we intend to file a Form 15 to terminate registration of our common shares and the Syncora Holdings Series A Preference Shares and suspend the duty to file reports and other information under the Exchange Act. This action will reduce the amount of information available to investors about us and there will be restrictions on the trading of our shares. After the deregistration of our shares, they will be subject to state blue sky laws and will only be able to be traded pursuant to an exemption from the applicable state blue sky law. Shareholders should consult their own legal counsel regarding any restrictions on the trading of our common shares and the Syncora Holdings Series A Preference Shares.

Common Share Performance Graphic

Set forth below is a line graph comparing the monthly dollar change in the cumulative total shareholder return from the effective date of our IPO through December 31, 2008 as compared to the cumulative total return during such period of the Standard & Poor’s 500 Stock Index and the cumulative total return of the Standard & Poor’s 500 Financial Stock Index. This graph assumes an equal measurement point of $100 of invested value on August 2, 2006, with all dividends reinvested.

Purchases of Equity Securities by the Issuer and Affiliate Purchases

In connection with the 2008 MTA, XL Capital transferred our common shares to the SCA Shareholder Entity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Business—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information—Master Transaction Agreement and Merrill Agreement.”

ITEM 6. SELECTED FINANCIAL INFORMATION

The following table presents our selected consolidated financial and operating data. The financial data set forth below for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 are derived from our Consolidated Financial Statements. The financial data as of December 31, 2008, 2007 and 2006 and for the years ended December 31, 2008, 2007, 2006 and 2005 have been audited. The information set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and our Consolidated Financial Statements and related notes included in Item 8.


(in thousands, except per share amounts)	Year Ended December 31,
	2008				2007				2006				2005				2004
Statement of operations data:
Gross premiums written		$	79,404			$	254,223			$	329,328			$	233,269			$	232,541
Reinsurance premiums assumed			(29,401	)			56,246				54,221				52,170				44,021

Total premiums written			50,003				310,469				383,549				285,439				276,562
Ceded premiums			(398	)			(66,913	)			(11,291	)			(40,527	)			(8,123	)

Net premiums written			49,605				243,555				372,258				244,912				268,439
Net premiums earned			279,371				168,660				159,441				151,839				116,281
Net investment income			132,282				120,710				77,724				51,160				35,746
Net realized losses on investments			(240,399	)			(2,517	)			(16,180	)			(3,221	)			(178	)
Net change in fair value of derivatives			494,564				(1,295,024	)			13,221				(6,681	)			12,687
Fee income and other			3,498				215				2,365				750				100

Total revenues			669,316				(1,007,956	)			236,571				193,847				164,636
Net losses and loss adjustment expenses			1,797,877				69,366				12,890				26,021				21,274
Acquisition costs, net			17,101				19,971				16,240				12,231				8,259
Loss on commutation of reinsurance agreements			42,381				—				—				—				—
Operating expenses			230,829				98,931				78,999				67,621				58,395

Total expenses			2,088,188				188,268				108,129				105,873				87,928

(Loss) income before income tax and minority interest			(1,418,872	)			(1,196,224	)			128,442				87,974				76,708
Income tax (benefit) expense			(2,659	)			16,389				3,133				(1,277	)			1,920

(Loss) income before minority interest			(1,416,213	)			(1,212,613	)			125,309				89,251				74,788
Minority interest—dividends on preferred shares of subsidiary			5,432				3,527				7,954				8,805				15,934

Net (loss) income			(1,421,645	)			(1,216,140	)			117,355				80,446				58,854
Dividends on Series A perpetual non-cumulative preference shares⁽²⁾			—				8,409				—				—				—
Gain on redemption of Series A redeemable preferred shares of subsidiary			36,075				—				—				—				—

Net (loss) income available to shareholders		$	(1,385,570	)		$	(1,224,549	)		$	117,355			$	80,446			$	58,854

Per Share Data⁽¹⁾:
(Loss) Earnings per share:
Basic		$	(26.49	)		$	(19.09	)		$	2.19			$	1.74			$	1.28
Diluted		$	(26.49	)		$	(19.09	)		$	2.18			$	1.74			$	1.28
Common dividends⁽²⁾		$	—			$	0.08			$	0.02			$	—			$	—

⁽¹⁾

As a result of a stock split of our outstanding common shares in July 2006, there were 46,127,245 shares of our common stock issued and outstanding just prior to the IPO. Per share amounts for 2005 and 2004 have been retrocactively adjusted for the effects of such stock split. Per share amounts for 2006 were based on 64,136,364 common shares outstanding from the IPO through December 31, 2006 and 46,127, 245 prior thereto. Per share amounts for 2008 reflect 30,069,049 common shares held in treasury since August 5, 2008 (see Note 4 and 23 to our Consolidated Financial Statements included elsewhere herein for additional information).

⁽²⁾

During the year ended December 31, 2007, our Board of Directors declared quarterly dividends on our common shares which were paid on March 30, 2007, June 29, 2007, September 28, 2007, and December 31, 2007, respectively, in the aggregate amount of approximately $5.1 million. Also on July 31, 2007 our Board of Directors declared a semi-annual dividend on the Syncora Holdings Series A Preference Shares aggregating $8.4 million, which was paid on October 1, 2007 to shareholders of record of the Syncora Holdings Series A Preference Shares on September 28, 2007. During 2008, our Board of Directors did not declare any dividends with respect to our common shares or semi-annual dividends with respect to the Syncora Holdings Series A Preference Shares or at any time thereafter through to the filing date of this report. On August 5, 2008, Syncora Holdings entered into an undertaking with the NYID pursuant to which it agreed to not make dividends or distributions to its shareholders for eighteen months following such date without its express written consent. Any future dividends will be subject to the discretion and approval of the Board of Directors, applicable law and regulatory and contractual requirements. If dividends on the Syncora Holdings Series A Preference Shares are not paid in an aggregate amount equivalent to dividends for six full quarterly periods, whether or not declared or whether or not consecutive, holders of the Syncora Holdings Series A Preference Shares will have the right to elect two persons who will then be appointed as additional directors to the Board of Directors of Syncora Holdings. As of March 31, 2009, dividends on the Syncora Holdings Series A Preference Shares have not been paid in an aggregate amount equivalent to six quarterly periods and therefore holders of the Syncora Holdings Series A Preference Shares have the right to elect two persons to serve on our Board of Directors.

(in thousands, except per share amounts)

As of December 31,

2008

2007

2006

2005

2004

Balance sheet data:

Investments, cash and cash equivalents

2,610,750

2,680,125

2,160,911

1,419,054

1,228,452

Prepaid reinsurance premiums

7,791

101,122

59,983

69,873

57,454

Deferred acquisition costs

110,062

108,117

93,809

59,592

44,599

Reinsurance balances recoverable on unpaid losses

6,011

266,945

88,616

69,217

60,914

Total assets

3,900,934

3,604,095

2,496,814

1,684,315

1,472,193

Unpaid losses and loss adjustment expenses

1,686,187

402,519

178,517

147,368

115,734

Deferred premium revenue

655,928

927,385

795,906

592,585

487,093

Total liabilities

3,170,975

3,138,032

1,076,278

765,983

618,774

Accumulated other comprehensive income (loss)

54,351

17,801

(19,705

)

(20,307

)

(241

)

Shareholders’ equity

709,959

427,063

1,366,520

867,814

804,730

Per Share Data:

Book value per common share

13.21⁽¹

⁾

2.81

21.31

18.81

17.45

⁽¹⁾

Book value per common share at December 31, 2008 is based on 35,082,248 shares outstanding.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes which appear in Item 8. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

References to the “Company,” “we,” “us” and “our” mean Syncora Holdings and, unless otherwise indicated, its subsidiaries.

Overview of Our Business

General

On March 17, 2006, XL Capital Ltd (“XL Capital”) formed Syncora Holdings Ltd. (“Syncora Holdings”) (formerly known as Security Capital Assurance Ltd), as a wholly-owned Bermuda based subsidiary holding company. On July 1, 2006, XL Capital contributed all of its ownership interests in its financial guarantee insurance and financial guarantee reinsurance operating businesses indirectly to us. The aforementioned operating businesses consisted of: (i) Syncora Guarantee Inc. (“Syncora Guarantee”) (a New York domiciled financial guarantee insurance company formerly known as XL Capital Assurance Inc.) and its wholly-owned subsidiary, Syncora Guarantee (U.K.) Ltd. (“Syncora Guarantee-UK”, formerly known as XL Capital Assurance (U.K.) Limited) and (ii) Syncora Guarantee Re Ltd. (“Syncora Guarantee Re”) (a Bermuda domiciled financial guarantee reinsurance company formerly known as XL Financial Assurance Ltd.). Syncora Guarantee was an indirect wholly-owned subsidiary of XL Capital and all of Syncora Guarantee Re was indirectly owned by XL Capital, except for a preferred stock interest which was owned by Financial Security Assurance Holdings Ltd. or its subsidiaries (“FSA”), an entity which is otherwise not related to XL Capital or us. On August 4, 2006, Syncora Holdings completed an initial public offering (the “IPO”). In addition, XL Capital sold common shares of Syncora Holdings from its holdings directly to the public in a secondary offering concurrent with the IPO. Immediately after the IPO and the secondary offering, XL Capital, through its wholly-owned subsidiary XL Insurance (Bermuda) Ltd (“XLI”), owned approximately a 63% economic interest in Syncora Holdings. In June 2007, XLI completed the sale of additional common shares of Syncora Holdings from its holdings. Immediately after such sale, XLI owned approximately a 46% voting and economic interest in Syncora Holdings. On August 5, 2008, we consummated the transactions comprising the 2008 MTA, as defined below, pursuant to which XL Capital transferred all of the common shares of Syncora Holdings it owned to be held in trust by CCRA Purpose Trust (the “SCA Shareholder Entity”) as described below. On September 4, 2008, Syncora Guarantee Re merged with and into Syncora Guarantee, with Syncora Guarantee being the surviving company. See “—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information.”

Prior to January of 2008 (as more fully discussed below under “—Recent Developments”), we provided credit enhancement and protection products to the public finance and structured finance markets throughout the United States and internationally through the issuance of financial guarantee insurance policies and credit default swap (“CDS”) contracts, as well as the reinsurance of financial guarantee insurance and CDS contracts written by other insurers. Financial guarantee insurance provides an unconditional and irrevocable guarantee to the holder of a debt obligation of full and timely payment of the guaranteed principal and interest. In the event of a default under the obligation, the insurer has recourse against the issuer or any related collateral (which is more common in the case of insured asset-backed obligations or other non-municipal debt) for amounts paid under the terms of the policy. CDS contracts are derivative contracts that offer credit protection relating to a particular security or pools of specified securities. Under the terms of a CDS contract, the seller of credit protection makes a specified payment to the buyer of credit protection upon the occurrence of one or more specified credit events with respect to a referenced security.

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), our guarantees qualify as either insurance contracts or derivative contracts for accounting purposes. For insurance contracts, premiums and losses with respect thereto are recognized in accordance with GAAP as discussed in “—Critical Accounting Policies and Estimates—Reserves for Losses and Loss Adjustment Expenses”, whereas derivative contracts are reported at fair value in accordance with GAAP with no separate recognition given to premiums or management’s best estimate of losses under such derivative contracts. Accounting for our CDS contracts in accordance with GAAP is discussed in “—Critical Accounting Policies and Estimates—Valuation of CDS Contracts” and Note 6 to the Consolidated Financial Statements. Throughout the discussion which follows, references are made to anticipated claims on our CDS contracts, which represent management’s best estimate of the ultimate amount of losses and loss adjustment expenses on such contracts. Anticipated claims represent the equivalent of reserves for unpaid losses and loss adjustment expense recognized on insurance contracts under GAAP.

Our operating business is conducted through Syncora Guarantee, which as a New York domiciled financial guarantee insurance company, is required to prepare financial statements in accordance with accounting practices prescribed by the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual and adopted by the State of New York (“NAIC SAP”) and that, under NAIC SAP all our guarantees are accounted for as insurance contracts. Accordingly, under NAIC SAP we account for all our guarantees as insurance contracts and, accordingly, recognize reserves for unpaid losses and loss adjustment expenses for all such contracts. For guarantees deemed to be insurance for GAAP, there is no difference between how we recognize reserves for insurance contracts under NAIC SAP and GAAP. As further discussed below, the adverse development of our reserves for unpaid losses and loss adjustment expenses, determined in accordance with NAIC SAP, is the principal factor affecting our regulatory solvency and potential regulatory intervention.

Recent Developments

Adverse developments in the credit markets generally and the mortgage market specifically that began in the second half of 2007 and continued through 2008 have resulted in material adverse effects on our business, results of operations, and financial condition, including (i) significant adverse development of anticipated claims on our guarantees, under our CDS contracts, of collateralized debt obligations (“CDOs”) of asset-backed securities (“ABS CDOs”) and significant adverse development of reserves for unpaid losses and loss adjustment expenses on our guarantees, under our insurance contracts, of residential mortgage-backed securities (“RMBS”), and (ii) downgrades of our insurance financial strength (“IFS”) ratings by Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings (“Fitch”) and Standard & Poor’s Ratings Services (“S&P”), which ratings had been fundamental to our ability to conduct business and which have caused us to cease writing substantially all new business since January of 2008, resulting in the loss of future incremental earnings and cash flow. As of March 30, 2009, Syncora Guarantee is rated “Ca” by Moody’s and “CC” by S&P; the Company has terminated the agreement for the provision of ratings with Fitch.

During the second quarter of 2008, we recorded a material increase in adverse development of anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS causing us to be unable to maintain Syncora Guarantee’s compliance with its $65 million minimum policyholders’ surplus requirement under New York Insurance Law as of June 30, 2008. In light of this material adverse development, and in accordance with our previously disclosed strategic plan, on July 28, 2008 we, certain financial institutions that are counterparties to CDS contracts with Syncora Guarantee (the “Counterparties”), Merrill Lynch & Co., Inc. (“Merrill Lynch”) and certain of its affiliates, and XL Capital and certain of its affiliates, entered into a Master Commutation, Release and Restructuring Agreement, dated July 28, 2008, as amended (the “Master Transaction Agreement”), and certain other related agreements (hereafter referred to collectively as the “2008 MTA”). The transactions comprising the 2008 MTA closed on August 5, 2008 (the “Closing Date”), except for the transactions comprising the FSA Master Agreement (as defined below), which closed on August 4, 2008. The transactions comprising the 2008 MTA are described below along with certain summary financial information

presenting the effect of the transactions comprising the 2008 MTA on our financial position and results of operations as of and for the year ended December 31, 2008. See “—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”.

During the third quarter of 2008, we recorded further significant adverse development relating to anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS which would have caused Syncora Guarantee to be unable to maintain its compliance with its $65 million minimum policyholders’ surplus requirement under New York Insurance Law as of September 30, 2008. However, at our request, the New York State Insurance Department (the “NYID”), pursuant to section 6903 of New York Insurance Law, granted Syncora Guarantee approval in connection with the preparation of its statutory financial statements for the quarter ended September 30, 2008 to release statutory-basis contingency reserves on policies that have been terminated and on policies on which we have established case basis reserves for losses and loss adjustment expenses, which differs from accounting practices prescribed by NAIC SAP. As a result of such approval, Syncora Guarantee reported policyholders’ surplus of $83.3 million at September 30, 2008. Absent such approval, Syncora Guarantee would have reported a policyholders’ surplus at September 30, 2008 of $19.1 million. Policyholders’ surplus is based on statutory-basis accounting practices which differ from GAAP. Such differences may be material. The aforementioned approval was also extended by the NYID in connection with the preparation of Syncora Guarantee’s statutory financial statements as of and for the year ended December 31, 2008. There can be no assurance that the NYID will continue to allow Syncora Guarantee to apply such practices.

During the fourth quarter of 2008, we recorded a material increase in adverse development relating to anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS. As a result of the material increase in adverse development relating to anticipated claims on our guarantees of ABS CDOs and reserves for unpaid losses and loss adjustment expenses on our guarantees of RMBS recorded during 2008, Syncora Guarantee reported a policyholders’ deficit of $2.4 billion as of December 31, 2008. Failure to maintain positive statutory policyholders’ surplus or non-compliance with the $65 million statutory minimum policyholders’ surplus requirement permits the New York Superintendent of Insurance (the “New York Superintendent”) to seek court appointment as rehabilitator or liquidator of Syncora Guarantee. As a result of this material adverse development, and in accordance with our previously disclosed strategic plan, effective as of March 5, 2009, Syncora Guarantee signed a non-binding letter of intent with certain of the Counterparties (the “Letter of Intent”) whereby the parties agreed to negotiate in good faith to seek to promptly agree on mutually agreeable definitive documentation, in the form of a master transaction agreement and related agreements (hereafter referred to collectively as the “2009 MTA”). In addition, pursuant to the RMBS Transaction Agreement, dated as of March 5, 2009 (the “RMBS Transaction Agreement”), on March 11, 2009, the fund referenced therein (the “Fund”) commenced a tender offer to acquire certain residential mortgage-backed securities that are insured by Syncora Guarantee (the “RMBS Securities”). The 2009 MTA and tender offer represent the principal elements of the second phase of our strategic plan. The transactions contemplated by the Letter of Intent and the related transactions are described below.

Description of the Transactions Contemplated by the Letter of Intent and Related Transactions

The non-binding terms and conditions in the Letter of Intent provide that Syncora Guarantee and the Counterparties will commute or transfer to an affiliate of Syncora Guarantee, or cause their respective affiliates to commute or transfer to an affiliate of Syncora Guarantee, their respective CDS contracts and financial guarantee insurance contracts and in exchange Syncora Guarantee will pay to the Counterparties certain consideration to include, in the aggregate, (i) approximately $1.2 billion in cash consideration, (ii) common shares of Syncora Holdings, such shares to represent approximately 40% of the outstanding common shares of Syncora Holdings following the transaction, (iii) a $150 million short-term surplus note and a $475 million long-term surplus note, and (iv) additional consideration that may include an increase in the principal amount of, or interest rate on the, surplus notes, and cash consideration based on certain specified calculations. Such non-binding terms and conditions also provide that Syncora Guarantee will form a New York financial

guarantee insurance subsidiary (“Drop-Down Company”) to (a) reinsure, on a cut-through basis, certain of Syncora Guarantee’s public finance and selected global infrastructure in-force business, and (b) assume through consensual novations certain of Syncora Guarantee’s in-force guarantees of CDS business, in connection with which Syncora Guarantee would enter into a new swap contract with the respective counterparties to such guarantees to provide a financial guarantee that guarantees certain of the payments under such novated swap contract. Syncora Guarantee will capitalize Drop-Down Company with $185 million in equity and the purchase of two surplus notes of Drop-Down Company in the aggregate principal amount of $350 million. Such non-binding terms and conditions also contemplate certain closing conditions to the 2009 MTA, including the receipt of regulatory approvals and a process for selecting members of the Board of Directors of each of Syncora Guarantee, Syncora Holdings, and Drop-Down Company and certain of our officers.

The non-binding terms and conditions in the Letter of Intent contemplate the participation of all of the 23 Counterparties. To date, 18 of the 19 significant Counterparties have indicated their willingness to enter into the transactions contemplated by the Letter of Intent, subject to final documentation and participation by the remaining Counterparties. The 19 significant Counterparties represent substantially all of Syncora Guarantee’s anticipated claims with respect to CDS contracts. One significant Counterparty has indicated that it is presently not contemplating entering into the transactions contemplated by the Letter of Intent. Syncora Guarantee is discussing with the remaining Counterparties alternative terms and conditions that would permit the consummation of the 2009 MTA without the participation of all of the Counterparties. There can be no assurance that the 2009 MTA will be consummated by a sufficient number of Counterparties or at all.

All of the terms and conditions described above are subject to definitive documentation satisfactory to all of the parties. There can be no assurance that the parties will enter into such agreements in accordance with these terms and conditions or at all. In addition, consummation of the transactions contemplated by the 2009 MTA will be subject to various closing conditions and there can be no assurance that the transactions contemplated thereby will be consummated. In addition, we need to enter into settlement agreements with certain third-parties as part of the second phase of our strategic plan.

An additional element of the second phase of our strategic plan is the tender offer contemplated by the RMBS Transaction Agreement. On March 11, 2009, the Fund commenced a tender offer to acquire the RMBS Securities either in consideration for cash or for a certificate representing the uninsured cash flows of the tendered RMBS Securities and a cash payout. Subject to closing conditions, Syncora Guarantee will purchase class B shares of the Fund and receive certificates representing the insurance cash flows on all RMBS Securities acquired by the Fund for an amount not to exceed $375 million in the aggregate. If the minimum amount of RMBS Securities is successfully acquired, the tender offer would significantly reduce Syncora Guarantee’s exposure to residential mortgages. Consummation of the transactions contemplated by the RMBS Transaction Agreement is subject to various closing conditions and there can be no assurance that the transactions contemplated thereby will be consummated.

If the transactions contemplated by the 2009 MTA and the RMBS Transaction Agreement are not consummated, Syncora Guarantee is expected to continue to report a policyholders’ deficit and may therefore be subject to action by the NYID. See “Risk Factors—Risks Related to Our Company—We may be unable to close the 2009 MTA and the tender offer, which would have a material adverse effect on our financial condition and results of operations”, as well as below for a description of continuing risks and uncertainties affecting us.

Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information

Set forth below is a description of agreements comprising the 2008 MTA, as well certain summary financial information presenting the effect of the transactions comprising the 2008 MTA on our financial position and results of operations as of the Closing Date.

Master Transaction Agreement and Merrill Agreement

The Master Transaction Agreement provided for the termination, commutation or elimination of certain reinsurance agreements, guarantees and other arrangements among us and XL Capital and certain of its subsidiaries, and between Syncora Guarantee and Syncora Guarantee Re, in exchange for a cash payment by XL Capital to us of $1.775 billion, the issuance and transfer of 8 million class A ordinary shares of XL Capital in the aggregate to Syncora Guarantee and Syncora Guarantee Re, and the transfer of XL Capital’s common shares of Syncora Holdings to a trust, the SCA Shareholder Entity, for the benefit of Syncora Guarantee until such time as an agreement between Syncora Guarantee and the Counterparties is reached, and thereafter the shares will be held for the benefit of the Counterparties. As a result of the transfer of the shares of Syncora Holdings to the SCA Shareholder Entity, XL Capital no longer has the right to vote, nominate directors to our Board of Directors or any other rights. On the Closing Date, the four XL Capital-nominated directors on our Board of Directors resigned. Pursuant to a shareholder agreement with the SCA Shareholder Entity, the trust has a number of rights including the right to vote the shares and to nominate directors to our Board of Directors, such number of directors as would equal one nominee less than a majority (if our Board of Directors consists of nine or fewer Directors) or two nominees less than a majority (if our Board of Directors consists of ten or more Directors). Effective November 19, 2008, pursuant to the shareholder agreement, the SCA Shareholder Entity appointed four members to our Board of Directors. We also entered into a registration rights agreement with the SCA Shareholder Entity providing for demand registration rights, a shelf registration if we are so eligible and piggyback registration rights. Until the common shares of Syncora Holdings are transferred from the aforementioned trust to Counterparties or otherwise sold in the open market, for accounting purposes, they are considered to be treasury shares.

Under a registration rights agreement, dated as of August 5, 2008, by and among Syncora Guarantee, Syncora Guarantee Re and XL Capital, XL Capital agreed to provide Syncora Guarantee and Syncora Guarantee Re with two demand registration and unlimited piggyback registration rights with respect to the 8 million class A ordinary shares issued by XL Capital to Syncora Guarantee and Syncora Guarantee Re. Syncora Guarantee and Syncora Guarantee Re also agreed to hold such shares for a period of six months, which expired on February 5, 2009, and any sale of class A ordinary shares of XL Capital by Syncora Guarantee or Syncora Guarantee Re will be subject to a right of first offer in favor of XL Capital. In addition, pursuant to a letter dated July 29, 2008, from Syncora Holdings to the underwriters named in the underwriting agreement entered into by XL Capital for a public offering of its class A ordinary shares, Syncora Holdings agreed, and agreed to cause its subsidiaries to agree, to a six month lock-up period with respect to class A ordinary shares of XL Capital, which expired on January 29, 2009.

Concurrent with the execution of the Master Transaction Agreement, Syncora Holdings, Syncora Guarantee and Syncora Guarantee Re entered into an agreement (the “Merrill Agreement”) with Merrill Lynch, Merrill Lynch International (“MLI”) and eight trusts affiliated with Syncora Holdings (the “CDS Trusts”), the obligations of which were guaranteed by policies issued by Syncora Guarantee. The Merrill Agreement provided for the termination of eight CDS contracts (the “Swaps”) and the related financial guarantee insurance policies issued by Syncora Guarantee with insured gross par outstanding as of June 30, 2008 of approximately $3.7 billion, in exchange for a payment by Syncora Guarantee to Merrill Lynch of an aggregate amount of $500 million. As part of the closing of the transactions comprising the Merrill Agreement, the parties provided mutual releases of claims with respect to the Swaps and the related policies. In addition, Syncora Guarantee and MLI have agreed to dismiss previously disclosed litigation related to seven of the Swaps. As a result of the termination of the Swaps, we recorded a realized loss of $94.0 million during the year ended December 31, 2008.

We and XL Capital obtained approvals from the NYID and the Bermuda Monetary Authority (the “BMA”) for the Master Transaction Agreement and the transactions comprising such agreement. Other required approvals related to the Master Transaction Agreement have been received from the Delaware Department of Insurance. The NYID has also approved the Merrill Agreement and the transactions comprising such agreement.

FSA Master Agreement

Concurrent with the execution of the Master Transaction Agreement, we also entered into an agreement (the “FSA Master Agreement”) with FSA. The FSA Master Agreement provided for the commutation of all reinsurance ceded by FSA and its subsidiaries to Syncora Guarantee Re, including that ceded under the amended and restated master facultative reinsurance agreement, dated as of November 3, 1998 (the “Old Master Facultative Agreement”) that was the subject of a guarantee issued by XLI (see Note 10 to the Consolidated Financial Statements). Commutation of the Old Master Facultative Reinsurance Agreement and all cessions thereunder was a condition to the obligations of XL Capital under the Master Transaction Agreement. Pursuant to the FSA Master Agreement, FSA and Syncora Guarantee Re entered into the commutation and release agreement (the “Commutation Agreement”), under which all existing cessions to Syncora Guarantee Re by FSA were commuted in return for a payment by Syncora Guarantee Re of approximately $165.4 million, representing statutory reserves less ceding commission plus a commutation premium. In turn, FSA and one of its subsidiaries entered into a new master facultative reinsurance agreement (the “New Master Facultative Agreement”) and related reinsurance memorandum (the “Reinsurance Memorandum”) with Syncora Guarantee, under which FSA ceded certain of the commuted risks to Syncora Guarantee in return for a payment by FSA to Syncora Guarantee of approximately $88.6 million, representing the statutory unearned premium reserve for such risks, less ceding commission. FSA has undertaken to use its best efforts to reassume such reinsurance from Syncora Guarantee for a period of nine months after the closing, subject to limitations under Article 69 of the New York Insurance Law, which imposes aggregate and single risk limits on insurance that can be written by a financial guaranty insurer, FSA’s internal and rating agency single risk limits, other potential limitations and FSA’s underwriting guidelines. Syncora Guarantee was required to fund a trust in an initial amount of approximately $104.1 million to collateralize its obligations to FSA under the reinsurance agreement ($92.7 million as of December 31, 2008), which includes regulatory mandated contingency reserves. Finally, Syncora Holdings purchased all class A preferred shares of Syncora Guarantee Re held by FSA and its subsidiary, with a liquidation preference of $39 million, for approximately $2.9 million pursuant to an agreement for the sale and purchase of preferred shares (the “Preferred Shares Purchase Agreement”). As a result of the Commutation Agreement and New Master Facultative Agreement, we recorded a loss of $17.9 million during the year ended December 31, 2008. In addition, as a result of our purchase of the class A preferred shares of Syncora Guarantee Re, we recorded a gain of $36.1 million during the year ended December 31, 2008, which was recorded in retained earnings and not reflected in our net loss.

Credit Agreement Amendment

Concurrent with the execution of the Master Transaction Agreement, we entered into Amendment No. 2, Forbearance and Limited Waiver Agreement (“Amendment No. 2”) with the lenders under our credit agreement, dated as of August 1, 2006 (the “Credit Agreement”). Pursuant to Amendment No. 2, we agreed (i) to permanently reduce the availability under our revolving credit facility from $250 million to zero, (ii) to reduce the availability under the letter of credit facility to the amount of the letter of credit exposure as of July 28, 2008 and subsequently further reduce such exposure for any outstanding letters of credit for FSA’s benefit upon the closing the Commutation Agreement, and (iii) to collateralize the remaining letters of credit after the consummation of the transactions comprising the Master Transaction Agreement. In consideration of the foregoing, the lenders under the Credit Agreement agreed to (i) forbear from declaring certain defaults, if any, as set forth in the Amendment No. 2, (ii) waive such defaults, if any, upon the satisfaction of certain conditions set forth in the Amendment No. 2, (iii) grant certain waivers in connection with the consummation of the Master Transaction Agreement and (iv) not instruct the Administrative Agent to send, and the Administrative Agent has agreed that it shall not send, a notice of non-renewal with respect to any outstanding letters of credit (other than the letter of credit for FSA’s benefit, which was canceled and returned to the Administrative Agent prior to the Closing Date) with regard to any renewal of a letter of credit during calendar year 2008. There can be no assurance that the Administrative Agent and the lenders will renew the outstanding letters of credit when they are subject to renewal during calendar year 2009. The amount of letters of credit outstanding under the Credit Agreement and the amount of collateral posted by us in support of

such letters of credit was approximately $15.2 million and $24.3 million, respectively, as of December 31, 2008.

On March 31, 2009, we entered into Amendment No. 3 and Waiver Agreement (“Amendment No. 3”) with the lenders under the Credit Agreement, whereby we agreed to collateralize the remaining letters of credit in an amount equal to 105% of the total letter of credit exposure as of such date, plus any accrued and unpaid interest and fees thereon, plus all other accrued and unpaid obligations of the account parties under the Credit Agreement. In consideration of the foregoing, the lenders under the Credit Agreement have agreed to permanently waive (i) the requirement that audited financial statements of each account party (other than Syncora Guarantee) be delivered within 90 days of the end of the fiscal year (provided that such audited financial statements shall be delivered within 120 days of the end of the fiscal year); (ii) the requirement that audited financial statements as reported on by the independent public accountants not have a “going concern” or like qualification or exception nor any qualification or exception as to the scope of such audit; (iii) the covenant relating to Syncora Holdings’ ratio of total funded debt to total capitalization; (iv) the covenant relating to Syncora Holdings’ consolidated net worth; and (v) any defaults as a result of the account parties not satisfying the requirements waived in clauses (i) through (iv) above or certain other requirements set forth in the Credit Agreement (as more fully described in Amendment No. 3 and Waiver Agreement).

Agreement with Counterparties

In consideration for the releases and waivers agreed to by the Counterparties as part of the Master Transaction Agreement, Syncora Guarantee agreed to segregate an aggregate amount of $820 million in cash plus interest thereon, premiums paid by the Counterparties from July 28, 2008 through October 31, 2008 and any proceeds from the sale by the trust of the common shares of Syncora Holdings formerly owned by XL Capital (in the event such shares are sold) for the purpose of commuting, terminating, amending or otherwise restructuring existing agreements with the Counterparties pursuant to an agreement to be negotiated with the Counterparties, which agreement is contemplated by the Letter of Intent. At December 31, 2008, the carrying value of invested assets in the segregated account was approximately $837.6 million. Pursuant to the terms of the 2008 MTA, Syncora Guarantee agreed to certain restrictions on its ability to access the funds in the segregated account and to commute, terminate, amend or otherwise restructure policies and contracts to which it is a party. In the event that Syncora Guarantee becomes subject to a rehabilitation or liquidation proceeding, the funds shall no longer be separately held, segregated or limited in use for commutations or restructurings, and will be part of the general assets of Syncora Guarantee.

Related Transactions

In addition to that discussed above, with the exception of the merger of Syncora Guarantee Re with and into Syncora Guarantee discussed below which was consummated on September 4, 2008, we executed the following transactions on or about the Closing Date:

•

commutation of certain retrocession agreements we had in place with non-affiliates,

•

distribution from Syncora Guarantee Re of $30.8 million to Syncora Holdings, and

•

discontinuance of Syncora Guarantee Re as a Bermuda corporation and continuance of Syncora Guarantee Re as a Delaware corporation, contribution by Syncora Holdings of all its ownership interests in Syncora Guarantee Re to Syncora Guarantee, which was followed by the merger of Syncora Guarantee Re with and into Syncora Guarantee on September 4, 2008, with Syncora Guarantee being the surviving company. Subsequent to the merger of Syncora Guarantee Re with and into Syncora Guarantee, our financial guarantee reinsurance segment ceased to exist.

Total expenses (consisting of legal, investment advisory, accounting and consulting fees) incurred in connection with the transactions comprising the 2008 MTA and the work through December 31, 2008 on the transactions contemplated by the Letter of Intent were approximately $55.5 million.

Summary Financial Information

The effect of the transactions comprising the 2008 MTA on our financial position and results of operations are presented below:



(in millions)	Summary Balance Sheet Information As of the Closing Date Increase/(Decrease)																								Total
(in millions)	(1)				(2)				(3)				(4)				(5)				(6)				Total
Assets:
Equity securities, at cost		$	120.6			$	—			$	—			$	—			$	—			$	—			$	120.6
Cash and cash equivalents			1,775.0				115.6				(500.0	)			(88.6	)			(2.9	)			(820.0	)			479.1
Restricted cash and cash equivalents			—				—				—				—				—				820.0				820.0
Deferred acquisition costs			17.4				13.8				—				(10.8	)			—				—				20.4
Prepaid reinsurance premiums			(38.4	)			(47.4	)			—				—				—				—				(85.8	)
Reinsurance balances receivable			(100.0	)			(1.3	)			—				—				—				—				(101.3	)
Reinsurance balance recoverable on unpaid losses			(82.3	)			(59.2	)			—				—				—				—				(141.5	)
Derivative assets			(140.0	)			(177.2	)			—				—				—				—				(317.2	)

Total assets		$	1,552.3			$	(155.7	)		$	(500.0	)		$	(99.4	)		$	(2.9	)		$	—			$	794.3

Liabilities:
Unpaid losses and loss adjustment expenses		$	—			$	—			$	—			$	(7.7	)		$	—			$	—			$	(7.7	)
Deferred premium revenue			—				—				—				(27.9	)			—				—				(27.9	)
Derivative liabilities			—				—				(406.0	)			—				—				—				(406.0	)
Reinsurance premiums payable			(11.1	)			(1.1	)			—				(45.9	)			—				—				(58.1	)

Total liabilities			(11.1	)			(1.1	)			(406.0	)			(81.5	)			—				—			$	(499.7	)
Minority interest
Series A redeemable preferred shares of subsidiary			—				—				—				—				(39.0	)			—				(39.0	)
Shareholders’ equity:
Common shares			1,618.2				—				—				—				—				61.6				1,679.8
Treasury stock			—				—				—				—				—				(61.6	)			(61.6	)
Accumulated deficit			(54.8	)			(154.6	)			(94.0	)			(17.9	)			36.1				—				(285.2	)

Total shareholders’ (deficit) equity			1,563.4				(154.6	)			(94.0	)			(17.9	)			36.1				—				1,333.0

Total liabilities, minority interest and shareholders’ (deficit) equity		$	1,552.3			$	(155.7	)		$	(500.0	)		$	(99.4	)		$	(2.9	)		$	—			$	794.3



(in millions)	Summary Statement of Operations Information As of the Closing Date
	(1)				(2)				(3)				(4)				(5)
Revenues:
Change in fair value of derivatives
Realized gains and losses and other settlements		$	66.8			$	65.4			$	(500.0	)		$	—			$	—
Unrealized (losses) gains			(140.0	)			(177.2	)			406.0				—				—

Net change in fair value of derivatives			(73.2	)			(111.8	)			(94.0	)			—				—

Total revenues			(73.2	)			(111.8	)			(94.0	)			—				—
Expenses:
Gain (loss) on commutation of reinsurance agreements			18.4				(42.8	)			—				(17.9	)			—

Total expenses			18.4				(42.8	)			—				(17.9	)			—

Net loss			(54.8	)			(154.6	)			(94.0	)			(17.9	)			—
Gain on redemption of Series A redeemable preferred shares of subsidiary			—				—				—				—				36.1

Net loss available to common shareholders		$	(54.8	)		$	(154.6	)		$	(94.0	)		$	(17.9	)		$	36.1

⁽¹⁾

Represents effect of termination, commutation or elimination of certain reinsurance agreements and other arrangements between us and XL Capital.

⁽²⁾

Represents the effect of the commutation of certain retrocession agreements in place with non-affiliates.

⁽³⁾

Represents the effect of terminating the Swaps issued to Merrill Lynch and MLI by Syncora Guarantee.

⁽⁴⁾

Represents the effect of commuting the Old Master Facultative Reinsurance Agreement and entering into the New Master Facultative Agreement.

⁽⁵⁾

Represents the effect of repurchasing the class A preferred shares of Syncora Guarantee Re.

⁽⁶⁾

Represents the effect of the transfer by XL Capital of its shares of Syncora Holdings to Syncora Guarantee, as well as the amount of cash restricted pursuant to the agreement to hold an aggregate amount of $820.0 million in cash plus interest and premiums for the purpose of commuting, terminating, amending, or otherwise restructuring existing agreements with Counterparties.

Continuing Risks and Uncertainties Affecting Us, Assessment of Our Ability to Continue as a Going Concern, and Description of Our On-Going Strategic Plan

Continuing Risks and Uncertainties

We continue to be exposed to certain significant risks and uncertainties that could materially adversely affect our results of operations, financial condition and liquidity, including the following:

•

Pursuant to section 6903 of the New York Insurance Law, the NYID has granted Syncora Guarantee approval, in connection with the preparation of its statutory basis financial statements as of and for the year ended December 31, 2008, to release statutory basis contingency reserves on terminated policies and policies on which Syncora Guarantee has established case basis reserves for losses and loss adjustment expenses, however, there can be no assurance that the NYID will continue to permit Syncora Guarantee to apply such accounting practices in the future. See “—Recent Developments.”

•

We continue to be materially exposed to risks associated with any continuing deterioration in the credit market sectors discussed above, as well as the spread of such deterioration to other sectors of the economy to which we have material business exposure, including commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”). The extent and duration of any continued deterioration of the credit markets is unknown, as is the effect, if any, on potential claim payments and the ultimate amount of losses we may incur on obligations we have guaranteed, and potential losses we may incur on our invested assets.

•

Establishment of case basis reserves for unpaid losses and loss adjustment expenses on our in-force insurance and reinsurance business and assessing the amount of anticipated claims and

recoveries on our in-force CDS contracts requires the use and exercise of significant judgment by management, including estimates regarding the likelihood of occurrence and amount of a loss on a guaranteed obligation. Actual experience may differ from estimates and such difference may be material, due to the fact that the ultimate dispositions of claims are subject to the outcome of events that have not yet occurred and, in certain cases, will occur over many years in the future. Examples of these events include changes in the level of interest rates, credit deterioration of guaranteed obligations, and changes in the value of specific assets supporting guaranteed obligations. Both qualitative and quantitative factors are used in making such estimates. Any estimate of future costs is subject to the inherent limitation on management’s ability to predict the aggregate course of future events. It should therefore be expected that the actual emergence of losses and claims will vary, perhaps materially, from any estimate. The most significant assumption underlying our estimate of ultimate losses on our guarantees of ABS CDOs and first lien RMBS transactions is our assumption regarding the expected cumulative loss on mortgage loan collateral supporting such securities. The most uncertain component of that assumption is the future performance of currently performing (non-delinquent) mortgage loan collateral. If the actual rate at which currently performing loans become delinquent is materially greater than assumed, there will be a material adverse effect on our estimate of ultimate losses on the aforementioned guarantees and, accordingly, our financial position and results of operations. Our estimate of ultimate losses on our guarantees of obligations supported by home equity line of credit (“HELOC”) and closed end second (“CES”) mortgage loan collateral is largely dependent on our default rate assumption. In this regard, we assumed that the default rate will begin to improve by early 2010. If actual loan performance improves later than assumed or does not improve as much as expected, there will be a material adverse effect on our ultimate losses on our guarantees of obligations supported by HELOCs and CES mortgage loan collateral and, accordingly, our financial position and results of operations. Our default assumptions for first lien RMBS transactions is based on current delinquent loans and analysis of historical defaults for loans with similar characteristics. A loss severity is applied to the first lien RMBS defaults ranging from 41-68% to determine the expected loss on the collateral in those transactions. We use traditional default and prepayment curves to model our unpaid losses. If loss severity is higher than the rates applied, there may be a material adverse effect on our ultimate losses. See Note 16 to the Consolidated Financial Statements for further information.

•

Substantially all of Syncora Guarantee’s CDS contracts have mark-to-market termination payments following the occurrence of events that are outside Syncora Guarantee’s control, such as Syncora Guarantee being placed into receivership or rehabilitation by the NYID or the NYID taking control of Syncora Guarantee or, in limited cases, Syncora Guarantee’s insolvency. Mark-to-market termination payments for deals in which Syncora Guarantee would have to pay a termination payment are generally calculated either based on “market quotation” or “loss” (each as defined in the ISDA Master Agreement). “Market quotation” is calculated as an amount (based on quotations received from dealers in the market) that the counterparty would have to pay another party (other than monoline financial guarantee insurance companies) to have such party takeover Syncora Guarantee’s position in the CDS contract. “Loss” is an amount that a counterparty reasonably determines in good faith to be its total losses and costs in connection with the CDS contract, including any loss of bargain, cost of funding or, at the election of such counterparty, but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position. There can be no assurance that counterparties to Syncora Guarantee’s CDS contracts, including the Counterparties, will not assert that events have occurred which require Syncora Guarantee to make mark-to-market termination payments. If such events were to occur, the aggregate termination payments that may be asserted against Syncora Guarantee would significantly exceed our ability to make such payments and, accordingly, such events would have a material adverse effect on our financial position and results of operations. The fair value of our CDS contracts recorded in our financial statements at December 31, 2008 does not reflect the effect of mark-to-market termination payments.

•

Under a reinsurance agreement between Syncora Guarantee and Syncora Guarantee-UK (the “Treaty”), Syncora Guarantee has agreed to reinsure, on a quota share basis, up to 97% of the financial guarantee business written by Syncora Guarantee-UK. In the event that, among other things, either of the parties becomes insolvent or has a receiver appointed, the other party shall have the right to terminate the Treaty. In the event of such termination, Syncora Guarantee will forego the right to receive any future premiums and Syncora Guarantee-UK may also have a right to claim back all or a proportion of any premiums already paid to Syncora Guarantee under the Treaty in relation to the period after the date the Treaty is terminated. The Financial Services Authority (“FSA UK”) also, as the applicable regulator of Syncora Guarantee-UK in the United Kingdom, would have broad and extensive powers under the Financial Services and Markets Act 2000 which could be exercised in the event that either Syncora Guarantee or Syncora Guarantee-UK became insolvent or had a receiver appointed, including to vary or cancel Syncora Guarantee-UK’s permission to carry on any of its regulated activities. If any of the aforementioned events should occur, it will have a material adverse effect on Syncora Guarantee’s financial position and results of operations, as well as its ability to comply with its mimimum policyholders’s surplus requirement.

Furthermore, in 2002, Syncora Guarantee-UK agreed with the FSA UK to maintain a minimum solvency margin at the greater of (i) $12.5 million or (ii) 200% of the FSA UK’s required minimum margin of solvency. Under a Surplus Maintenance Agreement, Syncora Guarantee agreed to provide Syncora Guarantee-UK with funds sufficient to maintain compliance with this test at all times. Syncora Guarantee-UK was in breach of its capital solvency margin as required by the FSA UK under U.K. GAAP by $4.4 million as of September 30, 2008 and $0.6 million as of December 31, 2008. Syncora Guarantee contributed $4.4 million to Syncora Guarantee-UK and has requested NYID approval to contribute another $1.0 million. The NYID has verbally notified Syncora Guarantee that, until the 2009 MTA is consummated, it will not permit the $1.0 million capital injection to be made. Syncora Guarantee could be required to provide additional contributions to Syncora Guarantee-UK and these amounts could be material. The payment of such funds will be subject to NYID approval. If the NYID does not approve capital contributions to Syncora Guarantee-UK, the FSA UK may take regulatory actions that adversely affect Syncora Guarantee’s financial position and results of operations, and may impact its ability to comply with its minimum policyholders’ surplus requirement.

•

We may be unable to enter into or consummate the transactions contemplated by the 2009 MTA or close the tender offer, which would have a material adverse effect on our financial condition and results of operations. In the absence of a successful restructuring that achieves remediation of RMBS exposures and CDS exposures of the magnitude contemplated by the Letter of Intent and the tender offer, Syncora Guarantee will continue to report a policyholders’ deficit and the New York Superintendent may seek court appointment as rehabilitator or liquidator of Syncora Guarantee. Moreover, in the absence of a successful restructuring and in the exercise of its fiduciary duties, Syncora Guarantee’s Board of Directors may request the New York Superintendent to seek such court appointment. In such circumstances, it is likely that the New York Superintendent would institute such proceedings. If Syncora Guarantee should become subject to a regulatory proceeding, or, in limited cases, if Syncora Guarantee should become insolvent, the holders of certain of the CDS contracts Syncora Guarantee has insured may assert the right to terminate the contracts and assert claims against Syncora Guarantee to pay them the termination values, which under current market conditions would be in excess of Syncora Guarantee’s resources. If Syncora Guarantee were required to pay the termination values, Syncora Guarantee would not have sufficient liquidity to fund its obligations as they become due.

•

although Syncora Guarantee’s Board of Directors could subsequently decide to recommence claim payments. Any decision to suspend claim payments could have a number of material adverse consequences, including but not limited to litigation potential loss of control rights, the potential assertion of mark-to-market termination payments by counterparties to Syncora Guarantee’s CDS contracts with respect to CDS contracts on which Syncora Guarantee fails to pay a claim, and adverse reaction from our regulators, including the NYID, FSA UK and the BMA, including, in the case of the NYID, a decision to seek to commence a rehabilitation or liquidation of Syncora Guarantee. There can be no assurance there would not be other material adverse consequences if Syncora Guarantee failed to pay claims.

•

Our expected financial condition after the consummation of the transactions contemplated by the 2009 MTA and the tender offer is based on various assumptions concerning these transactions, including accounting and tax treatment. There can be no assurance that the assumptions will not differ materially from the ultimate treatment of such transactions and any differences may be material. In addition, while the transactions contemplated by the 2009 MTA and the related agreements and the tender offer were designed to improve our financial condition, we will continue to be subject to risks and uncertainties that could materially affect our financial position. Therefore, even if the transactions contemplated by the 2009 MTA and the tender offer are consummated, we may continue to report a policyholders’ deficit or not comply with the statutory minimum policyholders’ surplus, undergo additional restructuring and, in addition, we may become insolvent in the future.

See “Risk Factors” for additional risks that could materially adversely affect our results of operations, financial condition and liquidity.

Our Ability to Continue as a Going Concern

In our opinion, the principal factors affecting our ability to continue as a going concern are (i) whether we are successful in consummating the transactions contemplated by the Letter of Intent and related transactions and the tender offer, as well as the effect on our financial condition from the consummation of such transactions, (ii) non-assertion by certain counterparties to our CDS contracts of a mark-to-market termination event, (iii) the risk of adverse loss development on our remaining in-force business after the successful consummation of the transactions contemplated by the Letter of Intent and related transactions and the tender offer that would cause Syncora Guarantee not to be in compliance with its $65 million minimum policyholders’ surplus requirement under New York Insurance Law, and (iv) the risk of intervention by the NYID as a result of the financial condition of Syncora Guarantee or the FSA UK as a result of Syncora Guarantee-UK’s financial condition.

As a result of uncertainties associated with the aforementioned factors affecting our ability to continue as a going concern, management has concluded that there is substantial doubt about our ability to continue as a going concern. Our financial statements as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007, and 2006 are prepared assuming we continue as a going concern and do not include any adjustment that might result from our inability to continue as a going concern.

Ongoing Strategic Plan

Management is principally focused on: (i) seeking to successfully consummate the 2009 MTA and the tender offer, (ii) maintaining or enhancing our liquidity, and (iii) remediating troubled credits to minimize claim payments, maximize recoveries and mitigate ultimate expected losses. We anticipate that in connection with the 2009 MTA Syncora Guarantee will agree, except in certain limited circumstances, not recommence writing any new business.

Corporate Structure

The following charts illustrate our corporate structure before and after consummation of the transactions comprising the 2008 MTA, as well as after the consummation of transactions contemplated in the Letter of Intent:

Corporate Structure PRIOR to Consummation of Transactions Comprising the 2008 MTA

Corporate Structure AFTER Consummation of Transactions Comprising the 2008 MTA

Corporate Structure AFTER Consummation of Transactions Contemplated by the Letter of Intent

Ratings Downgrades and Other Actions

Prior to the first quarter of 2008, we had maintained triple-A ratings from Moody’s, Fitch, and S&P and these ratings had been fundamental to our historical business plan and business activities. However, in response to deteriorating market conditions described above, the rating agencies have updated their analyses and evaluations of the financial guarantee insurance industry including us. As a result, our IFS ratings have been substantially downgraded by the rating agencies and the rating agencies have placed our IFS ratings on creditwatch/ratings watch negative or on review for further downgrade. Consequently, we suspended writing substantially all new business in January 2008.

substantially all new business, we believe ratings from two agencies are sufficient. This follows numerous downgrades by each of S&P, Moody’s and Fitch since each of them first downgraded our triple-A ratings in the first quarter of 2008.

In addition to the aforementioned downgrades of our IFS ratings, Moody’s, S&P and Fitch have also downgraded our debt and other ratings.

These rating agency actions reflect Moody’s, S&P’s and Fitch’s current assessment of our creditworthiness, business franchise and claims-paying ability. This assessment reflects our exposures to the U.S. residential mortgage market, which has precipitated our weakened financial position and business profile based on increased reserves for losses and loss adjustment expenses, realized and unrealized losses on credit derivatives and modeled capital shortfalls.

Recent Regulatory Developments

On the Closing Date, Syncora Holdings entered into an undertaking with the NYID pursuant to which Syncora Holdings agreed not to make any dividends or distributions to our shareholders during an eighteen month period beginning on that date without their express written consent. In addition, Syncora Guarantee entered into an undertaking with the NYID pursuant to which Syncora Guarantee agreed not to make any dividends or distributions to its shareholders without their express written consent during a two year period commencing on November 18, 2008.

Effective the Closing Date, Syncora Guarantee Re redomesticated from Bermuda to Delaware and the ownership interests of Syncora Guarantee Re owned by Syncora Holdings were contributed by Syncora Holdings to Syncora Guarantee. On September 4, 2008 Syncora Guarantee Re merged with and into Syncora Guarantee, with Syncora Guarantee surviving the merger.

As of March 30, 2009, ten states have suspended Syncora Guarantee’s license placed an order of impairment against it or Syncora Guarantee voluntarily agreed to cease writing business in such state, though we anticipate that Syncora Guarantee will be able to continue to collect premiums on existing business in such states. Additional states may suspend Syncora Guarantee’s license to write new business in the future. See “Business—Regulation—United States.” As noted above, Syncora Guarantee has in any event suspended the writing of substantially all new business as of January 2008.

On January 7, 2009, the New York Stock Exchange (“NYSE”) notified us that it filed a notification of removal from listing on Form 25 pursuant to Rule 12d2-2(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission to delist our common shares as we were no longer in compliance with two NYSE listing standards because our average global market capitalization over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders’ equity was less than $75 million, and the average closing price of our common shares was less than $1.00 over a consecutive 30 trading-day period. The delisting of our shares could further reduce the price of our common shares and the liquidity of the trading market for our common shares. Our common shares are currently traded over the counter and quoted on the Pink Sheets quotation service. We intend to deregister our common shares and the Syncora Holdings Series A Preference Shares. See “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Deregistration.”

Key Factors Affecting Our Results of Operations

Components of Our Revenues

We derive our revenues principally from: (i) premiums from our in-force business, (ii) net investment income and net realized gains and losses from our investment portfolio supporting such business and (iii) the change in fair value of our credit derivatives. Net premiums received or receivable on financial guarantees executed in derivative form are included in “Realized gains and losses and other settlements” in our consolidated statements of operations. As a result of adverse developments in the credit markets generally and the mortgage market specifically which have resulted in material adverse effects on our business, results of operations, and financial condition, we suspended writing substantially all new business since January of 2008. See “—Recent

Developments” and “—Continuing Risks and Uncertainties Affecting Us, Assessment of Our Ability to Continue as a Going Concern, and Description of Our On-Going Strategic Plan”.

We charged premiums either on an upfront basis when the policy was issued or the contract was executed, or on an installment basis over the life of the applicable transaction.

Premiums are accounted for as written when due; therefore, when we entered into policies that provided for upfront premium, all of the premium on the policy was accounted for as written generally when the policy commenced. The portion of the upfront premium that has been written but has not yet been earned is carried on our balance sheet as deferred premium revenue. When we entered into policies that provided for installment premium, only that installment of the premium that is then due (generally the current monthly, quarterly or semiannual installment) is accounted for as written. Future premium installments during the remainder of the life of the installment-based policy are not reflected on our financial statements. See “—Critical Accounting Policies and Estimates—Premium Revenue Recognition”. Therefore, in general, the amount of total premiums written by a financial guarantee insurance company that are reported in any period will be affected by the mix of policies that it wrote in that period on an “upfront” and, in that period and prior periods, on an “installment” basis. In addition, a financial guarantee insurance company with a growing in-force book of business should generally recognize an increasing amount of net earned premium from policies written in prior reporting periods, whether premiums are received on an upfront or installment basis. Future installments of premium on business written in a period are reported by financial guarantors as a component of adjusted gross premiums, a non-GAAP financial measure. See “—Other Measures Used by Management to Evaluate Operating Performance” for additional information. The amount of installment premiums actually realized by us in the future (and that would be otherwise reflected in revenue) could be reduced due to factors such as early termination of insurance contracts or accelerated prepayments of underlying obligations.

Our net investment income is a function of the amount of our invested assets and the yield that we earn on those assets. The investment yield will be a function of market interest rates at the time of investment, as well as the type, credit quality and duration of our invested assets. In addition, we could realize gains or losses on the sale of securities in our investment portfolio or recognize an other-than-temporary impairment as a result of changing market conditions, including changes in market interest rates, and changes in the credit quality of our invested assets. See “—Critical Accounting Policies and Estimates—Investments” and Note 7 to the Consolidated Financial Statements.

The change in fair value of our credit derivatives is primarily based on changes in credit spreads, the credit quality of the referenced securities, rates of return, our Non-Performance Risk, as defined and explained below, and various other factors. See “—Critical Accounting Policies and Estimates—Valuation of Credit Default Swaps” and “—Overview of Our Business—Other Measures Used by Management to Evaluate Results of Operations and Financial Condition.”

Components of Our Expenses

Our expenses primarily consist of losses and loss adjustment expenses, acquisition costs, and operating expenses. Acquisition costs are related to the production of financial guarantee insurance business and commissions paid on reinsurance assumed, net of commission revenues earned on ceded business. Acquisition costs are generally deferred and recognized over the period in which the related premiums are earned. As discussed above, we suspended writing substantially all new business since January of 2008. Operating expenses consist primarily of costs relating to professional and consulting fees, compensation of our employees, information technology, and office premises.

See also “—Exposure to Residential Mortgage Market” below for information in regard to our exposure to residential mortgages, Note 6 to our Consolidated Financial Statements for information in regard to how our GAAP earnings are affected by the change in the fair value of our credit derivatives and “Risk Factors—Risks Related to Our Company”.

Other Measures Used by Management to Evaluate Financial Condition

The following are certain financial measures management considers important in evaluating our financial condition:

Adusted Shareholders’ Equity

We believe that adjusted shareholders’ equity (“Adjusted Shareholders’ Equity”), a non-GAAP financial measure, is an important metric to assist investors in understanding our current financial position. Adjusted Shareholders’ Equity represents shareholders’ equity in accordance with GAAP adjusted to:

(i)

exclude the consolidated net credit derivative liability reported by us at December 31, 2008, which represents an estimate of the fair value of our guarantees issued in the form of CDS contracts, and

(ii)

include the present value of the liability at December 31, 2008 for anticipated losses expected to be incurred by us on our CDS contracts if we were to hold such CDS contracts to maturity and pay claims as they arise over the remaining life of such contracts. Our liability for losses expected to be incurred on our CDS contracts primarily relates to our in-force guarantees of ABS CDOs.

We believe that Adjusted Shareholders’ Equity is an important metric to assist investors in understanding our current financial condition because: (i) by excluding the net credit derivative liability, the metric eliminates the benefit to our shareholders’ equity embedded therein from Non-Performance Risk, as defined and explained below, as well as eliminates the effect of other assumptions made by us in estimating the fair value of our CDS contracts which are not directly observable in the marketplace, and (ii) by including our best estimate of losses we expect to incur on our CDS contracts if we were to hold such CDS contracts to maturity and pay claims as they arise over the remaining life of such contracts, the metric presents our guarantees in insurance and derivative form on a consistent basis, which results in a more meaningful measure of our intrinsic value.

Set forth in the table below is a reconciliation of shareholders’ equity reported by us at December 31, 2008 to Adjusted Shareholders’ Equity at such date. Also, the following table presents the beneficial effect on our net credit derivative liability at December 31, 2008 of our risk of non-performance (“Non-Performance Risk”). Non-Performance Risk reflects the market perception of the risk that we will not be financially able to honor our obligations as they become due. For example, when the market price of buying credit protection on us increases reflecting our deteriorating financial position, the Non-Performance Risk component of the fair value of our CDS contracts reduces our derivative liabilities and increases shareholders’ equity, whereas when the market price of buying credit protection on us decreases reflecting our improving financial position, the Non-Performance Risk component of the fair value of our CDS contracts increases our derivative liabilities and decreases shareholders’ equity. The beneficial effect on our net credit derivative liability from our Non-Performance Risk was estimated based on quoted market prices of buying credit protection on Syncora Guarantee. We believe that it is important to understand the effect of Non-Performance Risk on the fair value of our obligations under our CDS contracts when evaluating our financial position in accordance with GAAP. As can be seen from the table below,

the beneficial effect on our net credit derivative liability of Non-Performance Risk resulted in an increase in our shareholders’ equity, in accordance with GAAP, of approximately $14.2 billion.


			As of December 31, 2008						As of December 31, 2007
(in millions)
Shareholders’ equity				$	710.0					$	427.1
Plus:
Net credit derivative liabilities
Net credit derivative liabilities before Non-Performance Risk	$	14,954.4					$	1,346.1
Non-Performance Risk		14,222.0						—

Net credit derivative liabilities					732.4						1,346.1
Less:
Net losses expected to be incurred on CDS contracts					3,238.4						645.1

Adjusted Shareholders’ equity				$	(1,796.0	)				$	1,128.1

Adjusted Gross Premiums

Historically, we evaluated our periodic sales performance based on a non-GAAP measure known as adjusted gross premiums. Adjusted gross premiums for any period equals the sum of: (i) upfront premiums written in such period, (ii) current installment premiums on business written in such period and (iii) expected future installment premiums on contracts written during such period that remain in force and for which there is a binding obligation on the part of the insured to pay the future installment premiums, discounted to present value at 7%, which we refer to as the present value of future installment premiums (“PVFIP”) on business written during such period. This measure adjusted for the fact, as described above, that upfront premiums are recorded in full as total premiums written at inception of the contract but future installment premiums are not. PVFIP is not reflected in our Consolidated Financial Statements. However, because we suspended writing substantially all new business in January of 2008, we no longer use this metric.

Operating Earnings

Historically, we measured our performance by using a metric referred to as operating earnings, a non-GAAP financial measure. Operating earnings represents net income, in accordance with GAAP, adjusted to exclude: (i) net realized gains (losses) on investments, (ii) net unrealized gains (losses) on credit derivatives, other than those losses caused by credit impairment, and (iii) earned premiums from refundings (see “—Critical Accounting Policies—Premium Revenue Recognition”). However, as a result of our current financial condition, we no longer believe this metric is relevant to the evaluation of our performance.

Exposure to Residential Mortgage Market

We are exposed to residential mortgages directly, through our insurance guarantees of RMBS and indirectly, through our guarantees of ABS CDOs, which were primarily issued in the form of CDS contracts.

As of December 31, 2008, our total net direct exposure to RMBS aggregated approximately $8.7 billion, representing approximately 6.5% of our total in-force guaranteed net par outstanding at such date. The RMBS exposure consisted of various collateral types as set forth in the table below. The tables below also set forth our internal ratings, as well as the ratings of the rating agencies of the insured transactions at December 31, 2008. During the year ended December 31, 2008, we recorded an additional provision for losses and loss adjustment expenses after giving effect to reinsurance of approximately $1,789.8 million, on a present value basis, primarily to reflect adverse development on certain of such obligations. During the year ended December 31, 2007, we recorded a provision for losses and loss adjustment expenses after giving effect to reinsurance of $37.2 million on certain of such obligations. See Note 16 (a) to the Consolidated Financial Statements for detailed information regarding the basis of our estimates of losses and loss adjustment expenses with respect to the

aforementioned exposures, as well as “—Critical Accounting Policies and Estimates—Reserves for Losses and Loss Adjustment Expenses”.

As of December 31, 2008, we had 14 high-grade and 3 mezzanine ABS CDO guaranteed transactions in-force, with total net par outstanding of $14.2 billion. All of our indirect exposure to residential mortgages arises from CDOs in which our guarantees pertain to securities initially benefiting from higher than the minimum amount of subordination required under rating agency criteria in effect at the time of issue for a rating of “AAA,” based on S&P ratings. However, as a result of the actual levels of delinquencies, defaults and foreclosures on subprime mortgages substantially exceeding forecast levels, we now anticipate losses from these policies. As of December 31, 2008, our indirect subprime net exposure was approximately $4.4 billion based on the RMBS holdings within the ABS CDO collateral pools. In addition, the collateral pools of most of our ABS CDO transactions contain securities issued by other ABS CDOs. The indirect net exposure to other ABS CDOs was approximately $1.7 billion as of December 31, 2008 and a significant portion of the underlying collateral supporting these transactions consists of subprime RMBS. As our guarantees of ABS CDOs were issued in the form of CDS contracts, under GAAP, they are reported at fair value. At December 31, 2008 and 2007, we carried derivative liabilities relating to all of our CDS contracts of $787.2 million and $1,700.7 million, respectively, ($14,954.4 million and $1,700.7 million, respectively, before giving effect to Non- Performance Risk), of which $68.6 million and $1,511.7 million, respectively, ($11,209.3 million and $1,511.7 million, respectively, before giving effect to Non-Performance Risk), related to ABS CDOs. Non-Performance Risk is reflected in the fair value of our CDS contracts effective with the adoption of FASB No. 157, “Fair Value Measurements”, on January 1, 2008. Prior thereto, Non-Performance Risk was not reflected in the fair value of our CDS contracts. See “—Other Measures Used by Management to Evaluate Results of Operations and Financial Condition” and “Critical Accounting Policies and Estimates—Valuation of Credit Default Swaps” for a discussion of Non-Performance Risk. However, at December 31, 2008 and 2007, management’s best estimate of anticipated claims and recoveries on such CDS contracts, net of any recoveries anticipated from purchased credit derivatives, was $3,238.4 million and $645.1 million, respectively (see “—Anticipated Claims Payable and Anticipated Recoveries On CDS Contracts” below for detailed information regarding the basis of the estimate of such claims payments and recoveries and the sensitivity of assumptions underlying such estimate).

Set forth below is certain additional information in regard to our exposure to RMBS and CDOs:

Exposure to RMBS

The following table presents the net par outstanding for our insured RMBS portfolio by type of collateral as of December 31, 2008:


(in millions)	Net Par Outstanding as of December 31, 2008			% of total
Alt-A (1st lien)⁽¹⁾		$	2,977.4		34.1	%
HELOC (Prime)⁽²⁾			2,757.1		31.6
Prime and Alt-A (2nd lien)⁽³⁾			1,251.7		14.4
Subprime (1st lien)⁽⁴⁾			1,046.6		12.0
Subprime (2nd lien)⁽⁵⁾			575.9		6.6
Prime (1st lien) & other⁽⁶⁾			114.7		1.3

Total		$	8,723.4		100.0	%

⁽¹⁾

An “Alt-A” loan means a loan which is ineligible for purchase by Fannie Mae or Freddie Mac.

⁽²⁾

HELOC is an adjustable rate line of credit secured by a second lien on residential properties.

⁽³⁾

Prime (2nd lien) mortgage loans are secured by second liens on one-to-four family residential properties. The underwriting standards used to underwrite prime mortgage loans are the standards applied to the most creditworthy borrowers and are generally acceptable to Fannie Mae and Freddie Mac. This category also includes Alt-A (2nd lien) loans.

⁽⁴⁾

Subprime (1st lien) mortgage loans are secured by first liens on residential properties to non-prime borrowers. The underwriting standards used to underwrite subprime mortgage loans are less stringent than the standards applied to the

most creditworthy borrowers and less stringent than the standards generally acceptable to Fannie Mae and Freddie Mac with regard to the borrower’s credit standing and repayment ability.

⁽⁵⁾

Subprime (2nd lien) mortgage loans are secured by second liens on residential properties to non-prime borrowers. See Subprime (1st lien) for a description of the underwriting standards.

⁽⁶⁾

Prime (1st lien) mortgage loans are secured by first liens on one-to-four family residential properties. The underwriting standards used to underwrite prime mortgage loans are the standards applied to the most creditworthy borrowers and are generally acceptable to Fannie Mae and Freddie Mac.

The following table presents the net par outstanding and net case basis reserves for unpaid losses for our insured RMBS portfolio by year of origination (year the guarantee was underwritten and issued) as of December 31, 2008:


(in billions)	2007			2006			2005			2004			Total
Subprime		$	0.7		$	—		$	0.2		$	0.2		$	1.1
Prime/Alt-A			1.9			0.8			0.2			0.1			3.0

Total		$	2.6		$	0.8		$	0.4		$	0.3		$	4.1

(in millions)
Net case basis reserves for unpaid losses⁽¹⁾		$	434.7		$	977.2		$	124.1		$	14.0		$	1,550.0

⁽¹⁾

Excludes unpaid loss adjustment expenses.

The following tables show the current internal and rating agency ratings on all of our direct RMBS exposure by deal, grouped by collateral type. The internal ratings are based on reviews during the fourth quarter of 2008. Rating agencies’ ratings represent their most recent published ratings.

(in millions)
HELOC Prime

Vintage

Internal
Credit
Rating⁽¹⁾

S&P
Rating

Moody’s
Rating

Fitch
Rating

Actual
Cumulative
Losses
Through
December 31, 2008

Subordination
(Total Credit
Enhancement)

60+ Days
Delinquent⁽²⁾

Net Par
Outstanding
as of
December 31,
2008

2004

BBB

Caa1

1.9

7.0

9.1

127.1

2004

BBB

Caa1

2.5

4.8

9.5

215.8

2006

Caa1

6.2

—

13.5

737.4

2005

BBB-

10.3

0.6

14.5

309.1

2006

Caa1

19.9

—

15.6

625.1

2007

Caa1

27.3

—

15.3

376.2

2006

Caa1

16.8

—

13.0

277.9

2006

Caa1

15.1

—

12.8

88.5

Total

2,757.1

⁽¹⁾

Our internal ratings are based on our internal credit assessment of each transaction taking into account the overall credit strengths and weaknesses, transaction structure and the trends in the asset sector. We base our analysis on information received from the trustees or from the issuer, as well as on-site visits to issuers, servicers, collateral managers and project sites. If updated modeling has been performed, modeling results are also considered. We also take into consideration the rating agencies’ rationale for their ratings, and, accordingly, our ratings are typically consistent with the rating agencies. However, variations exist as we make internal conclusions that may result in different ratings.

⁽²⁾

Includes loans in process of foreclosure, loans where the mortgagee has filed for bankruptcy, and real estate owned.

Alt-A (1st Lien)


	Vintage	Internal Credit Rating⁽¹⁾	S&P Rating	Moody’s Rating	Fitch Rating	Actual Cumulative Losses Through December 31, 2008	Subordination (Total Credit Enhancement)	60+ Days Delinquent⁽²⁾	Net Par Outstanding as of December 31, 2008
1	2005	aaa	AAA	Aaa	AAA	0.3%	4.8%	6.1%		$	15.0
2	2006	c	B	Ba2	NR	3.3%	6.9%	38.0%			100.7
3	2005	c	AAA	Aaa	NR	0.7%	20.7%	23.1%			119.1
4	2007	bbb-	AAA	Aaa	NR	3.0%	21.6%	32.0%			524.6
5	2007	aaa	AAA	Aaa	NR	3.1%	11.8%	24.2%			455.7
6	2006	c	BB	Aaa	NR	0.9%	11.8%	35.2%			84.6
7	2005	c	AAA	A1	NR	14.6%	20.2%	32.2%			15.4
8	2006	c	AAA	Aaa	NR	0.6%	12.6%	24.5%			55.2
9	2005	aaa	AAA	Aaa	NR	1.2%	38.5%	12.5%			53.8
10	2005	c	AAA	Aa2	NR	11.7%	22.9%	29.6%			34.7
11	2006	c	B	Baa2	NR	2.0%	13.5%	34.7%			210.7
12	2006	c	AAA	Baa2	NR	1.7%	10.2%	42.3%			40.8
13	2006	c	B	B3	NR	1.5%	9.5%	34.8%			75.9
14	2007	bbb-	AAA	Aaa	AAA	2.4%	22.1%	24.3%			446.4
15	2006	c	B	Ba1	NR	2.0%	12.1%	37.7%			176.0
16	2007	c	B	Caa1	NR	4.3%	10.7%	38.9%			79.2
17	2007	c	CCC	Caa1	NR	6.0%	9.1%	39.4%			18.7
18	2007	c	NR	B3	AAA	3.5%	6.6%	21.9%			29.9
19	2007	c	NR	Caa3	BB	—	6.3%	40.5%			29.2
20	2007	c	NR	Caa3	BB	10.6%	12.7%	53.9%			58.2
21	2006	c	B	Ba1	NR	2.2%	10.0%	34.0%			96.2
22	2007	c	A	Baa3	NR	4.6%	19.8%	23.8%			22.0
23	2007	c	B	B3	AAA	—	6.7%	35.3%			30.8
24	2004	aaa	AAA	Aaa	NR	1.8%	59.7%	10.3%			0.3
25	2007	bbb-	AAA	Aaa	NR	4.9%	11.4%	18.0%			204.3

Total										$	2,977.4

⁽¹⁾

⁽²⁾

Includes loans in process of foreclosure, loans where the mortgagee has filed for bankruptcy, and real estate owned.

Prime, Subprime and Alt-A (2nd lien)


	Vintage	Internal Credit Rating⁽¹⁾	S&P Rating	Moody’s Rating	Fitch Rating	Actual Cumulative Losses Through December 31, 2008	Subordination (Total Credit Enhancement)	60+ Days Delinquent⁽²⁾	Net Par Outstanding as of December 31, 2008
1	2007	c	B	B1	NR	36.1%	4.6%	27.1%		$	129.0
2	2007	d	B	Caa1	NR	32.7%	17.1%	18.4%			214.4
3	2007	d	B	Caa1	NR	28.9%	—	16.2%			203.5
4	2006	c	B	Caa1	NR	2.1%	1.8%	12.8%			704.8
5	2007	bbb-	B	Baa3	NR	21.1%	31.1%	9.4%			277.2
6	2007	c	B	Caa1	NR	24.5%	3.3%	21.2%			190.7
7	2007	bbb-	B	B3	NR	14.9%	38.9%	10.9%			108.0

Total										$	1,827.6

⁽¹⁾

received from the trustees or from the issuer, as well as on-site visits to issuers, servicers, collateral managers and project sites. If updated modeling has been performed, modeling results are also considered. We also take into consideration the rating agencies’ rationale for their ratings, and, accordingly, our ratings are typically consistent with the rating agencies. However, variations exist as we make internal conclusions that may result in different ratings.

⁽²⁾

Includes loans in process of foreclosure, loans where the mortgagee has filed for bankruptcy, and real estate owned.

Subprime (1st Lien)


	Vintage	Internal Credit Rating⁽¹⁾	S&P Rating	Moody’s Rating	Fitch Rating	Actual Cumulative Losses Through December 31, 2008	Subordination (Total Credit Enhancement)	60+ Days Delinquent⁽²⁾	Net Par Outstanding as of December 31, 2008
1	2004	a-	NR	WD	A	2.8%	39.8%	25.0%		$	72.3
2	2004	a-	AA-	A2	AA	2.5%	22.3%	18.0%			36.1
3	2005	aa+	A	NR	AA	5.7%	29.6%	38.3%			208.2
4	2004	aaa	AAA	Aaa	AAA	2.9%	243.7%	11.5%			7.1
5	2005	aaa	AAA	Aaa	NR	3.5%	55.5%	39.5%			5.9
6	2004	aaa	AAA	Aaa	NR	2.4%	100.8%	45.4%			3.1
7	2007	bbb-	B	Caa1	NR	4.3%	18.0%	35.0%			58.0
8	2007	bbb-	B-	B2	NR	3.8%	21.7%	34.8%			77.2
9	1999	c	D	Caa1	NR	13.6%	0.2%	32.7%			0.2
10	2007	bbb-	A	B3	NR	6.4%	14.7%	26.9%			520.8
11	2004	aaa	AAA	Aaa	AAA	3.6%	83.1%	36.0%			36.4
12	2005	aaa	AAA	Aaa	NR	8.2%	60.1%	58.8%			21.3

Total										$	1,046.6

⁽¹⁾

⁽²⁾

Includes loans in process of foreclosure, loans where the mortgagee has filed for bankruptcy, and real estate owned.

Prime (1st Lien) and other


	Vintage	Internal Credit Rating⁽¹⁾	S&P Rating	Moody’s Rating	Fitch Rating	Actual Cumulative Losses Through December 31, 2008	Subordination (Total Credit Enhancement)	60+ Days Delinquent⁽²⁾	Net Par Outstanding as of December 31, 2008
1	2004	aaa	AAA	Aaa	NR	0.1%	21.5%	6.7%		$	8.1
2	2004	aaa	NR	Aaa	AAA	—	3.6%	1.9%			24.5
3	2004	aa	NA	NA	NA	—	—	—			1.5
4	2004	aaa	AAA	NR	AAA	—	4.4%	0.6%			14.7
5	2007	bbb	BBB	Baa2	BBB	—	0.2%	0.0%			65.9

Total										$	114.7

⁽¹⁾

⁽²⁾

Includes loans in process of foreclosure, loans where the mortgagee has filed for bankruptcy, and real estate owned

Exposure to CDOs

The following table presents the net notional exposure of our guaranteed CDOs by rating as of December 31, 2008:


(in billions)	Net Par Outstanding as of December 31, 2008			% of Total
AAA⁽¹⁾⁽²⁾		$	27.9		65.3	%
AA⁽¹⁾			2.5		5.9
A⁽¹⁾			0.3		0.7
BBB and lower			12.0		28.1

Total		$	42.7		100.0	%

⁽¹⁾

Based on S&P ratings if available and internal ratings if no S&P rating is available.

⁽²⁾

Also includes exposure considered to be “super senior” where the underlying credit support exceeds the “AAA” guidelines set by S&P.

The following table presents the net notional exposure of our guaranteed CDOs by type of referenced asset as of December 31, 2008:


(in billions)	Net Par Outstanding as of December 31, 2008			% of Total			# of Transactions
ABS CDO^(1)(2)(6)(7)		$	14.2		33.3	%		17
CLO⁽¹⁾⁽³⁾			14.0		32.8			61
Investment-grade corporate CDO⁽¹⁾⁽⁴⁾			5.8		13.6			22
CDO of CDO⁽¹⁾⁽⁵⁾			1.4		3.3			9
CMBS⁽¹⁾			5.0		11.7			8
Other			2.3		5.3			16

Total		$	42.7		100.0	%		133

⁽¹⁾

A CDO is an investment or a security that is collateralized by, or synthetically references, a pool of debt obligations such as corporate loans, bonds and ABS.

⁽²⁾

An ABS CDO is a CDO that is collateralized by, or synthetically references, a pool of asset-backed securities, though mostly RMBS.

⁽³⁾

A CLO is a CDO that is collateralized by, or synthetically references, a pool of leveraged bank loans to corporate entities generally rated below investment grade, i.e. rated below “BBB-” by S&P, “Baa3” by Moody’s and “BBB-” by Fitch.

⁽⁴⁾

An investment grade corporate CDO is a CDO that is collateralized by, or synthetically references, a bespoke portfolio or an index of debt to corporate entities rated investment grade, i.e. rated at least “BBB-” by S&P, “Baa3” by Moody’s and “BBB-” by Fitch or higher.

⁽⁵⁾

A CDO of CDOs, or CDO squared, is a CDO that is collateralized by, or synthetically references, a pool of other CDO securities.

⁽⁶⁾

Represents ABS CDOs with greater than 50% RMBS collateral.

⁽⁷⁾

Includes $13.9 billion secured primarily by “AAA”, “AA”, and “A” rated RMBS collateral at inception and $0.3 billion secured primarily by “BBB” rated RMBS collateral at inception. Ratings represent the lower of ratings by S&P or Moody’s.

The following table presents the net notional exposure of our ABS CDO⁽¹⁾portfolio by vintage (year the CDO was issued) as of December 31, 2008:


(in billions)	2007			2006			2005			2004			2003			2002			Total
High Grade⁽²⁾		$	5.5		$	6.7		$	0.9		$	0.8		$	—		$	—		$	13.9
Mezzanine⁽³⁾			—			—			—			0.1			0.1			0.1			0.3

Total		$	5.5		$	6.7		$	0.9		$	0.9		$	0.1		$	0.1		$	14.2

⁽¹⁾

Represents ABS CDOs with greater than 50% RMBS collateral.

⁽²⁾

ABS CDOs secured primarily by “AAA,” “AA,” and “A” rated RMBS collateral at inception.

⁽³⁾

ABS CDOs secured primarily by “BBB” rated RMBS collateral at inception.

The following table presents the net notional exposure of our ABS CDO portfolio by referenced asset type as of December 31, 2008:


(in billions)	Net Notional Outstanding as of December 31, 2008			% of Total
Prime & Midprime RMBS⁽¹⁾		$	5.7		40.1	%
Subprime RMBS⁽²⁾			4.4		31.0
CDO⁽³⁾			2.4		16.9
CMBS			1.3		9.2
Other ABS⁽⁴⁾			0.4		2.8

Total		$	14.2		100.0	%

⁽¹⁾

Prime RMBS includes securities with a weighted average Fair Isaac’s Credit Organization (“FICO”) score at or above 700 per third party data sources. Midprime RMBS includes securities with a weighted average FICO score below 700 but above 640 per third party data sources.

⁽²⁾

Subprime RMBS includes securities with a weighted average FICO score of 640 or below per third party data sources.

⁽³⁾

CDO includes ABS CDOs, CLOs, commercial real estate/CMBS CDOs, trust preferred securities CDOs, emerging markets CDOs and other CDOs.

⁽⁴⁾

Other ABS includes credit card, student loan, small business loan and other non-mortgage securitizations.

The following table presents the net notional exposure of the referenced assets underlying our ABS CDO portfolio by rating as of December 31, 2008:


(in billions)	Net Notional Outstanding as of December 31, 2008			% of Total
Ratings⁽¹⁾
AAA		$	1.9		13.4	%
AA			2.3		16.2
A			1.1		7.7
BBB & lower			8.9		62.7

Total		$	14.2		100.0	%

⁽¹⁾

Ratings represent the lower of ratings by S&P or Moody’s as of February 2, 2009.

The following table presents ratings information for each of our 17 guaranteed ABS CDOs as of December 31, 2008:

(in millions)

Net Par
Outstanding
as of
December 31,
2008

Notes
Wrapped

Original
Subord-
ination

Current
Subord-
ination⁽¹⁾

Event
of
Default
Declared⁽²⁾

S&P⁽³⁾

Moody’s⁽³⁾

Internal Rating⁽³⁾

Net
Derivative
Liability
(Asset) at
December 31,
2008

Deal #

Vintage

Deal Type

Original
Rating

Current
Rating

Original
Rating

Current
Rating

Original
Rating

Current
Rating

High Grade ABS CDOs CRMBS > 50%

2004

CDO of High Grade ABS

808.6

A1A, A1B

11.0%

11.8%

AAA

AA-/*-

Aaa

Ba3/*-

aaa

BIG

6.6

2005

CDO of High Grade ABS

232.3

4.1%

20.9%

AAA

—

aaa

bbb

0.9

2005

CDO of High Grade ABS

656.2

A1M, A1Q

19.2%

13.9%

yes

AAA

BB/*-

Aaa

Caa3

aaa

BIG

6.1

2006

CDO of High Grade ABS

1,311.4

11.8%

6.1%

yes

AAA

B-/*-

Aaa

aaa

BIG

9.3

2006

CDO of High Grade ABS

972.2

—

11.5%

6.8%

AAA

BB+/*-, CCC-/*-

Aaa

Caa3/Ca

aaa

BIG/bbb

8.0

2006

CDO of High Grade ABS

1,318.4

A1M, A1Q

11.1%

7.5%

yes

AAA

CCC/*-

Aaa

Caa3 /*-

aaa

BIG

6.6

2006

CDO of High Grade ABS

1,191.5

A1A, A1B

5.8%

-0.2%

yes

AAA

BB+/*-, B-/*-

Aaa

Caa1/*-, Caa3/*-

aaa

BIG

(2.1

)

2006

CDO of High Grade ABS

1,026.4

13.9%

14.3%

AAA

BB/*-

Aaa

Caa1/*-

aaa

BIG

5.4

2006

CDO of High Grade ABS

952.1

A1A-D

6.0%

1.5%

yes

A-1+/ AAA

CCC+/*-

P-1/Aaa

aaa

BIG

(2.5

)

2007

CDO of High Grade ABS

1,261.2

—

14.0%

5.8%

AAA

AA/*-, CC

Aaa

B2/*-, Caa3/*-

aaa

BIG

8.3

2007

CDO of High Grade ABS

1,795.2

A1B

9.8%

6.9%

yes

A-1+

CCC /*-

P-1

aaa

BIG

8.4

2007

CDO of High Grade ABS

823.6

A1LA

17.0%

10.9%

yes

AAA

Aaa

Caa1/*-

aaa

BIG

(4.0

)

2007

CDO of High Grade ABS

832.0

15.0%

14.5%

yes

AAA

CCC-/*-

Aaa

aaa

BIG

12.8

2007

CDO of High Grade ABS

777.4

A1S

20.0%

21.0%

yes

AAA

BB+/*-

Aaa

Ba2/*-

aaa

BIG

4.6

Subtotal High Grade ABS CDOs

13,958.5

68.4

Mezzanine ABS CDOs (RMBS > 50%)

2002

CDO of Mezz ABS

83.8

25.0%

30.1%

AAA

AA-/*-

Aaa

Caa3

aaa

BIG

—

2003

CDO of Mezz ABS⁽⁴⁾

76.6

20.1%

27.0%

AAA

B/*

Aaa

Ba3/*-

aaa

BIG

0.1

2004

CDO of Mezz ABS

81.9

30.0%

37.7%

AAA

Aaa

Baa2

aaa

bbb

0.1

Subtotal Mezzanine ABS CDOs

242.3

0.2

Total

14,200.8

68.6

⁽¹⁾

Subordination is calculated based on the par value of the CDO’s assets including cash in the principal account per December 2008 reported data.

⁽²⁾

Event of Default determination current as of February 28, 2009.

⁽³⁾

S&P and Moody’s and the Company’s internal ratings current as of March 20, 2009. “/*-” indicates rating is on review for downgrade. “/*” indicates rating on watch developing. Internal ratings as of December 31, 2008.

⁽⁴⁾

Transaction is preinsured by another monoline financial guarantee insurance company.

Note: The Company has additional exposure to three pre-2003 vintage mezzanine ABS CDOs with collateral pools consisting of less than 50% RMBS. The aggregate net par insured for these deals totaled $48.7 million as of December 31, 2008.

The following table presents our CDO squared exposure as of December 31, 2008:


(in millions)					Current Subord- ination⁽¹⁾		Ratings (Moody’s/ S&P)⁽²⁾	Internal Rating⁽³⁾	% CDO Collateral		% ABS Collateral		% Corp. Collateral		CDO Collateral Composition as a % of the Deal																Net Derivative Liability at December 31, 2008
Deal #	Vintage		Net Notional Out- standing												High Grade ABS CDO		Mezz ABS CDO		CLO		CBO		CDO of CDO		EM CDO		Trups		CRE CDO

1		2006		$141.0		45.1%	(4)	bbb-		100.0%		—		—		5.0%		3.5%		91.6%		—		—		—		—		—		$3.3
2		2005		134.3		38.3%	Ba1/*- AAA	bbb-		96.4%		3.6%		—		5.6%		2.6%		76.4%		2.3%		2.9%		4.1%		—		2.4%		3.2
3		2005		444.5		38.3%	Ba1/ AAA	BIG		80.6%		19.4%		—		4.2%		25.0%		31.9%		6.9%		2.8%		—		8.3%		1.4%		19.3
4		2005		151.9		41.3%	Ba1/-/ BBB-/-	BIG		100.0%		—		—		25.5%		13.0%		41.3%		3.9%		5.0%		5.4%		6.0%		—		0.2
Total⁽⁵⁾				$1,431.5		31.9%	Weighted Averages			93.3%		6.7%		0.1%		5.0%		10.0%		63.8%		7.7%		1.7%		1.2%		3.2%		0.7%		$27.8

⁽¹⁾

Subordination is calculated based on the par value of the CDO’s assets including cash in the principal account per December 2008 reported data.

⁽²⁾

Moody’s and S&P ratings as of March 20, 2009. The symbol “/*-” indicates rating is on review for downgrade.

⁽³⁾

Internal ratings as of December 31, 2008.

⁽⁴⁾

Ratings not shown due to confidentiality provisions.

⁽⁵⁾

In addition to the CDO squared exposures listed above, the Company has CDO squared exposure written in financial guarantee form with net par outstanding as of December 31, 2008 of $559.8 million.

Anticipated Claims Payable and Anticipated Recoveries On CDS Contracts

At December 31, 2008 and 2007, management estimated that we would incur anticipated claims and recoveries resulting in losses on our in-force CDS contracts, after giving effect to reinsurance, of $3,238.4 million and $645.1 million, respectively ($3,238.4 million and $829.8 million, respectively, before giving effect to reinsurance). Such losses primarily relate to our guarantees of ABS CDOs and represent: (i) the net present value of claims expected to be paid subsequent to the measurement date, less (ii) the net present value of expected recoveries subsequent to the measurement date, and the net present value of installment premiums due from the counterparties to such guarantees subsequent to the measurement date. The amount of expected claims and recoveries is based on assumptions and estimates extending over many years into the future. Such estimates are subject to the inherent limitation on our ability to predict the aggregate course of future events. It should, therefore, be expected that the actual emergence of claims and recoveries will vary, perhaps materially, from any estimate. As of December 31, 2008, no claim notices have been received with respect to these transactions. However, subsequent thereto through March 27, 2009, we have received claim notices under two CDS contracts guaranteeing ABS CDOs which aggregated approximately $5.7 million, of which $0.5 million has been paid to date. In addition, the Company commuted certain of its guarantees of ABS CDOs with Merrill Lynch and its affiliates during 2008 for a payment of $500 million (see “—Overview of Our Business—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”). Management continues to monitor our ABS CDO exposure and will revise its estimates if necessary, as new information becomes available.

Expected claims and recoveries on our ABS CDO portfolio were estimated based on detailed cash flow modeling of expected quarterly cash flows for loans that are referenced in our ABS CDOs. ABS CDOs that we guarantee are highly complex structured transactions, the performance of which depends on a wide variety of factors outside of our control. Our estimate of claims and recoveries on these transactions was based on financial models, generated internally, to estimate future credit performance of the underlying assets, and to evaluate structures, rights and our potential obligations over time. The modeling of ABS CDOs requires analysis of both direct RMBS, as well as CDO collateral within the ABS CDOs, known as “inner securitizations,” and we do not consistently have access to all the detailed information necessary to project every component of each inner securitization. Therefore, in some cases we put greater reliance on the third party data sources and analytics which we are not able to independently verify. In addition, many of these financial models include, and rely on, a number of assumptions, many of which are difficult to estimate and are subject to change, and even small alterations in the underlying assumptions of the model can

have a significant effect on its results. Moreover, the performance of the securities we guarantee depends on a wide variety of factors which are outside our control, including the liquidity and performance of the collateral underlying such securities, the correlation of assets within collateral pools, the performance or non-performance of other transaction participants (including third-party servicers) and the exercise of control or other rights held by other transaction participants.

To develop the cash flow model for each guaranteed CDO, we begin by determining the expected cash flows for each security owned by the CDO. For each direct holding of an RMBS security (based on the CUSIP number obtained from the latest trustee report) we determined a cumulative loss projection based on characteristics of the mortgage loans in the collateral pool. We obtained information on the pool’s loan performance from “LPS”, a loan information database developed by LoanPerformance, a third party vendor. Projected future performance of each loan in the pool was determined by its characteristics as matched up against the performance of similar loans in the LPS historical database.

The key assumptions in our modeling of direct RMBS holdings within ABS CDOs include:

•

The projected default rate for currently performing loans which were based on the loan’s characteristics at origination including:

—

Combined loan to value

—

FICO credit scoring model

—

Debt to income

—

Loan risk factors (option adjustable rate mortgages, negative amortization, investor property, second home, and second lien)

—

Level of borrower documentation (low documentation, stated documentation, or no documentation)

•

The roll rate projections of defaults for loans that are currently delinquent in the pool

•

The loss severity upon default for each loan

As of December 31, 2008, our forecast of average cumulative losses for 2006 and 2007 subprime RMBS was 25.6% (with a range from 10% to 44%) and 28.8% (with a range from 12% to 44%), respectively.

Segments

Prior to the 2008 MTA, including the merger of Syncora Guarantee Re with and into Syncora Guarantee (see “—Overview of Our Business—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”), the Company’s business activities were organized and managed in two operating segments: financial guarantee insurance and financial guarantee reinsurance. Following the 2008 MTA and the merger, the Company’s business is managed as one operating segment.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates, and those differences may be material.

Critical accounting policies and estimates are defined as those that require management to make significant judgments, as well as those where results therefrom may be materially different under different assumptions and conditions. We have identified the accounting for losses and loss adjustment expenses, the valuation of CDS contracts and investments, premium revenue recognition, deferred acquisition costs, and deferred income taxes, as critical accounting policies.

An understanding of our accounting policies for these items is of critical importance to understanding our Consolidated Financial Statements. The following discussion provides more

information regarding the estimates and assumptions used for these items and should be read in conjunction with the notes to our Consolidated Financial Statements.

Reserves for Losses and Loss Adjustment Expenses

Our financial guarantees insure scheduled payments of principal and interest due on various types of financial obligations against payment default by the issuers of such obligations. We establish reserves for unpaid losses and loss adjustment expenses on such business based on our best estimate of the ultimate expected incurred losses. Our estimated ultimate expected incurred losses are comprised of: (i) case basis reserves, (ii) unallocated reserves, and (iii) cumulative paid losses to date. Establishment of such reserves requires the use and exercise of significant judgment by management, including estimates regarding the occurrence and amount of a loss on an insured obligation. Actual experience may differ from estimates and such difference may be material, due to the fact that the ultimate dispositions of claims are subject to the outcome of events that have not yet occurred. Examples of these events include changes in the level of interest rates, credit deterioration of insured obligations, and changes in the value of specific assets supporting insured obligations. Both qualitative and quantitative factors are used in establishing such reserves. In determining the reserves, management considers all factors in the aggregate, and does not attribute the reserve provisions or any portion thereof to any specific factor. Any estimate of future loss is subject to the inherent limitation on our ability to predict the aggregate course of future events. It should therefore be expected that the actual emergence of losses and loss adjustment expenses will vary, perhaps materially, from any estimate.

The following tables summarize our gross reserves (before the effect of reinsurance ceded) for losses and loss adjustment expenses by type of reserve as of December 31, 2008 and 2007. For a detailed discussion of our reserves for unpaid losses and loss adjustment expenses, at December 31, 2008 and 2007 see Note 16 to the Consolidated Financial Statements.


(in millions)	As of December 31, 2008
Gross case basis reserve for losses⁽¹⁾		$	1,605.3
Gross case basis reserve for loss adjustment expenses			9.3
Gross unallocated reserves			71.6

Total		$	1,686.2

⁽¹⁾

Amount is net of $22.0 million, representing the net present value of future installment premiums at December 31, 2008 with regard to certain of our guarantees on which case reserves are recorded at December 31, 2008.

(in millions)

As of
December 31, 2007

Gross case basis reserve for losses⁽¹⁾

309.0

Gross case basis reserve for loss adjustment expenses

2.8

Gross unallocated reserves

90.7

Total

402.5

⁽¹⁾

Amount is net of $8.6 million, representing the net present value of future installment premiums at December 31, 2007 with regard to certain of our guarantees on which case reserves are recorded at December 31, 2007.

Case basis reserves on insured business are established by us with respect to a specific policy or contract upon receipt of a claim notice or when management determines that (i) a claim is probable in the future based on specific credit events that have occurred and (ii) the amount of the ultimate loss that we will incur can be reasonably estimated. As specific case basis reserves are established we consider whether any changes are required to the assumptions underlying the calculation of unallocated reserves (which are discussed below) as a result of such activity. The amount of the case basis reserve is based on the net present value of the expected ultimate loss and loss adjustment expense payments that we expect to make, net of expected recoveries under salvage and subrogation rights. Case basis reserves are generally determined using cash flow models to estimate the net present value of the anticipated shortfall between (i) scheduled payments on the insured obligation plus anticipated loss adjustment expenses and (ii) anticipated cash flow from the collateral

supporting the obligation and other anticipated recoveries. A number of quantitative and qualitative factors are considered when determining or assessing the need for a case basis reserve. These factors may include the creditworthiness of the underlying issuer of the insured obligation, whether the obligation is secured or unsecured, the projected cash flow or market value of the assets that collateralize or secure the insured obligation, and the historical and projected loss rates on such assets. Other factors that may affect the actual ultimate loss include the state of the economy, changes in interest rates, rates of inflation and the salvage values of specific collateral. Such factors and our assessment thereof will be subject to the specific facts and circumstances associated with the specific insured transaction being considered for case reserve establishment. Case basis reserves are generally discounted at a rate reflecting the return on our investment portfolio during the period the case basis reserve is established. We believe this rate of return is an appropriate rate to discount our reserves because it reflects the rate of return on the assets supporting such business. When a case basis reserve is established for a guaranteed obligation whose premium is paid on an upfront basis, we continue to record premium earnings on such policy over its remaining life, unless we have recorded a full limit loss with respect to such policy, in which case the remaining deferred premium revenue relating thereto is immediately reflected in earnings. When a case basis reserve is established for a guaranteed obligation whose premium is paid on an installment basis, those premiums, if expected to be received prospectively, are considered a form of recovery.

Case basis reserves on financial guarantee reinsurance assumed are generally established by us upon quarterly current notifications from ceding companies. There historically has been no time lag between the time we record an assumed case basis reserve and the time our ceding companies record such reserves. For each notification of a ceded case basis reserve from our ceding companies, we conduct an examination of the basis of the ceding company’s reserve to ensure that we concur with the ceding company’s evaluation and conclusions. In certain instances, we may develop our own estimates of losses on assumed business. Except as discussed below, in all instances to date where we have assumed case basis reserves, we have concurred with the ceding companies’ evaluation and conclusions with respect to such reserves and, accordingly, there has been no difference between the amount of case basis reserves reported to us by our ceding companies and the amount we have recorded in our financial statements. During the year ended December 31, 2008, based on our own internal analysis, we recorded a provision for losses and loss adjustment expenses of $8.6 million relating to a reinsured guarantee covering a global infrastructure financing (see Note 16(d) to the Consolidated Financial Statements) and, in March 2009 we were advised by the ceding company that our share of the estimated reserve they had established was approximately $18.0 million. To date, we have not completed our assessment of the ceding company’s estimated reserve and, therefore, have not adjusted our provision to reflect the ceding company’s estimate.

In assessing whether a loss is probable, management considers all available qualitative and quantitative evidence. Qualitative evidence may take various forms and the nature of such evidence will depend upon the type of insured obligation and the nature and sources of cash flows to fund the insured obligation’s debt service. For example, such evidence with respect to an insured special revenue obligation, such as an obligation supported by cash flows from a toll road, would consider traffic statistics such as highway volume and related demographic information, whereas an insured mortgage-backed securitization would consider the quality of the mortgage loans supporting the insured obligation including delinquency, default and foreclosure rates, loan to value statistics, market valuation of the mortgaged properties and other pertinent information. In addition, management will make qualitative judgments with respect to the amount by which certain other structural protections built into the transaction are expected to limit our loss exposure. Examples of such structural protections may include: (i) rate covenants, which generally stipulate that issuers (i.e. public finance issuers) set rates for services at certain pre-determined levels (i.e. water and sewer rates which support debt obligations supported by such revenues), (ii) springing liens, which generally require the issuer to provide additional collateral upon the breach of a covenant or trigger incorporated into the terms of the transaction, (iii) consultant call-in rights, which provide, under certain circumstances, for a consultant to be engaged to make certain binding recommendations, such as raising rates or reducing expenses, (iv) the ability to transfer servicing of collateral assets to another party, and (v) other legal rights and remedies pursuant to representations and warranties made by the issuer and written into the terms of such transactions. Quantitative information may

take the form of cash flow projections of the assets supporting the insured debt obligation (which may include, in addition to collateral assets supporting the obligation, structural protections subordinate to the attachment point of our risk, such as cash reserve accounts and letters of credit), as well as (to the extent applicable) other metrics indicative of the performance of such assets and the trends therein. See “—Overview of Our Business—Continuing Risks and Uncertainties Affecting Us, Assessment of Our Ability to Continue as a Going Concern and Description of Our On-Going Strategic Plan—Continuing Risks and Uncertainties.” Management’s ability to make a reasonable estimate of its expected loss depends upon its evaluation of the totality of both the available quantitative and qualitative evidence, and no one quantitative or qualitative factor is dispositive.

In addition to case basis reserves, we maintain an unallocated loss reserve for expected losses inherent in our in-force business (consisting of both financial guarantee insurance and reinsurance business) that we expect to emerge in the future. Our unallocated loss reserves represent our estimated ultimate liability from claims expected to be incurred in the future under our in-force insured and reinsured policies less outstanding case basis reserves and cumulative paid claims to date on such policies. Our unallocated reserves are estimated by management based upon an actuarial reserving analysis. The actuarial methodology applied by us is in accordance with Actuarial Standards of Practice No. 36, Determination of Reasonable Provision. The methodology applied is based on the selection of an expected ultimate loss ratio (“UELR”), as well as an expected loss emergence pattern (i.e., the expected pattern of the expiration of risk on insured and reinsured in-force policies). Salvage and subrogation recoveries are implicit in our selected UELR as such ratio is derived from industry loss experience, which is net of salvage and subrogation recoveries (i.e., from the liquidation of supporting or pledged collateral assets). The implicit inclusion of salvage and subrogation recoveries in our selected UELR is consistent with management’s explicit consideration of collateral support in the establishment of its case basis reserves. In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 163 (“SFAS 163”), Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”). SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Upon adoption of SFAS 163, we will no longer be able to record unallocated reserves and will be required to de-recognize our existing unallocated reserves. See “Recent Accounting Pronouncements—Statement of Financial Accounting Standards (“SFAS”) No. 163, Accounting for Financial Guarantee Insurance Contracts—An interpretation of FASB Statement No. 60.”

We update our estimates of losses and loss adjustment expense reserves quarterly and any resulting changes in reserves are recorded as a charge or credit to earnings in the period such estimates are changed. In connection therewith, our unallocated reserves are adjusted each period to reflect (i) revisions to management’s estimated UELR, if any, and (ii) the underlying par risk amortization of the related insured and reinsured in-force business (i.e., loss emergence pattern). As stated above, our estimated ultimate expected incurred losses are comprised of: (i) case basis reserves, (ii) unallocated reserves, and (iii) cumulative paid losses to date. As management establishes case basis reserves and pays claims it may, based on its judgment, reduce or increase the UELR used to determine unallocated reserves to reflect its best estimate of our expected ultimate loss experience. In addition, under our accounting policy management may, based on its judgment, reduce unallocated reserves in response to significant case basis reserve and or paid loss activity. Management would only expect such reductions to occur in limited instances, such as economic events generating significant loss activity across a broad cross-section of the portfolio. Management has not viewed our case basis reserve and paid loss activity to date to warrant such a reduction of our unallocated reserves. While material case basis reserves were established in 2007 and 2008, these reserves were concentrated in certain sectors of our financial guarantee portfolio and were associated with unprecedented credit-market events. As such, these events did not alter our perspective of the UELR associated with the remainder of the portfolio and the required level of unallocated reserves. In each quarterly period, there is an interplay between case basis reserves, unallocated reserves and cumulative paid losses to date, such that the aggregate thereof represents management’s best estimate of the ultimate losses it expects to incur on our in-force business. The process of establishing unallocated reserves and periodically revising such reserves to reflect the underlying par risk amortization and management’s current best estimate of ultimate losses will ultimately cause the

cumulative loss experience over the life of a particular underwriting year’s business to equal the cumulative inception-to-date actual paid losses on such business.

The selection of our UELR (and subsequent periodic updates thereof) is based on management’s judgment which considers: (i) the characteristics of our in-force financial guarantee insurance and reinsurance business (e.g., principally the mix of our in-force financial guarantee insurance and reinsurance business between public finance and structured finance business; however, we also considered the various bond sectors comprising our insured and reinsured in-force business which are discussed in detail in Note 15 to our Consolidated Financial Statements, as well as the credit profile of our insured and reinsured portfolio of business), (ii) our actual loss experience, (iii) the characteristics, as discussed above in relation to our in-force financial guarantee insurance and reinsurance business, of the insured in-force business of companies comprising the financial guarantee industry, and (iv) the actual loss experience of companies comprising the industry, as discussed below. Other factors impacting market default levels and the assumptions important to our reserving methodology are implicit in our IELR. Such factors may include interest rates, inflation, taxes, industry trends in the valuation of certain asset classes and the overall credit environment. Based on this comparison, we adjust our UELR, as we consider necessary, to ensure that such ratio continues to be appropriate for the risks inherent in our in-force business.

We analyze the actual loss experience of companies comprising the industry annually. The analysis utilizes loss and premium data filed by the three largest companies in the financial guarantee insurance industry in Schedule P of their annual statutory financial statements. These statutory filings provide data for ten calendar years and exclude unallocated reserves. Information on unallocated reserves is obtained from Annual Reports filed with the Securities and Exchange Commission on Form 10-K and is combined with the Schedule P data to estimate ultimate loss ratios for each of the preceding ten years.

Based on our analysis, we selected a UELR in 2006, 2007 and 2008 of 20%. We have not changed the UELR in 2008 or 2007 because of our view that the losses recorded by us and others in the industry are concentrated in residential mortgage exposures which are not correlated to the rest of our in-force business. Our expected loss emergence pattern is determined by underwriting year based on the par amortization schedules of the underlying insured and reinsured debt obligations comprising our in-force business. We adjust or realign the expected loss emergence pattern each quarter to reflect the underlying changes in our in-force business (for example, changes in the average life of in-force business resulting from changes in the mix of business and risk or par expiration).

Our methodology applies the UELR to earned premium during the period from our entire in-force book of business (after exclusion of the effect on earned premium of refunding and full limit losses because no more risk exists on these related policies). Significant changes to any variables on which our UELR is based, over an extended period of time, will likely result in an increase or decrease in such ratio. For example, a shift in business written for sectors with high default rates would likely increase our UELR, while a shift for sectors with low default rates would likely decrease our UELR. Additionally, increases in default rates relative to our in-force business and in our actual loss experience or decreases in statistical recovery rates and in our actual recovery experience would increase our UELR, while the inverse would likely decrease our UELR.

Our unallocated loss reserve is established on an undiscounted basis and represents management’s best estimate of losses that we will incur in the future as a result of credit deterioration in our in-force business but which have not yet been specifically identified. We do not attempt to apportion unallocated reserves by type of product.

Our surveillance department focuses its review on monitoring the lower-rated bonds and potentially troubled bond sectors, which have included RMBS, CMBS, CDOs and CLOs. It tracks performance monthly to try to ensure that covenants have not been breached. Once a covenant is

breached we may have the right to put the transaction into rapid amortization so that all cash flow generated from that transaction is used to pay down principal and stay current with interest. Typically, we review periodically servicing and trustee reports to help track coverage levels, enhancement levels, delinquency levels, loss frequency, loss severity and total losses and compare these performance metrics with the metrics that were made available at the time the transaction was closed. If losses are above projections we will analyze the reasons for the deviation. In some cases it may be an indication of servicing problems where loans are delinquent and are not put into foreclosure in time to maximize recovery. Periodically, we audit servicers of loans and other assets supporting our insured obligations to better understand their servicing practices and to identify potential servicing problems, if any. Management believes that this is an important safeguard, as servicers are required to indemnify us against failure to adhere to the servicing standards set forth in the servicing agreements.

Our surveillance department also analyzes whether a claim on our policy is probable. In some cases, we will engage an outside consultant with appropriate expertise in the underlying collateral assets and respective industries to assist management in examining the underlying collateral and determining the projected loss frequency and loss severity. In such case, we will use that information to run a cash flow model, which includes enhancement levels and debt service to determine whether a claim is probable, possible or not likely.

The activities of our surveillance department are integral to the identification of specific credits that have experienced deterioration in credit quality and to the assessment of whether losses on such credits are probable, as well as any estimation of the amount of loss expected to be incurred with respect to such credits. Closely monitored credits are divided into four categories: (i) Special Monitoring List—low investment grade credits where a material covenant or trigger may be breached and closer monitoring is warranted; (ii) Yellow Flag List—credits that we determine to be non-investment grade but a loss is unlikely, including credits where claims may have been paid or may be paid but reimbursement is likely; (iii) Red Flag List—credits where a loss is possible but not probable or reasonably estimable, including credits where claims may have been paid or may be paid but full recovery is in doubt; and (iv) Loss List—credits where a loss is probable and reasonably estimable. Credits that are not closely monitored credits are considered fundamentally sound, normal risk.

Our management establishes reserves for losses and loss adjustment expenses following consultation with our Loss Reserve Committee, which is comprised of senior members of management, including senior management of our surveillance department. See “Business—Risk Management” for further definition and discussion of credits designated as closely monitored credits. Both qualitative and quantitative factors are used in establishing such reserves. In determining the reserves, management considers all factors in the aggregate, and does not attribute the reserve provisions or any portion thereof to any specific factor.

The following table sets forth certain information in regard to our closely monitored credits as of December 31, 2008 and 2007 (see also Note 16 to our Consolidated Financial Statements):

(in billions, except percentages)

As of December 31, 2008

As of December 31, 2007

Net Par
Outstanding

% of Net Par
Outstanding

Net Par
Outstanding

% of Net Par
Outstanding

Fundamentally sound normal risk

101.1

75.6

145.2

88.0

Closely monitored credits:

Special monitoring

11.0

8.2

4.5

2.7

Yellow flag

1.0

0.8

2.4

1.4

Red flag

0.8

0.6

2.6

1.6

Loss list⁽¹⁾.

19.8

14.8

10.3

6.3

Sub Total

32.6

24.4

19.8

12.0

Total

133.7

100.0

165.0

100.0

⁽¹⁾

At December 31, 2008, the loss list consisted of 50 of our guarantees with remaining net par outstanding of $19.8 billion. Of these guarantees, 33 are insurance contracts on which we have recorded net case reserves for unpaid losses and loss adjustment expenses of $1.7 billion, and 17 are CDS contracts on which we have estimated we will incur anticipated claims

of $3.2 billion. At December 31, 2007, the loss list consisted of 21 of our guarantees with remaining net par outstanding of $10.3 billion. Of these guarantees, 9 are insurance contracts on which we have recorded net case reserves for unpaid losses and loss adjustment expenses of $135.6 million, and 12 are CDS contracts on which we have estimated we will incur anticipated claims of $645.1 million. The increase in net par outstanding on the loss list at December 31, 2008, as compared to December 31, 2007, resulted primarily from credit deterioration in our ABS CDO and RMBS exposures during 2008. See “—Anticipated Claims Payable and Anticipated Recoveries on CDS Contracts” and Note 16 of the Consolidated Financial Statements for further information.

The following table sets forth our guaranteed in-force net par outstanding as of December 31, 2008 and 2007.

(in billions, except percentages)

Net Par
Outstanding as of
December 31,
2008

Percent of
Total Net Par
Outstanding

Net Par
Outstanding as of
December 31,
2007

Percent of
Total Net Par
Outstanding

S&P Rating Category⁽¹⁾:

AAA

38.9

29.1

68.4

41.5

18.1

13.5

24.5

14.8

32.6

24.4

41.0

24.8

BBB

23.0

17.2

30.0

18.2

Below investment grade

21.1

15.8

1.1

0.7

Total

133.7

100.0

165.0

100.0

⁽¹⁾

If unrated by S&P, our internal rating is used.

Valuation of Credit Default Swaps

Prior to suspending writing substantially all new business (See “—Overview of Our Business— Recent Developments”), we issued CDS contracts and entered into arrangements with other issuers of CDS contracts to assume, all or a portion, of the risks in the CDS contracts they issued (“back-to-back arrangements”) and, in certain cases, which are discussed in more detail below, we purchased back-to-back credit protection on all or a portion of the risk from the CDS contracts we issued or assumed. Such back-to-back arrangements were generally structured on a proportional basis. In connection with the transactions comprising the 2008 MTA, we terminated substantially all our back-to-back arrangements in the third quarter of 2008. See “—Overview of Our Business— Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”.

CDS contracts are derivative contracts which offer credit protection relating to a particular security or pools of securities which are specifically referenced in the CDS contract. Under the terms of a CDS contract, the seller of credit protection (the issuer of the CDS contract) makes a specified payment to the buyer of such protection (the CDS contract counterparty) upon the occurrence of one or more credit events specified in the CDS contract with respect to a referenced security or securities. The terms of the CDS contracts issued by us generally only require us to make a payment upon the occurrence of one or more specified credit events after exhaustion of various levels of subordination or first-loss protection. In addition, pursuant to the terms of our CDS contracts, we are precluded from transferring such contracts to other market participants without the consent of the counterparty.

Securities or assets referenced in our in-force CDS contracts include structured pools of obligations, such as ABS CDOs, CLOs, corporate CDOs, CDOs of CDOs and CMBS. Such pools were rated investment-grade or better at the issuance of the CDS contract.

Our policy has been to hold its CDS contracts to maturity and not to manage such contracts to realize gains or losses from periodic market fluctuations. However, in certain circumstances, we may enter into an off-setting position or back-to-back arrangement, commute, terminate, or restructure a CDS contract prior to maturity for risk management purposes (for example, upon a deterioration in underlying credit quality or for the purposes of managing our capital). In connection with the 2008 MTA, we commuted several of our CDS contracts and back-to-back arrangements. See “—Overview of Our Business—Description of the Transactions Comprising the 2008 MTA and Certain Summary Financial Information”. In addition, the transactions contemplated by the Letter of Intent also

include commutations of CDS contracts. See “—Overview of Our Business—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions”.

As derivative financial instruments, CDS contracts are required under GAAP to be reported at fair value in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” and, effective January 1, 2008, measured in accordance with Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), with changes in fair value during the period included in earnings. SFAS 157 specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. This hierarchy requires the use of observable market data when available. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect assumptions about market data based on management’s judgment. In accordance with SFAS 157, the fair value hierarchy prioritizes model inputs into three broad levels as follows:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and valuation drivers are observable in active markets.

Level 3—Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

The principal drivers of the fair value of our CDS contracts include: (i) general market credit spreads for the type(s) of assets referenced in our CDS contracts, (ii) the specific quality and performance of the actual assets referenced in our CDS contracts, (iii) the amount of subordination in the transaction before our liability under the CDS contract attaches, (iv) other customized structural features of such contracts (e.g. terms, conditions, covenants), (v) supply and demand factors, including the volume of new issuance and financial guarantee market penetration, as well as the level of competition in the marketplace, and (vi) the market perception of our ability to meet our obligations under our CDS contracts which may be implied by the cost of buying credit protection on Syncora Guarantee.

The fair value of our in-force portfolio of CDS contracts other than CDS on ABS CDOs, which are discussed below, represents the net present value of the difference between the remaining unearned premiums that we originally charged for credit protection and our best estimate of what a financial guarantor of a comparable credit worthiness would hypothetically charge to provide the same protection as of the measurement date. The hypothetical nature of this exit value is representative of the lack of a principal market for our CDS contracts. In the absence of such a principal market, we believe other financial guarantors of comparable credit quality to Syncora Guarantee best represent the hypothetical exit market for our CDS contracts. Fair value is defined as the price at which an asset or a liability could be bought or transferred in a current transaction between willing parties. Fair value is determined based on quoted market prices, if available. Quoted market prices are available only on a limited portion of our in-force portfolio of CDS contracts. If quoted market prices are not available, fair value is estimated based on valuation techniques involving management’s judgment. In determining the fair value of our CDS contracts, we use various valuation approaches with priority given to observable market prices when they are available. Market prices are generally available for traded securities and market standard CDS contracts but are less available or unavailable for highly- customized CDS contracts. Most of our CDS contracts are highly customized structured credit derivative transactions that are not traded and do not have observable market prices. Due to the significance of unobservable inputs required to value such CDS contracts, they are considered to be Level 3 under the SFAS 157 fair value hierarchy.

Typical market CDS contracts are standardized, liquid instruments that reference tradeable securities such as corporate bonds that also have observable prices. These market standard CDS contracts also involve collateral posting, and upon a default of the referenced bond obligation, can be settled in cash. In contrast, our CDS contracts do not contain the typical CDS market standard features as described above but have been customized to replicate our financial guarantee insurance. Our CDS contracts provide protection on specified obligations, such as those described above and,

generally contain some form of subordination prior to the attachment of our liability. We are not required to post collateral, and upon default, we generally make payments on a “pay-as-you-go” basis after the subordination in a transaction is exhausted.

Our payment obligations after a default vary by deal type. There are three primary types of policy payment requirements:

(i)

timely interest and ultimate principal;

(ii)

ultimate principal only at final maturity; and

(iii)

payments upon settlement of individual collateral losses as they occur upon erosion of subordination.

Our CDS contracts are structured to prevent large one-time claims upon a specified credit event and generally allow for payments over time (i.e. “pay as you go” basis) or at final maturity. Also, our CDS contracts are generally governed by a single transaction International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement relating only to that particular transaction/contract. Under most monoline financial guarantee standard termination provisions, there is no requirement for mark-to-market termination payments upon the early termination of a guaranteed CDS contract. However, substantially all of our CDS contracts provide for mark-to-market termination payments following the occurrence of events that are outside our control, such as Syncora Guarantee being placed into receivership or rehabilitation or a regulator taking control of Syncora Guarantee or Syncora Guarantee’s insolvency. Under current market conditions such termination payments would result in a substantial liability to us which would be substantially in excess of that currently recorded by us in accordance with SFAS 157 and our ability to pay. See “—Overview of Our Business—Continuing Risks and Uncertainties Affecting Us, Assessment of Our Ability to Continue as a Going Concern, and Description of Our On-Going Strategic Plan.” An additional difference between our CDS contracts and the typical market standard CDS contracts is that, except in the circumstances noted above, there is no acceleration of the payment to be made under our CDS contracts unless we, at our option, elect to accelerate. Furthermore, by law, our guarantees are unconditional and irrevocable, and cannot be transferred to most other capital market participants as they are not licensed to write such business. However, through the purchase of back-to-back credit protection, the risk of loss (but not counterparty risk) on these contracts can be transferred to other financial guarantee insurance and reinsurance companies.

Description of Valuation Methodology Used by Us at December 31, 2008

Key variables used in our valuation of substantially all of our CDS contracts at December 31, 2008 include the balance of unpaid notional, expected term, fair values of the underlying reference obligations, reference obligation credit ratings, assumptions about current financial guarantee CDS fee levels relative to reference obligation spreads, our Non-Performance Risk and other factors (see “—Overview of Our Business—Other Measures Used by Management to Evaluate Results of Operations and Financial Condition” for a discussion of Non-Performance Risk). Fair values of the underlying reference obligations are obtained from broker quotes when available, or are derived from other market indications such as new issuance and secondary spreads and quoted values for similar transactions and indices, such as ABX or CDX. Our valuation of such CDS contracts does not generally provide for any adjustment to broker quotes. While such broker quotes are non-binding, the brokers from whom we obtain such quotes actively monitor and participate in the markets where such collateral is traded. Accordingly, we believe that such brokers rely on observable market information to the greatest extent possible when determining such quotes; however, such brokers may also rely on their internal models and unobservable inputs in making such determinations.

Implicit in the fair values obtained by us on the underlying reference obligations are the market’s assumptions about default probabilities, default timing, correlation, recovery rates and collateral values. In general, we use a percentage of the credit spread over LIBOR (the “premium percentage”) that we believe is consistent with (i) levels attainable in the market just prior to the collapse of the market for CDS from financial guarantors and (ii) historical premium pricing for high credit spread transactions. We believe that the premium percentage available in the market has dropped significantly as the credit spreads for the underlying reference securities have widened to

levels not seen historically. These credit spreads reflect the lack of liquidity in the market and this liquidity premium historically has flowed directly to the CDS counterparty as the funding institution. Though we believe the actual premium percentage would be far below those seen in previous markets, with no observable market transactions to use as a benchmark, management has decided to set a floor on the premium percentage of 30%. This level is consistent with the bottom range of our historical premium pricing for CDS transactions. Under this approach, the financial guarantee CDS fee used for a particular contract in our fair value calculations represent a consistent percentage, period to period, of the credit spread determinable from the reference index value as of the measurement date. This results in a CDS fair value (before adjustment for Non-Performance Risk) that fluctuates in proportion with the reference index value.

For example, assuming that at the end of the previous reporting period the credit spread of a reference index was 100 basis points and the current market premium for a transaction that is priced off of that reference index was set at 30 basis points (30% of the reference index), if at the end of the current reporting period the reference index moved to 150 basis points (a 50% increase), the current market premium for such a transaction would be set at 45 basis points (also a 50% increase). Thus, the model indicates that we would need to receive an additional 15 basis points (45 bps currently less the 30 bps reported last period) for issuing a CDS on the reference obligation in the current reporting period. To compute the current period change in fair value we discount the product of the outstanding notional amount of the CDS and the contractual premium over the life of the reference obligation, using a counterparty discount rate and subtract from that, the discounted product of the outstanding notional amount of the CDS and calculated current market premium, over the life of the reference obligation using a Syncora-specific discount rate.

For CDS contracts issued on ABS CDOs, we utilize non-binding broker quotes on the underlying obligations to project principal and interest shortfalls and the timing of such shortfalls. We then discount the shortfalls using a Company-specific discount rate and net from this the discounted expected premium using a counterparty discount rate (based on the published credit spreads of the counterparty), to arrive at the fair value of the CDS. No adjustments have been made to third party broker quotes as these are intended to capture all elements of the fair value of the underlying securities.

The basis of our estimate of the fair value of our CDS contracts at December 31, 2008 described above reflects the absence of observable transactions in our principal market. Should such transactions occur in the future, it may significantly affect our estimate of the fair value of our CDS contracts.

In addition to that discussed above, the fair value of our CDS contracts reflects our Non-Performance Risk as implied by the market price of buying credit protection on Syncora Guarantee, by incorporating the spread on CDS contracts traded on Syncora Guarantee into the discount rate used (see “—Overview of Our Business—Other Measures Used by Management to Evaluate Results of Operations and Financial Condition” for a discussion of Non-Performance Risk). We estimate a discount rate for each CDS contract based on the swap rate and our credit spread for the duration that is the closest to the remaining weighted average life (“WAL”) of the obligation referenced in the CDS contract. Reflecting Non-Performance Risk in our estimate of the fair value of our CDS contracts was the only change in our valuation methodology caused by the adoption of SFAS 157. At December 31, 2008, the effect of reflecting our Non-Performance Risk in our estimate of the fair value of our CDS contracts was a reduction in our net derivative liability of approximately $14.2 billion. The spread on 10-year CDS contracts traded on Syncora Guarantee at December 31, 2008, was 60.16%. If the transactions contemplated by the Letter of Intent are consummated, specifically the commutations of CDS contracts with Counterparties (see “—Overview of Our Business—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions”), the uncertainty associated with future adverse loss development on our guarantees will be reduced and management believes that, as a result, the cost of buying credit protection on Syncora Guarantee should decline. The effect of a decline in the cost of buying credit protection on Syncora Guarantee will increase our derivative liability on the remaining in-force CDS contracts; however, we believe that any such increase should be offset in part by the effect on our derivative liability from the aforementioned commutations. However, there can be no assurance that material adverse

loss development will not occur in the future or that the aforementioned commutations will offset the increase in our derivative liability. At December 31, 2008 and 2007, the notional amount outstanding of our in-force CDS contracts was $57.8 billion and $65.3 billion, respectively. The remaining WAL of such CDS contracts at December 31, 2008 was 10.2 years. In addition, based on such notional amount as of December 31, 2008 and 2007, approximately 60% and 93%, respectively, of referenced assets underlying such in-force CDS contracts were rated (based on S&P’s ratings) “AAA”, 18% and 7%, respectively, were rated at or above investment-grade, and 22% and less than 1%, respectively, were rated below investment-grade at such dates.

Description of Valuation Methodology Used by the Company at December 31, 2007

As of December 31, 2007, our estimate of the fair value of our in-force CDS contracts was based on valuation techniques involving management judgment in regard to a number of factors, including:

(i)

estimates of rates of return which would be required by market participants to assume the risks in our CDS contracts in the then current market environment,

(ii)

the amount of subordination in our CDS contracts before liability attaches that would be required by a market participant in order for it to assume the risks in our contracts,

(iii)

the actual amount of subordination in our CDS contracts before liability attaches,

(iv)

the quality of the specific assets referenced in our CDS contracts at the measurement date,

(v)

the market perception of risk associated with asset classes referenced in our CDS contracts,

(vi)

the remaining average life of the CDS contract,

(vii)

credit price indices, published by non-affiliated financial institutions, for the type(s), or similar types, of assets referenced in our CDS contracts (both in terms of type of assets and their credit rating),

(viii)

price discovery resulting from discussions and negotiations with market participants or counterparties to our CDS contracts to transfer or commute the risks in any of our CDS contracts, and

(ix)

prices of guarantees issued in our retail market or commutations of contracts we have executed in proximity to the measurement date.

With respect to items (viii) and (ix) above, in any price discovery involving a commutation of a CDS contract with our counterparty to the transaction, we considered our performance risk as implied by the market price of buying credit protection on Syncora Guarantee, when assessing the estimated fair value of our obligations to the counterparty under the contract.

The weight ascribed by us to the aforementioned factors in forming our best estimate of the fair value of our CDS contracts may vary under changing circumstances. In periods prior to July 1, 2007, we principally considered price indices published by nonaffiliated financial institutions in forming our best estimate of the fair value of our CDS contracts. The fair value of the guarantee was determined by multiplying the percentage change in the applicable credit price index or indices applicable to the assets referenced in the CDS contracts by the present value of the remaining expected future premiums to be received under the contract. We concluded that results from this calculation represented a reasonable estimate of the fair value of the Company’s CDS contracts at that time.

In forming our best estimate of the fair value of our CDS contracts subsequent to June 30, 2007, however, we concluded that limited reliance could be placed on price indices because events and conditions in the credit markets associated with subprime mortgage collateral and corporate loans resulted in limited or no transaction activity in many financial instruments since June 30, 2007 (including CDOs of high grade ABS, CLOs, RMBS, and other CDOs), causing financial institutions which publish the indices that we historically relied upon to estimate the fair value of our CDS contracts either to refrain from updating such indices or base changes in the indices partly on judgments in regard to estimated price levels and not actual executed trades. In addition, evidence suggested that the limited price information available in the marketplace in regard to such instruments was influenced by trades resulting from margin calls and liquidity issues that are

generally not part of the risks associated with our business model or CDS contracts. As a result of the factors discussed above, the fair value of our CDS contracts at December 31, 2007 was estimated by us primarily as follows:

•

in instances where we were in substantive discussions with market participants to transfer the risk in specific CDS contracts, our estimate of the fair value of such contracts was largely based on the price discovery we obtained from such discussions,

•

in instances where current market indices were reliable and available, our estimate of fair value was based on applying the percentage change in the applicable credit price index or indices applicable to the assets referenced in the CDS contracts to the present value of the remaining expected future premiums to be received under the contract, and

•

in substantially all other instances our estimate of the fair value of our CDS contracts ascribed significant weight to our judgments regarding rates of return required by market participants in the current market environment and the amount of subordination required by market participants before their liability would attach under the CDS contracts. Our judgment in regard to the appropriate rate of return that would be required by a market participant considered all of the other factors discussed above. Our judgment in regard to the amount of subordination required by market participants before the liability would attach under the CDS contracts generally assumed that, in the current market environment at December 31, 2007, to transfer the risk in an existing contract we would need subordination sufficient to qualify for a triple-A rating from Moody’s and S&P. Accordingly, for any contract rated below triple-A by us or the rating agencies (which consisted only of ABS CDO contracts), the estimated fair value was calculated by adding additional subordination sufficient to meet S&P standards for a triple-A rating based on S&P requirements at December 31, 2007 to the amount of additional premium required to be paid to transfer the risk to achieve the selected rate of return. Such premium was calculated by adjusting the present value of the expected remaining future net cash flows under such contracts (which are comprised of the remaining expected future premiums to be received under the contract, less estimated maintenance expenses and a provision for expected losses that will manifest in the future) to reflect our best estimate of the rates of return that would be required by a market participant to assume the risks on such contracts.

Valuation of Investments

As of December 31, 2008 our consolidated investment portfolio consisted of debt securities, cash and cash equivalents (including restricted cash and cash equivalents) and equity securities. All of our investments in debt securities are considered available-for-sale and, accordingly, are carried at fair value. In addition, our equity securities are carried at fair value. As of December 31, 2008 and 2007, the carrying value of such investments was $3.6 billion and $2.7 billion, respectively. The fair values of our investments are based upon quoted market prices from nationally recognized pricing services or, in the absence of quoted market prices, dealer quotes or matrix pricing.

As of December 31, 2008, based on fair value, approximately 55% of our investments were long-term debt securities, and our portfolio had an average duration of 1.8 years, compared with 89% and 3.3 years as of December 31, 2007. Changes in interest rates affect the value of our investment portfolio. As interest rates fall, the fair value of debt securities increases, and as interest rates rise, the fair value of debt securities decreases. The following table summarizes the estimated change in fair value net of related income taxes of our investments in debt securities as of December 31, 2008 based upon an assumed parallel shift in interest rates across the entire yield curve:

(in millions)

Estimated
Increase
(Decrease) in
Fair Value

Change in interest rates:

300 basis point increase

(195.0

)

200 basis point increase

(129.9

)

100 basis point increase

(64.9

)

100 basis point decrease.

64.9

200 basis point decrease

129.7

300 basis point decrease.

194.4

Our process for identifying declines in the fair value of investments that are other-than-temporary involves consideration of several factors. These factors include (i) the time period during which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects and financial condition of the issuer, (iii) the significance of the decline, (iv) an analysis of the capital structure and other credit support, as applicable, of the securities in question and (v) our intent and ability to hold the investment for a sufficient period of time for the value to recover. Where our analysis of the above factors results in the conclusion that declines in fair values are other-than-temporary, the cost of the security is written down to fair value and such write down is reflected as a realized loss in the period that such determination is made.

For the years ended December 31, 2008 and 2007, we recorded other-than-temporary impairment charges of $238.9 million and $1.2 million, respectively. The other-than-temporary impairment charge recorded during the year ended December 31, 2008, was due to our inability to assert that we have the intent and ability to hold securities in an unrealized loss position until they mature or recover in value. Our inability to make such assertion is due to the expectation that we will need to sell a significant amount of our invested assets to fund the transactions contemplated by the Letter of Intent if they are consummated. See “Overview of Our Business—Description of the Transactions Contemplated by the Letter of Intent and Related Transactions.”

The following table summarizes the unrealized losses on debt securities in our investment portfolio by type of security and the length of time such securities have been in a continuous unrealized loss position as of December 31, 2008 and 2007:


(in thousands)	As of December 31, 2008
	Less than 12 months								12 months or more								Total
	Fair Value			Unrealized Loss			Number of Securities		Fair Value			Unrealized Loss			Number of Securities		Fair Value			Unrealized Loss			Number of Securities
Description of securities
Mortgage and asset-backed securities		$	5,043		$	800		12		$	1,006		$	31		4		$	6,049		$	831		16
U.S. Government and government agencies			—			—		—			—			—		—			—			—		—
Corporate			9,787			377		23			—			—		—			9,787			377		23
U.S. states and political subdivisions.			340			27		1			361			86		1			701			113		2
Non-U.S. sovereign government			—			—		—			—			—

SYNCORA HOLDINGS LTD 10-K