What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-06 · 1040 added, 1443 removed, 1433 unchanged (63% of the section changed)

3 unchanged sentences

(dollars in millions except per share and share amounts)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Investment portfolio:

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $ 8,080 and $ 8,371 , allowance for credit loss of $ 76 at September 30, 2020)

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $ 8,267 and $ 8,204 , allowance for credit loss of $ 81 and $ 78 )

$ 8,687 $ 8,773

21 unchanged sentences

Commitments and contingencies (see Note 13)

Redeemable noncontrolling interests in consolidated investment vehicles 21 7

Common stock ($ 0.01 par value, 500,000,000 shares authorized;

Redeemable noncontrolling interests (see Note 9) 21 21

Common shares ($ 0.01 par value, 500,000,000 shares authorized;

75,935,382 and 77,546,896 shares issued and outstanding)

3 unchanged sentences

Total shareholders’ equity attributable to Assured Guaranty Ltd.

Nonredeemable noncontrolling interests 47 6

Nonredeemable noncontrolling interests (see Note 9) 42 41

Total shareholders’ equity 6,472 6,684

4 unchanged sentences

(dollars in millions except per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net earned premiums $ 103 $ 103

3 unchanged sentences

Net change in fair value of credit derivatives ( 19 ) ( 77 )

Fair value gains (losses) on committed capital securities ( 19 ) 48

Fair value gains (losses) on financial guaranty variable interest entities 5 ( 9 )

1 unchanged sentence

Foreign exchange gains (losses) on remeasurement — ( 62 )

Commutation gains (losses)

Other income (loss)

5 ( 9 ) 37 12

Total revenues 177 96

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Total expenses 171 154

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 and equity in earnings of investees 6 ( 58 )

Equity in earnings of investees 9 ( 4 )

Income (loss) before income taxes 15 ( 62 )

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(in millions)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net income (loss) $ 15 $ ( 58 )

Change in net unrealized gains (losses) on:

Investments with no credit impairment recognized in the statement of operations, net of tax provision (benefit) of $ 7 , $ 7 , $ 11 and $ 51

Investments with credit impairment recognized in the statement of operations, net of tax provision (benefit) of $ 2 , $( 2 ), $( 5 ) and $( 14 )

Investments with no credit impairment, net of tax provision (benefit) of $( 20 ) and $( 27 )

( 119 ) ( 162 )

Investments with credit impairment, net of tax provision (benefit) of $( 1 ) and $( 13 )

Change in net unrealized gains (losses) on investments ( 125 ) ( 214 )

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Comprehensive income (loss) ( 110 ) ( 262 )

Comprehensive income (loss) attributable to noncontrolling interest 3 — 5 —

Comprehensive income (loss) attributable to noncontrolling interests 4 ( 3 )

Comprehensive income (loss) attributable to Assured Guaranty Ltd.

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Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) (continued)

(dollars in millions, except share data)

For the Three Months Ended September 30, 2020

Common Shares Outstanding Common

Par Value Retained Earnings Accumulated

Comprehensive Income Deferred

Equity Compensation Total Shareholders’ Equity Attributable to Assured Guaranty Ltd.

Nonredeemable Noncontrolling Interests Total

Shareholders’ Equity

Balance at June 30, 2020 84,062,384 $ 1 $ 6,109 $ 333 $ 1 $ 6,444 $ 45 $ 6,489

Net income — — 86 — — 86 2 88

Dividends ($ 0.20 per share)

— — ( 17 ) — — ( 17 ) — ( 17 )

Reallocation of ownership interests — — — — — — — —

Contributions — — — — — — 3 3

Common stock repurchases ( 1,857,323 ) — ( 40 ) — — ( 40 ) — ( 40 )

Share based compensation 44,224 — 5 — — 5 — 5

Distributions — — — — — — ( 3 ) ( 3 )

Other comprehensive income — — — 71 — 71 — 71

Balance at September 30, 2020 82,249,285 $ 1 $ 6,143 $ 404 $ 1 $ 6,549 $ 47 $ 6,596

For the Three Months Ended September 30, 2019

Common Shares Outstanding Common

Par Value Additional

Capital Retained Earnings Accumulated

Comprehensive Income Deferred

Equity Compensation Total Shareholders' Equity Attributable to Assured Guaranty Ltd.

Nonredeemable Noncontrolling Interest Total

Shareholders’ Equity

Balance at June 30, 2019 99,801,012 $ 1 $ — $ 6,425 $ 295 $ 1 $ 6,722 $ — $ 6,722

Net income — — — 69 — — 69 — 69

Dividends ($ 0.18 per share)

— — — ( 18 ) — — ( 18 ) — ( 18 )

Common stock repurchases ( 3,400,677 ) — ( 5 ) ( 145 ) — — ( 150 ) — ( 150 )

Share-based compensation 94,808 — 5 — — — 5 — 5

Other comprehensive income — — — — 24 — 24 — 24

Balance at September 30, 2019 96,495,143 $ 1 $ — $ 6,331 $ 319 $ 1 $ 6,652 $ — $ 6,652

Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) (continued)

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

(dollars in millions, except share data)

For the Nine Months Ended September 30, 2020

For the Three Months Ended March 31, 2021

Common Shares Outstanding Common

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— — ( 17 ) — — ( 17 ) — ( 17 )

Reallocation of ownership interests — — — — — — 10 10

Contributions — — — — — — 3 3

Common stock repurchases ( 11,443,155 ) — ( 320 ) — — ( 320 ) — ( 320 )

Common shares repurchases ( 1,986,534 ) — ( 77 ) — — ( 77 ) — ( 77 )

Share-based compensation 375,020 — ( 5 ) — — ( 5 ) — ( 5 )

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Other comprehensive loss — — — ( 125 ) — ( 125 ) — ( 125 )

Balance at September 30, 2020 82,249,285 $ 1 $ 6,143 $ 404 $ 1 $ 6,549 $ 47 $ 6,596

For the Nine Months Ended September 30, 2019

Balance at March 31, 2021 75,935,382 $ 1 $ 6,055 $ 373 $ 1 $ 6,430 $ 42 $ 6,472

For the Three Months Ended March 31, 2020

Common Shares Outstanding Common

Par Value Additional

Capital Retained Earnings Accumulated

Par Value Retained Earnings Accumulated

Comprehensive Income Deferred

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— — ( 19 ) — — ( 19 ) — ( 19 )

Common stock repurchases ( 7,828,412 ) — ( 88 ) ( 252 ) — — ( 340 ) — ( 340 )

Common shares repurchases ( 3,629,410 ) — ( 116 ) — — ( 116 ) — ( 116 )

Share-based compensation 337,745 — ( 5 ) — — ( 5 ) — ( 5 )

Other comprehensive income — — — — 226 — 226 — 226

Balance at September 30, 2019 96,495,143 $ 1 $ — $ 6,331 $ 319 $ 1 $ 6,652 $ — $ 6,652

Other comprehensive loss — — — ( 204 ) — ( 204 ) — ( 204 )

Contributions and reallocation of ownership interests — — — — — — 20 20

Balance at March 31, 2020 89,983,322 $ 1 $ 6,100 $ 138 $ 1 $ 6,240 $ 25 $ 6,265

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(in millions)

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash flows provided by (used in) operating activities $ ( 466 ) $ ( 164 )

2 unchanged sentences

Purchases ( 396 ) ( 278 )

Sales 627 1,306

Maturities and paydowns 225 217

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Paydowns on financial guaranty variable interest entities’ assets 14 37

Sales of financial guaranty variable interest entities' assets — 51

Purchases of other invested assets ( 32 ) ( 10 )

Sales and return of capital of other invested assets 45 1

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Dividends paid ( 18 ) ( 20 )

Repurchases of common stock ( 320 ) ( 340 )

Repurchases of common shares ( 77 ) ( 116 )

Net paydowns of financial guaranty variable interest entities’ liabilities ( 13 ) ( 35 )

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Proceeds from issuance of warehouse financing debt 217 —

Repayment of warehouse financing debt ( 476 ) —

Contributions from noncontrolling interests to investment vehicles 3 23

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(in millions)

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental cash flow information

Cash paid (received) during the period for:

Income taxes $ 1 $ ( 2 )

Interest on long-term debt $ 8 $ 9

Supplemental disclosure of non-cash investing activities:

Purchases of fixed-maturity investments $ ( 1 ) $ ( 188 )

Sales of fixed-maturity investments 1 44

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

Reconciliation of cash and restricted cash to the condensed consolidated balance sheets:

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Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2020

March 31, 2021

Business and Basis of Presentation

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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.

On October 1, 2019, Assured Guaranty US Holdings Inc.

(AGUS), a wholly-owned subsidiary of AGL, completed the acquisition (the BlueMountain Acquisition) of all of the outstanding equity interests in BlueMountain Capital Management, LLC (BlueMountain) and its associated entities, now known as Assured Investment Management LLC (AssuredIM).

Through AssuredIM the Company provides investment management services across various asset classes including collateralized loan obligations (CLOs), long-duration opportunity funds that build on its corporate credit, asset-backed finance and healthcare structured capital experience, liquid strategy funds such as a municipal bond fund, as well as certain funds now subject to orderly wind-down.

Through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM), the Company significantly increased its participation in the asset management business with the completion on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain Capital Management, LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities.

AssuredIM is a diversified asset manager that serves as investment advisor to collateralized loan obligations (CLOs), opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down.

AssuredIM has managed structured and public finance, credit and special situation investments since 2003.

AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients.

Basis of Presentation

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Actual results could differ from those estimates.

These unaudited interim condensed consolidated financial statements are as of September 30, 2020 and cover the three-month period ended September 30, 2020 (Third Quarter 2020), the three-month period ended September 30, 2019 (Third Quarter 2019), the nine-month period ended September 30, 2020 (Nine Months 2020) and the nine-month period ended September 30, 2019 (Nine Months 2019).

These unaudited interim condensed consolidated financial statements are as of March 31, 2021 and cover the three-month period ended March 31, 2021 (First Quarter 2021) and the three-month period ended March 31, 2020 (First Quarter 2020).

Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted.

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Certain prior year balances have been reclassified to conform to the current year's presentation.

The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries and its consolidated VIEs.

The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries and include its consolidated financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs).

Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

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Securities and Exchange Commission (SEC).

AGL's principal insurance subsidiaries are:

The Company's principal insurance subsidiaries are:

• Assured Guaranty Municipal Corp.

(AGM), domiciled in New York;

• Municipal Assurance Corp.

(MAC), domiciled in New York;

• Assured Guaranty Corp.

(AGC), domiciled in Maryland;

• Assured Guaranty (Europe) plc (AGE UK), organized in the U.K.;

• Assured Guaranty (Europe) SA (AGE SA), organized in France;

• Assured Guaranty UK Limited (AGUK), organized in the U.K.;

• Assured Guaranty (Europe) SA (AGE), organized in France;

• Assured Guaranty Re Ltd.

2 unchanged sentences

(AGRO), domiciled in Bermuda.

The Company's principal asset management subsidiaries are AssuredIM, BlueMountain CLO Management, LLC, and Assured Investment Management GP Holdings, LLC.

The Company’s organizational structure includes various holding companies, two of which - AGUS and Assured Guaranty Municipal Holdings Inc.

(AGMH) - have public debt outstanding.

Adopted Accounting Standards

Credit Losses on Financial Instruments

On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The following summarizes the effect of adoption on the relevant balances.

Financial Assets Carried at Amortized Cost

This ASU provides a new current expected credit loss model (CECL) to account for credit losses on certain financial assets carried at amortized cost such as reinsurance recoverables, premiums receivable, asset management and performance fees receivables, as well as off-balance sheet exposures such as loan commitments.

The new model requires an entity to estimate lifetime credit losses related to these assets, based on relevant historical information, adjusted for current conditions and reasonable and supportable forecasts that could affect the collectability of the reported amount.

The Company determined that this ASU had no effect on these balances on the date of adoption or for Nine Months 2020.

Financial Assets Carried at Fair Value, not Through Net Income

The most significant effect of the adoption of this ASU is in respect of the available-for-sale investment portfolio, for which targeted amendments were made to the impairment model.

Under the new guidance, credit losses are recognized as an allowance for credit loss rather than a direct write-down of the amortized cost basis of the investment.

Under the previous accounting guidance for other-than-temporary impairment, or OTTI, such impairments reduced the amortized cost basis of the investment.

The allowance for credit loss is limited to the excess of amortized cost over fair value, and may be reduced, with a corresponding reversal of credit loss expense, in the event that the expected cash flows of the instrument improves.

The Company has elected to classify credit loss expense (including accretion and changes in the allowance for credit loss) as a component of realized gain (loss) on investments.

When amounts are deemed uncollectible, the Company writes off such amounts.

Write-offs are deducted from the allowance for credit loss and the amortized cost basis is written down.

Amounts that have been written off may not be reversed through the allowance for credit loss, and any subsequent recovery of such amounts is only recognized in income when received.

The assessment of whether a credit loss exists is performed each quarter and includes numerous factors including the extent to which fair value is less than amortized cost, and any adverse conditions specifically related to the security, industry, and/or geographic area, including changes in the financial condition of the issuer, or underlying loan obligors, as well as general economic and political factors.

Additional factors considered, as applicable, include remaining payment terms of the security, prepayment speeds, expected defaults and the value of any embedded credit enhancements.

Unlike the previous OTTI model, management may not consider the length of time an instrument has been impaired or the effect of changes in foreign exchange rates in its assessment of credit loss.

If, based on an assessment of these and other relevant factors, the Company determines that a credit loss may exist, it then performs a discounted cash flow analysis to determine its best estimate of such allowance for credit loss.

This ASU also eliminates the existing guidance for purchased credit impaired (PCI) securities (such as the Company's loss mitigation securities) and introduced a new model for purchased financial assets with credit deterioration (PCD) securities.

PCD securities are defined in the new guidance as financial assets that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment.

The ASU requires the recognition of an initial allowance for credit loss on the date of acquisition of PCD securities.

Under the new guidance, the amortized cost of PCD securities on the date of acquisition is equal to the purchase price plus the allowance for credit loss, but no credit loss expense is recognized in the statement of operations on the date of acquisition.

After the date of acquisition, PCD securities follow the guidance described above for the periodic assessment of credit losses in the available-for-sale investment portfolio.

For securities the Company intends to sell and securities for which it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost, the Company writes off any existing allowance for credit loss, and writes down the amortized cost basis of the instrument to fair value with an offset to realized gain (loss) in the statement of operations.

For all securities that were originally purchased with credit deterioration, whether or not an allowance was established on January 1, 2020, accrued interest is not separately presented, but rather is a component of the amortized cost of the instrument.

For all other available-for-sale securities, a separate amount for accrued interest is reported in other assets.

The Company has elected to not measure credit losses on its accrued interest receivable and instead write off accrued interest at the earliest to occur of (i) the date it is deemed uncollectible or (ii) when it is six months past due.

All write-offs of accrued interest are recorded as a reduction to interest income in the statement of operations.

The changes to the impairment model for available-for-sale securities were applied using a modified retrospective approach, and resulted in no effect to shareholders’ equity, in total or by component.

On the date of adoption, there was no change to the carrying value of the available-for-sale investment portfolio, other than a gross-up of amortized cost and the recording of an offsetting allowance for credit losses for securities to which the Company applied the PCD accounting model.

On January 1, 2020, the Company applied the PCD accounting model to PCI securities that were not in an unrealized gain position as of December 31, 2019.

The fair value of these PCI securities was $ 248 million and their amortized cost was $ 266 million as of December 31, 2019.

The Company determined the allowance for credit loss for such PCD securities was $ 62 million on January 1, 2020.

The recording of the allowance for these PCD securities on January 1, 2020 had no effect on the condensed consolidated statement of operations or any component of shareholders’ equity.

In Third Quarter 2020 and Nine Months 2020, the Company recorded an additional $ 0.1 million and $ 14 million, respectively, in credit loss expense.

Credit loss expense included accretion of $ 1 million in Third Quarter 2020 and $ 3 million in Nine Months 2020 .

Changes in the impairment model associated with PCD securities are applied prospectively.

The Company did not purchase any PCD securities during Nine Months 2020.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 10, Investments and Cash, of the Company's 2019 Annual Report on Form 10-K for a complete discussion of the accounting policy for evaluating investments for OTTI prior to January 1, 2020.

Registered Debt Offerings that Include Credit Enhancements from an Affiliate

In March 2020, the SEC adopted amendments to the financial disclosure requirements related to certain debt securities, including registered debt securities issued by a wholly-owned, operating subsidiary that are fully and unconditionally guaranteed by the parent company.

Prior to the amendments, a parent guarantor was required to provide condensed consolidating financial information for so long as the guaranteed securities were outstanding.

The requirements amend financial disclosures to allow summarized financial information, which may be presented on a combined basis, reducing the number of periods presented and permitting the disclosures to be provided outside the notes to the financial statements.

The Company elected to apply the amended requirements beginning in the first quarter of 2020, and is no longer providing condensed consolidating financial information that were disclosed in Part II, Item 8, Financial Statements and Supplementary Data, Note 25, Subsidiary Information, of the Company's 2019 Annual Report on Form 10-K.

Future Application of Accounting Standards

The Company's principal asset management subsidiaries are:

• Assured Investment Management LLC;

• Assured Investment Management (London) LLP;

• Assured Healthcare Partners LLC.

Until April 1, 2021, Municipal Assurance Corp.

(MAC) was also a principal insurance subsidiary domiciled in New York.

On February 24, 2021, the Company received the last regulatory approval required to execute a multi-step transaction to merge MAC with and into AGM, with AGM as the surviving company.

As a result, the Company wrote-off the $ 16 million carrying value of MAC's insurance licenses in First Quarter 2021, which was recorded in other operating expenses in the Insurance segment.

AGM, AGC and, until its merger with AGM on April 1, 2021, MAC, (collectively, the U.S.

Insurance Subsidiaries), jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by AssuredIM (AssuredIM Funds).

The Company’s organizational structure includes various holding companies, two of which - Assured Guaranty US Holdings Inc.

(AGUS) and Assured Guaranty Municipal Holdings Inc.

(AGMH) (collectively, the U.S.

Holding Companies)- have public debt outstanding.

Recent Accounting Standards Adopted

Simplification of the Accounting for Income Taxes

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses and annual effective tax rate calculations.

The ASU was effective for interim and annual periods beginning after December 15, 2020.

This ASU did not have an impact on the Company's consolidated financial statements.

Recent Accounting Standards Not Yet Adopted

Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-12, Financial Services - Insurance (Topic 944):

In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944):

Targeted Improvements to the Accounting for Long-Duration Contracts .

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• simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts,

• simplify the amortization of deferred acquisition costs, and

• simplify the amortization of deferred acquisition costs (DAC), and

• improve the effectiveness of the required disclosures.

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If early adoption is not elected, the transition date is required to be the beginning of the earliest period presented.

The Company is evaluating when it will adopt this ASU.

The Company does not expect this ASU to have a material effect on its consolidated financial statements.

Simplification of the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The ASU is effective for interim and annual periods beginning after December 15, 2020.

This ASU will not have an impact on the Company's consolidated financial statements.

The Company is evaluating when it will adopt this ASU and does not expect this ASU to have a material effect on its consolidated financial statements.

Reference Rate Reform

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Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications caused by reference rate reform.

The new guidance provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts that reference the London Interbank Offered Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform.

This guidance was effective upon issuance and may be applied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022.

The amendments in this ASU do not apply to contract modifications that occur after December 31, 2022.

The Company is evaluating the effect that this ASU will have on its consolidated financial statements.

This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in this ASU only apply to contracts that reference the London Interbank Offered Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform.

This ASU is effective upon issuance and may be applied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition, regardless of whether derivatives reference LIBOR or another rate expected to be discontinued because of reference rate reform.

Discounting transition refers to the changing of interest rates used for margining, discounting, or contract price alignment of derivatives to transition to alternative rates.

This ASU became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022.

The Company has not yet applied the relief afforded by these standard amendments and is evaluating the effect that these ASUs will have on its consolidated financial statements.

Segment Information

The Company reports its results of operations consistent with the manner in which the Company's chief operating decision maker (CODM) reviews the business to assess performance and allocate resources.

Prior to the acquisition of BlueMountain 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 acquisition of BlueMountain and expansion into the asset management business, the Company now operates in two distinct segments, Insurance and Asset Management.

The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company's chief operating decision maker (CODM) reviews the business to assess performance and allocate resources.

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 Note 11, Variable Interest Entities.

The Insurance and Asset Management segments are presented without giving effect to the consolidation of FG VIEs and those AssuredIM investment vehicles for which the Company is deemed the primary beneficiary (consolidated investment vehicles, or CIVs as described in Note 9, 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 funds managed by AssuredIM (AssuredIM funds).

The Asset Management segment consists of the Company's asset management subsidiaries and their 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.

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 the Insurance segment invests.

The Insurance segment is presented without giving effect to the consolidation of FG VIEs and therefore includes premiums and losses of all financial guaranty contracts, whether or not the associated FG VIEs are consolidated, and also includes its share of earnings from AssuredIM Funds in which the Insurance segment invests.

The Asset Management segment consists of AssuredIM, which provides asset management services to outside investors as well as to the U.S.

Insurance Subsidiaries and AGAS.

The Asset Management segment includes asset management fees attributable to CIVs and inter-segment asset management fees earned from the U.S.

Insurance Subsidiaries.

The Asset Management segment presents fund expenses and reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations, reimbursable expenses are shown as a component of asset management fees.

The Corporate division primarily consists of interest expense on the debt of the U.S.

Holding Companies, as well as other operating expenses attributed to AGL, the U.S.

Holding Companies and other corporate activities, including administrative services performed by operating subsidiaries for the holding companies.

Other items primarily consist of intersegment eliminations, reclassification of the reimbursement of fund expenses to revenue, and consolidation adjustments, including the effect of consolidating FG VIEs and CIVs.

See Note 9, Variable Interest Entities.

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.

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" column in the tables below, which represents the CODM's view, consistent with the management approach guidance for presentation of segment metrics.

Total adjusted operating income includes the effect of consolidating both FG VIEs and CIVs.

The effect of consolidating such entities, including the related eliminations, is included in the "other" column in the tables below, which represents the CODM's view, consistent with the management approach guidance for presentation of segment metrics.

The Company analyzes the operating performance of each segment using "adjusted operating income." Results for each segment include specifically identifiable expenses as well as allocations of expenses between legal entities based on time studies and other cost allocation methodologies based on headcount or other metrics.

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The following tables present the Company's operations by operating segment.

The information for the prior year has been conformed to the new segment presentation.

Segment Information

Third Quarter 2020

Insurance Asset Management Corporate Other Total

(in millions)

Third-party revenues $ 186 $ 13 $ 12 $ 21 $ 232

Intersegment revenues 3 1 — ( 4 ) —

Total revenues 189 14 12 17 232

Total expenses 134 29 32 5 200

Income (loss) before income taxes and equity in net earnings of investees 55 ( 15 ) ( 20 ) 12 32

Equity in net earnings of investees 20 — — ( 13 ) 7

Adjusted operating income (loss) before income taxes 75 ( 15 ) ( 20 ) ( 1 ) 39

Provision (benefit) for income taxes ( 6 ) ( 3 ) ( 2 ) ( 1 ) ( 12 )

Noncontrolling interests — — — 3 3

Adjusted operating income (loss) $ 81 $ ( 12 ) $ ( 18 ) $ ( 3 ) $ 48

Supplemental income statement information

Net investment income $ 75 $ — $ — $ ( 4 ) $ 71

Interest expense — — 24 ( 3 ) 21

Non-cash compensation and operating expenses (1) 9 4 1 — 14

Third Quarter 2019

Insurance Asset Management Corporate Other Total

(in millions)

Third-party revenues $ 221 $ — $ 1 $ 1 $ 223

Intersegment revenues 1 — — ( 1 ) —

Total revenues 222 — 1 — 223

Total expenses 97 — 31 2 130

Income (loss) before income taxes and equity in net earnings of investees 125 — ( 30 ) ( 2 ) 93

Equity in net earnings of investees 1 — ( 1 ) — —

Adjusted operating income (loss) before income taxes 126 — ( 31 ) ( 2 ) 93

Provision (benefit) for income taxes 19 — ( 3 ) — 16

Noncontrolling interests — — — — —

Adjusted operating income (loss) $ 107 $ — $ ( 28 ) $ ( 2 ) $ 77

Supplemental income statement information

Net investment income $ 89 $ — $ 1 $ ( 2 ) $ 88

Interest expense — — 23 ( 1 ) 22

Non-cash compensation and operating expenses (1) 9 — 1 — 10

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Insurance Asset Management Corporate Other Total

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Total expenses 106 29 32 7 174

Income (loss) before income taxes and equity in net earnings of investees 323 ( 37 ) ( 91 ) 25 220

Equity in net earnings of investees 37 — ( 5 ) ( 29 ) 3

Income (loss) before income taxes and equity in earnings of investees 73 ( 9 ) ( 32 ) 14 46

Equity in earnings of investees 19 — — ( 10 ) 9

Adjusted operating income (loss) before income taxes 92 ( 9 ) ( 32 ) 4 55

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Adjusted operating income (loss) $ 79 $ ( 7 ) $ ( 29 ) $ — $ 43

Supplemental income statement information

Net investment income $ 240 $ — $ 1 $ ( 12 ) $ 229

Interest expense — — 72 ( 8 ) 64

Non-cash compensation and operating expenses (1) 27 13 4 — 44

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Insurance Asset Management Corporate Other Total

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Total expenses 84 28 35 ( 1 ) 146

Income (loss) before income taxes and equity in net earnings of investees 453 — ( 91 ) 5 367

Equity in net earnings of investees 3 — — — 3

Income (loss) before income taxes and equity in earnings of investees 112 ( 11 ) ( 39 ) ( 18 ) 44

Equity in earnings of investees ( 9 ) — ( 5 ) 10 ( 4 )

Adjusted operating income (loss) before income taxes 103 ( 11 ) ( 44 ) ( 8 ) 40

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Adjusted operating income (loss) $ 85 $ ( 9 ) $ ( 39 ) $ ( 4 ) $ 33

Supplemental income statement information

Net investment income $ 298 $ — $ 3 $ ( 5 ) $ 296

Interest expense — — 69 ( 2 ) 67

Non-cash compensation and operating expenses (1) 29 — 4 — 33

_____________________

(1) Consists of amortization of deferred acquisition costs and intangible assets, depreciation and share-based compensation .

Reconciliation of Net Income (Loss) Attributable to AGL

to Adjusted Operating Income (Loss)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(in millions)

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Adjusted operating income (loss) $ 43 $ 33

_____________________

(1) Presented in Other income (loss) on the condensed consolidated statements of operations.

Revenue by Country of Domicile

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(in millions)

$ 186 $ 172 $ 579 $ 560

Bermuda 33 43 105 128

and other 13 8 32 32

Total $ 232 $ 223 $ 716 $ 720

The following table reconciles the Company's total consolidated revenues and expenses to segment revenues and expenses:

Reconciliation of Segment Revenues and Expenses

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(in millions)

Total consolidated revenues $ 268 $ 206 $ 736 $ 667

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 )

Credit derivative impairment (recoveries) (1) 4 10 ( 4 ) 9

Total segment revenues $ 232 $ 223 $ 716 $ 720

Total consolidated expenses $ 196 $ 120 $ 500 $ 344

Credit derivative impairment (recoveries) (1) 4 10 ( 4 ) 9

Total segment expenses $ 200 $ 130 $ 496 $ 353

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(1) Credit derivative impairment (recoveries) are included in "Net change in fair value of credit derivatives" in the Company's condensed consolidated statements of operations.

Outstanding Insurance Exposure

Outstanding Exposure

The Company sells credit protection primarily in financial guaranty insurance form.

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The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributed to the Company not entering into such new CDS in the U.S.

The Company has, however, acquired or reinsured portfolios both before and after 2009 that include financial guaranty contracts in credit derivative form.

The Company has, however, acquired or reinsured portfolios both before and since 2009 that include financial guaranty contracts in credit derivative form.

The Company also writes specialty insurance and reinsurance that is consistent with its risk profile and benefits from its underwriting experience.

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The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies, providing reinsurance on a portfolio of insurance or reassuming a portfolio of reinsurance it had previously ceded;

in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction.

The Company diversifies its insured portfolio across asset classes and, in the structured finance portfolio, typically requires subordination or collateral to protect it from loss.

in such instances, it evaluates the risk

characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction.

The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, typically requires subordination or collateral to protect it from loss.

Reinsurance may be used in order to reduce net exposure to certain insured transactions.

Public finance obligations insured by the Company primarily consist of general obligation bonds supported by the taxing powers of U.S.

state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and

collect fees and charges for public services or specific infrastructure projects.

The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, healthcare facilities and government office buildings.

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Unless otherwise specified, the outstanding par and principal and interest (debt service) amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated.

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.

The Company also provides specialty insurance and reinsurance on transactions without special purpose entities but with risk profiles similar to those of its structured finance exposures written in financial guaranty form.

Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company's obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default.

The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary financial guarantor.

The second-to-pay insured par outstanding as of September 30, 2020 and December 31, 2019 was $ 5.8 billion and $ 6.6 billion, respectively.

The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were BIG was $ 92 million and $ 105 million as of September 30, 2020 and December 31, 2019, respectively.

Surveillance Categories

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Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that the Company's internal credit ratings focus on future performance rather than lifetime performance.

The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings.

The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector.

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Exposures identified as BIG are subjected to further review to determine the probability of a loss.

See Note 4, Expected Loss to be Paid, for additional information.

See Note 4, Expected Loss to be Paid (Recovered), for additional information.

Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid.

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For financial statement measurement purposes, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss.

More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly.

More extensive monitoring and intervention are employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly.

For purposes of determining the appropriate surveillance category, the Company expects “future losses” on a transaction when the Company believes there is at least a 50 % chance that, on a present value basis, it will in the future pay claims on that transaction that will not be fully reimbursed.

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Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings.

Impact of COVID-19 Pandemic

A novel coronavirus emerged in Wuhan, China in late 2019 and began to spread beyond China in early 2020.

The virus is highly infectious and causes a coronavirus disease, COVID-19, that can be fatal.

COVID-19 has been declared a pandemic by the World Health Organization, and its emergence and reactions to it, including various closures and capacity and travel restrictions, are having 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.

The novel coronavirus that emerged in Wuhan, China in late 2019 and which causes the coronavirus disease known as COVID-19 was declared a pandemic by the World Health Organization in early 2020 and continues to spread throughout the world.

Several vaccines have been developed and approved by governments, and distribution of vaccines is proceeding unevenly across the globe.

The emergence of COVID-19 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 over a year now, its ultimate size, depth, course and duration, and the effectiveness, acceptance and distribution of vaccines for it, 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.

For information about how the COVID-19 pandemic has impacted the Company's loss projections, see Note 4, Expected Loss to be Paid (Recovered).

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 or an economic downturn.

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The Company's internal ratings and loss projections 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.

Through May 6, 2021, the Company has paid only relatively small first-time insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19.

The Company currently projects nearly full reimbursement of these relatively small claims.

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.

The Company typically guarantees the payment of principal and interest when due.

The Company typically guarantees the payment of debt service 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.

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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.

Gross debt service outstanding represents the sum of all estimated future principal and interest payments on the obligations insured, on an undiscounted basis.

As of March 31, 2021 and December 31, 2020, the Company excluded $ 1.3 billion and $ 1.4 billion, respectively, of net par attributable to loss mitigation securities, respectively.

Gross debt service outstanding represents the sum of all estimated future debt service payments on the obligations insured, on an undiscounted basis.

Net debt service outstanding equals gross debt service outstanding net of any reinsurance.

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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;

• for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (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.

• 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 debt service 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;

• for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (RMBS) and CLOs), as the total estimated expected future debt service 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.

The anticipated sunset of LIBOR after June, 30, 2023 has introduced another variable into the Company's calculation of future debt service.

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Outstanding Net Debt Service

September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

(in millions)

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by Internal Rating

As of September 30, 2020

As of March 31, 2021

Public Finance

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Total net par outstanding $ 171,597 100.0 % $ 53,028 100.0 % $ 8,952 100.0 % $ 576 100.0 % $ 234,153 100.0 %

In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $ 375 million of gross par for public finance and $ 573 million of gross par of structured finance as of September 30, 2020.

In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $ 673 million of public finance gross par and $ 629 million of structured finance gross par as of March 31, 2021.

These commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request.

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Components of BIG Net Par Outstanding

As of September 30, 2020

As of March 31, 2021

BIG Net Par Outstanding Net Par

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and Number of Risks

As of September 30, 2020

As of March 31, 2021

Net Par Outstanding Number of Risks (2)

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_____________________

(1) Includes VIEs.

(1) Includes FG VIEs.

(2) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

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).

On November 30, 2015, and December 8, 2015, the then governor of Puerto Rico issued executive orders (Clawback Orders) directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company to "claw back" certain taxes pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation Authority (PRHTA), Puerto Rico Infrastructure Financing Authority (PRIFA), and Puerto Rico Convention Center District Authority (PRCCDA).

The Puerto Rico exposures insured by the Company subject to clawback are shown in the table “Puerto Rico Net Par Outstanding.”

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 $ 3.7 billion net par as of March 31, 2021, 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 outstanding Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR).

On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law.

PROMESA established a seven-member financial oversight board (Oversight Board) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico.

PROMESA established a seven-member financial oversight and management board (FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico.

Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under chapter 9 of the United States Bankruptcy Code (Bankruptcy Code).

The terms of the original seven members of the Oversight Board have expired.

Several of the original members have resigned, and the federal government is in the process of reconstituting the board.

The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

In addition, the Commonwealth, the Oversight Board and others have taken legal action naming the Company as a party.

The Company believes that a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as a party.

See “Puerto Rico Litigation” below.

The Company also participates in mediation and negotiations relating to its Puerto Rico exposure.

The COVID-19 pandemic and evolving governmental and private responses to the pandemic are impacting both Puerto Rico itself and the process of resolving the payment defaults of the Commonwealth and some of its related authorities and public corporations, including delaying related litigation, the various Title III proceedings, and other legal proceedings.

The final form and timing of responses to Puerto Rico’s financial distress, the devastation of Hurricane Maria and the COVID-19 pandemic and evolving governmental and private responses to the pandemic, eventually taken by the federal government or implemented under the auspices of PROMESA and the Oversight Board or otherwise, and the final impact on the Company, after resolution of legal challenges, of any such responses on obligations insured by the Company, are uncertain.

The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company's results of operations in that particular quarter or year.

The Company groups its Puerto Rico exposure into three categories:

• Constitutionally Guaranteed.

The Company includes in this category public debt benefiting from Article VI of the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the public debt are to be paid before other disbursements are made.

• Public Corporations – Certain Revenues Potentially Subject to Clawback.

The Company includes in this category the debt of public corporations for which applicable law permits the Commonwealth to claw back, subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the bonds the Company insures.

As a constitutional condition to clawback, available Commonwealth revenues for any fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for that year.

The Company believes that this condition has not been satisfied to date, and accordingly that the Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company.

• Other Public Corporations.

The Company includes in this category the debt of public corporations that are supported by revenues it does not believe are subject to clawback.

Constitutionally Guaranteed

General Obligation.

As of September 30, 2020, the Company had $ 1,112 million insured net par outstanding of the general obligations of Puerto Rico, which are supported by the good faith, credit and taxing power of the Commonwealth.

Despite the requirements of Article VI of its Constitution, the Commonwealth defaulted on the debt service payment due on July 1, 2016, and the Company has been making claim payments on these bonds since that date.

The Oversight Board has filed a petition under Title III of PROMESA with respect to the Commonwealth.

On May 27, 2020, the Oversight Board certified a revised fiscal plan for the Commonwealth.

The revised certified Commonwealth fiscal plan contemplates a reduction in financial resources available for debt service as a result of efforts to contain, and the impact on the economy from, the COVID-19 pandemic.

That revised fiscal plan also contemplates a postponement of reforms for the Commonwealth.

The Company continues to disagree with the Oversight Board's view of available resources.

On February 9, 2020, the Oversight Board announced it had entered into an amended general obligation Plan Support Agreement (Amended GO PSA) with certain general obligation (GO) and Puerto Rico Public Buildings Authority (PBA) bondholders representing approximately $ 8 billion of the aggregate amount of general obligation and PBA bond claims.

The Amended GO PSA purported to provide a framework to address approximately $ 35 billion of Commonwealth debt (including PBA debt) and unsecured claims, and provided for different recoveries based on the bonds’ vintage issuance date, with GO and PBA bonds issued before 2011 (Vintage) receiving higher recoveries than GO and PBA bonds issued in 2011 and thereafter (except that, for purposes of the Amended GO PSA, Series 2011A GO bonds would be treated as Vintage bonds).

The differentiated recovery scheme provided under the Amended GO PSA is purportedly based on the Oversight Board’s attempt to invalidate the non-Vintage GO and PBA bonds (see “Puerto Rico Litigation” below)..

The Company is not a party to the Amended GO PSA and does not support it.

In a proposal dated August 18, 2020, the Oversight Board proposed changing the Amended GO PSA, due to the impact of COVID-19, in ways that generally would reduce the recovery for creditors from that contemplated by the Amended GO PSA.

Creditors party to the Amended GO PSA rejected the changes proposed by the Oversight Board, although they did, in a proposal dated August 24, 2020, offer to make some adjustments to the Amended GO PSA that generally would have changed the timing and type, although generally not the overall amount, of recoveries they would anticipate receiving.

On February 28, 2020, the Oversight Board filed with the Title III court an Amended Joint Plan of Adjustment of the Commonwealth (Amended POA) to restructure approximately $ 35 billion of debt (including the GO bonds) and other claims against the government of Puerto Rico and certain entities and $ 50 billion in pension obligations.

The Amended POA includes the terms of the settlement relating to the GO bonds embodied in the Amended GO PSA, which, as noted above, the Oversight Board no longer supports.

The Company believes the Amended POA, as currently constituted, does not comply with the laws and constitution of Puerto Rico and the provisions of PROMESA and does not satisfy the statutory requirements for confirmation of a plan of adjustment under Title III of PROMESA.

As of September 30, 2020, the Company had $ 134 million insured net par outstanding of PBA bonds, which are supported by a pledge of the rents due under leases of government facilities to departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power.

Despite the requirements of Article VI of its Constitution, the PBA defaulted on most of the debt service payment due on July 1, 2016, and the Company has been making claim payments on these bonds since then.

On September 27, 2019, the Oversight Board filed a petition under Title III of PROMESA with respect to the PBA to allow the restructuring of the PBA claims through the Amended POA.

The PBA bonds are covered by the Amended GO PSA, which the Oversight Board no longer supports.

As noted above, on February 28, 2020, the Oversight Board filed with the Title III court an Amended POA to restructure approximately $ 35 billion of debt (including the PBA bonds) and other claims against the government of Puerto Rico and certain entities and $ 50 billion in pension obligations.

The Amended POA includes the terms of the settlement relating to the PBA bonds embodied in the Amended GO PSA.

Public Corporations - Certain Revenues Potentially Subject to Clawback

As of September 30, 2020, the Company had $ 817 million insured net par outstanding of PRHTA (transportation revenue) bonds and $ 493 million insured net par outstanding of PRHTA (highway revenue) bonds.

Despite these concerns, the Company has engaged in negotiations with the FOMB and other stakeholders in an attempt to reach a consensual resolution, with particular progress being made in the early part of 2021.

On February 22, 2021, AGM and AGC agreed to support the revised Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) plan support agreement (PSA) (GO/PBA PSA) subject to reaching a satisfactory resolution with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA) bonds it insures.

On May 5, 2021, AGM and AGC entered into a PSA (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the FOMB with respect to the PRHTA and the PRCCDA bonds it insures.

With the signing of the HTA/CCDA PSA and the expiration of the related withdrawal rights of AGM and AGC under the GO/PBA PSA, AGM and AGC became bound to the GO/PBA PSA.

Previously, on May 3, 2019, AGM and AGC entered into a restructuring support agreement (PREPA RSA;

together with the GO/PBA PSA and the HTA/CCDA PSA, the Support Agreements) with the Puerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and FOMB, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds.

With the signing of the HTA/CCDA PSA and with the GO/PBA PSA now binding the Company, $ 3,484 million, or 93.5 % of the Company’s insured net par outstanding of Puerto Rico exposures is covered by a Support Agreement.

Each Support Agreement includes a number of conditions and the related debtor’s plan of adjustment must be approved by the Title III court, so there can be no assurance that the consensual resolutions embodied in the Support Agreements will be achieved in their current form, or at all.

Even if the consensual resolutions embodied in the Support Agreements are approved and documented as contemplated, they may be subject to further legal challenge or the parties to the legal documents may not live up to their obligations.

Both economic and political developments, including those related to the COVID-19 pandemic, may impact implementation of the consensual resolutions contemplated by the Support Agreements and the amount the Company realizes under the Support Agreements and related debtors’ plans of adjustment, as well as the performance or resolution of the Puerto Rico exposures not subject to a Support Agreement.

The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company's results of operations and shareholders' equity.

Support Agreements

As of March 31, 2021, the Company had $ 1,246 million of insured net par outstanding that is now covered by the GO/PBA PSA:

$ 1,112 million insured net par outstanding of GOs and $ 134 million insured net par outstanding of PBA bonds.

The GO bonds are supported by the good faith, credit and taxing power of the Commonwealth, while the PBA bonds are supported by a pledge of the rents due under leases of government facilities to departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power.

The Commonwealth and the PBA defaulted on their debt service payments due on July 1, 2016, and the Company has been making claim payments on these bonds since that date.

The FOMB has filed a petition under Title III of PROMESA with respect to both the Commonwealth and the PBA.

On February 22, 2021, the FOMB entered into the GO/PBA PSA with certain GO and PBA bondholders and insurers (including AGM and AGC) representing approximately $ 11.7 billion, or approximately 62 % of the aggregate amount of general obligation and PBA bond claims.

In general, the GO/PBA PSA provides for lower Commonwealth debt service payments per

annum relative to the Plan Support Agreement signed in February 2020 (February 2020 PSA), extends the tenor of new recovery bonds, increases the amount of cash distributed to creditors, and provides additional consideration in the form of a contingent value instrument (CVI).

This CVI is intended to provide creditors with additional returns tied to outperformance of the Puerto Rico 5.5% Sales and Use Tax receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps.

The GO/PBA PSA provides for different recoveries based on the bonds’ vintage issuance date, with GO and PBA bonds issued before 2011 (Vintage) receiving higher recoveries than GO and PBA bonds issued in 2011 and thereafter (except that, for purposes of the GO PSA, Series 2011A GO bonds would be treated as Vintage bonds).

On March 8, 2021, the FOMB filed with the Title III court a Second Amended Title III Joint Plan of Adjustment of the Commonwealth (Amended POA) that seeks to restructure approximately $ 35 billion of debt (including the GO bonds) and other claims against the government of Puerto Rico and certain entities and $ 50 billion in pension obligations.

The Amended POA includes the terms of the settlement embodied in the GO/PBA PSA.

The HTA/CCDA PSA requires the Amended POA to be further amended to, among other things, embody the terms of the clawback-related settlement contemplated by the HTA/CCDA PSA.

HTA/CCDA PSA.

As of March 31, 2021, the Company had $ 1,462 million of insured net par outstanding that is now covered by the HTA/CCDA PSA:

$ 817 million insured net par outstanding of PRHTA (transportation revenue) bonds;

$ 493 million insured net par outstanding of PRHTA (highway revenue) bonds;

and $ 152 million insured net par outstanding of PRCCDA bonds.

The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on up to $ 120 million annually of taxes on crude oil, unfinished oil and derivative products.

The highway revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls.

The non-toll revenues consisting of excise taxes and fees collected by the Commonwealth on behalf of PRHTA and its bondholders that are statutorily allocated to PRHTA and its bondholders are potentially subject to clawback.

Despite the presence of funds in relevant debt service reserve accounts that the Company believes should have been employed to fund debt service, PRHTA defaulted on the full July 1, 2017 insured debt service payment, and the Company has been making claim payments on these bonds since that date.

The Oversight Board has filed a petition under Title III of PROMESA with respect to PRHTA.

On June 26, 2020, the Oversight Board certified a revised fiscal plan for PRHTA.

The revised certified PRHTA fiscal plan projects very limited capacity to pay debt service over the five -year forecast period.

As of September 30, 2020, the Company had $ 152 million insured net par outstanding of PRCCDA bonds, which are secured by certain hotel tax revenues.

These revenues are sensitive to the level of economic activity in the area and are potentially subject to clawback.

The PRCCDA bonds are secured by certain hotel tax revenues.

The PRHTA defaulted on the full July 1, 2017 insured debt service payment, and the Company has been making claim payments on these bonds since that date.

The FOMB has filed a petition under Title III of PROMESA with respect to PRHTA.

There were sufficient funds in the PRCCDA bond accounts to make only partial payments on the July 1, 2017 PRCCDA bond payments guaranteed by the Company, and the Company has been making claim payments on these bonds since that date.

As of September 30, 2020, the Company had $ 16 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to PRIFA and its bondholders of a portion of federal excise taxes paid on rum.

These revenues are potentially subject to the clawback.

The Company has been making claim payments on the PRIFA bonds since January 2016.

Other Public Corporations

Puerto Rico Electric Power Authority ( PREPA).

As of September 30, 2020, the Company had $ 775 million insured net par outstanding of PREPA obligations, which are secured by a lien on the revenues of the electric system.

The HTA/CCDA PSA provides for payments to AGM and AGC consisting of (i) cash, (ii) in the case of PRHTA, new bonds expected to be backed by toll revenue (Toll Bonds);

and (iii) a CVI.

Under the HTA/CCDA PSA, bondholders and bond insurers of PRHTA will receive, in the aggregate, $ 389 million of cash;

$ 1,245 million in Toll Bonds;

Under the HTA/CCDA PSA, bondholders and bond insurers of PRCCDA will receive, in the aggregate, $ 112 million in cash and the CVI.

On June 26, 2020, the FOMB certified a revised fiscal plan for PRHTA.

The revised certified PRHTA fiscal plan will need to be further revised to be consistent with the HTA/CCDA PSA.

As of March 31, 2021, the Company had $ 776 million insured net par outstanding of PREPA obligations subject to the PREPA RSA.

The PREPA obligations are secured by a lien on the revenues of the electric system.

The Company has been making claim payments on these bonds since July 1, 2017.

On July 2, 2017, the Oversight Board commenced proceedings for PREPA under Title III of PROMESA.

On May 3, 2019, AGM and AGC entered into a restructuring support agreement with PREPA (PREPA RSA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth of Puerto Rico, and the Oversight Board, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds in PREPA's recovery plan.

Upon consummation of the restructuring transaction, PREPA’s revenue bonds will be exchanged into new securitization bonds issued by a special purpose corporation and secured by a segregated transition charge assessed on electricity bills.

The closing of the restructuring transaction is subject to a number of conditions, including approval by the Title III Court of the PREPA RSA and settlement described therein, a minimum of 67 % support of voting bondholders for a plan of adjustment that includes this proposed treatment of PREPA revenue bonds and confirmation of such plan by the Title III court, and execution of acceptable documentation and legal opinions.

On July 2, 2017, the FOMB commenced proceedings for PREPA under Title III of PROMESA.

The PREPA RSA contemplates the exchange of PREPA’s existing revenue bonds for new securitization bonds issued by a special purpose corporation and secured by a segregated transition charge assessed on electricity bills.

Under the PREPA RSA, the Company has the option to guarantee its allocated share of the securitization exchange bonds, which may then be offered and sold in the capital markets.

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and therefore that its economic results could differ from those reflected in the PREPA RSA.

On June 29, 2020, the Oversight Board certified a revised fiscal plan for PREPA.

On June 29, 2020, the FOMB certified a revised fiscal plan for PREPA.

The revised certified PREPA fiscal plan projects no capacity to pay debt service over the five -year forecast period without incurring rate increases.

As of September 30, 2020, the Company had $ 373 million of insured net par outstanding of PRASA bonds, which are secured by a lien on the gross revenues of the water and sewer system.

In July 2019, PRASA entered into a restructuring transaction with the federal government and the Oversight Board to restructure its subordinated loans from federal agencies that had been under forbearance for over three years (the PRASA Agreement).

The PRASA Agreement extends the maturity of the loans for up to 40 years and provides for low interest rates and no interest accrual for the first ten years on a portion of the loans, but also places the subordinated loans on a parity with the PRASA bonds the Company guarantees.

The Company was not asked to consent to the PRASA Agreement.

The PRASA Agreement reduces the amount of annual debt service owed by PRASA for its current debt.

The PRASA bond accounts contained sufficient funds to make the PRASA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.

On June 29, 2020, the Oversight Board certified a revised fiscal plan for PRASA.

The revised certified PRASA fiscal plan projects the ability to pay debt service over the five -year forecast period with the implementation of certain measures and draws from the current expense fund.

As of September 30, 2020, the Company had $ 223 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues.

Other Puerto Rico Exposures

As of March 31, 2021, the Company had $ 223 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues.

The MFA bond accounts contained sufficient funds to make the MFA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.

As of September 30, 2020, the Company had $ 1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.

Puerto Rico Infrastructure Financing Agency ( PRIFA).

As of March 31, 2021, the Company had $ 16 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to PRIFA and its bondholders of a portion of federal excise taxes paid on rum.

The Company has been making claim payments on the PRIFA bonds since January 2016.

As of March 31, 2021, the Company had $ 1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.

As of the date of this filing, all debt service payments on U of PR bonds insured by the Company have been made.

Resolved Commonwealth Credit

On February 12, 2019, pursuant to a plan of adjustment approved by the PROMESA Title III Court on February 4, 2019 (COFINA Plan of Adjustment), the Company paid off in full its $ 273 million net par outstanding of insured COFINA bonds, plus accrued and unpaid interest.

Pursuant to the COFINA Plan of Adjustment, the Company received $ 152 million in initial par of closed lien senior bonds of COFINA validated by the PROMESA Title III Court (COFINA Exchange Senior Bonds), along with cash.

The total recovery (cash and COFINA Exchange Senior Bonds) represented 60 % of the Company’s official Title III claim, which related to amounts owed as of the date COFINA entered Title III proceedings.

The fair value of the COFINA Exchange Senior Bonds, excluding accrued interest, was $ 139 million at February 12, 2019, and was recorded as salvage received.

During the third quarter of 2019 the Company sold all of its COFINA Exchange Senior Bonds.

In the fourth quarter of 2020, $ 372 million of PRASA obligations insured by the Company were refunded, reducing the Company's exposure to such bonds.

As of March 31, 2021, the Company had $ 1 million of insured net par outstanding of PRASA obligations.

The Company's insured PRASA obligations are secured by a lien on the gross revenues of the water and sewer system.

Puerto Rico Litigation

The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

In addition, the Commonwealth, the Oversight Board and others have taken legal action naming the Company as party.

The Company believes that a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.

Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its entities on debt service payments, and related matters, and the Company is a party to a number of them.

On July 24, 2019, Judge Laura Taylor Swain of the United States District Court for the District of Puerto Rico (Federal District Court for Puerto Rico) held an omnibus hearing on litigation matters relating to the Commonwealth.

At that hearing, she imposed a stay through November 30, 2019, on a series of adversary proceedings and contested matters amongst the stakeholders and imposed

mandatory mediation on all parties through that date.

At that hearing, she imposed a stay through November 30, 2019 on a series of adversary proceedings and contested matters amongst the stakeholders and imposed mandatory mediation on all parties through that date.

On October 28, 2019, Judge Swain extended the stay until December 31, 2019, and has since stayed the proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

A number of the legal actions in which the Company is involved remain subject to stay orders.

On January 7, 2016, AGM, AGC and Ambac Assurance Corporation commenced an action for declaratory judgment and injunctive relief in the Federal District Court for Puerto Rico to invalidate the executive orders issued on November 30, 2015 and December 8, 2015 by the then governor of Puerto Rico directing that the Secretary of the Treasury of the Commonwealth of Puerto Rico and the Puerto Rico Tourism Company claw back certain taxes and revenues pledged to secure the payment of bonds issued by the PRHTA, the PRCCDA and PRIFA.

The Commonwealth defendants filed a motion to dismiss the action for lack of subject matter jurisdiction, which the court denied on October 4, 2016.

On October 14, 2016, the Commonwealth defendants filed a notice of PROMESA automatic stay.

While the PROMESA automatic stay expired on May 1, 2017, on May 17, 2017, the court stayed the action under PROMESA.

On June 3, 2017, AGC and AGM filed an adversary complaint in the Federal District Court for Puerto Rico seeking (i) a judgment declaring that the application of pledged special revenues to the payment of the PRHTA bonds is not subject to the PROMESA Title III automatic stay and that the Commonwealth has violated the special revenue protections provided to the PRHTA bonds under the Bankruptcy Code;

(ii) an injunction enjoining the Commonwealth from taking or causing to be taken any action that would further violate the special revenue protections provided to the PRHTA bonds under the Bankruptcy Code;

and (iii) an injunction ordering the Commonwealth to remit the pledged special revenues securing the PRHTA bonds in accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code.

On January 30, 2018, the court rendered an opinion dismissing the complaint and holding, among other things, that (x) even though the special revenue provisions of the Bankruptcy Code protect a lien on pledged special revenues, those provisions do not mandate the turnover of pledged special revenues to the payment of bonds and (y) actions to enforce liens on pledged special revenues remain stayed.

A hearing on AGM and AGC’s appeal of the trial court’s decision to the United States Court of Appeals for the First Circuit (First Circuit) was held on November 5, 2018.

On March 26, 2019, the First Circuit issued its opinion affirming the trial court’s decision and held that Sections 928(a) and 922(d) of the Bankruptcy Code permit, but do not require, continued payments during the pendency of the Title III proceedings.

The First Circuit agreed with the trial court that (i) Section 928(a) of the Bankruptcy Code does not mandate the turnover of special revenues or require continuity of payments to the PRHTA bonds during the pendency of the Title III proceedings, and (ii) Section 922(d) of the Bankruptcy Code is not an exception to the automatic stay that would compel PRHTA, or third parties holding special revenues, to apply special revenues to outstanding obligations.

On April 9, 2019, AGM, AGC and other petitioners filed a petition with the First Circuit seeking a rehearing by the full court;

the petition was denied by the First Circuit on July 31, 2019.

On September 20, 2019, AGC, AGM and other petitioners filed a petition for review by the U.S.

Supreme Court of the First Circuit's holding, which was denied on January 13, 2020.

On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court for Puerto Rico seeking (i) a declaratory judgment that the PREPA restructuring support agreement executed in December 2015 (2015 PREPA RSA) is a “Preexisting Voluntary Agreement” under Section 104 of PROMESA and the Oversight Board’s failure to certify the 2015 PREPA RSA is an unlawful application of Section 601 of PROMESA;

(ii) an injunction enjoining the Oversight Board from unlawfully applying Section 601 of PROMESA and ordering it to certify the 2015 PREPA RSA;

and (iii) a writ of mandamus requiring the Oversight Board to comply with its duties under PROMESA and certify the 2015 PREPA RSA.

On July 21, 2017, in light of its PREPA Title III petition on July 2, 2017, the Oversight Board filed a notice of stay under PROMESA.

On July 18, 2017, AGM and AGC filed in the Federal District Court for Puerto Rico a motion for relief from the automatic stay in the PREPA Title III bankruptcy proceeding and a form of complaint seeking the appointment of a receiver for PREPA.

The court denied the motion on September 14, 2017, but on August 8, 2018, the First Circuit vacated and remanded the court's decision.

On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver.

Under the PREPA RSA, AGM and AGC have agreed to withdraw from the lift stay motion upon the Title III Court’s approval of the settlement of claims embodied in the PREPA RSA.

The Oversight Board filed a status report on May 15, 2020 regarding PREPA's financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, and that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned.

On May 22, 2020, the Title III Court issued an order to that effect.

The Oversight Board filed an updated status report on July 31, 2020, as well as a subsequent update on September 25, 2020, and requested that it be permitted to file a further report by December 9, 2020.

On May 23, 2018, AGM and AGC filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment declaring that (i) the Oversight Board lacked authority to develop or approve the new fiscal plan for Puerto Rico which it certified on April 19, 2018 (Revised Fiscal Plan);

(ii) the Revised Fiscal Plan and the Fiscal Plan Compliance Law

(Compliance Law) enacted by the Commonwealth to implement the original Commonwealth Fiscal Plan violate various sections of PROMESA;

The Company expects that the issues that remain relevant raised in several of the stayed proceedings commenced by the Company or the FOMB, either prior to or following the filing of petitions under Title III of PROMESA, to be addressed either in other subsequently filed adversary proceedings described below or in the proceedings to confirm the plans of adjustment for the Commonwealth, PRHTA or other instrumentalities of the Commonwealth.

Issues that the Company believes remain relevant from these earlier proceedings include (i) whether the clawback of certain excise taxes and revenues pledged to secure payment of bonds issued by PRHTA, PRCCDA and PRIFA should be invalidated, (ii) whether administrative rent claims of the PBA against the Commonwealth should be disallowed, (iii) whether certain later vintage Commonwealth general obligation bonds should be invalidated as having been issued in violation of the Puerto Rico constitutional debt limit, (iv) whether Commonwealth general obligation bonds are secured by consensual or statutory liens, and (v) the validity, enforceability and extent of security interests in PRHTA revenues securing PRHTA bonds.

One of the stayed proceedings concerns a PREPA RSA entered in 2015 and is no longer relevant in light of the PREPA RSA entered in by the FOMB, the Company and other parties in 2019.

For so long as the Company is a party to the Support Agreements, its participation as an adverse party to the FOMB in any PROMESA litigation is to be stayed, with the Company supporting the positions of the FOMB in seeking confirmation of the Commonwealth, PRCCDA and PRHTA plans of adjustment and the approval of the PREPA RSA so long as those plans of adjustment and the PREPA RSA conform to the respective requirements of the Support Agreements.

The Company is involved in three proceedings which have been adjourned indefinitely to permit the FOMB to assess the financial impact of the pandemic on PREPA and its request for approval of the PREPA RSA settlement.

The court has required, and the FOMB has provided, periodic reports.

Issues the Company believes remain relevant from these proceedings include (i) the approval of the PREPA RSA, (ii) whether certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims can obtain declarations that the advances made by such parties are "current expenses" as defined in the trust agreement pursuant to which the PREPA bonds were issued (Current Expenses) and there is no valid lien securing the PREPA bonds unless and until such parties are paid in full, as well as orders subordinating the PREPA bondholders’ lien and claim to such parties’ claims and declaring the PREPA RSA null and void, and (iii) whether the retirement system for PREPA employees (SREAEE) can obtain declarations that amounts owed to SREAEE are Current Expenses, that there is no valid lien securing the PREPA bonds other than on amounts in the sinking funds and that SREAEE is a third-party beneficiary of certain trust agreement provisions, as well as orders subordinating the PREPA bondholders’ lien and claim to the SREAEE claims.

The Company believes these proceedings will resume at some point in the future and the relevant issues resolved in proceedings before the Title III court.

On May 23, 2018, AGM and AGC filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment declaring that (i) the FOMB lacked authority to develop or approve the new fiscal plan for Puerto Rico which it certified on April 19, 2018 (Revised Fiscal Plan);

(ii) the Revised Fiscal Plan and the Fiscal Plan Compliance Law (Compliance Law) enacted by the Commonwealth to implement the original Commonwealth Fiscal Plan violate various sections of PROMESA;

(iii) the Revised Fiscal Plan, the Compliance Law and various moratorium laws and executive orders enacted by the Commonwealth to prevent the payment of debt service (a) are unconstitutional and void because they violate the Contracts, Takings and Due Process Clauses of the U.S.

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and (iv) no Title III plan of adjustment based on the Revised Fiscal Plan can be confirmed under PROMESA.

On August 13, 2018, the court-appointed magistrate judge granted the Commonwealth's and the Oversight Board's motion to stay this adversary proceeding pending a decision by the First Circuit in an appeal by Ambac Assurance Corporation of an unrelated adversary proceeding decision, which the First Circuit rendered on June 24, 2019.

On August 13, 2018, the court-appointed magistrate judge granted the Commonwealth's and the FOMB's motion to stay this adversary proceeding pending a decision by the United States Court of Appeals for the First Circuit (First Circuit) in an appeal by Ambac Assurance Corporation of an unrelated adversary proceeding decision, which the First Circuit rendered on June 24, 2019.

On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters through November 30, 2019, with a mandatory mediation element.

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Judge Swain postponed certain deadlines and hearings, including those related to the plan of adjustment, indefinitely as a result of the COVID-19 pandemic.

Pursuant to the court's order, the Oversight Board filed an updated status report on September 9, 2020, as well as a subsequent update on October 25, 2020, regarding the effects of the pandemic on the Commonwealth, and requested that it be permitted to file a further updated report by December 4, 2020.

On July 23, 2018, AGC and AGM filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment (i) declaring the members of the Oversight Board are officers of the U.S.

whose appointments were unlawful under the Appointments Clause of the U.S.

Constitution;

(ii) declaring void from the beginning the unlawful actions taken by the Oversight Board to date, including (x) development of the Commonwealth's Fiscal Plan, (y) development of PRHTA's Fiscal Plan, and (z) filing of the Title III cases on behalf of the Commonwealth and PRHTA;

and (iii) enjoining the Oversight Board from taking any further action until the Oversight Board members have been lawfully appointed in conformity with the Appointments Clause of the U.S.

Constitution.

The Title III court dismissed a similar lawsuit filed by another party in the Commonwealth’s Title III case in July 2018.

On August 3, 2018, a stipulated judgment was entered against AGM and AGC at their request based upon the court's July decision in the other Appointments Clause lawsuit and, on the same date, AGM and AGC appealed the stipulated judgment to the First Circuit.

On August 15, 2018, the court consolidated, for purposes of briefing and oral argument, AGM and AGC's appeal with the other Appointments Clause lawsuit.

The First Circuit consolidated AGM and AGC's appeal with a third Appointments Clause lawsuit on September 7, 2018 and held a hearing on December 3, 2018.

On February 15, 2019, the First Circuit issued its ruling on the appeal and held that members of the Oversight Board were not appointed in compliance with the Appointments Clause of the U.S.

Constitution but declined to dismiss the Title III petitions citing the (i) de facto officer doctrine and (ii) negative consequences to the many innocent third parties who relied on the Oversight Board’s actions to date, as well as the further delay which would result from a dismissal of the Title III petitions.

The case was remanded back to the Federal District Court for Puerto Rico for the appellants’ requested declaratory relief that the appointment of the board members of the Oversight Board is unconstitutional.

The First Circuit delayed the effectiveness of its ruling for 90 days so as to allow the President and the Senate to validate the defective appointments or reconstitute the Oversight Board in accordance with the Appointments Clause.

On April 23, 2019, the Oversight Board filed a petition for review by the U.S.

Supreme Court of the First Circuit's holding that its members were not appointed in compliance with the Appointments Clause and on the following day filed a motion in the First Circuit to further stay the effectiveness of the First Circuit’s February 15, 2019 ruling pending final disposition by the U.S.

Supreme Court.

On May 24, 2019, AGC and AGM filed a petition for a review by the U.S.

Supreme Court of the First Circuit’s holding that the de facto officer doctrine allows courts to deny meaningful relief to successful challengers suffering ongoing injury at the hands of unconstitutionally appointed officers.

On July 2, 2019, the First Circuit granted the Oversight Board’s motion to stay the effectiveness of the First Circuit’s February 15, 2019 ruling pending final disposition by the U.S.

Supreme Court.

On October 15, 2019, the U.S.

Supreme Court heard oral arguments on the First Circuit's ruling.

On June 1, 2020, the Supreme Court issued its opinion, reversing the First Circuit and holding that the selection process prescribed under PROMESA for Oversight Board members does not violate the Appointments Clause.

On December 21, 2018, the Oversight Board and the Official Committee of Unsecured Creditors of all Title III Debtors (other than COFINA) filed an adversary complaint in the Federal District Court for Puerto Rico seeking a judgment declaring that (i) the leases to public occupants entered into by the PBA are not “true leases” for purposes of Section 365(d)(3) of the Bankruptcy Code and therefore the Commonwealth has no obligation to make payments to the PBA under the leases or Section 365(d)(3) of the Bankruptcy Code, (ii) the PBA is not entitled to a priority administrative expense claim under the leases pursuant to Sections 503(b)(1) and 507(a)(2) of the Bankruptcy Code, and (iii) any such claims filed or asserted against the Commonwealth are disallowed.

On January 28, 2019, the PBA filed an answer to the complaint.

On March 12, 2019, the Federal District Court for Puerto Rico granted, with certain limitations, AGM’s and AGC’s motion to intervene.

On March 21, 2019, AGM and AGC, together with certain other intervenors, filed a motion for judgment on the pleadings.

On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters, which include this

proceeding, through November 30, 2019, with a mandatory mediation element.

Judge Swain extended the stay until December 31, 2019, and has since stayed the proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

On January 14, 2019, the Oversight Board and the Official Committee of Unsecured Creditors filed an omnibus objection in the Title III Court to claims filed by holders of approximately $ 6 billion of Commonwealth general obligation bonds issued in 2012 and 2014, asserting among other things that such bonds were issued in violation of the Puerto Rico constitutional debt service limit, such bonds are null and void, and the holders have no equitable remedy against the Commonwealth.

Pursuant to procedures established by Judge Swain, on April 10, 2019, AGM filed a notice of participation in these proceedings.

As of September 30, 2020, $ 369 million of the Company’s insured net par outstanding of the general obligation bonds of Puerto Rico were issued on or after March 2012.

On May 21, 2019, the Official Committee of Unsecured Creditors filed a claim objection to certain Commonwealth general obligation bonds issued in 2011, approximately $ 210 million of which are insured by the Company as of September 30, 2020, on substantially the same bases as the January 14, 2019 filing, and which the plaintiffs propose to be subject to the proceedings relating to the 2012 and 2014 bonds.

On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters, which include this proceeding, through November 30, 2019, with a mandatory mediation element.

Judge Swain extended the stay until December 31, 2019, but did not further extend the stay with respect to this matter.

On January 8, 2020, certain Commonwealth general obligation bondholders (self-styled as the Lawful Constitutional Debt Coalition) filed a claim objection to the 2012 and 2014 bonds, asserting among other things that those bonds were issued in violation of the Puerto Rico constitutional debt limit and are not entitled to first priority status under the Puerto Rico Constitution.

Judge Swain stayed these proceedings pending the Court’s determination on the Commonwealth’s plan of adjustment.

On May 2, 2019, the Oversight Board and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court for Puerto Rico against various Commonwealth general obligation bondholders and bond insurers, including AGC and AGM, that had asserted in their proofs of claim that their bonds are secured.

The complaint seeks a judgment declaring that defendants do not hold consensual or statutory liens and are unsecured claimholders to the extent they hold allowed claims.

The complaint also asserts that even if Commonwealth law granted statutory liens, such liens are avoidable under Section 545 of the Bankruptcy Code.

Judge Swain has since stayed these proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

On May 20, 2019, the Oversight Board and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court for Puerto Rico against the fiscal agent and holders and/or insurers, including AGC and AGM, that have asserted their PRHTA bond claims are entitled to secured status in PRHTA’s Title III case.

Plaintiffs are seeking to avoid the PRHTA bondholders’ liens and contend that (i) the scope of any lien only applies to revenues that have been both received by PRHTA and deposited in certain accounts held by the fiscal agent and does not include PRHTA’s right to receive such revenues;

(ii) any lien on revenues was not perfected because the fiscal agent does not have “control” of all accounts holding such revenues;

(iii) any lien on the excise tax revenues is no longer enforceable because any rights PRHTA had to receive such revenues are preempted by PROMESA;

and (iv) even if PRHTA held perfected liens on PRHTA’s revenues and the right to receive such revenues, such liens were terminated by Section 552(a) of the Bankruptcy Code as of the petition date.

Judge Swain extended the stay through December 31, 2019, and extended the stay again pending further order of the court on the understanding that these issues will be resolved in other proceedings.

On September 30, 2019, certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims (Fuel Line Lenders) filed an amended adversary complaint in the Federal District Court for Puerto Rico against the Oversight Board, PREPA, the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF"), U.S.

Bank National Association, as trustee for PREPA bondholders, and various PREPA bondholders and bond insurers, including AGC and AGM.

The complaint seeks, among other things, declarations that the advances made by the Fuel Line Lenders are Current Expenses as defined in the trust agreement pursuant to which the PREPA bonds were issued and there is no valid lien securing the PREPA bonds unless and until the Fuel Line Lenders are paid in full, as well as orders subordinating the PREPA bondholders’ lien and claim to the Fuel Line Lenders’ claims and declaring the PREPA RSA null and void.

The Oversight Board filed a status report on May 15, 2020, regarding PREPA's financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned.

On May 22, 2020, the Title III Court issued an order to that effect.

On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court for Puerto Rico against the Oversight Board, PREPA, AAFAF, the Commonwealth, the Governor of Puerto Rico, and U.S.

Bank National Association, as trustee for PREPA bondholders.

The complaint seeks, among other things, declarations that amounts owed to SREAEE are Current Expenses as defined in the trust agreement pursuant to which the PREPA bonds were issued, that there is no valid lien securing the PREPA bonds other than on amounts in the sinking funds and that SREAEE is a third-party beneficiary of certain trust agreement provisions, as well as orders subordinating the PREPA bondholders’ lien and claim to the SREAEE claims.

On November 7, 2019, the court granted a motion to intervene by AGC and AGM.

The Oversight Board filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned.

On May 22, 2020, the Title III Court issued an order to that effect.

Pursuant to the court's order, the FOMB filed an updated status report on September 9, 2020, as well as a subsequent update on October 25, 2020, regarding the effects of the pandemic on the Commonwealth.

Subsequently, the court ordered the FOMB to file a further updated report by December 8, 2020 and, no later than February 10, 2021, an amended Commonwealth disclosure statement and plan of adjustment or, at a minimum, a term sheet outlining such amendments necessitated by the COVID-19 pandemic.

On February 10, 2021, the FOMB filed a motion to extend the deadline to March 8, 2021 given a recent preliminary agreement with creditors.

On March 8, 2021, the FOMB filed a disclosure statement and a second amended Commonwealth plan of adjustment intended to implement a Plan Support Agreement dated as of February 22, 2021, to which AGM and AGC had given their support conditioned on the Plan Support Agreement becoming part of a consensually negotiated and comprehensive solution that would include PRHTA and PRCCDA.

On May 5, 2021, the FOMB announced the execution of the Plan Support Agreement that includes PRHTA and PRCCDA.

On January 16, 2020, AGM and AGC along with certain other monoline insurers filed in Federal District Court for Puerto Rico a motion (amending and superseding a motion filed by AGM and AGC on August 23, 2019) for relief from the automatic stay imposed pursuant to Title III of PROMESA to permit AGM and AGC, and the other moving parties to enforce in another forum the application of the revenues securing the PRHTA Bonds (the PRHTA Revenues) or, in the alternative, for adequate protection for their property interests in PRHTA Revenues.

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Pursuant to orders issued on July 2, 2020 and September 9, 2020, Judge Swain denied the motion to the extent it sought stay relief or adequate protection with respect to liens or other property interests in PRHTA Revenues that have not been deposited in the related bond resolution funds.

On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit.

On January 16, 2020, the Oversight Board brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA Bonds, objecting to the bond insurers claims in the Commonwealth Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or property interests with respect to PRHTA Revenues.

On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit, which held oral arguments on February 4, 2021.

On March 3, 2021, the First Circuit issued an opinion, finding that the District Court had not abused its discretion in denying lift stay relief.

The First Circuit did not rule on whether movants had a property interest, noting that issue was actively being adjudicated before the District Court, which will eventually decide on a final basis, and on a more developed record, whether the insurers have a property interest.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA Bonds, objecting to the bond insurers claims in the Commonwealth Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or property interests with respect to PRHTA Revenues.

Motions for partial summary judgment were filed on April 28, 2020, and a hearing was held on September 23, 2020.

a decision is pending.

On January 16, 2020, the Oversight Board, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA Bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRHTA Revenues.

On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

On January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA Bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRHTA Revenues.

This matter is stayed pending further order of the court.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRIFA Rum Tax Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRIFA Bonds (the PRIFA Revenues), seeking an order lifting the automatic stay so that AGM and AGC and the other moving parties can enforce rights respecting the PRIFA Revenues in another forum or, in the alternative, that the Commonwealth must provide adequate protection for such parties’ lien on the PRIFA Revenues.

securing the PRIFA Bonds (the PRIFA Revenues), seeking an order lifting the automatic stay so that AGM and AGC and the other moving parties can enforce rights respecting the PRIFA Revenues in another forum or, in the alternative, that the Commonwealth must provide adequate protection for such parties’ lien on the PRIFA Revenues.

A preliminary hearing on the motion occurred on June 4, 2020.

Pursuant to orders issued on July 2, 2020 and September 9, 2020, Judge Swain denied the motion to the extent it sought stay relief or adequate protection with respect to PRIFA Revenues that have not been deposited in the related sinking fund.

On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit.

On January 16, 2020, the Oversight Board brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRIFA Bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or ownership interests with respect to PRIFA Revenues.

On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit, which held oral arguments on February 4, 2021.

On March 3, 2021, the First Circuit issued an opinion, finding that the District Court had not abused its discretion in denying lift stay relief.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRIFA Bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or ownership interests with respect to PRIFA Revenues.

Motions for partial summary judgment were filed on April 28, 2020, and a hearing was held on September 23, 2020.

a decision is pending.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRCCDA Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRCCDA Bonds (the PRCCDA Revenues), seeking an order that an action to enforce rights respecting the PRCCDA Revenues in another forum is not subject to the automatic stay associated with the Commonwealth’s Title III proceeding or, in the alternative, if the court finds that the stay is applicable, lifting the automatic stay so that AGM, AGC and the moving parties can enforce such rights in another forum or, in the further alternative, if the court finds the automatic stay

applicable and does not lift it, that the Commonwealth must provide adequate protection for such parties’ lien on the PRCCDA Revenues.

On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRCCDA Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRCCDA Bonds (the PRCCDA Revenues), seeking an order that an action to enforce rights respecting the PRCCDA Revenues in another forum is not subject to the automatic stay associated with the Commonwealth’s Title III proceeding or, in the alternative, if the court finds that the stay is applicable, lifting the automatic stay so that AGM, AGC and the other moving parties can enforce such rights in another forum or, in the further alternative, if the court finds the automatic stay applicable and does not lift it, that the Commonwealth must provide adequate protection for such parties’ lien on the PRCCDA Revenues.

A preliminary hearing on the motion occurred on June 4, 2020.

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Following the final hearing with respect to the Transfer Account, AGM and AGC intend to appeal the portion of the opinion constituting a denial and the underlying determinations related to the denial to the First Circuit.

On January 16, 2020, the Oversight Board brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRCCDA Bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRCCDA Revenues.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRCCDA Bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRCCDA Revenues.

Motions for partial summary judgment were filed on April 28, 2020, and a hearing was held on September 23, 2020.

a decision is pending.

On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

Puerto Rico Par and Debt Service Schedules

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Gross Par Outstanding Gross Debt Service Outstanding

September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

(in millions)

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Net Par Outstanding

September 30, 2020 (1) December 31, 2019

March 31, 2021 December 31, 2020

(in millions)

Commonwealth Constitutionally Guaranteed

Commonwealth of Puerto Rico - General Obligation Bonds (2)

Puerto Rico Exposures Subject to a Support Agreement

Commonwealth of Puerto Rico - GO (1)

$ 1,112 $ 1,112

PBA (1) 134 134

Public Corporations - Certain Revenues Potentially Subject to Clawback

Subtotal - GO/PBA PSA 1,246 1,246

PRHTA (Transportation revenue) (1) 817 817

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PRCCDA 152 152

Other Public Corporations

Subtotal - HTA/CCDA PSA 1,462 1,462

PREPA (1) 776 776

PRASA 373 373

Subtotal Subject to a Support Agreement 3,484 3,484

Other Puerto Rico Exposures

PRASA and U of PR 2 2

Subtotal Other Puerto Rico Exposures 241 241

Total net exposure to Puerto Rico $ 3,725 $ 3,725

____________________

(1) In the second quarter of 2020, the Company reassumed $ 118 million in net par of Puerto Rico exposures from its largest remaining legacy financial guaranty reinsurer.

(2) As of the date of this filing, the Oversight Board has certified a filing under Title III of PROMESA for these exposures.

(1) As of the date of this filing, the FOMB has certified a filing under Title III of PROMESA for these exposures.

The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

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 be required to pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors.

In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.

Amortization Schedule of Puerto Rico Net Par Outstanding

and Net Debt Service Outstanding

As of September 30, 2020

As of March 31, 2021

Scheduled Net Par Amortization Scheduled Net Debt Service Amortization

(in millions)

2020 (October 1 - December 31) $ — $ 3

2021 (January 1 - March 31) — 101

2021 (April 1 - June 30) $ — $ 3

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2041-2042 49 51

2045-2047 246 272

Total $ 3,725 $ 5,499

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Virgin Islands

As of September 30, 2020, the Company had $ 484 million insured net par outstanding to the U.S.

As of March 31, 2021, the Company had $ 478 million insured net par outstanding to the U.S.

Virgin Islands and its related authorities (USVI), of which it rated $ 215 million BIG.

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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.

As of March 31, 2021 and December 31, 2020, $ 5 million and $ 13 million, respectively, of aircraft residual value insurance exposure was rated BIG.

Specialty Insurance and Reinsurance

Gross Exposure Net Exposure

September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

(in millions)

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____________________

(1) The life insurance transactions net exposure is projected to increase to approximately $ 0.9 billion by September 30, 2026.

Expected Loss to be Paid

This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio, regardless of the accounting model (insurance, derivative or VIE).

The expected loss to be paid is equal to the present value of expected future cash outflows for claim and LAE payments (net of the expected loss on the portion of loss mitigation bonds owned), and inflows for expected salvage and subrogation (and other recoveries including future payments by obligors pursuant to restructuring agreements, settlements or litigation judgments, excess spread on underlying collateral, and other estimated recoveries, including those from restructuring bonds and for breaches of representations and warranties (R&W)).

Expected loss to be paid is net of reinsurance.

All cash flows are discounted using end-of-period risk-free rates.

(1) The life insurance transactions net exposure is projected to increase to approximately $ 1.0 billion by June 30, 2027.

Expected Loss to be Paid (Recovered)

Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively

evaluate and manage the economics and liquidity of the entire insured portfolio.

The Company monitors and assigns ratings and

calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing

accounting models.

This note provides information regarding expected claim payments to be made under all contracts in the

insured portfolio.

Expected cash outflows and inflows are probability weighted cash flows that reflect management's assumptions about

the likelihood of all possible outcomes based on all information available to it.

Those assumptions consider the relevant facts

and circumstances and are consistent with the information tracked and monitored through the Company's risk-management

Expected loss to be paid (recovered) is important from a liquidity perspective in that it represents the present value of

amounts that the Company expects to pay or recover in future periods for all contracts.

The expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for claim and

LAE payments, net of (i) inflows for expected salvage, subrogation and other recoveries, and (ii) excess spread on underlying

Cash flows are discounted at current risk-free rates.

The Company updates the discount rates each quarter and

reflects the effect of such changes in economic loss development.

Net expected loss to be paid (recovered) is also net of

amounts ceded to reinsurers.

In circumstances where the Company has purchased its own insured obligations that had expected losses, and in cases

where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the

underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and

the asset received is prospectively accounted for under the applicable guidance for that instrument.

Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects

of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic

effects of loss mitigation efforts.

Loss Estimation Process

The Company’s loss reserve committees estimate expected loss to be paid for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them.

The Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them.

Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/or judgmental assessments.

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The Company does not use traditional actuarial approaches to determine its estimates of expected losses.

The determination of expected loss to be paid is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to residential mortgage-backed securities), and other factors that affect credit performance.

These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and as a result the Company’s loss estimates may change materially over that same period.

Each quarter, the Company may revise its scenarios and update assumptions (which may include shifting probability weightings of its scenarios) based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities.

Such information includes management's view of the potential impact of COVID-19 on its distressed U.S.

public finance exposures.

The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance.

These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company's financial statements.

Each quarter, the Company may revise its scenarios and update assumptions and probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities.

Such information includes management's view of the potential impact of COVID-19 on its distressed exposures.

Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction.

Actual losses will ultimately depend on future events or transaction performance and may be influenced by many

interrelated factors that are difficult to predict.

As a result, the Company's current projections of losses may be subject to

considerable volatility and may not reflect the Company's ultimate claims paid.

In some instances, the terms of the Company's policy give it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future.

The Company has sometimes exercised this option, which uses cash but reduces projected future losses.

The following tables present a roll forward of net expected loss to be paid for contracts under all accounting models (insurance, derivative and VIE).

The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under all accounting models (insurance, derivative and VIE).

The Company used risk-free rates for U.S.

dollar denominated obligations that ranged from 0.00 % to 1.52 % with a weighted average of 0.54 % as of September 30, 2020 and 0.00 % to 2.45 % with a weighted average of 1.94 % as of December 31, 2019.

dollar denominated obligations that ranged from 0.00 % to 2.49 % with a weighted average of 0.88 % as of March 31, 2021 and 0.00 % to 1.72 % with a weighted average of 0.60 % as of December 31, 2020.

Expected losses to be paid for transactions denominated in currencies other than the U.S.

dollar represented approximately 7.0 % and 3.2 % of the total as of September 30, 2020 and December 31, 2019, respectively.

Net Expected Loss to be Paid

Third Quarter Nine Months

2020 2019 2020 2019

dollar represented approximately 5.0 % and 6.8 % of the total as of March 31, 2021 and December 31, 2020, respectively.

Net Expected Loss to be Paid (Recovered)

First Quarter

(in millions)

Net expected loss to be paid, beginning of period $ 735 $ 960 $ 737 $ 1,183

Net expected loss to be paid (recovered), beginning of period $ 529 $ 737

Economic loss development (benefit) due to:

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Net (paid) recovered losses ( 70 ) ( 74 )

Net expected loss to be paid, end of period $ 471 $ 718 $ 471 $ 718

Net Expected Loss to be Paid

Net expected loss to be paid (recovered), end of period $ 472 $ 660

Net Expected Loss to be Paid (Recovered)

Roll Forward by Sector

Third Quarter 2020

Net Expected Loss to be Paid/(Recovered) as of June 30, 2020 Economic Loss

Development/ (Benefit) (Paid)/

Net Expected Loss to be Paid/(Recovered) as of September 30, 2020

(in millions)

Public finance:

public finance $ 543 $ 56 $ ( 336 ) $ 263

public finance 29 4 — 33

Public finance 572 60 ( 336 ) 296

Structured finance:

RMBS 128 1 8 137

Other structured finance 35 9 ( 6 ) 38

Structured finance 163 10 2 175

Total $ 735 $ 70 $ ( 334 ) $ 471

Third Quarter 2019

Net Expected Loss to be Paid/(Recovered) as of June 30, 2019 Economic Loss

Development / (Benefit) (Paid)

Net Expected Loss to be Paid/(Recovered) as of September 30, 2019

(in millions)

Public finance:

public finance $ 749 $ 50 $ ( 279 ) $ 520

public finance 23 5 — 28

Public finance 772 55 ( 279 ) 548

Structured finance:

RMBS 162 ( 40 ) 13 135

Other structured finance 26 10 ( 1 ) 35

Structured finance 188 ( 30 ) 12 170

Total $ 960 $ 25 $ ( 267 ) $ 718

Nine Months 2020

First Quarter 2021

Net Expected Loss to be Paid (Recovered) as of December 31, 2020 Economic Loss

Development (Benefit) (Paid)

Net Expected Loss to be Paid/(Recovered) as of September 30, 2020

Net Expected Loss to be Paid (Recovered) as of March 31, 2021

(in millions)

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Total $ 529 $ 13 $ ( 70 ) $ 472

Nine Months 2019

First Quarter 2020

Net Expected Loss to be Paid (Recovered) as of December 31, 2019 Economic Loss

Development (Benefit) (Paid)

Net Expected Loss to be Paid/(Recovered) as of September 30, 2019

Net Expected Loss to be Paid (Recovered) as of March 31, 2020

(in millions)

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Such amounts are recorded as reinsurance recoverable on paid losses in other assets.

The amounts for Nine Months 2019 are net of the COFINA Exchange Senior Bonds and cash that were received pursuant to the COFINA Plan of Adjustment.

The tables above include (1) LAE paid of $ 11 million and $ 7 million for Third Quarter 2020 and 2019, respectively, and $ 20 million and $ 23 million for Nine Months 2020 and 2019, respectively, and (2) expected LAE to be paid of $ 22 million as of September 30, 2020 and $ 33 million as of December 31, 2019.

The tables above include (1) LAE paid of $ 4 million and $ 3 million for First Quarter 2021 and 2020, respectively, and (2) expected LAE to be paid of $ 19 million as of March 31, 2021 and $ 23 million as of December 31, 2020.

Net Expected Loss to be Paid (Recovered) and

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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

As of First Quarter

March 31, 2021 December 31, 2020 2021 2020

(in millions)

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Public Finance Transactions

The Company insured general obligation bonds of the Commonwealth of Puerto Rico 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 BIG.

For additional information regarding the Company's Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 3, Outstanding Insurance Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California (the City) under chapter 9 of the Bankruptcy Code became effective.

As of September 30, 2020, the Company’s net par subject to the plan consisted of $ 104 million of pension obligation bonds.

The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $ 3.7 billion net par as of March 31, 2021, all of which was BIG.

For additional information regarding the Company's Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 3, Outstanding Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the Bankruptcy Code became effective.

As of March 31, 2021, the Company’s net par subject to the plan consisted of $ 104 million of pension obligation bonds.

As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth, which will likely be impacted by COVID-19.

The Company projects its total net expected loss across its troubled U.S.

public finance exposures as of September 30, 2020, including those mentioned above, to be $ 263 million, compared with a net expected loss of $ 531 million as of December 31, 2019.

public finance exposures as of March 31, 2021, including those mentioned above, to be $ 228 million, compared with a net expected loss of $ 305 million as of December 31, 2020.

The total net expected loss for troubled U.S.

public finance exposures is net of a credit for estimated future recoveries of claims already paid.

At September 30, 2020 that credit was $ 1,025 million compared with $ 819 million at December 31, 2019.

At March 31, 2021 that credit was $ 994 million compared with $ 1,154 million at December 31, 2020.

The Company’s net expected losses incorporate management’s probability weighted estimates of possible scenarios.

The economic loss development for U.S.

public finance transactions was $ 56 million during Third Quarter 2020 and the economic loss development was $ 142 million during Nine Months 2020, an d was primarily attributable to Puerto Rico exposures.

The loss development attributable to the Company’s Puerto Rico ex posures reflects adjustments the Company made to the assumptions it uses in its scenarios based on the public information as discussed under "Exposure to Puerto Rico" in Note 3, Outstanding Insurance Exposure as well as nonpublic information related to its loss mitigation activities during the period.

public finance transactions was $ 15 million during First Quarter 2021, an d w as primarily attributable to Puerto Rico exposures.

The lo ss development attributable to the Company’s Puerto Rico ex posures reflects adjustments the Company made to the assumptions it uses in its scenarios based on the public information as discussed under "Exposure to Puerto Rico" in Note 3, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period.

Selected Non - U.S.

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Expected loss to be paid for non-U.S.

public finance transactions was $ 33 million as of September 30, 2020, compared with $ 23 million as of December 31, 2019, primarily consisting of:

(i) an obligation backed by payments from a region in Italy, and for which the Company has been paying claims because of the impact of negative Euro Interbank Offered Rate (Euribor) on the transaction, (ii) an obligation backed by the availability and toll revenues of a major arterial road into a city in the U.K., which has been underperforming due to higher costs compared with expectations at underwriting, and (iii) transactions with sub-sovereign exposure to various Spanish and Portuguese issuers where a Spanish and Portuguese sovereign default may cause the sub-sovereigns also to default.

The economic loss development for non-U.S.

public finance transactions, including those mentioned above, was approximately $ 4 million during Third Quarter 2020 and $ 9 million during Nine Months 2020, and was primarily attributable to the impact of lower Euribor.

public finance transactions was $ 24 million as of March 31, 2021, compared with $ 36 million as of December 31, 2020, primarily consisting of:

(i) an obligation backed by the availability and toll revenues of a major arterial road, which has been underperforming due to higher costs compared with expectations at underwriting, and (ii) an obligation for which the Company has been paying claims because of the impact of negative Euro Interbank Offered Rate (Euribor) on the transaction.

The economic benefit for non-U.S.

public finance transactions, including those mentioned above, was approximately $ 12 million during First Quarter 2021, and was due to the restructuring of certain exposures and the impact of higher Euribor.

RMBS Loss Projections

The Company projects losses on its insured U.S.

RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any expected R&W recoveries/payables to the projected performance of the collateral over time.

RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any expected representation and warranty (R&W) recoveries/payables to the projected performance of the collateral over time.

The resulting projected claim payments or reimbursements are then discounted using risk-free rates.

As of September 30, 2020, the Company had a net R&W payable of $ 82 million to R&W counterparties, compared with a net R&W payable of $ 53 million as of December 31, 2019.

The Company’s agreements with providers of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers.

When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company will have a net R&W payable.

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will improve.

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Net Economic Loss Development (Benefit)

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

3 unchanged sentences

RMBS ( 14 ) ( 4 )

As of March 31, 2021, the Company had a net R&W payable of $ 59 million to R&W counterparties, compared with a net R&W payable of $ 74 million as of December 31, 2020.

When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company will have a net R&W payable.

First Lien RMBS Loss Projections:

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The Company arrived at its liquidation rates based on data purchased from a third party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated.

Each quarter the Company reviews the most recent twelve months of this data and (if necessary) adjusts its liquidation rates based on its observations.

Each quarter the Company reviews the most recent 12 months of this data and (if necessary) adjusts its liquidation rates based on its observations.

The following table shows liquidation assumptions for various non-performing categories.

First Lien Liquidation Rates

September 30, 2020 June 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Delinquent/Modified in the Previous 12 Months

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Real Estate Owned

All 100 100 100

Towards the end of the first quarter of 2020, lenders began offering mortgage borrowers the option to forbear interest and principal payments of their loans due to the COVID -19 pandemic, and to repay such amounts at a later date.

This resulted in an increase in early-stage delinquencies in RMBS transactions during the second quarter of 2020 and late-stage delinquencies during Third Quarter 2020.

This resulted in an increase in early-stage delinquencies in RMBS transactions during the second quarter of 2020 and late-stage delinquencies during the second half of 2020.

Early stage delinquencies have recovered to pre-pandemic levels, but late stage delinquencies continue to be elevated as many borrowers remain on COVID-19 forbearance plans.

The Company's expected loss estimate assumes that a portion of delinquencies are due to COVID-19 related forbearances, and applies a liquidation rate of 20 % to such loans.

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that intermediate CDR is held constant and then steps to a final CDR of 5 % of the CDR plateau.

In the base case, the Company assumes the final CDR will be reached 2.75 years after the initial 36 -month CDR plateau period.

In the base case, the Company

assumes the final CDR will be reached 2.25 years after the initial 36 -month CDR plateau period.

Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were modified or delinquent in the last 12 months or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36 -month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.

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The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 -month period, declining to 40 % in the base case over 2.5 years.

The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid for individual transactions for vintage 2004 - 2008 first lien U.S.

The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S.

Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS

As of September 30, 2020 As of June 30, 2020 As of December 31, 2019

Range Weighted Average Range Weighted Average Range Weighted Average

As of March 31, 2021 As of December 31, 2020

Range Weighted Average Range Weighted Average

Alt-A First Lien

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The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15 % in the base case.

For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.

For transactions where the initial

CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.

These CPR assumptions are the same as those the Company used for December 31, 2020.

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The Company also stressed CPR and the speed of recovery of loss severity rates.

The Company probability weighted a total of five scenarios as of September 30, 2020 and December 31, 2019.

The Company probability weighted a total of five scenarios as of March 31, 2021 and December 31, 2020.

Total expected loss to be paid on all first lien U.S.

RMBS was $ 121 million and $ 166 million as of September 30, 2020 and December 31, 2019, respectively.

The $ 6 million economic loss development in Third Quarter 2020 for first lien U.S.

RMBS transaction s was primarily attributable to lower excess spread and performance deterioration in certain transactions, partially offset by changes in discount rates.

The $ 49 million economic benefit in Nine Months 2020 for first lien U.S.

RMBS was primarily attributable to higher excess spread on certain transactions, partially offset by changes in discount rates and

COVID-19 related forbearances.

Certain tr ansactions benefit from excess spread when they are supported by large portions of fix ed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt linked to LIBOR, which decreased in Nine Months 2020, and so increased excess spread.

The Company used a similar approach to establish its pessimistic and optimistic scenarios as of September 30, 2020 as it used as of December 31, 2019, increasing and decreasing the periods of stress from those used in the base case.

RMBS was $ 166 million and $ 133 million as of March 31, 2021 and December 31, 2020, respectively.

The $ 25 million econo mic loss development in First Quarter 2021 for first lien U.S.

RMBS was prima rily attributable to lower excess spread of $ 53 million, partially offset by changes in discount rates of $ 26 million Certain transactions benefit from excess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt lin ked to LIBOR, which inreased in First Quarter 2021, and so decreased excess spread.

The Company used a similar approach to establish its pessimistic and optimistic scenarios as of March 31, 2021 as it used as of December 31, 2020, increasing and decreasing the periods of stress from those used in the base case.

LIBOR may be discontinued, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio refer encing LIBOR.

The economic development attributable to changes in discount rates was a gain of $ 1 million in Third Quarter 2020 and a loss of $ 24 million in Nine Months 2020.

In the Company's most stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 15 months, expected loss to be paid would increase from current projections by approximately $ 34 million for all first lien U.S.

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This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period.

In prior years, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.

In the prior periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization

period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.

The HELOC loans underlying the Company's insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans were modified to extend the original interest-only period for another five years .

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When a second lien loan defaults, there is generally a low recovery.

The Company assumed, as of September 30, 2020 and December 31, 2019, that it will generally recover 2 % of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time.

A second lien on the borrower’s home may be

retained in the Company's second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed.

The Company assumed, as of March 31, 2021 and December 31, 2020, that it will generally recover 2 % of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time.

A second lien on the borrower’s home may be retained in the Company's second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed.

If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate.

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Total expected loss to be paid on all second lien U.S.

RMBS was $ 16 million as of September 30, 2020 and total expected recovery was $ 20 million as of December 31, 2019.

After giving effect to recoveries received of $ 15 million in Third Quarter 2020 and $ 48 million in Nine Months 2020, the $ 5 million economic benefit in Third Quarter 2020 and $ 12 million economic benefit in Nine Months 2020 were primarily attributable to higher excess spread and improved performance in certain transactions and higher actual recoveries received for previously charged-off loans, partially offset by COVID-19 related forbearances and, in the case of Nine Months 2020, changes in discount rates.

The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid for individual transactions for vintage 2004 - 2008 HELOCs.

RMBS was $ 15 million as of March 31, 2021 and $ 15 million as of December 31, 2020.

The $ 14 million economic benefit in First Quarter 2021 was primarily attributable to a $ 13 million benefit related to improved performance in certain transactions and higher actual recoveries received for previously charged-off loans, and an $ 8 million benefit related to changes in discount rates, partially offset by lower excess spread of $ 6 million.

The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.

Key Assumptions in Base Case Expected Loss Estimates

As of September 30, 2020 As of June 30, 2020 As of December 31, 2019

Range Weighted Average Range Weighted Average Range Weighted Average

As of March 31, 2021 As of December 31, 2020

Range Weighted Average Range Weighted Average

Plateau CDR 3.9 % - 30.6 % 12.8 % 5.0 % - 36.2 % 12.9 %

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On the other hand, in the Company's least stressful scenario, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10 % would decrease the expected loss by approximately $ 7 million for HELOC transactions.

Other Structured Finance

The Company projected that its total net expected loss across its troubled other structured finance exposures as of September 30, 2020 was $ 38 million and is primarily attributable to $ 73 million in BIG net par of student loan securitizations issued by private issuers that are classified as structured finance.

Structured Finance Other Than U.S.

The Company projected that its total net expected loss across its troubled non-U.S.

RMBS structured finance exposures as of March 31, 2021 was $ 39 million and was primarily attributable to student loan securitizations issued by private issuers with $ 66 million in BIG net par outstanding.

In general, the projected losses of these transactions are due to:

(i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed.

The Company also had exposure to troubled life insurance transactions.

As of September 30, 2020, the Company's BIG net par in these transactions was $ 40 million.

The economic loss development across all other structured finance transactions during Third Quarter 2020 and Nine Months 2020 was $ 9 million and $ 11 million, respectively, which was primarily attributable to loss adjustment expenses for certain transactions and deterioration of certain aircraft residual value insurance exposures.

The Company also had exposure to troubled life insurance transactions with BIG net par of $ 40 million as of March 31, 2021.

The economic benefit ac ross all non-U.S.

RMBS structured finance transactions during First Quarter 2021 was $ 1 million.

Recovery Litigation

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The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico.

See Note 3, Outstanding Insurance Exposure, for a discussion of the Company's exposure to Puerto Rico and related recovery litigation being pursued by the Company.

See Note 3, Outstanding Exposure, for a discussion of the Company's exposure to Puerto Rico and related recovery litigation being pursued by the Company.

Contracts Accounted for as Insurance

The portfolio of outstanding exposures discussed in Note 3, Outstanding Insurance Exposure, and Note 4, Expected Loss to be Paid, includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs.

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs.

Amounts presented in this note relate only to contracts accounted for as insurance.

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Net Earned Premiums

Third Quarter Nine Months

2020 2019 2020 2019

(in millions)

First Quarter

Financial guaranty:

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___________________

(1) Excludes $ 2 million and $ 2 million for Third Quarter 2020 and 2019, respectively, and $ 4 million and $ 16 million for Nine Months 2020 and 2019, respectively, related to consolidated FG VIEs.

(1) Excludes $ 1 million for both First Quarter 2021 and 2020, related to consolidated FG VIEs.

Gross Premium Receivable,

Net of Commissions on Assumed Business

First Quarter

(in millions)

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Specialty insurance premium receivable 1 1

September 30, $ 1,321 $ 844

March 31, $ 1,359 $ 1,233

____________________

(1) Excludes $ 6 million and $ 7 million as of September 30, 2020 and September 30, 2019, respectively, related to consolidated FG VIEs.

Approximately 80 % and 78 % of installment premiums at September 30, 2020 and December 31, 2019, respectively, are denominated in currencies other than the U.S.

(1) Excludes $ 6 million and $ 7 million as of March 31, 2021 and March 31, 2020, respectively, related to consolidated FG VIEs.

Approximately 79 % and 80 % of gross premiums receivable, net of commissions at March 31, 2021 and December 31, 2020, respectively, are denominated in currencies other than the U.S.

dollar, primarily the pound sterling and euro.

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(Undiscounted)

As of September 30, 2020

As of March 31, 2021

(in millions)

2021 (April 1 - June 30) $ 43

2021 (July 1 - September 30) 41

2021 (October 1 - December 31) 23

Subtotal 2021 107

2026-2030 353

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Scheduled Financial Guaranty Insurance Net Earned Premiums

As of September 30, 2020

As of March 31, 2021

(in millions)

2021 (April 1 - June 30) $ 81

2021 (July 1 - September 30) 80

2021 (October 1 - December 31) 78

Subtotal 2021 239

2026-2030 925

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Policies with Premiums Paid in Installments

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(dollars in millions)

Premiums receivable, net of commission payable $ 1,320 $ 1,284

Premiums receivable, net of commissions payable $ 1,358 $ 1,371

Gross deferred premium revenue 1,660 1,664

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Financial Guaranty Insurance Losses

Loss reserves are discounted at risk-free rates for U.S.

dollar denominated financial guaranty insurance obligations that ranged from 0.00 % to 2.49 % with a weighted average of 0.88 % as of March 31, 2021 and 0.00 % to 1.72 % with a weighted average of 0.60 % as of December 31, 2020.

The following table provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.

To discount loss reserves, the Company used risk-free rates for U.S.

dollar denominated financial guaranty insurance obligations that ranged from 0.00 % to 1.52 % with a weighted average of 0.54 % as of September 30, 2020 and 0.00 % to 2.45 % with a weighted average of 1.94 % as of December 31, 2019.

Net Reserve (Salvage)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in millions)

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Structured finance 21 ( 18 )

Other payable (recoverables) ( 1 ) —

Total $ 89 $ 122

____________________

(1) Excludes net reserves of $ 35 million and $ 33 million as of September 30, 2020 and December 31, 2019, respectively, related to consolidated FG VIEs.

(1) Excludes net reserves of $ 29 million and $ 32 million as of March 31, 2021 and December 31, 2020, respectively, related to consolidated FG VIEs.

Components of Net Reserves (Salvage)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in millions)

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Salvage and subrogation reinsurance payable (2) 15 33

Salvage and subrogation recoverable, net ( 927 ) ( 717 )

Other payable (recoveries) (1) ( 1 ) —

Salvage and subrogation recoverable, net and other recoverable ( 963 ) ( 958 )

Net reserves (salvage) $ 89 $ 122

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(2) Recorded as a component of other liabilities in the condensed consolidated balance sheets.

The table below provides a reconciliation of net expected loss to be paid for financial guaranty insurance contracts to net expected loss to be expensed.

Expected loss to be paid for financial guaranty insurance contracts differs from expected loss to be expensed due to:

The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed.

Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to:

(i) the contra-paid which represents the claim payments made and recoveries received that have not yet been recognized in the statement of operations, (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Net Expected Loss to be Paid and

Reconciliation of Net Expected Loss to be Paid (Recovered) and

Net Expected Loss to be Expensed

Financial Guaranty Insurance Contracts

As of September 30, 2020

As of March 31, 2021

(in millions)

Net expected loss to be paid - financial guaranty insurance $ 418

Net expected loss to be paid (recovered) - financial guaranty insurance $ 421

Contra-paid, net 39

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____________________

(1) Excludes $ 32 million as of September 30, 2020, related to consolidated FG VIEs.

(1) Excludes $ 28 million as of March 31, 2021 related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed.

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Financial Guaranty Insurance Contracts

As of September 30, 2020

As of March 31, 2021

(in millions)

2021 (April 1 - June 30) $ 7

2021 (July 1 - September 30) 8

2021 (October 1 - December 31) 8

Subtotal 2021 23

2026-2030 122

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Loss (Benefit)

Third Quarter Nine Months

2020 2019 2020 2019

(in millions)

First Quarter

Public finance:

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____________________

(1) Exclud es a benefit of $ 1 million and $ 3 million for Third Quarter 2020 and 2019, respectively, and a loss of $ 7 million and a benefit of $ 18 million for Nine Months 2020 and 2019 respectively, related to consolidated FG VIEs.

(1) Excludes a benefit of $ 3 million and a loss of $ 6 million for First Quarter 2021 and 2020 respectively, related to consolidated FG VIEs.

The following tables provide information on financial guaranty insurance contracts categorized as BIG.

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BIG Transaction Loss Summary

As of September 30, 2020

As of March 31, 2021

BIG Categories

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Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past.

Contracts Accounted for as Credit Derivatives

The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with GAAP (primarily CDS).

The credit derivative portfolio also includes interest rate swaps.

Credit derivative transactions are governed by International Swaps and Derivatives Association, Inc.

documentation and have certain characteristics that differ from financial guaranty insurance contracts.

For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract.

In addition, there are more circumstances under which the Company may be obligated to make payments.

Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full.

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 non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity.

In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination.

Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract;

however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

Credit Derivative Net Par Outstanding by Sector

The components of the Company’s credit derivative net par outstanding are presented in the table below.

The estimated remaining weighted average life of credit derivatives was 12.0 years and 11.9 years as of March 31, 2021 and December 31, 2020, respectively.

Credit Derivatives (1)

As of March 31, 2021 As of December 31, 2020

Outstanding Net Fair Value Asset (Liability) Net Par

Outstanding Net Fair Value Asset (Liability)

(in millions)

public finance $ 1,817 $ ( 44 ) $ 1,980 $ ( 38 )

public finance 2,264 ( 32 ) 2,257 ( 27 )

structured finance 945 ( 40 ) 997 ( 30 )

structured finance 138 ( 4 ) 137 ( 5 )

Total $ 5,164 $ ( 120 ) $ 5,371 $ ( 100 )

____________________

(1) Expected loss to be paid was $ 2 million as of March 31, 2021 and expected recoveries were $ 1 million as of December 31, 2020.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating

As of March 31, 2021 As of December 31, 2020

Ratings Net Par

Outstanding % of Total Net Par

Outstanding % of Total

(dollars in millions)

AAA $ 1,780 34.4 % $ 1,796 33.5 %

AA 1,454 28.2 1,541 28.7

A 724 14.0 758 14.1

BBB 1,089 21.1 1,156 21.5

117 2.3 120 2.2

Credit derivative net par outstanding $ 5,164 100.0 % $ 5,371 100.0 %

Fair Value of Credit Derivatives

Net Change in Fair Value of Credit Derivative Gains (Losses)

First Quarter

(in millions)

Realized gains on credit derivatives $ 1 $ 2

Net credit derivative losses (paid and payable) recovered and recoverable and other settlements — ( 2 )

Realized gains (losses) and other settlements 1 —

Net unrealized gains (losses) ( 20 ) ( 77 )

Net change in fair value of credit derivatives $ ( 19 ) $ ( 77 )

During First Quarter 2021, unrealized fair value losses were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC's credit protection decreased during the period.

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.

The unrealized fair value losses were partially offset by higher discount rates.

During First Quarter 2020, unrealized fair value losses were generated primarily as a result of wider spreads of the underlying collateral and lower discount rates.

These were partially offset by gains due to the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these 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 primarily based on quoted CDS prices traded on AGC at each balance sheet date.

CDS Spread on AGC (in basis points)

As of March 31, 2021 As of December 31, 2020 As of March 31, 2020 As of December 31, 2019

Five-year CDS spread 97 132 224 41

One-year CDS spread 19 36 64 9

Fair Value of Credit Derivative Assets (Liabilities)

and Effect of AGC

Credit Spread

March 31, 2021 December 31, 2020

(in millions)

Fair value of credit derivatives before effect of AGC credit spread $ ( 266 ) $ ( 313 )

Effect of AGC credit spread 146 213

Net fair value of credit derivatives $ ( 120 ) $ ( 100 )

The fair value of CDS contracts at March 31, 2021, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wide credit spreads generally due to relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.

Collateral Posting for Certain Credit Derivative Contracts

The transaction documentation with one counterparty for $ 76 million in CDS net par insured by the Company requires the Company to post collateral, subject to a $ 76 million cap, to secure its obligation to make payments under such contracts.

Eligible collateral is generally cash or U.S.

government or agency securities;

eligible collateral other than cash is valued at a discount to the face amount.

As of March 31, 2021, AGC did not need to post collateral to satisfy these requirements.

The Company assumes exposure (Assumed Business) from third party insurers, primarily other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (Legacy Monoline Insurers), and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of any ceding commissions.

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The Company historically entered into, and with respect to new business originated by AGRO continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

Financial Guaranty Business

The Company’s facultative and treaty assumed agreements with the Legacy Monoline Insurers are generally subject to termination at the option of the ceding company:

• if the Company fails to meet certain financial and regulatory criteria;

• if the Company fails to maintain a specified minimum financial strength rating;

• upon certain changes of control of the Company.

Upon termination due to one of the above events, the Company typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S.

statutory basis, attributable to the Assumed Business (plus in certain cases, an additional required amount), after which the Company would be released from liability with respect to such business.

As of September 30, 2020, if each third party company ceding business to any of the Company's insurance subsidiaries had a right to recapture such business, and chose to exercise such right, the aggregate amounts that AG Re and AGC could be required to pay to all such companies would be approximately $ 42 million and $ 247 million, respectively.

The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk.

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The Company’s ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain triggering events, such as reinsurer downgrades.

Specialty Business

The Company, through AGRO, assumes specialty business from third party insurers (Assumed Specialty Business).

It also cedes and retrocedes some of its specialty business to third party reinsurers.

A downgrade of AGRO’s financial strength rating by S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) below "A" would require AGRO to post, as of September 30, 2020, an estimated $ 2.3 million of collateral in respect of certain of its Assumed Specialty Business.

A further downgrade of AGRO’s S&P rating below A- would give the company ceding such business the right to recapture the business for AGRO’s collateral amount, and, if also accompanied by a downgrade of AGRO's financial strength rating by A.M.

Best Company, Inc.

below A-, would also require AGRO to post, as of September 30, 2020, an estimated $ 13 million of collateral in respect of a different portion of AGRO’s Assumed Specialty Business.

AGRO’s ceded/retroceded contracts generally have equivalent provisions requiring the assuming reinsurer to post collateral and/or allowing AGRO to recapture the ceded/retroceded business upon certain triggering events, such as reinsurer rating downgrades.

Effect of Reinsurance

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Effect of Reinsurance on Statement of Operations

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

Premiums Written:

Direct $ 77 $ 64

Assumed ( 1 ) 2 — 3

Ceded ( 1 ) —

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Direct $ 96 $ 94

Assumed 8 12 28 42

Ceded ( 1 ) ( 1 )

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Net $ 30 $ 20

____________________

(1) Positive ceded premiums written were due to commutations and changes in expected debt service schedules.

Ceded Reinsurance (1)

As of September 30, 2020 As of December 31, 2019

As of March 31, 2021 As of December 31, 2020

(in millions)

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____________________

(1) The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of September 30, 2020 and December 31, 2019 was approximately $ 18 million and $ 68 million, respectively.

(1) The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of both March 31, 2021 and December 31, 2020 was approximately $ 18 million.

Such collateral is posted (i) in the case of certain reinsurers not authorized or "accredited" in the U.S., in order for the Company to receive credit for the liabilities ceded to such reinsurers in statutory financial statements, and (ii) in the case of certain reinsurers authorized in the U.S., on terms negotiated with the Company.

(2) Of the total par ceded to BIG rated reinsurers, $ 74 million and $ 224 million is rated BIG as of September 30, 2020 and December 31, 2019, respectively.

In the second quarter of 2020, the Company reassumed a previously ceded portfolio of insured business from its largest remaining legacy third party financial guaranty reinsurer, which included $ 118 million in net par of Puerto Rico exposures.

Commutations of Ceded Reinsurance Contracts

(2) Of the total par ceded to BIG rated reinsurers, $ 74 million was rated BIG as of both March 31, 2021 and December 31, 2020.

Investments and Cash

Investment Portfolio

The investment portfolio tables shown below include assets managed both externally and internally.

As of March 31, 2021, the majority of the investment portfolio is managed by three outside managers and AssuredIM.

The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.

The externally managed portfolio must maintain a minimum average rating of A+/A1/A+ by S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P), Moody’s Investors Service, Inc.

(Moody’s) or Fitch Ratings Inc., respectively.

The internally managed portfolio primarily consists of the Company's investments in (i) securities acquired for loss mitigation purposes or other risk management purposes, (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM, and (iii) other invested assets which primarily consist of alternative investments such as:

an equity method investment in one AssuredIM Fund (a healthcare private equity fund) that is not consolidated, an investment in renewable and clean energy, and a private equity fund managed by a third party.

In addition to amounts shown in the table below, the Company agreed to purchase up to $ 125 million of limited partnership interests in certain of these and other similar investments, of which $ 91 million was not yet funded as of March 31, 2021.

Investment Portfolio

Carrying Value

March 31, 2021 December 31, 2020

(in millions)

Increase in net unearned premium reserve $ 5 $ 15

Increase in net par outstanding 336 1,069

Commutation gains (losses) 38 1

Fixed-maturity securities (1):

Externally managed $ 7,224 $ 7,301

Internally managed:

Loss mitigation and other securities (2) 922 925

AssuredIM 541 547

Short-term investments 701 851

Other invested assets (internally managed)

Equity method investments-AssuredIM Funds 71 91

Equity method investments-other 127 107

Total $ 9,599 $ 9,838

____________________

(1) 8.2 % and 8.1 % of fixed-maturity securities, related primarily to loss mitigation and other risk management strategies, were rated BIG as of March 31, 2021 and December 31, 2020, respectively.

(2) Includes other fixed-maturities that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of the financial guaranties (other risk management securities).

Insurance Subsidiaries, through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $ 750 million in AssuredIM Funds.

As of March 31, 2021, the Insurance segment has total commitments to AssuredIM Funds of $ 587 million of which $ 335 million represents net invested capital and $ 252 million is undrawn.

This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, healthcare structured capital and municipal bonds.

As of March 31, 2021 and December 31, 2020, the fair value of AGAS’s interest in AssuredIM Funds, was $ 368 million and $ 345 million, respectively, although such amounts are not shown on the consolidated balance sheet in the investment portfolio if the AssuredIM Fund is consolidated.

The Insurance segment presents AGAS's investment in AssuredIM Funds in equity in earnings of investees, regardless of whether or not such AssuredIM Funds are consolidated.

AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not included in the "investment portfolio" line item on the condensed consolidated balance sheet, but rather, such AssuredIM Funds are consolidated and their assets and liabilities are presented in the line items “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles”, with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable non-controlling interests.

Changes in the fair value of CIVs are also presented in their own line item on the condensed consolidated statement of operations with the portion not owned by AGAS and other subsidiaries presented as non-controlling interests.

See Note 9, Variable Interest Entities.

Accrued investment income, which is recorded in other assets, was $ 77 million as of March 31, 2021 and $ 75 million December 31, 2020.

In First Quarter 2021 and First Quarter 2020, the Company did not write off any accrued investment income.

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of March 31, 2021

Security Type Percent

Total (1) Amortized

Cost Allowance for Credit Losses Gross

Losses Estimated

Value AOCI (2)

(dollars in millions)

Fixed-maturity securities:

Obligations of state and political subdivisions 40 % $ 3,613 $ ( 11 ) $ 319 $ ( 5 ) $ 3,916 $ — AA-

government and agencies 2 138 — 9 ( 3 ) 144 — AA+

Corporate securities 27 2,504 ( 43 ) 153 ( 42 ) 2,572 ( 25 ) A

Mortgage-backed securities (4):

RMBS 6 541 ( 20 ) 29 ( 20 ) 530 ( 19 ) A-

Commercial mortgage-backed securities (CMBS) 4 351 — 23 — 374 — AAA

Asset-backed securities:

CLOs 6 523 — 2 — 525 — AA-

Other 5 430 ( 7 ) 35 ( 2 ) 456 ( 2 ) CCC+

government securities 2 167 — 8 ( 5 ) 170 — AA-

Total fixed-maturity securities 92 8,267 ( 81 ) 578 ( 77 ) 8,687 ( 46 ) A+

Short-term investments 8 701 — — — 701 — AAA

Total 100 % $ 8,968 $ ( 81 ) $ 578 $ ( 77 ) $ 9,388 $ ( 46 ) A+

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2020

Security Type Percent

Total (1) Amortized

Cost Allowance for Credit Losses Gross

Losses Estimated

Credit Loss Weighted

(dollars in millions)

Fixed-maturity securities:

Obligations of state and political subdivisions 40 % $ 3,633 $ ( 11 ) $ 369 $ — $ 3,991 $ — AA-

government and agencies 2 151 — 12 ( 1 ) 162 — AA+

Corporate securities 26 2,366 ( 42 ) 210 ( 21 ) 2,513 ( 16 ) A

Mortgage-backed securities (4):

RMBS 6 571 ( 19 ) 35 ( 21 ) 566 ( 20 ) A-

CMBS 4 358 — 29 — 387 — AAA

Asset-backed securities:

CLOs 6 531 — 2 ( 1 ) 532 — AA-

Other 5 427 ( 6 ) 31 ( 3 ) 449 ( 3 ) CCC+

government securities 2 167 — 10 ( 4 ) 173 — AA-

Total fixed-maturity securities 91 8,204 ( 78 ) 698 ( 51 ) 8,773 ( 39 ) A+

Short-term investments 9 851 — — — 851 — AAA

Total 100 % $ 9,055 $ ( 78 ) $ 698 $ ( 51 ) $ 9,624 $ ( 39 ) A+

____________________

(1) Based on amortized cost.

(2) Accumulated other comprehensive income (AOCI).

(3) Ratings represent the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications.

The Company’s portfolio primarily consists of high-quality, liquid instruments.

government-agency obligations were approximately 34 % of mortgage backed securities as of March 31, 2021 and 35 % as of December 31, 2020 based on fair value.

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

For Which an Allowance for Credit Loss was Not Recorded

As of March 31, 2021

Less than 12 months 12 months or more Total

Value Unrealized

(dollars in millions)

Obligations of state and political subdivisions $ 138 $ ( 5 ) $ — $ — $ 138 $ ( 5 )

government and agencies 33 ( 3 ) — — 33 ( 3 )

Corporate securities 377 ( 13 ) 41 ( 4 ) 418 ( 17 )

Mortgage-backed securities:

RMBS 17 — 15 ( 1 ) 32 ( 1 )

Asset-backed securities:

CLOs 136 — 27 — 163 —

government securities 14 ( 1 ) 37 ( 4 ) 51 ( 5 )

Total $ 715 $ ( 22 ) $ 120 $ ( 9 ) $ 835 $ ( 31 )

Number of securities (1) 302 30 331

Fixed-Maturity Securities

Gross Unrealized Loss by Length of Time

For Which an Allowance for Credit Loss was Not Recorded

As of December 31, 2020

Less than 12 months 12 months or more Total

Value Unrealized

(dollars in millions)

Obligations of state and political subdivisions $ 1 $ — $ — $ — $ 1 $ —

government and agencies 22 ( 1 ) — — 22 ( 1 )

Corporate securities 73 — 45 ( 5 ) 118 ( 5 )

Mortgage-backed securities:

RMBS 15 ( 1 ) 1 — 16 ( 1 )

CMBS — — 1 — 1 —

Asset-backed securities:

CLOs 251 ( 1 ) 81 — 332 ( 1 )

government securities — — 38 ( 4 ) 38 ( 4 )

Total $ 362 $ ( 3 ) $ 166 $ ( 9 ) $ 528 $ ( 12 )

Number of securities (1) 94 46 139

___________________

(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.

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 March 31, 2021 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 position prior to expected recovery in value.

Of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 11 securities had unrealized losses in excess of 10% of their carrying value as of both March 31, 2021 and December 31, 2020.

The total unrealized loss for these securities was $ 9 million as of March 31, 2021 and $ 8 million as of December 31, 2020.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of March 31, 2021 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 March 31, 2021

Cost Estimated

(in millions)

Due within one year $ 364 $ 371

Due after one year through five years 1,586 1,700

Due after five years through 10 years 1,938 1,989

Due after 10 years 3,487 3,723

Mortgage-backed securities:

Total $ 8,267 $ 8,687

Based on fair value, investments and other 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 $ 257 million and $ 262 million, as of March 31, 2021 and December 31, 2020, 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 $ 1,271 million and $ 1,511 million, based on fair value as of March 31, 2021 and December 31, 2020, respectively.

Net Investment Income and Equity in Earnings of Investees

Net investment income is a function of the yield that the Company earns on fixed-maturity securities and short-term investments, and the size of such 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 securities in this portfolio.

Net Investment Income

and Equity in Earnings of Investees

First Quarter

(in millions)

Interest income:

Externally managed $ 51 $ 62

Internally managed:

AssuredIM (1) 4 —

Loss mitigation and other securities 16 20

Interest income 71 82

Investment expenses ( 1 ) ( 2 )

Net investment income $ 70 $ 80

Equity in earnings of investees $ 9 $ ( 4 )

____________________

(1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.

Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses).

Realized gains and losses on sales of investments are determined using the specific identification method.

Net Realized Investment Gains (Losses)

First Quarter

(in millions)

Gross realized gains on available-for-sale securities $ 3 $ 7

Gross realized losses on available-for-sale securities ( 2 ) ( 1 )

Credit impairment and intent to sell (1) ( 4 ) ( 11 )

Net realized investment gains (losses) (2) $ ( 3 ) $ ( 5 )

____________________

(1) Credit impairment in First Quarter 2021 and First Quarter 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 First Quarter 2020.

(2) Includes foreign currency gains of $ 1 million and $ 3 million for First Quarter 2021 and First Quarter 2020, respectively.

The following table presents the roll-forward of the credit losses on fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2021 and 2020.

Roll Forward of Credit Losses

in the Investment Portfolio

First Quarter

(in millions)

Balance, beginning of period $ 78 $ —

Effect of adoption of accounting guidance on credit losses on January 1, 2020 — 62

Additions for securities for which credit impairments were not previously recognized 1 2

Additions (reductions) for credit losses on securities for which credit impairments were previously recognized 2 9

Balance, end of period $ 81 $ 73

The Company recorded an additional $ 3 million and $ 11 million in credit loss expense for First Quarter 2021 and First Quarter 2020, respectively.

Credit loss expense included accretion of $ 1 million and $ 1 million in First Quarter 2021 and First Quarter 2020, respectively.

The Company did not purchase any securities with credit deterioration during the periods presented.

All of the Company’s securities that were purchased with credit deterioration are loss mitigation or other risk management securities.

Variable Interest Entities

The Company has elected the fair value option for assets and liabilities of FG VIEs because the carrying amount transition method was not practical.

The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs but do not act as the servicer or collateral manager for any VIE obligations they guarantee.

The transaction structure generally provides certain financial protections to the insurance subsidiaries.

This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread.

In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company.

In the case of first loss, the Company's financial guaranty insurance policy only

covers a senior layer of losses experienced by multiple obligations issued by the VIEs.

The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors.

In the case of excess spread, the financial assets contributed to VIEs, generate interest income that are in excess of the interest payments on the debt issued by the VIE.

Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall.

AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs.

Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on FG VIEs’ liabilities.

Net fair value gains and losses on FG VIEs are expected to reverse to zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contract.

The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered).

As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE.

These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition.

At deal inception, the insurance subsidiaries typically are not deemed to control the VIE;

however, once a trigger event occurs, the insurance subsidiaries' control of the VIE typically increases.

The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE.

The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts.

If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated.

If the insurance companies are deemed no longer to have those protective rights, the VIE is deconsolidated.

The FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because

they guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets.

liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of

principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets.

As of both March 31, 2021 and December 31, 2020, the Company consolidated 25 FG VIEs.

During First Quarter 2020 there was one FG VIE that matured.

There were no other consolidations or deconsolidations for the periods presented.

The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated financial statements, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities with recourse.

Consolidated FG VIEs

By Type of Collateral

As of March 31, 2021 As of December 31, 2020

Assets Liabilities Assets Liabilities

(in millions)

With recourse:

RMBS first lien $ 215 $ 249 $ 226 $ 260

RMBS second lien 49 52 53 56

Total with recourse 264 301 279 316

Without recourse 17 17 17 17

Total $ 281 $ 318 $ 296 $ 333

The change in the instrument-specific credit risk (ISCR) of the FG VIEs’ assets held as of March 31, 2021 that was recorded in the condensed consolidated statements of operations for First Quarter 2021 was a loss of $ 3 million.

The change in the ISCR of the FG VIEs’ assets held as of March 31, 2020 was a loss of $ 3 million for First Quarter 2020.

The ISCR amount is determined by using expected cash flows at the original date of consolidation discounted at the effective yield, less current expected cash flows discounted at that same original effective yield.

The inception to date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the Company’s CDS spread from the most recent date of consolidation to the current period.

In general, if the Company’s CDS spread tightens, more value will be assigned to the Company’s credit;

however, if the Company’s CDS widens, less value is assigned to the Company’s credit.

March 31, 2021 December 31, 2020

(in millions)

Excess of unpaid principal over fair value of:

FG VIEs’ assets $ 274 $ 274

FG VIEs’ liabilities with recourse 18 15

FG VIEs’ liabilities without recourse 16 16

Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due 69 68

Unpaid principal for FG VIEs’ liabilities with recourse (1)

____________________

(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2021 to 2038.

During First Quarter 2021, one AssuredIM Fund was deconsolidated, one new CLO and one CLO warehouse were consolidated, and one previously consolidated CLO warehouse was securitized and became a CLO.

There were no gains or losses on deconsolidation in First Quarter 2021.

As of March 31, 2021, the Company's CIVs consist of" six AssuredIM Funds, five CLOs and one CLO warehouse.

Substantially all of the CIVs are VIEs.

The Company consolidated these investment vehicles because it is deemed to be the primary beneficiary based on its power to direct the most significant activities of each VIE (through AssuredIM) and its level of economic interest in the entities (through AGAS).

The assets and liabilities of the Company's CIVs are held within separate legal entities.

The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs.

In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs.

Liquidity available at the Company's CIVs is not available for corporate liquidity needs, except to the extent of the Company's investment in the fund, subject to redemption provisions.

Assets and Liabilities

March 31, 2021 December 31, 2020

(in millions)

Cash and cash equivalents $ 57 $ 117

Fund investments, at fair value (1)

Corporate securities — 9

Structured products 50 39

Obligations of state and political subdivisions 94 61

Equity securities and warrants 10 18

Other (2) 1 —

Due from brokers and counterparties 53 35

CLO and CLO warehouse assets:

CLO investments

Loans in CLOs at fair value, collateralized financing entity (CFE) 2,114 1,291

Loans in CLO warehouses, at fair value option 189 170

Short-term investments, at fair value 136 139

Due from brokers and counterparties 59 17

Total assets (3) $ 2,956 $ 1,913

CLO obligations of CFE, at fair value (4)

Warehouse financing debt, at fair value option (5) 68 25

Securities sold short, at fair value 55 47

Due to brokers and counterparties 477 290

Other liabilities (2) — 1

Total liabilities $ 2,573 $ 1,590

____________________

(1) Includes investment in affiliates of $ 10 million as of both March 31, 2021 and December 31, 2020.

(2) Includes forward currency contracts and interest rate swaps derivatives.

(3) Includes assets of a voting interest entity as of March 31, 2021 and December 31, 2020 of $ 57 million and $ 10 million, respectively.

(4) The weighted average maturity of CLO obligations was 6.0 years for March 31, 2021 and 5.6 years for December 31, 2020.

The weighted average interest rate of CLO obligations was 2.1 % for March 31, 2021 and 2.4 % for December 31, 2020.

CLO obligations will mature at various dates ranging from 2031 to 2034.

(5) The weighted average maturity of warehouse financing debt of CLO warehouses was 0.7 years for March 31, 2021 and 1.7 years for December 31, 2020.

The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.5 % for March 31, 2021 and 1.7 % for December 31, 2020.

Warehouse financing debt will mature in 2021.

As of March 31, 2021 and December 31, 2020, the CIVs had a commitment to invest $ 7 million and $ 6 million, respectively.

As of March 31, 2021, the CIVs included forward currency contracts and interest rate swaps with a notional of $ 54 million and $ 13 million, respectively, and average notional of $ 33 million and $ 10 million, respectively.

As of December 31, 2020, the CIVs included forward currency contracts and interest rate swaps with a notional of $ 11 million and $ 8 million, respectively, and average notional of $ 6 million and $ 4 million, respectively.

The fair value of the forward contracts and interest rate swaps is recorded in the "assets of CIVs" or "liabilities of CIVs" in the Company's condensed consolidated balance sheets.

The net change in fair value recorded in the "fair value gains (losses) of CIVs" in the condensed consolidated statements of operations for First Quarter 2021 were $ 2 million gains.

The CIVs did not have such contracts during First Quarter 2020.

The following table shows the information for assets and liabilities of the CIVs measured using the fair value option.

March 31, 2021 December 31, 2020

(in millions)

Excess of unpaid principal over fair value of loans in CLO warehouses $ 1 $ 1

Unpaid principal for warehouse financing debt 68 25

On December 23, 2020, BlueMountain CLO XXXI Ltd.

(CLO XXXI), as borrower, entered into a credit facility pursuant to which CLO XXXI may borrow for purposes of purchasing loans during the CLO warehouse stage.

Under the CLO XXXI credit facility, the principal amount may not exceed $ 360 million.

The current available commitment is determined by an advance rate of 75 % 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 CLO XXXI as of March 31, 2021 was $ 90 million.

As of March 31, 2021, CLO XXXI has drawn down $ 68 million.

The scheduled maturity date under the credit facility is December 22, 2021.

The unpaid principal amounts will bear interest at a rate of 3-month LIBOR plus 130 basis points (bps).

Accrued interest on all loans will be paid on the maturity date or the closing date of the CLO, whichever is earlier.

The CLO warehouse was in compliance with all financial covenants as of March 31, 2021.

As of December 31, 2020, € 20 million (or $ 25 million) and € 1 million (or $ 1 million) had been drawn under a BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1) credit facility with counterparties dated August 26, 2020 by EUR 2021-1 and AssuredIM, respectively.

During First Quarter 2021, EUR 2021-1 and AssuredIM repaid the borrowings under credit facility.

Redeemable Noncontrolling Interests in CIVs

First Quarter

(in millions)

Beginning balance $ 21 $ 7

Reallocation of ownership interests — ( 2 )

Contributions to investment vehicles — 5

Net income (loss) — ( 2 )

March 31, $ 21 $ 8

Effect of Consolidating FG VIEs and CIVs

The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), includes (1) the establishment of the FG VIEs assets and liabilities and related changes in fair value on the condensed consolidated financial statement, (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs, and (3) eliminating the investment balances associated with the insurance subsidiaries' purchases of the debt obligations of the FG VIEs.

The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on assets, liabilities and cash flows.

The economic effect of the Company's ownership interest in CIVs are presented in the Insurance segment as equity in earnings of investees, and as separate line items on a consolidated basis.

The table below reflects the effect of consolidating FG VIEs and CIVs.

The amounts represent (1) the assets, liabilities, revenues and expenses of the FG VIEs and the CIVs, and (2) the amounts eliminated between consolidated FG VIEs or CIVs and the operating subsidiaries.

Effect of Consolidating FG VIEs and CIVs

on the Condensed Consolidated Balance Sheets

Increase (Decrease)

March 31, 2021 December 31, 2020

(in millions)

Investment portfolio:

Fixed maturity securities and short-term investments (1) $ ( 51 ) $ ( 32 )

Equity method investments (2)

( 297 ) ( 254 )

Other invested assets — ( 2 )

Total investments ( 348 ) ( 288 )

Premiums receivable, net of commissions payable (3) ( 6 ) ( 6 )

Salvage and subrogation recoverable (3) ( 10 ) ( 9 )

FG VIEs’ assets, at fair value 281 296

Assets of CIVs 2,956 1,913

Other assets 1 ( 3 )

Total assets $ 2,874 $ 1,903

Liabilities and shareholders’ equity

Unearned premium reserve (3) $ ( 37 ) $ ( 38 )

Loss and LAE reserve (3) ( 39 ) ( 41 )

FG VIEs’ liabilities with recourse, at fair value 301 316

FG VIEs’ liabilities without recourse, at fair value 17 17

Liabilities of CIVs

Total liabilities 2,815 1,844

Redeemable noncontrolling interests (4) 21 21

Retained earnings 22 22

Accumulated other comprehensive income (5) ( 26 ) ( 25 )

Total shareholders’ equity attributable to Assured Guaranty Ltd.

Nonredeemable noncontrolling interests (4) 42 41

Total shareholders’ equity 38 38

Total liabilities, redeemable noncontrolling interests and shareholders’ equity $ 2,874 $ 1,903

____________________

(1) Represents the elimination of investment balances related to the insurance subsidiaries' purchases of insured FG VIEs’ debt.

(2) Represents the elimination of the equity method investment made by AGAS and other subsidiaries' in the consolidated AssuredIM Funds.

(3) Represents the elimination of insurance balances related to the insurance subsidiaries' guarantee of FG VIEs’ liabilities with recourse.

(4) Represents the proportion of consolidated AssuredIM Funds that is not owned by AGAS or other subsidiaries.

(5) Represents (a) the fair value of the FG VIEs’ liabilities with recourse that are attributable to changes in the Company's own credit risk and (b) elimination of the AOCI related to the insurance subsidiaries' purchases of insured FG VIEs' debt.

Effect of Consolidating FG VIEs and CIVs

on the Condensed Consolidated Statements of Operations

Increase (Decrease)

First Quarter

(in millions)

Net earned premiums (1) $ ( 1 ) $ ( 1 )

Net investment income (2) ( 1 ) ( 1 )

Asset management fees (3) ( 2 ) ( 1 )

Fair value gains (losses) on FG VIEs (4) 5 ( 9 )

Fair value gains (losses) on CIVs 16 ( 12 )

Loss and LAE (1) ( 3 ) 6

Equity in earnings of investees (5) ( 10 ) 10

Effect on income before tax 4 ( 8 )

Tax provision (benefit) — ( 1 )

Effect on net income (loss) 4 ( 7 )

Effect on noncontrolling interests (6) 4 ( 3 )

Effect on net income (loss) attributable to AGL $ — $ ( 4 )

____________________

(1) Represents the elimination of insurance revenues and expenses related to the insurance subsidiaries' guarantee of FG VIEs’ liabilities with recourse.

(2) Represents the elimination of investment income related to the insurance subsidiaries' purchases of insured FG VIEs’ debt.

(3) Represents the elimination of intercompany asset management fees.

(4) Changes in fair value of the FG VIEs’ liabilities with recourse that are attributable to factors other than changes in the Company's own credit risk.

(5) Represents the elimination of the equity in earnings in investees of AGAS and the other subsidiaries' investments in the consolidated AssuredIM Funds.

(6) Represents the proportion of consolidated AssuredIM Funds' income that is not attributable to AGAS' or any other subsidiaries' ownership interest .

The fair value gains on CIVs for First Quarter 2021 were attributable to realized gains or losses, changes in underlying investment prices and investment interest, net of fees and expenses.

The fair value losses on CIVs for First Quarter 2020 were attributable to price depreciation on underlying assets.

Fair value gains on FG VIEs for First Quarter 2021 were attributable to price depreciation on insured fixed rate debt that were negatively impacted due to the assumptions in forward interest rates.

For First Quarter 2020, the fair value losses on FG VIEs were attributable to price depreciation due to the observed widening in the market spreads for the underlying collateral.

Other Consolidated VIEs

In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the original insured financial guaranty insurance or credit derivative contract, the Company classifies the assets and liabilities of those VIEs in the line items that most accurately reflect the nature of the items, as opposed to within the FG VIEs’ assets and FG VIEs’ liabilities.

The largest of these VIEs had assets of $ 95 million and liabilities of $ 9 million as of March 31, 2021, and assets of $ 96 million and liabilities of $ 3 million as of December 31, 2020, primarily recorded in the investment portfolio and credit derivative liabilities on the condensed consolidated balance sheets.

Non-Consolidated VIEs

As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio.

Of the approximately 17 thousand policies monitored as of March 31, 2021, approximately 15 thousand policies are not within the scope of FASB Accounting Standards Codification (ASC) 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization.

The majority of the remaining

policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities.

As of March 31, 2021 and December 31, 2020, the Company identified 80 and 79 policies, respectively, that contain provisions and experienced events that may trigger consolidation.

Based on management’s assessment of these potential triggers or events, the Company consolidated 25 FG VIEs as of both March 31, 2021 and December 31, 2020.

The Company’s exposure provided through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Exposure.

The Company manages funds and CLOs that have been determined to be VIEs, in which the Company concluded that it is not the primary beneficiary.

As such, the Company does not consolidate these entities.

The Company holds variable interests in a VIE which is not consolidated, as it has been determined that the Company is not the primary beneficiary, but in which it holds a significant variable interest.

This VIE has $ 178 million of assets and $ 51 million of liabilities as of March 31, 2021 and $ 204 million of assets and $ 9 million of liabilities as of December 31, 2020.

As of March 31, 2021, the Company had $ 71 million maximum exposure to losses relating to this VIE, which is limited to the carrying value of this investment.

Fair Value Measurement

9 unchanged sentences

As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions.

During Nine Months 2020, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income.

During First Quarter 2021, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income.

The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values.

The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date.

The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable.

11 unchanged sentences

financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

There was a transfer of a fixed-maturity security from Level 3 into Level 2 during Nine Months 2020.

There was a transfer of a fixed-maturity security from Level 2 into Level 3 during Nine Months 2019.

There was a transfer of a fixed-maturity security from Level 3 into Level 2 during First Quarter 2020.

There were no other transfers into or from Level 3 during the periods presented.

Carried at Fair Value

Fixed-Maturity Securities and Short-Term Investments

Fixed-Maturity Securities

The fair value of fixed-maturity securities in the investment portfolio is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency.

6 unchanged sentences

The valuation of fixed-maturity investments is more subjective when markets are less liquid due to the lack of market based inputs.

Short-term investments that are traded in active markets are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices.

Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.

As of September 30, 2020, the Company used models to price 200 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $ 1,277 million.

Most Level 3 securities were priced with the assistance of an independent third party.

As of March 31, 2021, the Company used models to price 209 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $ 1,318 million.

Most Level 3 securities were priced with the assistance of independent third parties.

The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models.

6 unchanged sentences

Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.

Short-Term Investments

Short-term investments that are traded in active markets are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices.

Other Invested Assets

Other invested assets that are carried at fair value primarily include equity securities traded in active markets that are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices.

Other invested assets also include equity method investments in an AssuredIM healthcare private equity fund and a distressed opportunity fund managed by a third party asset manager, for which fair value is measured at net asset value (NAV), as a practical expedient and therefore excluded from the fair value hierarchy.

The unfunded commitments for the AssuredIM healthcare private equity fund were $ 117 million as of March 31, 2021.

The fund does not allow redemptions.

Committed Capital Securities

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Supplemental Executive Retirement Plans

The Company classifies the fair value measurement included in the Company's various supplemental executive retirement plans as either Level 1 or Level 2.

The fair value of these assets is valued based on the observable published daily values of the underlying mutual fund included in the plans (Level 1) or based upon the net asset value (NAV) of the funds if a published daily value is not available (Level 2).

The Company classifies assets included in the Company's various supplemental executive retirement plans as either Level 1 or Level 2.

The fair value of these assets is valued based on the observable published daily values of the underlying mutual fund included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2).

The NAVs are based on observable information.

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Contracts Accounted for as Credit Derivatives

The Company’s credit derivatives primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes recorded in the statement of operations.

The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes recorded in the statement of operations.

The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts;

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Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors.

Consistent with previous years, market conditions at September 30, 2020 were such that market prices of the Company’s CDS contracts were not available.

Consistent with previous years, market conditions at March 31, 2021 were such that market prices of the Company’s CDS contracts were not available.

Assumptions and Inputs

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the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the weighted average life which is based on debt service schedules.

The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources.

The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within

the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources.

The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction;

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It is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements.

Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their trading desks for the specific asset in question.

Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from trading desks for the specific asset in question.

Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness.

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• Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

The rates used to discount future expected premium cash flows ranged from 0.22 % to 1.06 % at September 30, 2020 and 1.69 % to 2.08 % at December 31, 2019.

The rates used to discount future expected premium cash flows ranged from 0.11 % to 2.52 % at March 31, 2021 and 0.19 % to 1.33 % at December 31, 2020.

The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its transactions.

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This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts.

Given market conditions and the Company’s own credit spreads, de minimis amounts, based on fair value, of the Company's CDS contracts were fair valued using this minimum premium as of September 30, 2020 and December 31, 2019.

Given market conditions and the Company’s own credit spreads, approximately 51 %, based on fair value, of the Company's CDS contracts were fair valued using this minimum premium as of December 31, 2020.

As of March 31, 2021, the corresponding percentage was de minimis.

The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC's credit spreads.

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If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract.

The Company determines the fair value

of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts and taking the present value of such amounts discounted at the LIBOR corresponding to the weighted average remaining life of the contract.

The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of its CDS contracts and taking the present value of such amounts discounted at the LIBOR corresponding to the weighted average remaining life of the contract.

Strengths and Weaknesses of Model

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The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach.

The net change in the fair value of consolidated FG VIEs’ assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in instrument-specific credit risk (ISCR) which is separately presented in other comprehensive income (OCI).

Interest income and interest expense are derived from the trustee reports and also included in "fair value gains (losses) on FG VIEs." The FG VIEs issued securities typically collateralized by first lien and second lien RMBS as well as other structured credit.

The net change in the fair value of consolidated FG VIEs’ assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in ISCR which is separately presented in other comprehensive income (OCI).

The fair value of the Company’s FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds;

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The models used to price the FG VIEs’ liabilities generally apply the same inputs used in determining fair value of FG VIEs’ assets.

For those liabilities insured by the Company, the benefit of the Company's insurance policy guaranteeing the timely payment of principal and interest is also taken into account.

For those liabilities insured by the Company, the benefit of the Company's insurance policy guaranteeing the timely payment of debt service is also taken into account.

Significant changes to any of the inputs described above could have materially changed the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs.

In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse.

Assets and Liabilities of Consolidated Investment Vehicles

Due to the fact that AssuredIM manages and the insurance companies have an investment in certain AssuredIM funds, the Company consolidated several AssuredIM investment vehicles listed below (collectively, the consolidated investment vehicles).

All consolidated investment vehicles are accounted for at fair value.

Assets and Liabilities of CIVs

Due to the fact that AssuredIM manages and AGAS or another AGL subsidiary has an investment in certain AssuredIM Funds, the Company consolidated several AssuredIM Funds, CLOs and CLO warehouses (collectively, the CIVs).

Substantially all assets and liabilities of CIVs are accounted for at fair value.

See Note 9, Variable Interest Entities.

AssuredIM funds that are consolidated (consolidated AssuredIM funds) are:

• AHP Capital Solutions, LP (AHP),

• AIM Asset Backed Income Fund (US) L.P.

• BlueMountain CLO Warehouse Fund (US) L.P.

(CLO Warehouse Fund), and

• AIM Municipal Bond Fund L.P.

The CLO Warehouse Fund invested in the following entities managed by AssuredIM, and which are also consolidated:

• BlueMountain CLO XXVI Ltd.

• BlueMountain CLO XXIX Ltd.

• BlueMountain CLO Warehouse Ltd.

• BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1).

CLO XXVI and CLO XXIX, which are CLOs managed by AssuredIM (collectively, the consolidated CLOs), are collateralized financing entities (CFEs).

Under Accounting Standards Codification (ASC) 810, Consolidation, the debt issued by, and loans held by, the consolidated CLOs are measured at fair value under the CFE practical expedient, a measurement alternative to ASC 820.

The consolidated CLOs, are CFEs, and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured at fair value under the CFE practical expedient.

The loans are all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs.

As a result the less observable CLO debt will be measured on the basis of the more observable CLO loans.

As a result the less observable CLO debt is measured on the basis of the more observable CLO loans.

Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as:

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The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by the Company).

Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE, as is the case for CLOWH and EUR 2021-1.

The loans held, and the debt issued by CLOWH and EUR 2021-1 are recorded at fair value under the fair value option.

Investments of consolidated investment vehicles which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third party data generally at the average between the offer and bid prices.

Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE.

The Company has elected the fair value option to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO.

Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third party data generally at the average between the offer and bid prices.

These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments.

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Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors.

Assets supporting consolidated CLOs and certain assets of the consolidated funds are Level 2.

Derivative assets and/or liabilities are classified as Level 2.

The remainder of the invested assets of consolidated funds are Level 3.

Liabilities include various tranches of CLO debt, which are classified as Level 3, securities sold short, which are classified as Level 2, and fair value option warehouse financing debt used to fund CLO warehouses, which is Level 2 in the fair value hierarchy.

Investments in private investment companies are generally valued utilizing the net asset valuation.

Level 2 assets in the CIVs include assets of the consolidated CLOs, certain assets of the consolidated funds and derivative assets.

Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds.

Level 2 liabilities in the CIVs include fair value option warehouse financing debt used to fund CLO warehouse, securities sold short and derivative liabilities.

Level 3 liabilities of the CIVs include various tranches of CLO debt.

Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.

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Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of September 30, 2020

As of March 31, 2021

Fair Value Hierarchy

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RMBS 530 — 284 246

Commercial mortgage-backed securities (CMBS) 396 — 396 —

CMBS 374 — 374 —

Asset-backed securities 981 — 40 941

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Other invested assets (1) 13 6 — 7

FG VIEs’ assets, at fair value 314 — — 314

Assets of consolidated investment vehicles:

FG VIEs’ assets 281 — — 281

Assets of CIVs (2):

Fund investments

Corporate securities 85 — 23 62

Equity securities and warrants 43 — — 43

Equity securities 1 — — 1

Structured products 50 — 50 —

Obligations of state and political subdivisions 94 — 94 —

CLO investments

Other 1 — 1 —

CLOs and CLO warehouse assets

Loans 2,303 — 2,303 —

Short-term investments 136 136 — —

Total assets of consolidated investment vehicles 1,301 30 1,166 105

Total assets of CIVs 2,585 136 2,448 1

Other assets 134 47 50 37

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Credit derivative liabilities $ 124 $ — $ — $ 124

FG VIEs’ liabilities with recourse, at fair value 336 — — 336

FG VIEs’ liabilities without recourse, at fair value 19 — — 19

Liabilities of consolidated investment vehicles:

FG VIEs’ liabilities with recourse 301 — — 301

FG VIEs’ liabilities without recourse 17 — — 17

Liabilities of CIVs:

CLO obligations of CFE 1,973 — — 1,973

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Securities sold short 55 — 55 —

Total liabilities of consolidated investment vehicles 930 — 100 830

Total liabilities of CIVs 2,096 — 123 1,973

Total liabilities carried at fair value $ 2,538 $ — $ 123 $ 2,415

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Short-term investments

1,268 1,061 207 —

Other invested assets (1) 15 10 — 5

FG VIEs’ assets, at fair value 442 — — 442

Assets of consolidated investment vehicles:

FG VIEs’ assets 296 — — 296

Assets of CIVs (2):

Fund investments

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Equity securities and warrants 10 — 8 2

CLO investments

Structured products 39 — 39 —

Obligations of state and political subdivisions 61 — 61 —

CLOs and CLO warehouse assets

Loans 1,461 — 1,461 —

Total assets of consolidated investment vehicles 558 — 494 64

Short-term investments 139 139 — —

Total assets of CIVs 1,719 139 1,578 2

Other assets 145 42 48 55

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Credit derivative liabilities $ 103 $ — $ — $ 103

FG VIEs’ liabilities with recourse, at fair value 367 — — 367

FG VIEs’ liabilities without recourse, at fair value 102 — — 102

Liabilities of consolidated investment vehicles

FG VIEs’ liabilities with recourse 316 — — 316

FG VIEs’ liabilities without recourse 17 — — 17

Liabilities of CIVs

CLO obligations of CFE 1,227 — — 1,227

Warehouse financing debt 25 — 25 —

Securities sold short 47 — 47 —

Total liabilities of CIVs 1,299 — 72 1,227

Other liabilities 1 — 1 —

Total liabilities carried at fair value $ 1,736 $ — $ 73 $ 1,663

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(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis.

Excludes $ 79 million and $ 91 million of equity method investments measured at NAV as a practical expedient as of March 31, 2021 and December 31, 2020, respectively.

(2) Excludes $ 9 million and $ 8 million of equity investments measured at NAV as of March 31, 2021 and December 31, 2020, respectively.

Changes in Level 3 Fair Value Measurements

The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Third Quarter 2020, Third Quarter 2019, Nine Months 2020 and Nine Months 2019.

The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during First Quarter 2021 and First Quarter 2020.

Rollforward of Level 3 Assets

At Fair Value on a Recurring Basis

Third Quarter 2020

Fixed-Maturity Securities Assets of Consolidated Investment Vehicles

First Quarter 2021

Fixed-Maturity Securities

Subdivisions Corporate Securities RMBS Asset-

Securities FG VIEs’

Value Corporate Securities Equity Securities and Warrants Structured Products Other

Assets Assets of CIVs - Equity Securities Other

(in millions)

Fair value as of June 30, 2020 $ 97 $ 29 $ 254 $ 714 $ 318 $ 60 $ 53 $ 6 $ 78

Fair value as of December 31, 2020 $ 101 $ 30 $ 255 $ 940 $ 296 $ 2 $ 54

Total pretax realized and unrealized gains/(losses) recorded in:

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Settlements ( 1 ) — ( 11 ) ( 62 ) ( 14 ) — —

Fair value as of September 30, 2020 $ 93 $ 30 $ 257 $ 897 $ 314 $ 62 $ 43 $ — $ 68

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of September 30, 2020 $ 8 (2) $ 2 (4) $ 5 (4) $ — (4) $ ( 10 ) (3)

Fair value as of March 31, 2021 $ 103 $ 28 $ 246 $ 941 $ 281 $ 1 $ 37

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2021 $ — $ 3 (4) $ ( 19 ) (3)

Change in unrealized

gains/(losses) included in OCI related to financial instruments held as of September 30, 2020 $ ( 5 ) $ — $ 9 $ 26 $ —

gains/(losses) included in OCI related to financial instruments held as of March 31, 2021 $ 2 $ ( 4 ) $ — $ 5 1

Rollforward of Level 3 Liabilities

At Fair Value on a Recurring Basis

Third Quarter 2020

FG VIEs’ Liabilities, at Fair Value

First Quarter 2021

FG VIEs’ Liabilities

Recourse Without

Recourse Liabilities of Consolidated Investment Vehicles

Recourse Liabilities of CIVs

(in millions)

Fair value as of June 30, 2020 $ ( 161 ) $ ( 332 ) $ ( 20 ) $ ( 806 )

Fair value as of December 31, 2020 $ ( 100 ) $ ( 316 ) $ ( 17 ) $ ( 1,227 )

Total pretax realized and unrealized gains/(losses) recorded in:

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Settlements ( 1 ) 12 1 —

Fair value as of September 30, 2020 $ ( 159 ) $ ( 336 ) $ ( 19 ) $ ( 830 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of September 30, 2020 $ 1 (6) $ ( 7 ) (2) $ ( 1 ) (2) $ ( 24 ) (4)

Change in unrealized gains/(losses) included in OCI related to financial instruments held as of September 30, 2020 $ ( 4 )

Fair value as of March 31, 2021 $ ( 120 ) $ ( 301 ) $ ( 17 ) $ ( 1,973 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2021 $ ( 20 ) (6) $ 5 (2) $ — $ 6 (4)

Change in unrealized gains/(losses) included in OCI related to financial instruments held as of March 31, 2021 $ ( 1 )

Rollforward of Level 3 Assets and Liabilities

At Fair Value on a Recurring Basis

Third Quarter 2019

Fixed-Maturity Securities FG VIEs’ Liabilities, at Fair Value

Subdivisions Corporate Securities RMBS Asset-

Securities FG VIEs’

(in millions)

Fair value as of June 30, 2019 $ 105 $ 48 $ 325 $ 674 $ 526 $ 87 $ ( 216 ) $ ( 446 ) $ ( 105 )

Total pretax realized and unrealized gains/(losses) recorded in:

Net income (loss) 3 (1) 1 (1) 5 (1) 7 (1) 6 (2) ( 14 ) (3) 5 (6) ( 2 ) (2) ( 2 ) (2)

Other comprehensive income (loss) ( 4 ) ( 3 ) 1 ( 3 ) — — — 1 —

Purchases 6 — — 1 — — — — —

Settlements ( 1 ) — ( 15 ) ( 15 ) ( 69 ) — 3 64 3

FG VIE consolidation — — — — 6 — — ( 5 ) ( 1 )

Fair value as of September 30, 2019 $ 109 $ 46 $ 316 $ 664 $ 469 $ 73 $ ( 208 ) $ ( 388 ) $ ( 105 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of September 30, 2019 $ 6 (2) $ ( 14 ) (3) $ 8 (6) $ ( 2 ) (2) $ ( 1 ) (2)

Change in unrealized gains/(losses) included in OCI related to financial instruments held at September 30, 2019 $ ( 4 ) $ ( 3 ) $ 1 $ ( 2 ) $ — $ 1

Rollforward of Level 3 Assets

At Fair Value on a Recurring Basis

Nine Months 2020

Fixed-Maturity Securities Assets of Consolidated Investment Vehicles

First Quarter 2020

Fixed-Maturity Securities Assets of CIVs

Subdivisions Corporate Securities RMBS Asset-

Securities FG VIEs’

Value Corporate Securities Equity Securities and Warrants Structured Products Other

Assets Corporate Securities Equity Securities and Warrants Structured Products Other

(in millions)

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Settlements ( 1 ) — ( 11 ) ( 7 ) ( 37 ) — ( 14 ) — —

FG VIE consolidations — — — — 18 — — — —

Transfers out of Level 3 — — — ( 1 ) — — — — —

Fair value as of September 30, 2020 $ 93 $ 30 $ 257 $ 897 $ 314 $ 62 $ 43 $ — $ 68

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of September 30, 2020 $ ( 2 ) (2) $ 10 (4) $ 8 (4) $ — $ 13 (3)

Change in unrealized

gains/(losses) included in OCI related to financial instruments held as of September 30, 2020 $ ( 16 ) $ ( 6 ) $ ( 24 ) $ ( 17 )

Fair value as of March 31, 2020 $ 86 $ 26 $ 253 $ 596 $ 368 $ 52 $ 32 $ 12 $ 103

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2020 $ ( 35 ) (2) $ 5 (4) $ ( 4 ) (4) $ — $ 48 (3)

Change in unrealized gains/(losses) included in OCI related to financial instruments held at March 31, 2020 $ ( 21 ) $ ( 8 ) $ ( 46 ) $ ( 58 )

Rollforward of Level 3 Liabilities

At Fair Value on a Recurring Basis

Nine Months 2020

FG VIEs’ Liabilities, at Fair Value

First Quarter 2020

FG VIEs’ Liabilities

Recourse Without

Recourse Liabilities of Consolidated Investment Vehicles

(in millions)

Fair value as of December 31, 2019 $ ( 185 ) $ ( 367 ) $ ( 102 ) $ ( 481 )

Total pretax realized and unrealized gains/(losses) recorded in:

Net income (loss) 20 (6) ( 5 ) (2) 73 (2) 13 (4)

Other comprehensive income (loss) — 2 — —

Issuances — — — ( 362 )

Settlements 6 50 13 —

FG VIE consolidations — ( 16 ) ( 3 ) —

Fair value as of September 30, 2020 $ ( 159 ) $ ( 336 ) $ ( 19 ) $ ( 830 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of September 30, 2020 $ 28 (6) $ ( 3 ) (2) $ ( 2 ) (2) $ 13 (4)

Change in unrealized gains/(losses) included in OCI related to financial instruments held as of September 30, 2020 $ 2

Rollforward of Level 3 Assets and Liabilities

At Fair Value on a Recurring Basis

Nine Months 2019

Fixed-Maturity Securities FG VIEs’ Liabilities, at Fair Value

Subdivisions Corporate Securities RMBS Asset-

Securities FG VIEs’

Recourse Liabilities of CIVs

(in millions)

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Other comprehensive income (loss) — 13 — —

Purchases 6 — 11 19 — — — — —

Settlements — 26 9 —

FG VIE consolidation — — — — 6 — — ( 5 ) ( 1 )

FG VIE deconsolidation — — — — ( 6 ) — — 5 1

Transfers into Level 3 — — — 1 — — — — —

Fair value as of September 30, 2019 $ 109 $ 46 $ 316 $ 664 $ 469 $ 73 $ ( 208 ) $ ( 388 ) $ ( 105 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of September 30, 2019 $ 78 (2) $ ( 4 ) (3) $ ( 19 ) (6) $ ( 32 ) (2) $ ( 16 ) (2)

Change in unrealized gains/(losses) included in OCI related to financial instruments held at September 30.

2019 $ 1 $ ( 1 ) $ 21 $ 8 $ — $ 6

Fair value as of March 31, 2020 $ ( 262 ) $ ( 312 ) $ ( 82 ) $ ( 426 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2020 $ ( 73 ) (6) $ 15 (2) $ 11 (2) $ 55 (4)

Change in unrealized gains/(losses) included in OCI related to financial instruments held at March 31, 2020 $ 13

____________________

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(2) Included in fair value gains (losses) on FG VIEs.

(3) Recorded in f air value gains (losses) on CCS, net investment income and other income.

(4) Recorded in f air value gains (losses) on consolidated investment vehicles .

(3) Recorded in fair value gains (losses) on CCS, net investment income and other income.

(4) Recorded in fair value gains (losses) on consolidated investment vehicles.

(5) Represents the net position of credit derivatives.

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Quantitative Information About Level 3 Fair Value Inputs

At September 30, 2020

Financial Instrument Description Fair Value at September 30, 2020 (in millions) Significant Unobservable Inputs Range Weighted Average (5)

At March 31, 2021

Financial Instrument Description Fair Value at March 31, 2021 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Fixed-maturity securities (1):

Obligations of state and political subdivisions $ 103 Yield 4.4 % - 35.6 % 6.9 %

Corporate securities 30 Yield 44.9 %

Corporate security 28 Yield 32.2 %

RMBS 246 CPR 0.0 % - 30.0 % 7.4 %

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Others 43 Yield 3.1 % - 8.3 % 8.2 %

FG VIEs’ assets, at fair value (1) 314 CPR 0.9 % - 18.9 % 8.7 %

FG VIEs’ assets (1) 281 CPR 0.9 % - 19.2 % 10.3 %

CDR 1.2 % - 28.1 % 6.1 %

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Yield 1.6 % - 6.7 % 5.3 %

Assets of consolidated investment vehicles (3):

Corporate securities 62 Discount rate 15.3 % - 22.8 % 18.4 %

Market multiple - enterprise/revenue value 0.66x

Market multiple - enterprise/EBITDA (4) 10.0x

Equity securities and warrants 43 Discount rate 15.3 % - 27.2 % 25.9 %

Market multiple - enterprise/revenue value 0.66x

Market multiple - enterprise/EBITDA 8.0x - 10.0x

Assets of CIVs (3):

Equity securities 1 Yield 14.4 %

Other assets (1) 33 Implied Yield 3.0 % - 3.6 % 3.3 %

Term (years) 10 years

Financial Instrument Description (1) Fair Value at September 30, 2020 (in millions) Significant Unobservable Inputs Range Weighted Average (5)

Financial Instrument Description (1) Fair Value at March 31, 2021 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Credit derivative liabilities, net $ ( 120 ) Year 1 loss estimates 0.0 % - 79.1 % 1.5 %

Hedge cost (in basis points (bps)) 20.0 - 105.0 32.0

Hedge cost (in bps) 13.5 - 72.6 22.7

Bank profit (in bps) 0.0 - 291.7 83.6

Internal floor (in bps) 8.8

Internal credit rating AAA - CCC AA-

FG VIEs’ liabilities, at fair value ( 355 ) CPR 0.9 % - 18.9 % 8.7 %

FG VIEs’ liabilities ( 318 ) CPR 0.9 % - 19.2 % 10.3 %

CDR 1.2 % - 28.1 % 6.1 %

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Yield 1.6 % - 5.9 % 4.1 %

Liabilities of consolidated investment vehicles:

Liabilities of CIVs:

CLO obligations of CFE (5) ( 1,973 ) Yield 1.6 % - 16.3 % 2.3 %

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(2) Excludes several investments recorded in other invested assets with a fair value of $ 7 million.

(3) The primary inputs to the valuation are data on comparable companies, including market multiples, yields/discount rates, financial projections, and recent market transaction prices where available.

(4) Earnings before interest, taxes, depreciation, and amortization.

(5) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of consolidated investment vehicles, where it is calculated as a percentage of fair value.

(3) The primary inputs to the valuation are recent market transaction prices, supported by yield/discount rates.

(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, where it is calculated as a percentage of fair value.

(5) See CFE fair value methodology described above for consolidated CLOs.

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At December 31, 2020

Financial Instrument Description Fair Value at December 31, 2019 (in millions) Significant Unobservable Inputs Range Weighted Average as a Percentage of Current Par Outstanding

Financial Instrument Description Fair Value at December 31, 2020 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Fixed-maturity securities (1):

Obligations of state and political subdivisions $ 101 Yield 6.4 % - 33.4 % 12.8 %

Corporate securities 41 Yield 35.9 %

Corporate security 30 Yield 42.0 %

RMBS 255 CPR 0.4 % - 30.0 % 7.1 %

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Life insurance transactions 367 Yield 5.2 %

CLOs/TruPS 256 Yield 2.5 % - 4.1 % 2.9 %

CLOs 532 Discount Margin 0.1 % - 3.1 % 1.9 %

Others 41 Yield 2.6 % - 9.0 % 9.0 %

FG VIEs’ assets, at fair value (1) 442 CPR 0.1 % - 18.6 % 8.6 %

FG VIEs’ assets (1) 296 CPR 0.9 % - 19.0 % 9.4 %

CDR 1.9 % - 26.6 % 6.0 %

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Yield 1.9 % - 6.0 % 4.8 %

Assets of consolidated investment vehicles (3):

Corporate securities 47 Discount rate 16.0 % - 28.0 % 21.5 %

Market multiple - enterprise/revenue value 0.5x

Market multiple - enterprise/EBITDA 9.5x

Equity securities and warrants 17 Discount rate 16.0 % - 28.0 % 20.8 %

Market multiple - enterprise/revenue value 0.5x

Market multiple - enterprise/EBITDA 9.5x

Assets of CIVs (3):

Equity securities and warrants 2 Yield 9.7 %

Other assets (1)

1 unchanged sentence

Term (years) 10 years

Financial Instrument Description (1) Fair Value at December 31, 2019 (in millions) Significant Unobservable Inputs Range Weighted Average as a Percentage of Current Par Outstanding

Financial Instrument Description (1) Fair Value at December 31, 2020 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Credit derivative liabilities, net $ ( 100 ) Year 1 loss estimates 0.0 % - 85.0 % 1.9 %

3 unchanged sentences

Internal credit rating AAA - CCC AA-

FG VIEs’ liabilities, at fair value ( 469 ) CPR 0.1 % - 18.6 % 8.6 %

FG VIEs’ liabilities ( 333 ) CPR 0.9 % - 19.0 % 9.4 %

CDR 1.9 % - 26.6 % 6.0 %

1 unchanged sentence

Yield 1.9 % - 6.2 % 3.8 %

Liabilities of consolidated investment vehicles:

Liabilities of CIVs:

CLO obligations of CFE (5) ( 1,227 ) Yield 2.2 % - 15.2 % 2.5 %

2 unchanged sentences

(2) Excludes several investments recorded in other invested assets with a fair value of $ 5 million.

(3) The primary inputs to the valuation are recent market transaction prices, supported by market multiples and yields/discount rates.

(3) The primary inputs to the valuation are recent market transaction prices, supported by market multiples and yield/discount rates.

(4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, where it is calculated as a percentage of fair value.

(5) See CFE fair value methodology described above for consolidated CLOs.

Not Carried at Fair Value

4 unchanged sentences

Long-Term Debt

Long-term debt issued by AGUS and AGMH is valued by broker-dealers using third party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy.

Long-term debt issued by the U.S.

Holding Companies is valued by broker-dealers using third party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy.

The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry.

The fair value of notes payable was determined by calculating the present value of the expected cash flows, and was classified as Level 3 in the fair value hierarchy.

Due From/To Brokers and Counterparties

Due from/to brokers and counterparties primarily consists of cash, margin deposits, and cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date.

Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the consolidated balance sheet where a contractual right of offset exists under an enforceable netting arrangement.

Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the condensed consolidated balance sheet where a contractual right of offset exists under an enforceable netting arrangement.

The cash at brokers is partially related to collateral for securities sold short and derivative contracts;

its use is therefore restricted until the

securities are purchased or the derivative contracts are closed.

The fair value of these items is approximated by carrying value and such items are considered Level 1.

its use is therefore restricted until the securities are purchased or the derivative contracts are closed.

The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy.

The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.

Fair Value of Financial Instruments Not Carried at Fair Value

As of September 30, 2020 As of December 31, 2019

As of March 31, 2021 As of December 31, 2020

Amount Estimated

8 unchanged sentences

Other liabilities (1) ( 69 ) ( 69 ) ( 27 ) ( 27 )

Assets (liabilities) of consolidated investment vehicles:

Assets (liabilities) of CIVs:

Due from brokers and counterparties 112 112 52 52

Other assets 1 1 — —

Due to brokers and counterparties ( 477 ) ( 477 ) ( 290 ) ( 290 )

1 unchanged sentence

(1) The Company's other assets and other liabilities consist of:

accrued interest, management fees receivables, receivables for securities sold and payables for securities purchased, for which the carrying value approximates fair value, and a promissory note receivable.

accrued interest, repurchase agreement liability, management fees receivables, promissory note receivable, receivables for securities sold and payables for securities purchased, for which the carrying value approximates fair value.

Includes a $ 19 million repurchase agreement liability entered into during First Quarter 2021.

(2) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.

Investments and Cash

Accounting Policy

Refer to Note 1, Business and Basis of Presentation for a description of new accounting guidance adopted as of January 1, 2020 related to credit impairment of financial assets.

Investment Portfolio

As of September 30, 2020, the majority of the investment portfolio is managed by three outside managers and AssuredIM.

The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.

The externally managed portfolio must maintain a minimum average rating of A+ by S&P or A1 by Moody’s Investors Service, Inc.

The investment portfolio tables shown below include assets managed both externally and internally.

The internally managed portfolio primarily consists of the Company's investments in (i) securities acquired for loss mitigation purposes or other risk management purposes, (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM, and (iii) other alternative investments, including both equity and debt securities other than AssuredIM funds, that the Company believes present an attractive investment opportunity.

AssuredIM funds in which the insurance and other operating subsidiaries invest are accounted for as consolidated investment vehicles;

such amounts are not included in this note, instead, see Note 11, Variable Interest Entities.

One of the Company's strategies for mitigating losses has been to purchase loss mitigation securities at discounted prices.

The Company also holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of the financial guaranties (other risk management assets).

In the second quarter of 2020, AGM, AGC and MAC (the insurance subsidiaries) entered into an IMA with AssuredIM for the management of a portfolio of municipal obligations and a portfolio of CLOs.

As of September 30, 2020, 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.

The Company agreed to purchase up to $ 100 million of limited partnership interests in a fund that invests in the equity of private equity managers of which $ 84 million of the commitment was not funded as of September 30, 2020.

The Company has also invested in a limited liability company that owns fuel cells with a fair value of $ 58 million as of September 30, 2020.

Investment Portfolio

Carrying Value

September 30, 2020 December 31, 2019

(in millions)

Fixed-maturity securities (1):

Externally managed $ 7,237 $ 7,978

Internally managed:

AssuredIM 520 —

Loss mitigation and other securities 799 876

Short-term investments 858 1,268

Other invested assets

Equity method investments 97 111

Total $ 9,527 $ 10,240

____________________

(1) 8.1 % and 8.6 % of fixed-maturity securities, related primarily to loss mitigation and other risk management strategies, are rated BIG as of September 30, 2020 and December 31, 2019, respectively.

The insurance subsidiaries have allocated $ 500 million to be invested in AssuredIM funds through their jointly owned investment subsidiary, AG Asset Strategies LLC (AGAS).

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.

AGAS's remaining commitment to AssuredIM funds was $ 106 million as of September 30, 2020.

The total undrawn committed capital and uncommitted AGAS investments totaled $ 148 million as of September 30, 2020 and are included in short-term investments in the table above.

As of September 30, 2020, the fair value of AGAS's investments across four Assured IM funds was $ 379 million.

All of AssuredIM funds in which AGAS invests were consolidated as of September 30, 2020 and December 31, 2019, and therefore the investment in the funds is not shown in the table above.

See Note 11 Variable Interest Entities.

Accrued investment income, which is recorded in other assets, was $ 79 million as of both September 30, 2020 and December 31, 2019.

In Nine Months 2020, the Company did not write off any accrued investment income.

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of September 30, 2020

Security Type Percent

Total (1) Amortized

Cost Allowance for Credit Losses Gross

Losses Estimated

Value AOCI (2)

(dollars in millions)

Fixed-maturity securities:

Obligations of state and political subdivisions 41 % $ 3,665 $ ( 11 ) $ 347 $ ( 2 ) $ 3,999 $ — AA-

government and agencies 2 179 — 13 — 192 — AA+

Corporate securities 24 2,179 ( 39 ) 159 ( 26 ) 2,273 ( 17 ) A

Mortgage-backed securities (4):

RMBS 7 612 ( 20 ) 37 ( 23 ) 606 ( 22 ) A-

CMBS 4 367 — 29 — 396 — AAA

Asset-backed securities 10 932 ( 6 ) 25 ( 4 ) 947 ( 3 ) BBB

government securities 2 146 — 4 ( 7 ) 143 — AA

Total fixed-maturity securities 90 8,080 ( 76 ) 614 ( 62 ) 8,556 ( 42 ) A+

Short-term investments 10 858 — — — 858 — AAA

Total 100 % $ 8,938 $ ( 76 ) $ 614 $ ( 62 ) $ 9,414 $ ( 42 ) A+

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2019

Security Type Percent

Total (1) Amortized

Losses Estimated

OTTI Weighted

(dollars in millions)

Fixed-maturity securities:

Obligations of state and political subdivisions 42 % $ 4,036 $ 305 $ ( 1 ) $ 4,340 $ 40 AA-

government and agencies 1 137 10 — 147 — AA+

Corporate securities 23 2,137 103 ( 19 ) 2,221 ( 8 ) A

Mortgage-backed securities (4):

RMBS 8 745 37 ( 7 ) 775 8 A-

CMBS 4 402 17 — 419 — AAA

Asset-backed securities 7 684 38 ( 2 ) 720 16 BB+

government securities 2 230 7 ( 5 ) 232 3 AA

Total fixed-maturity securities 87 8,371 517 ( 34 ) 8,854 59 A+

Short-term investments 13 1,268 — — 1,268 — AAA

Total 100 % $ 9,639 $ 517 $ ( 34 ) $ 10,122 $ 59 AA-

____________________

(1) Based on amortized cost.

(2) Accumulated OCI (AOCI).

(3) Ratings represent the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications.

The Company’s portfolio primarily consists of high-quality, liquid instruments.

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.

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

Value Unrealized

(dollars in millions)

Obligations of state and political subdivisions $ 89 $ ( 2 ) $ — $ — $ 89 $ ( 2 )

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 )

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

Value Unrealized

(dollars in millions)

Obligations of state and political subdivisions $ 45 $ ( 1 ) $ — $ — $ 45 $ ( 1 )

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 )

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

___________________

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, 22 securities had unrealized losses in excess of 10% of their carrying value as of September 30, 2020.

The total unrealized loss for these securities was $ 13 million as of September 30, 2020.

The Company has determined that the unrealized losses recorded as of September 30, 2020 were not related to credit

In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss 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 determined that the unrealized losses recorded as of December 31, 2019 were not related to credit quality.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of September 30, 2020 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

Cost Estimated

(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:

Total $ 8,080 $ 8,556

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.

Net Investment Income

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio.

Net investment income includes the income earned on fixed-maturity securities, short-term investments and other invested assets (excluding investments accounted for under the equity method, which are recorded in equity in earnings of investees in the condensed consolidated statements of operations).

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

Third Quarter Nine Months

2020 2019 2020 2019

(in millions)

Interest income:

Externally managed $ 54 $ 66 $ 178 $ 207

Internally managed:

AssuredIM 3 — 3 —

Loss mitigation and other securities 16 24 54 95

Interest income 73 90 235 302

Investment expenses ( 2 ) ( 2 ) ( 6 ) ( 6 )

Net investment income $ 71 $ 88 $ 229 $ 296

Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses).

Realized gains and losses on sales of investments are determined using the specific identification method.

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 (1) — ( 12 ) ( 15 ) ( 32 )

Net realized investment gains (losses) (2) $ 13 $ 16 $ 12 $ 12

____________________

(1) 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.

(2) Includes foreign currency gains of $ 5 million for Third Quarter 2020 and $ 6 million for Nine Months 2020.

Includes foreign currency losses of $ 12 million in Third Quarter 2019 and $ 17 million Nine Months 2019, respectively.

The proceeds from sales of fixed-maturity securities classified as available-for-sale were $ 137 million in Third Quarter 2020, $ 405 million in Third Quarter 2019, $ 627 million in Nine Months 2020 and $ 1,306 million in Nine Months 2019.

The following table presents the roll-forward of the credit losses on fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2020 or an OTTI and for which unrealized loss was recognized in OCI for 2019.

Roll Forward of Credit Losses

for Fixed-Maturity Securities

Third Quarter Nine Months

2020 2019 2020 2019

(in millions)

Balance, beginning of period $ 75 $ 191 $ — $ 185

Effect of adoption of accounting guidance on credit losses on January 1, 2020 — — 62 —

Additions for credit losses on securities for which credit impairments were not previously recognized — — 1 —

Reductions for securities sold and other settlements — — — ( 7 )

Additions (reductions) for credit losses on securities for which credit impairments were previously recognized 1 — 13 13

Balance, end of period $ 76 $ 191 $ 76 $ 191