**Exhibit 99.1**

CONSOLIDATEDFINANCIAL STATEMENTS

**FinancialGuaranty Insurance Company and Subsidiaries**

December31, 2006

withReport of Independent Auditors

** **

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**Financial Guaranty InsuranceCompany and Subsidiaries**

ConsolidatedFinancial Statements

December 31, 2006

**Contents**
| Report of Independent  Auditors                       |   | 1      |   |
|-------------------------------------------------------|--------|--------|--------|
|                                                  |   |   |   |
| Consolidated Balance  Sheets                          |   | 2      |   |
| Consolidated Statements  of Income                    |   | 3      |   |
| Consolidated Statements  of Stockholder’s Equity |   | 4      |   |
| Consolidated Statements  of Cash Flows                |   | 5      |   |
| Notes to Consolidated Financial Statements            |   | 6      |   |

** **

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Report ofIndependent Registered Public Accounting Firm

The Board of Directors and Stockholder

Financial GuarantyInsurance Company

We have audited theaccompanying consolidated balance sheets of Financial Guaranty InsuranceCompany and Subsidiaries (the “Company”) as of December 31, 2006 and 2005, andthe related consolidated statements of income, stockholder’s equity, and cashflows for each of the three years in the period ended December 31, 2006. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. We were not engaged to perform an audit ofthe Company’s internal control over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the consolidated financial position of the Company at December 31, 2006 and2005, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended December 31, 2006 in conformitywith U.S. generally accepted accounting principles.

/S/ Ernst & Young LLP

New York, New York

February 2, 2007

** **

1

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**Financial Guaranty InsuranceCompany and Subsidiaries**

ConsolidatedBalance Sheets

*(Dollarsin thousands, except per share amounts)*
| ** **                                                                                                                   | ** ** | **December 31,** | ** **    | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** **    | **2005**              | ** ** |
| ** **                                                                                                                   | ** ** | **(Unaudited)**       | ** **    | ** **            | ** ** |
| **Assets**                                                                                                                   |       |                  |          |                  |       |
| Fixed maturity  securities, available for sale, at fair value (amortized cost of $3,627,344  in 2006 and $3,277,291 in 2005) | ** ** | **$**                 | **3,627,007** |                  | $          | 3,258,738 |   |
| Variable interest  entity fixed maturity securities, held to maturity at amortized cost                                      | ** ** | **750,000**           |          | —                |       |
| Short-term investments                                                                                                       | ** ** | **211,726**           |          | 159,334               |       |
| Total investments                                                                                                            | ** ** | **4,588,733**         |          | 3,418,072             |       |
|                                                                                                                         |       |                  |          |                  |       |
| Cash and cash  equivalents                                                                                                   | ** ** | **29,963**            |          | 45,077                |       |
| Accrued investment  income                                                                                                   | ** ** | **49,843**            |          | 42,576                |       |
| Reinsurance recoverable  on losses                                                                                           | ** ** | **1,485**             |          | 3,271                 |       |
| Prepaid reinsurance  premiums                                                                                                | ** ** | **156,708**           |          | 110,636               |       |
| Policy acquisition  costs deferred, net                                                                                      | ** ** | **93,170**            |          | 63,330                |       |
| Receivable from related  parties                                                                                             | ** ** | **2,483**             |          | 9,539                 |       |
| Property and equipment,  net of accumulated depreciation of $2,107 in 2006 and $885 in 2005                                  | ** ** | **2,617**             |          | 3,092                 |       |
| Prepaid expenses and  other assets                                                                                           | ** ** | **17,589**            |          | 10,354                |       |
| Foreign deferred tax  asset                                                                                                  | ** ** | **3,491**             |          | 3,500                 |       |
| Current income tax  receivable                                                                                               |       | —                |          | 2,158                 |       |
| Total assets                                                                                                                 | ** ** | **$**                 | **4,946,082** |                  | $          | 3,711,605 |   |
| ** **                                                                                                                   | ** ** | ** **            | ** **    | ** **            | ** ** |
| **Liabilities and stockholder’s  equity**                                                                               | ** ** | ** **            | ** **    | ** **            | ** ** |
| Liabilities:                                                                                                                 |       |                  |          |                  |       |
| Unearned  premiums                                                                                                           | ** ** | **$**                 | **1,347,592** |                  | $          | 1,201,163 |   |
| Losses and loss  adjustment expense reserves                                                                                 | ** ** | **40,299**            |          | 54,812                |       |
| Ceded  reinsurance balances payable                                                                                          | ** ** | **7,524**             |          | 1,615                 |       |
| Accounts payable  and accrued expenses and other liabilities                                                                 | ** ** | **43,405**            |          | 36,359                |       |
| Capital lease  obligations                                                                                                   | ** ** | **2,941**             |          | 4,262                 |       |
| Payable for  securities purchased                                                                                            | ** ** | **10,770**            |          | —                |       |
| Variable interest  entity floating rate notes                                                                                | ** ** | **750,000**           |          | —                |       |
| Accrued interest  expense — variable interest entity                                                                    | ** ** | **1,298**             |          | —                |       |
| Current income  taxes payable                                                                                                | ** ** | **17,520**            |          | —                |       |
| Deferred income  taxes                                                                                                       | ** ** | **76,551**            |          | 45,963                |       |
| Dividends  payable                                                                                                           | ** ** | **10,000**            |          | —                |       |
| Total liabilities                                                                                                            | ** ** | **2,307,900**         |          | 1,344,174             |       |
| ** **                                                                                                                   | ** ** | ** **            | ** **    | ** **            | ** ** |
| Stockholder’s equity:                                                                                                   |       |                  |          |                  |       |
| Common stock,  par value $1,500 per share; 10,000 shares authorized, issued and outstanding                                  | ** ** | **15,000**            |          | 15,000                |       |
| Additional  paid-in capital                                                                                                  | ** ** | **1,901,799**         |          | 1,894,983             |       |
| Accumulated  other comprehensive income (loss), net of tax                                                                   | ** ** | **6,500**             |          | (13,597               | )          |
| Retained  earnings                                                                                                           | ** ** | **714,883**           |          | 471,045               |       |
| Total stockholder’s  equity                                                                                             | ** ** | **2,638,182**         |          | $                     | 2,367,431  |   |
| Total liabilities and stockholder’s equity                                                                              | ** ** | **$**                 | **4,946,082** |                  | $          | 3,711,605 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

2

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**Financial Guaranty InsuranceCompany and Subsidiaries**

Consolidated Statements of Income

*(Dollarsin thousands)*
| ** **                                                                 | ** ** | **Year ended  December 31,** | ** **  | **Year ended  December 31,** | ** ** | **Year ended  December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                               | ** **  | **2005**                               | ** ** | **2004**                               | ** ** |
| Revenues:                                                                  |       |                                   |        |                                   |       |                                   |       |
| Gross direct and  assumed premiums written                                 | ** ** | **$**                                  | **441,231** |                                   | $          | 410,202                                |       | $ | 323,575 |   |
| Reassumed ceded  premiums                                                  |       | —                                 |        | —                                 |       | 4,959                                  |       |
| Ceded premiums  written                                                    | ** ** | **(74,417**                            | **)**       | (29,148                                | )          | (14,656                                | )          |
| Net premiums  written                                                      | ** ** | **366,814**                            |        | 381,054                                |       | 313,878                                |       |
| Change in net  unearned premiums                                           | ** ** | **(100,357**                           | **)**       | (156,485                               | )          | (138,929                               | )          |
| Net premiums earned                                                        | ** ** | **266,457**                            |        | 224,569                                |       | 174,949                                |       |
|                                                                       |       |                                   |        |                                   |       |                                   |       |
| Net investment income                                                      | ** ** | **138,475**                            |        | 117,072                                |       | 97,709                                 |       |
| Interest income —  investments held by variable interest entity       | ** ** | **35,893**                             |        | —                                 |       | —                                 |       |
| Net realized gains                                                         | ** ** | **274**                                |        | 101                                    |       | 559                                    |       |
| Net realized and  unrealized gains (losses) on credit derivative contracts | ** ** | **507**                                |        | (167                                   | )          | —                                 |       |
| Other income                                                               | ** ** | **1,815**                              |        | 762                                    |       | 736                                    |       |
| Total revenues                                                             | ** ** | **443,421**                            |        | 342,337                                |       | 273,953                                |       |
|                                                                       |       |                                   |        |                                   |       |                                   |       |
| Expenses:                                                                  |       |                                   |        |                                   |       |                                   |       |
| Loss and loss  adjustment expenses                                         | ** ** | **(8,700**                             | **)**       | 18,506                                 |       | 5,922                                  |       |
| Underwriting and  other operating expenses                                 | ** ** | **91,614**                             |        | 82,064                                 |       | 73,426                                 |       |
| Policy  acquisition costs deferred, net                                    | ** ** | **(39,728**                            | **)**       | (38,069                                | )          | (32,952                                | )          |
| Amortization of  policy acquisition costs deferred                         | ** ** | **11,486**                             |        | 8,302                                  |       | 2,038                                  |       |
| Interest expense  — debt held by variable interest entity             | ** ** | **35,893**                             |        | —                                 |       | —                                 |       |
| Total expenses                                                             | ** ** | **90,565**                             |        | 70,803                                 |       | 48,434                                 |       |
|                                                                       |       |                                   |        |                                   |       |                                   |       |
| Income before income  tax expense                                          | ** ** | **352,856**                            |        | 271,534                                |       | 225,519                                |       |
|                                                                       |       |                                   |        |                                   |       |                                   |       |
| Income tax expense:                                                        |       |                                   |        |                                   |       |                                   |       |
| Current                                                                    | ** ** | **67,895**                             |        | 32,370                                 |       | 42,510                                 |       |
| Deferred                                                                   | ** ** | **21,123**                             |        | 32,738                                 |       | 12,923                                 |       |
| Total income tax  expense                                                  | ** ** | **89,018**                             |        | 65,108                                 |       | 55,433                                 |       |
| Net income                                                                 | ** ** | **$**                                  | **263,838** |                                   | $          | 206,426                                |       | $ | 170,086 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

3

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**Financial Guaranty InsuranceCompany and Subsidiaries**

Consolidated Statementsof Stockholder’s Equity

*(Dollars in thousands)*
| ** **                                                          | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income,  Net of Tax** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| Balance at January 1,  2004                                         |       | 15,000            |       | 1,857,772                        |       | 2,059                                                                            |       | 94,533                 |       | 1,969,364 |       |
| Net income                                                          |       | —            |       | —                           |       | —                                                                           |       | 170,086                |       | 170,086   |       |
| Other comprehensive  income:                                        |       |              |       |                             |       |                                                                             |       |                   |       |      |       |
| Change in fixed  maturity securities available for sale, net of tax |       | —            |       | —                           |       | 9,340                                                                            |       | —                 |       | 9,340     |       |
| Change in foreign  currency translation adjustment, net of tax      |       | —            |       | —                           |       | 4,086                                                                            |       | —                 |       | 4,086     |       |
| Total comprehensive  income                                         |       |              |       |                             |       |                                                                             |       |                   |       | 183,512   |       |
| Capital contribution                                                |       | —            |       | 25,000                           | ** ** | **—**                                                                       |       | —                 |       | 25,000    |       |
| Balance at December 31,  2004                                       |       | 15,000            |       | 1,882,772                        |       | 15,485                                                                           |       | 264,619                |       | 2,177,876 |       |
| Net income                                                          |       | —            |       | —                           |       | —                                                                           |       | 206,426                |       | 206,426   |       |
| Other comprehensive  income:                                        |       |              |       |                             |       |                                                                             |       |                   |       |      |       |
| Change in fixed  maturity securities available for sale, net of tax |       | —            |       | —                           |       | (23,550                                                                          | )          | —                 |       | (23,550   | )          |
| Change in  foreign currency translation adjustment, net of tax      |       | —            |       | —                           |       | (5,532                                                                           | )          | —                 |       | (5,532    | )          |
| Total comprehensive  income                                         |       |              |       |                             |       |                                                                             |       |                   |       | 177,344   |       |
| Capital contribution                                                |       | —            |       | 12,211                           |       | —                                                                           |       | —                 |       | 12,211    |       |
| Balance at December 31,  2005                                       |       | 15,000            |       | 1,894,983                        |       | (13,597                                                                          | )          | 471,045                |       | 2,367,431 |       |
| Net Income                                                          |       | —            |       | —                           |       | —                                                                           |       | 263,838                |       | 263,838   |       |
| Other comprehensive  income:                                        |       |              |       |                             |       |                                                                             |       |                   |       |      |       |
| Change in fixed  maturity securities available for sale, net of tax |       | —            |       | —                           |       | 11,901                                                                           |       | —                 |       | 11,901    |       |
| Change in  foreign currency translation adjustment, net of tax      |       | —            |       | —                           |       | 8,196                                                                            |       | —                 |       | 8,196     |       |
| Total comprehensive  income                                         |       | —            |       | —                           |       | —                                                                           |       | —                 |       | 283,935   |       |
| Dividends declared to  FGIC Corp.                                   |       | —            |       | —                           |       | —                                                                           |       | (20,000                | )          | (20,000   | )          |
| Amortization of stock  options and restricted stock                 |       | —            |       | 6,816                            |       | —                                                                           |       | —                 |       | 6,816     |       |
| Balance at December 31, 2006                                        |       | $                 | 15,000     |                             | $          | 1,901,799                                                                        |       | $                      | 6,500      |      | $          | 714,883 |   | $ | 2,638,182 |   |
|                                                                     |            |                   |            |                                  |            |                                                                                  |            |                        |            |           |            |  |  |  |  |  |

*See accompanying notes toconsolidated financial statements.*

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**Financial Guaranty InsuranceCompany and Subsidiaries**

ConsolidatedStatements of Cash Flows

*(Dollarsin thousands)*
| ** **                                                                                                     | ** ** | **Year ended  December 31,** | ** **  | **Year ended  December 31,** | ** ** | **Year ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                               | ** **  | **2005**                               | ** ** | **2004**                               | ** ** |
| **Operating activities**                                                                                       |       |                                   |        |                                   |       |                                   |       |
| Net income                                                                                                     | ** ** | **$**                                  | **263,838** |                                   | $          | 206,426                                |       | $ | 170,086 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                             |       |                                   |        |                                   |       |                                   |       |
| Amortization of  policy acquisition costs deferred                                                             | ** ** | **11,486**                             |        | 8,574                                  |       | 2,038                                  |       |
| Policy  acquisition costs deferred                                                                             | ** ** | **(39,728**                            | **)**       | (38,069                                | )          | (32,952                                | )          |
| Depreciation of  property and equipment                                                                        | ** ** | **1,222**                              |        | 721                                    |       | 164                                    |       |
| Amortization of  fixed maturity securities                                                                     | ** ** | **33,774**                             |        | 31,504                                 |       | 37,013                                 |       |
| Amortization of  short-term investments                                                                        | ** ** | **131**                                |        | 481                                    |       | 29                                     |       |
| Net realized  gains on investments                                                                             | ** ** | **(274**                               | **)**       | (101                                   | )          | (559                                   | )          |
| Stock compensation  expense                                                                                    | ** ** | **6,816**                              |        | —                                 |       | —                                 |       |
| Change in  accrued investment income, prepaid expenses, foreign deferred tax asset, and  other assets, net     | ** ** | **(14,725**                            | **)**       | (8,504                                 | )          | (5,545                                 | )          |
| Change in  realized and unrealized gains on credit derivative contracts                                        | ** ** | **1,336**                              |        | 167                                    |       | —                                 |       |
| Change in  current income taxes receivable                                                                     | ** ** | —                                 |        | —                                 |       | 126                                    |       |
| Change in  reinsurance recoverable on losses                                                                   | ** ** | **1,786**                              |        | (217                                   | )          | 5,011                                  |       |
| Change in  prepaid reinsurance premiums                                                                        | ** ** | **(46,072**                            | **)**       | (1,344                                 | )          | 14,476                                 |       |
| Change in other  reinsurance receivables                                                                       | ** ** | —                                 |        | —                                 |       | 5,295                                  |       |
| Change in receivable  from related parties                                                                     | ** ** | **7,056**                              |        | (8,737                                 | )          | 8,957                                  |       |
| Change in  unearned premiums                                                                                   | ** ** | **147,589**                            |        | 157,829                                |       | 124,452                                |       |
| Change in loss  and loss adjustment expenses                                                                   | ** ** | **(14,513**                            | **)**       | 15,631                                 |       | (1,286                                 | )          |
| Change in ceded  reinsurance balances payable and accounts payable and accrued expenses and  other liabilities | ** ** | **10,529**                             |        | 8,923                                  |       | 7,348                                  |       |
| Change in  current income taxes payable                                                                        | ** ** | **19,678**                             |        | (6,559                                 | )          | 4,401                                  |       |
| Change in  accrued interest expense — variable interest entity                                            | ** ** | **1,298**                              |        | -                                      |       | -                                      |       |
| Change in  deferred federal income taxes                                                                       | ** ** | **20,878**                             |        | 19,252                                 |       | 12,923                                 |       |
| Net cash provided by  operating activities                                                                     | ** ** | **412,105**                            |        | 385,977                                |       | 351,977                                |       |
|                                                                                                           |       |                                   |        |                                   |       |                                   |       |
| **Investing activities**                                                                                       |       |                                   |        |                                   |       |                                   |       |
| Sales and maturities of  fixed maturity securities                                                             | ** ** | **198,186**                            |        | 122,638                                |       | 284,227                                |       |
| Purchases of fixed  maturity securities                                                                        | ** ** | **(576,386**                           | **)**       | (520,089                               | )          | (546,028                               | )          |
| Purchases, sales and  maturities of short-term investments, net                                                | ** ** | **(52,126**                            | **)**       | (19,342                                | )          | (126,125                               | )          |
| Receivable for  securities sold                                                                                | ** ** | —                                 |        | (20                                    | )          | 170                                    |       |
| Payable for securities  purchased                                                                              | ** ** | **10,770**                             |        | (5,715                                 | )          | 5,715                                  |       |
| Purchase of fixed  assets                                                                                      | ** ** | **(477**                               | **)**       | (1,405                                 | )          | (2,572                                 | )          |
| Purchase of investments  held by variable interest entity                                                      | ** ** | **(750,000**                           | **)**       | —                                 |       | —                                 |       |
| Net cash used in  investing activities                                                                         | ** ** | **(1,170,033**                         | **)**       | (423,933                               | )          | (384,613                               | )          |
|                                                                                                           |       |                                   |        |                                   |       |                                   |       |
| **Financing activities**                                                                                       | ** ** | ** **                             | ** **  | ** **                             | ** ** | ** **                             | ** ** |
| Proceeds from issuance  of debt held by variable interest entity                                               | ** ** | **750,000**                            |        | —                                 |       | —                                 |       |
| Capital contribution                                                                                           | ** ** | —                                 |        | 12,211                                 |       | 25,000                                 |       |
| Dividends paid                                                                                                 | ** ** | **(10,000**                            | **)**       | —                                 |       | —                                 |       |
| Net cash provided by  financing activities                                                                     | ** ** | **740,000**                            |        | 12,211                                 |       | 25,000                                 |       |
| Effect of exchange rate  changes on cash                                                                       | ** ** | **2,814**                              |        | 1,530                                  |       | (1,717                                 | )          |
| Net decrease in cash  and cash equivalents                                                                     | ** ** | **(15,114**                            | **)**       | (24,215                                | )          | (9,353                                 | )          |
| Cash and cash  equivalents at beginning of period                                                              | ** ** | **45,077**                             |        | 69,292                                 |       | 78,645                                 |       |
| Cash and cash  equivalents at end of period                                                                    | ** ** | **$**                                  | **29,963**  |                                   | $          | 45,077                                 |       | $ | 69,292 |   |
|                                                                                                           |       |                                   |        |                                   |       |                                   |       |
| **Supplemental disclosure of cash  flow information**                                                          | ** ** | ** **                             | ** **  | ** **                             | ** ** | ** **                             | ** ** |
| Income taxes paid                                                                                              | ** ** | **$**                                  | **47,507**  |                                   | $          | 49,613                                 |       | $ | 40,890 |   |
| Interest paid — debt held by variable interest entity                                                     | ** ** | **$**                                  | **34,595**  |                                   | —     |                                   | —     |   |

 

*Seeaccompanying notes to consolidated financial statements.*

5

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**1.Business and Organization**

Financial GuarantyInsurance Company (the “Company” or “FGIC”) is a wholly owned subsidiary ofFGIC Corporation (“FGIC Corp.”). The Company provides financial guarantyinsurance and other forms of credit enhancement for public finance andstructured finance obligations. The Company’s financial strength is rated “Aaa”by Moody’s Investors Service, Inc., “AAA” by Standard & Poor’s RatingServices, a division of The McGraw-Hill Companies, Inc., and “AAA” by FitchRatings, Inc. The Company is licensed to write financial guaranty insurance inall 50 states, the District of Columbia, the Commonwealth of Puerto Rico, theU.S. Virgin Islands, and, through a branch, the United Kingdom. In addition, aUnited Kingdom subsidiary of the Company is authorized to write financialguaranty business in the United Kingdom and has passport rights to writebusiness in other European Union member countries.

On December 18, 2003, aninvestor group consisting primarily of The PMI Group, Inc. (“PMI”), affiliatesof the Blackstone Group L.P. (“Blackstone”), affiliates of the Cypress GroupL.L.C. (“Cypress”) and affiliates of CIVC Partners L.P. (“CIVC”) (collectively,the “Investor Group”) completed the acquisition of FGIC Corp. from a subsidiaryof General Electric Capital Corporation (“GE Capital”) in a transaction valuedat approximately $2,200,000 (the “Transaction”).  An affiliate of GE Capital owns 2,346 shares,or 100%, of FGIC Corp.’s Senior Participating Mandatorily Convertible ModifiedPreferred Stock (“Senior Preferred Shares”), with an aggregate liquidationpreference of $287,255 as of December 31, 2006, and approximately 5% of FGICCorp.’s outstanding common stock.

PMI is the largeststockholder of FGIC Corp., owning approximately 42% of its common stock atDecember 31, 2006 and 2005.  Blackstone, Cypress and CIVC ownedapproximately 23%, 23% and 7% of FGIC Corp.’s common stock, respectively, atDecember 31, 2006 and 2005.

**2. Basisof Presentation**

The consolidatedfinancial statements include the accounts of the Company and all other entitiesin which the Company has a controlling financial interest.  All significant intercompany balances havebeen eliminated.

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States (“GAAP”) requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and the accompanying notes. Actual results could differfrom those estimates.

The accompanyingfinancial statements have been prepared on the basis of GAAP, which differs incertain respects from the accounting practices prescribed or permitted by theNew York State Insurance Department (see Note 4).  Certain 2005 and 2004 amounts have beenreclassified to conform to the 2006 presentation.

6

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**3.Summary of Significant Accounting Policies**

The Company’s significantaccounting policies are as follows:

**a.Investments**

All the Company’s fixedmaturity securities are classified as available for sale and are recorded onthe trade date at fair value. Unrealized gains and losses are recorded as aseparate component of accumulated other comprehensive (loss) income, net ofapplicable income taxes, in the consolidated statements of stockholders’equity. Short-term investments are carried at fair value, which approximatescost.

Bond discounts andpremiums are amortized over the remaining terms of the respective securities.Realized gains or losses on the sale of investments are determined based on thespecific identification method.

Securities that have beendetermined to be other than temporarily impaired are reduced to realizablevalue, establishing a new cost basis, with a charge to realized loss at suchdate.

**b.Cash and Cash Equivalents**

The Company considers allbank deposits, highly liquid securities and certificates of deposit withmaturities of three months or less at the date of purchase to be cashequivalents. These cash equivalents are carried at cost, which approximatesfair value.

**c.Premium Revenue Recognition**

Direct and assumedpremiums are received either up-front or over time on an installment basis. Thepremium collection method is determined at the time the policy is issued.Up-front premiums are paid in full at the inception of the policy and areearned over the period of risk in proportion to the total amount of principaland interest amortized in the period as a proportion of the original principaland interest outstanding. Installment premiums are collected periodically andare reflected in income pro rata over the period covered by the premiumpayment, including premiums received on credit default swaps (see Note 6).

Gross direct and assumedpremiums written for the years ended December 31, 2006, 2005, and 2004 include$15,989, $965, and $0, respectively, of assumed premiums written.

7

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** **

**3.Summary of Significant Accounting Policies (continued)**

Unearned premiumsrepresent the portion of premiums received applicable to future periods oninsurance policies in force. When an obligation insured by the Company isrefunded by the issuer prior to the end of the expected policy coverage period,any remaining unearned premium is recognized at that time. A refunding occurswhen an insured obligation is called or legally defeased prior to statedmaturity. Premiums earned on refundings were $41,836,****$54,795,and $42,695 for the years ended December 31, 2006, 2005, and 2004,respectively.

Ceded premiums arerecognized in a manner consistent with the premium earned on the underlyingpolicies.

**d.Policy Acquisition Costs**

Policy acquisition costsinclude only those expenses that relate directly to and vary with premiumproduction. Such costs include compensation of employees involved in marketing,underwriting and policy issuance functions, rating agency fees, premium taxes,ceding commissions paid on assumed policies and certain other expenses. Indetermining policy acquisition costs, the Company must estimate and allocatethe percentage of its costs and expenses that are attributable to premium production,rather than to other activities. Policy acquisition costs, net of cedingcommission income on premiums ceded to reinsurers, are deferred and amortizedover the period in which the related premiums are earned. Anticipated loss andloss adjustment expenses, future maintenance costs on the in-force business andnet investment income are considered in determining the recoverability ofacquisition costs.

**e.Loss and Loss Adjustment Expense Reserves**

Provisionfor loss and loss adjustment expenses falls into two categories: case reservesand watchlist reserves. Case reserves are established for the value ofestimated losses on specific insured obligations that are presently or likelyto be in payment default and for which future loss is probable and can be reasonablyestimated. These reserves represent an estimate of the present value of theanticipated shortfall between (1) payments on insured obligations plusanticipated loss adjustment expenses and (2) anticipated cash flow from, andproceeds to be received on, sales of any collateral supporting the obligationand/or other anticipated recoveries. The discount rate used in calculating thenet present value of estimated losses is based upon the risk-free ratefor the duration of the anticipated shortfall.

8

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**3.Summary of Significant Accounting Policies (continued)**

The Companyestablishes watchlist reserves to recognize the potential for claims againstthe Company on insured obligations that are not presently in payment default,but which have migrated to an impaired level where there is a substantiallyincreased probability of default.  Thesereserves reflect an estimate of probable loss given evidence of impairment, anda reasonable estimate of the amount of loss given default. The methodology forestablishing and calculating the watchlist reserve relies on a categorizationand assessment of the probability of default, and loss severity in the event ofdefault, of the specific impaired obligations on the watchlist based onhistorical trends and other factors. The watchlist reserves are adjusted asnecessary to reflect changes in the loss expectation inherent in the group ofimpaired credits.

The reserves for loss andloss adjustment expenses are reviewed regularly and updated based on claimpayments and the results of surveillance. The Company conducts ongoing insuredportfolio surveillance to identify all impaired obligations and thereby providea materially complete recognition of potential losses for each accountingperiod. The reserves are necessarily based upon estimates and subjectivejudgments about the outcome of future events, and actual results will likelydiffer from these estimates. Adjustments of estimates made in prior years mayresult in additional loss and loss adjustment expenses or a reduction of lossand loss adjustment expenses in the period an adjustment is made.

Reinsurance recoverableon losses is calculated in a manner consistent with the calculation of loss andloss adjustment expenses.

**f.Income Taxes**

Deferred tax assets andliabilities are recognized to reflect the tax impact attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases.

Deferred tax assets andliabilities are measured using statutory tax rates expected to apply to taxableincome in the years in which temporary differences are expected to be recoveredor settled. The effect of a change in tax rates on deferred tax assets andliabilities is recognized in income in the period in which a change occurs.

**g.Property and Equipment**

Property and equipmentconsists of office furniture, fixtures, computer equipment and software andleasehold improvements that are reported at cost less accumulated depreciation.Office furniture and fixtures are depreciated on a straight-line basis overfive years. Leasehold improvements are amortized over their estimated servicelives or over the life of the lease, whichever is shorter. Computer equipmentand software are depreciated over three years. Maintenance and repairs arecharged to expense as incurred.

9

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**3.Summary of Significant Accounting Policies (continued)**

**h.Foreign Currency Translation**

The Company has anestablished foreign branch and three subsidiaries in the United Kingdom andinsured exposure from a former branch in France. The Company has determinedthat the functional currencies of these operations are their local currencies.Accordingly, the assets and liabilities of these operations are translated intoU.S. dollars at the rates of exchange at December 31, 2006 and 2005, andrevenues and expenses are translated at average monthly exchange rates. Thecumulative translation gain (loss) at December 31, 2006 and 2005 was $6,750 and$(1,446), respectively, net of tax (expense) benefit of ($3,580) and $723, respectively,and is reported as a separate component of accumulated other comprehensiveincome in the consolidated statements of stockholders’ equity.

i. StockCompensation Plan

FGIC Corp. has an incentive stock plan that providesfor stock-based compensation, including stock options, restricted stock awardsand restricted stock units. Stock options are granted for a fixed number ofshares with an exercise price equal to or greater than the estimated fair valueof the common stock at the date of the grant. Restricted stock awards and unitsare valued at the estimated fair value of the common stock on the grant date.Prior to January 1, 2006, the Company accounted for grants under this planunder the recognition and measurement provisions of Accounting Principles Board(“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations, as permitted byStatement of Financial Accounting Standards (“SFAS”) No. 123, *Accounting for Stock-Based Compensation*.

10

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**3. Summary of SignificantAccounting Policies (continued)**

**Effective January 1, 2006, theCompany adopted the fair value recognition provisions of SFAS No. 123(R), *Share-Based Payment*(“SFAS No. 123 (R)), using themodified-prospective-transition method. Under that method, compensation cost includes all share-based paymentsgranted prior to, but not yet vested as of, January 1, 2006, based on the grantdate fair value estimated in accordance with SFAS No. 123(R). The Company hasestimated the fair value of all stock options at the date of grant using theBlack-Scholes-Merton option pricing model. Results for prior periods have notbeen restated.**

**j.Variable Interest Entities**

Financial InterpretationNo.46-R, *Consolidation of Variable Interest Entities*(“FIN46-R”), provides accounting and disclosure rules for determining whethercertain entities should be consolidated in the Company’s consolidated financialstatements. An entity is subject to FIN 46-R, and is called a Variable InterestEntity (“VIE”), if it has (i) equity that is insufficient to permit the entityto finance its activities without additional subordinated financial support or(ii) equity investors that cannot make significant decisions about the entity’soperations or that do not absorb the majority of expected losses or receive themajority of expected residual returns of the entity.

** **

11

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**3. Summary of SignificantAccounting Policies (continued)**

Under FIN 46-R, a VIE isconsolidated by its primary beneficiary, which is the party that has a majorityof the expected losses or a majority of the expected residual returns of theVIE, or both. FIN 46-R requires disclosures for companies that have either aprimary or significant variable interest in a VIE. All other entities notconsidered VIEs are evaluated for consolidation under SFAS No. 94, *Consolidation of all Majority-Owned Subsidiaries.*

As part of its structuredfinance business, the Company insures debt obligations or certificates issuedby special purpose entities. The Company has evaluated the relevanttransactions and does not believe any such transactions require consolidationor disclosure under FIN 46-R other than as disclosed in Note 10.

**k. Derivative Instruments**

Under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities,*as**amended by SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*, all derivative instruments are recognized onthe consolidated balance sheet at their fair value, and changes in fair valueare recognized immediately in earnings unless the derivatives qualify ashedges.

The Company providescredit default swaps (“CDSs”) to certain buyers of credit protection byentering into contracts that reference collateralized debt obligations fromcash and synthetic structures backed by pools of corporate, consumer orstructured finance debt.  It also offerscredit protection on public finance and structured finance obligations in CDSform. The Company considers CDS agreements to be a normal extension of itsfinancial guaranty insurance business, although they are considered derivativesfor accounting purposes. These agreements are recorded at fair value. TheCompany believes that the most meaningful presentation of the financialstatement impact of these derivatives is to reflect premiums as installmentsare received, and to record losses and loss adjustment expenses and changes infair value as incurred.

12

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**3. Summary of Significant Accounting Policies(continued)**

**l. New Accounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (the “FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*(“FIN48”), an interpretation of SFAS No. 109, *Accounting for IncomeTaxes*. FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with SFASNo. 109 and prescribes metrics for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on other matters related to accounting for incometaxes. FIN 48 is applicable for fiscal years beginning after December 15, 2006,with earlier application encouraged if financial statements, including interimfinancial statements, have not been issued for the period of adoption. TheCompany has not elected early application, and the interpretation is not expectedto have a material impact on the Company’s operating results or financialcondition.

In February 2006, theFASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments*. SFAS No. 155 amends SFAS No. 133, and SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities*, and addresses issues raised in SFAS No. 133Implementation Issue No. D1, *Application of Statement133* t*o Beneficial Interests in SecuritizedFinancial Assets*.  The primaryobjectives of SFAS No. 155 are: (i) with respect to SFAS No. 133, to addressthe accounting for beneficial interests in securitized financial assets and(ii) with respect to SFAS No. 140, eliminate a restriction on the passivederivative instruments that a qualifying special purpose entity may hold.  SFAS No. 155 is effective for those financialinstruments acquired or issued after January 1, 2007.  The Company will adopt SFAS No. 155 onJanuary 1, 2007 and is currently evaluating the implications of SFAS No.155 on its financial statements.  Theadoption of SFAS No. 155 is not expected to have a material impact on theCompany’s operating results or financial condition.

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*. SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and requires additionaldisclosures about fair value measurements. SFAS No. 157 does not require anynew fair value measurements, but its application could change current practicesin determining fair value. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007.  The Company iscurrently evaluating the implications of SFAS No. 157 and its potential impacton the Company’s financial statements.

13

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**3.Summary of Significant Accounting Policies (continued)**

**m. Review of Financial GuarantyIndustry Accounting Practices**

The FASB is drafting apronouncement to address loss reserving, premium recognition and deferredacquisition costs in the financial guaranty industry. Currently, the financialguaranty industry accounts for financial guaranty insurance contracts underSFAS No. 60, *Accounting and Reporting byInsurance Enterprises,*which was developed prior to the emergence ofthe financial guaranty industry. As SFAS No. 60 does not specifically addressfinancial guaranty contracts, there has been diversity in the manner in whichdifferent financial guarantors account for these contracts. The purpose of thepronouncement would be to provide authoritative guidance on accounting forfinancial guaranty contracts issued by insurance companies that are notaccounted for as derivative contracts under SFAS No. 133. When the FASB issuesa final pronouncement, the Company, along with other companies in the financialguaranty industry, may be required to change certain aspects of accounting forloss reserves, premium income and deferred acquisition costs. It is notpossible to predict the impact the FASB’s pronouncement may have on the Company’saccounting practices.

**4.Statutory Accounting Practices**

Statutory-basis surplusof the Company at December 31, 2006 and 2005 was $1,130,779 and $1,162,904,respectively. Statutory-basis net income for the years ended December 31, 2006,2005 and 2004 was $220,519, $192,009 and $144,100, respectively.  The Company’s statutory contingency reserveswere $1,274,274 and $1,035,397 as of December 31, 2006 and 2005.

14

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**5.Investments**

The amortized cost andfair values of investments classified as fixed maturity securities are asfollows:
| ** **                                                                             | ** ** | ** **    | ** **    | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------|---------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                                                             | ** ** | **Amortized** | ** **    | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| ** **                                                                             | ** ** | **Cost**      | ** **    | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **At  December 31, 2006**                                                              | ** ** | ** **    | ** **    | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| **Available  for sale:**                                                               | ** ** | ** **    | ** **    | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| Obligations of  states and political subdivisions                                      | ** ** | **$**         | **3,117,989** | ** **     | **$**      | **27,105**     | ** ** | **$**               | **20,879** | ** ** | **$** | **3,124,215** | ** ** |
| Asset- and  mortgage-backed securities                                                 | ** ** | **275,647**   | ** **    | **814**        | ** ** | **3,574**      | ** ** | **272,887**         | ** ** |
| U.S. Treasury  securities and obligations of U.S. government corporations and agencies | ** ** | **90,978**    | ** **    | **528**        | ** ** | **1,655**      | ** ** | **89,851**          | ** ** |
| Corporate bonds                                                                        | ** ** | **87,805**    | ** **    | **85**         | ** ** | **1,776**      | ** ** | **86,114**          | ** ** |
| Debt securities  issued by foreign governments                                         | ** ** | **41,426**    | ** **    | **15**         | ** ** | **245**        | ** ** | **41,196**          | ** ** |
| Preferred stock                                                                        | ** ** | **13,499**    | ** **    | **—**     | ** ** | **755**        | ** ** | **12,744**          | ** ** |
| Total fixed  maturity securities                                                       | ** ** | **3,627,344** | ** **    | **28,547**     | ** ** | **28,884**     | ** ** | **3,627,007**       | ** ** |
| Short-term  investments                                                                | ** ** | **211,749**   | ** **    | **—**     | ** ** | **23**         | ** ** | **211,726**         | ** ** |
| **Held to  maturity:**                                                                 | ** ** | ** **    | ** **    | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| Variable  interest entity fixed maturity securities                                    | ** ** | **750,000**   | ** **    | **—**     | ** ** | **—**     | ** ** | **750,000**         | ** ** |
| Total investments                                                                      | ** ** | **$**         | **4,589,093** | ** **     | **$**      | **28,547**     | ** ** | **$**               | **28,907** | ** ** | **$** | **4,588,733** | ** ** |

 
| ** **                                                                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                                                             | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| ** **                                                                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **At  December 31, 2005**                                                              | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| Obligations of  states and political subdivisions                                      |       | $             | 2,777,807  |           | $          | 12,718         |       | $                   | 26,410     |   | $ | 2,764,115 |   |
| Asset- and  mortgage-backed securities                                                 |       | 209,148       |       | 135            |       | 3,490          |       | 205,793             |       |
| U.S. Treasury  securities and obligations of U.S. government corporations and agencies |       | 148,785       |       | 1,387          |       | 2,036          |       | 148,136             |       |
| Corporate bonds                                                                        |       | 91,422        |       | 501            |       | 1,486          |       | 90,437              |       |
| Debt securities  issued by foreign governments                                         |       | 30,930        |       | 345            |       | 5              |       | 31,270              |       |
| Preferred stock                                                                        |       | 19,199        |       | 427            |       | 639            |       | 18,987              |       |
| Total fixed maturity  securities                                                       |       | 3,277,291     |       | 15,513         |       | 34,066         |       | 3,258,738           |       |
| Short-term  investments                                                                |       | 159,334       |       | —         |       | —         |       | 159,334             |       |
| Total investments                                                                      |       | $             | 3,436,625  |           | $          | 15,513         |       | $                   | 34,066     |   | $ | 3,418,072 |   |

 

15

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 **5.Investments (continued)**

The following table showsgross unrealized losses and the fair value of fixed maturity securities,aggregated by investment category and the length of time that individualsecurities have been in a continuous unrealized loss position, at December 31,2006:
| ** **                                                                             | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**                   | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**               | ** ** | **No. of  Securities** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **No. of  Securities** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **No. of  Securities** | ** ** |
| Obligations of  states and political subdivisions                                      |       | $                                      | 582,407    |                                 | $          | 1,971                       |       | 173 |   | $ | 1,173,894 |   | $ | 18,908 |   | 263 |   | $ | 1,756,301 |   | $ | 20,879 |   | 436 |   |
| Asset- and  mortgage-backed securities                                                 |       | 54,862                                 |       | 365                                  |       | 13                          |       | 149,103 |   | 3,209 |   | 40 |   | 203,965 |   | 3,574 |   | 53 |   |
| U.S. Treasury  securities and obligations of U.S. government corporations and agencies |       | 11,988                                 |       | 78                                   |       | 5                           |       | 53,238 |   | 1,578 |   | 10 |   | 65,226 |   | 1,656 |   | 15 |   |
| Other                                                                                  |       | 54,123                                 |       | 542                                  |       | 73                          |       | 62,892 |   | 1,478 |   | 50 |   | 117,015 |   | 2,020 |   | 123 |   |
| Preferred stock                                                                        |       | -                                      |       | -                                    |       | -                           |       | 12,742 |   | 756 |   | 1 |   | 12,742 |   | 756 |   | 1 |   |
| Total temporarily  impaired securities                                                 |       | $                                      | 703,380    |                                 | $          | 2,956                       |       | 264 |   | $ | 1,451,869 |   | $ | 25,929 |   | 364 |   | $ | 2,155,249 |   | $ | 28,885 |   | 628 |   |

 

The unrealized losses inthe Company’s investments were caused by interest rate increases. The Companyhas evaluated the credit ratings of these securities and noted nodeterioration. Because the decline in market value is attributable to changesin interest rates and not credit quality, and because the Company has theability and intent to hold these investments until a recovery of fair valueabove amortized cost, which may be maturity, the Company did not consider theseinvestments to be other than temporarily impaired at December 31, 2006.

Investments in fixedmaturity securities carried at fair value of $4,456 and $4,625 as of December31, 2006 and 2005, respectively, were on deposit with various regulatoryauthorities, as required by law.

The amortized cost andfair values of investments in fixed maturity securities available for sale atDecember 31, 2006 are shown below by contractual maturity date. Actualmaturities may differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without penalties.

|                                         | ** ** | **Amortized   Cost** | ** ** | **Fair  Value** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-----------------|------------|
|                                    |       |                      |       |            |       |
| Due within one  year                    |       | $                         | 72,446     |            | $          | 72,036 |   |
| Due after one  year through five years  |       | 746,986                   |       | 734,423         |       |
| Due after five  years through ten years |       | 1,496,067                 |       | 1,490,829       |       |
| Due after ten  years                    |       | 1,311,845                 |       | 1,329,719       |       |
| Total                                   |       | $                         | 3,627,344  |            | $          | 3,627,007 |   |

 

16

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**5.Investments (continued)**

For the years endedDecember 31, 2006, 2005 and 2004, proceeds from sales of fixed maturitysecurities, available for sale, were $20,781, $31,380 and $178,030,respectively. For the years ended December 31, 2006, 2005 and 2004, gross gainsof $382, $185 and $1,859 respectively, and gross losses of $108, $84 and$1,300, respectively, were realized on such sales.

Net investment income ofthe Company was derived from the following sources:
| ** **                                                           | ** ** | **Year ended December 31,** | ** **  |
|----------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                           | ** ** | **2006**                                   | ** **  | **2005** | ** ** | **2004** | ** ** |
| Income from  fixed maturity securities                               | ** ** | **$**                                      | **130,498** |   | $ | 112,616 |   | $ | 97,720 |   |
| Income from  short-term investments                                  | ** ** | **10,556**                                 |        | 6,801 |   | 1,450 |   |
| Total investment  income                                             | ** ** | **141,054**                                |        | 119,417 |   | 99,170 |   |
| Investment  expenses                                                 | ** ** | **(2,579**                                 | **)**       | (2,345 | ) | (1,461 | ) |
| Net investment  income                                               | ** ** | **138,475**                                |        | 117,072 |   | 97,709 |   |
| Interest income  — investments held by variable interest entity | ** ** | **35,893**                                 |        | — |   | — |   |
|                                                                 | ** ** | **$**                                      | **174,368** |   | 117,072 |   | 97,709 |   |
|                                                                      |            |                                            |             |  |  |  |  |  |  |  |

 

As of December 31, 2006,the Company did not have more than 3% of its investment portfolio concentratedin a single issuer or industry; however, the Company had the followinginvestment concentrations by state:

|                        | ** ** | **Fair Value** | ** ** |
|------------------------|------------|---------------------|------------|
| New York               |       | $                   | 325,042    |   |
| Texas                  |       | 281,781             |       |
| Florida                |       | 223,742             |       |
| New Jersey             |       | 191,543             |       |
| Illinois               |       | 186,600             |       |
| California             |       | 180,295             |       |
| Massachusetts          |       | 155,202             |       |
| Michigan               |       | 128,268             |       |
|                   |       | 1,672,473           |       |
|                   |       |                |       |
| All other states       |       | 1,389,883           |       |
| All other  investments |       | 776,377             |       |
| Total investments      |       | $                   | 3,838,733  |   |

** **

17

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**6.Derivative Instruments**

The Company provides CDSsto certain buyers of credit protection by entering into contracts thatreference collateralized debt obligations from cash and synthetic structuresbacked by pools of corporate, consumer or structured finance debt. It alsooffers credit protection on public finance and structured finance obligationsin CDS form. The Company considers CDS agreements to be a normal extension ofits financial guaranty insurance business, although they are considered derivativesfor accounting purposes. These agreements are recorded at fair value. TheCompany believes that the most meaningful presentation of the financialstatement impact of these derivatives is to reflect revenues as a component ofpremiums, and to record claims payments, expected claims as loss and lossadjustment expenses, and changes in fair value as “Net realized and unrealizedgains (losses) on credit derivative contracts” on the Consolidated Statementsof Income.  The Company recorded revenueunder CDS agreements of $17,095, $3,036 and $0 for the years ended December 31,2006, 2005 and 2004, respectively.  As ofDecember 31, 2006, the Company has recorded no losses and loss adjustmentsexpenses related to CDS agreements.

The gains and lossesrecognized by recording CDS agreements at fair value are determined eachquarter based on quoted market prices, if available.  If quoted market prices are not available,the determination of fair value is based on an internally developed model.  As of December 31, 2006 and 2005, all fairvalue prices were determined using an internally developed model.  The following table summarizes the realizedand unrealized gains (losses) on credit derivative agreements.

|                                                                            | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Change in  unrealized gains                                                | ** ** | **$**                                      | **2,887**  |   | $ | 545 |   |
| Change in  unrealized losses                                               | ** ** | **(4,223**                                 | **)**      | (712 | ) |
| Realized gains                                                             | ** ** | **1,843**                                  |       | — |   |
| Realized losses                                                            |       | —                                     |       | — |   |
| Net realized and unrealized gains (losses) on credit derivative  contracts | ** ** | **$**                                      | **507**    |   | $ | (167 | ) |

 

Themark-to-market gain and (loss) on the CDS portfolio were $314 and ($1,817) atDecember 31, 2006, and $545 and ($712) at December 31, 2005, and were recordedin “Other assets” and in “Other liabilities,” respectively.

18

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**7.Income Taxes**

The Company files a consolidated federal income taxreturn with FGIC Corp. The method of allocation between FGIC Corp. and itssubsidiaries is determined under a tax sharing agreement approved by theCompany’s Board of Directors and the New York State Insurance Department, andis based upon separate return calculations.

The Company is permitteda tax deduction, subject to certain limitations, for amounts required to be setaside in statutory contingency reserves by state law or regulation.  The deduction is allowed only to the extentthe Company purchases U.S. Government non-interest bearing tax and loss bondsin an amount equal to the tax benefit attributable to such deductions.Purchases of tax and loss bonds are recorded as a reduction of current taxexpense. The Company did not purchase any tax and loss bonds in the year endedDecember 31, 2006.  For the years endedDecember 31, 2005 and 2004, the Company purchased $13,565 and $10,810,respectively, of tax and loss bonds.

The following is areconciliation of foreign and domestic income taxes computed at the statutoryincome tax rate and the provision for foreign and domestic income taxes:

|                                                                                                               | ** ** | **Year ended December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                    | ** ** | **2006**                                   | ** **  | **2005** | ** ** | **2004** | ** ** |
| Income taxes computed  on income before provision for federal income taxes, at the statutory income  tax rate | ** ** | **$**                                      | **123,500** |   | $ | 95,037 |   | $ | 78,932 |   |
| State and local income  taxes, net of Federal income taxes                                                    | ** ** | **756**                                    |        | 453 |   | 479 |   |
| Tax effect of:                                                                                                |       |                                       |        |   |   |   |   |
| Tax-exempt  interest                                                                                          | ** ** | **(35,646**                                | **)**       | (31,072 | ) | (28,015 | ) |
| Other, net                                                                                                    | ** ** | **408**                                    |        | 690 |   | 4,037 |   |
| Provision for income taxes                                                                                    | ** ** | **$**                                      | **89,018**  |   | $ | 65,108 |   | $ | 55,433 |   |

 

Following are theforeign and domestic components of provision of income taxes:

|            | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Foreign    |       |                                       |       |   |   |   |   |
| Current    | ** ** | **$**                                      | **(383**   | **)** | $ | 2,409 |   | $ | (983 | ) |
| Deferred   | ** ** | **(752**                                   | **)**      | (3,038 | ) | — |   |
| Domestic   |       |                                       |       |   |   |   |   |
| Current    | ** ** | **68,278**                                 |       | 29,961 |   | 43,492 |   |
| Deferred   | ** ** | **21,875**                                 |       | 35,776 |   | 12,924 |   |
| Total      | ** ** | **$**                                      | **89,018** |   | $ | 65,108 |   | $ | 55,433 |   |

 

19

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**7.Income Taxes (continued)**

The tax effects oftemporary differences that give rise to significant portions of the netdeferred tax liability at December 31, 2006 and 2005 are presented below:
| ** **                                                        | ** ** | **2006**    | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|----------|------------|
| Deferred tax assets:                                              |       |        |       |     |       |
| Tax and loss  bonds                                               | ** ** | **$**       | **24,375** |     | $          | 24,375 |   |
| Loss and loss  adjustment expense reserves                        | ** ** | **3,717**   |       | 6,180    |       |
| AMT credit  carryforward                                          | ** ** | **—**  |       | 7,140    |       |
| Property and  equipment                                           | ** ** | **125**     |       | 83       |       |
| Deferred  compensation                                            | ** ** | **5,222**   |       | 1,483    |       |
| Capital lease                                                     | ** ** | **2,591**   |       | 2,483    |       |
| Net operating  loss on foreign subsidiaries                       | ** ** | **4,228**   |       | 2,948    |       |
| Other                                                             | ** ** | **586**     |       | 266      |       |
| Total gross deferred  tax assets                                  | ** ** | **40,844**  |       | 44,958   |       |
|                                                              |       |        |       |     |       |
| Deferred tax  liabilities:                                        |       |        |       |     |       |
| Contingency  reserves                                             | ** ** | **42,656**  |       | 42,656   |       |
| Unrealized gains  on fixed maturity securities available for sale | ** ** | **15,734**  |       | 12,883   |       |
| Deferred  acquisition costs                                       | ** ** | **26,558**  |       | 19,639   |       |
| Premium revenue  recognition                                      | ** ** | **22,915**  |       | 10,359   |       |
| Profit commission                                                 | ** ** | **1,444**   |       | 1,435    |       |
| Unrealized gains  on foreign currency                             | ** ** | **3,581**   |       | 194      |       |
| Other                                                             | ** ** | **1,016**   |       | 255      |       |
| Total gross deferred  tax liabilities                             | ** ** | **113,904** |       | 87,421   |       |
| Net deferred tax liability                                        | ** ** | **$**       | **73,060** |     | $          | 42,463 |   |

 

As of December 31,2006 and 2005, there were gross foreign deferred tax assets of $4,359 and$3,677, respectively, and gross foreign deferred tax liabilities of $868 and$177, respectively.  The net operatinglosses on foreign subsidiaries of $14,094 as of December 31, 2006 weregenerated by FGIC’s United Kingdom subsidiaries. The United Kingdom does notallow net operating losses to be carried back, but does permit them to becarried forward indefinitely. Based upon projections of future taxable incomeover the periods in which the deferred tax assets are deductible and theestimated reversal of future taxable temporary differences, the Companybelieves it is more likely than not that it will realize the benefits of thesedeductible differences and, therefore, has not established a valuationallowance at December 31, 2006 and 2005.

20

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**7.Income Taxes (continued)**

The Company’sconsolidated income tax return for the year ended December 31, 2004 iscurrently under examination by tax authorities. In the opinion of management,adequate provision has been made for any additional taxes that may become dueas a result of current or future examinations by tax authorities.

**8.Reinsurance**

Reinsurance is thecommitment by one insurance company (the reinsurer) to reimburse anotherinsurance company (the ceding company) for a specified portion of the insurancerisks under policies issued by the ceding company in consideration for aportion of the related premiums received. The ceding company typically willreceive a ceding commission from the reinsurer.

The Company usesreinsurance to increase its capacity to write insurance for obligations oflarge, frequent issuers; to meet internal, rating agency or regulatory singlerisk limits; to diversify risk; and to manage rating agency and regulatorycapital requirements. In 2005 and 2006, the Company arranged reinsuranceprimarily on a facultative (transaction-by-transaction) basis.  During 2006, the Company began arrangingreinsurance on a proportional share basis, as well.

The Company seeks toplace reinsurance with financially strong reinsurance companies since, as aprimary insurer, the Company is required to fulfill all its obligations topolicyholders even where a reinsurer fails to perform its obligations under theapplicable reinsurance agreement. The Company regularly monitors the financialcondition of its reinsurers. Under most of the Company’s reinsuranceagreements, the Company has the right to reassume all the exposure ceded to areinsurer (and receive all the remaining unearned premiums ceded) in the eventof a ratings downgrade of the reinsurer or the occurrence of certain otherevents. In certain of these cases, the Company also has the right to imposeadditional ceding commissions.

In 2004, some ofthe Company’s reinsurers were downgraded by the rating agencies, reducing thefinancial benefits of using reinsurance under rating agency capital adequacymodels, because the Company must allocate additional capital to the relatedreinsured exposure. In connection with such a downgrade, the Company reassumed$4,959 of ceded premiums for the year ended December 31, 2004.

Under certain reinsuranceagreements, the Company holds collateral in the form of letters of credit andtrust agreements. Such collateral totaled $102,370 at December 31, 2006, andcan be drawn on in the event of default by the reinsurer.

21

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**8.Reinsurance (continued)**

Reinsurance decreased thefollowing balances recorded in the consolidated statements of income asfollows:

|                                   | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                              |       |                                       |       |   |   |   |   |
| Net premiums earned               | ** ** | **$**                                      | **28,324** |   | $ | 25,921 |   | $ | 24,173 |   |
| Loss and loss adjustment expenses | ** ** | **1,722**                                  |       | 217 |   | 4,759 |   |
|                                   |            |                                            |            |  |  |  |  |  |  |  |

 

**9. Loss and Loss Adjustment Expenses**

Activity in the reservesfor loss and loss adjustment expenses is summarized as follows:

|                                 | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                            |       |                                       |       |   |   |   |   |
| Case reserves                   | ** ** | **$**                                      | **33,328** |   | $ | 15,700 |   | $ | 18,900 |   |
| Watchlist reserves              | ** ** | **21,484**                                 |       | 23,481 |   | 21,567 |   |
| Balance at beginning of  period | ** ** | **54,812**                                 |       | 39,181 |   | 40,467 |   |
| Less reinsurance  recoverable   | ** ** | **(3,271**                                 | **)**      | (3,054 | ) | (8,065 | ) |
| Net balance                     | ** ** | **51,541**                                 |       | 36,127 |   | 32,402 |   |
| Incurred related to:            |       |                                       |       |   |   |   |   |
| Current period                  |       | —                                     |       | 23,985 |   | 11,756 |   |
| Prior periods                   | ** ** | **(8,700**                                 | **)**      | (5,479 | ) | (5,834 | ) |
| Total incurred                  | ** ** | **(8,700**                                 | **)**      | 18,506 |   | 5,922 |   |
|                            |       |                                       |       |   |   |   |   |
| Paid related to:                |       |                                       |       |   |   |   |   |
| Current period                  |       | —                                     |       | (1,993 | ) | — |   |
| Prior periods                   | ** ** | **(4,027**                                 | **)**      | (1,099 | ) | (2,197 | ) |
| Total paid                      | ** ** | **(4,027**                                 | **)**      | (3,092 | ) | (2,197 | ) |
|                            |       |                                       |       |   |   |   |   |
| Net balance                     | ** ** | **38,814**                                 |       | 51,541 |   | 36,127 |   |
| Plus reinsurance  recoverable   | ** ** | **1,485**                                  |       | 3,271 |   | 3,054 |   |
|                            |       |                                       |       |   |   |   |   |
| Case reserves                   | ** ** | **28,558**                                 |       | 33,328 |   | 15,700 |   |
| Watchlist reserves              | ** ** | **11,741**                                 |       | 21,484 |   | 23,481 |   |
| Balance at end of period        | ** ** | **$**                                      | **40,299** |   | $ | 54,812 |   | $ | 39,181 |   |

 

22

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**9. Loss and Loss Adjustment Expenses (continued)**

Casereserves were discounted at interest rates of approximately 4.6% and 4.5% in2006 and 2005, respectively. The amount of the discount at December 31, 2006and 2005 was $6,369 and $15,015, respectively.

At December 31, 2005, theCompany had insured public finance obligations located in the City of NewOrleans and the immediately surrounding areas and an investor-owned utility inNew Orleans that were impacted by Hurricane Katrina.  During the yearended December 31, 2006, incurred loss expense consisted primarily of therelease of reserves on certain obligations impacted by Hurricane Katrina due tothe improved financial condition of these credits and activity related toseveral structured finance transactions.  During the year ended December31, 2005, incurred loss expense consisted primarily of the establishment ofreserves on obligations impacted by Hurricane Katrina and incurred expenserelated to several structured finance transactions.  Loss and lossadjustment expense included (benefit) expense of $(7,919) and $20,093 relatedto obligations impacted by Hurricane Katrina for the years ended December 31,2006 and 2005, respectively.

At December 31,2006 and 2005 loss reserves and reinsurance recoverables included $8,967 and$255 and $21,833 and $1,740, respectively, related to obligations impacted byHurricane Katrina. Loss reserves at December 31, 2006 and 2005 were based onmanagement’s assessment that the associated insured obligations haveexperienced impairment due to diminished revenue sources.  Given the unprecedented nature of the eventsand the magnitude of damage in the affected areas related to Hurricane Katrina,the loss reserves were necessarily based upon estimates and subjectivejudgments about the outcomes of future events. The loss reserves were adjusted as additional information was available.

The Company paid noclaims related to insured public finance obligations impacted by HurricaneKatrina during the year ended December 31, 2006.  During the year ended December 31, 2005, theCompany paid claims totaling $4,855 related to the insured public financeobligations and was fully reimbursed for these claims payments in 2005.

During the years endedDecember 31, 2006 and 2005, the Company paid claims totaling $4,216 and $1,055,respectively, related to the investor-owned utility impacted by HurricaneKatrina and received reimbursements of $796 in 2006, for these claims payments. For the years ended December 31, 2006 and 2005, the Company paid lossadjustment expenses for professional fees totaling $1,835 and $748,respectively, related to the investor-owned utility and received reimbursementsof $1,792 for these expenses in 2006. The Company has not recorded a potentialrecovery for paid claims and loss adjustment expenses that have not beenreimbursed as of December 31, 2006.

During the year endedDecember 31, 2004, the increase in incurred loss and loss adjustment expense relatedto several structured finance transactions of one particular issuer.

23

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**10.Variable Interest Entities**

FIN 46-R providesaccounting and disclosure rules for determining whether certain entities shouldbe consolidated in the Company’s consolidated financial statements. An entityis subject to FIN 46-R, and is called a variable interest entity (“VIE”), if ithas (i) equity that is insufficient to permit the entity to finance itsactivities without additional subordinated financial support or (ii) equity investorsthat cannot make significant decisions about the entity’s operations or that donot absorb the majority of its expected losses or receive the majority of itsexpected residual returns.  A VIE must beconsolidated by its primary beneficiary, which is the party that has a majorityof the VIE’s expected losses or a majority of its expected residual returns, orboth.

Additionally, FIN46-R requires disclosures for companies that have either a primary orsignificant variable interest in a VIE. All other entities not considered VIEsare evaluated for consolidation under SFAS No. 94, *Consolidationof all Majority-Owned Subsidiaries.*

As part of its structured finance business, theCompany insures debt obligations or certificates issued by special purpose entities.During the first quarter of 2006, the Company consolidated a VIE as a result offinancial guarantees provided by the Company on one transaction related to thesecuritization of life insurance reserves. This third-party VIE had assets of $750,000 and an equal amount ofliabilities at December 31, 2006*,* which areshown under “Assets — Variable interest entity fixed maturity securities, heldto maturity at amortized cost” and “Liabilities — Variable interest entityfloating rate notes,” respectively, on the Company’s consolidated balance sheetat December 31, 2006.  In addition,accrued investment income includes $1,298 related to the VIE’s fixed incomematurity securities, and the corresponding liability is shown under “Accruedinvestment expense-variable interest entity” on the Company’s consolidatedbalance sheet at December 31, 2006. Although the third-party VIE is included in the consolidated financialstatements, its creditors do not have recourse to the general assets of theCompany outside of the financial guaranty policy provided to the VIE. TheCompany has evaluated its other structured finance transactions and does notbelieve any of the third-party entities involved in these transactions requiresconsolidation or disclosure under FIN 46-R. Interest income and expense of $35,893 and $35,893, respectively, wererecognized in the year ended December 31, 2006 on the assets and liabilities ofthe VIE and are included on the Consolidated Statements of Income in “Interestincome — investments held by variable interest entity” and “Interest expense —debt held by variable interest entity,” respectively.

** **

24

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**10. Variable Interest Entities (continued)**

The Company has entered into agreements providing forthe issuance of contingent preferred trust securities by a group of specialpurpose trusts. Each trust is solely responsible for its obligations, and hasbeen established for the purpose of entering into a put agreement with theCompany that obligates the trusts, at the Company’s discretion, to purchasePerpetual Preferred Stock of the Company. The purpose of this arrangement is toprovide capital support to the Company by allowing it to obtain immediateaccess to new capital at its sole discretion at any time through the exerciseof the put options. These trusts are considered VIEs under FIN 46-R. However,the Company is not considered a primary beneficiary and therefore is notrequired to consolidate the trusts.

**11.Related Party Transactions**

The Company had variousservice agreements with subsidiaries of General Electric Company and GECapital. These agreements provided for the payment by the Company of certainpayroll and office expenses, investment fees pertaining to the management ofthe Company’s investment portfolio, and telecommunication service charges.Approximately $179 in expenses were incurred during the year ended December 31,2004 related to such agreements and are reflected in the accompanyingconsolidated financial statements.  Noexpenses were incurred during the years 2006 and 2005.

The Company is party to acapital lease agreement with a subsidiary of GE Capital. The lease agreementcovers leasehold improvements made to the Company’s headquarters as well asfurniture and fixtures and computer hardware and software used by the Company(see Note 19).

In 2004, the Companyentered into a $300,000 soft capital facility, with GE Capital as lender and administrativeagent. The soft capital facility, which replaced the capital support facilitythat the Company previously had with GE Capital, had an initial term of eightyears. The Company paid GE Capital $1,132 under this agreement for the yearended December 31, 2004. This agreement was terminated by the Company in July2004 and was replaced by a new soft capital facility (see Note 16).

25

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**11.Related Party Transactions (continued)**

FGIC Corp. is party totransaction fee and monitoring fee agreements with the members of the InvestorGroup. Pursuant to these agreements, an affiliate of each member of theInvestor Group received its pro rata portion of an aggregate transaction feeequal to $25,000. In addition, each of the members of the Investor Group will receive,in exchange for providing certain financial advisory services on behalf of FGICCorp., its pro rata share of an aggregate $5,000 annual monitoring fee. FGICCorp. may defer paying the monitoring fee in certain circumstances and didelect to defer in the period between December 18, 2003 and September 30, 2005.During 2005, FGIC Corp. paid the members of the Investor Group an aggregate of$10,192 in payment of the monitoring fee covering the period from December 18,2003 through December 31, 2005. During 2006, FGIC Corp. paid the members of theInvestor Group an aggregate of $3,789 for the monitoring fee covering the yearended December 31, 2006.  As of December31, 2006, FGIC Corp. had $1,211 payable to the Investor Group for themonitoring fee covering the year ended December 31, 2006.  Pursuant to the transaction fee andmonitoring fee agreements, FGIC Corp. has agreed to indemnify the members ofthe Investor Group and their respective affiliates and other related partiesfor losses relating to the transaction fee and monitoring fee agreements.

The Company insurescertain non-municipal issues with GE Capital involvement as sponsor of theinsured securitization and/or servicer of the underlying assets. For some ofthese issues, GE Capital also provides first loss protection in the event ofdefault. Gross premiums written on these issues amounted to $2, $3 and $6 forthe years ended December 31, 2006, 2005 and 2004, respectively. As of December31, 2006 and 2005, principal outstanding on these deals before reinsurance was$5,667 and $6,142, respectively.

During 2006, the Company,in the normal course of operations, has entered into reinsurance transactionswith PMI Guaranty Co. and PMI Mortgage Insurance Co., which are bothwholly-owned subsidiaries of PMI. For the years ended December 31, 2006 and2005, ceded premiums written were $4,041 and $582, respectively, and cedingcommission income was $578 and $114, respectively. Accounts payable due tothese subsidiaries were $1,283 and $102 at December 31, 2006 and 2005,respectively.

The Company, in thenormal course of operations, has entered into reinsurance transactions with RAMReinsurance Company Ltd (“RAM Re”), which is 24% owned by PMI. For the yearsended December 31, 2006 and 2005, ceded premiums written for these transactionswere $9,824 and $4,582, respectively, and ceding commission income was $2,929and $1,369, respectively. Accounts payable due to RAM Re were $91 and $3 atDecember 31, 2006 and 2005, respectively.

26

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**11.Related Party Transactions (continued)**

Cypress, a member of theInvestor Group, is reported to own approximately 15% of Scottish Re GroupLimited (“Scottish Re”). During 2006, the Company entered into astructured finance transaction and assumed a structured financetransaction in which subsidiaries of Scottish Re were involved.  Neither transaction involves (a) a guarantyby the Company of any obligation of Scottish Re, or (b) the payment of any feesor other amounts between the Company and Scottish Re. As of December 31, 2006,there were no amounts due to or from Scottish Re. Gross premiums written andpremiums earned of $699 and $637, respectively, are reflected in theConsolidated Statements of Income for the year ended December 31, 2006.

The Company believes thatthe terms of the transactions involving GE Capital, PMI subsidiaries, RAM Reand Scottish Re described above were substantially identical to comparabletransactions between unaffiliated parties.

**12.Compensation Plans**

Since January 1,2004, the Company has offered a defined contribution savings plan under Section401(k) of the Internal Revenue Code. This plan covers substantially allemployees who meet minimum age and service requirements and allows participantsto defer a portion of their annual compensation on a pre-tax basis (for 2006,up to $15 for employees under age 50, plus an additional “catch up”contribution of up to $5 for employees 50 and older). The Company may also makediscretionary contributions to the plan on behalf of employees. The Companycontributed $4,255, $3,429 and $2,532 to the plan on behalf of employees forthe years ended December 31, 2006, 2005 and 2004, respectively.

The Company alsooffers a non-qualified deferred compensation plan for certain employees whosecash compensation equals or exceeds the cap under the 401(k) Plan.  These employees may defer up to 100% of theirpre-tax incentive compensation to a future date and accumulate tax-deferredearnings on this compensation.  TheCompany may also make discretionary contributions to the plan on behalf ofemployees.  The Company contributed $827,$583 and $470 to the plan on behalf of employees for the years ended December31, 2006, 2005 and 2004, respectively.

**13. Stock Compensation Plan**

Employees of the Company may receive stock-basedcompensation under a FGIC Corp. incentive stock plan that provides forstock-based compensation, including stock options, restricted stock awards andrestricted stock units. Stock options are granted for a fixed number of shareswith an exercise price equal to or greater than the fair value of the shares atthe date of the grant. Restricted stock awards and restricted stock units arevalued at the fair value of the stock on the grant date, with no cost to thegrantee. Prior to January 1, 2006, the Company accounted for those plans underthe recognition and measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations, as permitted by SFAS No. 123, *Accounting for Stock-Based Compensation*.

27

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**13. Stock Compensation Plan (continued)**

No stock-based employee compensation cost related tostock options was recognized in the Consolidated Statements of Income for theyears ended December 31, 2005 and 2004, as all options granted through thatdate had an exercise price equal to the fair value of the underlying commonstock on the date of grant. For grants of restricted stock units, unearnedcompensation, equivalent to the estimated fair value of the common stock at thedate of grant, was recorded as a separate component of stockholders’ equity andsubsequently amortized to compensation expense over the vesting period.

**Effective January 1, 2006, theCompany adopted the fair value recognition provisions of SFAS No. 123(R), *Share-Based Payment*, using themodified-prospective-transition method. Under that method, compensation cost includes all share-based paymentsgranted prior to, but not yet vested as of, January 1, 2006, based on the grantdate fair value estimated in accordance with SFAS No. 123(R). The Companyestimated the fair value of all stock options at the date of grant using theBlack-Scholes-Merton option pricing model. Results for prior periods have notbeen restated.**

As a result of adoptingSFAS No. 123(R) effective January 1, 2006, the Company’s income before incometaxes and net income for the year ended December 31, 2006 were impacted asfollows:

|                             | ** ** | **Year ended  December 31, 2006** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| Income before  income taxes | ** ** | **$**                                            | **(6,816** | **)** |
|                        |       |                                             |       |
| Income tax benefit          | ** ** | **2,386**                                        | ** ** |
|                        |       |                                             |       |
| Net income                  | ** ** | **$**                                            | **(4,430** | **)** |

 

The following tableillustrates the effect on net income if the Company had applied the fair valuerecognition provisions of SFAS No. 123(R) to stock options granted during theyears ended December 31, 2005 and 2004. For purposes of this pro forma disclosure, the value of the stockoptions is amortized to expense over the stock options’ vesting periods.

|                                                                                         | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income, as  reported                                                                |       | $                                      | 190,466    |   | $ | 156,880 |   |
|                                                                                    |       |                                   |       |   |   |
| Stock option compensation expense determined under  fair value-based method, net of tax |       | (2,109                                 | )          | (1,200 | ) |
|                                                                                    |       |                                   |       |   |   |
| Pro forma net income                                                                    |       | $                                      | 188,357    |   | $ | 155,680 |   |

 

28

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**13. Stock Compensation Plan (continued)**

A summary of optionactivity for the years ended December 31, 2006, 2005 and 2004 is as follows:

|                                            | ** ** | **Number of  Shares Subject  to Options** | ** ** | **Weighted Average  Exercise Price  per Share** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Balance at  December 31, 2003:             |       | 93,373                                                   |       | $                                                              | 840        |   |
| Granted                                    |       | 22,017                                                   |       | 752                                                            |       |
| Exercised                                  |       | —                                                   |       | —                                                         |       |
| Forfeited                                  |       | (1,237                                                   | )          | 746                                                            |       |
| Expired                                    |       | —                                                   |       | —                                                         |       |
| Balance at  December 31, 2004:             |       | 114,153                                                  |       | 824                                                            |       |
| Granted                                    |       | 27,145                                                   |       | 711                                                            |       |
| Exercised                                  |       | —                                                   |       | —                                                         |       |
| Forfeited                                  |       | (1,876                                                   | )          | 685                                                            |       |
| Expired                                    |       | —                                                   |       | —                                                         |       |
| Balance at  December 31, 2005:             |       | 139,422                                                  |       | 804                                                            |       |
| Granted                                    |       | 38,113                                                   |       | 850                                                            |       |
| Exercised                                  |       | —                                                   |       | —                                                         |       |
| Forfeited                                  |       | (6,504                                                   | )          | 776                                                            |       |
| Expired                                    |       | —                                                   |       | —                                                         |       |
| Balance at  December 31, 2006:             |       | 171,031                                                  |       | $                                                              | 815        |   |
| Shares subject  to options exercisable at: |       |                                                     |       |                                                           |       |
| December 31,  2006                         |       | 72,585                                                   |       | $                                                              | 818        |   |
| December 31,  2005                         |       | 42,630                                                   |       | $                                                              | 840        |   |
| December 31, 2004                          |       | 22,831                                                   |       | $                                                              | 824        |   |

 

Exercise prices for thestock options outstanding at December 31, 2006 range from $600 to $1,080 pershare. At December 31, 2006, the weighted average remaining contractual life ofthe outstanding options was approximately seven years. Stock options granted in2006 vest ratably over four years and expire seven years from the date ofgrant. All stock options granted prior to December 31, 2005 vest ratably overfive years and expire ten years from the date of grant.

29

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1**3. Stock Compensation Plan (continued)**

The weighted average pershare fair value of the stock options granted during the years ended December31, 2006, 2005 and 2004 was $238.00, $211.94, and $48.21, respectively,estimated at the date of grant, using the Black-Scholes-Merton option valuationmodel based on the following assumptions:

|                          | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life            | ** ** | **4 Years**                                |       | 5 Years |   | 5 Years |   |
| Risk-free  interest rate | ** ** | **4.46%**                                  |       | 3.691% |   | 4.021% |   |
| Volatility  factor       | ** ** | **25.0%**                                  |       | 25.0% |   | 25.0% |   |
| Dividend yield           | ** ** | **—**                                 |       | — |   | — |   |

 

The total fair value ofstock options granted during the years ended December 31, 2006, 2005 and 2004was approximately $9,071, $5,753 and $1,100, respectively.

As of December 31, 2006,there was $5,584 of total unrecognized compensation cost related to unvestedstock options granted.  These costs areexpected to be recognized through April 30, 2010.

** **

30

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# **13. Stock Compensation Plan(continued)**

# *RestrictedStock Units*

The Company recorded $880 and $45 in compensationexpense related to the grant of restricted stock units for the years endedDecember 31, 2006 and 2005, respectively.

**A summary of restricted stockunits is as follows:**

|                                | ** ** | **Shares** | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Balance at December 31,  2003: | ** ** | —     | ** ** | —                                                      | ** ** |
| Granted                        |       | 200        |       | 600                                                         |       |
| Delivered                      | ** ** | —     | ** ** | —                                                      | ** ** |
| Forfeited                      | ** ** | —     | ** ** | —                                                      | ** ** |
| Balance at December 31,  2004: |       | 200        |       | $                                                           | 600        |   |
| Granted                        |       | 37         |       | 710                                                         |       |
| Delivered                      | ** ** | —     | ** ** | —                                                      | ** ** |
| Forfeited                      | ** ** | —     | ** ** | —                                                      | ** ** |
| Balance at December 31,  2005: |       | 237        |       | 617                                                         |       |
| Granted                        |       | 3,275      |       | 850                                                         |       |
| Delivered                      |       | (237       | )          | 617                                                         |       |
| Forfeited                      |       | (213       | )          | 850                                                         |       |
| Balance at December 31, 2006:  |       | 3,062      |       | 850                                                         |       |
|                                |            |            |            |                                                             |            |  |

 

As of December 31, 2006there was $1,451 of total unrecognized compensation cost related to unvestedrestricted stock units granted.  Thesecosts are expected to be recognized through January 31, 2009.

**14.Dividends**

Under New York insurancelaw, the Company may pay dividends to FGIC Corp. only from earned surplus,subject to the following limitations: (a) the Company’s statutory surplusafter any dividend may not be less than the minimum required paid-in capital,which was $72,500 in 2006, 2005, and 2004 and (b) dividends may not exceedthe lesser of 10% of its surplus or 100% of adjusted net investment income, asdefined by New York insurance law, for the preceding twelve-month period,without the prior approval of the New York State Superintendent of Insurance.

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**14.Dividends (continued)**

During the year endedDecember 31, 2006, the Company declared dividends to FGIC Corp. totaling$20,000 on its common stock and paid dividends of $10,000 to FGIC Corp., whichowns all of the Company’s common stock. During the years ended December 31, 2005 and 2004, the Company did notdeclare nor pay dividends to FGIC Corp.

**15.  RevolvingCredit Facility**

During December 2005,FGIC Corp. and the Company entered into a $250,000 senior unsecured revolvingcredit facility that matures on December 11, 2010. The facility is provided bya syndicate of banks and other financial institutions. In connection with thefacility, $150 in syndication costs were prepaid and will be amortized intoexpense over the term of the facility. The facility replaced a similar one-yearfacility that matured in December 2005. No draws have been made under eitherfacility.

**16. Preferred Trust Securities**

On July 19, 2004, theCompany entered into a $300,000 facility, consisting of Money Market CommittedPreferred Custodial Trust Securities (“CPS Securities”). This facility replaceda $300,000 “soft capital” facility previously provided by GE Capital. Under the2004 facility, each of six separate Delaware trusts (the “Trusts”), issues$50,000 in perpetual CPS Securities on a rolling 28-day auction rate basis.Proceeds from these securities are invested in high quality, short-termsecurities and are held in the respective Trusts. Each Trust is solelyresponsible for its obligations and has been established for the purpose ofentering into a put agreement with the Company, which obligates the Trusts, atthe Company’s discretion, to purchase perpetual Preferred Stock of the Company.

In this way, the programprovides capital support to the Company by allowing it to obtain immediateaccess to new capital at its sole discretion at any time through the exerciseof the put options. In connection with the establishment of the Trusts, theCompany incurred $4,638 of expenses, which is included in “Other operatingexpenses” for the year ended December 31, 2004. The Company recorded expensesfor the right to put its shares to the Trusts of $1,432, $1,806, and $905 forthe years ended December 31, 2006, 2005, and 2004, respectively.

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**17. Financial Instruments**

(a)                Fair Value ofFinancial Instruments

The following methods and assumptions were used by the Company inestimating the fair values of financial instruments:

*Fixed Maturity Securities**:* Fair values for fixed maturity securities are based onquoted market prices, if available. If a quoted market price is not available,fair values are estimated using quoted market prices for similar securities.Fair value disclosure for fixed maturity securities is included in theconsolidated balance sheets and in Note 5.

Short*-Term Investments**:*Short-term investments are carried at fair value, whichapproximates cost.

*Cash and Cash Equivalents, AccruedInvestment Income, Prepaid Expenses and Other Assets, Receivable from*Related*Parties, Ceded Reinsurance Balances Payable,Accounts Payable and Accrued Expenses and Payable for Securities Purchased:*Thecarrying amounts of these items approximate their fair values.

The estimated fair values of the Company’s financial instruments atDecember 31, 2006 and 2005 were as follows:

|                                                                       | ** ** | **2006**             | ** ** | **2005**        | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Financial assets:                                                     |       |                 |       |            |       |   |   |   |   |
| Cash on hand and  in-demand accounts                                  | ** ** | **$**                | **29,963** | ** **      | **$**      | **29,963** |   | $ | 45,077 |   | $ | 45,077 |   |
| Short-term  investments                                               | ** ** | **211,726**          | ** ** | **211,726**     |       | 159,334 |   | 159,334 |   |
| Fixed maturity  securities, available for sale                        | ** ** | **3,627,007**        | ** ** | **3,627,007**   |       | 3,258,738 |   | 3,258,738 |   |
| Variable interest  entity fixed maturity securities, held to maturity | ** ** | **750,000**          | ** ** | **750,000**     |       | — |   | — |   |
|                                                                       |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

*Financial Guaranties**:* The carrying value of the Company’s financial guarantiesis represented by the unearned premium reserve, net of deferred acquisitioncosts, loss and loss adjustment expense reserves and prepaid reinsurancepremiums. Estimated fair values of these guaranties are based on an estimate ofthe balance that is necessary to bring the future returns for the Company’s embeddedbook of business to a market return. The estimated fair values of suchfinancial guaranties was $1,176,823 compared to a carrying value of $1,243,530as of December 31, 2006, and $1,098,165 compared to a carrying value of$1,099,045 as of December 31, 2005*.*

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**17. Financial Instruments (continued)**

As of December 31, 2006 and 2005, the net present value of futureinstallment premiums was approximately $630,831 and $393,000, respectively,both discounted at 5%.

*Derivatives:* Forfair value adjustments on derivatives, the carrying amount represents fairvalue. The Company uses quoted market prices when available, but if quotedmarket prices are not available, management uses internally developedestimates.

(b)               Concentrations ofCredit Risk

The Company considers its role in providing insuranceto be credit enhancement rather than credit substitution. The Company insuresonly those securities that, in its judgment, are of investment grade quality.The Company has established and maintains its own underwriting standards thatare based on those aspects of credit that the Company deems important for theparticular category of obligations considered for insurance.

Credit criteria include economic and social trends,debt management, financial management and legal and administrative factors, theadequacy of anticipated cash flows, including the historical and expectedperformance of assets pledged to secure payment of securities under varyingeconomic scenarios, and underlying levels of protection, such as insurance orover-collateralization.

**In connection with underwriting newissues, the Company sometimes requires, as a condition to insuring an issue,that collateral be pledged or, in some instances, that a third-party guarantybe provided for the term of the issue by a party of acceptable credit qualityobligated to make payment prior to any payment by the Company. The types andextent of collateral varies, but may include residential and commercialmortgages, corporate and/or government debt and consumer receivables.**

As of December 31, 2006, the Company’s totaloutstanding principal insured was $299,889,266, net of reinsurance of$29,888,237. The Company’s insured portfolio as of December 31, 2006 wasbroadly diversified by geographic and bond market sector, with no singleobligor representing more than 1% of the Company’s principal insuredoutstanding, net of reinsurance. The insured portfolio includes exposureexecuted in the form of a credit derivative. The principal written in the form of credit derivatives was $25,888,996at December 31, 2006.

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**17. Financial Instruments (continued)**

As of December 31, 2006, the composition of principalinsured by type of issue, net of reinsurance, was as follows:

|                                  | ** ** | **Net Principal** | ** **  |
|----------------------------------|------------|------------------------|-------------|
| ** **                       | ** ** | **Outstanding**        | ** **  |
| Municipal:                       |       |                   |        |
| Tax-supported                    |       | $                      | 134,917,574 |   |
| Utility revenue                  |       | 35,337,159             |        |
| Transportation                   |       | 24,501,099             |        |
| Education                        |       | 10,259,116             |        |
| Health Care                      |       | 6,495,630              |        |
| Investor-owned  utilities        |       | 4,825,029              |        |
| Housing                          |       | 1,582,963              |        |
| Other                            |       | 1,417,555              |        |
| Non-municipal and  international |       | 80,553,141             |        |
| Total                            |       | $                      | 299,889,266 |   |

 

As of December 31, 2006, the composition of principalinsured ceded to reinsurers was as follows:

|                               | ** ** | **Ceded Principal** | ** ** |
|-------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **Outstanding**          | ** ** |
| Reinsurer:                    |       |                     |       |
| Radian Asset  Assurance Inc.  |       | $                        | 9,104,883  |   |
| Assured Guaranty  Corp        |       | 5,634,737                |       |
| BluePoint RE                  |       | 3,933,256                |       |
| Assured Guaranty  Re Ltd.     |       | 3,167,811                |       |
| RAM Reinsurance  Company Ltd. |       | 2,637,039                |       |
| Other                         |       | 5,410,511                |       |
| Total                         |       | $                        | 29,888,237 |   |

 

The Company did not have recoverables in excess of 3%of stockholders’ equity from any single reinsurer.

The Company’s insured gross and net principal and interest outstandingwas $519,514,036 and $468,625,903, respectively, as of December 31, 2006.

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**17. Financial Instruments (continued)**

FGIC is authorized to do business in all 50 states, the District ofColumbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands and in theUnited Kingdom. Principal insured outstanding at December 31, 2006 by state,net of reinsurance, was as follows:

|                            | ** ** | **Net Principal** | ** **  |
|----------------------------|------------|------------------------|-------------|
| ** **                 | ** ** | **Outstanding**        | ** **  |
|                       |       |                   |        |
| California                 |       | $                      | 35,178,629  |   |
| New York                   |       | 22,327,210             |        |
| Florida                    |       | 15,617,186             |        |
| Pennsylvania               |       | 14,525,136             |        |
| Texas                      |       | 12,799,320             |        |
| Illinois                   |       | 11,957,490             |        |
| New Jersey                 |       | 10,150,268             |        |
| Michigan                   |       | 8,685,038              |        |
| Ohio                       |       | 7,056,980              |        |
| Arizona                    |       | 6,556,683              |        |
|                       |       |                   |        |
| All other states           |       | 74,482,184             |        |
| Mortgage and  asset-backed |       | 67,980,672             |        |
| International              |       | 12,572,470             |        |
| Total                      |       | $                      | 299,889,266 |   |

 

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**18.Commitments and Contingencies**

*Lease Obligations*

The Company leases officespace and equipment under operating lease agreements in the United States andthe United Kingdom. Rent expense under operating leases for the years endedDecember 31, 2006, 2005 and 2004 was $4,319, $3,631, and $3,070 respectively.Future payments associated with these leases are as follows as of December 31,2006:

|                                      | ** ** | **Operating  Lease** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **Commitment**       | ** ** |
| ** **                           | ** ** | **Amount**           | ** ** |
| Year:                                |       |                 |       |
| 2007                                 |       | $                    | 3,740      |   |
| 2008                                 |       | 4,841                |       |
| 2009                                 |       | 5,980                |       |
| 2010                                 |       | 6,013                |       |
| 2011                                 |       | 6,109                |       |
| 2012 and  thereafter                 |       | 52,170               |       |
| Total minimum future rental payments |       | $                    | 78,853     |   |

 

In connection with theTransaction, the Company entered into a capital lease with an affiliate of GECapital, covering leasehold improvements and computer equipment to be used atits headquarters. At the lease termination date of June 30, 2009, the Companywill own the leased equipment. Future payments associated with this lease areas follows as of December 31, 2006:

|                                         | ** ** | **Capital Lease  Commitment  Amount** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| Year ending December  31:               |       |                                       |       |
| 2007                                    |       | 1,545                                      |       |
| 2008                                    |       | 1,391                                      |       |
| 2009                                    |       | 265                                        |       |
| Total                                   |       | 3,201                                      |       |
| Less interest                           |       | 258                                        |       |
| Present value of minimum lease payments |       | $                                          | 2,943      |   |
|                                         |            |                                            |            |  |

 

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**18.Commitments and Contingencies (continued)**

*Justice Department Subpoena*

On November 15, 2006,FGIC received a grand jury subpoena from the Antitrust Division of the U.S.Department of Justice.  Based upon pressreports, FGIC believes that the subpoena relates to an ongoing criminalinvestigation of alleged bid rigging of awards of municipal guaranteedinvestment contracts (“Municipal GICs”) and that several other companies(including other financial guarantors) received similar subpoenas.

Until December 18, 2003,FGIC was affiliated with certain companies (the “Former Affiliates”) thatprovided Municipal GICs; however, at no time did FGIC provide program insurancefor Municipal GICs.  The FormerAffiliates remained a part of GE Capital after the Transaction, and allobligations under the outstanding Municipal GICs remained with the FormerAffiliates.

The subpoena contains noallegations or statements concerning FGIC’s activities or business practices,and FGIC is not aware of any such allegations. FGIC has complied with all requests of the Justice Department andintends to continue to cooperate fully with the investigation.

**19.Comprehensive Income**

Accumulated othercomprehensive income (loss) of the Company consists of net unrealized gains andlosses on investment securities and foreign currency translation adjustments.The components of other comprehensive income for the years ended December 31,2006, 2005 and 2004 are as follows:
| ** **                                                         | ** ** | **Year ended December 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Before   Tax   Amount**                  | ** ** | **Tax** | ** ** | **Net of   Tax   Amount** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |
| Unrealized holding  gains arising during the year                  | ** ** | **$**                                                | **18,583** | ** ** | **$** | **(6,504** | **)** | **$** | **12,079** | ** ** |
| Less reclassification  adjustment for gains realized in net income | ** ** | **(274**                                             | **)**      | **96** | ** ** | **(178** | **)** |
| Unrealized gains on  investments                                   | ** ** | **18,309**                                           | ** ** | **(6,408** | **)** | **11,901** | ** ** |
| Foreign currency  translation adjustment                           | ** ** | **11,583**                                           | ** ** | **(3,387** | **)** | **8,196** | ** ** |
| Total other comprehensive income                                   | ** ** | **$**                                                | **29,892** | ** ** | **$** | **(9,795** | **)** | **$** | **20,097** | ** ** |

 

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**19.Comprehensive Income (continued)**

|                                                                    | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Before   Tax   Amount**                  | ** ** | **Tax** | ** ** | **Net of   Tax   Amount** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |
| Unrealized holding  losses arising during the year                 |       | $                                                    | (36,050    | ) | $ | 12,566 |   | $ | (23,484 | ) |
| Less reclassification  adjustment for gains realized in net income |       | (101                                                 | )          | 35 |   | (66 | ) |
| Unrealized losses on  investments                                  |       | (36,151                                              | )          | 12,601 |   | (23,550 | ) |
| Foreign currency  translation adjustment                           |       | (8,454                                               | )          | 2,922 |   | (5,532 | ) |
| Total other comprehensive loss                                     |       | $                                                    | (44,605    | ) | $ | 15,523 |   | $ | (29,082 | ) |

 

|                                                                    | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Before  Tax   Amount**                        | ** ** | **Tax** | ** ** | **Net of   Tax   Amount** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |
| Unrealized holding  gains arising during the year                  |       | $                                                    | 14,928     |   | $ | (5,225 | ) | $ | 9,703 |   |
| Less reclassification  adjustment for gains realized in net income |       | (559                                                 | )          | 196 |   | (363 | ) |
| Unrealized gains on  investments                                   |       | $                                                    | 14,369     |   | (5,029 | ) | $ | 9,340 |   |
| Foreign currency  translation adjustment                           |       | 6,286                                                |       | (2,200 | ) | 4,086 |   |
| Total other comprehensive income                                   |       | $                                                    | 20,655     |   | $ | (7,229 | ) | $ | 13,426 |   |

 

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**20.Quarterly Financial Information (Unaudited)**
| ** **                                                                                  | ** ** | **Three months ended** | ** ** | **Year ended**           | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                                                                                  | ** ** | **March 31,   2006**   | ** ** | **June 30,   2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** | **December 31,  2006** | ** ** |
|                                                                                        |       |                             |       |                          |       |   |   |   |   |   |   |
| Gross premiums written                                                                      |       | $                                | 89,281     |                          | $          | 163,260 |   | $ | 85,030 |   | $ | 103,660 |   | $ | 441,231 |   |
| Net premiums written                                                                        |       | 82,585                           |       | 134,373                       |       | 66,590 |   | 83,266 |   | 366,814 |   |
| Net premiums earned                                                                         |       | 59,464                           |       | 71,845                        |       | 62,738 |   | 72,410 |   | 266,457 |   |
| Net investment income  and net realized gains                                               |       | 32,319                           |       | 34,038                        |       | 35,803 |   | 36,315 |   | 138,475 |   |
| Interest  income-investments held by variable interest entity                               |       | 4,937                            |       | 9,658                         |       | 10,033 |   | 11,265 |   | 35,893 |   |
| Other income and net  realized and unrealized gains (expense) on credit derivative products |       | 308                              |       | (48                           | )          | 1,596 |   | 740 |   | 2,596 |   |
| Total revenues                                                                              |       | 97,028                           |       | 115,493                       |       | 110,170 |   | 120,730 |   | 443,421 |   |
| Losses and loss  adjustment expenses                                                        |       | (1,933                           | )          | (265                          | )          | 520 |   | (7,022 | ) | (8,700 | ) |
| Interest expense — debt  held by variable interest entity                              |       | 4,937                            |       | 9,658                         |       | 10,033 |   | 11,265 |   | 35,893 |   |
| Income before taxes                                                                         |       | 77,573                           |       | 90,732                        |       | 85,119 |   | 99,432 |   | 352,856 |   |
| Net income                                                                                  |       | 58,711                           |       | 67,211                        |       | 63,563 |   | 74,353 |   | 263,838 |   |
|                                                                                             |            |                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

** **
| ** **                                    | ** ** | **Three months ended** | ** ** | **Year ended**           | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **March 31,   2005**   | ** ** | **June 30,   2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** | **December 31,  2005** | ** ** |
|                                          |       |                             |       |                          |       |   |   |   |   |   |   |
| Gross premiums written                        |       | $                                | 84,404     |                          | $          | 131,335 |   | $ | 96,787 |   | $ | 97,676 |   | $ | 410,202 |   |
| Net premiums written                          |       | 82,609                           |       | 113,305                       |       | 92,331 |   | 92,809 |   | 381,054 |   |
| Net premiums earned                           |       | 52,633                           |       | 61,907                        |       | 54,794 |   | 55,235 |   | 224,569 |   |
| Net investment income  and net realized gains |       | 27,558                           |       | 28,389                        |       | 30,117 |   | 31,109 |   | 117,173 |   |
| Other income (expense)                        |       | 426                              |       | 90                            |       | 402 |   | (323 | ) | 595 |   |
| Total revenues                                |       | 80,617                           |       | 90,386                        |       | 85,313 |   | 86,021 |   | 342,337 |   |
| Losses and loss adjustment  expenses          |       | (2,611                           | )          | (3,066                        | )          | 20,693 |   | 3,490 |   | 18,506 |   |
| Income before taxes                           |       | 71,100                           |       | 81,377                        |       | 48,783 |   | 70,274 |   | 271,534 |   |
| Net income                                    |       | 53,306                           |       | 59,992                        |       | 39,407 |   | 53,721 |   | 206,426 |   |
|                                               |            |                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

** **

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