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

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

Financial guaranty insurance products are sold in three principal markets: the U.S. public finance market, the U.S. structured finance market and the international finance market. The Company divides its lines of business into the following: public finance, asset-backed securities, structured single risk and structured investment products. The Company also offers financial guaranty reinsurance on a limited basis to third-party triple-A-rated monoline insurers other than FSA.

Within the financial guaranty insurance segment, the Company writes insurance in four principal business lines: public finance, asset-backed securities, structured single risk and structured investment products. The Company writes insurance in these product lines both in the United States and internationally.

The Company also provides financial guaranty insurance for a variety of structured single risks both in the United States and internationally. This category includes private utilities, guarantied investment certificates, financial and insurance transactions, bank products, future flows, essential infrastructure finance, and other structured single risk exposures.

The Company also provides financial guaranty insurance for structured investment products, typically CDOs. CDOs are debt obligations backed by a pool of loans or securities. Such collateral can consist of corporate or financial institution debt obligations, asset-backed securities and debt issued by other CDOs.

Gross premiums written were $233.3 million in the year ended December 31, 2005, an increase of $0.8 million or 0.3%, from $232.5 million recorded in the year ended December 31, 2004.

Net premiums earned in the year ended December 31, 2005 were $151.8 million, an increase of $35.5 million or 30.5%, as compared to $116.3 million in the year ended December 31, 2004.

Net investment income was $51.2 million in the year ended December 31, 2005, an increase of $15.5 million or 43.4% as compared to $35.7 million in the year ended December 31, 2004.