What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 739 added, 1070 removed, 763 unchanged (70% of the section changed)

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Among factors that could cause actual results to differ adversely are:

• the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, including their impact on the factors listed below ;

• the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, the effectiveness, acceptance and distribution of COVID-19 vaccines, and the global consequences of the pandemic and such actions, including their impact on the factors listed below ;

• changes in the world’s credit markets, segments thereof, interest rates, credit spreads or general economic conditions;

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• the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures;

• insured losses in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the failure to resolve Assured Guaranty's Puerto Rico exposure in a manner substantially consistent with the support agreements signed to date;

• increased competition, including from new entrants into the financial guaranty industry;

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• changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions;

• the failure of Assured Guaranty to successfully integrate the business of BlueMountain Capital Management, LLC (BlueMountain) and associated entities, now known as Assured Investment Management LLC (AssuredIM);

• the failure of Assured Guaranty to successfully integrate the business of BlueMountain Capital Management, LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities;

• the possibility that acquisitions made by Assured Guaranty, including its acquisition of BlueMountain (BlueMountain Acquisition), do not result in the benefits anticipated or subject Assured Guaranty to unanticipated consequences;

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• management’s response to these factors.

The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in AGL's 2019 Annual Report on Form 10-K and its Quarterly Report for the three months ended March 31, 2020, on Form 10-Q.

The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

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The Company maintains an Internet web site at www.assuredguaranty.com .

The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings ) the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.

The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance ) links to the Company's Corporate Governance Guidelines, its Code of Conduct, AGL's Bye-Laws and the charters for its Board committees.

Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.

The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance ) links to the Company's Corporate Governance Guidelines, its Global Code of Ethics, AGL's Bye-Laws and the charters for its Board committees.

In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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The information contained on, or that may be accessed through, the Company's web site or social media account is not incorporated by reference into, and is not a part of, this report.

Executive Summary

This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report.

For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to AGL's 2019 Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2020, and June 30, 2020.

Beginning in the fourth quarter of 2019, after the acquisition of BlueMountain, the Company realigned its reporting structure to be consistent with how management now views the Company's different business lines.

Management views the Company's businesses in two distinct segments:

Insurance and Asset Management.

The Company 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 Company's Corporate division activities are presented separately.

The Insurance and Asset Management businesses are conducted through separate legal entities, which is the basis on which the results of operations are presented and reviewed by the chief operating decision maker (CODM) to assess performance and allocate resources.

In the Insurance segment, the Company provides credit protection products to the U.S.

and international public finance (including infrastructure) and structured finance markets.

The Company applies its credit underwriting judgment, risk

management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments.

The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments.

If an obligor defaults on a scheduled payment due on an obligation, including a scheduled debt service payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation.

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The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience.

Premiums are earned over the contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts.

In the Asset Management segment, the Company provides investment advisory services, which include the management of collateralized loan obligations (CLOs), opportunity and liquid asset strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down.

As of September 30, 2020, AssuredIM had $17.0 billion of assets under management (AUM), including $1.0 billion that is managed on behalf of the Company's insurance subsidiaries.

AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions.

For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, please see " -- Results of Operations by Segment -- Asset Management Segment."

Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM) has managed structured, public finance and credit investments since 2003.

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

The establishment, in the fourth quarter of 2019, of the Asset Management segment diversifies the risk profile and revenue opportunities of the Company.

As of March 31, 2021, AssuredIM had $17.5 billion of assets under management (AUM), including $1.2 billion that is managed on behalf of the Company's insurance subsidiaries.

Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment.

AssuredIM asset managers are compensated for their investment advisory services generally through management fees which are based on AUM.

In addition, AssuredIM asset managers may receive performance fees on certain CLOs and funds, if certain thresholds are met.

AssuredIM is compensated for its investment advisory services generally through management fees which are based on AUM, and may also earn performance fees calculated as a percentage of net profits or based on an internal rate of return referencing distributions made to investors, in each case, in respect of funds, CLOs and/or accounts which it advises.

The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc.

(AGUS) and Assured Guaranty Municipal Holdings Inc.

(AGMH), as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies.

The Company reviews its segment results before giving effect to the consolidation of VIEs.

The effect of consolidating VIEs, as well as intersegment eliminations and certain reclassifications are presented separately in the Company's reconciliation of segment results to accounting principles generally accepted in the United States of America (GAAP) and non-GAAP measures.

(AGMH) (the U.S.

Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies.

The Company reviews its segment results before giving effect to the consolidation of financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs), intersegment eliminations and certain reclassifications.

Economic Environment and Impact of COVID-19

The novel coronavirus that emerged in Wuhan, China in late 2019 and which causes the coronavirus disease known as COVID-19 continued to spread throughout the world over the course of 2020.

As of September 30, 2020, there were over 35 million confirmed cases worldwide and over 7 million confirmed cases in the U.S.

COVID-19 was declared a pandemic by the World Health Organization, and its emergence and reactions to it, including various closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets.

While the COVID-19 pandemic has been impacting the global economy and the Company for quite some time now, its ultimate size, depth, course and duration remain unknown, and the governmental and private responses to the pandemic continue to evolve.

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.

As a consequence of the onset of the COVID-19 pandemic, economic activity in the U.S.

and throughout the world slowed significantly, but has begun to recover.

By the end of the three-month period ended September 30, 2020 (Third Quarter 2020), the unemployment rate had declined to 7.9% from a high of 14.7% in April, according to a report issued by the U.S.

Bureau of Labor Statistics (the BLS) in early October.

The BLS noted that in September the number of unemployed persons fell by 1.0 million to 12.6 million.

The 12.6 million unemployed in September was much lower than the 23.1 million unemployed in April.

The Bureau of Economic Analysis (BEA) reported that GDP increased at an annual rate of 33.1% in Third Quarter 2020 after decreasing at an annual rate of 31.4% in the second quarter of 2020.

Among the steps taken by the Federal Reserve Board (the Fed) to help counteract the negative economic consequences of COVID-19 was the establishment of the Municipal Liquidity Facility (MLF), which was authorized to provide up to $500 billion in 36-month loans to certain qualifying states and municipalities.

As of the end of Third Quarter 2020, only two issuers - the State of Illinois and New York's Metropolitan Transit Authority - had borrowed from the MLF.

In its September 15-16 th meeting, the Federal Open Market Committee (FOMC), citing the ongoing pandemic, decided to keep the target range for the federal funds rate at 0% to .25 % and “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” In addition, the Fed pledged to increase its holdings of Treasury securities and agency mortgage-backed securities over the coming months “at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” Fed Chairman Jerome Powell and other officials at the Fed continued to encourage federal lawmakers to pass additional COVID-19 related stimulus packages.

The 30-year AAA Municipal Market Data (MMD) rate started the quarter at 1.63%, and during the quarter it never ended the day higher.

It reached a historical low of 1.27% on August 7 th .

The average AAA benchmark yield for the quarter of 1.49% was the lowest average yield on record for any quarter.

A-rated GO spreads relative to the 30-year AAA MMD rate decreased from 49 basis points (bps) at the beginning of the quarter to 43 bps at the end of the quarter.

BBB spreads also decreased from 157 bps relative to the AAA benchmark at the beginning of the quarter to 143 bps at the end of the quarter.

Both levels remain above the pre-pandemic lows (35 bps on As and 63 bps on BBBs), but, the quarter-end spread of 43 bps between the A and AAA GO 30-year MMD rates is still below the 49 bps average in January 2016.

See “Key Business Strategies -- Insurance” below for the impact of the interest rate environment and U.S.

municipal credit spreads on the demand for bond insurance.

After double-digit gains in the second quarter of 2020, the Dow Jones Industrial Average (DJIA) gained nearly 8% in Third Quarter 2020, the S&P 500 Index gained over 8%, and the Nasdaq Composite gained 11%.

The ongoing impact of the COVID-19 pandemic and governmental and private actions taken in response produced a surge in home prices and home sales.

The National Association of Realtors (NAR) reported that existing home sales increased 9.4% to a seasonally adjusted annual rate of 6.54 million units in September 2020, the highest level since May 2006.

The median existing house price gained 14.8% from a year ago to $311,800 in September.

The Commerce Department reported that year-over-year new single-family home sales were up 32.1% from the 726,000 homes sold in September 2019.

The median sales price rose to $326,800 from $322,400 in August (the latest data available), while the average price grew to $405,400 from $382,700.

and throughout the world slowed significantly in early to mid-2020, but began to recover later in the year and, at least in the U.S., continued to expand in the three-month period ended March 31, 2021 (First Quarter 2021).

In March 2021, the U.S.

Bureau of Economic Analysis (BEA) reported that real Gross Domestic Product (GDP) increased at an annual rate of 4.3% in the fourth quarter of 2020.

In its initial estimate, the BEA reported that GDP increased 6.4% for First Quarter 2021.

At the end of March 2021, the U.S.

unemployment rate, seasonally adjusted, stood at 6.0%, down from 6.7% at the beginning of the period and a pandemic high of 14.7% in April 2020.

In addition to providing for direct payments to individuals, the $1.9 trillion American Rescue Plan Act of 2021, signed into law on March 11, 2021, allocates $350 billion dollars in emergency funding for state, local, territorial, and tribal governments (including nearly $220 billion for states, the District of Columbia, tribes and territories), $130 billion for local governments and nearly $40 billion for colleges and universities.

Both the expanding economy evidenced by the GDP and unemployment figures above and the funds from the American Rescue Plan Act of 2021 will help, either directly or indirectly, many of the obligors of debt the Company insures, which we expect should reduce the number and size of payment defaults and claims on the Company’s insurance policies.

The level and direction of interest rates impact the Company in numerous ways.

For example, low interest rates may make the Company’s credit enhancement products less attractive in the market and reduce the level of premiums it can charge for that product, and, over time, also reduce the amount the Company can earn on its largely fixed-income investment portfolio.

Specifically, the level of interest rates on the U.S.

municipal bonds the Company enhances influences how high a premium the Company can charge for its public finance financial guaranty insurance product, with lower interest rates generally lowering the premium rates the Company may charge.

On the other hand, low interest rates increase the amount of excess spread available to support the distressed residential-mortgage-backed securities the Company insures.

The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company's largest financial guaranty insurance market, U.S.

public finance.

The 30-year AAA MMD rate started First Quarter 2021 at 1.39% and rose towards the middle of the quarter to end the period at 1.75%.

Despite the increase, the rate averaged 1.56% throughout the quarter, which is one of the lowest quarterly average rates on record.

The Company believes that the policies being pursued by the Federal Reserve are designed to keep general interest rates low.

In its March 2021 meeting, the Federal Open Market Committee (FOMC) decided to keep the target range for the federal funds rate at 0% to 0.25%, noting it “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” In addition, it stated that “the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” At its April 27-28, 2021 meeting, the FOMC kept the federal funds rates unchanged.

The difference, or spread, between the 30-year A-rated General Obligation (GO) relative to the 30-year AAA MMD remained in a tight range of 36-39 basis points (bps) (with an average of 37.5 bps) for the quarter.

BBB credit spreads measured on the same basis started the year at 108 bps but narrowed throughout the quarter ending at 78 bps.

Both the A and BBB spreads were some of the narrowest levels in over a decade.

A larger credit spread is one factor that may allow the Company to charge higher premiums for its public finance financial guaranty insurance product.

The National Association of Realtors reported that median existing-home sales prices hit a historic high in March 2021 of $329,100, rising by a “record-breaking annual pace of 17.2%”, with all regions posting double-digit price gains.

As of the end of March, housing inventory remained at 1.07 million units, close to a record-low of 1.03 million units seen in February 2021 when it was down by 29.5% year-over-year – a record decline.

Properties typically sold in 18 days, also a record low.

The S&P CoreLogic Case-Shiller U.S.

National Home Price NSA Index, covering all nine U.S.

census divisions, reported a 5.7% annual gain in August (the latest data available), up from 4.8% in the previous month.

In See Item 1, Financial Statements, Note 4, Expected Loss to be Paid, for a discussion of the residential market assumptions used in determining expected losses for U.S.

residential mortgage-backed securities (RMBS).

Direct and indirect consequences of COVID-19 are causing financial distress to many of the obligors and assets underlying obligations guaranteed by the Company, and may result in increases in claims and loss reserves.

census divisions, reported a 12.0% annual gain in February (the latest data available), up from 11.2% in the previous month.

The 20-City Composite posted an 11.9% year-over-year gain, up from 11.1% in the previous month.

Home prices in the U.S.

impact the performance of the Company's insured residential mortgage-backed securities (RMBS) portfolio.

Improved home prices generally result in fewer losses or more reimbursements with respect to the Company's distressed insured RMBS risks.

The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims.

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The Company's internal ratings and loss projections for those distressed credits it believes are most likely to be impacted by the COVID-19 pandemic, including RMBS, Puerto Rico and certain other distressed public finance exposures, reflect this augmented surveillance activity.

Through November 5, 2020, the Company had not paid any first-time financial guaranty claims it believes are due to credit stress arising specifically from COVID-19.

The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it are unknown, so the Company cannot predict the ultimate size of any increases in claims and loss reserves that may result from the pandemic.

For information about how the COVID-19 pandemic has impacted the Company's loss projections, see Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered).

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.

The Company believes its financial guaranty business model is particularly well-suited to withstand global economic disruptions.

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While the Company believes its guaranty may support the market value of an insured obligation in comparison to a similar uninsured obligation, the Company’s ultimate loss on a defaulted insured obligation is not a function of that underlying obligation’s market price.

Rather, the Company’s ultimate loss is the sum of all principal and interest payments it makes under its policy less

the sum of all reimbursements, subrogation payments and other recoveries it receives from the obligor or any other sources in connection with the obligation.

For contracts accounted for as insurance (which constitute 98% of its net par outstanding at September 30, 2020), its expected losses equal the discounted value of all insurance payments it projects making less the discounted value of all recoveries it expects to receive, on a probability-weighted basis.

See Part I, Financial Statements, Note 4, Expected Losses to be Paid.

Rather, the Company’s ultimate loss is the sum of all principal and interest payments it makes under its policy less the sum of all reimbursements, subrogation payments and other recoveries it receives from the obligor or any other sources in connection with the obligation.

For contracts accounted for as insurance, its expected losses equal the discounted value of all claim payments it projects making less the discounted value of all recoveries it expects to receive, on a probability-weighted basis.

See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered).

The nature of the financial guaranty business model, which requires the Company to pay only any shortfall in interest and principal on scheduled payment dates, along with the Company’s liquidity practices, reduce the need for the Company to sell investment assets in periods of market distress.

As of September 30, 2020, the Company had $858 million of short-term investments and $223 million of cash.

As of March 31, 2021, the Company had $ 701 million of short-term investments and $ 95 million of cash.

In addition, the Company’s investment portfolio generates cash over time through interest and principal receipts.

While volatility and dislocation in the municipal finance market in the U.S.

resulted in the Company issuing a reduced number of new insurance policies in late March and into April 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as the second quarter of 2020 progressed, and this continued in Third Quarter 2020.

The present value of new business production (PVP) for both the Third Quarter 2020 and the nine-month period ended September 30, 2020 (Nine Months 2020) was very strong compared to a year ago.

See "-- Results of Operations by Segment -- Insurance Segment" below.

The Company cannot predict what impact the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, will have on the market for its insurance products over the medium term.

On one hand, increased defaults and an increased focus on the credit of public finance issuers and other obligors may increase the perceived value of the Company’s insurance products, and so increase demand, as appears to have been the case in Third Quarter 2020.

On the other hand, legislative responses, especially in the public finance sector, could reduce the need for the Company’s insurance products.

While a reduction in new insurance business written compared to previous years would be unwelcome since it would impact the Company's net income in future years, it would have a limited impact on the current year’s net income, since the Company earns the premium for a new policy over the term of the policy, often as long as twenty or thirty years.

In 2019, for example, only approximately 3% of the premiums the Company earned in 2019 related to new financial guaranty policies it wrote in 2019.

The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may have an adverse impact on the amount of third-party funds the Company can attract to its asset management products and on the amount of the Company’s AUM, which would reduce the amount of management fees earned by the Company.

In addition, the volatility and downgrades in loan markets have triggered over-collateralization provisions in CLOs, deferring current CLO management fee payments to the Company.

On the other hand, periods of market volatility may increase the attractiveness to investors of investment managers such as AssuredIM, and may provide the Company with opportunities to increase its AUM.

In Nine Months 2020, funded AUM declined, but fee-earning AUM increased, largely as the result of the sale of CLO equity before the disruption in the markets caused by the COVID-19 pandemic.

See "-- Results of Operations by Segment -- Asset Management Segment" below.

The Company’s ability to raise third-party funds and increase and retain AUM is directly related to the performance of the assets it manages as measured against market averages and the performance of the Company’s competitors, and if it performs worse during the COVID-19 pandemic than its competitors, that could impede its ability to raise funds, seek investors and hire and retain professionals, and may also lead to an impairment of goodwill.

In Nine Months 2020, the Company considered the impact of COVID-19 on the Company’s goodwill carrying value associated with the Asset Management segment, and determined no impairment had occurred.

Over the past several years, the Company’s insurance subsidiaries have sought and received permission from their respective regulators to make certain discretionary payments to their holding companies, which has increased the amount of cash available to such holding companies to make investments in the asset management business and, in the case of AGL, to repurchase its common shares.

The COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, may impact the Company’s regulatory capital position and the willingness of the insurance subsidiaries’ regulators to permit discretionary payments to their holding companies, which may result in the Company investing less in the asset management business or spending less to repurchase its common shares than it had planned.

As of November 5, 2020, the Company had remaining authorization to repurchase $332 million of its common shares, including an additional $250 million authorization approved by the Board of Directors (the Board) on November 2, 2020.

For more information, see Part I, Item 1A, Risk Factors, “Operational Risks - The Company’s holding companies’ ability to meet their obligations may be constrained,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The Company began operating remotely in accordance with its business continuity plan in March 2020, instituting mandatory work-from-home policies in its U.S., U.K.

and Bermuda offices.

The Company is providing the services and communications it normally would, and continues to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades.

However, the Company’s operations could be disrupted if key members of its senior management or a significant percentage of its workforce or the workforce of its vendors were unable to continue work because of illness, government directives, or otherwise.

In addition, the Company’s shift to working from home has made it more dependent on the Internet and communications access and capabilities and has heightened its risk of cybersecurity attacks.

For more information, see Part I, Item 1A, Risk Factors, “Operational Risks - The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in such systems could adversely affect the Company’s business,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Financial Performance of Assured Guaranty

Results of operations for Third Quarter 2020 and Nine Months 2020 include the results of AssuredIM, which was acquired on October 1, 2019.

Financial Results

Third Quarter Nine Months

2020 2019 2020 2019

(in millions, except per share amounts)

GAAP Highlights

Net income (loss) attributable to AGL $ 86 $ 69 $ 214 $ 265

Net income (loss) attributable to AGL per diluted share 1.02 0.70 2.43 2.61

Weighted average diluted shares 83.8 98.9 88.0 101.6

Adjusted operating income (loss) (1) (2)

Insurance $ 81 $ 107 $ 320 $ 379

Asset Management (12) — (30) —

Corporate (18) (28) (83) (79)

Other (3) (2) (7) 4

Adjusted operating income (loss) 48 77 200 304

Adjusted operating income per diluted share (2)

0.58 0.79 2.28 3.00

Insurance Segment

Gross written premiums (GWP) $ 121 $ 69 $ 334 $ 159

117 89 264 187

Gross par written 7,432 4,909 16,477 11,799

Asset Management Segment

CLO net inflows $ 123 $ — $ 584 $ —

Opportunity funds net outflows (27) — (77) —

Liquid strategies net inflows — — 370 —

Wind-down funds net outflows (228) — (1,644) —

Total net flows $ (132) $ — $ (767) $ —

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

Amount Per Share Amount Per Share

(in millions, except per share amounts)

Shareholders' equity attributable to AGL $ 6,549 $ 79.63 $ 6,639 $ 71.18

Adjusted operating shareholders' equity (1) (3) 6,070 73.80 6,246 66.96

Adjusted book value (1) (4) 8,885 108.02 9,047 96.99

Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity 1 0.01 7 0.07

Gain (loss) related to VIE consolidation included in adjusted book value (8) (0.11) (4) (0.05)

Common shares outstanding (5) 82.2 93.3

____________________

(1) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP) and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available.

See “—Non-GAAP Financial Measures” for additional details.

(2) "Adjusted operating income" was formerly known as "Non-GAAP operating income." Adjusted operating income is also the Company's segment measure.

(3) "Adjusted operating shareholders' equity" was formerly known as "Non-GAAP operating shareholders' equity."

(4) "Adjusted book value" was formerly known as "Non-GAAP adjusted book value."

(5) See "Key Business Strategies – Capital Management" below for information on common share repurchases.

Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses such as:

changes in credit spreads of insured credit derivative obligations, changes in fair value of assets and liabilities of VIEs and committed capital securities (CCS), changes in fair value related to the Company's own credit spreads, and changes in risk-free rates used to discount expected losses.

Other factors that drive volatility in net income in the Insurance segment include:

changes in expected losses and recoveries, the amount and timing of the refunding and/or termination of insured obligations, realized gains and losses on the investment portfolio (including credit impairment), changes in foreign exchange rates, the effects of large settlements, commutations, acquisitions, the effects of the Company's various loss mitigation strategies, and changes in the fair value of investments in AssuredIM funds.

In the Asset Management segment, changes in the fair value of AssuredIM funds affect the amount of management and performance fees earned.

Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period.

Condensed Consolidated Results of Operations

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

2020 2019 2020 2019

(in millions)

Net earned premiums $ 107 $ 123 $ 331 $ 353

Net investment income 71 88 229 296

Asset management fees 17 — 60 —

Net realized investment gains (losses) 13 16 12 12

Net change in fair value of credit derivatives (3) 5 20 (25)

Fair value gains (losses) on financial guaranty VIEs — 4 (8) 42

Fair value gains (losses) on consolidated investment vehicles 18 — 37 —

Foreign exchange gain (loss) on remeasurement 40 (21) (20) (24)

Commutation gains (losses) — — 38 1

Other income (loss) 5 (9) 37 12

Total revenues 268 206 736 667

Loss and loss adjustment expenses (LAE) 73 30 130 75

Interest expense 21 22 64 67

Amortization of deferred acquisition costs (DAC) 4 3 11 13

Employee compensation and benefit expenses 57 38 167 118

Other operating expenses 41 27 128 71

Total expenses 196 120 500 344

Income (loss) before income taxes and equity in net earnings of investees 72 86 236 323

Equity in net earnings of investees 7 — 3 3

Income (loss) before income taxes 79 86 239 326

Provision (benefit) for income taxes (10) 17 20 61

Net income (loss) 89 69 219 265

Noncontrolling interest 3 — 5 —

Net income (loss) attributable to AGL $ 86 $ 69 $ 214 $ 265

Third Quarter 2020 Compared with Third Quarter 2019

Net income attributable to AGL for Third Quarter 2020 was higher compared to the three-month period ended September 30, 2019 (Third Quarter 2019) primarily due to:

• foreign exchange gains on remeasurement in Third Quarter 2020 compared with losses in Third Quarter 2019,

• fair value gains in the consolidated AssuredIM funds (the consolidated investment vehicles), and

• a tax benefit attributable to the release of reserves for uncertain tax positions.

These increases were offset in part by:

• higher loss and LAE attributable to U.S.

• lower net investment income due to lower average balances in the fixed maturity portfolio,

• lower net earned premiums mainly due to lower accelerations from refundings and terminations, and

• losses in the Asset Management segment.

Nine Months 2020 Compared with Nine Months 2019

Net income attributable to AGL for Nine Months 2020 was lower compared to the nine-month period ended September 30, 2019 (Nine Months 2019) primarily due to:

• lower net investment income due to lower average balances in the fixed maturity investment portfolio,

• higher loss and LAE attributable primarily to a lower benefit for U.S.

RMBS transactions, offset in part by lower loss expense on public finance transactions,

• fair value losses on FG VIE in Nine Months 2020 compared with gains in Nine Months 2019,

• losses in the Asset Management segment, and

• lower net earned premiums mainly due to lower accelerations from refundings and terminations.

These decreases were offset in part by:

• fair value gains on credit derivatives in Nine Months 2020 compared with losses in Nine Months 2019,

• a commutation gain in Nine Months 2020 ,

• fair value gains in the consolidated investment vehicles, and

• a tax benefit attributable to the release of reserves for uncertain tax positions.

Shareholders' equity attributable to AGL decreased since December 31, 2019 primarily due to share repurchases and dividends, partially offset by net income.

Adjusted operating shareholders' equity decreased in Nine Months 2020 as adjusted operating income was offset mainly by share repurchases and dividends.

Adjusted book value decreased in Nine Months 2020 primarily due to share repurchases and dividends, partially offset by net premiums written.

Shareholders' equity attributable to AGL per share, adjusted operating shareholders' equity per share and adjusted book value per share all increased in Nine Months 2020 to $79.63, $73.80 and $108.02, respectively.

In Nine Months 2020, the Company repurchased an additional 11.4 million shares under the share repurchase program that began in 2013, at an average price of $27.99 per share during Nine Months 2020.

See "Accretive Effect of Cumulative Repurchases" table below.

The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S.

subsidiaries generally taxed at the U.S.

marginal corporate income tax rate of 21%, U.K.

subsidiaries taxed at the U.K.

marginal corporate tax rate of 19%, and no taxes for the Company’s Bermuda subsidiaries Assured Guaranty Re Ltd (AG Re), Assured Guaranty Re Overseas Ltd.

(AGRO) and Cedar Personnel Ltd., unless subject to U.S.

tax by election or as a U.S.

controlled foreign corporation.

The effective tax rate in Third Quarter 2020 and Nine Months 2020 was lower than the comparable periods in 2019 due mainly to the release of a reserve for uncertain tax positions.

Key Business Strategies

The Company continually evaluates its business strategies.

For example, with the BlueMountain Acquisition the Company has increased its focus on asset management and alternative investments.

For example, with the establishment of AssuredIM the Company has increased its focus on asset management and alternative investments.

Currently, the Company is pursuing the following key business strategies in three areas:

• Asset Management and Alternative Investments

• Capital Management

The Company seeks to grow the insurance business through new business production, acquisitions of legacy monolines or reinsurance of their portfolios, and to continue to mitigate losses in its current insured portfolio.

(1) Insurance, (2) Asset Management and Alternative Investments, and (3) Capital Management.

The Company seeks to grow the insurance business through new business production, acquisitions of remaining legacy monolines or reinsurance of their portfolios, and to continue to mitigate losses in its current insured portfolio.

Growth of the Insured Portfolio

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public finance, international infrastructure and global structured finance.

The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California have led to increased awareness of the value of bond insurance and stimulated demand for the product.

The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product.

The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation.

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On the other hand, the persistently low interest rate environment and relatively tight U.S.

municipal credit spreads have dampened demand for bond insurance compared to pre-financial crisis levels, and provisions in legislation known as the 2017 Tax Cuts and Jobs Act, such as the reduction in corporate tax rates, have made municipal obligations less attractive to certain institutional investors.

municipal credit spreads have dampened demand for bond insurance compared to the levels before the 2008 financial crisis, and provisions in legislation known as the 2017 Tax Cuts and Jobs Act, such as the reduction in corporate tax rates, have made municipal obligations less attractive to certain institutional investors.

The Company believes that some of the U.S.

federal tax increases recently proposed could, if enacted, make municipal obligations more attractive to both institutional and retail investors.

In certain segments of the global infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options.

2 unchanged sentences

public finance.

Quarterly business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from quarter to quarter.

The timing of new business production in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.

While volatility and dislocation in the municipal finance market in the U.S.

PVP for both the Third Quarter 2020 and Nine Months 2020 was very strong compared to a year ago.

resulted in the Company issuing a reduced number of new insurance policies in late March and into April 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as 2020 progressed, and the trend continued into First Quarter 2021.

The $5.5 billion of municipal new issue par sold with the Company's insurance was the most the Company insured in any first quarter since 2010, and the Company's 65% share of insured municipal par sold was better than the Company's market share in any quarter since 2014.

See "-- Results of Operations by Segment -- Insurance Segment" below.

On the other hand, legislative responses, especially in the public finance sector, could reduce the need for the Company’s insurance products.

In 2019, for example, only approximately 3% of the premiums the Company earned in 2019 related to new financial guaranty policies it wrote in 2019.

Municipal Market Data and Bond Insurance Penetration Rates (1)

Based on Sale Date

Nine Months 2020 Nine Months 2019 Year Ended December 31, 2019

First Quarter 2021 First Quarter 2020 Year Ended December 31, 2020

(dollars in billions, except number of issues and percent)

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These transactions enable the Company to improve its future earnings and deploy excess capital.

In Nine Months 2020, the Company reassumed $336 million in par from its largest remaining legacy financial guaranty reinsurer.

This commutation resulted in an increase of unearned premium reserve of $5 million and commutation gain of $38 million.

Loss Mitigation

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Stockton, California;

and Jefferson County, Alabama financial crises.

Currently, the Company is actively working to mitigate potential losses in connection with the obligations it insures of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations and was an active participant in negotiating the Puerto Rico Electric Power Authority (PREPA) restructuring support agreement and the Puerto Rico Sales Tax Financing Corporation (COFINA) plan of adjustment.

The Company will also, where appropriate, pursue litigation to enforce its rights, and it has initiated a number of legal actions to enforce its rights in Puerto Rico.

For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure and the Insured Portfolio section below.

and Jefferson County, Alabama financial crises, and more recently by the Company's role in negotiating the Puerto Rico Electric Power Authority (PREPA) restructuring support agreement (RSA) (PREPA RSA) and the Puerto Rico Sales Tax Financing Corporation (COFINA) plan of adjustment.

The Company will also, where appropriate, pursue litigation to enforce its rights, and it has initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico (Commonwealth) and various obligations of its related authorities and public corporations.

On May 5, 2021, Assured Guaranty Municipal Corp.

(AGM) and Assured Guaranty Corp.

(AGC) entered into a plan support agreement (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the Financial Oversight and Management Board for Puerto Rico (FOMB) with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA).

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 (GO/PBA PSA, and together with the HTA/CCDA PSA and the PREPA RSA, Support Agreements) subject to reaching a satisfactory resolution with respect to the PRHTA and PRCCDA bonds.

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

As a consequence, 93.5% of Assured Guaranty’s net par outstanding to Puerto Rico credits as of March 31, 2021, is now covered by a Support Agreement.

The closings of the transactions contemplated by each of the Support Agreements are subject to a number of conditions, including approval by the Title III court of the related plans of adjustment and execution of acceptable final documentation, and there can be no assurance that the resolutions contemplated by the

Support Agreements will be achieved, but the Company believes these developments mark a milestone in its Puerto Rico loss mitigation efforts.

For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Exposure and the Insured Portfolio section below.

The Company is currently working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS.

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Refunding bonds may provide the issuer with payment relief.

Asset Management

The establishment of AssuredIM represents a significant increase in the Company's participation in the asset management industry.

AssuredIM is a diversified asset manager that serves as investment advisor to CLOs, opportunity and liquid strategy funds such as a municipal bond fund, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down.

AssuredIM manages structured and public finance, credit and special situation investments, with a track record dating back to 2003.

AssuredIM underwrites assets and structures investments while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients.

In the second quarter of 2020, AssuredIM launched a new strategy, focused on more liquid investments.

Liquid strategies are investment vehicles that typically offer investors redemption rights within one year and are largely invested in liquid securities, such as municipal obligations.

As of September 30, 2020, liquid strategies includes a municipal bond fund, launched primarily with funds from the U.S.

insurance subsidiaries, and management of a portfolio of the U.S.

insurance companies' municipal obligation under an Investment Management Agreement (IMA).

As of September 30, 2020, AssuredIM is a top-twenty CLO manager by AUM, as published by CreditFlux, and is led by an experienced CLO and loan research team.

AssuredIM and its affiliates have issued 38 CLOs since inception, in both the U.S.

and European markets.

The CLOs have broad investor distribution with access to a diversified set of global investors.

The team has focused on building diversified portfolios with a focus on free cash flow generation and downside protection.

The Company allocated $500 million of capital to funds managed by AssuredIM plus additional amounts in other accounts managed by AssuredIM.

The Company intends to use these capital investments to (a) launch new products in AssuredIM and (b) enhance the returns of its own investment portfolio.

As of September 30, 2020, the Company had invested approximately $352 million, net of distributions, of the $500 million it intends to invest in AssuredIM funds.

This capital was invested in four new investment vehicles, with each vehicle dedicated to a single strategy including CLOs, asset-backed finance, healthcare structured capital and municipal bonds.

In addition, Assured Guaranty Municipal Corp.

(AGM) and Assured Guaranty Corp.

(AGC) entered into an IMA with AssuredIM for the management of a portfolio of municipal obligations and a portfolio of CLOs.

They have together allocated $250 million to municipal obligation strategies and $263 million to CLO strategies, with authorization to allocate an additional $37 million to CLOs strategies.

All of these strategies are consistent with the investment strengths of AssuredIM and its plans to continue to grow its investment strategies.

Asset Management and Alternative Investments

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

As of March 31, 2021, AssuredIM is a top-twenty five CLO manager by AUM, as published by CreditFlux.

AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending and liquid strategies relating to municipal obligations.

Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform.

The Company intends to leverage AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations.

The Company intends to leverage the AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations.

The Company monitors certain operating metrics that are common to the asset management industry.

These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees.

The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment.

AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees.

For a discussion of the metric AUM, please see “— Results of Operations by Segment — Asset Management Segment.”

Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations.

The Company allocated $750 million of capital to invest in funds managed by AssuredIM plus $550 million of general account assets now managed by AssuredIM under an Investment Management Agreement (IMA).

The Company is using these allocations to (a) launch new products (CLOs, opportunity funds and liquid strategy funds) on the AssuredIM platform and (b) enhance the returns of its own investment portfolio.

As of March 31, 2021, AG Asset Strategies LLC (AGAS) had committed $587 million to funds managed by AssuredIM (AssuredIM Funds), including $252 million that has yet to be funded.

This capital was committed to several funds, each dedicated to a single strategy including CLOs, asset-based finance, healthcare structured capital and municipal bonds.

Under the IMA with AssuredIM, AGM and AGC have together allocated $250 million to municipal obligation strategies and $300 million to CLO strategies.

All of these strategies are consistent with the investment strengths of AssuredIM and the Company's plans to continue to grow its investment strategies.

Capital Management

In recent years, the Company has developed several strategies to manage capital within the Assured Guaranty group efficiently.

From 2013 through November 5, 2020, the Company has repurchased 118.9 million common shares for approximately $3,582 million, representing approximately 61% of the total shares outstanding at the beginning of the repurchase program in 2013.

On November 2, 2020, the Board authorized an additional $250 million of share repurchases.

Under this and previous authorizations, as of November 5, 2020, the Company had remaining authorization to repurchase $332 million of its common shares.

The Company has developed strategies to efficiently manage capital within the Assured Guaranty group.

From 2013 through May 6, 2021, the Company has repurchased 124.1 million common shares for approximately $3,767 million, representing approximately 64% of the total shares outstanding at the beginning of the repurchase program in 2013.

On November 2, 2020, the Board of Directors (the Board) authorized an additional $250 million of share repurchases.

Under this and previous authorizations, as of May 6, 2021, the Company was authorized to purchase $147 million of its common shares.

Shares may be repurchased from time to time in the open market or in privately negotiated transactions.

The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic.

Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic.

The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date.

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2021 (First Quarter) 77 1.99 38.83

2020 (Second Quarter) 164 5.96 27.49

2020 (Third Quarter) 40 1.86 21.72

2020 (through November 5, 2020) 46 1.73 $ 26.36

2021 (through May 6) 28 0.61 45.57

Cumulative repurchases since the beginning of 2013 $ 3,767 124.11 $ 30.35

Accretive Effect of Cumulative Repurchases (1)

Third Quarter 2020 Nine Months 2020 As of September 30, 2020

First Quarter 2021 As of March 31, 2021

Net income (loss) attributable to AGL $ 0.22

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(1) Represents the estimated accretive effect of cumulative repurchases since the beginning of 2013.

The Company considers the appropriate mix of debt and equity in its capital structure, and may repurchase some of its debt from time to time.

For example, in Nine Months 2020, AGUS purchased $23 million of principal of AGMH's outstanding Junior Subordinated Debentures, which resulted in a loss on extinguishment of debt of $5 million in Nine Months 2020.

The Company also considers the appropriate mix of debt and equity in its capital structure, and may repurchase some of its debt from time to time.

Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH's outstanding Junior Subordinated Debentures.

The Company may choose to make additional purchases of this or other Company debt in the future.

Other Matters

Demand for the financial guaranties issued by the Company's insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies.

On July 16, 2020, S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P), affirmed the ratings it assigns to AGL, AGL's insurance subsidiaries, and certain other AGL affiliates.

The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency assigning the rating, are shown in the table below.

Ratings are subject to continuous rating agency review and revision or withdrawal at any time.

In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies.

S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC Kroll Bond Rating

Agency Moody’s Investors Service, Inc.

Best Company,

AGM AA (stable) (7/16/20) AA+ (stable) (10/29/20) A2 (stable) (8/13/19) —

AGC AA (stable) (7/16/20) AA (stable) (10/29/20) (1) —

Municipal Assurance Corp.

(MAC) AA (stable) (7/16/20) AA+ (stable) (10/29/20) — —

AG Re AA (stable) (7/16/20) — — —

AGRO AA (stable) (7/16/20) — — A+ (stable) (7/13/20)

Assured Guaranty (Europe) plc (AGE UK) AA (stable) (7/16/20) AA+ (stable) (10/29/20) A2 (stable) (8/13/19) —

Assured Guaranty (Europe) SA (AGE SA) AA (stable) (7/16/20) AA+ (stable) (10/29/20) — —

On February 24, 2021, the Company received the last regulatory approval required to merge MAC with and into AGM, with AGM as the surviving company.

The merger was effective on April 1, 2021.

Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM.

As a result, the Company wrote off the $16 million carrying value of MAC's insurance licenses in First Quarter 2021.

This restructuring of the Company's U.S.

insurance subsidiaries will simplify the organizational and capital structure, reduce costs, and increase the future dividend capacity of the U.S.

insurance subsidiaries.

Executive Summary

This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report.

Financial Performance of Assured Guaranty

Financial Results

First Quarter

(in millions, except per share amounts)

Net income (loss) attributable to AGL $ 11 $ (55)

Net income (loss) attributable to AGL per diluted share $ 0.14 $ (0.59)

Weighted Average diluted shares 77.5 92.6

Adjusted operating income (loss) (1) (2) $ 43 $ 33

Adjusted operating income per diluted share (2) $ 0.55 $ 0.36

Weighted Average diluted shares 77.5 93.4

Segment results

Insurance $ 79 $ 85

Asset Management (7) (9)

Corporate (29) (39)

Adjusted operating income (loss) 43 33

Insurance Segment

Gross written premiums (GWP) $ 87 $ 64

Present value of new business production (PVP) (1)

Gross par written 5,472 3,033

Asset Management Segment

Inflows-third party $ 873 $ 11

Inflows-intercompany 145 77

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

Amount Per Share Amount Per Share

(in millions, except per share amounts)

Shareholders' equity attributable to AGL $ 6,430 $ 84.67 $ 6,643 $ 85.66

Adjusted operating shareholders' equity (1) 6,032 79.44 6,087 78.49

Adjusted book value (1) 8,851 116.56 8,908 114.87

Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity 1 0.02 2 0.03

Gain (loss) related to VIE consolidation included in adjusted book value (9) (0.12) (8) (0.10)

Common shares outstanding (3) 75.9 77.5

____________________

(1) AGC requested that Moody’s Investors Service, Inc.

(Moody’s) withdraw its financial strength ratings of AGC in January 2017, but Moody's denied that request.

Moody’s continues to rate AGC A3 (stable).

There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL's insurance subsidiaries in the future or cease to rate one or more of AGL's insurance subsidiaries, either voluntarily or at the request of that subsidiary.

For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see Item 1, Financial Statements, Note 6, Reinsurance and "--Liquidity and Capital Resources--" section below.

On June 23, 2016, a referendum was held in the U.K.

in which a majority voted to exit the European Union (EU), known as “Brexit”.

government served notice to the European Council on March 29, 2017 of its desire to withdraw in accordance with Article 50 of the Treaty on European Union.

As described in Part 1, Item 1, Business, Regulation of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, the U.K.

parliament approved a withdrawal agreement with the EU and the U.K.

left the EU on January 31, 2020.

There is a transition period under the terms of the withdrawal agreement which will end on December 31, 2020.

Negotiations have been ongoing during the transition period between the U.K.

and EU to determine the wider terms of the U.K.'s future relationship with the EU, including the terms of trade between the U.K.

and EU fail to agree on the U.K.'s future relationship with the EU during the transition period ending on December 31, 2020, there will be considerable uncertainty as to the ongoing terms of the U.K’s relationship with the EU, including the terms of trade between the U.K.

and the EU, and a likely negative impact on all parties.

The Company established AGE SA in mid-2019 to address the potential impact of Brexit on the Company's ability to write new business in the European Economic Area (EEA), and to service existing business in the EEA.

AGE SA was authorized by the French insurance and banking supervisory authority, the Autorité de Contrôle Prudential et de Résolution, on January 2, 2020, to provide insurance covering credit, suretyship and miscellaneous financial loss and was passported to write such insurance in certain other EEA member states.

On October 1, 2020, AGE UK transferred those of its existing policies that are affected by Brexit to AGE SA in order for that company to service such business.

In 2017, the U.K.’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate London Interbank Offered Rate (LIBOR).

This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR.

While regulators have suggested substitute rates, including the Secured Overnight Financing Rate, the impact of the discontinuance of LIBOR, if it occurs, will be contract-specific.

(1) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details.

(2) "Adjusted operating income" is the Company's segment measure.

(3) See "— Overview— Key Business Strategies – Capital Management" above for information on common share repurchases.

Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses such as:

changes in credit spreads of insured credit derivative obligations,

changes in fair value of assets and liabilities of VIEs and committed capital securities (CCS), changes in fair value of credit derivatives related to the Company's own credit spreads, and changes in risk-free rates used to discount expected losses.

Other factors that drive volatility in net income include:

Changes in the fair value of AssuredIM Funds affect the amount of management and performance fees earned.

Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period.

Condensed Consolidated Results of Operations

Three Months Ended March 31,

Net earned premiums $ 103 $ 103

Net investment income 70 80

Asset management fees 24 23

Net realized investment gains (losses) (3) (5)

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

Fair value gains (losses) on CCS (19) 48

Fair value gains (losses) on FG VIEs 5 (9)

Fair value gains (losses) on CIVs 16 (12)

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

Other income (loss) — 7

Total revenues 177 96

Loss and loss adjustment expenses (LAE) 30 20

Interest expense 21 22

Amortization of deferred acquisition costs (DAC) 3 3

Employee compensation and benefit expenses 60 64

Other operating expenses 57 45

Total expenses 171 154

Income (loss) before provision for income taxes and equity in earnings of investees 6 (58)

Equity in earnings of investees 9 (4)

Income (loss) before income taxes 15 (62)

Provision (benefit) for income taxes — (4)

Net income (loss) 15 (58)

Noncontrolling interests 4 (3)

Net income (loss) attributable to AGL $ 11 $ (55)

Effective tax rate (0.9) % 7.1 %

First Quarter 2021 Compared with First Quarter 2020

Net income attributable to AGL for First Quarter 2021 was higher compared to the three-month period ended March 31, 2020 (First Quarter 2020) primarily due to:

• de minimis foreign exchange gains on remeasurement in First Quarter 2021 compared with losses in First Quarter 2020,

• lower fair value losses on credit derivatives in First Quarter 2021 compared with First Quarter 2020, and

• fair value gains on CIVs in First Quarter 2021 compared to losses in First Quarter 2020.

These increases were offset in part by:

• fair value losses on CCS in First Quarter 2021 compared with gains in First Quarter 2020, and

• the write-off of an indefinite lived intangible asset, recorded in other operating expenses, representing the insurance licenses of Municipal Assurance Corp.

(MAC), which was merged with and into AGM on April 1, 2021.

The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S.

subsidiaries generally taxed at the U.S.

marginal corporate income tax rate of 21%, U.K.

subsidiaries taxed at the U.K.

marginal corporate tax rate of 19%, French subsidiaries taxed at the French marginal corporate tax rate of 27.5%, and no taxes for the Company’s Bermuda subsidiaries Assured Guaranty Re Ltd (AG Re), Assured Guaranty Re Overseas Ltd.

(AGRO) and Cedar Personnel Ltd., unless subject to U.S.

tax by election or as a U.S.

controlled foreign corporation.

The effective tax rate in First Quarter 2021 was lower than in First Quarter 2020 due primarily to the portion of income in different jurisdictions.

Shareholders' equity attributable to AGL declined, on both a nominal and per-share basis, due mainly to unrealized losses on the fixed-maturity investment portfolio.

Share repurchases and dividends also reduced shareholders' equity attributable to AGL.

Adjusted operating shareholders' equity and adjusted book value decreased on a nominal basis due to share repurchases and dividends, partially offset, in the case of adjusted book value, by net premiums written on new business production.

On a per share basis, adjusted operating shareholders' equity and adjusted book value, benefited from the repurchase of an additional 2.0 million shares in First Quarter 2021.

See "Accretive Effect of Cumulative Repurchases" table above.

Other Matters

In 2017, the U.K.’s Financial Conduct Authority (FCA) announced that after 2021 it would no longer compel banks to submit the rates required to calculate London Interbank Offered Rate (LIBOR).

On November 30, 2021, ICE Benchmark Administration (IBA), the administrator of U.S.

Dollar LIBOR, announced that it would cease the publication of the overnight and 1, 3, 6 and 12-month U.S.

Dollar LIBOR settings immediately following the LIBOR publication on June 30, 2023, rather than at the end of 2021.

On March 5, 2021, IBA and FCA confirmed a representative panel of banks will continue setting 1, 3, 6 and 12-month U.S.

Dollar LIBOR through June 2023.

The Company believes that the continued publication of U.S.

Dollar LIBOR on the current basis after that date is unlikely.

The Company has exposure to LIBOR in four areas of its operations:

(i) issuers of obligations the Company insures have obligations, assets and hedges that reference LIBOR, and some of the obligations the Company insures reference LIBOR, (ii) debt issued by the Company's wholly owned subsidiaries AGUS and AGMH currently pay, or will convert to, a floating interest rate tied to LIBOR, (iii) CCS from which the Company benefits pay interest tied to LIBOR, and (iv) certain obligations issued by, and certain assets owned by, its consolidated investment vehicles pay interest tied to LIBOR.

While the documents relevant to the consolidated investment vehicles were entered into after LIBOR sunset was

announced and generally contain fallback language contemplating the discontinuance of LIBOR, documents relevant to the other three areas were entered into before the LIBOR sunset was announced and generally contain less robust fallback language.

The Company has reviewed its insured portfolio to identify insured transactions that it believes may be vulnerable to the transition from LIBOR.

The review focused on insured issues that are scheduled or projected to have an outstanding principal balance as of December 31, 2021, the date of LIBOR’s scheduled sunset, and excluded, due to their immateriality, insured issues projected to have an outstanding principal balance of less than $1 million at December 31, 2021.

The Company reviewed the language governing the setting of interest rates in the event of unavailability of LIBOR in the governing documents of all below-investment-grade (BIG) insured transactions (except those issues projected to have an outstanding principal balance of less than $1 million at December 31, 2021), which the Company believes are most likely to be vulnerable to issues relating to the setting of interest rates after the sunset of LIBOR.

The Company has also reviewed relevant language in the documents relating to the debt issued by the Company and the CCS that benefit the Company.

As a significant portion of these securities are likely, absent a legislative solution or agreement by the parties, to become fixed rate in December 2021, the initial benefit or harm of the sunset of LIBOR depends on the level of interest rates at such time.

Also, whatever interest rate is set by the party responsible for calculating the interest rate may be challenged in the court by other parties in interest.

(i) issuers of obligations the Company insures have obligations, assets and hedges that reference LIBOR, and some loss mitigation securities held in the investment portfolio reference LIBOR, (ii) debt issued by the U.S.

Holding Companies currently pay, or will convert to, a floating interest rate tied to LIBOR, (iii) CCS from which the Company benefits pay interest tied to LIBOR, and (iv) certain obligations issued by, and certain assets owned by, its CIVs pay interest tied to LIBOR.

While the documents relevant to the CIVs were entered into after the initial LIBOR sunset was announced and generally contain fallback language contemplating the discontinuance of LIBOR, documents relevant to the other three areas were entered into before the initial LIBOR sunset was announced and generally contain less robust fallback language.

On April 6, 2021, New York's governor signed into law legislation that provides, among other things, that any LIBOR based-contracts governed by New York law that contain inadequate fall back language will, by operation of law, use the Secured Overnight Finance Rate (SOFR) as a benchmark replacement when LIBOR ceases to exist (NY Legacy LIBOR Law).

While each exposure is contract-specific, most LIBOR provisions relevant to the Company are governed by New York law, so the NY Legacy LIBOR Law is a helpful development for those contracts relevant to the Company with less robust fallback language and where parties are unlikely to negotiate a new rate.

The Company believes that there are still issues to be addressed in substituting SOFR for LIBOR in those contracts relevant to it.

For example, at present SOFR lacks a forward-looking term structure, which presents an operational challenge as the applicable interest rate will not be known until a period ends.

On April 20, 2021, the Alternative Reference Rates Committee announced they are working toward recommending a forward-looking SOFR term rate.

The Company has initiated a dialogue with relevant trustees, calculation agents, auction agents, servicers and other parties responsible for implementing the rate change in these transactions.

Most have not yet committed to a course of action.

The documents for the LIBOR-based obligations and assets of the consolidated investment vehicles generally include relatively standardized fallback language for transitions to an alternative index.

There is some uncertainty with respect to what alternative index will be adopted.

Given the lack of clarity on decisions that parties responsible for calculating interest rates will make and the reaction of impacted parties as well as the unknown level of interest rates when the change occurs, the Company cannot at this time predict the impact of the discontinuance of LIBOR, if it occurs, on every obligor and obligation the Company enhances or on its own debt issuances.

For more information, see the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Internal Revenue Service and Department of the Treasury issued proposed regulations on July 10, 2019

relating to the tax treatment of passive foreign investment companies.

The proposed regulations provide guidance on various passive foreign investment company rules, including changes resulting from the 2017 Tax Cuts and Jobs Act.

Management is currently in the process of evaluating the impact to its shareholders and business operations.

Internal Revenue Service and Department of the Treasury issued final and proposed regulations in October 2020 relating to the tax treatment of passive foreign investment companies (PFICs).

The final regulations are not expected to have a material impact to the company’s business operation or its shareholders and the proposed regulations are continuing to be evaluated.

Results of Operations

Business Segments

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

Prior to the BlueMountain Acquisition on October 1, 2019, the Company's operating subsidiaries were all insurance companies, and results of operations were viewed by the CODM as one segment.

Beginning in the fourth quarter of 2019, with the BlueMountain Acquisition and expansion into the asset management business, the Company now operates in two distinct segments, Insurance and Asset Management.

The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company's 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.

Financial Statements, 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 AssuredIM funds.

The Asset Management segment consists of the Company's investment management subsidiaries and associated entities, which provide asset management services to outside investors as well as to the Company's Insurance segment.

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

The Corporate division consists primarily of interest expense on the debt of AGUS and AGMH, as well as other operating expenses attributed to holding company activities, including administrative services performed by operating subsidiaries for the holding companies.

Other items consist of intersegment eliminations, reclassification of asset management reimbursable expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain AssuredIM investment vehicles in which Insurance segment invests.

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

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.

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

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

The effect of consolidating such entities, including the related

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

The following table summarizes adjusted operating income from the Company's business segment operations and also provides a reconciliation of the segment measure to net income on a consolidated GAAP basis.

See also Item 1, Financial Statements, Note 2, Segment Information.

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

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Corporate (29) (39)

Other (3) (2) (7) 4

Adjusted operating income (loss) $ 43 $ 33

Reconciling items from adjusted operating income to net income (loss) attributable to AGL:

Reconciliation to net income (loss) attributable to AGL:

Plus pre-tax adjustments:

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Insurance Results

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

1 unchanged sentence

Net investment income 73 83

Commutation gains (losses) — — 38 1

Other income (loss) (1) 6

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Total expenses 106 84

Equity in net earnings of investees (1) 20 1 37 3

Equity in earnings of investees 19 (9)

Adjusted operating income (loss) before income taxes 92 103

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Adjusted operating income (loss) $ 79 $ 85

____________________

(1) Includes interest income of $6 million in Third Quarter 2020 and $13 million in Nine Months 2020 related to consolidated investment vehicles' investments in debt securities.

Insurance New Business Production

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New Business Production

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

Public Finance—U.S.

$ 93 $ 46 $ 182 $ 119

Public Finance—non-U.S.

3 unchanged sentences

Public Finance—U.S.

$ 93 $ 46 $ 182 $ 122

Public Finance—non-U.S.

6 unchanged sentences

Public Finance—non-U.S.

500 237 1,434 712

Structured Finance—U.S.

— 438 188 1,159

Structured Finance—non-U.S.

Total gross par written $ 5,472 $ 3,033

Average rating on new business written BBB+ A- A- A-

Average rating on new business written A- BBB+

____________________

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See “– Non-GAAP Financial Measures – PVP or Present Value of New Business Production.”

GWP relates to both financial guaranty insurance and specialty insurance and reinsurance contracts.

Financial guaranty GWP includes (1) amounts collected upfront on new business written, (2) the present value of future contractual or expected premiums on new business written (discounted at risk free rates), and (3) the effects of changes in the estimated lives of transactions in the inforce book of business.

Specialty insurance and reinsurance GWP is recorded as premiums are due.

Credit derivatives are accounted for at fair value and therefore are not included in GWP.

The non-GAAP measure, PVP, on the other hand, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, for all contracts whether in insurance or credit derivative form.

See Non-GAAP Financial Measures below.

Third Quarter 2020

public finance GWP and PVP, including transactions guaranteed in both the primary and secondary markets, doubled compared with Third Quarter 2019.

The average rating of all U.S.

public finance par written in Third Quarter 2020 was BBB+.

The Company guaranteed 63% of insured U.S.

public finance new issuance par in Third Quarter 2020, representing 5.2% penetration of the total new issuance market, compared to 3.0% in Third Quarter 2019.

Outside the U.S., public finance GWP increased 40% and PVP increased 50% in Third Quarter 2020, compared with Third Quarter 2019.

In Third Quarter 2020, the Company's new French subsidiary, AGE SA, wrote a guaranty of a solar bond transaction in Spain, and the Company's U.K.

subsidiary wrote a guaranty of a U.K.

university student housing transaction.

public finance GWP and PVP in First Quarter 2021 both increased over 170% compared with First Quarter 2020, primarily driven by several large transactions as well as an increase in market volume and insured penetration.

The average rating of U.S.

public finance par written was A-.

The Company's gross par written represented 65% of the total U.S.

municipal market insured issuance in First Quarter 2021.

The Company has consistently written new non-U.S.

public finance business every quarter since the end of 2015.

The Company did not write any structured finance transactions in Third Quarter 2020.

Business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.

Nine Months 2020

Nine Months 2020 GWP increased 110%, and PVP increased 41% compared with Nine Months 2019, driven by public finance new business production in both, the U.S and Europe.

U.S public finance GWP and PVP increased by 53% and 49%, respectively.

The average rating of U.S.

public finance par written was A-, and represented 59% of the total U.S.

municipal market insured issuance in Nine Months 2020.

Outside the U.S., increases in public finance GWP and PVP were attributable primarily to several guaranties of solar bond transactions in Spain, and a secondary market guaranty to a European financial institution for a public sector credit, all written by the Company's new French subsidiary, AGE SA, as well as a U.K.

university housing transaction written by the Company's U.K subsidiary.

In addition, several insured transactions were restructured resulting in no additional insured exposure.

Structured finance new business production declined in Nine Months 2020 compared with Nine Months 2019, which included a large transaction in the Third Quarter 2019.

Business activity in the international infrastructure and structured finance sectors typically has long lead times and therefore may vary from period to period.

Net Earned Premiums and Credit Derivative Revenues

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See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information.

Credit derivative revenue represents realized gains on credit derivatives representing premiums received and receivable.

Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by (a) refundings of insured obligations or (b) terminations of insured obligations either through negotiated agreements or the exercise of the Company's contractual rights to make claim payments on an accelerated basis.

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Net Earned Premiums and Credit Derivative Revenues

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

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Total public finance 88 85

Structured finance

Scheduled net earned premiums 17 18 51 61

Accelerations — 1 — 7

Total structured finance 17 19 51 68

Structured finance scheduled net earned premiums 15 18

Specialty insurance and reinsurance 1 1

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Credit derivative revenues 3 3

Total net earned premiums and credit derivative revenue $ 113 $ 129 $ 345 $ 382

Net earned premiums decreased in Third Quarter 2020 compared with Third Quarter 2019 primarily due to a decrease in public finance accelerations of net earned premiums from refundings and terminations, offset in part by an increase in scheduled earned premiums due to higher levels of premiums written in recent periods.

Net earned premiums decreased in Nine Months 2020 compared with Nine Months 2019, primarily due to the reduction in net earned premiums from accelerations and scheduled decline in structured finance par outstanding, in addition to a reduction in accelerations.

At September 30, 2020, $3.8 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts.

Credit derivative revenues have declined in Nine Months 2020 compared with Nine Months 2019 primarily due to the scheduled decline in the net par outstanding.

The Company has not written new credit derivatives since 2009.

Other than credit derivatives that may be acquired in business combinations and reinsurance agreements, or as part of loss mitigation strategies, credit derivative exposure is expected to decline.

Net Investment Income and Equity in Net Earnings of Investees

Net investment income is a function of the yield earned and the size of the investment portfolio.

The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets.

Net investment income in the Insurance segment represents income earned on the available for sale portfolio, short-term investments and invested assets other than equity method investments.

Equity method investments in the Insurance segment include the insurance companies' investments in AssuredIM funds, as well as other direct investments.

The income (loss) on such investments is presented as a separate line item, "equity in earnings of investees." The Company currently intends to invest up to $500 million in AssuredIM funds, and as of September 30, 2020 had invested $352 million, net of distributions.

Net Investment Income and Equity in Net Earnings of Investees

Third Quarter Nine Months

2020 2019 2020 2019

Total net earned premiums and credit derivative revenues $ 107 $ 107

Net earned premiums in First Quarter 2021 were consistent with First Quarter 2020.

Public finance scheduled net earned premiums increased slightly, offsetting the decline in structured finance net earned premiums due to the scheduled decline in structured finance par outstanding.

At March 31, 2021, $3.8 billion of net deferred premium revenue remained to be earned over the life of the insurance contracts.

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.

Equity method investments in the Insurance segment include the U.S.

Insurance Subsidiaries' investments in AssuredIM Funds, as well as other alternative investments.

The income (loss) on such investments is presented as a separate line item, "equity in earnings of investees," and typically represents the change in net asset value (NAV) of AssuredIM Funds and the Company's share of earnings of its other investees.

The Insurance segment is 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.

Net Investment Income and Equity in Earnings of Investees

First Quarter

(in millions)

Net investment income

Managed by third parties $ 51 $ 62

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Net investment income $ 73 $ 83

Equity in earnings of investees

AssuredIM Funds $ 10 $ (10)

Other 7 1 8 3

Equity in net earnings of investees (1) 20 1 37 3

____________________

(1) Includes interest income of $6 million in Third Quarter 2020 and $13 million in Nine Months 2020 related to consolidated investment vehicles' investments in debt securities.

Net investment income for Third Quarter 2020 and Nine Months 2020 decreased compared to Third Quarter 2019 and Nine Months 2019, primarily due to (1) lower average balances in the externally managed fixed-maturity investment portfolio, which declined due to dividends paid from the insurance subsidiaries that were used for AGL share repurchases, and a shift of assets to AssuredIM funds, and other alternative investments, and (2) lower average balances in the portfolio of securities purchased for loss mitigation purposes, which typically earn a higher yield than the externally managed portfolio of fixed maturities, as balances amortize or are settled.

In Nine Months 2019, a large loss mitigation security was favorably settled and is no longer in the loss mitigation security portfolio;

the proceeds of the settlement were reinvested in the assets that had lower yields.

The overall pre-tax book yield was 3.40% as of September 30, 2020 and 3.63% as of September 30, 2019.

Excluding the internally managed portfolio, pre-tax book yield was 3.00% as of September 30, 2020 and 3.22% as of September 30, 2019.

The fair value gains on investments in AssuredIM funds in Third Quarter 2020 and Nine Months 2020 were attributable to price appreciation in all AssuredIM funds.

Commutation Gains (Losses)

In Nine Months 2020, the Company reassumed $336 million in par from its largest remaining legacy third party financial guaranty reinsurer.

This commutation resulted in an increase of unearned premium reserve of $5 million and commutation gain of $38 million.

Equity in earnings of investees 19 (9)

Net investment income for First Quarter 2021 decreased compared to First Quarter 2020, primarily due to lower average balances in the fixed-maturity investment portfolio, which declined due to dividends paid by the insurance subsidiaries that were used for AGL share repurchases, lower reinvestment short-term yields, and lower income on securities purchased for loss mitigation purposes.

The overall pre-tax book yield was 3.23% as of March 31, 2021 and 3.41% as of March 31, 2020.

Excluding the internally managed portfolio, pre-tax book yield was 2.94% as of March 31, 2021 and 3.14% as of March 31, 2020.

Equity in earnings of AssuredIM Funds in First Quarter 2021 was primarily attributable to changes in the NAV of CLO funds.

In First Quarter 2020, equity in earnings of AssuredIM Funds was a loss primarily attributable to CLO and asset-based funds.

In addition to the Insurance segment's investments in AssuredIM Funds, other alternative investments also generated gains of $9 million.

Other Income (Loss)

Other income (loss) consists of recurring items such as those listed in the table below as well as ancillary fees on financial guaranty policies for commitments and consents, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries and other non-recurring items.

Other income (loss) consists of recurring items such as foreign exchange gain (loss) on remeasurement, ancillary fees on financial guaranty policies for commitments and consents, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries and other non-recurring items.

Other Income (Loss)

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

Foreign exchange gain (loss) on remeasurement (1) $ — $ (5)

Other 1 5 13 17

Total other income (loss) $ (1) $ 6

3 unchanged sentences

The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights.

For a discussion of methodologies used in calculating the expected loss to be paid for all contracts and the accounting policies for measurement and recognition under GAAP for each type of contract, see the notes listed below in Part II.

For a discussion of methodologies used in estimating the expected loss to be paid (recovered) for all contracts and the accounting policies for measurement and recognition under GAAP for each type of contract, see the notes listed below in Part II.

Item 8, Financial Statements and Supplementary Data, of the Company's 2020 Annual Report on Form 10-K:

• Note 6 for expected loss to be paid

• Note 5 for expected loss to be paid (recovered)

• Note 6 for contracts accounted for as insurance

• Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities

• Note 7 for contracts accounted for as credit derivatives

• Note 10 for FG VIEs

• Note 11 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities

In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis.

The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified.

Net expected loss to be paid primarily consists of the present value of future:

Net expected loss to be paid (recovered) primarily consists of the present value of future:

expected claim and LAE payments, expected recoveries from issuers or excess spread, cessions to reinsurers, expected recoveries/payables for breaches of representations and warranties, and the effects of other loss mitigation strategies.

Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, and discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.

Current risk-free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported.

Assumptions used in the determination of the net expected loss to be paid such as delinquency, severity, and discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.

The primary drivers of economic loss development are discussed below.

Changes in risk-free rates used to discount losses affect economic loss development, and loss and LAE;

however, the effect of changes in discount rates are not indicative of actual credit impairment or improvement in the period.

The following table presents the range and weighted average discount rates used to discount expected losses (recoveries).

Risk-Free Rates

Risk-Free Rates used in Expected Loss for U.S.

Dollar Denominated Obligations

Range Weighted Average

As of March 31, 2021 0.00 % - 2.49% 0.88 %

As of December 31, 2020 0.00 % - 1.72% 0.60 %

As of March 31, 2020 0.00 % - 1.39% 0.64 %

As of December 31, 2019 0.00 % - 2.45% 1.94 %

The primary components of economic loss development are presented in the tables that follow and the drivers of economic loss development are discussed below.

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)

3 unchanged sentences

$ 472 $ 529 $ 13 $ (3)

Net exposure rated BIG $ 7,997 $ 8,506

Net exposure rated below-investment-grade (BIG) $ 7,514 $ 7,988

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)

9 unchanged sentences

(1) The total net expected loss for troubled U.S.

public finance exposures is net of a credit for estimated future recoveries of $1,025 million as of September 30, 2020 and $819 million as of December 31, 2019 for claims already paid.

Risk-Free Rates

Risk-Free Rates used in Expected Loss for U.S.

Dollar Denominated Obligations

Range Weighted Average

As of September 30, 2020 0.00 % - 1.52% 0.54 %

As of June 30, 2020 0.00 % - 1.47% 0.57 %

As of December 31, 2019 0.00 % - 2.45% 1.94 %

As of September 30, 2019 0.00 % - 2.20% 1.79 %

As of June 30, 2019 0.00 % - 2.63% 2.10 %

As of December 31, 2018 0.00 % - 3.06% 2.74 %

Third Quarter 2020 Net Economic Loss Development

Public Finance:

public finance exposures is net of a credit for estimated future recoveries of $994 million as of March 31, 2021 and $1,154 million as of December 31, 2020 for claims already paid.

First Quarter 2021 Net Economic Loss Development

Public Finance Economic Loss Development:

Public finance expected loss to be paid primarily related to U.S.

exposures, which had BIG net par outstanding of $5.4 billion as of September 30, 2020 compared with $5.8 billion as of December 31, 2019.

exposures, which had BIG net par outstanding of $5.4 billion as of March 31, 2021 compared with $5.4 billion as of December 31, 2020.

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

public finance exposures as of September 30, 2020 will be $263 million, compared with $531 million as of December 31, 2019.

public finance exposures as of March 31, 2021 will be $228 million compared with $305 million as of December 31, 2020.

Economic loss development on U.S.

exposures in Third Quarter 2020 was $56 million, which was primarily attributable to Puerto Rico exposures.

The economic loss development was approximately $4 million for non-U.S.

exposures during Third Quarter 2020 mainly due to the impact of lower Euro Interbank Offered Rate (Euribor).

public finance exposures in First Quarter 2021 was $15 million, which was primarily attributable to Puerto Rico exposures.

The economic benefit was approximately $12 million for non-U.S.

public finance exposures during First Quarter 2021 mainly due to the restructuring of certain exposures and the impact of higher Euro Interbank Offered Rate (Euribor).

The economic loss development attributable to U.S.

RMBS was $1 million and was mainly related to reduction of excess spread of $6 million, and mostly offset by higher recoveries for secured charged-off loans and changes in discount rates.

The economic development attributable to changes in discount rates was a gain of $2 million in Third Quarter 2020.

Other Structured Finance Economic Loss Development:

The economic loss development was approximately $9 million for other structured finance exposures during Third Quarter 2020, which was mainly attributable to loss adjustment expenses for certain transactions.

See Item 1, Financial Statements, Note 4, Expected Loss to be Paid for additional information.

Third Quarter 2019 Net Economic Loss Development

Public Finance Economic Loss Development:

RMBS was $11 million and was mainly related to a reduction of excess spread of $58 million, partially offset by changes in discount rates, which was a gain of $33 million, and improved performance in certain transactions and higher recoveries for secured charged-off loans.

See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.

First Quarter 2020 Net Economic Loss Development

Public Finance:

Public finance expected loss to be paid primarily related to U.S.

exposures, which had BIG net par outstanding of $5.8 billion as of September 30, 2019 compared with $6.4 billion as of December 31, 2018.

exposures, which had BIG net par outstanding of $5.6 billion as of March 31, 2020 compared with $5.8 billion as of December 31, 2019.

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

public finance exposures as of September 30, 2019 would be $520 million, compared with $832 million as of December 31, 2018.

Economic loss development on U.S.

exposures in Third Quarter 2019 was $50 million, which was primarily attributable to Puerto Rico exposures.

The economic loss development was approximately $5 million for non-U.S.

exposures during Third Quarter 2019 due to the impact of negative European interest rates on an interest rate swap in an Italian transaction.

RMBS Economic Loss Development:

The net benefit attributable to U.S.

RMBS was $40 million and was mainly related to an increase in excess spread and improved performance.

Other Structured Finance Economic Loss Development:

The economic loss development was approximately $10 million for other structured finance exposures during Third Quarter 2019, which was mainly attributable to higher expected LAE related to certain exposures.

Nine Months 2020 Net Economic Loss Development

public finance exposures as of March 31, 2020 would be $493 million, compared with $531 million as of December 31, 2019.

Economic loss development on U.S.

public finance exposures in Nine Months 2020 was $142 million, which was primarily attributable to Puerto Rico exposures.

exposures in First Quarter 2020 was $56 million, which was primarily attributable to Puerto Rico exposures.

The economic loss development was approximately $3 million for non-U.S.

public finance exposures during Nine Months 2020 mainly due to the impact of lower Euribor.

exposures during First Quarter 2020 due to the weaker outlook of the performance of a troubled U.K.

The net benefit attributable to U.S.

RMBS was $61 million and was mainly related to higher excess spread on certain transactions supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to LIBOR, which decreased in Nine Months 2020, and partially offset by COVID-19 related forbearances.

The economic development attributable to changes in discount rates was a loss of $30 million in Nine Months 2020.

Nine Months 2019 Net Economic Loss Development

The total economic benefit of $14 million in Nine Months 2019 was generated by the structured finance sector, partially offset by the economic loss development in the U.S.

public finance sector.

The economic benefit in the structured finance sector in Nine Months 2019 was $214 million, which was primarily attributable to an increase in excess spread, higher projected recoveries for previously charged-off loans for second lien U.S.

RMBS, improved performance, and loss mitigation efforts.

This was partially offset by U.S.

public finance economic loss development of $204 million, which was primarily attributable to Puerto Rico exposures.

The effect of the change in the risk-free rates used to discount expected losses was a benefit of $4 million in Nine Months 2019.

RMBS was $63 million and was mainly related to higher excess spread on certain transactions supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to LIBOR, which decreased in First Quarter 2020.

The economic development attributable to changes in discount rates was a loss of $32 million in First Quarter 2020.

Insurance Segment Loss and LAE

1 unchanged sentence

(1) considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty insurance contracts, (2) eliminates loss and LAE related to consolidated FG VIEs, and (3) does not include estimated losses on credit derivatives.

Loss and LAE reported in the Insurance segment adjusted operating income (i.e., adjusted loss and LAE) includes loss and LAE on financial guaranty insurance contracts (without giving effect to eliminations related to consolidation of FG VIEs), plus credit derivative losses.

Loss and LAE reported in the Insurance segment adjusted operating income (i.e., adjusted loss and LAE) includes loss and LAE on financial guaranty insurance contracts without giving effect to eliminations related to consolidation of FG VIEs, and also includes losses on credit derivatives.

For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction.

Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed.

Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies.

Expected loss to be expensed is the Company's projection of incurred losses that will be recognized in future periods, excluding accretion of discount.

When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess.

2 unchanged sentences

Therefore the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.

The amount of loss and LAE recognized in the Insurance segment income, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis.

While expected loss to be paid is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.

The amount of loss and LAE recognized in the Insurance segment, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis.

While expected loss to be paid (recovered) is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the condensed consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.

The following table presents the Insurance segment loss and LAE, net of reinsurance.

1 unchanged sentence

Loss and LAE (Benefit)

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

2 unchanged sentences

Structured finance

RMBS 6 (39) (32) (172)

Other structured finance — 3

2 unchanged sentences

The primary components of the Insurance segment loss and LAE expense were as follows:

• Loss and LAE in Third Quarter 2020 and Nine Months 2020 was mainly driven by loss expense on certain Puerto Rico transactions.

For Nine Months 2020, these losses were partially offset by a benefit in U.S.

RMBS transactions.

• Loss and LAE in Third Quarter 2019 and Nine Months 2019 was mainly driven by higher losses on certain Puerto Rico exposures, partially offset by a benefit in U.S.

• Loss and LAE in First Quarter 2021 was mainly driven by loss expense on certain Puerto Rico transactions and U.S.

RMBS exposures.

For First Quarter 2021, these losses were partially offset by a benefit in certain European exposures.

• Loss and LAE in First Quarter 2020 was mainly driven by higher losses on certain Puerto Rico exposures, partially offset by a benefit on first lien U.S.

RMBS exposures.

For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Losses.

Other Operating Expenses

The increase in other operating expenses was primarily attributable to the write-off of a $16 million intangible asset attributable to MAC insurance licenses.

MAC was merged with and into AGM on April 1, 2021.

See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for additional information.

Demand for the financial guaranties issued by the Company's insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies.

Ratings are subject to continuous rating agency review and revision or withdrawal at any time.

S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC Kroll Bond Rating

Agency Moody’s Investors Service, Inc.

Best Company,

AGM AA (stable) (7/16/20) AA+ (stable) (10/29/20) A2 (stable) (8/13/19) —

AGC AA (stable) (7/16/20) AA (stable) (10/29/20) (1) —

MAC (2) AA (stable) (7/16/20) AA+ (stable) (10/29/20) — —

AG Re AA (stable) (7/16/20) — — —

AGRO AA (stable) (7/16/20) — — A+ (stable) (7/13/20)

Assured Guaranty UK Limited (AGUK) AA (stable) (7/16/20) AA+ (stable) (10/29/20) A2 (stable) (8/13/19) —

Assured Guaranty (Europe) SA (AGE) AA (stable) (7/16/20) AA+ (stable) (10/29/20) — —

____________________

(1) AGC requested that Moody’s Investors Service, Inc.

(Moody’s) withdraw its financial strength ratings of AGC in January 2017, but Moody's denied that request.

Moody’s continues to rate AGC A3 (stable).

(2) An April 1, 2021, the Company executed a multi-step transaction to merge MAC with and into AGM, with AGM as the surviving company.

See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for additional information.

For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see Item 1, Financial Statements, Note 7, Reinsurance and "--Liquidity and Capital Resources--" section below.

Asset Management Segment Results

Asset Management Results

Third Quarter Nine Months

First Quarter

(in millions)

Management fees (1) $ 19 $ 16

CLOs $ 5 $ 12

Opportunity funds and liquid strategies 2 7

Wind-down funds 5 21

Total management fees (1) 12 40

Performance fees 1 —

Other income — 1

Total revenues 20 17

Amortization of intangible assets 3 9

Employee compensation and benefit expenses 19 18

Amortization of intangible assets 3 3

Other operating expenses 7 7

4 unchanged sentences

_____________________

(1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses.

Asset Management Fees

Management fees from CLOs are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO equity that is held directly by AssuredIM funds.

Gross management fees from CLOs, before rebates to AssuredIM funds, we re $8 million and $25 million for Third Quarter 2020 and Nine Months 2020, respectively.

The COVID-19 pandemic and resulting volatility and downgrades in loan markets have triggered over-collateralization provisions in CLOs, resulting in the deferral of $3 million and $6 million in CLO management fee payments for Third Quarter 2020 and Nine Months 2020, respectively, as well as slowed the issuance of CLOs.

Management fees from opportunity funds and liquid strategies are mainly attributable to previously established opportunity funds and also include three funds created since the Company's acquisition of BlueMountain in the fourth quarter of 2019 in which the Insurance segment’s U.S.

insurance subsidiaries invest.

Total opportunity funds and liquid strategies'' AUM, including assets managed under an IMA with the insurance companies, includes $620 million in AUM of the Company's U.S.insurance subsidiaries.

Distributions to investors in the wind-down funds are expected to continue, at least into 2021.

There were de minimis performance fees recognized in Third Quarter 2020 and Nine Months 2020.

Performance fees are recorded when the contractual performance criteria (sometimes referred to as "high water marks" or "return hurdles") have been met and when it is probable that a significant reversal of revenues will not occur in future reporting periods.

For opportunity funds, these conditions are met typically close to the end of the fund’s life.

The Company's current opportunity funds were not near the end of their harvest period during the quarter, when they would typically earn performance fees.

Expenses primarily consist of employee compensation and benefits, and also include other operating expenses such as rent, depreciation and amortization related to the leases held by AssuredIM in New York and London.

Amortization of finite-

lived intangible assets, which mainly consist of AssuredIM's CLO and investment management contracts and its CLO distribution network, was $3 million and $9 million during Third Quarter 2020 and Nine Months 2020, respectively.

As of September 30, 2020, the Company h as $114 million in goodwill and $66 million in finite-lived intangible assets associated with its acquisition of BlueMountain.

In 2020, the Company assessed the carrying value of these intangible assets and determined no impairment occurred.

The Company continues to evaluate developments in market conditions, changes in key personnel and other factors that may impact the Company’s ability to raise third party funds and retain and attract professionals, which may affect the carrying value of, and result in an impairment of, goodwill or intangible assets.

Assets Under Management

The Company uses AUM as a metric to measure progress in its Asset Management segment.

The Company uses measures of its AUM in its decision making process and intends to use a measure of change in AUM in its calculation of certain components of management compensation.

Investors also use AUM to evaluate companies that participate in the asset management business.

AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following:

• the amount of aggregate collateral balance and principal cash of AssuredIM's CLOs, including CLO equity that may be held by AssuredIM funds.

This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji).

AssuredIM is not the investment manager of BM Fuji CLOs, but rather has entered into a services agreement and a secondary agreement with BM Fuji pursuant to which AssuredIM provides certain services associated with the management of BM Fuji-advised CLOs and acts in the capacity of service provider, and

• the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments.

The Company's calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers.

The calculation also differs from the manner in which AssuredIM affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.

The Company also uses several other measurements of AUM to understand and measure its AUM in more detail and for various purposes, including its relative position in the market and its income and income potential:

• “Third-party assets under management” or “3rd Party AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors.

This includes current and former employee investments in AssuredIM's funds.

For CLOs, this also includes CLO equity that may be held by AssuredIM's funds.

• “Intercompany assets under management” or “Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company.

This includes investments from affiliates of Assured Guaranty along with general partners' investments of AssuredIM (or its affiliates) into the funds.

• “Funded assets under management” or “Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs.

• “Unfunded assets under management” or “Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse fund.

• “Fee earning assets under management” or “Fee Earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors.

• “Non-fee earning assets under management” or “Non-Fee Earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors.

AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company.

Further, to the extent that the Company's wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance compensation earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by AssuredIM.

Rollforward of

Assets Under Management

Third Quarter 2020

CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total

Management fees are generated by CLOs, opportunity funds, liquid strategies, and the wind-down funds.

CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO Equity that is held directly by AssuredIM Funds.

Management fees from opportunity funds and liquid strategies are mainly attributable to several healthcare funds that ware launched in 2020, in which the Insurance segment’s U.S.

Insurance Subsidiaries invest, along with two previously established opportunity funds in their harvest periods.

The Company also generates fees from legacy hedge and opportunity funds now subject to an orderly wind-down.

The following table presents management fees for First Quarter 2021 and First Quarter 2020.

Management Fees

First Quarter

(in millions)

AUM, June 30, 2020 $ 13,212 $ 973 $ 371 $ 2,460 $ 17,016

Inflows 168 — — — 168

Redemptions — — — — —

Distributions (45) (27) — (228) (300)

Total outflows (45) (27) — (228) (300)

Net flows 123 (27) — (228) (132)

Change in fund value 76 38 7 21 142

AUM, September 30, 2020 $ 13,411 $ 984 $ 378 $ 2,253 $ 17,026

CLOs $ 12 $ 5

Opportunity funds and liquid strategies 4 2

Wind-down funds 3 9

Total management fees $ 19 $ 16

Net CLO fees increased in First Quarter 2021 compared with First Quarter 2020, largely driven by the sale of CLO equity to third parties from legacy funds, the recovery of previously deferred CLO fees, and the issuance of several new CLOs.

The COVID-19 pandemic and downgrades in loan markets had triggered over-collateralization provisions in CLOs in 2020, resulting in the deferral of CLO management fees, the majority which reversed by First Quarter 2021.

CLO inflows of $922 million were mainly due to the issuance of two CLOs during the quarter.

CLO AUM includes CLO Equity that is held by various AssuredIM Funds of $250 million as of March 31, 2021, and $265 million as of December 31, 2020.

This CLO Equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM Funds.

Fee-earning CLO AUM increased 17% in First Quarter 2021.

Management fees from opportunity funds and liquid strategies are mainly attributable to two new healthcare funds launched in 2020, along with fees from previously established funds and other funds created since the establishment of

AssuredIM, and fees from an IMA with the U.S.

Insurance Subsidiaries.

Opportunity funds and liquid strategies' AUM increased to $1,897 million as of March 31, 2021, from $1,869 million as of December 31, 2020 driven by the increase in fund value, and additional commitments, offset by the return of capital in previously established funds in their harvest period.

Management fees from wind down funds declined as distributions to investors continued throughout First Quarter 2021.

The AUM of wind-down funds as of March 31, 2021 was $1,297 million compared with $1,623 million as of December 31, 2020.

Rollforward of

Assets Under Management

Nine Months 2020

First Quarter 2021

CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total

1 unchanged sentence

AUM, December 31, 2020 $ 13,856 $ 1,486 $ 383 $ 1,623 $ 17,348

Inflows 909 118 370 — 1,397

Inflows-third party 813 60 — — 873

Inflows-intercompany 109 36 — — 145

Redemptions — — — — —

2 unchanged sentences

Net flows 566 (121) — (329) 116

Change in fund value 69 38 8 (149) (34)

AUM, September 30, 2020 $ 13,411 $ 984 $ 378 $ 2,253 $ 17,026

Change in value (91) 148 1 3 61

AUM, March 31, 2021 $ 14,331 $ 1,513 $ 384 $ 1,297 $ 17,525

Components of

2 unchanged sentences

(in millions)

As of September 30, 2020:

As of March 31, 2021:

Funded AUM $ 14,222 $ 982 $ 384 $ 1,275 $ 16,863

13 unchanged sentences

Unfunded AUM 40 137 — — 177

_____________________

(1) Includes assets managed by AssuredIM under an IMA with its insurance affiliates of $265 million in CLO strategies and $255 million in liquid municipal strategies as of September 30, 2020.

Total inflows of $1.4 billion in Nine Months 2020 includes CLO AUM inflows of $909 million, which mainly consists of $402 million for a new CLO, and an IMA with the U.S.

insurance company subsidiaries to manage up to $300 million in CLO obligations, of which $263 million had been allocated as of September 30, 2020.

Total outflows of $2.2 billion for Nine Months 2020, were mainly driven by the return of capital in wind-down funds, which include certain funds that are in their harvest period.

CLO AUM includes CLO equity that is held by various AssuredIM funds of $286 million as of September 30, 2020, and $536 million as of December 31, 2019.

This CLO equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM funds.

AssuredIM funds sold CLO equity prior to the market dislocation caused by the COVID-19 pandemic in March, which contributed to the increase in fee earning AUM from $7,971 million as of December 31, 2019 to $11,277 million as of September 30, 2020;

however CLO fees did not increase proportionately due to the breach of certain over-collaterization triggers that deferred certain CLO fees to future periods.

The launch of a new liquid asset strategy contributed inflows of $370 million for Nine Months 2020.

Funds raised in the new liquid strategies primarily include $100 million of capital from the Insurance segment's U.S.

insurance subsidiaries that were invested in a new municipal bond fund, as well as a $250 million IMA with the U.S.

insurance subsidiaries to manage a portfolio of municipal obligations.

Opportunity fund inflows of $118 million for Nine Months 2020 consisted mainly of additional investments made by the U.S insurance subsidiaries in the first quarter of 2020.

Assets Under Management

The Company uses AUM as a metric to measure progress in its Asset Management segment.

Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM.

However, we believe AUM is a useful metric for assessing the relative size and scope of our asset management business.

The Company uses measures of its AUM in its decision making process and intends to use a measure of change in AUM in its calculation of certain components of management compensation.

Investors also use AUM to evaluate companies that participate in the asset management business.

AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following:

• the amount of aggregate collateral balance and principal cash of AssuredIM's CLOs, including CLO Equity that may be held by AssuredIM Funds.

This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji).

AssuredIM is not the investment manager of BM Fuji-advised CLOs, but rather has entered into a services agreement and a secondment agreement with BM Fuji pursuant to which AssuredIM provides certain services associated with the management of BM Fuji-advised CLOs and acts in the capacity of service provider, and

• the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments.

Changes in NAV attributable to movements in fund value of certain private equity funds are reported on a quarter lag.

The calculation also differs from the manner in which AssuredIM affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.

• “Third-party AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors.

This includes current and former employee investments in AssuredIM Funds.

For CLOs, this also includes CLO Equity that may be held by AssuredIM Funds.

• “Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company.

This includes investments from affiliates of Assured Guaranty along with general partners' investments of AssuredIM (or its affiliates) into the AssuredIM Funds.

• “Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs.

• “Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse funds.

• “Fee earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors.

• “Non-fee earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors.

AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company.

Corporate Division Results

Corporate Results

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

Net investment income $ — $ 1

Other income (loss) 12 — 7 (1)

Loss on extinguishment of debt

Total revenues — (4)

3 unchanged sentences

Total expenses 32 35

Equity in net earnings of investees — (1) (5) —

Equity in earnings of investees — (5)

Adjusted operating income (loss) before income taxes (32) (44)

1 unchanged sentence

Adjusted operating income (loss) $ (29) $ (39)

Other income in Third Quarter 2020 related to a benefit recognized by the Company in connection with the separation of the former Chief Investment Officer and Head of Asset Management.

The loss on extinguishment of debt, recorded in other income, is related to AGUS's purchase of a portion of the principal amount of AGMH's outstanding Junior Subordinated Debentures.

The loss on extinguishment of debt, recorded in other income (loss), is related to AGUS's purchase of a portion of the principal amount of AGMH's outstanding Junior Subordinated Debentures.

The loss represents the difference between the amount paid to purchase AGMH's debt and the carrying value of the debt, which includes the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.

Interest expense relates to debt issued by AGUS and AGMH.

Intersegment interest expense of $3 million in Third Quarter 2020 and $8 million in Nine Months 2020, related primarily to the $250 million AGUS debt to AGM, AGC and MAC, which was borrowed in October 2019 in connection with the BlueMountain Acquisition.

Intersegment interest expense was $1 million in Third Quarter 2019 and $2 million in Nine Months 2019.

Interest expense relates to debt issued by the U.S.

Holding Companies.

Intersegment interest expense of $2 million in First Quarter 2021 and $3 million in First Quarter 2020, related primarily to the $250 million AGUS debt to the U.S.

Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition.

Compensation and benefits expenses allocated to the Corporate division are based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance.

Other expenses include Board of Director expenses, legal fees and other direct or allocated expenses.

Equity in net earnings of investees was a loss in Nine Months 2020 due to a write down of AGUS' investment in an investment firm that provides investment banking services in the global infrastructure sector.

Other primarily consists of intersegment eliminations, reclassifications of reimbursable fund expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain AssuredIM investment vehicles in which the operating companies (primarily the insurance subsidiaries in the Insurance segment) invest.

Equity in earnings of investees was a loss in First Quarter 2020 due to a write down of AGUS' investment in an investment firm that provides investment banking services in the global infrastructure sector.

Other primarily consists of intersegment eliminations, reclassifications of reimbursable fund expenses to revenue, and consolidation adjustments, including the effect of consolidating FG VIEs and AssuredIM investment vehicles.

The net effect on adjusted operating income (loss) of these items is presented in the table below.

2 unchanged sentences

Net Income (Loss) Attributable to AGL

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

3 unchanged sentences

VIE consolidation effect $ — $ (4)

The types of VIEs the Company consolidates when it is deemed to be the primary beneficiary primarily include (1) entities whose debt obligations the insurance subsidiaries insure, and (2) investment vehicles such as collateralized financing entities and funds managed by the Asset Management subsidiaries, in which the insurance company subsidiaries have a variable interest (consolidated investment vehicles).

The Company eliminates the effects of intercompany transactions between consolidated VIEs and its insurance and asset management subsidiaries, as well as intercompany transactions between consolidated VIEs.

Generally, the consolidation of the Company's consolidated investment vehicles and FG VIEs has a significant gross-up effect on the Company's assets, liabilities and cash flows.

The consolidation of the investment vehicles have no net effect on the net income attributable to the Company.

The majority of the economic interest the Company holds in consolidated funds is held by the insurance subsidiaries and presented in the Insurance segment.

The ownership interests of the Company's consolidated funds, to which the Company has no economic rights, are reflected as either redeemable or nonredeemable noncontrolling interests in the consolidated funds in the Company's consolidated financial statements.

The Company eliminates the effects of intercompany transactions between its consolidated VIEs and its insurance and asset management subsidiaries, as well as intercompany transactions between CIVs.

Generally, the consolidation of the AssuredIM investment vehicles and FG VIEs has a significant gross-up effect on the Company's assets, liabilities and cash flows.

The majority of the economic interest the Company holds in consolidated AssuredIM Funds is held by the insurance subsidiaries and presented in the Insurance segment.

The ownership interests of the Company's consolidated AssuredIM Funds, to which the Company has no economic rights, are reflected as either redeemable or nonredeemable noncontrolling interests in the Company's condensed consolidated financial statements.

See Item 1, Financial Statements, Note 9, Variable Interest Entities, for additional information.

Reconciliation to GAAP

Reconciliation of Net Income (Loss)

Attributable to AGL

Reconciliation of Net Income (Loss) Attributable to AGL

To Adjusted Operating Income (Loss)

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

8 unchanged sentences

Adjusted operating income (loss) $ 43 $ 33

_____________________

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

Gain (loss) related to VIE consolidation (net of tax provision (benefit) of $- and $(1)) included in adjusted operating income $ — $ (4)

Net Realized Investment Gains (Losses)

1 unchanged sentence

Net Realized Investment Gains (Losses)

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

1 unchanged sentence

Gross realized losses on available-for-sale securities (2) (1)

Credit impairments — (12) (15) (32)

Credit impairment and intend to sell (4) (11)

Net realized investment gains (losses) $ (3) $ (5)

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.

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 loss in First Quarter 2020.

Non-Credit Impairment Unrealized Fair Value Gains (Losses) on Credit Derivatives

1 unchanged sentence

The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results.

Non-economic changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because it does not represent actual claims or expected losses and are expected to reverse to zero as the exposure approaches its maturity date.

Non-economic changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because they do not represent actual claims or losses and are expected to reverse to zero as the exposure approaches its maturity date.

Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions.

9 unchanged sentences

The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past.

There has been very limited new issuance activity in this market over the past several years and as of September 30, 2020, market prices for the Company’s credit derivative contracts were generally not available.

There has been very limited new issuance activity in this market since 2009 and as of March 31, 2021, market prices for the Company’s credit derivative contracts were generally not available.

Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments.

See Item 1, Financial Statements, Note 10, Fair Value Measurement, for additional information.

During Third Quarter 2020, unrealized fair value losses on credit derivatives were generated primarily as a result of the tightening of AGC spreads, partially offset by price improvements of the underlying collateral.

During Third Quarter 2019, unrealized fair value gains were generated primarily as a result of price improvements on the underlying collateral of certain of the Company's public finance CDS, partially offset by unrealized fair value losses related to certain structured finance CDS transactions and effect of changes in discount rates.

For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company would expect to receive on these transactions increased.

During Nine Months 2020, non-credit impairment fair value gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period.

These gains were partially offset by the wider spreads of the underlying collateral and lower discount rates.

During Nine Months 2019, unrealized fair value losses were generated primarily as a result of wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name during the period.

These unrealized losses were offset by price improvements and the final maturity paydown of a CDS contract.

During First Quarter 2021, non-credit impairment 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.

These losses were partially offset by the higher discount rates.

During First Quarter 2020, non-credit impairment 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.

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, increased, the implied spreads that the Company would expect to receive on these transactions decreased.

See Item 1, Financial Statements, Note 6, Contracts Accounted for as Credit Derivatives, for additional information.

Sensitivity to Changes in Credit Spread

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Effect of Changes in Credit Spread

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

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

Credit Spreads (1) Estimated Net

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Fair Value Gains (Losses) on CCS

Fair value losses on CCS in Third Quarter 2020 and Third Quarter 2019 were caused primarily by the tightening of market spreads during the periods.

Fair value gains on CCS in Nine Months 2020 were primarily due to a widening in market spreads.

Fair value losses on CCS recorded in Nine Months 2019 were primarily due to the decrease in interest rates during the year.

Fair value losses on CCS in First Quarter 2021 were primarily due to a tightening in market spreads.

Fair value gains on CCS in First Quarter 2020 were primarily due to a widening in market spreads during the quarter.

Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

Foreign Exchange Gain (Loss) on Remeasurement

Foreign exchange gains and losses in all periods primarily relate to remeasurement of premiums receivable and are mainly due to changes in the exchange rate of the euro and pound sterling relative to the U.S.

Foreign exchange gains and losses in both periods primarily relate to remeasurement of long-dated premiums receivables, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and euro relative to the U.S.

Non-GAAP Financial Measures

To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discloses both financial measures determined in accordance with GAAP and financial measures not determined in accordance with GAAP (non-GAAP financial measures).

The Company discloses both (a) financial measures determined in accordance with GAAP and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures).

Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures.

The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company.

By disclosing non-GAAP financial measures, the Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally.

The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.

The Company also provides the effect of VIE consolidation that is embedded in each non-GAAP financial measure, as applicable, which the Company believes may also be useful to investors, analysts and financial news media to evaluate Assured Guaranty’s financial results.

GAAP requires the Company to consolidate certain FG VIEs and investment vehicles.

The Company does not own the consolidated FG VIEs and its exposure is limited to its obligation under the financial guaranty insurance contract.

The Insurance segment presents the economic effect of the financial guaranty contracts associated with the consolidated FG VIEs.

The Company does own a substantial ownership interest in its consolidated investment vehicles, which is reflected in the Insurance segment.

GAAP requires the Company to consolidate:

• certain FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and

• certain investment vehicles for which the Company is deemed the primary beneficiary.

The Company provides the effect of VIE consolidation that is embedded in each non-GAAP financial measure, as applicable.

The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty's

financial results.

In the case of both the consolidated FG VIEs and the CIVs, the economic effect of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment.

Management and the Board of Directors use non-GAAP financial measures further adjusted to remove the effect of VIE consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals.

The Company uses core financial measures in its decision making process and in its calculation of certain components of management compensation.

Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity, further adjusted to remove the effect of VIE consolidation, as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares.

Management also believes that many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.

Management believes that many investors, analysts and financial news reporters also use adjusted book value, further adjusted to remove the effect of VIE consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares.

Adjusted operating income further adjusted for the effect of VIE consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.

The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation.

The core financial measures that the Company uses to help determine compensation are:

(1) adjusted operating income, further adjusted to remove the effect of VIE consolidation, (2) adjusted operating shareholders' equity, further adjusted to remove the effect of VIE consolidation, (3) growth in adjusted book value per share, further adjusted to remove the effect of VIE consolidation, and (4) PVP.

In the first quarter of 2020, the Company changed the discount rate used in the calculation of PVP and net present value of estimated future net revenues, which is a component of adjusted book value.

Beginning in 2020, the discount rate is the approximate average pre-tax fixed book yield of fixed-maturity securities purchased in the prior calendar year, excluding loss mitigation bonds.

In prior periods the discount rate was a constant 6% discount rate.

The Company made these changes and recast prior periods to better reflect the then current interest rate environment.

The reconciliation tables of GAAP to non-GAAP financial measures for PVP and adjusted book value indicate the new discount rate for each relevant period.

Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of VIE consolidation, as the principal financial measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares.

Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders' equity, further adjusted to remove the effect of VIE consolidation to evaluate the Company’s capital adequacy.

Adjusted operating income, further adjusted for the effect of VIE consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.

The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful.

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Adjusted Operating Income

Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the underwriting results of the Company.

Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company.

Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

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5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

See “— Results of Operations by Segment — Reconciliation to GAAP”, for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).

Adjusted Operating Shareholders’ Equity and Adjusted Book Value

Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.

Adjusted operating shareholders’ equity is the basis of the calculation of adjusted book value (see below).

Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:

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To Adjusted Book Value

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

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

After-Tax Per Share After-Tax Per Share

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Gain (loss) related to VIE consolidation included in adjusted book value (net of tax benefit of $4 and $2) $ (9) $ (0.12) $ (8) $ (0.10)

___________________

(1) The discount rate used for net present value of estimated net future revenues as of September 30, 2020 is 3%.

The prior period has been recast to present the net present value of net future revenues discounted at 3% instead of 6%.

Net Present Value of Estimated Net Future Revenue

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The discount rate is recalculated annually and updated as necessary.

Net present value of estimated future revenue for an obligation may change from period to period due to a

change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.

Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.

There is no corresponding GAAP financial measure.

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Reconciliation of GWP to PVP

Third Quarter 2020 Third Quarter 2019

Public Finance Structured Finance Public Finance Structured Finance

(in millions)

GWP $ 93 $ 28 $ 1 $ (1) $ 121 $ 46 $ 20 $ 2 $ 1 $ 69

Installment GWP and other GAAP adjustments (2) — 28 1 (1) 28 — 20 2 (1) 21

Upfront GWP 93 — — — 93 46 — — 2 48

Installment premium PVP — 24 — — 24 — 16 25 — 41

PVP $ 93 $ 24 $ — $ — $ 117 $ 46 $ 16 $ 25 $ 2 $ 89

Nine Months 2020 Nine Months 2019

First Quarter 2021 First Quarter 2020

Public Finance Structured Finance Public Finance Structured Finance

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___________________

(1) The discount rate used for PVP as of September 30, 2020 is 3%.

The prior period has been recast to present PVP discounted at 3% instead of 6%.

(1) Includes present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions, and other GAAP adjustments.

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Financial Guaranty Exposure

The Company measures its financial guaranty exposure in terms of (a) gross and net par outstanding and (b) gross and net debt service, which includes scheduled principal and interest.

The Company uses gross and net par outstanding and gross and net debt service to measure and understand the financial guaranty risk it guarantees in its Insurance segment and to understand its relative position in the fixed income markets.

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

Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure.

Gross par outstanding generally represents the principal amount of the insured obligation at a point in time.

Net par outstanding equals gross par outstanding net of any reinsurance.

The Company includes in its par outstanding calculation the impact of any consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date.

The Company purchases securities that it has insured, and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses (loss mitigation securities).

The Company excludes amounts attributable to loss mitigation securities from par and debt service outstanding, which amounts are included in the investment portfolio, because the Company manages such securities as investments and not insurance exposure.

As of both September 30, 2020 and December 31, 2019, the Company excluded $1.4 billion of net par attributable to loss mitigation securities.

See Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure, for additional information.

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

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

Future debt service payments include the impact of any consumer price index inflator after the reporting date, as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date.

The Company calculates its debt service outstanding as follows:

• for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company's public finance transactions), as the total estimated contractual future principal and interest due through maturity, regardless of whether the obligations may be called and regardless of whether, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, the Company believes the obligations will be repaid prior to contractual maturity;

• for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, RMBS and CLOs), as the total estimated expected future principal and interest due on insured obligations through their respective expected terms, which includes the Company's expectations as to whether the obligations may be called and, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity.

The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation.

The anticipated sunset of LIBOR at the end of 2021 has introduced another variable into the Company's calculation of future debt service.

See the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract.

Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S.

dollar denominated insured obligations and other factors.

The following table presents the insured financial guaranty portfolio by sector, net of cessions to reinsurers.

It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or VIE consolidation).

The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.

The following table presents the financial guaranty portfolio by sector, net of cessions to reinsurers.

Financial Guaranty Portfolio

Net Par Outstanding and Average Internal Rating by Sector

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

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

Sector Net Par

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Transportation 15,083 BBB+ 15,179 BBB+

Healthcare 8,688 BBB+ 7,148 A-

Higher education 6,340 A- 5,916 A-

Healthcare 8,901 BBB+ 8,691 BBB+

Infrastructure finance 6,342 A- 5,843 A-

Higher education 6,293 A- 6,127 A-

Housing revenue 1,142 BBB 1,149 BBB

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Renewable energy 196 A- 204 A-

Other public finance 1,745 A- 1,890 A-

Other public finance-U.S.

1,404 A- 1,417 A-

Total public finance—U.S.

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Consumer receivables 722 A 768 A-

Other structured finance 522 BBB 596 BBB+

Other structured finance 638 A- 600 A-

Total structured finance—U.S.

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RMBS 348 A 357 A

Pooled corporate obligations 55 BB+ 55 BB+

Other structured finance 204 A+ 219 A+

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Total net par outstanding $ 234,270 A- $ 234,153 A-

The following table sets forth the Company’s net financial guaranty portfolio by internal rating.

Financial Guaranty

Portfolio by Internal Rating

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

Category Net Par Outstanding % Net Par Outstanding %

(dollars in millions)

AAA $ 4,108 1.8 % $ 4,361 1.8 %

AA 26,021 11.2 29,037 12.3

A 103,575 44.4 111,329 47.0

BBB 91,404 39.2 83,574 35.3

BIG 7,967 3.4 8,506 3.6

Total net par outstanding $ 233,075 100.0 % $ 236,807 100.0 %

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 both March 31, 2021 and December 31, 2020 was $5.6

The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were BIG was $90 million and $91 million as of March 31, 2021 and December 31, 2020, respectively.

Exposure to Puerto Rico

The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $4.1 billion net par as of September 30, 2020, all of which was rated BIG.

Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except for Puerto Rico Aqueduct and Sewer Authority (PRASA), Municipal Finance Agency (MFA) and University of Puerto Rico (U of PR).

The Company groups its Puerto Rico exposure into three categories:

• Constitutionally Guaranteed.

• Public Corporations – Certain Revenues Potentially Subject to Clawback.

• Other Public Corporations.

Additional information about recent developments in Puerto Rico and the individual exposures insured by the Company may be found in Item 1, Financial Statements, Note 3, Outstanding Insurance Exposure.

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 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).

The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.

Exposure to Puerto Rico

As of September 30, 2020

As of March 31, 2021

Net Par Outstanding

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(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 (2)

$ 574 $ 185 $ 353 $ — $ 1,112 $ 1,150

Puerto Rico Public Buildings Authority (PBA) (2) 2 134 — (2) 134 140

Public Corporations - Certain Revenues Potentially Subject to Clawback

Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) (2) 244 472 180 (79) 817 817

PBA (2) 2 134 — (2) 134 140

Subtotal - GO/PBA PSA 576 319 353 (2) 1,246 1,290

PRHTA (Transportation revenue) (2) 244 472 180 (79) 817 817

PRHTA (Highway revenue) (2)

399 63 31 — 493 493

Puerto Rico Convention Center District Authority (PRCCDA) — 152 — — 152 152

Puerto Rico Infrastructure Financing Authority (PRIFA) — 15 1 — 16 16

Other Public Corporations

PRCCDA — 152 — — 152 152

Subtotal - HTA/CCDA PSA 643 687 211 (79) 1,462 1,462

489 71 216 — 776 787

PRASA — 284 89 — 373 373

Subtotal Subject to a Support Agreement 1,708 1,077 780 (81) 3,484 3,539

Other Puerto Rico Exposures

MFA 151 23 49 — 223 232

U of PR — 1 — — 1 1

Puerto Rico Infrastructure Financing Authority (PRIFA) — 15 1 — 16 16

PRASA and U of PR — 2 — — 2 2

Subtotal Other Puerto Rico Exposures 151 40 50 — 241 250

Total exposure to Puerto Rico $ 1,859 $ 1,117 $ 830 $ (81) $ 3,725 $ 3,789

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of Net Par of Puerto Rico

As of September 30, 2020

Scheduled Net Par Outstanding

2020 (4Q) 2021 (1Q) 2021 (2Q) 2021 (3Q) 2021 (4Q) 2022 2023 2024 2025 - 2029 2030 - 2034 2035 - 2039 2040 - 2044 2045 - 2047 Total

As of March 31, 2021

Scheduled Net Par Amortization

2021 (2Q) 2021 (3Q) 2021 (4Q) 2022 2023 2024 2025 2026 - 2030 2031 - 2035 2036 - 2040 2041 - 2042 Total

(in millions)

Commonwealth Constitutionally Guaranteed

Commonwealth of Puerto Rico - General Obligation Bonds $ — $ — $ — $ 15 $ — $ 37 $ 14 $ 73 $ 289 $ 419 $ 265 $ — $ — $ 1,112

Puerto Rico Exposures Subject to a Support Agreement

Commonwealth of Puerto Rico - GO $ — $ 16 $ — $ 37 $ 14 $ 73 $ 68 $ 268 $ 491 $ 145 $ — $ 1,112

PBA — 12 — — 7 — 6 54 38 17 — 134

Public Corporations - Certain Revenues Potentially Subject to Clawback

Subtotal - GO/PBA PSA — 28 — 37 21 73 74 322 529 162 — 1,246

PRHTA (Transportation revenue) — 18 — 28 33 4 29 167 242 251 45 817

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PRCCDA — — — — — — — 19 104 29 — 152

PRIFA — — — — — — 2 — — — 7 7 — 16

Other Public Corporations

Subtotal - HTA/CCDA PSA — 53 — 68 65 36 63 226 573 333 45 1,462

PREPA — 28 — 28 95 93 68 362 102 — — 776

PRASA — — — — — — — 1 109 — 2 15 246 373

Subtotal Subject to a Support Agreement — 109 — 133 181 202 205 910 1,204 495 45 3,484

Other Puerto Rico Exposures

MFA — 43 — 43 23 19 18 77 — — — 223

U of PR — — — — — — — — — 1 — — — 1

PRIFA — — — — 2 — — — — 10 4 16

PRASA and U of PR — — — — — 1 — — 1 — — 2

Subtotal Other Puerto Rico Exposures — 43 — 43 25 20 18 77 1 10 4 241

Total $ — $ 152 $ — $ 176 $ 206 $ 222 $ 223 $ 987 $ 1,205 $ 505 $ 49 $ 3,725

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of Net Debt Service of Puerto Rico

As of September 30, 2020

Scheduled Net Debt Service

2020 (4Q) 2021 (1Q) 2021 (2Q) 2021 (3Q) 2021 (4Q) 2022 2023 2024 2025 - 2029 2030 - 2034 2035 - 2039 2040 - 2044 2045 - 2047 Total

As of March 31, 2021

Scheduled Net Debt Service Amortization

2021 (2Q) 2021 (3Q) 2021 (4Q) 2022 2023 2024 2025 2026 - 2030 2031 - 2035 2036 - 2040 2041 - 2042 Total

(in millions)

Commonwealth Constitutionally Guaranteed

Commonwealth of Puerto Rico - General Obligation Bonds $ — $ 29 $ — $ 45 $ — $ 95 $ 70 $ 128 $ 514 $ 572 $ 294 $ — $ — $ 1,747

Puerto Rico Exposures Subject to a Support Agreement

Commonwealth of Puerto Rico - GO $ — $ 45 $ — $ 94 $ 70 $ 128 $ 119 $ 480 $ 623 $ 159 $ — $ 1,718

PBA — 16 — 7 13 6 13 71 49 18 — 193

Public Corporations - Certain Revenues Potentially Subject to Clawback

Subtotal - GO/PBA PSA — 61 — 101 83 134 132 551 672 177 — 1,911

PRHTA (Transportation revenue) — 40 — 69 73 42 67 334 367 300 47 1,339

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PRCCDA — 3 — 7 7 7 7 51 127 31 — 240

PRIFA — — — — — 1 2 1 5 3 10 8 — 30

Other Public Corporations

Subtotal - HTA/CCDA PSA — 91 — 140 134 102 127 507 771 386 47 2,305

PREPA 3 43 3 62 128 122 91 427 110 — — 989

PRASA — 10 — 10 — 19 19 20 190 68 70 82 272 760

Subtotal Subject to a Support Agreement 3 195 3 303 345 358 350 1,485 1,553 563 47 5,205

Other Puerto Rico Exposures

MFA — 49 — 52 29 24 22 86 — — — 262

U of PR — — — — — — — — — 1 — — — 1

PRIFA — — — 1 3 1 1 4 3 13 4 30

PRASA and U of PR — — — — — 1 — — 1 — — 2

Subtotal Other Puerto Rico Exposures — 49 — 53 32 26 23 90 4 13 4 294

Total $ 3 $ 244 $ 3 $ 356 $ 377 $ 384 $ 373 $ 1,575 $ 1,557 $ 576 $ 51 $ 5,499

Financial Guaranty Exposure to U.S.

The table below provides information on certain risk characteristics of the Company’s U.S.

RMBS exposures.

The following table presents information in respect of the U.S.

RMBS exposures to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).

RMBS exposures represent 1.2% of the total net par outstanding, and BIG U.S.

RMBS represent 19.2% of total BIG net par outstanding.

See Item 1, Financial Statements, Note 4, Expected Loss to be Paid, for a discussion of expected losses to be paid on U.S.

RMBS exposures.

Distribution of U.S.

RMBS by Year Insured and Type of Exposure as of September 30, 2020

RMBS by Year Insured and Type of Exposure as of March 31, 2021

First Lien Alt-A

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Exposures rated BIG $ 51 $ 273 $ 20 $ 936 $ 162 $ 1,442

Specialty Insurance and Reinsurance Exposure

The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form.

All specialty insurance and reinsurance exposures shown in the table below were rated investment grade internally as of December 31, 2019.

As of September 30, 2020, $30 million of aircraft residual value insurance exposure was rated BIG.

Specialty Insurance and Reinsurance Exposure

Gross Exposure Net Exposure

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

(in millions)

Life insurance transactions (1)

$ 1,025 $ 1,046 $ 883 $ 898

Aircraft residual value insurance policies

380 398 225 243

$ 1,405 $ 1,444 $ 1,108 $ 1,141

____________________

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

Reinsurer Exposures

The Company has exposure to reinsurers through reinsurance arrangements (both as a ceding company and as an assuming company).

In recent years, the Company has reassumed most of its previously ceded exposure but continues to cede portions of certain specialty exposures to reinsurers to mitigate risk.

In recent years, the Company has also assumed additional financial guaranty exposures (from financial guarantors no longer writing new business).

See Item 1, Financial Statements, Note 6, Reinsurance.

Liquidity and Capital Resources

Liquidity Requirements and Sources

AGL and its Holding Company Subsidiaries

The liquidity of AGL, AGUS and AGMH is largely dependent on dividends from their operating subsidiaries and their access to external financing.

AGL and its U.S.

Holding Companies

Sources and Uses of Funds

The liquidity of AGL and its U.S.

Holding Companies is largely dependent on dividends from their operating subsidiaries (see Insurance Subsidiaries, Distributions From Insurance Subsidiaries below for a description of dividend restrictions) and their access to external financing.

The operating liquidity requirements of AGL and the U.S.

holding companies include the payment of operating expenses, interest on debt issued by AGUS and AGMH, and dividends on AGL's common shares.

AGL and its holding company subsidiaries may also require liquidity to fund acquisitions of new businesses, to make capital investments in their operating subsidiaries, purchase the Company's outstanding debt, or in the case of AGL, to repurchase its common shares pursuant to its share repurchase authorization.

Holding Companies include:

• interest on debt issued by AGUS and AGMH,

• dividends on AGL's common shares, and

• the payment of operating expenses.

AGL and its U.S.

Holding Companies may also require liquidity to:

• make capital investments in their operating subsidiaries,

• fund acquisitions of new businesses,

• purchase the Company's outstanding debt, or

• in the case of AGL, to repurchase its common shares pursuant to its share repurchase authorization.

In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations.

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Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months.

See “—Distributions From Subsidiaries” below for a discussion of the dividend restrictions of its insurance subsidiaries.

AGL fully and unconditionally guarantees all of the AGUS and AGMH debt.

Long-Term Debt Obligations

The Company has outstanding long-term debt issued by the U.S.

Holding Companies.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 14, Long-Term Debt and Credit Facilities of the Company's Annual Report on Form 10-K for the year ended December 31, 2020, and Guarantor and U.S.

Holding Companies' Summarized Financial Information , below.

Holding Companies

Long-Term Debt and Intercompany Loans

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

(in millions)

Effective Interest Rate Final Maturity Principal Amount

AGUS - long-term debt

7% Senior Notes 6.40% 2034 $ 200 $ 200

5% Senior Notes 5.00% 2024 500 500

Series A Enhanced Junior Subordinated Debentures 3 month LIBOR +2.38% (1) 2066 150 150

AGUS long-term debt subtotal 850 850

AGUS - intercompany loans from insurance subsidiaries

AGC/AGM/MAC 3.50% 2030 250 250

AGRO 6 month LIBOR +3.00% (1) 2023 30 30

AGUS intercompany loans subtotal 280 280

Total AGUS 1,130 1,130

6 7 / 8 % Senior Notes

6.88% 2101 100 100

6.25% Senior Notes 6.25% 2102 230 230

5.6% Senior Notes 5.60% 2103 100 100

Junior Subordinated Debentures 1 Month LIBOR +2.215% (1) 2066 300 300

Total AGMH 730 730

AGMH's long-term debt purchased by AGUS (154) (154)

Holding Company debt $ 1,706 $ 1,706

From time to time, AGL and its subsidiaries have entered into intercompany loan facilities.

For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes.

Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate.

The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date).

The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d).

Accrued interest on all loans will be paid on the last day of each June and December and at maturity.

AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date.

AGL has not drawn upon the credit facility.

See the Company's 2020 Annual Report on Form 10-K, Part II.

Financial Statements and Supplementary Data, Note 14, Long-Term Debt and Credit Facilities, for additional information.

Guarantor and U.S.

Holding Companies' Summarized Financial Information

AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130 million aggregate principal amount of senior notes issued by the U.S.

Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by the U.S.

Holding Companies, and the AGC/AGM/MAC intercompany loans.

The following tables include summarized financial information for AGL and the U.S.

holding company subsidiaries, excluding their investments in subsidiaries.

AGUS and AGMH are shown on a combined basis as "U.S.

Holding Companies" in the tables below.

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

Holding Companies AGL U.S.

Holding Companies, excluding their investments in subsidiaries.

As of March 31, 2021

Holding Companies

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____________________

(1) As of September 30, 2020 and December 31, 2019, weighted average duration of U.S.

Holding Companies' fixed-maturity securities (excluding AGUS' investment in AGMH's debt) was 1.8 years and 4.4 years, respectively.

(1) As of March 31, 2021 weighted average durations of AGL and U.S.

Holding Companies' fixed-maturity securities (excluding AGUS' investment in AGMH's debt) were 5.2 years and 1.8 years, respectively.

(2) Represents receivable and payables with non-guarantor subsidiaries.

Nine Months 2020

First Quarter 2021

Holding Companies

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Income (loss) before provision for income taxes (8) (24)

Equity in net earnings of investees — (5)

Equity in earnings of investees — —

Net income (loss) (8) (21)

The following table presents significant holding company cash flow activities (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities.

Holding Company Subsidiaries

The following table presents significant cash flow items for AGL and the U.S.

Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities.

Holding Companies

Significant Cash Flow Items

First Quarter 2021

Holding Companies

(in millions)

Third Quarter 2020

Intercompany sources $ 55 $ 111

Intercompany (uses) — (55)

External sources (uses):

Dividends paid to AGL shareholders (16) —

Repurchases of common shares (1) (40) —

Interest paid (2)

Third Quarter 2019

Intercompany sources $ 180 $ 124

Intercompany (uses) — (90)

External sources (uses):

Dividends paid to AGL shareholders (17) —

Repurchases of common shares (1) (150) —

Interest paid (2)

Nine Months 2020

Intercompany sources 265 292

Intercompany (uses) — (295)

External sources (uses):

Dividends paid to AGL shareholders (53) —

Repurchases of common shares (1) (320) —

Dividends received from subsidiaries $ — $ 95

Interest paid (1) — (8)

Nine Months 2019

Intercompany sources 412 368

Intercompany (uses) — (237)

External sources (uses):

Dividends paid to AGL shareholders (56) —

Investments in subsidiaries — (15)

Dividends paid (18) —

Repurchases of common shares (2) (77) —

Interest paid (2) — (51)

____________________

(1) Includes $1 million and $7 million paid by AGUS and AGMH, respectively.

(2) See Item 1, Financial Statements, Note 14, Shareholders' Equity, for additional information about share repurchases and authorizations.

(2) See Long-Term Obligations below for interest paid by subsidiary.

Generally, dividends paid by a U.S.

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Financial Statements and Supplementary Data, Note 14, Long-Term Debt and Credit Facilities of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

Commitments and Contingencies, and Long-Term Debt Obligations

The Company has outstanding long-term debt issued primarily by AGUS and AGMH.

All of AGUS' and AGMH's debt is fully and unconditionally guaranteed by AGL;

AGL's guarantee of the junior subordinated debentures is on a junior subordinated basis.

Principal Outstanding of

Long-Term Debt and Intercompany Loans

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

Principal Carrying

Value Principal Carrying

(in millions)

AGUS - long-term debt $ 850 $ 845 $ 850 $ 844

AGUS - Intercompany loans 290 290 290 290

Total AGUS 1,140 1,135 1,140 1,134

AGMH - long-term debt 730 482 730 476

AGM - long-term debt 3 3 4 4

AGMH's long-term debt purchased by AGUS (1) (154) (107) (131) (89)

Elimination of intercompany loans (290) (290) (290) (290)

Total $ 1,429 $ 1,223 $ 1,453 $ 1,235

____________________

(1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.

Loss on extinguishment of debt was $5 million in Nine Months 2020 and $1 million in Nine Months 2019.

There was no loss on extinguishment of debt in Third Quarter 2020 and Third Quarter 2019.

Issued by AGUS:

7% Senior Notes.

On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 for net proceeds of $197 million.

Although the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge.

The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest at the date of redemption or, if greater, the make-whole redemption price.

5% Senior Notes.

On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 for net proceeds of $495 million.

The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of common shares of AGL.

The notes are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest at the date of redemption or, if greater, the make-whole redemption price.

Series A Enhanced Junior Subordinated Debentures.

On December 20, 2006, AGUS issued $150 million of Debentures due 2066.

The Debentures paid a fixed 6.4% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%.

LIBOR may be discontinued.

For more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Risks Related to the Financial, Credit and Financial Guaranty Markets in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019.

AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to ten years.

Any unpaid interest bears interest at the then applicable rate.

AGUS may not defer interest past the maturity date.

The debentures are redeemable, in whole or in part, at their principal amount plus accrued and unpaid interest to the date of redemption.

Issued by AGMH:

6 7/8% QUIBS.

On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due December 15, 2101, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption.

On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1, 2102, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption.

On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but not including the date of redemption.

Junior Subordinated Debentures.

On November 22, 2006, AGMH issued $300 million face amount of Junior Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15, 2066.

The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments provided certain conditions are met.

The debentures are redeemable, in whole or in part, at any time prior to December 15, 2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption price.

Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of 6.4%.

If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid.

LIBOR may be discontinued.

AGMH may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that do not exceed ten years.

In connection with the completion of this offering, AGMH entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the debentures.

Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its subsidiaries on or before the date that is twenty years prior to the final repayment date, except to the extent that AGMH has received proceeds from the sale of replacement capital securities.

The proceeds from this offering were used to pay a dividend to the shareholders of AGMH.

In Nine Months 2020 and Nine Months 2019, AGUS purchased $23 million and $3 million of principal of the debentures, which resulted in a loss on extinguishment of debt on a consolidated basis of $5 million and $1 million for Nine Months 2020 and 2019, respectively.

There were no purchases in Third Quarter 2020 and Third Quarter 2019.

The Company may choose to make additional purchases of this or other Company debt in the future.

Intercompany Loans and Guarantees

On October 1, 2019 AGM, AGC and MAC made 10-year, 3.5% interest rate intercompany loans to AGUS totaling $250 million to fund the BlueMountain Acquisition and the related capital contributions.

See the Company's 2019 Annual Report on Form 10-K, Part II.

Financial Statements and Supplementary Data, Note 2, Business Combinations and Assumption of Insured Portfolio, for additional information.

In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC.

In 2018, the maturity date was extended to November 2023.

As of September 30, 2020, $40 million remained outstanding.

From time to time, AGL and its subsidiaries have entered into intercompany loan facilities.

For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes.

Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate.

The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date).

The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d).

Accrued interest on all loans will be paid on the last day of each June and December and at maturity.

AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date.

AGL has not drawn upon the credit facility.

Furthermore, AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130 million aggregate principal amount of senior notes issued by AGUS and AGMH, and the $450 million aggregate principal amount of junior subordinated debentures issued by AGUS and AGMH, in each case, as described under "Commitments and Contingencies -- Long-Term Debt Obligations" above.

External Financing

From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations.

External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company.

Insurance Subsidiaries

Sources and Uses of Funds

Liquidity of the insurance subsidiaries is primarily used to pay for:

2 unchanged sentences

• dividends or other distributions to AGL, AGUS and/or AGMH, as applicable,

• posting of collateral in connection with reinsurance and credit derivative transactions, if necessary,

• reinsurance premiums,

• principal of and, where applicable, interest on surplus notes, and

• principal of and, interest on, surplus notes,where applicable, and

• capital investments in their own subsidiaries, where appropriate.

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The Company intends to hold and has the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost.

The insurance subsidiaries have allocated $500 million to invest in AssuredIM funds.

As of September 30, 2020, the Insurance segment had invested $352 million, net of distributions, in AssuredIM funds which are accounted for under the equity method.

On a consolidated basis, these investments are eliminated and the underlying funds and CLOs are consolidated.

The insurance subsidiaries have committed an additional $106 million to the four AssuredIM funds that may be drawn in the future.

See Item 1, Financial Statements, Note 11, Variable Interest Entities.

Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company's insurance subsidiaries, insurance regulations and rating agency capital requirements.

Financial Guaranty Policies

Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation.

Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option.

Premiums received on financial guaranty contracts are paid either upfront or in installments over the life of the insured obligations.

Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses.

Direct and indirect consequences of COVID-19 are continuing to cause financial distress to many of the obligors and assets underlying obligations guaranteed by the Company, and may result in further increases in claims and loss reserves.

The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it, and the effectiveness and acceptance of vaccines for it, remain unknown, so the Company cannot predict the ultimate size of any increases in claims that may result from the pandemic.

In addition, the Company has net par exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $3.7 billion, all of which is rated BIG.

Beginning in 2016, the Commonwealth and certain related authorities and public corporations have defaulted on obligations to make payments on its debt.

Claims (Paid) Recovered

Third Quarter Nine Months

2020 2019 2020 2019

Public finance $ (336) $ (279) $ (409) $ (516)

Structured finance:

RMBS 8 13 52 65

Other structured finance (6) (1) (10) —

Structured finance 2 12 42 65

Claims (paid) recovered, net of reinsurance (1) $ (334) $ (267) $ (367) $ (451)

____________________

(1) Includes $0.1 million paid and $0.4 million paid for consolidated FG VIEs for Third Quarter 2020 and 2019, respectively, and $0.1 million paid and $12 million recovered for Nine Months 2020 and Nine Months 2019, respectively.

Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public corporations is set forth in Item 1, Financial Statements, Note 3, Outstanding Exposure, Note 4, Expected Loss to be Paid (Recovered) and Item 2, Management Discussion and Analysis, Insured Portfolio.

In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business.

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However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment.

If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $651 million as of September 30, 2020.

To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy.

As of September 30, 2020, approximately $1.7 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis.

As of March 31, 2021, approximately $1.7 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis.

The consensual terminations have resulted in no claims on AGM.

5 unchanged sentences

Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis.

The transaction documentation with one counterparty for $123 million of the CDS insured by the Company requires the Company to post collateral, subject to a cap, to secure its obligation to make payments under such contracts.

As of September 30, 2020, AGC did not have to post collateral to satisfy these requirements and the maximum posting requirement was $123 million.

Ratings Impact on Financial Guaranty Business

A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The transaction documentation with one counterparty for $76 million of CDS insured by the Company requires the Company to post collateral, subject to a cap, to secure its obligation to make payments under such contracts.

As of March 31, 2021, AGC did not have to post collateral to satisfy these requirements and the maximum posting requirement was $76 million.

Distributions From Insurance Subsidiaries

The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of its liquidity.

The Company anticipates that for the next twelve months amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies' liquidity.

The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile.

For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Insurance Company Regulatory Requirements, of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a complete discussion of the Company's dividend restrictions applicable to AGC, AGM, MAC, AG Re and AGRO.

For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 17, Insurance Company Regulatory Requirements, of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for a complete discussion of the Company's dividend restrictions applicable to AGC, AGM, AG Re and AGRO.

Dividend restrictions by insurance subsidiary are as follows:

• The maximum amount available during 2020 for AGM to distribute as dividends without regulatory approval is estimated to be approximately $267 million, of which approximately $108 million is estimated to be available for distribution in the fourth quarter of 2020.

• The maximum amount available during 2020 for AGC to distribute as ordinary dividends is approximately $166 million, of which approximately $42 million is available for distribution in the fourth quarter of 2020.

• The maximum amount available during 2020 for MAC to distribute to MAC Assurance Holdings Inc.

(MAC Holdings) as dividends without regulatory approval is estimated to be approximately $18 million, none of which is available for distribution in the fourth quarter of 2020.

• Based on the applicable law and regulations, in 2020 AG Re has the capacity to (i) make capital distributions in an aggregate amount up to $128 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $274 million as of September 30, 2020.

Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $237 million as of September 30, 2020, and (ii) the amount of statutory surplus, which as of September 30, 2020 was $301 million.

• Based on the applicable law and regulations, in 2020 AGRO has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $103 million as of September 30, 2020.

Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $401 million as of September 30, 2020, and (ii) the amount of statutory surplus, which as of September 30, 2020 was $289 million.

• The maximum amount available during 2021 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $275 million, none of which is estimated to be available for distribution in the second quarter of 2021.

• The maximum amount available during 2021 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $94 million, of which approximately $24 million is available for distribution in the second quarter of 2021.

• Based on the applicable law and regulations, in 2021 AG Re (a subsidiary of AGL) has the capacity to (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $257 million as of March 31, 2021.

Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $230 million as of March 31, 2021, and (ii) the amount of statutory surplus, which as of March 31, 2021 was $152 million.

• Based on the applicable law and regulations, in 2021 AGRO (an indirect subsidiary of AGRe) has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $107 million as of March 31, 2021.

Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $402 million as of March 31, 2021, and (ii) the amount of Statutory surplus, which as of March 31, 2021 was $286 million.

Distributions From / Contributions To

Insurance Company Subsidiaries

Third Quarter Nine Months

2020 2019 2020 2019

First Quarter

(in millions)

Dividends paid by AGC to AGUS $ 13 $ 85

Repurchase of common stock by AGC from AGUS — — — 100

Dividends paid by AGM to AGMH 82 72

Dividends paid by AG Re to AGL — 90 — 175

Dividends paid by MAC to MAC Holdings (1) — — 20 105

Dividends from AGE UK to AGM (2) 124 — 124 —

Contributions from AGM to AGE SA — (26)

____________________

(1) MAC Holdings distributed substantially all amounts to AGM and AGC, in proportion to their ownership percentages.

(2) In 2020, the dividend paid to AGM from AGE UK was contributed to AGE SA.

External Financing

From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations.

External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company.

Commitments and Contingencies-Committed Capital Securities

Ratings Impact on Financial Guaranty Business

See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Assumed Reinsurance

Some of the Company’s insurance subsidiaries (Assuming Subsidiaries) assumed financial guaranty insurance from legacy third-party bond insurers.

The agreements under which such Assuming Subsidiaries assumed such business are generally subject to termination at the option of the ceding company (a) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria;

(b) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating;

or (c) upon certain changes of control of the Assuming Subsidiary.

Upon termination due to one of the above events, the Assuming Subsidiary 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 Assuming Subsidiary would be released from liability with respect to such business.

As of March 31, 2021, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $284 million, including $242 million by AGC and $42 million by AG Re.

Committed Capital Securities

Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash.

Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.

The Company does not consider itself to be the primary beneficiary of the trusts and the trusts are not consolidated in Assured Guaranty's financial statements.

The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty's financial statements.

The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options.

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LIBOR may be discontinued.

Fore more information, see the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Operational Risks in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2019.

AssuredIM Sources and Uses of Liquidity

The Asset Management segment's sources of liquidity are (1) net working capital, (2) cash from operations, including management and performance fees (which are unpredictable as to amount and timing), and (3) capital contributions from AGUS (in the first quarter of 2020 $30 million had been contributed to supplement working capital).

As of September 30, 2020, the Asset Management subsidiaries had $16 million in cash.

Liquidity needs in the Asset Management segment primarily include (1) paying operating expenses including compensation, (2) paying dividends or other distributions to AGUS, and (3) capital to support growth and expansion of the asset management business.

In Third Quarter 2020, AssuredIM distributed $8.8 million to AGUS to fund AGUS's interest payment on its intercompany debt to the insurance subsidiaries.

That debt was incurred in October 2019 to fund the BlueMountain Acquisition.

Credit Facilities of Consolidated Investment Vehicles

On June 26, 2020, CLOWH, as borrower, entered into a revolving credit facility pursuant to which CLOWH may borrow for purposes of purchasing loans during the CLO warehouse stage.

Under the CLOWH revolving credit facility, the principal amount may not exceed $175 million.

The current available commitment is determined by an advance rate of 70% based on the amount of equity contributed to the warehouse.

Based on the current advance rate and amount of equity contributed, the available commitment for CLOWH as of September 30, 2020 was $67 million.

As of September 30, 2020, CLOWH has drawn down $39 million.

The maturity date of the revolving credit facility is January 15, 2029.

The unpaid principal amounts will bear quarterly interest at a rate of 3-month LIBOR plus 175 bps.

Accrued interest on all loans will be paid on the 15th of January, April, July and October beginning October 2020.

On August 26, 2020, EUR 2021-1, as borrower, entered into a credit facility pursuant to which EUR 2021-1 may borrow for purposes of purchasing loans during the CLO warehouse stage.

Under the EUR 2021-1 credit facility, the principal amount may not exceed €140 million (which was equivalent to $164 million as of September 30, 2020).

The current available commitment is determined by an advance rate of 70% based on the amount of equity contributed to the warehouse.

Based on the current advance rate and amount of equity contributed, the available commitment for EUR 2021-1 as of September 30, 2020 was €7 million (or $8 million).

As of September 30, 2020, EUR 2021-1 had drawn down €7 million (or $8 million).

The ramp up period under the credit facility terminates on August 26, 2021 and the final maturity date is August 25, 2022.

During the ramp up period the unpaid principal amounts will bear interest at a rate of 3-month Euribor plus 170 bps.

Thereafter the interest rate increases by 50 basis points per quarter until maturity.

Accrued interest on all loans will be paid on the last day of the ramp up period or the closing date of the CLO, whichever is earlier, and then quarterly thereafter until maturity, or upon the payment in full by the borrower of all secured obligations, or upon CLO closing, whichever is earlier.

The warehouses were in compliance with all financial covenants as of September 30, 2020.

Condensed Consolidated Cash Flows

Condensed Consolidated Cash Flow Summary

Third Quarter Nine Months

2020 2019 2020 2019

(in millions)

Net cash flows provided by (used in) operating activities before effect of VIE consolidation $ (176) $ (168) $ (97) $ (365)

Effect of VIE consolidation (1) (43) 1 (567) —

Net cash flows provided by (used in) operating activities (219) (167) (664) (365)

Net cash flows provided by (used in) investing activities before effect of VIE consolidation 158 373 566 908

Effect of VIE consolidation (1)

15 66 340 162

Net cash flows provided by (used in) investing activities 173 439 906 1,070

Dividends paid (16) (17) (53) (56)

Repurchases of common stock (40) (150) (320) (340)

Repurchase of debt — — (21) (3)

Net cash flows provided by (used in) financing activities before effect of VIE consolidation — (1) (13) (17)

Effect of VIE consolidation (1) 35 (67) 395 (162)

Net cash flows provided by (used in) financing activities (2) (21) (235) (12) (578)

Effect of exchange rate changes — (2) (7) (2)

Cash and restricted cash at beginning of period 473 194 183 104

Total cash and restricted cash at the end of the period $ 406 $ 229 $ 406 $ 229

____________________

(1) VIE consolidation includes the effects of FG VIEs and consolidated investment vehicles.

(2) Claims paid on consolidated FG VIEs are presented in the condensed consolidated cash flow statements as a component of paydowns on FG VIEs' liabilities in financing activities as opposed to operating activities.

Cash flows from operations, excluding the effect of consolidating VIEs, was an outflow of $97 million in Nine Months 2020 and an outflow of $365 million in Nine Months 2019.

The decrease in cash outflows during 2020 was primarily due to larger claim payments in Nine Months 2019 mainly due to an approximately $273 million settlement of COFINA exposures, a $99 million increase in gross premiums received (net of commissions) in Nine Months 2020, as well as cash received as part of a commutation agreement in Nine Months 2020, offset in part by cash outflows for the Asset Management segment in Nine Months 2020.

Cash flows from operations attributable to the effect of VIE consolidation was negative in Nine Months 2020 due to the inclusion of investing activities of consolidated investment vehicles, which included purchases of investments in consolidated funds and purchases of loans in consolidated CLOs.

Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs’ assets.

The decrease in investing cash inflows was mainly attributable to sales of securities to fund share repurchases and, in first quarter of 2019, the COFINA claim payment.

Financing activities primarily consisted of share repurchases, dividends, debt extinguishment and paydowns of FG VIEs’ liabilities.

In Third Quarter 2020 and Nine Months 2020 it also included issuances of CLOs of consolidated investment vehicles, bank borrowings and contributions from minority interest holders into consolidated investment funds.

From October 1, 2020 through November 5, 2020, the Company repurchased an additional 1.7 million of common shares.

As of November 5, 2020, the Company was authorized to purchase $332 million of its common shares, including a $250 million additional authorization that was approved by the Board on November 2, 2020.

For m ore information about th e Company's share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders' Equity.

AGL and its subsidiaries lease office space and certain other items.

Future cash payments associated with contractual obligations pursuant to operating leases for office space have not materially changed since December 31, 2019.

See Item 1, Financial Statements, Note 13, Commitments and Contingencies.

See "— Executive Summary — Other Matters — LIBOR Sunset" above and the Risk Factor captioned "The Company may be adversely impacted by the transition from LIBOR as a reference rate" under Operational Risks in Part I, Item 1A, Risk Factors in AGL's Annual Report on Form 10-K for the year ended December 31, 2020.

Investment Portfolio

The disruption in the financial markets related to COVID-19 has contributed to credit impairment losses on certain loss mitigation securities in the investment portfolio, which are recognized in the condensed consolidated statements of operations.

The disruption in the financial markets caused by COVID-19 had contributed to unrealized losses in the investment portfolio in the first quarter of 2020, which have since reversed.

Losses in the Company’s investment portfolio impact its U.S GAAP financial statements.

Credit impairment losses also impact its capital as measured by insurance regulators and rating agencies.

The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income.

The Company’s fixed-maturity securities and short-term investments had a duration of 4.1 years as of both September 30, 2020 and December 31, 2019.

Generally, the Company’s fixed-maturity securities are designated as available-for-sale.

For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Item 1, Financial Statements, Note 8, Investments and Cash.

Fixed-Maturity Securities and Short-Term Investments

by Security Type

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

Cost (1) Estimated

Fair Value Amortized

Cost Estimated

Changes in interest rates affect the value of the Company’s fixed-maturity portfolio.

As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases.

The Company’s portfolio of fixed-maturity securities primarily consists of high-quality, liquid instruments.

Other invested assets includes interest in AssuredIM Funds, and other alternative investments.

For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Item 1, Financial Statements, Note 10, Fair Value Measurement and Note 8, Investments and Cash.

The disruption in the financial markets related to COVID-19 contributed to credit impairment losses on certain loss mitigation securities in First Quarter 2020, which were recognized in the condensed consolidated statements of operations.

Investment Portfolio

Carrying Value

March 31, 2021 December 31, 2020

(in millions)

Fixed-maturity securities:

Obligations of state and political subdivisions $ 3,665 $ 3,999 $ 4,036 $ 4,340

government and agencies 179 192 137 147

Corporate securities 2,179 2,273 2,137 2,221

Mortgage-backed securities (2):

RMBS 612 606 745 775

Commercial mortgage-backed securities (CMBS) 367 396 402 419

Asset-backed securities 932 947 684 720

government securities 146 143 230 232

Total fixed-maturity securities 8,080 8,556 8,371 8,854

Short-term investments 858 858 1,268 1,268

Total fixed-maturity and short-term investments $ 8,938 $ 9,414 $ 9,639 $ 10,122

$ 8,687 $ 8,773

(1) In 2020, the Company established an allowance for credit losses which was $76 million as of September 30, 2020.

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)

Short-term investments 701 851

Other invested assets 211 214

Total $ 9,599 $ 9,838

Number of securities 57 119 176

Number of securities with OTTI 1 7 8

___________________

(1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more).

If a security appears in both categories, it is counted only once in the total column.

Of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, as of September 30, 2020, 22 securities had unrealized losses in excess of 10% of their carrying value.The total unrealized loss for these securities was $13 million as of September 30, 2020.

The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss.

The Company has determined that the unrealized losses recorded as of September 30, 2020 were not related to credit quality.

In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss

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 has determined that the unrealized losses recorded as of December 31, 2019 were not related to credit quality.

Changes in interest rates affect the value of the Company’s fixed-maturity portfolio.

As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases.

The Company’s portfolio of fixed-maturity securities primarily consists of high-quality, liquid instruments.

The Company’s fixed-maturity securities and short-term investments had a duration of 4.5 years and 4.3 years as of March 31, 2021 and December 31, 2020.

Generally, the Company’s fixed-maturity securities are designated as available-for-sale.

For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Item 1, Financial Statements, Note 8, Investments and Cash.

Fixed-Maturity Securities By Contractual Maturity

The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below.

2 unchanged sentences

by Contractual Maturity

As of September 30, 2020

As of March 31, 2021

Cost Estimated

6 unchanged sentences

Total $ 8,267 $ 8,687

The following table summarizes the ratings distributions of the Company’s investment portfolio as of September 30, 2020 and December 31, 2019.

Ratings reflect the lower of the Moody’s and S&P classifications, except for bonds purchased for loss mitigation or other risk management strategies, which use Assured Guaranty’s internal ratings classifications.

Fixed-Maturity Securities By Rating

The following table summarizes the ratings distributions of the Company’s investment portfolio as of March 31, 2021 and December 31, 2020.

Ratings reflect the lower of Moody’s and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications, except for bonds purchased for loss mitigation or other risk management strategies, which use Assured Guaranty’s internal ratings classifications.

Distribution of

Fixed-Maturity Securities by Rating

Rating September 30, 2020 December 31, 2019

Rating March 31, 2021 December 31, 2020

AAA 15.2 % 15.5 %

BBB 12.8 12.0

BIG (1) 8.2 8.1

4 unchanged sentences

See Item I, Financial Statements, Note 8, Investments and Cash, for additional information.

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.

Other Invested Assets

Other invested assets primarily consist of equity method investments, including investments in renewable and clean energy and private equity fund managed by a third party, and investments in AssuredIM Funds that are not consolidated.

1, Financial Statements, Note 9, Variable Interest Entities.

The Insurance segment accounts for AGAS’s percentage ownership of AssuredIM Funds as equity method investments with changes in NAV presented in the Insurance segment adjusted operating income.

See Commitments below.

Fair Value of AGAS’s Interest

in AssuredIM Funds

March 31, 2021 December 31, 2020

(in millions)

AssuredIM Funds by strategy (1)

CLOs $ 143 $ 100

Municipal bonds 106 105

Healthcare 71 97

Asset-based 48 43

Total $ 368 $ 345

____________________

(1) Except for certain healthcare amounts of $71 million as of March 31, 2021 and $91 million as of December 31, 2020 that did not meet the criteria for consolidation, these amounts represent the carrying value (NAV) of AGAS's investments in the funds that are consolidated at the AGL reporting level because the Company is also the asset manager of these funds and is deemed the primary beneficiary.

Restricted Assets

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.

The Company agreed to purchase up to $125 million of limited partnership interests and other similar investments, of which $91 million was not yet funded as of March 31, 2021.

The Company is 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 .

Sources and Uses of Funds

AssuredIM's sources of liquidity are (1) net working capital, (2) cash from operations, including management and performance fees (which are unpredictable as to amount and timing), and (3) capital contributions from AGUS (in First Quarter 2021 and First Quarter 2020 $15 million and $30 million, respectively, had been contributed to supplement working capital).

As of March 31, 2021, AssuredIM had $21 million in cash and short-term investments.

AssuredIM's liquidity needs primarily include (1) paying operating expenses including compensation, (2) paying dividends or other distributions to AGUS, and (3) capital to support growth and expansion of the asset management business.

The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco, London, Paris, and other locations with various lease terms.

During the fourth quarter of 2020, the Company entered into an agreement to sublease additional office in the building where its New York City headquarters is located, for approximately 52,000 square feet to relocate AssuredIM.

This sublease with additional $32 million of future rental payments commenced in First Quarter 2021 and expires in 2032.

During the second quarter of 2021, the Company entered into a renewed lease agreement for its existing Bermuda office space.

This lease, with an additional $2 million of future rental payments, commenced in the second quarter of 2021 and expires in April 2026.

Consolidated VIEs

The Company manages its liquidity needs by evaluating cash flows without the effect of consolidated VIEs;

however, the Company's consolidated financial statements reflect the financial position of Assured Guaranty as well as Assured Guaranty's consolidated VIEs.

however, the Company's condensed consolidated financial statements reflect the financial position of Assured Guaranty as well as Assured Guaranty's consolidated VIEs.

1, Financial Statements, Note 9, Variable Interest Entities, for additional information.

The primary sources and uses of cash at Assured Guaranty's consolidated VIEs are as follows:

1 unchanged sentence

• Investment Vehicles.

The primary sources and uses of cash in the consolidated investment vehicles are raising capital from investors, using capital to make investments, generating cash income from its investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses).

The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from its investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses).

Credit Facilities of CIVs

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 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 under its credit facility 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 this credit facility.

Condensed Consolidated Cash Flows

The condensed consolidated statements of cash flow include the cash flows of the Insurance and Asset Management subsidiaries and holding companies as well as the cash flows of the consolidated FG VIEs and CIVs.

Condensed Consolidated Cash Flow Summary

First Quarter

(in millions)

Net cash flows provided by (used in) operating activities before effect of VIE consolidation $ (42) $ (97)

Effect of VIE consolidation (1) (424) (67)

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

Net cash flows provided by (used in) investing activities before effect of VIE consolidation 81 242

Effect of VIE consolidation (1)

Net cash flows provided by (used in) investing activities 125 389

Dividends paid (18) (20)

Repurchases of common shares (77) (116)

Repurchase of debt — (21)

Net cash flows provided by (used in) financing activities before effect of VIE consolidation (12) (11)

Effect of VIE consolidation (1) 496 (12)

Net cash flows provided by (used in) financing activities (2) 389 (180)

Effect of exchange rate changes — (7)

Cash and restricted cash at beginning of period 298 183

Total cash and restricted cash at the end of the period $ 346 $ 221

____________________

(1) VIE consolidation includes the effects of FG VIEs and CIVs.

Cash flows from operations, excluding the effect of consolidating VIEs, was an outflow of $42 million in First Quarter 2021 and an outflow of $97 million in First Quarter 2020.

The decrease in cash outflows during 2021 was primarily due to a $43 million increase in gross premiums received (net of commissions) and as well as lower payments for operating expenses.

Cash flows from operations attributable to the effect of VIE consolidation was negative in 2021 and 2020 due to the inclusion of investing activities of CIVs, which included cash outflows for purchases of investments, offset by sales of investments.

Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs’ assets.

The decrease in investing cash inflows during 2021 was mainly attributable to higher sales of securities in 2020 to fund higher share repurchases and claim payments.

Financing activities primarily consisted of share repurchases, dividends, debt extinguishment and paydowns of FG VIEs’ liabilities.

In First Quarter 2021 it also included issuances of CLOs, bank borrowings and repayment of warehouse financing debt.

From April 1 through May 6, 2021, the Company repurchased an additional 0.6 million of common shares.

As of May 6, 2021, the Company was authorized to purchase $147 million of its common shares.

For m ore information about th e Company's share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders' Equity.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2020, there were no material changes in the market risks that the Company is exposed to since December 31, 2019.

As of March 31, 2021, there were no material changes in the market risks that the Company is exposed to since December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis