ASSURED GUARANTY LTD 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance. Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are: • the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, including their impact on the factors listed below ; • changes in the world’s credit markets, segments thereof, interest rates, credit spreads or general economic conditions; 93 Table of Contents • developments in the world’s financial and capital markets that adversely affect insured obligors’ repayment rates, Assured Guaranty’s insurance loss or recovery experience, investments of Assured Guaranty or assets it manages; • reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty's insurance; • the loss of investors in Assured Guaranty's asset management strategies or the failure to attract new investors to Assured Guaranty's asset management business; • the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures; • insured losses in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures; • increased competition, including from new entrants into the financial guaranty industry; • poor performance of Assured Guaranty's asset management strategies compared to the performance of the asset management strategies of Assured Guaranty's competitors; • the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity or to unanticipated consequences; • the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, most of its contracts written in credit default swap (CDS) form, and variable interest entities (VIEs) as well as on the mark-to-market of assets Assured Guaranty manages; • rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured; • the inability of Assured Guaranty to access external sources of capital on acceptable terms; • changes in applicable accounting policies or practices; • changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions; • the failure of Assured Guaranty to successfully integrate the business of BlueMountain Capital Management, LLC (BlueMountain) and associated entities, now known as Assured Investment Management LLC (AssuredIM); • the possibility that acquisitions made by Assured Guaranty, including its acquisition of BlueMountain (BlueMountain Acquisition), do not result in the benefits anticipated or subject Assured Guaranty to unanticipated consequences; • difficulties with the execution of Assured Guaranty’s business strategy; • loss of key personnel; • the effects of mergers, acquisitions and divestitures; • natural or man-made catastrophes or pandemics; • other risk factors identified in AGL’s filings with the United States (U.S.) Securities and Exchange Commission (the SEC); • other risks and uncertainties that have not been identified at this time; and • management’s response to these factors. 94 Table of Contents The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in AGL's 2019 Annual Report on Form 10-K and its Quarterly Report for the three months ended March 31, 2020, on Form 10-Q. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity. For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Available Information The Company maintains an Internet web site at www.assuredguaranty.com . The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings ) the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance ) links to the Company's Corporate Governance Guidelines, its Code of Conduct, AGL's Bye-Laws and the charters for its Board committees. In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses ). The Company also maintains a social media account on LinkedIn ( www.linkedin.com/company/assured-guaranty/ ). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company's web site as well as the Company's social media account on LinkedIn, in addition to following the Company's press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, the Company's web site or social media account is not incorporated by reference into, and is not a part of, this report. Executive Summary This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to AGL's 2019 Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2020, and June 30, 2020. Overview Beginning in the fourth quarter of 2019, after the acquisition of BlueMountain, the Company realigned its reporting structure to be consistent with how management now views the Company's different business lines. Management views the Company's businesses in two distinct segments: Insurance and Asset Management. The Company's Corporate division activities are presented separately. The Insurance and Asset Management businesses are conducted through separate legal entities, which is the basis on which the results of operations are presented and reviewed by the chief operating decision maker (CODM) to assess performance and allocate resources. In the Insurance segment, the Company provides credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk 95 Table of Contents management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled debt service payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia. The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience. In the Asset Management segment, the Company provides investment advisory services, which include the management of collateralized loan obligations (CLOs), opportunity and liquid asset strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of September 30, 2020, AssuredIM had $17.0 billion of assets under management (AUM), including $1.0 billion that is managed on behalf of the Company's insurance subsidiaries. AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, please see " -- Results of Operations by Segment -- Asset Management Segment." Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment. AssuredIM asset managers are compensated for their investment advisory services generally through management fees which are based on AUM. In addition, AssuredIM asset managers may receive performance fees on certain CLOs and funds, if certain thresholds are met. The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH), as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies. The Company reviews its segment results before giving effect to the consolidation of VIEs. The effect of consolidating VIEs, as well as intersegment eliminations and certain reclassifications are presented separately in the Company's reconciliation of segment results to accounting principles generally accepted in the United States of America (GAAP) and non-GAAP measures. Economic Environment and Impact of COVID-19 The novel coronavirus that emerged in Wuhan, China in late 2019 and which causes the coronavirus disease known as COVID-19 continued to spread throughout the world over the course of 2020. As of September 30, 2020, there were over 35 million confirmed cases worldwide and over 7 million confirmed cases in the U.S. COVID-19 was declared a pandemic by the World Health Organization, and its emergence and reactions to it, including various closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. While the COVID-19 pandemic has been impacting the global economy and the Company for quite some time now, its ultimate size, depth, course and duration remain unknown, and the governmental and private responses to the pandemic continue to evolve. Consequently, and due to the nature of the Company's business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time. As a consequence of the onset of the COVID-19 pandemic, economic activity in the U.S. and throughout the world slowed significantly, but has begun to recover. By the end of the three-month period ended September 30, 2020 (Third Quarter 2020), the unemployment rate had declined to 7.9% from a high of 14.7% in April, according to a report issued by the U.S. Bureau of Labor Statistics (the BLS) in early October. The BLS noted that in September the number of unemployed persons fell by 1.0 million to 12.6 million. The 12.6 million unemployed in September was much lower than the 23.1 million unemployed in April. The Bureau of Economic Analysis (BEA) reported that GDP increased at an annual rate of 33.1% in Third Quarter 2020 after decreasing at an annual rate of 31.4% in the second quarter of 2020. Among the steps taken by the Federal Reserve Board (the Fed) to help counteract the negative economic consequences of COVID-19 was the establishment of the Municipal Liquidity Facility (MLF), which was authorized to provide up to $500 billion in 36-month loans to certain qualifying states and municipalities. As of the end of Third Quarter 2020, only two issuers - the State of Illinois and New York's Metropolitan Transit Authority - had borrowed from the MLF. 96 Table of Contents In its September 15-16 th meeting, the Federal Open Market Committee (FOMC), citing the ongoing pandemic, decided to keep the target range for the federal funds rate at 0% to .25 % and “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” In addition, the Fed pledged to increase its holdings of Treasury securities and agency mortgage-backed securities over the coming months “at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” Fed Chairman Jerome Powell and other officials at the Fed continued to encourage federal lawmakers to pass additional COVID-19 related stimulus packages. The 30-year AAA Municipal Market Data (MMD) rate started the quarter at 1.63%, and during the quarter it never ended the day higher. It reached a historical low of 1.27% on August 7 th . The average AAA benchmark yield for the quarter of 1.49% was the lowest average yield on record for any quarter. A-rated GO spreads relative to the 30-year AAA MMD rate decreased from 49 basis points (bps) at the beginning of the quarter to 43 bps at the end of the quarter. BBB spreads also decreased from 157 bps relative to the AAA benchmark at the beginning of the quarter to 143 bps at the end of the quarter. Both levels remain above the pre-pandemic lows (35 bps on As and 63 bps on BBBs), but, the quarter-end spread of 43 bps between the A and AAA GO 30-year MMD rates is still below the 49 bps average in January 2016. See “Key Business Strategies -- Insurance” below for the impact of the interest rate environment and U.S. municipal credit spreads on the demand for bond insurance. After double-digit gains in the second quarter of 2020, the Dow Jones Industrial Average (DJIA) gained nearly 8% in Third Quarter 2020, the S&P 500 Index gained over 8%, and the Nasdaq Composite gained 11%. The ongoing impact of the COVID-19 pandemic and governmental and private actions taken in response produced a surge in home prices and home sales. The National Association of Realtors (NAR) reported that existing home sales increased 9.4% to a seasonally adjusted annual rate of 6.54 million units in September 2020, the highest level since May 2006. The median existing house price gained 14.8% from a year ago to $311,800 in September. The Commerce Department reported that year-over-year new single-family home sales were up 32.1% from the 726,000 homes sold in September 2019. The median sales price rose to $326,800 from $322,400 in August (the latest data available), while the average price grew to $405,400 from $382,700. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.7% annual gain in August (the latest data available), up from 4.8% in the previous month. In See Item 1, Financial Statements, Note 4, Expected Loss to be Paid, for a discussion of the residential market assumptions used in determining expected losses for U.S. residential mortgage-backed securities (RMBS). Direct and indirect consequences of COVID-19 are causing financial distress to many of the obligors and assets underlying obligations guaranteed by the Company, and may result in increases in claims and loss reserves. The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims. The Company's Surveillance department has established supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions and related restrictions or an economic downturn. In addition, the Company's surveillance department has been in contact with certain of its credits that it believes may be more at risk from COVID-19 and governmental and private responses to COVID-19. The Company's internal ratings and loss projections for those distressed credits it believes are most likely to be impacted by the COVID-19 pandemic, including RMBS, Puerto Rico and certain other distressed public finance exposures, reflect this augmented surveillance activity. Through November 5, 2020, the Company had not paid any first-time financial guaranty claims it believes are due to credit stress arising specifically from COVID-19. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it are unknown, so the Company cannot predict the ultimate size of any increases in claims and loss reserves that may result from the pandemic. The Company believes its financial guaranty business model is particularly well-suited to withstand global economic disruptions. If an insured obligor defaults, the Company is required to pay only any shortfall in interest and principal on scheduled payment dates; the Company’s policies forbid acceleration of its obligations without its consent. In addition, many of the obligations the Company insures benefit from debt service reserve funds or other funding sources from which interest and principal may be paid during limited periods of stress, providing the obligor with an opportunity to recover. While the Company believes its guaranty may support the market value of an insured obligation in comparison to a similar uninsured obligation, the Company’s ultimate loss on a defaulted insured obligation is not a function of that underlying obligation’s market price. Rather, the Company’s ultimate loss is the sum of all principal and interest payments it makes under its policy less 97 Table of Contents the sum of all reimbursements, subrogation payments and other recoveries it receives from the obligor or any other sources in connection with the obligation. For contracts accounted for as insurance (which constitute 98% of its net par outstanding at September 30, 2020), its expected losses equal the discounted value of all insurance payments it projects making less the discounted value of all recoveries it expects to receive, on a probability-weighted basis. See Part I, Financial Statements, Note 4, Expected Losses to be Paid. The nature of the financial guaranty business model, which requires the Company to pay only any shortfall in interest and principal on scheduled payment dates, along with the Company’s liquidity practices, reduce the need for the Company to sell investment assets in periods of market distress. As of September 30, 2020, the Company had $858 million of short-term investments and $223 million of cash. In addition, the Company’s investment portfolio generates cash over time through interest and principal receipts. While volatility and dislocation in the municipal finance market in the U.S. resulted in the Company issuing a reduced number of new insurance policies in late March and into April 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as the second quarter of 2020 progressed, and this continued in Third Quarter 2020. The present value of new business production (PVP) for both the Third Quarter 2020 and the nine-month period ended September 30, 2020 (Nine Months 2020) was very strong compared to a year ago. See "-- Results of Operations by Segment -- Insurance Segment" below. The Company cannot predict what impact the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, will have on the market for its insurance products over the medium term. On one hand, increased defaults and an increased focus on the credit of public finance issuers and other obligors may increase the perceived value of the Company’s insurance products, and so increase demand, as appears to have been the case in Third Quarter 2020. On the other hand, legislative responses, especially in the public finance sector, could reduce the need for the Company’s insurance products. While a reduction in new insurance business written compared to previous years would be unwelcome since it would impact the Company's net income in future years, it would have a limited impact on the current year’s net income, since the Company earns the premium for a new policy over the term of the policy, often as long as twenty or thirty years. In 2019, for example, only approximately 3% of the premiums the Company earned in 2019 related to new financial guaranty policies it wrote in 2019. The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may have an adverse impact on the amount of third-party funds the Company can attract to its asset management products and on the amount of the Company’s AUM, which would reduce the amount of management fees earned by the Company. In addition, the volatility and downgrades in loan markets have triggered over-collateralization provisions in CLOs, deferring current CLO management fee payments to the Company. On the other hand, periods of market volatility may increase the attractiveness to investors of investment managers such as AssuredIM, and may provide the Company with opportunities to increase its AUM. In Nine Months 2020, funded AUM declined, but fee-earning AUM increased, largely as the result of the sale of CLO equity before the disruption in the markets caused by the COVID-19 pandemic. See "-- Results of Operations by Segment -- Asset Management Segment" below. The Company’s ability to raise third-party funds and increase and retain AUM is directly related to the performance of the assets it manages as measured against market averages and the performance of the Company’s competitors, and if it performs worse during the COVID-19 pandemic than its competitors, that could impede its ability to raise funds, seek investors and hire and retain professionals, and may also lead to an impairment of goodwill. In Nine Months 2020, the Company considered the impact of COVID-19 on the Company’s goodwill carrying value associated with the Asset Management segment, and determined no impairment had occurred. Over the past several years, the Company’s insurance subsidiaries have sought and received permission from their respective regulators to make certain discretionary payments to their holding companies, which has increased the amount of cash available to such holding companies to make investments in the asset management business and, in the case of AGL, to repurchase its common shares. The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may impact the Company’s regulatory capital position and the willingness of the insurance subsidiaries’ regulators to permit discretionary payments to their holding companies, which may result in the Company investing less in the asset management business or spending less to repurchase its common shares than it had planned. As of November 5, 2020, the Company had remaining authorization to repurchase $332 million of its common shares, including an additional $250 million authorization approved by the Board of Directors (the Board) on November 2, 2020. For more information, see Part I, Item 1A, Risk Factors, “Operational Risks - The Company’s holding companies’ ability to meet their obligations may be constrained,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 98 Table of Contents The Company began operating remotely in accordance with its business continuity plan in March 2020, instituting mandatory work-from-home policies in its U.S., U.K. and Bermuda offices. The Company is providing the services and communications it normally would, and continues to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades. However, the Company’s operations could be disrupted if key members of its senior management or a significant percentage of its workforce or the workforce of its vendors were unable to continue work because of illness, government directives, or otherwise. In addition, the Company’s shift to working from home has made it more dependent on the Internet and communications access and capabilities and has heightened its risk of cybersecurity attacks. For more information, see Part I, Item 1A, Risk Factors, “Operational Risks - The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in such systems could adversely affect the Company’s business,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Financial Performance of Assured Guaranty Results of operations for Third Quarter 2020 and Nine Months 2020 include the results of AssuredIM, which was acquired on October 1, 2019. Financial Results Third Quarter Nine Months 2020 2019 2020 2019 (in millions, except per share amounts) GAAP Highlights Net income (loss) attributable to AGL $ 86 $ 69 $ 214 $ 265 Net income (loss) attributable to AGL per diluted share 1.02 0.70 2.43 2.61 Weighted average diluted shares 83.8 98.9 88.0 101.6 Adjusted operating income (loss) (1) (2) Insurance $ 81 $ 107 $ 320 $ 379 Asset Management (12) — (30) — Corporate (18) (28) (83) (79) Other (3) (2) (7) 4 Adjusted operating income (loss) 48 77 200 304 Adjusted operating income per diluted share (2) 0.58 0.79 2.28 3.00 Insurance Segment Gross written premiums (GWP) $ 121 $ 69 $ 334 $ 159 PVP (1) 117 89 264 187 Gross par written 7,432 4,909 16,477 11,799 Asset Management Segment CLO net inflows $ 123 $ — $ 584 $ — Opportunity funds net outflows (27) — (77) — Liquid strategies net inflows — — 370 — Wind-down funds net outflows (228) — (1,644) — Total net flows $ (132) $ — $ (767) $ — 99 Table of Contents As of September 30, 2020 As of December 31, 2019 Amount Per Share Amount Per Share (in millions, except per share amounts) Shareholders' equity attributable to AGL $ 6,549 $ 79.63 $ 6,639 $ 71.18 Adjusted operating shareholders' equity (1) (3) 6,070 73.80 6,246 66.96 Adjusted book value (1) (4) 8,885 108.02 9,047 96.99 Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity 1 0.01 7 0.07 Gain (loss) related to VIE consolidation included in adjusted book value (8) (0.11) (4) (0.05) Common shares outstanding (5) 82.2 93.3 ____________________ (1) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP) and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available. See “—Non-GAAP Financial Measures” for additional details. (2) "Adjusted operating income" was formerly known as "Non-GAAP operating income." Adjusted operating income is also the Company's segment measure. (3) "Adjusted operating shareholders' equity" was formerly known as "Non-GAAP operating shareholders' equity." (4) "Adjusted book value" was formerly known as "Non-GAAP adjusted book value." (5) See "Key Business Strategies – Capital Management" below for information on common share repurchases. Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses such as: changes in credit spreads of insured credit derivative obligations, changes in fair value of assets and liabilities of VIEs and committed capital securities (CCS), changes in fair value related to the Company's own credit spreads, and changes in risk-free rates used to discount expected losses. Other factors that drive volatility in net income in the Insurance segment include: changes in expected losses and recoveries, the amount and timing of the refunding and/or termination of insured obligations, realized gains and losses on the investment portfolio (including credit impairment), changes in foreign exchange rates, the effects of large settlements, commutations, acquisitions, the effects of the Company's various loss mitigation strategies, and changes in the fair value of investments in AssuredIM funds. In the Asset Management segment, changes in the fair value of AssuredIM funds affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 100 Table of Contents Condensed Consolidated Results of Operations Condensed Consolidated Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in millions) Revenues: Net earned premiums $ 107 $ 123 $ 331 $ 353 Net investment income 71 88 229 296 Asset management fees 17 — 60 — Net realized investment gains (losses) 13 16 12 12 Net change in fair value of credit derivatives (3) 5 20 (25) Fair value gains (losses) on financial guaranty VIEs — 4 (8) 42 Fair value gains (losses) on consolidated investment vehicles 18 — 37 — Foreign exchange gain (loss) on remeasurement 40 (21) (20) (24) Commutation gains (losses) — — 38 1 Other income (loss) 5 (9) 37 12 Total revenues 268 206 736 667 Expenses: Loss and loss adjustment expenses (LAE) 73 30 130 75 Interest expense 21 22 64 67 Amortization of deferred acquisition costs (DAC) 4 3 11 13 Employee compensation and benefit expenses 57 38 167 118 Other operating expenses 41 27 128 71 Total expenses 196 120 500 344 Income (loss) before income taxes and equity in net earnings of investees 72 86 236 323 Equity in net earnings of investees 7 — 3 3 Income (loss) before income taxes 79 86 239 326 Provision (benefit) for income taxes (10) 17 20 61 Net income (loss) 89 69 219 265 Less: Noncontrolling interest 3 — 5 — Net income (loss) attributable to AGL $ 86 $ 69 $ 214 $ 265 Third Quarter 2020 Compared with Third Quarter 2019 Net income attributable to AGL for Third Quarter 2020 was higher compared to the three-month period ended September 30, 2019 (Third Quarter 2019) primarily due to: • foreign exchange gains on remeasurement in Third Quarter 2020 compared with losses in Third Quarter 2019, • fair value gains in the consolidated AssuredIM funds (the consolidated investment vehicles), and • a tax benefit attributable to the release of reserves for uncertain tax positions. These increases were offset in part by: • higher loss and LAE attributable to U.S. RMBS, • lower net investment income due to lower average balances in the fixed maturity portfolio, • lower net earned premiums mainly due to lower accelerations from refundings and terminations, and • losses in the Asset Management segment. 101 Table of Contents Nine Months 2020 Compared with Nine Months 2019 Net income attributable to AGL for Nine Months 2020 was lower compared to the nine-month period ended September 30, 2019 (Nine Months 2019) primarily due to: • lower net investment income due to lower average balances in the fixed maturity investment portfolio, • higher loss and LAE attributable primarily to a lower benefit for U.S. RMBS transactions, offset in part by lower loss expense on public finance transactions, • fair value losses on FG VIE in Nine Months 2020 compared with gains in Nine Months 2019, • losses in the Asset Management segment, and • lower net earned premiums mainly due to lower accelerations from refundings and terminations. These decreases were offset in part by: • fair value gains on credit derivatives in Nine Months 2020 compared with losses in Nine Months 2019, • a commutation gain in Nine Months 2020 , • fair value gains in the consolidated investment vehicles, and • a tax benefit attributable to the release of reserves for uncertain tax positions. Shareholders' equity attributable to AGL decreased since December 31, 2019 primarily due to share repurchases and dividends, partially offset by net income. Adjusted operating shareholders' equity decreased in Nine Months 2020 as adjusted operating income was offset mainly by share repurchases and dividends. Adjusted book value decreased in Nine Months 2020 primarily due to share repurchases and dividends, partially offset by net premiums written. Shareholders' equity attributable to AGL per share, adjusted operating shareholders' equity per share and adjusted book value per share all increased in Nine Months 2020 to $79.63, $73.80 and $108.02, respectively. In Nine Months 2020, the Company repurchased an additional 11.4 million shares under the share repurchase program that began in 2013, at an average price of $27.99 per share during Nine Months 2020. See "Accretive Effect of Cumulative Repurchases" table below. The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, and no taxes for the Company’s Bermuda subsidiaries Assured Guaranty Re Ltd (AG Re), Assured Guaranty Re Overseas Ltd. (AGRO) and Cedar Personnel Ltd., unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. The effective tax rate in Third Quarter 2020 and Nine Months 2020 was lower than the comparable periods in 2019 due mainly to the release of a reserve for uncertain tax positions. Key Business Strategies The Company continually evaluates its business strategies. For example, with the BlueMountain Acquisition the Company has increased its focus on asset management and alternative investments. Currently, the Company is pursuing the following key business strategies in three areas: • Insurance • Asset Management and Alternative Investments • Capital Management 102 Table of Contents Insurance The Company seeks to grow the insurance business through new business production, acquisitions of legacy monolines or reinsurance of their portfolios, and to continue to mitigate losses in its current insured portfolio. Growth of the Insured Portfolio The Company seeks to grow its insurance portfolio through new business production in each of its three markets: U.S. public finance, international infrastructure and global structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance: • encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds; • enables institutional investors to operate more efficiently; and • allows smaller, less well-known issuers to gain market access on a more cost-effective basis. On the other hand, the persistently low interest rate environment and relatively tight U.S. municipal credit spreads have dampened demand for bond insurance compared to pre-financial crisis levels, and provisions in legislation known as the 2017 Tax Cuts and Jobs Act, such as the reduction in corporate tax rates, have made municipal obligations less attractive to certain institutional investors. In certain segments of the global infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company's business opportunities and its risk profile beyond U.S. public finance. Quarterly business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from quarter to quarter. While volatility and dislocation in the municipal finance market in the U.S. resulted in the Company issuing a reduced number of new insurance policies in late March and into April 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as the second quarter of 2020 progressed, and this continued in Third Quarter 2020. PVP for both the Third Quarter 2020 and Nine Months 2020 was very strong compared to a year ago. See "-- Results of Operations by Segment -- Insurance Segment" below. The Company cannot predict what impact the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, will have on the market for its insurance products over the medium term. On one hand, increased defaults and an increased focus on the credit of public finance issuers and other obligors may increase the perceived value of the Company’s insurance products, and so increase demand, as appears to have been the case in Third Quarter 2020. On the other hand, legislative responses, especially in the public finance sector, could reduce the need for the Company’s insurance products. While a reduction in new insurance business written compared to previous years would be unwelcome since it would impact the Company's net income in future years, it would have a limited impact on the current year’s net income, since the Company earns the premium for a new policy over the term of the policy, often as long as twenty or thirty years. In 2019, for example, only approximately 3% of the premiums the Company earned in 2019 related to new financial guaranty policies it wrote in 2019. 103 Table of Contents U.S. Municipal Market Data and Bond Insurance Penetration Rates (1) Based on Sale Date Nine Months 2020 Nine Months 2019 Year Ended December 31, 2019 (dollars in billions, except number of issues and percent) Par: New municipal bonds issued $ 330.4 $ 267.5 $ 406.6 Total insured $ 25.4 $ 15.6 $ 23.9 Insured by Assured Guaranty $ 15.1 $ 8.8 $ 14.0 Number of issues: New municipal bonds issued 8,536 7,313 10,590 Total insured 1,605 1,227 1,724 Insured by Assured Guaranty 734 616 839 Bond insurance market penetration based on: Par 7.7 % 5.8 % 5.9 % Number of issues 18.8 % 16.8 % 16.3 % Single A par sold 27.3 % 21.6 % 21.4 % Single A transactions sold 54.3 % 55.8 % 54.9 % $25 million and under par sold 22.0 % 18.4 % 18.1 % $25 million and under transactions sold 21.9 % 20.3 % 19.7 % ____________________ (1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business. The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios. These transactions enable the Company to improve its future earnings and deploy excess capital. In Nine Months 2020, the Company reassumed $336 million in par from its largest remaining legacy financial guaranty reinsurer. This commutation resulted in an increase of unearned premium reserve of $5 million and commutation gain of $38 million. Loss Mitigation In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolios, the Company employs a number of strategies. In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company's role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises. Currently, the Company is actively working to mitigate potential losses in connection with the obligations it insures of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations and was an active participant in negotiating the Puerto Rico Electric Power Authority (PREPA) restructuring support agreement and the Puerto Rico Sales Tax Financing Corporation (COFINA) plan of adjustment. The Company will also, where appropriate, pursue litigation to enforce its rights, and it has initiated a number of legal actions to enforce its rights in Puerto Rico. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure and the Insured Portfolio section below. The Company is currently working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS. 104 Table of Contents In some instances, the terms of the Company's policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief. Asset Management The establishment of AssuredIM represents a significant increase in the Company's participation in the asset management industry. AssuredIM is a diversified asset manager that serves as investment advisor to CLOs, opportunity and liquid strategy funds such as a municipal bond fund, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. AssuredIM manages structured and public finance, credit and special situation investments, with a track record dating back to 2003. AssuredIM underwrites assets and structures investments while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. In the second quarter of 2020, AssuredIM launched a new strategy, focused on more liquid investments. Liquid strategies are investment vehicles that typically offer investors redemption rights within one year and are largely invested in liquid securities, such as municipal obligations. As of September 30, 2020, liquid strategies includes a municipal bond fund, launched primarily with funds from the U.S. insurance subsidiaries, and management of a portfolio of the U.S. insurance companies' municipal obligation under an Investment Management Agreement (IMA). As of September 30, 2020, AssuredIM is a top-twenty CLO manager by AUM, as published by CreditFlux, and is led by an experienced CLO and loan research team. AssuredIM and its affiliates have issued 38 CLOs since inception, in both the U.S. and European markets. The CLOs have broad investor distribution with access to a diversified set of global investors. The team has focused on building diversified portfolios with a focus on free cash flow generation and downside protection. The Company allocated $500 million of capital to funds managed by AssuredIM plus additional amounts in other accounts managed by AssuredIM. The Company intends to use these capital investments to (a) launch new products in AssuredIM and (b) enhance the returns of its own investment portfolio. As of September 30, 2020, the Company had invested approximately $352 million, net of distributions, of the $500 million it intends to invest in AssuredIM funds. This capital was invested in four new investment vehicles, with each vehicle dedicated to a single strategy including CLOs, asset-backed finance, healthcare structured capital and municipal bonds. In addition, Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC) entered into an IMA with AssuredIM for the management of a portfolio of municipal obligations and a portfolio of CLOs. They have together allocated $250 million to municipal obligation strategies and $263 million to CLO strategies, with authorization to allocate an additional $37 million to CLOs strategies. All of these strategies are consistent with the investment strengths of AssuredIM and its plans to continue to grow its investment strategies. Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform. The Company intends to leverage AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations. Capital Management In recent years, the Company has developed several strategies to manage capital within the Assured Guaranty group efficiently. From 2013 through November 5, 2020, the Company has repurchased 118.9 million common shares for approximately $3,582 million, representing approximately 61% of the total shares outstanding at the beginning of the repurchase program in 2013. On November 2, 2020, the Board authorized an additional $250 million of share repurchases. Under this and previous authorizations, as of November 5, 2020, the Company had remaining authorization to repurchase $332 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 14, Shareholders' Equity, for additional information about the Company's repurchases of its common shares. 105 Table of Contents Summary of Share Repurchases Amount Number of Shares Average price per share (in millions, except per share data) 2013 - 2019 $ 3,216 105.72 $ 30.42 2020 (First Quarter) 116 3.63 32.03 2020 (Second Quarter) 164 5.96 27.49 2020 (Third Quarter) 40 1.86 21.72 2020 (through November 5, 2020) 46 1.73 $ 26.36 Cumulative repurchases since the beginning of 2013 $ 3,582 $ 118.90 $ 30.13 Accretive Effect of Cumulative Repurchases (1) Third Quarter 2020 Nine Months 2020 As of September 30, 2020 (per share) Net income (loss) attributable to AGL $ 0.48 $ 1.03 Adjusted operating income 0.22 0.94 Shareholders' equity attributable to AGL $ 28.85 Adjusted operating shareholders' equity 25.43 Adjusted book value 45.48 _________________ (1) Represents the estimated accretive effect of cumulative repurchases since the beginning of 2013. The Company considers the appropriate mix of debt and equity in its capital structure, and may repurchase some of its debt from time to time. For example, in Nine Months 2020, AGUS purchased $23 million of principal of AGMH's outstanding Junior Subordinated Debentures, which resulted in a loss on extinguishment of debt of $5 million in Nine Months 2020. Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH's outstanding Junior Subordinated Debentures. The Company may choose to make additional purchases of this or other Company debt in the future. Other Matters Ratings Demand for the financial guaranties issued by the Company's insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. On July 16, 2020, S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P), affirmed the ratings it assigns to AGL, AGL's insurance subsidiaries, and certain other AGL affiliates. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency assigning the rating, are shown in the table below. Ratings are subject to continuous rating agency review and revision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. 106 Table of Contents S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC Kroll Bond Rating Agency Moody’s Investors Service, Inc. A.M. Best Company, Inc. AGM AA (stable) (7/16/20) AA+ (stable) (10/29/20) A2 (stable) (8/13/19) — AGC AA (stable) (7/16/20) AA (stable) (10/29/20) (1) — Municipal Assurance Corp. (MAC) AA (stable) (7/16/20) AA+ (stable) (10/29/20) — — AG Re AA (stable) (7/16/20) — — — AGRO AA (stable) (7/16/20) — — A+ (stable) (7/13/20) Assured Guaranty (Europe) plc (AGE UK) AA (stable) (7/16/20) AA+ (stable) (10/29/20) A2 (stable) (8/13/19) — Assured Guaranty (Europe) SA (AGE SA) AA (stable) (7/16/20) AA+ (stable) (10/29/20) — — ____________________ (1) AGC requested that Moody’s Investors Service, Inc. (Moody’s) withdraw its financial strength ratings of AGC in January 2017, but Moody's denied that request. Moody’s continues to rate AGC A3 (stable). There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL's insurance subsidiaries in the future or cease to rate one or more of AGL's insurance subsidiaries, either voluntarily or at the request of that subsidiary. For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see Item 1, Financial Statements, Note 6, Reinsurance and "--Liquidity and Capital Resources--" section below. Brexit On June 23, 2016, a referendum was held in the U.K. in which a majority voted to exit the European Union (EU), known as “Brexit”. The U.K. government served notice to the European Council on March 29, 2017 of its desire to withdraw in accordance with Article 50 of the Treaty on European Union. As described in Part 1, Item 1, Business, Regulation of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, the U.K. parliament approved a withdrawal agreement with the EU and the U.K. left the EU on January 31, 2020. There is a transition period under the terms of the withdrawal agreement which will end on December 31, 2020. Negotiations have been ongoing during the transition period between the U.K. and EU to determine the wider terms of the U.K.'s future relationship with the EU, including the terms of trade between the U.K. and the EU. If the U.K. and EU fail to agree on the U.K.'s future relationship with the EU during the transition period ending on December 31, 2020, there will be considerable uncertainty as to the ongoing terms of the U.K’s relationship with the EU, including the terms of trade between the U.K. and the EU, and a likely negative impact on all parties. The Company established AGE SA in mid-2019 to address the potential impact of Brexit on the Company's ability to write new business in the European Economic Area (EEA), and to service existing business in the EEA. AGE SA was authorized by the French insurance and banking supervisory authority, the Autorité de Contrôle Prudential et de Résolution, on January 2, 2020, to provide insurance covering credit, suretyship and miscellaneous financial loss and was passported to write such insurance in certain other EEA member states. On October 1, 2020, AGE UK transferred those of its existing policies that are affected by Brexit to AGE SA in order for that company to service such business. LIBOR Sunset In 2017, the U.K.’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate London Interbank Offered Rate (LIBOR). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. While regulators have suggested substitute rates, including the Secured Overnight Financing Rate, the impact of the discontinuance of LIBOR, if it occurs, will be contract-specific. The Company has exposure to LIBOR in four areas of its operations: (i) issuers of obligations the Company insures have obligations, assets and hedges that reference LIBOR, and some of the obligations the Company insures reference LIBOR, (ii) debt issued by the Company's wholly owned subsidiaries AGUS and AGMH currently pay, or will convert to, a floating interest rate tied to LIBOR, (iii) CCS from which the Company benefits pay interest tied to LIBOR, and (iv) certain obligations issued by, and certain assets owned by, its consolidated investment vehicles pay interest tied to LIBOR. While the documents relevant to the consolidated investment vehicles were entered into after LIBOR sunset was 107 Table of Contents announced and generally contain fallback language contemplating the discontinuance of LIBOR, documents relevant to the other three areas were entered into before the LIBOR sunset was announced and generally contain less robust fallback language. The Company has reviewed its insured portfolio to identify insured transactions that it believes may be vulnerable to the transition from LIBOR. The review focused on insured issues that are scheduled or projected to have an outstanding principal balance as of December 31, 2021, the date of LIBOR’s scheduled sunset, and excluded, due to their immateriality, insured issues projected to have an outstanding principal balance of less than $1 million at December 31, 2021. The Company reviewed the language governing the setting of interest rates in the event of unavailability of LIBOR in the governing documents of all below-investment-grade (BIG) insured transactions (except those issues projected to have an outstanding principal balance of less than $1 million at December 31, 2021), which the Company believes are most likely to be vulnerable to issues relating to the setting of interest rates after the sunset of LIBOR. The Company has also reviewed relevant language in the documents relating to the debt issued by the Company and the CCS that benefit the Company. As a significant portion of these securities are likely, absent a legislative solution or agreement by the parties, to become fixed rate in December 2021, the initial benefit or harm of the sunset of LIBOR depends on the level of interest rates at such time. Also, whatever interest rate is set by the party responsible for calculating the interest rate may be challenged in the court by other parties in interest. The Company has initiated a dialogue with relevant trustees, calculation agents, auction agents, servicers and other parties responsible for implementing the rate change in these transactions. Most have not yet committed to a course of action. The documents for the LIBOR-based obligations and assets of the consolidated investment vehicles generally include relatively standardized fallback language for transitions to an alternative index. There is some uncertainty with respect to what alternative index will be adopted. Given the lack of clarity on decisions that parties responsible for calculating interest rates will make and the reaction of impacted parties as well as the unknown level of interest rates when the change occurs, the Company cannot at this time predict the impact of the discontinuance of LIBOR, if it occurs, on every obligor and obligation the Company enhances or on its own debt issuances. For more information, see the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Income Taxes The U.S. Internal Revenue Service and Department of the Treasury issued proposed regulations on July 10, 2019 relating to the tax treatment of passive foreign investment companies. The proposed regulations provide guidance on various passive foreign investment company rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. Management is currently in the process of evaluating the impact to its shareholders and business operations. Results of Operations Business Segments The Company reports its results of operations consistent with the manner in which the Company's CODM reviews the business to assess performance and allocate resources. Prior to the BlueMountain Acquisition on October 1, 2019, the Company's operating subsidiaries were all insurance companies, and results of operations were viewed by the CODM as one segment. Beginning in the fourth quarter of 2019, with the BlueMountain Acquisition and expansion into the asset management business, the Company now operates in two distinct segments, Insurance and Asset Management. The following describes the components of each segment, along with the Corporate division and Other categories. The Insurance and Asset Management segments are presented without giving effect to the consolidation of the financial guaranty (FG) VIEs and investment vehicles. See Item 1. Financial Statements, Note 11, Variable Interest Entities. The Insurance segment primarily consists of the Company's insurance subsidiaries that provide credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Insurance segment also includes the income (loss) from its proportionate equity investments in AssuredIM funds. The Asset Management segment consists of the Company's investment management subsidiaries and associated entities, which provide asset management services to outside investors as well as to the Company's Insurance segment. The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses. 108 Table of Contents The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH, as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies. Other items consist of intersegment eliminations, reclassification of asset management reimbursable expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain AssuredIM investment vehicles in which Insurance segment invests. The Company does not report assets by reportable segment as the CODM does not use assets to assess performance and allocate resources and only reviews assets at a consolidated level. The Company analyzes the operating performance of each segment using "adjusted operating income." See “-- Non-GAAP Financial Measures -- Adjusted Operating Income” below for definition of "adjusted operating income" (formerly known as non-GAAP operating income) and Item 1, Financial Statements, Note 2, Segment Information. Results for each segment include specifically identifiable expenses as well as allocations of expenses among legal entities based on time studies and other cost allocation methodologies based on headcount or other metrics. Total adjusted operating income includes the effect of consolidating both FG VIEs and investment vehicles; however the effect of consolidating such entities, including the related eliminations, is included in the "other" in the tables below, which represents the CODM's view, consistent with the management approach guidance for presentation of segment metrics. The following table summarizes adjusted operating income from the Company's business segment operations and also provides a reconciliation of the segment measure to net income on a consolidated GAAP basis. See also Item 1, Financial Statements, Note 2, Segment Information. Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Adjusted operating income (loss) by segment: Insurance $ 81 $ 107 $ 320 $ 379 Asset Management (12) — (30) — Corporate (18) (28) (83) (79) Other (3) (2) (7) 4 Adjusted operating income (loss) $ 48 $ 77 $ 200 $ 304 Reconciling items from adjusted operating income to net income (loss) attributable to AGL: Plus pre-tax adjustments: Realized gains (losses) on investments $ 13 $ 16 $ 12 $ 12 Non-credit impairment unrealized fair value gains (losses) on credit derivatives (3) 11 6 (29) Fair value gains (losses) on CCS (10) (14) 13 (4) Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves 40 (20) (15) (23) Total pre-tax adjustments 40 (7) 16 (44) Plus tax effect on pre-tax adjustments (2) (1) (2) 5 Net income (loss) attributable to AGL $ 86 $ 69 $ 214 $ 265 109 Table of Contents Results of Operations by Segment Insurance Segment Results Insurance Results Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Revenues Net earned premiums and credit derivative revenues $ 113 $ 129 $ 345 $ 382 Net investment income 75 89 240 298 Commutation gains (losses) — — 38 1 Other income (loss) 1 4 8 16 Total revenues 189 222 631 697 Expenses Loss expense 76 37 133 66 Amortization of DAC 4 3 11 13 Employee compensation and benefit expenses 35 34 105 105 Other operating expenses 19 23 59 60 Total expenses 134 97 308 244 Equity in net earnings of investees (1) 20 1 37 3 Adjusted operating income (loss) before income taxes 75 126 360 456 Provision (benefit) for income taxes (6) 19 40 77 Adjusted operating income (loss) $ 81 $ 107 $ 320 $ 379 ____________________ (1) Includes interest income of $6 million in Third Quarter 2020 and $13 million in Nine Months 2020 related to consolidated investment vehicles' investments in debt securities. 110 Table of Contents Insurance New Business Production Gross Written Premiums and New Business Production Third Quarter Nine Months 2020 2019 2020 2019 (in millions) GWP Public Finance—U.S. $ 93 $ 46 $ 182 $ 119 Public Finance—non-U.S. 28 20 143 34 Structured Finance—U.S. 1 2 10 4 Structured Finance—non-U.S. (1) 1 (1) 2 Total GWP $ 121 $ 69 $ 334 $ 159 PVP (1): Public Finance—U.S. $ 93 $ 46 $ 182 $ 122 Public Finance—non-U.S. 24 16 73 28 Structured Finance—U.S. — 25 9 33 Structured Finance—non-U.S. — 2 — 4 Total PVP $ 117 $ 89 $ 264 $ 187 Gross Par Written (1): Public Finance—U.S. $ 6,932 $ 4,212 $ 14,855 $ 9,885 Public Finance—non-U.S. 500 237 1,434 712 Structured Finance—U.S. — 438 188 1,159 Structured Finance—non-U.S. — 22 — 43 Total gross par written $ 7,432 $ 4,909 $ 16,477 $ 11,799 Average rating on new business written BBB+ A- A- A- ____________________ (1) PVP and Gross Par Written in the table above are based on "close date," when the transaction settles. See “– Non-GAAP Financial Measures – PVP or Present Value of New Business Production.” GWP relates to both financial guaranty insurance and specialty insurance and reinsurance contracts. Financial guaranty GWP includes (1) amounts collected upfront on new business written, (2) the present value of future contractual or expected premiums on new business written (discounted at risk free rates), and (3) the effects of changes in the estimated lives of transactions in the inforce book of business. Specialty insurance and reinsurance GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore are not included in GWP. The non-GAAP measure, PVP, on the other hand, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, for all contracts whether in insurance or credit derivative form. See Non-GAAP Financial Measures below. Third Quarter 2020 U.S. public finance GWP and PVP, including transactions guaranteed in both the primary and secondary markets, doubled compared with Third Quarter 2019. The average rating of all U.S. public finance par written in Third Quarter 2020 was BBB+. The Company guaranteed 63% of insured U.S. public finance new issuance par in Third Quarter 2020, representing 5.2% penetration of the total new issuance market, compared to 3.0% in Third Quarter 2019. Outside the U.S., public finance GWP increased 40% and PVP increased 50% in Third Quarter 2020, compared with Third Quarter 2019. In Third Quarter 2020, the Company's new French subsidiary, AGE SA, wrote a guaranty of a solar bond transaction in Spain, and the Company's U.K. subsidiary wrote a guaranty of a U.K. university student housing transaction. The Company has consistently written new non-U.S. public finance business every quarter since the end of 2015. 111 Table of Contents The Company did not write any structured finance transactions in Third Quarter 2020. Business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period. Nine Months 2020 Nine Months 2020 GWP increased 110%, and PVP increased 41% compared with Nine Months 2019, driven by public finance new business production in both, the U.S and Europe. U.S public finance GWP and PVP increased by 53% and 49%, respectively. The average rating of U.S. public finance par written was A-, and represented 59% of the total U.S. municipal market insured issuance in Nine Months 2020. Outside the U.S., increases in public finance GWP and PVP were attributable primarily to several guaranties of solar bond transactions in Spain, and a secondary market guaranty to a European financial institution for a public sector credit, all written by the Company's new French subsidiary, AGE SA, as well as a U.K. university housing transaction written by the Company's U.K subsidiary. In addition, several insured transactions were restructured resulting in no additional insured exposure. Structured finance new business production declined in Nine Months 2020 compared with Nine Months 2019, which included a large transaction in the Third Quarter 2019. Net Earned Premiums and Credit Derivative Revenues Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, reassumptions of previously ceded business or books of business acquired in a business combination. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information. Credit derivative revenue represents realized gains on credit derivatives representing premiums received and receivable. Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by (a) refundings of insured obligations or (b) terminations of insured obligations either through negotiated agreements or the exercise of the Company's contractual rights to make claim payments on an accelerated basis. Refundings occur in the public finance market and had been at historically high levels until recently primarily due to the low interest rate environment, which allowed many municipalities and other public finance issuers to refinance their debt obligations at lower rates. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When such issuers pay down insured obligations prior to their originally scheduled maturities, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the nonrefundable deferred premium revenue remaining. Provisions in the 2017 Tax Cuts and Jobs Act regarding the termination of the tax-exempt status of advance refunding bonds have resulted in fewer refundings. Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations are more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable. 112 Table of Contents Net Earned Premiums and Credit Derivative Revenues Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Financial guaranty insurance: 71 Public finance Scheduled net earned premiums $ 75 $ 68 $ 218 $ 211 Accelerations: Refundings 17 27 58 76 Terminations — 10 6 10 Total accelerations 17 37 64 86 Total public finance 92 105 282 297 Structured finance Scheduled net earned premiums 17 18 51 61 Accelerations — 1 — 7 Total structured finance 17 19 51 68 Specialty insurance and reinsurance — 1 2 4 Total net earned premiums $ 109 $ 125 $ 335 $ 369 Credit derivative revenues 4 4 10 13 Total net earned premiums and credit derivative revenue $ 113 $ 129 $ 345 $ 382 Net earned premiums decreased in Third Quarter 2020 compared with Third Quarter 2019 primarily due to a decrease in public finance accelerations of net earned premiums from refundings and terminations, offset in part by an increase in scheduled earned premiums due to higher levels of premiums written in recent periods. Net earned premiums decreased in Nine Months 2020 compared with Nine Months 2019, primarily due to the reduction in net earned premiums from accelerations and scheduled decline in structured finance par outstanding, in addition to a reduction in accelerations. At September 30, 2020, $3.8 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts. Credit derivative revenues have declined in Nine Months 2020 compared with Nine Months 2019 primarily due to the scheduled decline in the net par outstanding. The Company has not written new credit derivatives since 2009. Other than credit derivatives that may be acquired in business combinations and reinsurance agreements, or as part of loss mitigation strategies, credit derivative exposure is expected to decline. Net Investment Income and Equity in Net Earnings of Investees Net investment income is a function of the yield earned and the size of the investment portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Net investment income in the Insurance segment represents income earned on the available for sale portfolio, short-term investments and invested assets other than equity method investments. Equity method investments in the Insurance segment include the insurance companies' investments in AssuredIM funds, as well as other direct investments. The income (loss) on such investments is presented as a separate line item, "equity in earnings of investees." The Company currently intends to invest up to $500 million in AssuredIM funds, and as of September 30, 2020 had invested $352 million, net of distributions. 113 Table of Contents Net Investment Income and Equity in Net Earnings of Investees Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Managed by third parties $ 54 $ 67 $ 178 $ 207 Internally managed: AssuredIM 3 — 3 — Loss mitigation and other securities 17 23 57 95 Intercompany loans 3 1 8 2 Gross investment income 77 91 246 304 Investment expenses (2) (2) (6) (6) Net investment income $ 75 $ 89 $ 240 $ 298 AssuredIM funds $ 13 $ — $ 29 $ — Other 7 1 8 3 Equity in net earnings of investees (1) 20 1 37 3 ____________________ (1) Includes interest income of $6 million in Third Quarter 2020 and $13 million in Nine Months 2020 related to consolidated investment vehicles' investments in debt securities. Net investment income for Third Quarter 2020 and Nine Months 2020 decreased compared to Third Quarter 2019 and Nine Months 2019, primarily due to (1) lower average balances in the externally managed fixed-maturity investment portfolio, which declined due to dividends paid from the insurance subsidiaries that were used for AGL share repurchases, and a shift of assets to AssuredIM funds, and other alternative investments, and (2) lower average balances in the portfolio of securities purchased for loss mitigation purposes, which typically earn a higher yield than the externally managed portfolio of fixed maturities, as balances amortize or are settled. In Nine Months 2019, a large loss mitigation security was favorably settled and is no longer in the loss mitigation security portfolio; the proceeds of the settlement were reinvested in the assets that had lower yields. The overall pre-tax book yield was 3.40% as of September 30, 2020 and 3.63% as of September 30, 2019. Excluding the internally managed portfolio, pre-tax book yield was 3.00% as of September 30, 2020 and 3.22% as of September 30, 2019. The fair value gains on investments in AssuredIM funds in Third Quarter 2020 and Nine Months 2020 were attributable to price appreciation in all AssuredIM funds. Commutation Gains (Losses) In Nine Months 2020, the Company reassumed $336 million in par from its largest remaining legacy third party financial guaranty reinsurer. This commutation resulted in an increase of unearned premium reserve of $5 million and commutation gain of $38 million. Other Income (Loss) Other income (loss) consists of recurring items such as those listed in the table below as well as ancillary fees on financial guaranty policies for commitments and consents, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries and other non-recurring items. 114 Table of Contents Other Income (Loss) Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Foreign exchange gain (loss) on remeasurement (1) $ — $ (1) $ (5) $ (1) Other 1 5 13 17 Total other income (loss) $ 1 $ 4 $ 8 $ 16 ____________________ (1) Primarily related to cash. Economic Loss Development The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies used in calculating the expected loss to be paid for all contracts and the accounting policies for measurement and recognition under GAAP for each type of contract, see the notes listed below in Part II. Item 8, Financial Statements and Supplementary Data, of the Company's 2019 Annual Report on Form 10-K: • Note 6 for expected loss to be paid • Note 7 for contracts accounted for as insurance • Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities • Note 11 for contracts accounted for as credit derivatives • Note 14 for FG VIEs In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid primarily consists of the present value of future: expected claim and LAE payments, expected recoveries from issuers or excess spread, cessions to reinsurers, expected recoveries/payables for breaches of representations and warranties, and the effects of other loss mitigation strategies. Current risk-free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported. Assumptions used in the determination of the net expected loss to be paid such as delinquency, severity, and discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used. The primary drivers of economic loss development are discussed below. Changes in risk-free rates used to discount losses affect economic loss development, and loss and LAE; however, the effect of changes in discount rates are not indicative of actual credit impairment or improvement in the period. Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) By Accounting Model Net Expected Loss to be Paid/ (Recovered) Net Economic Loss Development/ (Benefit) As of Third Quarter Nine Months September 30, 2020 December 31, 2019 2020 2019 2020 2019 (in millions) Insurance $ 421 $ 683 $ 65 $ 17 $ 96 $ 5 FG VIEs 63 58 (2) (2) 5 (26) Credit derivatives (13) (4) 7 10 — 7 Total $ 471 $ 737 $ 70 $ 25 $ 101 $ (14) Net exposure rated BIG $ 7,997 $ 8,506 115 Table of Contents Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) By Sector Net Expected Loss to be Paid/(Recovered) Net Economic Loss Development/(Benefit) As of Third Quarter Nine Months September 30, 2020 December 31, 2019 2020 2019 2020 2019 (in millions) U.S. public finance (1) $ 263 $ 531 $ 56 $ 50 $ 142 $ 204 Non-U.S. public finance 33 23 4 5 9 (4) Structured finance U.S. RMBS 137 146 1 (40) (61) (223) Other structured finance 38 37 9 10 11 9 Structured finance 175 183 10 (30) (50) (214) Total $ 471 $ 737 $ 70 $ 25 $ 101 $ (14) Effect of changes in the risk-free rates included in economic loss development (benefit) $ (2) $ 1 $ 30 $ (4) ____________________ (1) The total net expected loss for troubled U.S. public finance exposures is net of a credit for estimated future recoveries of $1,025 million as of September 30, 2020 and $819 million as of December 31, 2019 for claims already paid. Risk-Free Rates Risk-Free Rates used in Expected Loss for U.S. Dollar Denominated Obligations Range Weighted Average As of September 30, 2020 0.00 % - 1.52% 0.54 % As of June 30, 2020 0.00 % - 1.47% 0.57 % As of December 31, 2019 0.00 % - 2.45% 1.94 % As of September 30, 2019 0.00 % - 2.20% 1.79 % As of June 30, 2019 0.00 % - 2.63% 2.10 % As of December 31, 2018 0.00 % - 3.06% 2.74 % Third Quarter 2020 Net Economic Loss Development Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.4 billion as of September 30, 2020 compared with $5.8 billion as of December 31, 2019. The Company projects that its total net expected loss across its troubled U.S. public finance exposures as of September 30, 2020 will be $263 million, compared with $531 million as of December 31, 2019. Economic loss development on U.S. exposures in Third Quarter 2020 was $56 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $4 million for non-U.S. exposures during Third Quarter 2020 mainly due to the impact of lower Euro Interbank Offered Rate (Euribor). U.S. RMBS: The economic loss development attributable to U.S. RMBS was $1 million and was mainly related to reduction of excess spread of $6 million, and mostly offset by higher recoveries for secured charged-off loans and changes in discount rates. The economic development attributable to changes in discount rates was a gain of $2 million in Third Quarter 2020. Other Structured Finance Economic Loss Development: The economic loss development was approximately $9 million for other structured finance exposures during Third Quarter 2020, which was mainly attributable to loss adjustment expenses for certain transactions. 116 Table of Contents See Item 1, Financial Statements, Note 4, Expected Loss to be Paid for additional information. Third Quarter 2019 Net Economic Loss Development Public Finance Economic Loss Development: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.8 billion as of September 30, 2019 compared with $6.4 billion as of December 31, 2018. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of September 30, 2019 would be $520 million, compared with $832 million as of December 31, 2018. Economic loss development on U.S. exposures in Third Quarter 2019 was $50 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $5 million for non-U.S. exposures during Third Quarter 2019 due to the impact of negative European interest rates on an interest rate swap in an Italian transaction. U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $40 million and was mainly related to an increase in excess spread and improved performance. Other Structured Finance Economic Loss Development: The economic loss development was approximately $10 million for other structured finance exposures during Third Quarter 2019, which was mainly attributable to higher expected LAE related to certain exposures. Nine Months 2020 Net Economic Loss Development Economic loss development on U.S. public finance exposures in Nine Months 2020 was $142 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $9 million for non-U.S. public finance exposures during Nine Months 2020 mainly due to the impact of lower Euribor. The net benefit attributable to U.S. RMBS was $61 million and was mainly related to higher excess spread on certain transactions supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to LIBOR, which decreased in Nine Months 2020, and partially offset by COVID-19 related forbearances. The economic development attributable to changes in discount rates was a loss of $30 million in Nine Months 2020. Nine Months 2019 Net Economic Loss Development The total economic benefit of $14 million in Nine Months 2019 was generated by the structured finance sector, partially offset by the economic loss development in the U.S. public finance sector. The economic benefit in the structured finance sector in Nine Months 2019 was $214 million, which was primarily attributable to an increase in excess spread, higher projected recoveries for previously charged-off loans for second lien U.S. RMBS, improved performance, and loss mitigation efforts. This was partially offset by U.S. public finance economic loss development of $204 million, which was primarily attributable to Puerto Rico exposures. The effect of the change in the risk-free rates used to discount expected losses was a benefit of $4 million in Nine Months 2019. Insurance Segment Loss and LAE The primary differences between net economic loss development and the amount reported as loss and LAE in the condensed consolidated statements of operations are that loss and LAE: (1) considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty insurance contracts, (2) eliminates loss and LAE related to consolidated FG VIEs, and (3) does not include estimated losses on credit derivatives. Loss and LAE reported in the Insurance segment adjusted operating income (i.e., adjusted loss and LAE) includes loss and LAE on financial guaranty insurance contracts (without giving effect to eliminations related to consolidation of FG VIEs), plus credit derivative losses. For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies. 117 Table of Contents The amount of loss and LAE recognized in the Insurance segment income, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. While expected loss to be paid is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies. The following table presents the Insurance segment loss and LAE, net of reinsurance. Insurance Segment Loss and LAE (Benefit) Third Quarter Nine Months 2020 2019 2020 2019 (in millions) U.S. public finance $ 61 $ 64 $ 153 $ 228 Non-U.S. public finance 3 1 3 (7) Structured finance U.S. RMBS 6 (39) (32) (172) Other structured finance 6 11 9 17 Structured finance 12 (28) (23) (155) Total loss and LAE (benefit) $ 76 $ 37 $ 133 $ 66 The primary components of the Insurance segment loss and LAE expense were as follows: • Loss and LAE in Third Quarter 2020 and Nine Months 2020 was mainly driven by loss expense on certain Puerto Rico transactions. For Nine Months 2020, these losses were partially offset by a benefit in U.S. RMBS transactions. • Loss and LAE in Third Quarter 2019 and Nine Months 2019 was mainly driven by higher losses on certain Puerto Rico exposures, partially offset by a benefit in U.S. RMBS exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Losses. 118 Table of Contents Asset Management Segment Results Asset Management Results Third Quarter Nine Months 2020 2020 (in millions) Revenues Management fees: CLOs $ 5 $ 12 Opportunity funds and liquid strategies 2 7 Wind-down funds 5 21 Total management fees (1) 12 40 Other income 2 4 Total revenues 14 44 Expenses Amortization of intangible assets 3 9 Employee compensation and benefit expenses 19 51 Other operating expenses (1) 7 21 Total expenses 29 81 Adjusted operating income (loss) before income taxes (15) (37) Provision (benefit) for income taxes (3) (7) Adjusted operating income (loss) $ (12) $ (30) _____________________ (1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses. Asset Management Fees Management fees from CLOs are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO equity that is held directly by AssuredIM funds. Gross management fees from CLOs, before rebates to AssuredIM funds, we re $8 million and $25 million for Third Quarter 2020 and Nine Months 2020, respectively. The COVID-19 pandemic and resulting volatility and downgrades in loan markets have triggered over-collateralization provisions in CLOs, resulting in the deferral of $3 million and $6 million in CLO management fee payments for Third Quarter 2020 and Nine Months 2020, respectively, as well as slowed the issuance of CLOs. Management fees from opportunity funds and liquid strategies are mainly attributable to previously established opportunity funds and also include three funds created since the Company's acquisition of BlueMountain in the fourth quarter of 2019 in which the Insurance segment’s U.S. insurance subsidiaries invest. Total opportunity funds and liquid strategies'' AUM, including assets managed under an IMA with the insurance companies, includes $620 million in AUM of the Company's U.S.insurance subsidiaries. Distributions to investors in the wind-down funds are expected to continue, at least into 2021. There were de minimis performance fees recognized in Third Quarter 2020 and Nine Months 2020. Performance fees are recorded when the contractual performance criteria (sometimes referred to as "high water marks" or "return hurdles") have been met and when it is probable that a significant reversal of revenues will not occur in future reporting periods. For opportunity funds, these conditions are met typically close to the end of the fund’s life. The Company's current opportunity funds were not near the end of their harvest period during the quarter, when they would typically earn performance fees. Expenses Expenses primarily consist of employee compensation and benefits, and also include other operating expenses such as rent, depreciation and amortization related to the leases held by AssuredIM in New York and London. Amortization of finite- 119 Table of Contents lived intangible assets, which mainly consist of AssuredIM's CLO and investment management contracts and its CLO distribution network, was $3 million and $9 million during Third Quarter 2020 and Nine Months 2020, respectively. As of September 30, 2020, the Company h as $114 million in goodwill and $66 million in finite-lived intangible assets associated with its acquisition of BlueMountain. In 2020, the Company assessed the carrying value of these intangible assets and determined no impairment occurred. The Company continues to evaluate developments in market conditions, changes in key personnel and other factors that may impact the Company’s ability to raise third party funds and retain and attract professionals, which may affect the carrying value of, and result in an impairment of, goodwill or intangible assets. Assets Under Management The Company uses AUM as a metric to measure progress in its Asset Management segment. The Company uses measures of its AUM in its decision making process and intends to use a measure of change in AUM in its calculation of certain components of management compensation. Investors also use AUM to evaluate companies that participate in the asset management business. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following: • the amount of aggregate collateral balance and principal cash of AssuredIM's CLOs, including CLO equity that may be held by AssuredIM funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji). AssuredIM is not the investment manager of BM Fuji CLOs, but rather has entered into a services agreement and a secondary agreement with BM Fuji pursuant to which AssuredIM provides certain services associated with the management of BM Fuji-advised CLOs and acts in the capacity of service provider, and • the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments. The Company's calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which AssuredIM affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways. The Company also uses several other measurements of AUM to understand and measure its AUM in more detail and for various purposes, including its relative position in the market and its income and income potential: • “Third-party assets under management” or “3rd Party AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in AssuredIM's funds. For CLOs, this also includes CLO equity that may be held by AssuredIM's funds. • “Intercompany assets under management” or “Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners' investments of AssuredIM (or its affiliates) into the funds. • “Funded assets under management” or “Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs. • “Unfunded assets under management” or “Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse fund. • “Fee earning assets under management” or “Fee Earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors. • “Non-fee earning assets under management” or “Non-Fee Earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors. AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company. Further, to the extent that the Company's wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance compensation earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by AssuredIM. 120 Table of Contents Rollforward of Assets Under Management Third Quarter 2020 CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) AUM, June 30, 2020 $ 13,212 $ 973 $ 371 $ 2,460 $ 17,016 Inflows 168 — — — 168 Outflows: Redemptions — — — — — Distributions (45) (27) — (228) (300) Total outflows (45) (27) — (228) (300) Net flows 123 (27) — (228) (132) Change in fund value 76 38 7 21 142 AUM, September 30, 2020 $ 13,411 $ 984 $ 378 $ 2,253 $ 17,026 Rollforward of Assets Under Management Nine Months 2020 CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) AUM, December 31, 2019 $ 12,758 $ 1,023 $ — $ 4,046 $ 17,827 Inflows 909 118 370 — 1,397 Outflows: Redemptions — — — — — Distributions (325) (195) — (1,644) (2,164) Total outflows (325) (195) — (1,644) (2,164) Net flows 584 (77) 370 (1,644) (767) Change in fund value 69 38 8 (149) (34) AUM, September 30, 2020 $ 13,411 $ 984 $ 378 $ 2,253 $ 17,026 121 Table of Contents Components of Assets Under Management CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) As of September 30, 2020: Funded AUM $ 13,350 $ 879 $ 378 $ 2,231 $ 16,838 Unfunded AUM 61 105 — 22 188 Fee Earning AUM $ 8,001 $ 805 $ 378 $ 2,093 $ 11,277 Non-Fee Earning AUM 5,410 179 — 160 5,749 Intercompany AUM (1) Funded AUM $ 331 $ 207 $ 357 $ — $ 895 Unfunded AUM 50 56 — — 106 As of December 31, 2019: Funded AUM $ 12,721 $ 796 $ — $ 3,980 $ 17,497 Unfunded AUM 37 227 — 66 330 Fee Earning AUM $ 3,438 $ 695 $ — $ 3,838 $ 7,971 Non-Fee Earning AUM 9,320 328 — 208 9,856 Intercompany AUM Funded AUM $ 19 $ 58 $ — $ — $ 77 Unfunded AUM 30 84 — — 114 _____________________ (1) Includes assets managed by AssuredIM under an IMA with its insurance affiliates of $265 million in CLO strategies and $255 million in liquid municipal strategies as of September 30, 2020. Total inflows of $1.4 billion in Nine Months 2020 includes CLO AUM inflows of $909 million, which mainly consists of $402 million for a new CLO, and an IMA with the U.S. insurance company subsidiaries to manage up to $300 million in CLO obligations, of which $263 million had been allocated as of September 30, 2020. Total outflows of $2.2 billion for Nine Months 2020, were mainly driven by the return of capital in wind-down funds, which include certain funds that are in their harvest period. CLO AUM includes CLO equity that is held by various AssuredIM funds of $286 million as of September 30, 2020, and $536 million as of December 31, 2019. This CLO equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM funds. AssuredIM funds sold CLO equity prior to the market dislocation caused by the COVID-19 pandemic in March, which contributed to the increase in fee earning AUM from $7,971 million as of December 31, 2019 to $11,277 million as of September 30, 2020; however CLO fees did not increase proportionately due to the breach of certain over-collaterization triggers that deferred certain CLO fees to future periods. The launch of a new liquid asset strategy contributed inflows of $370 million for Nine Months 2020. Funds raised in the new liquid strategies primarily include $100 million of capital from the Insurance segment's U.S. insurance subsidiaries that were invested in a new municipal bond fund, as well as a $250 million IMA with the U.S. insurance subsidiaries to manage a portfolio of municipal obligations. Opportunity fund inflows of $118 million for Nine Months 2020 consisted mainly of additional investments made by the U.S insurance subsidiaries in the first quarter of 2020. 122 Table of Contents Corporate Division Results Corporate Results Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Revenues Net investment income $ — $ 1 $ 1 $ 3 Other income (loss) 12 — 7 (1) Total revenues 12 1 8 2 Expenses Interest expense 24 23 72 69 Employee compensation and benefit expenses 3 4 11 13 Other operating expenses 5 4 16 11 Total expenses 32 31 99 93 Equity in net earnings of investees — (1) (5) — Adjusted operating income (loss) before income taxes (20) (31) (96) (91) Provision (benefit) for income taxes (2) (3) (13) (12) Adjusted operating income (loss) $ (18) $ (28) $ (83) $ (79) Other income in Third Quarter 2020 related to a benefit recognized by the Company in connection with the separation of the former Chief Investment Officer and Head of Asset Management. The loss on extinguishment of debt, recorded in other income, is related to AGUS's purchase of a portion of the principal amount of AGMH's outstanding Junior Subordinated Debentures. The loss represents the difference between the amount paid to purchase AGMH's debt and the carrying value of the debt, which includes the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009. Interest expense relates to debt issued by AGUS and AGMH. Intersegment interest expense of $3 million in Third Quarter 2020 and $8 million in Nine Months 2020, related primarily to the $250 million AGUS debt to AGM, AGC and MAC, which was borrowed in October 2019 in connection with the BlueMountain Acquisition. Intersegment interest expense was $1 million in Third Quarter 2019 and $2 million in Nine Months 2019. Compensation and benefits expenses allocated to the Corporate division are based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other expenses include Board of Director expenses, legal fees and other direct or allocated expenses. Equity in net earnings of investees was a loss in Nine Months 2020 due to a write down of AGUS' investment in an investment firm that provides investment banking services in the global infrastructure sector. Other Other primarily consists of intersegment eliminations, reclassifications of reimbursable fund expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain AssuredIM investment vehicles in which the operating companies (primarily the insurance subsidiaries in the Insurance segment) invest. The net effect on adjusted operating income (loss) of these items is presented in the table below. See Item 1, Financial Statements, Note 2, Segment Information. 123 Table of Contents VIE Consolidation Effect on Net Income (Loss) Attributable to AGL Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Effect of consolidating: FG VIEs $ (3) $ (2) $ (7) $ 4 Investment vehicles — — — — VIE consolidation effect $ (3) $ (2) $ (7) $ 4 The types of VIEs the Company consolidates when it is deemed to be the primary beneficiary primarily include (1) entities whose debt obligations the insurance subsidiaries insure, and (2) investment vehicles such as collateralized financing entities and funds managed by the Asset Management subsidiaries, in which the insurance company subsidiaries have a variable interest (consolidated investment vehicles). The Company eliminates the effects of intercompany transactions between consolidated VIEs and its insurance and asset management subsidiaries, as well as intercompany transactions between consolidated VIEs. Generally, the consolidation of the Company's consolidated investment vehicles and FG VIEs has a significant gross-up effect on the Company's assets, liabilities and cash flows. The consolidation of the investment vehicles have no net effect on the net income attributable to the Company. The majority of the economic interest the Company holds in consolidated funds is held by the insurance subsidiaries and presented in the Insurance segment. The ownership interests of the Company's consolidated funds, to which the Company has no economic rights, are reflected as either redeemable or nonredeemable noncontrolling interests in the consolidated funds in the Company's consolidated financial statements. See Item 1, Financial Statements, Note 11, Variable Interest Entities, for additional information. Reconciliation to GAAP Reconciliation of Net Income (Loss) Attributable to AGL To Adjusted Operating Income (Loss) Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Net income (loss) attributable to AGL $ 86 $ 69 $ 214 $ 265 Less pre-tax adjustments: Realized gains (losses) on investments 13 16 12 12 Non-credit impairment unrealized fair value gains (losses) on credit derivatives (3) 11 6 (29) Fair value gains (losses) on CCS (1) (10) (14) 13 (4) Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves 40 (20) (15) (23) Total pre-tax adjustments 40 (7) 16 (44) Less tax effect on pre-tax adjustments (2) (1) (2) 5 Adjusted operating income (loss) $ 48 $ 77 $ 200 $ 304 _____________________ (1) Presented in Other income (loss) on the condensed consolidated statements of operations. 124 Table of Contents Net Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). Net Realized Investment Gains (Losses) Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Gross realized gains on available-for-sale securities $ 16 $ 29 $ 39 $ 48 Gross realized losses on available-for-sale securities (3) (1) (12) (4) Credit impairments — (12) (15) (32) Net realized investment gains (losses) $ 13 $ 16 $ 12 $ 12 Credit impairment in Nine Months 2020 was related primarily to an increase in the allowance for credit loss on loss mitigation securities. Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in Nine Months 2020. Credit impairment in Third Quarter 2019 was primarily attributable to foreign exchange losses while Nine Months 2019 was primarily attributable to foreign exchange losses and loss mitigation securities. Non-Credit Impairment Unrealized Fair Value Gains (Losses) on Credit Derivatives Changes in the fair value of credit derivatives occur because of changes in the Company's own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates, and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-economic changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because it does not represent actual claims or expected losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods. The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM's portfolio, changes in AGM's credit spreads do not significantly affect the fair value of these CDS contracts. The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market over the past several years and as of September 30, 2020, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments. See Item 1, Financial Statements, Note 7, Fair Value Measurement, for additional information. 125 Table of Contents During Third Quarter 2020, unrealized fair value losses on credit derivatives were generated primarily as a result of the tightening of AGC spreads, partially offset by price improvements of the underlying collateral. During Third Quarter 2019, unrealized fair value gains were generated primarily as a result of price improvements on the underlying collateral of certain of the Company's public finance CDS, partially offset by unrealized fair value losses related to certain structured finance CDS transactions and effect of changes in discount rates. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company would expect to receive on these transactions increased. During Nine Months 2020, non-credit impairment fair value gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period. These gains were partially offset by the wider spreads of the underlying collateral and lower discount rates. During Nine Months 2019, unrealized fair value losses were generated primarily as a result of wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name during the period. These unrealized losses were offset by price improvements and the final maturity paydown of a CDS contract. Sensitivity to Changes in Credit Spread The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC. Effect of Changes in Credit Spread As of September 30, 2020 As of December 31, 2019 Credit Spreads (1) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain/(Loss) (Pre-Tax) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain/(Loss) (Pre-Tax) (in millions) Increase of 25 bps $ (270) $ (111) $ (315) $ (130) Base Scenario (159) — (185) — Decrease of 25 bps (97) 62 (97) 88 All transactions priced at floor (62) 97 (56) 129 ____________________ (1) Includes the effects of changes in the net spreads assumed by the Company. Fair Value Gains (Losses) on CCS Fair value losses on CCS in Third Quarter 2020 and Third Quarter 2019 were caused primarily by the tightening of market spreads during the periods. Fair value gains on CCS in Nine Months 2020 were primarily due to a widening in market spreads. Fair value losses on CCS recorded in Nine Months 2019 were primarily due to the decrease in interest rates during the year. Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. Foreign Exchange Gain (Loss) on Remeasurement Foreign exchange gains and losses in all periods primarily relate to remeasurement of premiums receivable and are mainly due to changes in the exchange rate of the euro and pound sterling relative to the U.S. dollar. Non-GAAP Financial Measures To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discloses both financial measures determined in accordance with GAAP and financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company. 126 Table of Contents By disclosing non-GAAP financial measures, the Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally. The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results. The Company also provides the effect of VIE consolidation that is embedded in each non-GAAP financial measure, as applicable, which the Company believes may also be useful to investors, analysts and financial news media to evaluate Assured Guaranty’s financial results. GAAP requires the Company to consolidate certain FG VIEs and investment vehicles. The Company does not own the consolidated FG VIEs and its exposure is limited to its obligation under the financial guaranty insurance contract. The Insurance segment presents the economic effect of the financial guaranty contracts associated with the consolidated FG VIEs. The Company does own a substantial ownership interest in its consolidated investment vehicles, which is reflected in the Insurance segment. Management and the Board of Directors use non-GAAP financial measures further adjusted to remove the effect of VIE consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision making process and in its calculation of certain components of management compensation. Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity, further adjusted to remove the effect of VIE consolidation, as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy. Management believes that many investors, analysts and financial news reporters also use adjusted book value, further adjusted to remove the effect of VIE consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Adjusted operating income further adjusted for the effect of VIE consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases. The core financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of VIE consolidation, (2) adjusted operating shareholders' equity, further adjusted to remove the effect of VIE consolidation, (3) growth in adjusted book value per share, further adjusted to remove the effect of VIE consolidation, and (4) PVP. In the first quarter of 2020, the Company changed the discount rate used in the calculation of PVP and net present value of estimated future net revenues, which is a component of adjusted book value. Beginning in 2020, the discount rate is the approximate average pre-tax fixed book yield of fixed-maturity securities purchased in the prior calendar year, excluding loss mitigation bonds. In prior periods the discount rate was a constant 6% discount rate. The Company made these changes and recast prior periods to better reflect the then current interest rate environment. The reconciliation tables of GAAP to non-GAAP financial measures for PVP and adjusted book value indicate the new discount rate for each relevant period. The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below. Adjusted Operating Income Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the underwriting results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. 127 Table of Contents 2) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company's credit spreads, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize. 5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. Adjusted Operating Shareholders’ Equity and Adjusted Book Value Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss. Adjusted operating shareholders’ equity is the basis of the calculation of adjusted book value (see below). Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. 2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. Management uses adjusted book value, further adjusted for VIE consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value per share, further adjusted for VIE consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following: 1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods. 2) Addition of the net present value of estimated net future revenue. See below. 128 Table of Contents 3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. Reconciliation of Shareholders’ Equity Attributable to AGL To Adjusted Book Value (1) As of September 30, 2020 As of December 31, 2019 After-Tax Per Share After-Tax Per Share (dollars in millions, except per share amounts) Shareholders’ equity attributable to AGL $ 6,549 $ 79.63 $ 6,639 $ 71.18 Less pre-tax adjustments: Non-credit impairment unrealized fair value gains (losses) on credit derivatives (50) (0.60) (56) (0.60) Fair value gains (losses) on CCS 65 0.79 52 0.56 Unrealized gain (loss) on investment portfolio excluding foreign exchange effect 563 6.85 486 5.21 Less taxes (99) (1.21) (89) (0.95) Adjusted operating shareholders’ equity 6,070 73.80 6,246 66.96 Pre-tax adjustments: Less: Deferred acquisition costs 118 1.44 111 1.19 Plus: Net present value of estimated net future revenue 183 2.23 206 2.20 Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed 3,346 40.68 3,296 35.34 Plus taxes (596) (7.25) (590) (6.32) Adjusted book value $ 8,885 $ 108.02 9,047 96.99 Gain (loss) related to VIE consolidation included in adjusted operating shareholders' equity (net of tax provision of $1 and $2) $ 1 $ 0.01 $ 7 $ 0.07 Gain (loss) related to VIE consolidation included in adjusted book value (net of tax benefit of $2 and $1) $ (8) $ (0.11) $ (4) $ (0.05) ___________________ (1) The discount rate used for net present value of estimated net future revenues as of September 30, 2020 is 3%. The prior period has been recast to present the net present value of net future revenues discounted at 3% instead of 6%. Net Present Value of Estimated Net Future Revenue Management believes that this amount is a useful measure because it enables an evaluation of the value of the present value of estimated net future revenue for contracts other than financial guaranty insurance contracts (such as specialty insurance and reinsurance contracts and credit derivatives). This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a 129 Table of Contents change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure. PVP or Present Value of New Business Production Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premium on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), whether in insurance or credit derivative contract form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual installment premiums may differ from those estimated in the Company's PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation. Reconciliation of GWP to PVP (1) Third Quarter 2020 Third Quarter 2019 Public Finance Structured Finance Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP $ 93 $ 28 $ 1 $ (1) $ 121 $ 46 $ 20 $ 2 $ 1 $ 69 Less: Installment GWP and other GAAP adjustments (2) — 28 1 (1) 28 — 20 2 (1) 21 Upfront GWP 93 — — — 93 46 — — 2 48 Plus: Installment premium PVP — 24 — — 24 — 16 25 — 41 PVP $ 93 $ 24 $ — $ — $ 117 $ 46 $ 16 $ 25 $ 2 $ 89 Nine Months 2020 Nine Months 2019 Public Finance Structured Finance Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total U.S. Non - U.S. U.S. Non - U.S. Total (in millions) Total GWP $ 182 $ 143 $ 10 $ (1) $ 334 $ 119 $ 34 $ 4 $ 2 $ 159 Less: Installment GWP and other GAAP adjustments (2) — 143 10 (1) 152 (3) 34 3 (1) 33 Upfront GWP 182 — — — 182 122 — 1 3 126 Plus: Installment premium PVP — 73 9 — 82 — 28 32 1 61 Total PVP $ 182 $ 73 $ 9 $ — $ 264 $ 122 $ 28 $ 33 $ 4 $ 187 ___________________ (1) The discount rate used for PVP as of September 30, 2020 is 3%. The prior period has been recast to present PVP discounted at 3% instead of 6%. (2) Includes present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions, and other GAAP adjustments. 130 Table of Contents Insured Portfolio Financial Guaranty Exposure The Company measures its financial guaranty exposure in terms of (a) gross and net par outstanding and (b) gross and net debt service, which includes scheduled principal and interest. The Company uses gross and net par outstanding and gross and net debt service to measure and understand the financial guaranty risk it guarantees in its Insurance segment and to understand its relative position in the fixed income markets. The Company typically guarantees the payment of principal and interest when due. Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure. Gross par outstanding generally represents the principal amount of the insured obligation at a point in time. Net par outstanding equals gross par outstanding net of any reinsurance. The Company includes in its par outstanding calculation the impact of any consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date. The Company purchases securities that it has insured, and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses (loss mitigation securities). The Company excludes amounts attributable to loss mitigation securities from par and debt service outstanding, which amounts are included in the investment portfolio, because the Company manages such securities as investments and not insurance exposure. As of both September 30, 2020 and December 31, 2019, the Company excluded $1.4 billion of net par attributable to loss mitigation securities. See Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure, for additional information. Gross debt service outstanding represents the sum of all estimated future principal and interest payments on the obligations insured, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any reinsurance. Future debt service payments include the impact of any consumer price index inflator after the reporting date, as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date. The Company calculates its debt service outstanding as follows: • for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company's public finance transactions), as the total estimated contractual future principal and interest due through maturity, regardless of whether the obligations may be called and regardless of whether, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, the Company believes the obligations will be repaid prior to contractual maturity; and • for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, RMBS and CLOs), as the total estimated expected future principal and interest due on insured obligations through their respective expected terms, which includes the Company's expectations as to whether the obligations may be called and, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity. The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation. The anticipated sunset of LIBOR at the end of 2021 has introduced another variable into the Company's calculation of future debt service. See the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract. Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors. 131 Table of Contents The following table presents the insured financial guaranty portfolio by sector, net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or VIE consolidation). Financial Guaranty Portfolio Net Par Outstanding and Average Internal Rating by Sector As of September 30, 2020 As of December 31, 2019 Sector Net Par Outstanding Avg. Rating Net Par Outstanding Avg. Rating (dollars in millions) Public finance: U.S.: General obligation $ 72,452 A- $ 73,467 A- Tax backed 34,723 A- 37,047 A- Municipal utilities 25,596 A- 26,195 A- Transportation 15,503 BBB+ 16,209 BBB+ Healthcare 8,688 BBB+ 7,148 A- Higher education 6,340 A- 5,916 A- Infrastructure finance 5,393 A- 5,429 A- Housing revenue 1,278 BBB 1,321 BBB+ Investor-owned utilities 645 A- 655 A- Renewable energy 207 A- 210 A- Other public finance 1,745 A- 1,890 A- Total public finance—U.S. 172,570 A- 175,487 A- Non-U.S.: Regulated utilities 18,377 BBB+ 18,995 BBB+ Infrastructure finance 17,451 BBB 17,952 BBB Sovereign and sub-sovereign 11,368 A+ 11,341 A+ Renewable energy 2,672 A- 1,555 A Pooled infrastructure 1,374 AAA 1,416 AAA Total public finance—non-U.S. 51,242 A- 51,259 A- Total public finance 223,812 A- 226,746 A- Structured finance: U.S.: RMBS 3,132 BBB- 3,546 BBB- Life insurance transactions 1,987 AA- 1,776 AA- Pooled corporate obligations 1,299 AA- 1,401 AA- Financial products 826 AA- 1,019 AA- Consumer receivables 815 A- 962 A- Other structured finance 522 BBB 596 BBB+ Total structured finance—U.S. 8,581 A- 9,300 A- Non-U.S.: RMBS 394 A 427 A Pooled corporate obligations 55 BB+ 55 BB+ Other structured finance 233 A+ 279 A+ Total structured finance—non-U.S. 682 A 761 A Total structured finance 9,263 A- 10,061 A- Total net par outstanding $ 233,075 A- $ 236,807 A- 132 Table of Contents The following table sets forth the Company’s net financial guaranty portfolio by internal rating. Financial Guaranty Portfolio by Internal Rating As of September 30, 2020 As of December 31, 2019 Rating Category Net Par Outstanding % Net Par Outstanding % (dollars in millions) AAA $ 4,108 1.8 % $ 4,361 1.8 % AA 26,021 11.2 29,037 12.3 A 103,575 44.4 111,329 47.0 BBB 91,404 39.2 83,574 35.3 BIG 7,967 3.4 8,506 3.6 Total net par outstanding $ 233,075 100.0 % $ 236,807 100.0 % Exposure to Puerto Rico The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $4.1 billion net par as of September 30, 2020, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except for Puerto Rico Aqueduct and Sewer Authority (PRASA), Municipal Finance Agency (MFA) and University of Puerto Rico (U of PR). The Company groups its Puerto Rico exposure into three categories: • Constitutionally Guaranteed. • Public Corporations – Certain Revenues Potentially Subject to Clawback. • Other Public Corporations. Additional information about recent developments in Puerto Rico and the individual exposures insured by the Company may be found in Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure. 133 Table of Contents Exposure to Puerto Rico As of September 30, 2020 Net Par Outstanding AGM AGC AG Re Eliminations (1) Total Net Par Outstanding Gross Par Outstanding (in millions) Commonwealth Constitutionally Guaranteed Commonwealth of Puerto Rico - General Obligation Bonds (2) $ 574 $ 185 $ 353 $ — $ 1,112 $ 1,150 Puerto Rico Public Buildings Authority (PBA) (2) 2 134 — (2) 134 140 Public Corporations - Certain Revenues Potentially Subject to Clawback Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) (2) 244 472 180 (79) 817 817 PRHTA (Highway revenue) (2) 399 63 31 — 493 493 Puerto Rico Convention Center District Authority (PRCCDA) — 152 — — 152 152 Puerto Rico Infrastructure Financing Authority (PRIFA) — 15 1 — 16 16 Other Public Corporations PREPA (2) 489 71 215 — 775 787 PRASA — 284 89 — 373 373 MFA 151 23 49 — 223 232 U of PR — 1 — — 1 1 Total exposure to Puerto Rico $ 1,859 $ 1,400 $ 918 $ (81) $ 4,096 $ 4,161 ___________________ (1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary. (2) As of the date of this filing, the seven-member financial oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) has certified a filing under Title III of PROMESA for these exposures. 134 Table of Contents The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors. Amortization Schedule of Net Par of Puerto Rico As of September 30, 2020 Scheduled Net Par Outstanding 2020 (4Q) 2021 (1Q) 2021 (2Q) 2021 (3Q) 2021 (4Q) 2022 2023 2024 2025 - 2029 2030 - 2034 2035 - 2039 2040 - 2044 2045 - 2047 Total (in millions) Commonwealth Constitutionally Guaranteed Commonwealth of Puerto Rico - General Obligation Bonds $ — $ — $ — $ 15 $ — $ 37 $ 14 $ 73 $ 289 $ 419 $ 265 $ — $ — $ 1,112 PBA — — — 13 — — 7 — 58 38 18 — — 134 Public Corporations - Certain Revenues Potentially Subject to Clawback PRHTA (Transportation revenue) — — — 18 — 28 33 4 165 180 307 82 — 817 PRHTA (Highway revenue) — — — 35 — 40 32 33 58 192 103 — — 493 PRCCDA — — — — — — — — 19 76 57 — — 152 PRIFA — — — — — — 2 — — — 7 7 — 16 Other Public Corporations PREPA — — — 28 — 28 95 93 386 141 4 — — 775 PRASA — — — — — — — 1 109 — 2 15 246 373 MFA — — — 44 — 43 23 19 89 5 — — — 223 U of PR — — — — — — — — — 1 — — — 1 Total $ — $ — $ — $ 153 $ — $ 176 $ 206 $ 223 $ 1,173 $ 1,052 $ 763 $ 104 $ 246 $ 4,096 135 Table of Contents Amortization Schedule of Net Debt Service of Puerto Rico As of September 30, 2020 Scheduled Net Debt Service 2020 (4Q) 2021 (1Q) 2021 (2Q) 2021 (3Q) 2021 (4Q) 2022 2023 2024 2025 - 2029 2030 - 2034 2035 - 2039 2040 - 2044 2045 - 2047 Total (in millions) Commonwealth Constitutionally Guaranteed Commonwealth of Puerto Rico - General Obligation Bonds $ — $ 29 $ — $ 45 $ — $ 95 $ 70 $ 128 $ 514 $ 572 $ 294 $ — $ — $ 1,747 PBA — 4 — 16 — 6 13 6 81 50 20 — — 196 Public Corporations - Certain Revenues Potentially Subject to Clawback PRHTA (Transportation revenue) — 21 — 40 — 69 74 42 340 314 371 89 — 1,360 PRHTA (Highway revenue) — 13 — 48 — 64 54 53 144 253 111 — — 740 PRCCDA — 3 — 3 — 7 7 7 52 103 61 — — 243 PRIFA — — — — — 1 2 1 5 3 10 8 — 30 Other Public Corporations PREPA 3 15 3 43 3 62 128 122 466 157 5 — — 1,007 PRASA — 10 — 10 — 19 19 20 190 68 70 82 272 760 MFA — 6 — 49 — 52 29 24 102 6 — — — 268 U of PR — — — — — — — — — 1 — — — 1 Total $ 3 $ 101 $ 3 $ 254 $ 3 $ 375 $ 396 $ 403 $ 1,894 $ 1,527 $ 942 $ 179 $ 272 $ 6,352 Financial Guaranty Exposure to U.S. RMBS The table below provides information on certain risk characteristics of the Company’s U.S. RMBS exposures. U.S. RMBS exposures represent 1.3% of the total net par outstanding, and BIG U.S. RMBS represent 19.1% of total BIG net par outstanding. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid, for a discussion of expected losses to be paid on U.S. RMBS exposures. Distribution of U.S. RMBS by Year Insured and Type of Exposure as of September 30, 2020 Year insured: Prime First Lien Alt-A First Lien Option ARMs Subprime First Lien Second Lien Total Net Par Outstanding (in millions) 2004 and prior $ 18 $ 18 $ — $ 508 $ 36 $ 580 2005 41 190 21 211 109 572 2006 38 37 9 205 187 476 2007 — 295 24 896 249 1,464 2008 — — — 40 — 40 Total exposures $ 97 $ 540 $ 54 $ 1,860 $ 581 $ 3,132 Exposures rated BIG $ 56 $ 299 $ 30 $ 964 $ 175 $ 1,524 136 Table of Contents Specialty Insurance and Reinsurance Exposure The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. All specialty insurance and reinsurance exposures shown in the table below were rated investment grade internally as of December 31, 2019. As of September 30, 2020, $30 million of aircraft residual value insurance exposure was rated BIG. Specialty Insurance and Reinsurance Exposure Gross Exposure Net Exposure As of As of September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 (in millions) Life insurance transactions (1) $ 1,025 $ 1,046 $ 883 $ 898 Aircraft residual value insurance policies 380 398 225 243 Total $ 1,405 $ 1,444 $ 1,108 $ 1,141 ____________________ (1) The life insurance transactions net exposure is projected to increase to approximately $0.9 billion by September 30, 2026. Reinsurer Exposures The Company has exposure to reinsurers through reinsurance arrangements (both as a ceding company and as an assuming company). In recent years, the Company has reassumed most of its previously ceded exposure but continues to cede portions of certain specialty exposures to reinsurers to mitigate risk. In recent years, the Company has also assumed additional financial guaranty exposures (from financial guarantors no longer writing new business). See Item 1, Financial Statements, Note 6, Reinsurance. Liquidity and Capital Resources Liquidity Requirements and Sources AGL and its Holding Company Subsidiaries The liquidity of AGL, AGUS and AGMH is largely dependent on dividends from their operating subsidiaries and their access to external financing. The operating liquidity requirements of AGL and the U.S. holding companies include the payment of operating expenses, interest on debt issued by AGUS and AGMH, and dividends on AGL's common shares. AGL and its holding company subsidiaries may also require liquidity to fund acquisitions of new businesses, to make capital investments in their operating subsidiaries, purchase the Company's outstanding debt, or in the case of AGL, to repurchase its common shares pursuant to its share repurchase authorization. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See “—Distributions From Subsidiaries” below for a discussion of the dividend restrictions of its insurance subsidiaries. 137 Table of Contents AGL fully and unconditionally guarantees all of the AGUS and AGMH debt. The following tables include summarized financial information for AGL and the U.S. holding company subsidiaries, excluding their investments in subsidiaries. AGUS and AGMH are shown on a combined basis as "U.S. Holding Companies" in the tables below. As of September 30, 2020 As of December 31, 2019 AGL U.S. Holding Companies AGL U.S. Holding Companies (in millions) Investments and cash (1) $ 7 $ 163 $ 135 $ 243 Receivables from affiliates (2) 29 — 29 — Receivable from U.S. Holding Companies 57 — 40 — Other assets 2 52 2 59 Long term debt — 1,220 — 1,231 Loans payable to affiliate — 290 — 290 Payable to affiliates (2) 8 11 9 5 Payable to AGL — 45 — 40 Other liabilities 6 120 8 130 ____________________ (1) As of September 30, 2020 and December 31, 2019, weighted average duration of U.S. Holding Companies' fixed-maturity securities (excluding AGUS' investment in AGMH's debt) was 1.8 years and 4.4 years, respectively. (2) Represents receivable and payables with non-guarantor subsidiaries. Nine Months 2020 AGL U.S. Holding Companies (in millions) Revenues $ — $ 8 Interest expense — 72 Other expenses 25 2 Income (loss) before provision for income taxes (25) (66) Equity in net earnings of investees — (5) Net income (loss) (25) (57) 138 Table of Contents The following table presents significant holding company cash flow activities (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities. AGL and U.S. Holding Company Subsidiaries Significant Cash Flow Items AGL U.S. Holding Companies (in millions) Third Quarter 2020 Intercompany sources $ 55 $ 111 Intercompany (uses) — (55) External sources (uses): Dividends paid to AGL shareholders (16) — Repurchases of common shares (1) (40) — Interest paid (2) — (8) Third Quarter 2019 Intercompany sources $ 180 $ 124 Intercompany (uses) — (90) External sources (uses): Dividends paid to AGL shareholders (17) — Repurchases of common shares (1) (150) — Interest paid (2) — (9) Nine Months 2020 Intercompany sources 265 292 Intercompany (uses) — (295) External sources (uses): Dividends paid to AGL shareholders (53) — Repurchases of common shares (1) (320) — Interest paid (2) — (49) Nine Months 2019 Intercompany sources 412 368 Intercompany (uses) — (237) External sources (uses): Dividends paid to AGL shareholders (56) — Repurchases of common shares (1) (340) — Interest paid (2) — (51) ____________________ (1) See Item 1, Financial Statements, Note 14, Shareholders' Equity, for additional information about share repurchases and authorizations. (2) See Long-Term Obligations below for interest paid by subsidiary. Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty. 139 Table of Contents For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 15, Long-Term Debt and Credit Facilities of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Commitments and Contingencies, and Long-Term Debt Obligations The Company has outstanding long-term debt issued primarily by AGUS and AGMH. All of AGUS' and AGMH's debt is fully and unconditionally guaranteed by AGL; AGL's guarantee of the junior subordinated debentures is on a junior subordinated basis. Principal Outstanding of Long-Term Debt and Intercompany Loans As of September 30, 2020 As of December 31, 2019 Principal Carrying Value Principal Carrying Value (in millions) AGUS - long-term debt $ 850 $ 845 $ 850 $ 844 AGUS - Intercompany loans 290 290 290 290 Total AGUS 1,140 1,135 1,140 1,134 AGMH - long-term debt 730 482 730 476 AGM - long-term debt 3 3 4 4 AGMH's long-term debt purchased by AGUS (1) (154) (107) (131) (89) Elimination of intercompany loans (290) (290) (290) (290) Total $ 1,429 $ 1,223 $ 1,453 $ 1,235 ____________________ (1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS. Loss on extinguishment of debt was $5 million in Nine Months 2020 and $1 million in Nine Months 2019. There was no loss on extinguishment of debt in Third Quarter 2020 and Third Quarter 2019. Issued by AGUS: 7% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 for net proceeds of $197 million. Although the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest at the date of redemption or, if greater, the make-whole redemption price. 5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 for net proceeds of $495 million. The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of common shares of AGL. The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest at the date of redemption or, if greater, the make-whole redemption price. Series A Enhanced Junior Subordinated Debentures. On December 20, 2006, AGUS issued $150 million of Debentures due 2066. The Debentures paid a fixed 6.4% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%. LIBOR may be discontinued. For more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Risks Related to the Financial, Credit and Financial Guaranty Markets in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019. AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date. The debentures are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption. Issued by AGMH: 6 7/8% QUIBS. On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due December 15, 2101, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption. 140 Table of Contents 6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption. 5.6% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption. Junior Subordinated Debentures. On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.4%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. LIBOR may be discontinued. For more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Risks Related to the Financial, Credit and Financial Guaranty Markets in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019. AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is twenty years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend to the shareholders of AGMH. In Nine Months 2020 and Nine Months 2019, AGUS purchased $23 million and $3 million of principal of the debentures, which resulted in a loss on extinguishment of debt on a consolidated basis of $5 million and $1 million for Nine Months 2020 and 2019, respectively. There were no purchases in Third Quarter 2020 and Third Quarter 2019. The Company may choose to make additional purchases of this or other Company debt in the future. Intercompany Loans and Guarantees On October 1, 2019 AGM, AGC and MAC made 10-year, 3.5% interest rate intercompany loans to AGUS totaling $250 million to fund the BlueMountain Acquisition and the related capital contributions. See the Company's 2019 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 2, Business Combinations and Assumption of Insured Portfolio, for additional information. In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. In 2018, the maturity date was extended to November 2023. As of September 30, 2020, $40 million remained outstanding. From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility. Furthermore, AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130 million aggregate principal amount of senior notes issued by AGUS and AGMH, and the $450 million aggregate principal amount of junior subordinated debentures issued by AGUS and AGMH, in each case, as described under "Commitments and Contingencies -- Long-Term Debt Obligations" above. 141 Table of Contents Insurance Subsidiaries Liquidity of the insurance subsidiaries is primarily used to pay for: • operating expenses, • claims on the insured portfolio, • dividends or other distributions to AGL, AGUS and/or AGMH, as applicable, • posting of collateral in connection with reinsurance and credit derivative transactions, if necessary, • reinsurance premiums, • principal of and, where applicable, interest on surplus notes, and • capital investments in their own subsidiaries, where appropriate. Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios. The Company targets a balance of its most liquid assets including cash and short-term securities, Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost. The insurance subsidiaries have allocated $500 million to invest in AssuredIM funds. As of September 30, 2020, the Insurance segment had invested $352 million, net of distributions, in AssuredIM funds which are accounted for under the equity method. On a consolidated basis, these investments are eliminated and the underlying funds and CLOs are consolidated. The insurance subsidiaries have committed an additional $106 million to the four AssuredIM funds that may be drawn in the future. See Item 1, Financial Statements, Note 11, Variable Interest Entities. Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company's insurance subsidiaries, insurance regulations and rating agency capital requirements. Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option. Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. Direct and indirect consequences of COVID-19 are causing financial distress to many of the obligors and assets underlying obligations guaranteed by the Company, and may result in increases in claims and loss reserves. The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it are unknown, so the Company cannot predict the ultimate size of any increases in claims that may result from the pandemic. In addition, the Company has net par exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $4.1 billion, all of which is rated BIG. Beginning in 2016, the Commonwealth and certain related authorities and public corporations have defaulted on obligations to make payments on its debt. Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public corporations is set forth in Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure. 142 Table of Contents Claims (Paid) Recovered Third Quarter Nine Months 2020 2019 2020 2019 Public finance $ (336) $ (279) $ (409) $ (516) Structured finance: U.S. RMBS 8 13 52 65 Other structured finance (6) (1) (10) — Structured finance 2 12 42 65 Claims (paid) recovered, net of reinsurance (1) $ (334) $ (267) $ (367) $ (451) ____________________ (1) Includes $0.1 million paid and $0.4 million paid for consolidated FG VIEs for Third Quarter 2020 and 2019, respectively, and $0.1 million paid and $12 million recovered for Nine Months 2020 and Nine Months 2019, respectively. In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner. If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds. Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $651 million as of September 30, 2020. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As of September 30, 2020, approximately $1.7 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM. The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled "pay-as-you-go" basis and to replicate the terms of a traditional financial guaranty insurance policy. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis. The transaction documentation with one counterparty for $123 million of the CDS insured by the Company requires the Company to post collateral, subject to a cap, to secure its obligation to make payments under such contracts. As of September 30, 2020, AGC did not have to post collateral to satisfy these requirements and the maximum posting requirement was $123 million. 143 Table of Contents Ratings Impact on Financial Guaranty Business A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay. See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Distributions From Insurance Subsidiaries The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of its liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Insurance Company Regulatory Requirements, of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a complete discussion of the Company's dividend restrictions applicable to AGC, AGM, MAC, AG Re and AGRO. Dividend restrictions by insurance subsidiary are as follows: • The maximum amount available during 2020 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $267 million, of which approximately $108 million is estimated to be available for distribution in the fourth quarter of 2020. • The maximum amount available during 2020 for AGC to distribute as ordinary dividends is approximately $166 million, of which approximately $42 million is available for distribution in the fourth quarter of 2020. • The maximum amount available during 2020 for MAC to distribute to MAC Assurance Holdings Inc. (MAC Holdings) as dividends without regulatory approval is estimated to be approximately $18 million, none of which is available for distribution in the fourth quarter of 2020. • Based on the applicable law and regulations, in 2020 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $128 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $274 million as of September 30, 2020. Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $237 million as of September 30, 2020, and (ii) the amount of statutory surplus, which as of September 30, 2020 was $301 million. • Based on the applicable law and regulations, in 2020 AGRO has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $103 million as of September 30, 2020. Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $401 million as of September 30, 2020, and (ii) the amount of statutory surplus, which as of September 30, 2020 was $289 million. 144 Table of Contents Distributions From / Contributions To Insurance Company Subsidiaries Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Dividends paid by AGC to AGUS $ 15 $ 15 $ 124 $ 81 Repurchase of common stock by AGC from AGUS — — — 100 Dividends paid by AGM to AGMH 87 109 159 187 Dividends paid by AG Re to AGL — 90 — 175 Dividends paid by MAC to MAC Holdings (1) — — 20 105 Dividends from AGE UK to AGM (2) 124 — 124 — Contributions from AGM to AGE SA (2) (97) — (123) — ____________________ (1) MAC Holdings distributed substantially all amounts to AGM and AGC, in proportion to their ownership percentages. (2) In 2020, the dividend paid to AGM from AGE UK was contributed to AGE SA. External Financing From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company. Commitments and Contingencies-Committed Capital Securities Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company does not consider itself to be the primary beneficiary of the trusts and the trusts are not consolidated in Assured Guaranty's financial statements. The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock. Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities is one-month LIBOR plus 200 bps. LIBOR may be discontinued. Fore more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Operational Risks in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019. AssuredIM Sources and Uses of Liquidity The Asset Management segment's sources of liquidity are (1) net working capital, (2) cash from operations, including management and performance fees (which are unpredictable as to amount and timing), and (3) capital contributions from AGUS (in the first quarter of 2020 $30 million had been contributed to supplement working capital). As of September 30, 2020, the Asset Management subsidiaries had $16 million in cash. 145 Table of Contents Liquidity needs in the Asset Management segment primarily include (1) paying operating expenses including compensation, (2) paying dividends or other distributions to AGUS, and (3) capital to support growth and expansion of the asset management business. In Third Quarter 2020, AssuredIM distributed $8.8 million to AGUS to fund AGUS's interest payment on its intercompany debt to the insurance subsidiaries. That debt was incurred in October 2019 to fund the BlueMountain Acquisition. Credit Facilities of Consolidated Investment Vehicles On June 26, 2020, CLOWH, as borrower, entered into a revolving credit facility pursuant to which CLOWH may borrow for purposes of purchasing loans during the CLO warehouse stage. Under the CLOWH revolving credit facility, the principal amount may not exceed $175 million. The current available commitment is determined by an advance rate of 70% based on the amount of equity contributed to the warehouse. Based on the current advance rate and amount of equity contributed, the available commitment for CLOWH as of September 30, 2020 was $67 million. As of September 30, 2020, CLOWH has drawn down $39 million. The maturity date of the revolving credit facility is January 15, 2029. The unpaid principal amounts will bear quarterly interest at a rate of 3-month LIBOR plus 175 bps. Accrued interest on all loans will be paid on the 15th of January, April, July and October beginning October 2020. On August 26, 2020, EUR 2021-1, as borrower, entered into a credit facility pursuant to which EUR 2021-1 may borrow for purposes of purchasing loans during the CLO warehouse stage. Under the EUR 2021-1 credit facility, the principal amount may not exceed €140 million (which was equivalent to $164 million as of September 30, 2020). The current available commitment is determined by an advance rate of 70% based on the amount of equity contributed to the warehouse. Based on the current advance rate and amount of equity contributed, the available commitment for EUR 2021-1 as of September 30, 2020 was €7 million (or $8 million). As of September 30, 2020, EUR 2021-1 had drawn down €7 million (or $8 million). The ramp up period under the credit facility terminates on August 26, 2021 and the final maturity date is August 25, 2022. During the ramp up period the unpaid principal amounts will bear interest at a rate of 3-month Euribor plus 170 bps. Thereafter the interest rate increases by 50 basis points per quarter until maturity. Accrued interest on all loans will be paid on the last day of the ramp up period or the closing date of the CLO, whichever is earlier, and then quarterly thereafter until maturity, or upon the payment in full by the borrower of all secured obligations, or upon CLO closing, whichever is earlier. The warehouses were in compliance with all financial covenants as of September 30, 2020. 146 Table of Contents Condensed Consolidated Cash Flows Condensed Consolidated Cash Flow Summary Third Quarter Nine Months 2020 2019 2020 2019 (in millions) Net cash flows provided by (used in) operating activities before effect of VIE consolidation $ (176) $ (168) $ (97) $ (365) Effect of VIE consolidation (1) (43) 1 (567) — Net cash flows provided by (used in) operating activities (219) (167) (664) (365) Net cash flows provided by (used in) investing activities before effect of VIE consolidation 158 373 566 908 Effect of VIE consolidation (1) 15 66 340 162 Net cash flows provided by (used in) investing activities 173 439 906 1,070 Dividends paid (16) (17) (53) (56) Repurchases of common stock (40) (150) (320) (340) Repurchase of debt — — (21) (3) Net cash flows provided by (used in) financing activities before effect of VIE consolidation — (1) (13) (17) Effect of VIE consolidation (1) 35 (67) 395 (162) Net cash flows provided by (used in) financing activities (2) (21) (235) (12) (578) Effect of exchange rate changes — (2) (7) (2) Cash and restricted cash at beginning of period 473 194 183 104 Total cash and restricted cash at the end of the period $ 406 $ 229 $ 406 $ 229 ____________________ (1) VIE consolidation includes the effects of FG VIEs and consolidated investment vehicles. (2) Claims paid on consolidated FG VIEs are presented in the condensed consolidated cash flow statements as a component of paydowns on FG VIEs' liabilities in financing activities as opposed to operating activities. Cash flows from operations, excluding the effect of consolidating VIEs, was an outflow of $97 million in Nine Months 2020 and an outflow of $365 million in Nine Months 2019. The decrease in cash outflows during 2020 was primarily due to larger claim payments in Nine Months 2019 mainly due to an approximately $273 million settlement of COFINA exposures, a $99 million increase in gross premiums received (net of commissions) in Nine Months 2020, as well as cash received as part of a commutation agreement in Nine Months 2020, offset in part by cash outflows for the Asset Management segment in Nine Months 2020. Cash flows from operations attributable to the effect of VIE consolidation was negative in Nine Months 2020 due to the inclusion of investing activities of consolidated investment vehicles, which included purchases of investments in consolidated funds and purchases of loans in consolidated CLOs. Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs’ assets. The decrease in investing cash inflows was mainly attributable to sales of securities to fund share repurchases and, in first quarter of 2019, the COFINA claim payment. Financing activities primarily consisted of share repurchases, dividends, debt extinguishment and paydowns of FG VIEs’ liabilities. In Third Quarter 2020 and Nine Months 2020 it also included issuances of CLOs of consolidated investment vehicles, bank borrowings and contributions from minority interest holders into consolidated investment funds. From October 1, 2020 through November 5, 2020, the Company repurchased an additional 1.7 million of common shares. As of November 5, 2020, the Company was authorized to purchase $332 million of its common shares, including a $250 million additional authorization that was approved by the Board on November 2, 2020. For m ore information about th e Company's share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders' Equity. 147 Table of Contents Leases AGL and its subsidiaries lease office space and certain other items. Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed since December 31, 2019. See Item 1, Financial Statements, Note 13, Commitments and Contingencies. Investment Portfolio The disruption in the financial markets related to COVID-19 has contributed to credit impairment losses on certain loss mitigation securities in the investment portfolio, which are recognized in the condensed consolidated statements of operations. The disruption in the financial markets caused by COVID-19 had contributed to unrealized losses in the investment portfolio in the first quarter of 2020, which have since reversed. Losses in the Company’s investment portfolio impact its U.S GAAP financial statements. Credit impairment losses also impact its capital as measured by insurance regulators and rating agencies. The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income. The Company’s fixed-maturity securities and short-term investments had a duration of 4.1 years as of both September 30, 2020 and December 31, 2019. Generally, the Company’s fixed-maturity securities are designated as available-for-sale. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Item 1, Financial Statements, Note 8, Investments and Cash. Fixed-Maturity Securities and Short-Term Investments by Security Type As of September 30, 2020 As of December 31, 2019 Amortized Cost (1) Estimated Fair Value Amortized Cost Estimated Fair Value (in millions) Fixed-maturity securities: Obligations of state and political subdivisions $ 3,665 $ 3,999 $ 4,036 $ 4,340 U.S. government and agencies 179 192 137 147 Corporate securities 2,179 2,273 2,137 2,221 Mortgage-backed securities (2): RMBS 612 606 745 775 Commercial mortgage-backed securities (CMBS) 367 396 402 419 Asset-backed securities 932 947 684 720 Non-U.S. government securities 146 143 230 232 Total fixed-maturity securities 8,080 8,556 8,371 8,854 Short-term investments 858 858 1,268 1,268 Total fixed-maturity and short-term investments $ 8,938 $ 9,414 $ 9,639 $ 10,122 ____________________ (1) In 2020, the Company established an allowance for credit losses which was $76 million as of September 30, 2020. (2) U.S. government-agency obligations were approximately 37% of mortgage backed securities as of September 30, 2020 and 42% as of December 31, 2019, based on fair value. 148 Table of Contents Fixed-Maturity Securities Gross Unrealized Loss by Length of Time For Which an Allowance for Credit Loss was Not Recorded As of September 30, 2020 Less than 12 months 12 months or more Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Obligations of state and political subdivisions $ 89 $ (2) $ — $ — $ 89 $ (2) U.S. government and agencies 20 — — — 20 — Corporate securities 39 (1) 57 (8) 96 (9) Mortgage-backed securities: RMBS 20 (1) 1 — 21 (1) CMBS — — 1 — 1 — Asset-backed securities 122 — 94 (1) 216 (1) Non-U.S. government securities 10 — 41 (7) 51 (7) Total $ 300 $ (4) $ 194 $ (16) $ 494 $ (20) Number of securities (1) 93 55 147 Fixed-Maturity Securities Gross Unrealized Loss by Length of Time As of December 31, 2019 Less than 12 months 12 months or more Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Obligations of state and political subdivisions $ 45 $ (1) $ — $ — $ 45 $ (1) U.S. government and agencies 5 — 5 — 10 — Corporate securities 61 — 119 (19) 180 (19) Mortgage-backed securities: RMBS 10 — 75 (7) 85 (7) CMBS — — 4 — 4 — Asset-backed securities 24 — 183 (2) 207 (2) Non-U.S. government securities — — 56 (5) 56 (5) Total $ 145 $ (1) $ 442 $ (33) $ 587 $ (34) Number of securities 57 119 176 Number of securities with OTTI 1 7 8 ___________________ (1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column. Of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, as of September 30, 2020, 22 securities had unrealized losses in excess of 10% of their carrying value.The total unrealized loss for these securities was $13 million as of September 30, 2020. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of September 30, 2020 were not related to credit quality. In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss 149 Table of Contents position prior to expected recovery in value. Of the securities in an unrealized loss position for 12 months or more as of December 31, 2019, 19 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 2019. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of December 31, 2019 were not related to credit quality. Changes in interest rates affect the value of the Company’s fixed-maturity portfolio. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of high-quality, liquid instruments. The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Distribution of Fixed-Maturity Securities by Contractual Maturity As of September 30, 2020 Amortized Cost Estimated Fair Value (in millions) Due within one year $ 333 $ 329 Due after one year through five years 1,599 1,686 Due after five years through 10 years 1,913 2,014 Due after 10 years 3,256 3,525 Mortgage-backed securities: RMBS 612 606 CMBS 367 396 Total $ 8,080 $ 8,556 The following table summarizes the ratings distributions of the Company’s investment portfolio as of September 30, 2020 and December 31, 2019. Ratings reflect the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or other risk management strategies, which use Assured Guaranty’s internal ratings classifications. Distribution of Fixed-Maturity Securities by Rating As of Rating September 30, 2020 December 31, 2019 AAA 15.1 % 16.2 % AA 39.9 45.1 A 25.5 21.2 BBB 10.8 8.2 BIG (1) 8.1 8.6 Not rated 0.6 0.7 Total 100.0 % 100.0 % ____________________ (1) Includes primarily loss mitigation and other risk management assets. See Item I, Financial Statements, Note 8, Investments and Cash, for additional information. 150 Table of Contents Based on fair value, investments and restricted assets that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted totaled $290 million and $280 million as of September 30, 2020 and December 31, 2019, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,457 million and $1,502 million, based on fair value, as of September 30, 2020 and December 31, 2019, respectively. Consolidated VIEs The Company manages its liquidity needs by evaluating cash flows without the effect of consolidated VIEs; however, the Company's consolidated financial statements reflect the financial position of Assured Guaranty as well as Assured Guaranty's consolidated VIEs. The primary sources and uses of cash at Assured Guaranty's consolidated VIEs are as follows: • FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting its insured debt obligations, and the primary uses of cash are the payment of principal and interest due on the insured obligations. • Investment Vehicles. The primary sources and uses of cash in the consolidated investment vehicles are raising capital from investors, using capital to make investments, generating cash income from its investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2020, there were no material changes in the market risks that the Company is exposed to since December 31, 2019.