Financial Security Assurance Holdings Ltd. Third Quarter 2008 Results and Business Profile. November 14, EarningsPresentation1108v

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1 Financial Security ssurance Holdings Ltd. Third Quarter 2008 Results and Business Profile November 14, 2008 EarningsPresentation1108v pptx 1

2 2 Contents Page Section I Financial Results and Insured Portfolio Profile Strategic Focus and Market Environment 7-14 FS s Strategic Focus on Public Finance Highlights and Financial Results FS Insurance Portfolio Public Finance Discontinued Business Lines: sset-backed, Mortgage-Backed and Other Structured Finance Run-Off of Discontinued sset-backed Business Conclusion Supplementary Information Mark-to-Market djustments Home Equity Line of Credit (HELOC) and lt- Closed-End Second-Lien (CES) Loss Projections First Lien Residential Mortgage-Backed Securities Loss Projections Exposure to Other Insurers and Monolines FS Inc. Insurance Investment Portfolio Section II Financial Products Profile Financial Products Business Investment Portfolio Supplementary Information Mark-to-Market djustments Home Equity Line of Credit (HELOC) and lt- Closed-End Second-Lien (CES) Loss Projections Exposure to Other Insurers and Monolines Notes and Disclaimers Notes 285 Non-GP Measures 287 Forward-Looking Statements 289 EarningsPresentation1108v pptx 3

3 4 Section I: Financial Results and Insured Portfolio Profile EarningsPresentation1108v pptx 5

4 6 Strategic Focus and Market Environment EarningsPresentation1108v pptx 7

5 8 In 3Q08, FS Began Its Transformation to an Exclusively Global Public Finance Bond Insurer On ugust 6, FS announced that it would exit the asset-backed business to focus its full resources on the U.S. municipal and global public finance markets. While FS had enjoyed a leadership position in the U.S. municipal i market through h 1HO8, FS s momentum in that market slowed in 3Q08 due to Moody s placement of FS s Triple- rating on review for downgrade (July 21) and the general turmoil in the credit markets. Despite rating uncertainty, there continues to be demand for FS s financial guaranty in the U.S. municipal market based on our value proposition, which goes beyond default protection to include liquidity, analysis and monitoring of underlying transactions. Investors are increasingly concerned about municipal credits given broad economic uncertainty. Since early September, the global public infrastructure markets have generally been at a standstill, though FS has a number of mandated transactions in the pipeline. Looking ahead, considering i the enormous needs for new public infrastructure t throughout the world, FS believes the public finance markets offer broad and deep opportunities consistent with FS s conservative business model. significant number of institutional investors have reacted positively to FS s new strategic focus and have confirmed their belief in the important role bond insurance plays in this market. EarningsPresentation1108v pptx 9

6 10 dditional ctions and Events In 3Q 2008, loss expenses totaled $327.6 million ($212.9 million after tax) primarily for increases in loss estimates on RMBS transactions and increased credit impairment estimates on insured CDS and NIMs by $47.6 million ($30.4 million after tax). While at the end of the second quarter we had set loss provisions at a level believed to reflect severe assumptions about the impact of current economic conditions on our insured RMBS portfolio, we made additional provisions for incremental deterioration that occurred primarily in our Option RM and lt- first-lien portfolios. Performance in the second-lien portfolio, primarily HELOCs, has generally been consistent with second quarter reserves, which reflected severe assumptions about the impact of current economic conditions on the insured portfolio. However, in 3Q we revised our view of future prepayment rates, which caused our projected losses to increase. In addition to the $5 billion unsecured liquidity facility provided to the Financial Products (FP) business and announced in the second quarter, Dexia has also provided a $500 million capital commitment t agreement e to cover economic o c losses in the FP portfolio o o occurring after June 30, In accordance with the terms of this agreement, a contribution of $208 million will be made to FS by November 30. On October 8, FS s Triple- rating was placed on credit watch by S&P, and on October 9 by Fitch. However, on November 6, S&P reported that FS surpasses its Triple- minimum capital requirement with a Margin of Safety of times, taking into consideration S&P s updated loss projections for the RMBS portfolio, but not including the $500 million capital commitment facility, which had not been completed at that time. EarningsPresentation1108v pptx 11

7 12 FS s Existing Insured Portfolio Will Rapidly Evolve Toward Its New Focus of Public Finance FS expects the net outstanding par of its asset-backed insurance business to be less than 6% of all net insured par by the end of $600 $500 $400 Billions $300 $200 $100 $ Structured Finance Public Finance ssumes municipal originations decline 10% in 2009, increase 7% in 2010, and increase 6% each year thereafter. EarningsPresentation1108v pptx 13

8 14 FS s Strategic Focus on Public Finance Strong Value Proposition EarningsPresentation1108v pptx 15

9 16 FS Will Increase U.S. Municipal Originations as Market Normalizes Despite FS s placement on review by Moody s, and significantly decreased municipal volume in September, FS originated $55 million of U.S. municipal PV originations in 3Q08 and captured market share of 42%. The municipal market is a large market based on enormous infrastructure needs. FS believes that when the market stabilizes, insurance penetration will be in the range of 20% to 30%. Penetration for 9M08 was low (19%) due not only to the downgrades and watch listings of guarantors but also to the large amount of letter-of-credit supported floating rate conversions from auction rate securities (RS) to variable rate demand notes (VRDNs), resulting from the liquidity crisis. Spreads were wide during the third quarter, and volume fell off in September as the impact of the credit crisis reached the municipal market. New issuance began showing signs of improvement after mid-october. Once the market normalizes, FS should increase origination volume based on its strong capitalization and value proposition. Investors have reasons to focus on the underlying municipal credit fundamentals, particularly as lower sales, income and property tax revenues weaken governmental finances and lead to more municipal debt financing. dditionally, Moody s and Fitch have postponed their plans to shift to a global ratings scale. FS has a strong legacy franchise in this market. EarningsPresentation1108v pptx 17

10 18 Financial Guarantor Market Shares 3Q08 and 9M08 U.S. Municipal Insured Market Share (1) 3Q08 ssured 44% 9M08 ssured 34% FS 42% BHC 14% FS 59% Other (2) 1% BHC 3% MBI 2% mbac 1% (1) Source: Thomson Financial. Represents only primary issuances (no secondary). Percentage estimates based on each insurers' principal amount in Thomson s True Economics league table, which is designed to credit each insurer with its actual insured amount per issue. (2) Other includes: FGIC, Radian, CIFG and Syncora. EarningsPresentation1108v pptx 19

11 20 New Business Originations & Current Market Overview U.S. Municipal and Project Finance Markets U.S. Public Finance Originations ($MM) New Business Originations Three Months & Ended September 30, Current Market Overview U.S. Municipal and Project Finance Markets Nine Months Ended September 30, United States Change Change Gross par insured $5,707.4 $13, % $45,355.8 $40, % Gross PV originations $54.5 $ % $520.6 $ % Though FS s year-to-date originations increased significantly, production declined in 3Q08 due to the negative impact of Moody s placing FS s insurance financial strength rating on review for possible downgrade on July 21. dditionally, the global credit crisis i caused total t municipal i issuance to slow down significantly ifi in September. More than 130 primary-market transactions were sold with FS insurance from July 22 through the end of the third quarter. lthough average transaction size decreased, pricing was attractive. dditionally, FS insured a healthy volume of secondary-market issues. EarningsPresentation1108v pptx 21

12 22 FS Focused on Core, Low-Risk Municipal Sectors During the First Nine Months of 2008 First Nine Months U.S. Public Finance Gross Par Originations: $45.4 Billion Sectors Ratings (1) Tax-Supported 20% Utility 20% Health C are 2% Housing 1% Transportation 14% 4% 1% 37% General Obligation 36% Education/ University 6% Other Public Finance 1% 58% FS added only minimal exposure in the Healthcare and Housing sectors. (1) FS internal ratings on net par outstanding at 9/30/08. Pre-insured securities are classified at the higher of internal underlying rating and financial guarantor rating as of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 23

13 U.S. Municipal investors continue to focus on underlying issuer credit fundamentals. Even if credit spreads tighten from current market levels, FS would still have profitable opportunities. 24 Current U.S. Municipal Operating Environment Remains Favorable as Credit Spreads Widened Further in 3Q Single- and Triple-B vs. Insured Triple- 10 Year Spreads Jan Nov GO vs. Ins GO GO vs. Ins GO /6/06 5/6/06 9/6/06 1/6/07 5/6/07 9/6/07 1/6/08 5/6/08 9/6/08 11/6/08 Source: Municipal Market Data EarningsPresentation1108v pptx 25

14 26 lthough Origination Volume Decreased Significantly in 3Q08, Pricing Was ttractive Gross PV ($MM) Premium Rate (Basis Points) ROE* % 14% 13% 19% 23% 21% 18% 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Underlying credit quality for nine-month and 3Q08 originations was strong at 1/+ on average. * Return on equity reflects economic return on deployed equity (net of origination costs and after-tax) based on FS's internal model. EarningsPresentation1108v pptx 27

15 International Public Finance Until early September, international public finance had some momentum, with smaller private placements and wrapped bank loans complementing the illiquid bond market. More recently, the cessation of bank loan originations and high cost of borrowing, even for better credits, have brought the market to a standstill. Transactions in this market tend to have long lead times, and FS is focused on transactions expected to close in 2009, which allows time for market conditions to improve. FS continues to hold a competitive advantage over other monolines, based on significant market acceptance and well-established, respected transaction capabilities in these global markets (UK, Europe, Canada and ustralia). 28 New Business Originations & Current Market Overview International Public Infrastructure International Public Finance Originations ($MM) Three Months Ended d Nine Months Ended d September 30, September 30, International Change Change Gross par insured $172.4 $8, % $1,342.2 $11, % Gross PV originations $5.7 $ % $50.4 $ % Reduced activity for 9M08 due to an increasingly illiquid market. Pent-up demand for capital in the infrastructure market should lead to demand for guaranteed executions when the credit environment improves. EarningsPresentation1108v pptx 29

16 30 New Business Originations & Current Market Overview International Public Infrastructure 22% Ratings (1) 6% 4% International Public Finance Originations Gross PV Originations ($MM) 68% Originated in First Nine Months % 39% Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 23% Originated in 3Q08 (1) FS internal ratings on net par outstanding at 9/30/08. Pre-insured securities are classified at the higher of internal underlying rating and financial guarantor rating as of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 31

17 32 Highlights and Financial Results EarningsPresentation1108v pptx 33

18 34 Financial Highlights of Third Quarter and Nine Months ended September 30, 2008 FS produced $61.6 million in present value (PV) originations during 3Q08 and $652.8 million during the nine months ended 9/30/08. Despite a strong 1H08, third quarter production was down compared with prior years, reflecting FS s exit from the BS market, lack of activity in the global public infrastructure sector, and Moody s July announcement of its review of FS for possible downgrade. Under U.S. GP, FS reported a net loss of $333.5 million for 3Q08 and $1,085.6 million for the nine months ended 9/30/08. Operating losses, which exclude noneconomic fair-value adjustments, were $331.6 million for 3Q08 and $933.3 million for the nine months ended 9/30/08. GP net losses in 2008 were driven primarily by other-than-temporary impairment (OTTI) charges in the Financial Products (FP) Investment Portfolio and loss expense in the insured portfolio, offset, in part, by fair-value adjustments on FP segment debt related to FS s own credit risk. Premium and investment t income operating metrics were very positive: public finance earned premiums excluding refundings and accelerations, up 30% for the quarter and 22% for the year to date; investment income up 11% and 13% respectively. djusted Book Value (BV) was $4.5 billion at September 30, Operating expenses and amortization of deferred policy acquisition costs (excluding DCP/SERP) were down 12% on a year-to-date basis due primarily to decreased compensation expenses. EarningsPresentation1108v pptx 35

19 Primary drivers of negative operating earnings: Losses in insured portfolio, primarily due to increase in RMBS expected net losses OTTI charges in the FP Investment Portfolio Positive trends in operating earnings: 10% YTD growth in premiums earned (excluding refundings) and realized gains and other settlements from credit derivative contracts Growth in net investment income from the General Investment Portfolio reflecting higher average balances Declines in YTD operating expenses driven by lower variable employee compensation 36 Summary Earnings Results Dollars in Millions Three Months Ended Nine Months Ended September 30, September 30, % change fav/ % change fav/ (unfav) (unfav) Net premiums earned $ $ % $ $ % Less: refundings and accelerations % % Net premiums earned excluding effect of refundings and % % accelerations of which: Public Finance % % sset Backed % % Realized gains & other settlements from credit derivative contracts % % Net premiums earned excluding effect of refundings and accelerations % % Net Investment Income on General Investment Portfolio % % FP Segment NIM (1) % % FP Segment Economic OTTI (207.8) (11.1) * (524.3) (11.1) * Total FP Segment NIM (182.1) % (464.9) % Losses on Non Derivative Portfolio (327.6) (10.0) (1,230.9) (19.1) Credit Impairment on Insured Derivative Portfolio (47.6) 0.0 (115.5) 0.0 Total Losses (375.2) (10.0) ** (1,346.4) (19.1) ** Operating Expenses and mortization of DC (66.1) (49.1) 35% (125.6) (142.7) 12% Other (2) 0.7 (3.2) 122% (13.3) (12.8) 4% Taxes 83.9 (25.1) 434% (90.6) 596% Subtotal ($318.0) $ % ($922.0) $ % IFRS adjustments (13.6) % (11.3) % Operating Earnings (Losses) ($331.6) $ % ($933.3) $ % (1) FP segment net interest margin. Excludes other-than-temporary-impairments on FP segment investment portfolio. (2) Includes debt interest expense, other income and realized gains. * Refer to Supplementary Information beginning on page 261 for detailed discussion on OTTI. ** Refer to pages and for detailed discussion on Losses. EarningsPresentation1108v pptx 37

20 FS eliminates all fair-value adjustments that are not representative of economic gains or losses, now or in the future, from U.S. GP reported net income and equity to arrive at operating earnings and BV. Beginning 1/1/08, FS s operating earnings and BV incorporate the following additional adjustments: Removal of mark-to-market (MtM) related to FS s own credit risk Removal of impairment losses on investments, other than the PV of estimated economic losses. 38 Summary Earnings Results Dollars in Millions Net Income (Loss) and Reconciliation to Non-GP Operating Earnings (Losses) ($MM) Three Months Ended September 30, Nine Months Ended September 30, Net Income (Loss) $(333.5) $(121.8) $(1,085.6) $26.2 Less after-tax non-economic adjustments: Fair-value adjustments for instruments with economically hedged risk (1) 11.0 (21.2) (83.3) (28.4) Fair-value adjustments for credit derivatives in insured portfolio (95.2) (190.9) (229.0) (229.1) Fair-value adjustments attributable to the Company s own credit risk (2) Fair-value adjustments attributable to impairment charges and amortization (3) (117.7) (589.6) Other (4.9) (4.9) Subtotal $(318.0) $90.3 $(922.0) $283.7 IFRS djustments (13.6) 3.3 (11.3) 7.3 Operating Earnings (Losses) (4) $(331.6) $93.6 $(933.3) $291.0 (1) Primarily represents fair-value adjustments attributable to credit spread changes in the FP trading portfolio. (2) Represents fair-value adjustments attributable to FS s credit spread changes included in the fair-value adjustments for FP Segment Debt and the Committed Preferred Trust. (3) Represents the portion of OTTI charges deemed non-economic (i.e., OTTI charges in excess of expected losses). (4) IFRS is now used as the basis for compensation metrics of operating earnings and BV. EarningsPresentation1108v pptx 39

21 Prior to 1Q08, operating earnings had grown steadily over many years. 40 Operating Earnings Remove Distortions Caused by Unrealized Marks to Market and Other djustments Dollars in Millions Operating Earnings (Losses) Quarterly Comparative Data Third Quarter Nine Months * ** ** Net Income (Loss) (U.S. GP) Third Quarter -122 Nine Months * *Excludes $76 million of net expenses related to Dexia purchase. **Beginning in 2008, IFRS adjustments are included in operating earnings. -1, EarningsPresentation1108v pptx 41

22 Premiums earned and investment income have grown steadily through several cycles. FP Segment NIM in 3Q08 was negatively affected by economic OTTI of $207.8 MM on RMBS securities. 42 Financial Guaranty Premiums and Investment Income Continue to Grow Dollars in Millions Net Premiums Earned and Net Investment Income Net Investment Income Net Premiums Earned Quarterly Comparative Data Third Quarter Nine Months FP Segment NIM has decreased in 2008 primarily due to economic losses in the investment portfolio. Quarterly Comparative Data FP Segment NIM Third Quarter Nine Months EarningsPresentation1108v pptx 43

23 Reductions in operating expenses and amortization of deferred acquisition cost (DC) for year-to-date reflect the impact of the Company s variable compensation plans. Operating earnings and BV growth rates are primary drivers of the employee bonus and equity-based compensation plans. 3Q08 expenses were higher than 3Q07 due primarily to settlement of a taxbenefit sharing agreement with White Mountains Holdings, Inc., the fee for Dexia s liquidity facility for the FP business, charges related to the exit from the asset-backed business and lower expense deferral rates. 44 Reduced Nine-Month Operating Expenses Dollars in Millions Operating Expenses* plus mortization of DC Third Quarter Nine Months (1) (1) Excludes $105 million of gross expenses related to Dexia purchase * Excluding DCP/SERP EarningsPresentation1108v pptx 45

24 Third Quarter and Year-to-Date Noteworthy Items in Income Dollars in Millions Three Months Ended September 30, 2008 Nine Months Ended September 30, 2008 Effect on Operating Effect on Operating Pre-tax fter-tax Earnings Pre-tax fter-tax Earnings Losses on non-derivative insured portfolio $(327.6) $(212.9) $(212.9) $(1,230.9) $(800.1) $(800.1) Fair-value adjustments related to the Company s own credit risk (1) 1, Fair-value adjustments attributable to impairment charges and amortization in FP Investment Portfolio (389.0) (325.5) (2) (207.8) (2) (1,431.4) (1,003.1) (2) (413.5) (2) Fair-value adjustments for credit derivatives in insured portfolio (194.2) (126.2) (31.0) (467.9) (304.0) (75.1) (1) fter-tax amount consists of $169.3MM for FP segment liabilities and $22.0MM for committed preferred trust. (2) Net of tax valuation allowance of $72.8MM. EarningsPresentation1108v pptx 47

25 Losses in 2008 driven by increased estimates of ultimate net losses primarily on RMBS transactions summarized below. For all of its mortgage products, FS revised its voluntary prepayment assumptions to assume they return to more normal rates when default rates return to normal; this assumption increases FS s projected losses in mortgage sectors. Second-lien mortgage performance during the third quarter was generally consistent with second quarter assumptions, so (except for the change in assumed prepayments) FS did not change its projection assumptions. Based upon the continuation of economic stress in the U.S. economy, FS has recast 2Q08 reserves for first-mortgage transactions by extending their assumed peak loss rates another three months until mid-2010; they are assumed to slowly recover to more normal rates by early Insured Portfolio Losses and FP Impairments 3Q08 Pre-Tax Income Statement Impact of Loss Expenses, Credit Impairments and FP Other-than-Temporary Impairments (OTTI) ($MM) Loss Expense for Insured Portfolio (non-derivatives) HELOC $ 54 lt- Closed-End Second Lien (CES) 17 Option RM 113 lt- First Lien 56 NIMs 4 Subprime RMBS 13 Other (2) Subtotal Insured BS 255 Public Finance (2) Total Case Reserves 253 Non-Specific dditions 75 Subtotal $328 Credit Impairment of Insured Credit Derivatives in Insured Portfolio (1) Insured CDS (2) $28 Insured NIMs 20 Subtotal $48 Economic OTTI in FP Portfolio lt- $164 Other (3) 44 Subtotal $208 Summary Loss Expense $328 Credit Impairment of Insured Derivatives 48 Subtotal Insured Portfolio 376 OTTI in FP Portfolio 208 Total Pre-Tax Economic Loss $583 (1) Economic portion of fair-value adjustment. (2) Includes static pool corporate (see pages 124 and 125) and other US BS (see pages 130 and 131). (3) Includes subprime RMBS Option RM, HELOC and CES (see pages ). EarningsPresentation1108v pptx 49

26 50 Jefferson County, labama Sewer Debt is a Unique Municipal Situation FS has $151 million of net par exposure to Jefferson County s total $3.2 billion of sewer debt. dditionally, FS provides a surety in the net par amount of $15 million. Jefferson County is a unique municipal situation and not, in our view, part of a larger trend for the following reasons: 94% of Jefferson County s debt is in the form of Variable Rate Demand Obligations (VRDOs) and uction Rate Securities (RS); The markets for RS collapsed in the first quarter of 2008 due to general market illiquidity and the downgrade of its two primary bond insurers, Syncora (1) and FGIC, causing an unexpectedly large increase in interest rates on the County s debt; It is highly leveraged with $3.2 billion of debt and charges users very high rates; The sewer debt structure included over $5 billion of interest rate swaps. FS has taken a pre-tax $50.6 million net loss expense for Jefferson County due to the repeated failure of the County to restructure the sewer debt to alleviate high interest rates and avoid bank bond acceleration. complete restructuring and refinancing of sewer debt without material loss to FS is still a possibility, but the outcome remains uncertain. (1) In this presentation, Syncora refers to either or both of the companies formerly called XLC and XLF. EarningsPresentation1108v pptx 51

27 Present value (PV) originations in the financial guaranty business decreased 88% to $61 million on a comparable-quarter basis, driven primarily by FS s exit from the asset-backed business in early ugust and the lack of market activity in the global public infrastructure sector. dditionally, U.S. public finance PV originations decreased 44% to $55 million on a comparable-quarter basis primarily due to the negative impact of Moody s placing FS s insurance financial strength rating on review for possible downgrade. The corresponding 109% increase to $521 million on a year-to-date basis was driven by strong first-half performance based on FS s ability to achieve attractive pricing across sectors. FS achieved a 59% new-issue market share during the first nine months of During 3Q08, the public infrastructure market was virtually closed for capital market executions. FS is currently working on international public finance transactions expected to close in Summary Financial Guaranty PV Originations Dollars in Millions For the Three Months Ended September 30 For the Nine Months Ended September 30 International BS International Public Finance U.S. BS U.S. Public Finance % % (1) (1) 2008 (1) Subtotals for 3Q07 and YTD07 reflect reclassifications of previously wrapped transactions made at year-end Financial Security ssurance Holdings Ltd. EarningsPresentation1108v pptx 53

28 Each year s new originations are the source of future financial guaranty earnings. 54 Financial Guaranty PV Originations $MM PV New Business Revenue Originated International (1) International BS International Public Finance US U.S. BS U.S. Public Finance 1, YTD 08 (1)International public finance and asset-backed sectors were combined prior to Financial Security ssurance Holdings Ltd. Subtotals do not reflect reclassifications of previously wrapped transactions made at 2007 year-end. EarningsPresentation1108v pptx 55

29 The cumulative effect of many years of originations has created a storehouse of future premiums to be earned in future periods. Public finance premiums are generally collected at origination, earned over the life of the bond and held as unearned premium revenue on the balance sheet. BS, MBS and certain other premiums are contractually committed and collected over time. 56 Future Financial Guaranty Revenues Tripled Over the Past Eight Years $MM Net Financial Guaranty PV Premiums Outstanding Net Unearned Premium Revenue 11% $2,981 $2, $2,136 $2, $ $1, $1, $1, ,167 $1, , , , ,788 2, Sep 08 Financial Security ssurance Holdings Ltd. EarningsPresentation1108v pptx 57

30 djusted book value (BV) consists of book value plus net deferred premium revenues, the estimated value of future contractual cash flows on financial guaranty and financial products transactions, less net deferred acquisition costs. dditionally, unrealized investment results, the non-economic fair-value adjustment for credit derivatives in the insured portfolio, the fair-value adjustments related to FS s own credit risk and instruments with economically hedged risks and non-economic impairment charges are eliminated. BV reflects any hedge inefficiency and PV of estimated losses. FS s management believes that BV is an important indicator of future earning potential and the best measure of the Company s current economic value, excluding franchise value. Despite negative results in 2008, BV remains strong. 58 djusted Book Value Per Share (1)(2) $150 $140 $130 $135.6 $120 $110 $100 $90 $80 $70 $60 $50 Dec ember 2000 Dec ember 2001 Dec ember 2002 Dec ember 2003 Dec ember 2004 Dec ember 2005 Dec ember 2006 (1)(2) Dec ember September (1) Non-GP measure. Starting 4Q06, BV per share is shown on IFRS basis. (2) BV per share is impacted by extraordinary dividends in 2006 and capital contributions in EarningsPresentation1108v pptx 59

31 Management defines operating earnings as net income, excluding the effects of fair-value adjustments considered to be non-economic and including IFRS income statement amounts where different from U.S. GP. September month trailing operating earnings reflects negative impact of RMBS estimated losses, economic OTTI and credit impairment on the insured CDS portfolio. 60 Twelve-Month Trailing Operating Earnings (1) per Share since July 2000 $10 $7 $4 $1 $(2) December 2000 December 2001 December 2002 December 2003 December 2004 December 2005 December 2006 December 2007 $(5) $(8) $(11) $(14) $(17) $(20) $(23) $(26) September 2008 (1) Non-GP measure. Starting 1Q08 Operating Earnings per share are shown on IFRS basis. EarningsPresentation1108v pptx 61

32 $800 million of previously distributed dividends were re-contributed to FS in Operating Shareholders Equity and djusted Book Value (djusted for Dividends Paid) Year-End Operating Equity/ BV $MM (1) Dividends Paid, net of Capital Contribution Operating Equity BV $4,068 $4,586 $5,284 $4,566 $3,578 $3,072 $2,865 $3,104 $2,749 $2,388 $2,412 $2,046 $2,086 3,931 3,919 $1,806 3,512 $1, ,029 $1,396 2,822 2,357 2,612 2,346 2,437 2,046 2,043 1,763 1,568 1,396 $3,490 $2,560 4,495 4,543 2,701 2, Sep 08 (1) Starting 2006, BV is shown on IFRS basis. EarningsPresentation1108v pptx 63

33 The loss expense for RMBS transactions represents the present value of losses related to claims that are expected to be paid out over years, in some cases not until 2037 or later. Loss expense is recognized in the period it becomes probable and estimable, regardless of when cash outflows are expected to occur. 64 Twelve-Month Trailing Operating Return on Equity Operating ROE (1) 13.7% 14.6% 13.0% 14.0% 14.8% 13.5% 14.5% 14.9% % Sep 08 Financial Security ssurance Holdings Ltd. (1) Starting 2006, ROE is shown including IFRS adjustments. EarningsPresentation1108v pptx 65

34 Composition of Claims-Paying Resources at September 30, 2008: $2,635MM $2,657MM $1,056MM $350MM $200MM $1,240MM $8,138MM Qualified statutory capital = an insurance company s policyholders surplus plus contingency reserve under New York State statutory accounting rules Statutory unearned premium reserve = premiums written but not yet earned (primarily public finance) Net present value of future installment premiums = future installment premiums from business already originated (primarily asset-backed), discounted to net present value at a rate equal to the average pre-tax yield of the investment portfolio for the three years prior to each transaction s origination Soft capital facility = a limited recourse, standby line of credit provided by a group of international banks CPS = Money market committed preferred trust securities. The CPS is fully funded and FS has the right to access the capital through the exercise of put options Statutory loss and loss adjustment expense (LE) reserves Total Claims-Paying Resources 66 FS s Claims-Paying Resources Have Grown at an 18% nnual Compound Rate (December September 2008) $MM 8,138(1) 6,739 5,231 6,056 5,676 4,658 3, ,217 2,592 2,805 2,120 1,696 1,157 1, September 08 s of 9/30/08 Rating agencies use claims-paying resources in evaluating guarantors' financial strength. (1) Total includes Dexia s capital contributions to FS Holdings of $500MM in February 2008 and $300MM in ugust EarningsPresentation1108v pptx 67

35 68 FS Insurance Portfolio EarningsPresentation1108v pptx 69

36 FS s highly diversified insured portfolio is composed of public finance obligations supported by taxes and/or revenues from essential public services and structured BS and MBS issues backed by streams of cash flow from pools of assets. Single- or better credits constitute 89% of Public Finance business and 81% of BS business. 70 FS s Portfolio of Insured Transactions is Highly Diversified Consumer 2% 29% sset-backed ($127.6 Billion) 71% Public Finance ($314.4 Billion) CDS(1) 9% CLO(1) 8% CBO(1) <1% RMBS 4% International sset-backed 1% International Infrastructure(2) 6% Other <1% Education 2% Transportation 5% Housing Health Care 2% 3% Net Par Outstanding: $442.0 Billion Other BS 1% Financial Products(4) 4% Utility 11% G.O. 29% Tax-Supported 13% 34% 10% Ratings (5) s of 9/30/08. Internal FS ratings expressed in industry terms. See Notes on page 285 for exposure methodology. (1) Includes U.S. and international. CDS of CBOs and CDS of CLOs are included in CBOs and CLOs, respectively. CDS referencing obligations outside the pooled corporate sector are included in the appropriate asset-backed or public finance categories. (2) Primarily PFI/PPP and utility. (3) Excludes CBOs, CLOs and pooled corporate CDS. (4) Guaranteed investment contracts (GICs) issued by FS s Financial Products affiliates. (5) Reflects benefit of layered loss reinsurance. FS s internal ratings on the GIC policies are distributed proportionally to the underlying investments. 3% 22% 31% EarningsPresentation1108v pptx 71

37 72 Public Finance EarningsPresentation1108v pptx 73

38 74 FS Insures Well-Diversified Public Finance Obligations FS s Total Net Par Outstanding: Public Finance Net Par Outstanding: $442.0Bn $314.4Bn 4 sset-backed, $127.6 Public Finance, $314.4 Other $2.2 Education/ University $7.9 Transportation $21.6 International $27.8 Housing $7.7 Health Care $13.4 Utility $51.1 G.O. $126.4 Tax-Supported $ % 46% <1% 2% 41% s of 9/30/08. Ratings are FS internal ratings. See Notes on page 285 for exposure methodology. EarningsPresentation1108v pptx 75

39 76 U.S. General Obligation Bonds This sector includes general obligation (G.O.) and general fund/non-ad valorem debt of states and municipalities, including counties, cities, towns, school districts and special districts. 7% <1% 3% 40% 44% 45% Net Par Outstanding: $126.4Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 77

40 78 U.S. Tax-Supported Bonds This sector includes lease-backed/appropriation, special tax and moral obligation debt of states, state agencies and municipalities. Taxes normally include taxes on income, sales, property, gas & motor vehicle taxes or special assessments. Moral obligation debt normally represents debt issued by a state agency, local agency or bond bank, which may rely on the back-up support of the state, county or city moral obligation if debt payments are otherwise insufficient. 6% <1% 2% 18% 39% 53% Net Par Outstanding: $56.3Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 79

41 80 U.S. Municipal Utility Revenue Bonds This sector includes electric, gas, water and sewer utility revenue secured debt and solid waste system or facility debt. 7% <1% <1% 36% 16% 57% Net Par Outstanding: $51.1Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 81

42 82 U.S. Transportation Revenue Bonds This sector includes irport revenue, passenger facility charge and special facility revenue bonds Port revenue bonds Parking revenue bonds Toll road revenue bonds, including concession financing of U.S. tollroads Mass transit farebox revenue bonds 8% <1% 27% 7% 65% Net Par Outstanding: $21.6Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 83

43 84 U.S. Health Care Revenue Bonds Non-profit hospitals and hospital systems represent 97% of this sector. The sector also includes exposure to HMOs and other health-related credits, which together represent 4% of this sector. 13% 2% 32% 4% 53% Net Par Outstanding: $13.4Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 85

44 86 U.S. Education/University Bonds This sector includes debt secured by tuition, fees, leases or general obligation pledges of public universities, private colleges and independent schools. 2% <1% <1% 3% 39% 58% Net Par Outstanding: $7.9Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 87

45 88 U.S. Housing Revenue Bonds This sector includes exposure to debt secured by State agency-managed single-family loan secured portfolios State agency-managed single-family and multi-family project loan portfolios, enhanced by a G.O. of the state housing agency Multi-family il project loans insured by a state guarantee fund or by the state moral obligation i FH insured loans from hospitals and a multi-family project Capital fund grants appropriated by Congress and administered by HUD Local-issuer single-family loan secured portfolios 21% 1% <1% 7% 2% 70% Net Par Outstanding: $7.7Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 89

46 90 Other U.S. Public Finance This sector includes Federal Highway Grant nticipation Notes secured by sizable and stable state share of available federal highway aid Citizens Property Insurance, Florida Portfolios of federally insured student loans Other unique obligors or security pledges 17% <1% <1% 36% 1% 46% Net Par Outstanding: $2.2Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 91

47 92 International Public Finance This sector includes Financings of essential infrastructure projects, including public-private partnerships Municipal and sovereign debt Debt of regulated utility ty companies Debt of government-supported public enterprises The below-investment grade () exposure relates to the Metronet London Underground bonds, which are currently secured by U.K. Gilts sufficient to redeem the bonds in full. 2% 5% 7% 9% 51% 35% Net Par Outstanding: $27.8Bn s of 9/30/08. See Notes on page 285 for rating methodology. EarningsPresentation1108v pptx 93

48 94 Insured Portfolio Discontinued Business Lines: sset-backed, Mortgage-Backed and Other Structured Finance EarningsPresentation1108v pptx 95

49 96 Prior to ugust 2008, FS s Financial Guaranty Business Participated in the sset-backed, Mortgage- Backed and Other Structured Finance Markets pproximately 29% net par outstanding of FS s insurance portfolio is assetbacked, mortgage-backed or other structured finance products. The following section describes the asset types, internal ratings and vintage origination years of this portfolio. FS s objective was to insure only securities consistent with its business model: Low probability of default (investment grade, bankruptcy-remote structures) Low loss severity in the event of default Low liquidity demand (no forced acceleration pay as you go) FS executed some of its insurance business in the form of credit default swaps, but generally in a form that substantively tracks its insurance policies: Pay as you go No collateralization requirement With the prolonged disruption in the mortgage market, there has been some continued downward migration in the internal ratings of FS s insured portfolio since last quarter, especially in mortgage-related assets. pproximately 76% of the portfolio remains or better, down from 78% last quarter. EarningsPresentation1108v pptx 97

50 98 FS s Run-Off Insured Portfolio Includes a Wide Variety of sset-backed, Mortgage-Backed and Other Structured Finance Obligations FS s Total Net Par Outstanding: $442.0Bn sset-backed Net Par Outstanding: $127.6Bn Other BS, $1.8 Int'l BS, $4.2 Public Finance, $314.4 sset-backed, $127.6 Other Pooled CLOs, $34.7 Corporate, $1.2 Other Consumer Receivables, $0.5 U.S. utos, $9.3 Other Residential, $0.1 1st Lien lt, $1.7 2nd Lien lt, Static Pool CDS, $1.5 $37.8 Option RMs, $2.8 HELOCs, $6.7 NIMs, $0.2 U.S. Sub-prime CBOs, $2.4 (excluding NIMs), $4.8 BS-CDO, $0.3 Financial Products, $17.8 (1) 11% 8% 5% 6% 70% (1) Guaranteed investment contracts issued by FS s Financial Products affiliates and insured by FS, Inc. The ratings for the policies on the GICs are distributed in proportion to the ratings of the underlying assets. s of 9/30/08. Ratings are FS internal ratings. See Notes at page 285 for exposure methodology. EarningsPresentation1108v pptx 99

51 Subprime U.S. RMBS Most subprime transactions are secured by fully amortizing first-lien mortgage loans that pay a fixed rate of interest for two-to-five years, after which they pay a floating rate of interest. Typically, all principal received on the underlying mortgages is paid through to the senior () noteholders for at least the first 36 months, causing credit protection to increase over time. Typical subprime MBS transactions at origination contain approximately 20% overcollateralization and subordination plus excess spread valued at 7% (PV) versus an original FS loss expectation of 9.9% (22% defaults at 45% loss severity). If loss severity increased to 60%, more than 45% of all borrowers would have to default for FS to pay a claim. 25% (by net par) of the insured transactions have not begun to amortize. For the insured transactions, hard overcollateralization ranges between 19% 77%. One 2007 transaction ($241MM net par) originally rated was internally downgraded from BB to CCC in 3Q08 and is now projected to lose $9.6 million. Projections run in the second quarter show no other projected losses to FS, and 95% of the exposure remains internally rated or better. Performance in the $55 million of pre-2001 transactions remains stable. See Supplementary Information - First Lien Residential Mortgage-Backed Securities Loss Projections for assumptions used in projections. 100 Exposure to Subprime U.S. RMBS (Excluding NIMs) Total net insured par of Subprime: $4.8Bn s of 9/30/08. See Notes on page 285 for rating methodology. Pre Vintage EarningsPresentation1108v pptx 101

52 NIMs Net interest margin securities (NIMs) are generally collateralized by excess cash flow expected to be produced during the first months of a subprime mortgage securitization. Since 2001, FS has insured 67 NIM transactions totaling $5.9 billion. Of this amount, 17 transactions with net par of $214 million are currently outstanding. 10 of FS s outstanding insured NIM transactions benefit from first loss insurance provided by Radian Insurance (BB+ Negative Outlook/Baa1 Review for Downgrade). Due to declining performance of the underlying subprime transactions, FS established a reserve and estimated credit impairment of $39.4 million for these transactions during the third quarter. FS s loss estimations now assume only $15 million of value from the MBS, with the rest of the payments coming from Radian Insurance or other third-party support. 102 Exposure to U.S. Net Interest Margin Securities (NIMs) Total net insured par of NIMs: $0.2Bn s of 9/30/08. See Notes on page 285 for rating methodology Vintage EarningsPresentation1108v pptx 103

53 lt- First Lien Mortgages lt- refers to borrowers whose credit quality falls between prime (FICO score > 700) and subprime (FICO score < 640). ll of FS s exposure to lt- first liens was originally rated. lt- transactions are collateralized by fixed and floating rate loans secured by a first lien on residential property. ll principal received on the underlying mortgages is paid through to the senior (originally ) note holders for at least the first 36 months, causing credit protection to increase over time. In many cases, the senior (originally ) notes are further divided into tranches that pay sequentially. In a typical transaction, FS is protected by approximately 8% subordination plus 3% (PV) of future spreads for total protection of 11%. ssuming a 35% severity rate and 8.5% foreclosure frequency, FS would have expected pool losses to equal 3%. 64% of the insured transactions (by net par) have not begun to amortize yet as FS guaranteed later tranches. 77% of the insured transactions (by net par) have 100% fixed rate collateral. Deterioration in this portfolio during the third quarter resulted in: Downgrade of 12 transactions and 75% of net par in the sector to below investment grade Estimated net PV losses of $56 million See Supplementary Information - First Lien Residential Mortgage-Backed Securities Loss Projections for assumptions used in projections. 104 Exposure to U.S. lt- First-Lien Mortgages Total net insured par of lt- First Liens: $1.7Bn s of 9/30/08. See Notes on page 285 for rating methodology. Pre Vintage EarningsPresentation1108v pptx 105

54 Closed-End Second-Lien Mortgages (lt-) Closed-end second-lien mortgage g transactions are backed by fully amortizing loans secured by a second lien on residential property. ll FS closed-end second-lien transactions involve lt- borrowers. ll principal received on the underlying mortgages is paid through to the senior note holders for at least the first 36 months, causing credit protection to increase over time. Transactions were typically structured with 25-27% of subordination plus excess spread of approximately 8% (PV). t initial underwriting, defaults were expected to equal approximately 10.5% (no assumed recovery), providing over 3x coverage. ll FS closed-end second-lien transactions were rated at closing. Seven insured 2007 transactions ($709 million net par) have wraps provided by other monolines; of this, $324 million is insured by ssured, $208 million by Syncora and $177 million by MBC. Performance of the four insured transactions that are not previously wrapped was generally consistent with first quarter projections. FS s projections show a present value net loss of $185.9 million across the 5 transactions, although under the terms of the transactions, most of the loss will not be paid until 2037 or later. Most of the increase in projected losses was due to a change in the prepayment rate. See Supplementary Information - First Lien Residential Mortgage-Backed Securities Loss Projections for assumptions used in projections. 106 Exposure to Closed-End Second-Lien Mortgages (lt-) Total net insured par of Closed-End Seconds: $1.5Bn s of 9/30/08. See Notes on page 285 for rating methodology. Vintage EarningsPresentation1108v pptx 107

55 Option djustable Rate Mortgages (RMs) Generally backed by first-lien mortgages made to prime borrowers (on average) with average original loan-to-value ratios of around 76% The loans have three payment options fully amortizing payment, interest only, and a minimum payment that results in negative amortization of the borrower s loan. The loans generally reset to full amortization between their third and fifth anniversaries, or possibly earlier if the loan s negative amortization results in loan-to-value ratios that exceed limits usually between 110% and 120% of the original loan balance (which can happen if interest rates rise and the borrower makes only the minimum payment). Upon reset, monthly payment amounts can increase significantly. In a typical transaction, FS was protected by approximately 10% subordination plus 2% (PV) of future spread for total protection of 12%. ssuming a 35% loss severity, foreclosures would need to exceed 34% before FS experienced a loss. ll option RM exposures were rated at closing. ll benefit from mortgage insurance policies. lthough option RMs are prepaying at moderate speeds and building overcollateralization and there are few losses to date, delinquencies are rising quickly. FS-insured securities are senior in the capital structures. Projections run in the third quarter resulted in: an increase in reserves to $153 million on six transactions, up from $39 million on three transactions. internal downgrade of much of the portfolio, so 88% is now internally rated below investment grade. FS does not expect most of the loans in these transactions to reset until at least 2010, giving servicers and borrowers ample opportunity to take advantage of loan modification programs aimed at creditworthy borrowers threatened by steep increases in monthly payments. See Supplementary Information - First Lien Residential Mortgage-Backed Securities Loss Projections for assumptions used in projections. 108 Exposure to U.S. Option djustable Rate Mortgages ( RMs ) Total net insured par of Option RMs: $2.8Bn s of 9/30/08. See Notes on page 285 for rating methodology. Vintage EarningsPresentation1108v pptx 109

56 Home Equity Line of Credit RMBS (HELOCs) HELOC transactions are collateralized by pools of revolving lines of credit made to prime quality borrowers (on average) and secured by a second lien on residential property. Credit protection is typically provided by excess spread of around 3.5% per annum, which is used to pay current period losses and build reserves. Even in a transaction with no remaining overcollateralization, FS is only required to pay claims when current period losses exceed current period excess spread. When current period losses are less than current period excess spread, the difference is used to reimburse FS. Prior to 2007, HELOC pools typically had experienced historical lifetime losses of between 1% and 2.5%. t underwriting and at originally expected net prepayment speeds, a typical HELOC pool would have sufficient protection to withstand losses of approximately 15% of original par. Default rates on several insured HELOC pools recently have risen to historically unprecedented levels. FS has made claim payments of $439 million through September 30 across nine transactions. Q3 performance was generally consistent with second quarter projections and no new transactions were rated below investment grade. FS projects present value cumulative lifetime losses of $836 million across ten HELOCs, up from $776 million last quarter. Most of the increase in projected loss was due to a change in prepayment assumptions. The 2007 insured HELOCs comprise two originally natural HELOCs ($306 million and $356 million net par, currently rated ), one of which ($306 million net par) consists of firstlien HELOCS. See Supplementary Information - Home Equity Line of Credit (HELOC) and lt- Closed-End Second-Lien (CES) Loss Projections for assumptions used in projections. 110 Exposure to U.S. Home Equity Line of Credit RMBS (HELOCs) Total net insured par of HELOCs: $6.7Bn Pre s of 9/30/08. See Notes on page 285 for rating methodology. Vintage EarningsPresentation1108v pptx 111