Exhibit 10.5


 


For participants subject to $1 million limit


 


Terms of Performance Retention Award


Four Year Installment Vesting


Granted on February 25, 2010


 


The Assured Guaranty Ltd.
(the “Company”) Performance Retention Award amounts described in the enclosed
letter (the “Award Letter”) dated February 25, 2010 (the “Grant Date”)
will be payable in accordance with the following Terms of Performance Retention
Award (the “Award Terms”).  Under the
following Award Terms, the Principal Amount is divided into three installments,
and a different Performance Period is established with respect to each
Installment, under paragraph 1 below. 
The Performance Retention Award (sometimes referred to as the “Award” or
“Award Payment”) will be a cash distribution payable with respect to the
Installment for each Performance Period, with the amount determined under
paragraph 2 below, subject to the vesting restrictions under paragraph 3
below.  Payment of the Award will be due
on the Payment Date determined under paragraph 4 below (subject to paragraphs 2(b) and
2(c)).  Paragraph 5 establishes rules for
death, disability, and retirement. 
Paragraph 7 provides certain definitions that apply to these Award
Terms.


 


1.  Performance
Period and Installments.  The
Principal Amount is divided into three Installments.  The Performance Period for each Installment,
and the Principal Portion of each such Installment, is set forth in the
following schedule (provided that the determination of the Performance Periods
will be subject to paragraph 5):


 


	
  Installment

  Number:

  	
   

  	
  First Day of

  Performance

  Period:

  	
   

  	
  Last Day of Performance

  Period: 

  	
   

  	
  Portion of Principal

  Amount Attributable to

  Installment:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1

  	
   

  	
  January 1,
  2010

  	
   

  	
  December 31,
  2011

  	
   

  	
  25

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2

  	
   

  	
  January 1,
  2010

  	
   

  	
  December 31,
  2012

  	
   

  	
  25

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3

  	
   

  	
  January 1,
  2010

  	
   

  	
  December 31,
  2013

  	
   

  	
  50

  	
  %

  



 


2.  Amount of
Payment.  The Award Payments will be
subject to paragraph 3 and to the following:


 


(a)                                  The Award Payment for each Installment
will equal the sum of the amounts described in paragraph (i) below and
paragraph (ii) below:


 

















 


(i)  The
product of (A) 50% of the Portion of the Principal Amount attributable to
that Installment, multiplied by (B) a fraction, converted to an equivalent
percentage, the numerator of which is the Company’s per-share Adjusted Book
Value as of the last day of the applicable Performance Period and the
denominator of which is the Company’s per-share Adjusted Book Value as of the
first day of the applicable Performance Period.


 


(ii)  The
product of (A) 50% of the Portion of the Principal Amount attributable to
that Installment, multiplied by (B) a percentage equal to 100% plus (or
minus if negative) the Company’s Operating Return on Equity for the Performance
Period attributable to that Installment.


 


(b)                                 The amount determined under both
paragraph (a)(i) above and paragraph (a)(ii) above will be zero if
both of the following are true:


 


(i)  the
percentage described in paragraph (a)(i)(B) for the Performance Period to
which the Award is attributable is less than 100%; and


 


(ii)  the
percentage described in paragraph (a)(ii)(B) above for the Performance
Period to which the Award is attributable is less than the sum of: (A) 100%
plus (B) the product of 3% multiplied by the number of years and
fractional years in the applicable Performance Period.


 


(c)                                  Notwithstanding the foregoing provisions
of this paragraph 2 (but subject to the provisions of paragraph 5), if:


 


(i)  by
reason of paragraph (b) above, the Participant receives no payment with
respect to the Installment for either the Performance Period ending December 31,
2011 or December 31, 2012 (each, a “Prior Performance Period”);


 


(ii)  in a
subsequent Performance Period under this Agreement (the “Subsequent Performance
Period”), either or both of paragraph (b)(i) and (b)(ii) above are
satisfied; and


 


(iii)  the
Participant’s Date of Termination has not occurred during the Subsequent
Performance Period;


 


then,
as soon as practicable after the end of the Subsequent Performance Period (and
notwithstanding the provisions of paragraph 4), the Participant will receive
the payment (without interest) he would have received for the Prior Performance
Period if paragraph (b) above had not been applicable to him for the Prior
Performance Period.


 


3.  Vesting
and Forfeitures.  Vesting of the
Award Payment is subject to paragraph 5 and to the following:


 


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(a)                                  If, in accordance with the following
provisions of this paragraph 3, the Participant is vested in the Award Payment
for any Performance Period, the Award Payment (if any) for that Performance
Period will be due on the Payment Date as described in paragraph 4, subject to
the terms of the Plan and these Award Terms. 
If the Participant is not vested in the Award for a Performance Period,
the Participant will forfeit that Award.


 


(b)                                 If, with respect to any Installment, the
Participant’s Date of Termination does not occur before the last day of the
Performance Period for that Installment, the Participant will be vested in the
Award Payment.  Subject to paragraph 5,
if the Participant’s Date of Termination occurs before the last day of the
Performance Period for that Installment, the Participant will not be vested in
the Award Payment for that Installment.


 


4.  Payment
Date.


 


(a)                                  Except as otherwise provided in this
paragraph 4, and subject to paragraphs 2(b), 2(c), and 5, the Participant’s
Award Payment attributable to any Installment will be due on the last day of
the Performance Period with respect to that Installment (the “Payment Date”
with respect to that Installment).


 


(b)                                 The Award will be paid to the Participant
in a cash lump sum in US dollars. 
Payment will be due on the Payment Date, and will be paid no later than
the 15th day of the third month following the end of the Participant’s first
taxable year in which the right to the payment is no longer subject to a
substantial risk of forfeiture (as determined in accordance with Treas. Reg.
§1.409A-1(b)(4)).


 


(c)                                  Notwithstanding the foregoing, except in
the case of a Performance Period ending by reason of the Participant’s death or
Permanent Disability, no payment will be made unless, on or before the date of
payment, the Committee has certified that the performance goals for the
Performance Period and any other material provisions of the Award Terms have in
fact been satisfied.


 


5.  Death,
Disability and Retirement.  This
paragraph 5 will apply to the Participant if, before the last day of the final
Performance Period, either the Participant incurs a Permanent Disability or the
Participant incurs a Date of Termination by reason of death, Disability, or
Retirement, subject to the following:


 


(a)                                  Death.  If the
Participant’s Date of Termination occurs by reason of death, the following
provisions of this paragraph (a) will apply:


 


(i)  Effect
on Performance Periods.  For each
Installment for any Performance Period that ends after the Date of Termination,
the Participant’s estate will receive, in lieu of any other payment with
respect 


 


3

















 


to such
Installment, an amount equal to the portion of the Principal Amount
attributable to that Installment (without regard to the actual performance of
Adjusted Book Value or Operating Return on Equity).


 


(ii)  Reinstatement
Payments.  Solely for purposes of
determining eligibility for payment under paragraph 2(c), the Participant will
be considered to have remained employed (and not have incurred a Date of
Termination) during all of the Performance Periods.


 


(iii)  Vesting.  The Participant will be vested in the amounts
payable under paragraph (i) above.


 


(iv)  Payment
Date.  Payments under paragraph (i) above
will be due on the Payment Date, which, for such payments, will be the Date of
Termination.  Payment of amounts, if any,
that become payable under paragraph 2(c) will be made at the time
specified under paragraph 2(c).


 


(b)                                 Permanent Disability. 
If the Participant incurs a Permanent Disability prior to his Date of
Termination, the following provisions of this paragraph (b) will apply:


 


(i)  Effect
on Performance Periods.  For each
Installment for any Performance Period that ends after the Participant incurs a
Permanent Disability, the Participant will receive, in lieu of any other
payment with respect to such Installment, an amount equal to the portion of the
Principal Amount attributable to that Installment (without regard to the actual
performance of Adjusted Book Value or Operating Return on Equity).


 


(ii)  Reinstatement
Payments.  Solely for purposes of
determining eligibility for payment under paragraph 2(c), the Participant will
be considered to have remained employed (and not have incurred a Date of
Termination) during all of the Performance Periods.


 


(iii)  Vesting.  The Participant will be vested in the amounts
payable under paragraph (i) above.


 


(iv)  Payment
Date.  Payments under paragraph (i) above
will be due on the Payment Date, which, for such payments, will be the date on
which the Participant incurs a Permanent Disability.  Payment of amounts, if any, that become
payable under paragraph 2(c) will be made at the time specified under
paragraph 2(c).


 


(c)                                  Disability.  If the
Participant’s Date of Termination occurs by reason of Disability (and unless he
has previously incurred a Permanent Disability), the following provisions of
this paragraph (c) will apply:


 


4

















 


(i)  Effect
on Performance Periods.  The last day
of each of the Performance Periods will be determined in accordance with
paragraph 1 without regard to this paragraph (c).


 


(ii)  Reinstatement
Payments.  For purposes of applying
paragraph 2(c), the Participant will be considered to have remained employed
(and not have incurred a Date of Termination) during all of the Performance
Periods.


 


(iii)  Vesting.  For purposes of paragraph 3, the Participant
will be vested in the Award Payment for any Performance Period ending after the
Date of Termination.


 


(iv)  Payment
Date.  The Payment Date will be
determined in accordance with paragraph 4 without regard to this paragraph (c);
provided that for amounts, if any, that become payable under paragraph 2(c),
payment will be made at the time specified under paragraph 2(c).


 


(d)                                 Retirement.  If the
Participant’s Date of Termination occurs by reason of Retirement, the following
provisions of this paragraph (d) will apply:


 


(i)  Effect
on Performance Periods.  The last day
of each of the Performance Periods will be determined in accordance with
paragraph 1 without regard to this paragraph (d).


 


(ii)  Reinstatement
Payments.  For purposes of
determining eligibility for payment under paragraph 2(c), the Participant will
be considered to have remained employed (and not have incurred a Date of
Termination) during all of the Performance Periods.


 


(iii)  Vesting.  For purposes of paragraph 3, the Participant will
be vested in the Award Payment for any Performance Period ending after the Date
of Termination.


 


(iv)  Payment
Date.  The Payment Date will be
determined in accordance with paragraph 4 without regard to this paragraph (d);
provided that for amounts, if any, that become payable under paragraph 2(c),
payment will be made at the time specified under paragraph 2(c).


 


6.  Recoupment
and Applicable Plans.


 


(a)                                  Notwithstanding
anything in this Agreement to the contrary, the Participant’s rights with
respect to the Award shall be subject to the Assured Guaranty Ltd. Executive
Officer Recoupment Policy as in effect on the Grant Date, a
copy of which policy is set forth in the Company’s Code of Conduct, and which
generally will not apply to Participants who are not Executive Officers for
purposes of SEC rules.


 


5

















 


(b)                                 The Award Payments described in the Award
Letter are granted under and pursuant to the terms of the Plan and Section 4
(relating to Cash Incentive Awards) of the Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (the “LTIP”) and are intended to constitute performance-based
compensation as that term is used in the LTIP and section 162(m) of the
Code.  In no event may the amount payable
under these Award Terms, when added to any other amounts payable under Section 4
of the LTIP to the Participant that are intended to constitute “performance-based
compensation” as that term is used in the LTIP and section 162(m) of the
Code, exceed the limit imposed by Section 5.2(e)(v) of the LTIP for
the applicable performance period. 
Subject to paragraph (a) above, the terms of this Agreement shall
be subject to the terms of the LTIP and the Plan, and this Agreement is subject
to all interpretations, amendments, rules and regulations promulgated by
the Committee from time to time pursuant to the LTIP and the Plan.


 


7.  Definitions.  For purposes of these Award Terms, the
definitions set forth in this paragraph 7 or elsewhere in these Award Terms
shall apply.  Except where the context
clearly implies or indicates the contrary, a word, term, or phrase used in the
Plan or LTIP is similarly used in these Award Terms.


 


(a)                                  Adjusted Book Value. 
The “Adjusted Book Value” of the Company as of any date shall equal
shareholders’ equity attributable to Assured Guaranty Ltd. (which excludes
noncontrolling interest in consolidated entities) adjusted for the following:


 


(i) 
elimination of the after-tax non-credit impairment fair value gains (losses) on
credit derivatives accounted for as derivatives, which is the amount in excess
of the present value of the expected estimated economic credit losses;


 


(ii) 
elimination of the after-tax fair value gains (losses) on the Company’s
committed capital securities;


 


(iii) 
elimination of the after-tax unrealized gains (losses) on investment
portfolios, recorded as a component of accumulated comprehensive income,
excluding foreign exchange revaluation;


 


(iv) 
elimination of after-tax deferred acquisition costs;


 


(v)  addition
of the after-tax net present value of expected estimated future revenue on
credit derivatives in force, less ceding commissions and premium taxes in
excess of expected losses, discounted at the tax equivalent yield on the
investment portfolio for periods beginning in 2010 and 6% for periods prior to
2010;


 


(vi) 
addition of the after-tax value of the net unearned premium reserve on
financial guaranty contracts in excess of net expected loss; and


 


6

















 


(vii) 
addition of the after-tax value of net unearned revenue on credit derivatives.


 


Notwithstanding the
foregoing, the Committee, in its discretion, may adjust the determination of
the Company’s Adjusted Book Value as it deems necessary or desirable to achieve
the purpose and/or preserve the benefits or potential benefits of the Award
(including, without limitation, adjustments to reflect corporate
transactions).  However, in no event may
the Committee make such adjustments to the extent that the adjustments would
result in amounts payable under this Agreement or other compensation payable to
the Participant being nondeductible by the Company and its affiliates by reason
of section 162(m).


 


(b)                                 Date of Termination. 
A Participant’s “Date of Termination” means the first day on which the
Participant is not employed by the Company or any Subsidiary, regardless of the
reason for the termination of employment; provided that a termination of
employment shall not be deemed to occur by reason of a transfer of the
Participant between the Company and a Subsidiary or between two Subsidiaries,
nor by reason of a Participant’s termination of employment with the Company or
a Subsidiary if immediately following such termination of employment the
Participant continues to be or becomes a Director; and further provided that
the Participant’s employment shall not be considered terminated while the
Participant is on a leave of absence from the Company or a Subsidiary approved
by the Participant’s employer.  If, as a
result of a sale or other transaction, the Participant’s employer ceases to be
a Subsidiary (and the Participant’s employer is or becomes an entity that is
separate from the Company), and the Participant is not, at the end of the 30-day
period following the transaction, employed by the Company or an entity that is
then a Subsidiary, then the occurrence of such transaction shall be treated as
the Date of Termination.


 


(c)                                  Director.  The term “Director”
means a member of the Board, who may or may not be an employee of the Company
or a Subsidiary.


 


(d)                                 Disabled.  The
Participant shall be considered to have a “Disability” during the period in
which the Participant is unable, by reason of a medically determinable physical
or mental impairment, to engage in any substantial gainful activity, which
condition, in the opinion of a physician selected by the Committee, is expected
to have a duration of not less than 180 days. 
The Participant shall be considered to be Permanently Disabled if he
would be treated as “disabled” in accordance with the provisions of Treas. Reg.
§1.409A-3(i)(4).


 


(e)                                  Operating Return on Equity. 
Operating Return on Equity equals operating income (as defined below)
for the specified period divided by the average of operating shareholders’
equity.  Operating shareholders’ equity
is a non-GAAP financial measure calculated as shareholders’ equity attributable
to 


 


7

















 


Assured Guaranty
Ltd. (which excludes noncontrolling interest in consolidated variable interest
entities) reported under accounting principles generally accepted in the United
States of America (GAAP), subject to the following adjustments:


 


(i)  elimination of
the after-tax non-credit impairment fair value gains (losses) on credit
derivatives accounted for as derivatives, which is the amount in excess of the
present value of the expected estimated economic credit losses;


 


(ii)  elimination of
the after-tax fair value gains (losses) on the Company’s committed capital
securities; and


 


(iii)  elimination
of the after-tax unrealized gains (losses) on investment portfolios, recorded
as a component of accumulated comprehensive income, excluding foreign exchange
revaluation.


 


Notwithstanding the
foregoing, the Committee, in its discretion, may adjust the determination of
the Company’s Operating Return on Equity as it deems necessary or desirable to
achieve the purpose and/or preserve the benefits or potential benefits of the
Award (including, without limitation, adjustments to reflect corporate
transactions).  However, in no event may
the Committee make such adjustments to the extent that the adjustments would
result in amounts payable under this Agreement or other compensation payable to
the Participant being nondeductible by the Company and its affiliates by reason
of section 162(m).


 


(f)                                    Operating
Income.  Operating
income is a non-GAAP financial measure defined as net income (loss)
attributable to Assured Guaranty Ltd. (which excludes noncontrolling interest
in consolidated variable interest entities) adjusted for the following:


 


(i)  elimination
of the after-tax realized gains (losses) on investments;


 


(ii) 
elimination of the after-tax non-credit impairment fair value gains (losses) on
credit derivatives accounted for as derivatives, which is the amount in excess
of the present value of the expected estimated economic credit losses;


 


(iii) 
elimination of the after-tax fair value gains (losses) on the Company’s
committed capital; and


 


(iv) 
elimination of goodwill and settlement of pre-existing relationships.


 


Notwithstanding the
foregoing, the Committee, in its discretion, may adjust the determination of
the Company’s operating income as it deems necessary or desirable to achieve
the purpose and/or preserve the benefits or potential benefits of the Award
(including, without limitation, 


 


8

















 


adjustments to reflect
corporate transactions).  However, in no
event may the Committee make such adjustments to the extent that the
adjustments would result in amounts payable under this Agreement or other
compensation payable to the Participant being nondeductible by the Company and
its affiliates by reason of section 162(m).


 


(g)                                 Performance Period. 
The “Performance Period” will be determined in accordance with paragraph
1.


 


(h)                                 Plan.  “Plan” means
the Assured Guaranty Ltd. Performance Retention Plan.


 


(i)                                     Principal Amount. 
The “Principal Amount” with respect to the Participant will be the
Principal Amount as stated in the Award Letter.


 


(j)                                     Retirement.  “Retirement”
of a Participant will be determined in accordance with the following:


 


(i) 
Retirement shall mean the occurrence of a Participant’s Date of Termination
with the consent of the Participant’s employer after the Participant has
completed five years of service and attained age 55.


 


(ii)  For purposes
of defining “Retirement,” years of service shall be determined in accordance
with rules which may be established by the Committee, and shall take into
account service with the Company and the Subsidiaries.  If, on or before the date of the initial public
offering of stock of the Company, the Participant was employed by the Company
or its Subsidiaries, years of service shall also include service with ACE
Limited and its subsidiaries occurring prior to such the initial public
offering.


 


(iii) 
Notwithstanding that the Participant’s Date of Termination satisfies the
requirements of paragraph (i) above, the Participant will not be
considered to have retired (or have terminated by reason of Retirement) with
respect to any Installment if the Committee determines that the Participant has
provided significant commercial or business services to any one or more persons
or entities on or before the last day of the Performance Period applicable to
that Installment, regardless of whether such entity is owned or controlled by
the Participant; provided that the Participant may devote reasonable time to
the supervision of his personal investments, and activities involving
professional, charitable, community, educational, religious and similar types
of organizations, speaking engagements, membership on the boards of directors
of other organizations, and similar types of activities, to the extent that the
Committee, in its discretion, determines that such activities are consistent
with the Participant’s Retirement.


 


(iv)  At the
request of the Committee, and as a condition of receiving the Award Payment
with respect to a Performance Period, the Participant 


 


9

















 


shall be required
to provide a listing of the activities engaged in by the Participant following
the Participant’s Date of Termination and prior to the end of the Performance
Period and such other information that the Committee determines may be
necessary from time to time to establish whether the Participant has acted in a
manner that is consistent with the requirements of paragraph (iii) above.  Such listing and information shall be
provided promptly by the Participant, but in no event more than 10 days after
written request is delivered to the Participant.


 


(v)  At the
request of the Participant, the Committee shall determine whether a proposed
activity of the Participant will be consistent with the requirements of
paragraph (iii) above.  Such request
shall be accompanied by a description of the proposed activities, and the
Participant shall provide such additional information as the Committee may
determine is necessary to make the determination.  Such a determination shall be made promptly,
but in no event more than 30 days after the written request, together with any
additional information requested of the Participant, is delivered to the
Committee.


 


(vi)  If,
with respect to any Performance Period, 
a Participant engages in one or more activities that the Committee
determines to be inconsistent with Retirement, as set forth in paragraph (iii) above,
the right to the Award Payment with respect to that Performance Period may be
canceled by the Committee.


 


(vii)  If,
after the Participant’s Date of Termination, an Award is otherwise payable in
accordance with paragraphs 2(b) and 2(c): (A) the determination of
whether the Participant has Retired and is entitled to such payment shall be
contingent on the Participant having satisfied the requirements of paragraph (iii) above
through the last day of the Subsequent Performance Period in which the
performance occurs which gives rise to the payment under paragraphs 2(b) and
2(c); and (B) the requirement to provide information pursuant to paragraph
(iv) above shall apply for periods through the last day of such Subsequent
Performance Period.


 


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