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ACA Financial
Guaranty Corporation

Statutory-Basis Financial Statements as of and
for the Years Ended December 31, 2012 and 2011,
Supplemental Schedules as of December 31, 2012,
and Independent Auditors’ Report
ACA FINANCIAL GUARANTY CORPORATION
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS’ REPORT 1–2
STATUTORY-BASIS FINANCIAL STATEMENTS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 2012 AND 2011:

Statements of Admitted Assets, Liabilities and Surplus 3

Statements of Income and Changes in Surplus 4

Statements of Cash flow 5

Notes to Statutory-Basis Financial Statements 6–34
SUPPLEMENTAL SCHEDULES: 35

Supplemental Summary of Investment Schedule as of December 31, 2012 36

Supplemental Schedule of Investment Risk Interrogatories as of December 31, 2012 37–41

Supplemental Schedule of Reinsurance Risk Interrogatories as of December 31, 2012 42–43
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of
ACA Financial Guaranty Corporation:
We have audited the accompanying statutory-basis financial statements of ACA Financial Guaranty
Corporation (the “Company”), which comprise the statutory-basis statements of admitted assets, liabilities
and surplus as of December 31, 2012 and 2011, and the related statutory-basis statements of income
and changes in surplus, and cash flow for the years then ended, and the related notes to the statutory-
basis financial statements.

Management’s Responsibility for the Statutory-Basis Financial Statements

Management is responsible for the preparation and fair presentation of these statutory-basis financial
statements in accordance with the accounting practices prescribed or permitted by the Maryland
Insurance Administration. Management is also responsible for the design, implementation, and
maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these statutory-basis financial statements based on our
audits. We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statutory-basis financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the statutory-basis financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the statutory-basis financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the Company’s preparation and fair presentation of the statutory-basis financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of the accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the statutory-basis financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinions.

Basis for Adverse Opinion on Accounting Principles Generally Accepted in the United States of
America

As described in Note 4 to the statutory-basis financial statements, the statutory-basis financial statements
are prepared by the Company using the accounting practices prescribed or permitted by the Maryland
Insurance Administration, which is a basis of accounting other than accounting principles generally
accepted in the United States of America, to meet the requirements of the Maryland Insurance
Administration.
The effects on the statutory-basis financial statements of the variances between the statutory-basis of
accounting described in Note 5 to the statutory-basis financial statements and accounting principles
generally accepted in the United States of America, although not reasonably determinable, are presumed
to be material.

Adverse Opinion on Accounting Principles Generally Accepted in the United States of America

In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion on
Accounting Principles Generally Accepted in the United States of America paragraph, the statutory-basis
financial statements referred to above do not present fairly, in accordance with accounting principles
generally accepted in the United States of America, the financial position of the Company as of December
31, 2012 and 2011, or the results of its operations or its cash flows for the years then ended.

Opinion on Statutory-Basis of Accounting

In our opinion, the statutory-basis financial statements referred to above present fairly, in all material
respects, the admitted assets, liabilities and surplus of the Company as of December 31, 2012 and 2011,
and the results of its operations and its cash flows for the years then ended, in accordance with the
accounting practices prescribed or permitted by the Maryland Insurance Administration as described in
Note 4 to the statutory-basis financial statements.

Report on Supplemental Schedules

Our 2012 audit was conducted for the purpose of forming an opinion on the 2012 statutory-basis financial
statements as a whole. The supplemental summary of investment schedule, the supplemental schedule
of investment risk interrogatories, and the supplemental schedule of reinsurance risk interrogatories as of
and for the year ended December 31, 2012 are presented for purposes of additional analysis and are not
a required part of the 2012 statutory–basis financial statements. These schedules are the responsibility
of the Company’s management and were derived from and relate directly to the underlying accounting
and other records used to prepare the statutory-basis financial statements. Such schedules have been
subjected to the auditing procedures applied in our audit of the 2012 statutory-basis financial statements
and certain additional procedures, including comparing and reconciling such schedules directly to the
underlying accounting and other records used to prepare the statutory-basis financial statements or to the
statutory-basis financial statements themselves, and other additional procedures in accordance with
auditing standards generally accepted in the United States of America. In our opinion, such schedules
are fairly stated in all material respects in relation to the 2012 statutory-basis financial statements as a
whole.

May 23, 2013
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ACA FINANCIAL GUARANTY CORPORATION
STATUTORY-BASIS STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS
AS OF DECEMBER 31, 2012 AND 2011
(Dollars in thousands)
2012 2011
ADMITTED ASSETS
BONDS — At NAIC carrying value $ 397,472 $ 430,358
CASH AND SHORT-TERM INVESTMENTS 24,241 12,856
RECEIVABLE FOR SECURITIES 3 20
Total cash and investments 4 21,716 443,234
ACCRUED INVESTMENT INCOME 2,836 3,169
OTHER ASSETS 38 1,768
TOTAL ADMITTED ASSETS $ 424,590 $ 448,171
LIABILITIES AND SURPLUS
UNEARNED PREMIUMS $ 146,732 $ 174,425
LOSSES AND LOSS ADJUSTMENT EXPENSES 86,580 75,889
CONTINGENCY RESERVE 76,919 73,919
PAYABLE TO SUBSIDIARIES 83 86
ACCRUED EXPENSES AND OTHER LIABILITIES 5,082 6,537
Total liabilities 3 15,396 330,856
COMMON STOCK — 1,000,000 shares authorized, issued and
outstanding at December 31, 2012 and 2011; par value of $15 per share 15,000 15,000
GROSS PAID-IN AND CONTRIBUTED SURPLUS 363,974 363,974
UNASSIGNED DEFICIT (269,780) (261,659)
Surplus as regards policyholders 1 09,194 117,315
TOTAL LIABILITIES AND SURPLUS $ 424,590 $ 448,171
See notes to statutory-basis financial statements.

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ACA FINANCIAL GUARANTY CORPORATION
STATUTORY-BASIS STATEMENTS OF INCOME AND CHANGES IN SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(Dollars in thousands)
2012 2011
PREMIUM EARNED $ 2 7,755 $ 16,333
LOSSES AND LOSS ADJUSTMENT EXPENSES 3 1,199 46,670
UNDERWRITING EXPENSES INCURRED 2 5,311 22,969
TOTAL UNDERWRITING DEDUCTIONS 5 6,510 69,639
NET UNDERWRITING LOSS (28,755) (53,306)
NET INVESTMENT INCOME 1 6,594 17,981
NET REALIZED CAPITAL GAINS 1 ,018 1,649
NET INVESTMENT GAIN 1 7,612 19,630
OTHER INCOME 5 ,190 7,415
LOSS BEFORE FEDERAL INCOME TAXES (5,953) (26,261)
FEDERAL INCOME TAXES - -
NET LOSS $ (5,953) $ (26,261)
SURPLUS AS REGARDS POLICYHOLDERS — Beginning of year $ 117,315 $ 122,466
Net loss (5,953) (26,261)
Change in net unrealized capital gains (losses) 1 22 (142)
Change in contingency reserve (3,000) 22,910
Change in deferred income tax 1 ,087 (7,946)
Change in non-admitted assets (377) 6,288
Change in surplus as regards policyholders (8,121) (5,151)
SURPLUS AS REGARDS POLICYHOLDERS — End of year $ 1 09,194 $ 117,315
See notes to statutory-basis financial statements.

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ACA FINANCIAL GUARANTY CORPORATION
STATUTORY-BASIS STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(Dollars in thousands)
2012 2011
CASH FLOWS FROM OPERATIONS:
Premiums collected net of reinsurance $ 62 $ 309
Net investment income 18,616 19,829
Other income 5,190 7,415
Losses and loss related payments (16,415) (17,478)
Commissions, expenses paid and aggregate write-ins for deductions (30,874) (26,310)
Net cash used in operations (23,421) (16,235)
CASH FLOWS FROM INVESTMENTS:
Proceeds from investments sold or matured 122,241 126,563
Cost of investments acquired (87,755) (123,712)
Net cash provided by investments 34,486 2,851
CASH FLOWS FROM FINANCING AND MISCELLANEOUS
SOURCES:
Other applications 320 241
Net cash provided by financing and miscellaneous sources 320 241
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 11,385 (13,143)
CASH AND SHORT-TERM INVESTMENTS — Beginning of year 12,856 25,999
CASH AND SHORT-TERM INVESTMENTS — End of year $ 24,241 $ 12,856
See notes to statutory-basis financial statements.

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ACA FINANCIAL GUARANTY CORPORATION
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
1. GENERAL
ACA Financial Guaranty Corporation (the “Company” or “ACA FG”) is organized and domiciled in the
State of Maryland and is a licensed, authorized and accredited insurance company in all 50 states, the
District of Columbia, Puerto Rico, the U.S. Virgin Islands and Guam. The Company is authorized to
provide financial guaranty insurance on tax-exempt and other debt obligations, as well as on certain
obligations related to asset-backed and corporate financings. As further discussed in Note 2, since
December 2007, the Company has not issued any new financial guaranty insurance policies and is
currently operating as a run-off insurance company.
Financial guaranty insurance provides an unconditional and irrevocable guaranty to the holder of a valid
debt obligation to full and timely payment of the guaranteed principal and interest thereon when due.
Financial guaranty insurance adds another potential source of repayment of principal and interest for an
investor, namely the credit quality of the financial guarantor. Generally, in the event of any default on an
insured debt obligation, payments made pursuant to the applicable insurance policy may not be
accelerated by the holder of the insured debt obligation without the approval of the insurer. While the
holder of such an insured debt obligation continues to receive guaranteed payments of principal and
interest on schedule, as if no default had occurred, and each subsequent purchaser of the obligation
generally receives the benefit of such guaranty, the insurer normally retains the option to pay the debt
obligation in full at any time. Also, the insurer generally has recourse against the issuer of the defaulted
obligation and/or any related collateral for amounts paid under the terms of the insurance policy as well
as pursuant to general rights of subrogation. The issuer of an insured debt obligation generally pays the
premium for financial guaranty insurance, either in full at the inception of the policy, as is the case in
most public finance transactions, or in periodic installments funded by the cash flow generated by
related pledged collateral, as is the case in most structured finance and international transactions.
Typically, premium rates paid by an issuer are stated as a percentage of the total principal (in the case of
structured finance and international transactions) or principal and interest (in the case of public finance
transactions) of the insured obligation. Premiums are almost always non-refundable and are invested
upon receipt.
The Company’s common stock is owned 76.6% by ACA Holding, L.L.C. (ACAH), a Delaware limited
liability company, and 23.4% by KPR Ltd, (KPR), a company with limited liability organized under the
laws of the Cayman Islands. KPR is a wholly owned subsidiary of ACAH and ACAH is a wholly owned
subsidiary of Manifold Capital Corp. (ACACH), formerly ACA Capital Holdings, Inc., a Delaware
corporation. Effective at the closing of the Restructuring Transaction discussed in Note 2, ACACH and
its wholly owned subsidiaries disclaimed control over the Company and voting control of the Company
became vested in the surplus notes issued in connection with the restructuring. This disclaimer of control
was approved by the Maryland Insurance Administration (MIA).
The Company through its subsidiaries, ACA Service, L.L.C. and ACA Management L.L.C., was
historically engaged in the business of providing asset management services within targeted sectors of
the fixed income capital markets. ACA FG’s affiliates participated in this market by structuring and
managing and investing in collateralized debt obligations (CDO) in collaboration with investment banks
which market the corresponding CDO securities to investors worldwide. The Company and its affiliates
are no longer engaged in the CDO asset management business, except for a limited number of
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pre-existing arrangements, and have not originated any CDOs since the third quarter of 2007. The
Company’s indirect wholly owned subsidiary, ACA Management, L.L.C., continues to receive fees
related to these contracts from third parties to whom they assigned rights and obligations to manage
these contracts and on a periodic basis pays dividends to ACA Service, L.L.C., its direct parent and
direct wholly owned subsidiary of the Company. ACA Service, in turn, passes on these funds to the
Company, also in the form of a dividend.
2. RESTRUCTURING TRANSACTION
As a result of adverse developments in the credit markets generally and the mortgage market specifically
that began in the second half of 2007 and continued to deepen in 2008 and thereafter, the Company
experienced material adverse effects on its business, results of operations, and financial condition, which
resulted in significant downgrades of the Company’s financial strength ratings by Standard & Poor’s
Ratings Services (S&P) and, ultimately, a restructuring of the Company to avoid a regulatory proceeding
(the “Restructuring Transaction”). The Restructuring Transaction, which was consummated on
August 8, 2008, was comprised of three main components.
The first component of the Restructuring Transaction consisted of a Global Settlement Agreement
whereby insured credit swap counterparties’ claims were settled in consideration for a cash payment of
approximately $209 million and surplus notes with a face value of approximately $950 million. In the
aggregate $1 billion face amount of surplus notes were issued in connection with the Restructuring
Transaction. Of such amount, the aforementioned insured credit swap counterparties received
$950 million and the balance of $50 million was issued to ACACH. While certain of the surplus notes
issued to the insured credit swap counterparties were issued to be non-voting at the request of certain of
such counterparties, the surplus notes issued to the counterparties, in the aggregate, represent a 100%
voting interest in the Company. The surplus notes issued to ACACH are all non-voting.
The second component of the Restructuring Transaction provided for the settlement of a $100 million
medium term note guaranteed by the Company. This obligation was settled with the noteholders in
exchange for a cash payment by the Company of approximately $48 million and the transfer by the
Company to the noteholders of investments in CDO equity with an estimated value of $2.5 million. Of
the total cash settlement, approximately $32 million was paid out of a cash collateral account supporting
the issued note while the remaining amount of approximately $16 million was funded by cash from the
Company and its other subsidiaries.
The third component of the Restructuring Transaction centered on the Intercompany Agreement which
treated ACACH and its non-ACA FG subsidiaries as one sub-group and ACA FG and its subsidiary as a
separate sub-group. By its terms, the Intercompany Agreement provided for the cancellation of a
previously issued intercompany surplus note as well as intercompany balances between the Company’s
sub-group and the ACACH sub-group. It also provided for a global release of liability among the two
sub-groups. In general, the release discharges the entities from any and all actions, cause of action, suits,
debts, liens, contracts, rights and other legal obligations against each other, except those provided for in
the Intercompany Agreement.
Subsequent to the closing of the Restructuring Transaction, the Company is required to and has operated
under an order issued by the MIA, Case No.: MIA: 2008-08-011 dated August 7, 2008 (the “Order”).
The Order provides, among other things, that the Company operate as a run-off company. In connection
with the Order, following the Restructuring Transaction, the Company wound down all subsidiaries no
longer necessary for the conduct of its ongoing business, including 73 special purpose entities created
for the insured credit swap and CDO asset management businesses.
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3. DESCRIPTION OF SIGNIFICANT RISKS AND UNCERTAINTIES AND THE COMPANY’S
ON-GOING STRATEGIC PLAN
Description of Significant Risks and Uncertainties
• As further discussed in Note 4, ACA FG recognizes losses and establishes related loss reserves on
bond obligations it has insured only upon the initial payment default by the issuer of such bond
obligations (under the Company’s accounting policy, the initial payment default is generally
considered the incident which gives rise to a claim and triggers loss recognition relating to the
incident). The loss recognized by ACA FG upon a payment default represents the Company’s best
estimate of its remaining unpaid ultimate loss over the life of the policy, discounted to reflect the
time value of money (not the amount of the claim under the policy received upon the initial payment
default which generally reflects the shortfall by the obligor of the scheduled principal and/or interest
payment then due under the terms of the bond indenture). However, ACA FG has policies in-force
upon which it expects that payment defaults will occur in the future resulting in losses that will be
incurred by the Company. Such expected future losses are not recorded by the Company in the
accompanying Statements of Admitted Assets, Liabilities and Surplus at December 31, 2012 and
2011, because a payment default has not yet occurred. With consideration of the inherent uncertainty
of estimating losses discussed further below, the Company’s estimate of the ultimate losses that it
will incur in the future on such policies (where payment defaults have not yet occurred but are
expected) ranged from $80 million to $100 million at December 31, 2012, on a discounted basis.
Accordingly, the Company believes it will incur material losses in the future which will materially
adversely affect its policyholders’ surplus. Notwithstanding the de-recognition of the Company’s
contingency reserves approved by the Maryland Insurance Commissioner discussed in Note 4 and
any further de-recognition of contingency reserves that may be approved by the Maryland Insurance
Commissioner in the future, no assurance can be given that the recognition of such losses in the
future will not cause the Company to fail to comply with its regulatory required minimum
policyholders’ surplus requirement of $750,000. However, the Company believes that its surplus
will be in excess of the required minimum surplus over the twelve months succeeding the date of the
accompanying Statement of Admitted Assets, Liabilities and Surplus and, that it has sufficient
liquidity resources to satisfy its financial obligations as they come due for the foreseeable future.
• The Company is materially exposed to risks associated with deterioration in the tax exempt bond
market through its insurance guaranties (see Note 10), as well as to the economy generally. The
extent and duration of any future deterioration in the tax exempt bond market is unknown, as is the
effect, if any, on potential claim payments and the ultimate amount of losses the Company may
incur on obligations it has guaranteed. As discussed in Note 19, the Company classifies its insured
in-force portfolio in one of four credit quality categories. As noted therein, as of December 31, 2012,
the Company had insured obligations with outstanding principal totaling $359.9 million classified in
category 4, which means that it either has paid claims on such exposures or expects to pay claims on
such exposures in the future. In addition, as of such date, the Company had insured obligations with
outstanding principal totaling $365.3 million classified in category 3, which means those credits
have materially violated financial and operational covenants and require remedial action to avoid
further performance deterioration. As discussed in Note 10, the risk of loss under the Company’s
guaranties extends to the full amount of unpaid principal and interest on all debt obligations it has
guaranteed. No assurance can be provided that further deterioration in ACA FG’s insured guaranties
will not occur resulting in a further migration of insured exposure to categories 3 and/or 4 or that
ACA FG will not incur losses that may be materially in excess of what it currently estimates.
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