ASSURED GUARANTY LTD 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance. Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are: • the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, 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; • developments in the world’s financial and capital markets that adversely affect insured obligors’ repayment rates, Assured Guaranty’s insurance loss or recovery experience, investments of Assured Guaranty or assets it manages; • reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty's insurance; • the loss of investors in Assured Guaranty's asset management strategies or the failure to attract new investors to Assured Guaranty’s asset management business; • the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures; • insured losses in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, 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; • poor performance of Assured Guaranty’s asset management strategies compared to the performance of the asset management strategies of Assured Guaranty's competitors; • the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity or to unanticipated consequences; • the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, most of its contracts written in credit default swap (CDS) form, and variable interest entities (VIEs) as well as on the mark-to-market of assets Assured Guaranty manages; • rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured; • the inability of Assured Guaranty to access external sources of capital on acceptable terms; • changes in applicable accounting policies or practices; • changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions; • the failure of Assured Guaranty to successfully integrate the business of BlueMountain Capital Management, LLC (BlueMountain, 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; • difficulties with the execution of Assured Guaranty’s business strategy; • loss of key personnel; • the effects of mergers, acquisitions and divestitures; • natural or man-made catastrophes or pandemics; 87 Table of Contents • other risk factors identified in AGL’s filings with the United States (U.S.) Securities and Exchange Commission (the SEC); • other risks and uncertainties that have not been identified at this time; and • management’s response to these factors. 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 the Company’s 2020 Annual Report on Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity. For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Available Information The Company maintains an Internet web site at www.assuredguaranty.com . The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings ) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance ) links to the Company’s Corporate Governance Guidelines, the Company’s Global Code of Ethics, AGL’s Bye-Laws and the charters for the committees of its Board of Directors. In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses ). The Company also maintains a social media account on LinkedIn ( www.linkedin.com/company/assured-guaranty/ ). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, the Company’s web site or social media account is not incorporated by reference into, and is not a part of, this report. Overview Business 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. 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. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal and interest (debt service) payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The 88 Table of Contents Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia. The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience. 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 strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM) have 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 September 30, 2021, AssuredIM had $17.6 billion of assets under management (AUM), including $1.3 billion that is managed on behalf of the Company’s U.S. insurance subsidiaries. Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment. 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) (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. In Third Quarter 2021, it also included a loss on extinguishment of debt. See Item 1. Financial Statements, Note 2, Segment Information. Economic Environment and Impact of COVID-19 The COVID-19 pandemic continues throughout the world, while the production, acceptance, and distribution of vaccines for it are proceeding unevenly across the globe. The emergence of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, 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 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 nine-month period ended September 30, 2021 (Nine Months 2021). In October 2021, the U.S. Bureau of Economic Analysis (BEA) reported that real Gross Domestic Product (GDP) was estimated to have increased at an annual rate of 2% in the three-month period ended September 30, 2021 (Third Quarter 2021), compared to 6.7% for the three-month period ended June 30, 2021. At the end of September 2021, the U.S. unemployment rate, seasonally adjusted, stood at 4.8%, lower than where it started the period at 5.9%, and down from a pandemic high of 14.7% in April 2020. 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 Third Quarter 2021 at 1.50% and decreased through the first few weeks of July 2021. It generally increased in the weeks that followed and reached 1.67% by the end of Third Quarter 2021. Despite the increase, the average for Third Quarter 2021 was 1.47%, slightly lower than the 1.49% average for the same quarter last year. The Company believes that the policies being pursued by the Federal Reserve are designed to keep interest rates low. In its September 2021 meeting, the Federal Open Market Committee (FOMC) decided to 89 Table of Contents 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.” At its November 2-3, 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 was virtually flat throughout Third Quarter 2021 as it finished the quarter at 29 basis points (bps) after starting the quarter one basis point higher. This is down from an average of 44.2 bps across the same quarter in 2020. In addition, BBB credit spreads measured on the same basis also remained steady throughout the quarter, averaging 60.1 bps for Third Quarter 2021. This is significantly lower than the 148.4 bps average for the same quarter in 2020. Both the A and BBB spreads are at their narrowest levels in over a decade. Generally, wider credit spreads are one factor that may allow the Company to charge higher premiums for its public finance financial guaranty insurance product. The National Association of Realtors (NAR) reported that “existing-home sales on a seasonally adjusted annual rate rose 7% in September from August, with all regions showing an increase.” According to the NAR, the median existing-homes sales price climbed 13.3% year-over-year to $352,800. Properties typically sold in 17 days in September, remaining at 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 19.8% annual gain in August 2021 (the latest data available), remaining the same as the previous month. The 20-City Composite posted a 19.7% year-over-year gain, down from 20.0% 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. From shortly after the pandemic reached the U.S. through early 2021, the Company’s surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn. Given significant federal funding to state and local governments in 2021 and the performance it observed, the Company’s surveillance department has reduced the supplemental procedures. However, it is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments. The Company’s internal ratings and loss projections, including those for RMBS, Puerto Rico and certain other distressed public finance exposures, reflect its supplemental COVID-19 surveillance activity. 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 November 4, 2021, the Company has paid less than $10 million in 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 claims. The Company believes its financial guaranty business model is particularly well-suited to withstand global economic disruptions. If an insured obligor defaults, the Company is required to pay only any shortfall in interest and principal on scheduled payment dates; the Company’s policies forbid acceleration of its obligations without its consent. In addition, many of the obligations the Company insures benefit from debt service reserve funds or other funding sources from which interest and principal may be paid during limited periods of stress, providing the obligor with an opportunity to recover. While the Company believes its guaranty may support the market value of an insured obligation in comparison to a similar uninsured obligation, the Company’s ultimate loss on a defaulted insured obligation is not a function of that underlying obligation’s market price. Rather, the Company’s ultimate loss is the sum of all principal and interest payments it makes under its policy less 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, 2021, the Company had $694 million of short-term investments and $101 million of cash, including proceeds from the issuance of debt in 2021. See Item 1, Financial Statements, Note 14, Long-Term Debt. In addition, the Company’s investment portfolio generates cash over time through interest and principal receipts. The Company began operating remotely in accordance with its business continuity plan in March 2020, instituting mandatory work-from-home policies in its Bermuda, U.S., U.K. and French offices. While such policies are not currently mandatory in some of the jurisdictions where it has offices, the majority of its workforce is still working remotely. Some of its 90 Table of Contents workforce has returned to the office, and the Company is planning for the reopening of all its offices in November 2021. In response to employee feedback and as part of its commitment to providing a safe and healthy workplace for employees and visitors, the Company intends to implement a hybrid remote and office work model, among other safety measures based on regional governmental guidance and recommended practices for reopening its 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 and raise funds. Key Business Strategies The Company continually evaluates its business strategies. 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: (1) Insurance, (2) Asset Management and Alternative Investments, and (3) Capital Management. Insurance The Company seeks to grow the insurance business through new business production, acquisitions of remaining legacy monoline insurers or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio. Growth of the Insured Portfolio The Company seeks to grow its insurance portfolio through new business production in each of its three markets: U.S. public finance, international infrastructure and global structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California 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. The Company believes that its insurance: • encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds; • enables institutional investors to operate more efficiently; and • allows smaller, less well-known issuers to gain market access on a more cost-effective basis. On the other hand, the persistently low interest rate environment and relatively tight U.S. municipal credit spreads have dampened demand for bond insurance compared to the levels before the 2008 financial crisis. 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. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company’s business opportunities and its risk profile beyond U.S. public finance. 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. 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. The $17.4 billion of municipal new issue par sold with the Company’s insurance in Nine Months 2021 was the most the Company insured in the first nine months of a year since 2010. See “— Results of Operations by Segment — Insurance Segment” below. 91 Table of Contents U.S. Municipal Market Data and Bond Insurance Penetration Rates (1) Based on Sale Date Nine Months 2021 Nine Months 2020 Year Ended December 31, 2020 (dollars in billions, except number of issues and percent) Par: New municipal bonds issued $ 343.4 $ 330.4 $ 451.8 Total insured $ 29.1 $ 25.4 $ 34.2 Insured by Assured Guaranty $ 17.4 $ 15.1 $ 19.7 Number of issues: New municipal bonds issued 9,125 8,536 11,857 Total insured 1,714 1,605 2,140 Insured by Assured Guaranty 826 734 982 Bond insurance market penetration based on: Par 8.5 % 7.7 % 7.6 % Number of issues 18.8 % 18.8 % 18.0 % Single A par sold 27.2 % 27.3 % 28.3 % Single A transactions sold 56.4 % 54.3 % 54.3 % $25 million and under par sold 21.6 % 22.0 % 20.9 % $25 million and under transactions sold 21.9 % 21.9 % 21.0 % ____________________ (1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business. The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios. These transactions enable the Company to improve its future earnings and deploy excess capital. Loss Mitigation In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies. In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company’s role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico (Commonwealth) and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth and various obligations of its related authorities and public corporations. On February 22, 2021, Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC) entered into a revised Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) plan support agreement (PSA) (GO/PBA PSA) with certain other stakeholders, the Commonwealth, and the Financial Oversight and Management Board for Puerto Rico (FOMB). Then, on May 5, 2021, AGM and AGC entered into a PSA (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the FOMB with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA). More recently, on July 28, 2021, AGC joined the PSA (PRIFA PSA) signed on July 27, 2021 by certain other stakeholders, the Commonwealth, and the FOMB with respect to the Puerto Rico Infrastructure Financing Authority (PRIFA). Previously, on May 3, 2019, AGM and AGC entered into a restructuring support agreement (PREPA RSA; together with the GO/PBA PSA, HTA/CCDA PSA, and PRIFA PSA, the Support Agreements) with the Puerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and FOMB, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds. 92 Table of Contents With AGM and AGC agreeing to the HTA/CCDA PSA, GO/PBA PSA, and (in the case of AGC) PRIFA PSA, 95% of Assured Guaranty’s net par outstanding to Puerto Rico credits as of September 30, 2021, is now covered by a Support Agreement. Each Support Agreement includes a number of conditions and the related debtor’s plan of adjustment must be approved by the Title III court, so there can be no assurance that the consensual resolutions embodied in the Support Agreements will be achieved in their current form, or at all. Even if the consensual resolutions embodied in the Support Agreements are approved and documented as contemplated, they may be subject to further legal challenge or the parties to the legal documents may not live up to their obligations. Both economic and political developments, including those related to the COVID-19 pandemic, may impact implementation of the consensual resolutions contemplated by the Support Agreements and the amount the Company realizes under the Support Agreements and related debtors’ plans of adjustment, as well as the performance or resolution of the Puerto Rico exposures not subject to a Support Agreement. Nevertheless, 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. In some instances, the terms of the Company’s policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief. Asset Management 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 September 30, 2021, AssuredIM is a top-25 CLO manager by AUM, as published by Creditflux Ltd. 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 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 September 30, 2021, AG Asset Strategies LLC (AGAS) had committed $659 million to funds managed by AssuredIM (AssuredIM Funds), including $279 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 invested $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. 93 Table of Contents Capital Management The Company has developed strategies to efficiently manage capital within the Assured Guaranty group. From 2013 through November 4, 2021, the Company has repurchased 129.8 million common shares for approximately $4,044 million, representing approximately 67% of the total shares outstanding at the beginning of the repurchase program in 2013. On August 4, 2021, the Board of Directors (the Board) authorized the repurchase of an additional $350 million of common shares. Under this and previous authorizations, as of November 4, 2021, the Company was authorized to purchase $220 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 15, Shareholders’ Equity, for additional information about the Company’s repurchases of its common shares. Summary of Share Repurchases Amount Number of Shares Average price per share (in millions, except per share data) 2013 - 2020 $ 3,662 121.5 $ 30.14 2021 (First Quarter) 77 2.0 38.83 2021 (Second Quarter) 88 1.9 46.63 2021 (Third Quarter) 140 2.9 47.76 2021 (through November 4) 77 1.5 51.90 Cumulative repurchases since the beginning of 2013 $ 4,044 129.8 31.16 Accretive Effect of Cumulative Repurchases (1) Third Quarter 2021 Nine Months 2021 As of September 30, 2021 (per share) Net income (loss) attributable to AGL $ 0.01 $ 0.66 Adjusted operating income 0.16 1.25 Shareholders’ equity attributable to AGL $ 36.81 Adjusted operating shareholders' equity 33.26 Adjusted book value 58.68 _________________ (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. On May 26, 2021, the Company issued $500 million of 3.15% Senior Notes, due in 2031 for net proceeds of $494 million. On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes were used to redeem $200 million of AGMH debt as follows: all $100 million of AGMH's 6 7/8% Quarterly Interest Bonds due in 2101, and $100 million of the $230 million of AGMH's 6.25% Notes due in 2102. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ expected debt service for its long-term debt. On August 20, 2021, the Company issued $400 million of 3.6% Senior Notes, due in 2051 for net proceeds of $395 million. On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows: all $100 million of AGMH's 5.60% Notes due in 2103, the remaining $130 million of AGMH 6.25% Notes due in 2102, and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. In Third Quarter 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid 94 Table of Contents to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009. Proceeds from the debt issuances that were not used to redeem debt are being used for general corporate purposes, including share repurchases. 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 redeem or make additional purchases of this or other Company debt in the future. See Item 1. Financial Statements, Note 14, Long-Term Debt. Municipal Assurance Corp. Merger On April 1, 2021, Municipal Assurance Corp. (MAC) merged with and into AGM, with AGM as the surviving company. 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 the first quarter of 2021. This restructuring of the Company’s U.S. insurance subsidiaries will simplify the organizational and capital structure, reduce costs, and is expected to 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. 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 the Company’s 2020 Annual Report on Form 10-K. 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 (recoveries). Other factors that drive volatility in net income 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 investments (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. 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. 95 Table of Contents Financial Performance of Assured Guaranty Financial Results Third Quarter Nine Months 2021 2020 2021 2020 (in millions, except per share amounts) GAAP Net income (loss) attributable to AGL $ 17 $ 86 $ 126 $ 214 Net income (loss) attributable to AGL per diluted share $ 0.22 $ 1.02 $ 1.66 $ 2.43 Weighted average diluted shares 73.6 83.8 75.7 88.0 Non-GAAP Adjusted operating income (loss) (1) (2) $ 34 $ 48 $ 197 $ 200 Adjusted operating income per diluted share (2) $ 0.45 $ 0.58 $ 2.60 $ 2.28 Weighted average diluted shares 73.6 83.8 75.7 88.0 Components of total adjusted operating income (loss) Insurance segment $ 214 $ 81 $ 445 $ 320 Asset Management segment (7) (12) (16) (30) Corporate division (169) (18) (232) (83) Other (4) (3) — (7) Adjusted operating income (loss) $ 34 $ 48 $ 197 $ 200 Insurance Segment Gross written premiums (GWP) $ 106 $ 121 $ 277 $ 334 Present value of new business production (PVP) (1) 96 117 263 264 Gross par written 8,561 7,432 20,170 16,477 Asset Management Segment Inflows - third party $ 843 $ 1 $ 2,082 $ 466 Inflows - intercompany 73 167 182 931 As of September 30, 2021 As of December 31, 2020 Amount Per Share Amount Per Share (in millions, except per share amounts) Shareholders’ equity attributable to AGL $ 6,300 $ 88.42 $ 6,643 $ 85.66 Adjusted operating shareholders' equity (1) 5,906 82.89 6,087 78.49 Adjusted book value (1) 8,727 122.50 8,908 114.87 Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity — — 2 0.03 Gain (loss) related to VIE consolidation included in adjusted book value (9) (0.12) (8) (0.10) Common shares outstanding (3) 71.2 77.5 ____________________ (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. 96 Table of Contents Condensed Consolidated Results of Operations Condensed Consolidated Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenues: Net earned premiums $ 102 $ 107 $ 307 $ 331 Net investment income 66 71 204 229 Asset management fees 20 17 65 60 Net realized investment gains (losses) 3 13 4 12 Fair value gains (losses) on credit derivatives 21 (3) (31) 20 Fair value gains (losses) on CCS (3) (10) (28) 13 Fair value gains (losses) on financial guaranty variable interest entities 5 — 18 (8) Fair value gains (losses) on consolidated investment vehicles (CIVs) 16 18 53 37 Foreign exchange gains (losses) on remeasurement (27) 40 (22) (20) Commutation gains (losses) — — — 38 Other income (loss) 9 15 15 24 Total revenues 212 268 585 736 Expenses: Loss and loss adjustment expenses (LAE) (68) 73 (54) 130 Interest expense 23 21 67 64 Loss on extinguishment of debt 175 — 175 — Amortization of deferred acquisition costs (DAC) 3 4 10 11 Employee compensation and benefit expenses 59 57 173 167 Other operating expenses 38 41 135 128 Total expenses 230 196 506 500 Income (loss) before provision for income taxes and equity in earnings of investees (18) 72 79 236 Equity in earnings of investees 23 7 66 3 Income (loss) before income taxes 5 79 145 239 Less: Provision (benefit) for income taxes (15) (10) 8 20 Net income (loss) 20 89 137 219 Less: Noncontrolling interests 3 3 11 5 Net income (loss) attributable to AGL $ 17 $ 86 $ 126 $ 214 Effective tax rate (313.3) % (12.0) % 6.0 % 8.4 % Third Quarter 2021 Compared with Third Quarter 2020 Net income attributable to AGL for Third Quarter 2021 was lower compared with the three-month period ended September 30, 2020 (Third Quarter 2020) primarily due to: • losses on extinguishment of debt of $175 million on a pre-tax basis ($138 million after-tax) related to the redemption of $600 million of long-term debt in Third Quarter 2021, and • foreign exchange losses of $27 million in Third Quarter 2021 compared with gains of $40 million in Third Quarter 2020. 97 Table of Contents These decreases were offset in part by a $68 million benefit in loss expense in Third Quarter 2021 compared with losses incurred of $73 million in Third Quarter 2020. Nine Months 2021 Compared with Nine Months 2020 Net income attributable to AGL for Nine Months 2021 was lower compared with the nine-month period ended September 30, 2020 (Nine Months 2020) primarily due to: • losses on extinguishment of debt of $175 million on a pre-tax basis ($138 million after-tax) related to the redemption of $600 million of long-term debt in Nine Months 2021, • fair value losses on credit derivatives of $31 million in Nine Months 2021 compared with gains of $20 million in Nine Months 2020, • fair value losses on CCS of $28 million in Nine Months 2021 compared with gains of $13 million in Nine Months 2020, and • commutation gains in Nine Months 2020 that did not recur in Nine Months 2021. These decreases were offset in part by: • benefit in loss expense of $54 million in Nine Months 2021 compared with losses incurred of $130 million Nine Months 2020, and • higher equity in earnings of investees gains from AssuredIM Funds and other alternative investments in Nine Months 2021 compared with Nine Months 2020. 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 Nine Months 2021 was lower than in Nine Months 2020 due primarily to differences in the portion of income generated by various jurisdictions. As of September 30, 2021, on a per share basis, shareholders’ equity attributable to AGL, adjusted operating shareholders' equity and adjusted book value all reached record highs. See “Accretive Effect of Cumulative Repurchases” table above. Shareholders’ equity attributable to AGL, adjusted operating shareholders’ equity and adjusted book value declined, mainly due to share repurchases and dividends, offset in part, in the case of adjusted book value, by net premiums written and a reduction in expected losses due to positive development. Other Matters LIBOR Sunset 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, 2020, 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 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 98 Table of Contents 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. Income Taxes The U.S. 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 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 and the Corporate division are presented without giving effect to the consolidation of financial guaranty VIEs (FG VIEs) and those AssuredIM investment vehicles (primarily funds and CLOs) for which the Company is deemed to be the primary beneficiary (CIVs). The Company analyzes the operating performance of each segment using “adjusted operating income.” See Item 1, Financial Statements, Note 2, Segment Information, and “— Non-GAAP Financial Measures — Adjusted Operating Income” below for definition of “adjusted operating income” (formerly known as non-GAAP operating income). Results for each segment include specifically identifiable expenses as well as allocations of expenses among legal entities based on time studies and other cost allocation methodologies based on headcount or other metrics. Total adjusted operating income includes the effect of consolidating both FG VIEs and investment vehicles. The effect of consolidating such entities, including the related eliminations, is included in “other” in the tables below. The presentation of the segments 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. 99 Table of Contents Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Adjusted operating income (loss) by segment: Insurance $ 214 $ 81 $ 445 $ 320 Asset management (7) (12) (16) (30) Corporate (169) (18) (232) (83) Other (4) (3) — (7) Adjusted operating income (loss) $ 34 $ 48 $ 197 $ 200 Reconciliation to net income (loss) attributable to AGL: Plus pre-tax adjustments: Realized gains (losses) on investments $ 3 $ 13 $ 4 $ 12 Non-credit impairment unrealized fair value gains (losses) on credit derivatives 9 (3) (41) 6 Fair value gains (losses) on CCS (3) (10) (28) 13 Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves (27) 40 (21) (15) Total pre-tax adjustments (18) 40 (86) 16 Plus tax effect on pre-tax adjustments 1 (2) 15 (2) Net income (loss) attributable to AGL $ 17 $ 86 $ 126 $ 214 Results of Operations by Segment Insurance Segment Results Insurance Results Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Revenues Net earned premiums and credit derivative revenues $ 114 $ 113 $ 327 $ 345 Net investment income 69 75 213 240 Commutation gains (losses) — — — 38 Other income (loss) 7 1 11 8 Total revenues 190 189 551 631 Expenses Loss expense (benefit) (78) 76 (60) 133 Amortization of DAC 3 4 10 11 Employee compensation and benefit expenses 35 35 105 105 Other operating expenses 18 19 76 59 Total expenses (22) 134 131 308 Equity in earnings of investees 33 20 100 37 Adjusted operating income (loss) before income taxes 245 75 520 360 Less: Provision (benefit) for income taxes 31 (6) 75 40 Adjusted operating income (loss) $ 214 $ 81 $ 445 $ 320 100 Table of Contents Insurance New Business Production Gross Written Premiums and New Business Production Third Quarter Nine Months 2021 2020 2021 2020 (in millions) GWP Public Finance—U.S. $ 52 $ 93 $ 160 $ 182 Public Finance—non-U.S. 21 28 70 143 Structured Finance—U.S. 29 1 43 10 Structured Finance—non-U.S. 4 (1) 4 (1) Total GWP $ 106 $ 121 $ 277 $ 334 PVP (1): Public Finance—U.S. $ 55 $ 93 $ 165 $ 182 Public Finance—non-U.S. 17 24 63 73 Structured Finance—U.S. 21 — 32 9 Structured Finance—non-U.S. 3 — 3 — Total PVP $ 96 $ 117 $ 263 $ 264 Gross Par Written (1): Public Finance—U.S. $ 7,703 $ 6,932 $ 17,846 $ 14,855 Public Finance—non-U.S. 156 500 1,117 1,434 Structured Finance—U.S. 436 — 941 188 Structured Finance—non-U.S. 266 — 266 — Total gross par written $ 8,561 $ 7,432 $ 20,170 $ 16,477 Average rating on new business written A- BBB+ A- A- ____________________ (1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “– Non-GAAP Financial Measures – PVP or Present Value of New Business Production.” Third Quarter 2021 Direct U.S. public finance GWP and PVP were $41 million and $44 million, respectively, compared with $93 million in GWP and PVP in Third Quarter 2020. In Third Quarter 2021 pricing returned to pre-pandemic levels, after the COVID-19 pandemic resulted in increased pricing spreads and an increase in demand for insurance in second and Third Quarter 2020, particularly in the healthcare and private higher education sectors where the Company insured several large transactions. The Company’s direct par written represented 64% of the total U.S. municipal market insured issuance in Third Quarter 2021, consistent with Third Quarter 2020, and the Company’s penetration of all municipal issuance increased to 5.43% in Third Quarter 2021 from 5.21% in Third Quarter 2020. The Company also assumed U.S. public finance transactions with $833 million in par outstanding in Third Quarter 2021, which generated GWP and PVP of $11 million. The average rating of U.S. public finance (direct and assumed) par written in Third Quarter 2021 was A-. In Third Quarter 2021, non-U.S. public finance GWP and PVP were primarily attributable to a large U.K. university housing transaction. Third Quarter 2021 structured finance GWP and PVP were primarily attributable to a large insurance securitization transaction. Nine Months 2021 Direct U.S. public finance GWP and PVP were $149 million and $154 million, respectively, compared with $182 million in GWP and PVP in Nine Months 2020. In Nine Months 2021 pricing returned to pre-pandemic levels, after the COVID-19 pandemic resulted in increased pricing spreads and an increase in demand for insurance in second and third quarter of 2020, particularly in the healthcare and private higher education sectors where the Company insured several large 101 Table of Contents transactions. This was partially offset by several large infrastructure transactions written in the first half of 2021. The Company’s direct par written represented 60% of the total U.S. municipal market insured issuance in Nine Months 2021, compared with 59% in Nine Months 2020. The Company’s penetration of all municipal issuance increased to 5.08% in Nine Months 2021 from 4.56% in Nine Months 2020. The Company also assumed U.S. public finance transactions with $833 million in par outstanding in Nine Months 2021, which generated GWP and PVP of $11 million. The average rating of U.S. public finance (direct and assumed) par written was A-. Non-U.S. GWP and PVP decreased 48% and 10% respectively. Excluding amounts relating to one large long-dated policy written in Nine Months 2020, for which GWP includes the present value of all contractual future premiums, while PVP includes the present value of only expected future premiums, non-U.S. GWP decreased by 12% and PVP decreased 11%. In addition to Third Quarter 2021 new business as described above, the Company also insured several large European infrastructure finance transactions and insurance securitization transactions in the first half of the year. 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 Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, reassumptions of previously ceded business or books of business acquired in a business combination. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information. Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by (a) refundings of insured obligations or (b) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis. Refundings occur in the public finance market when municipalities and other public finance issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When such issuers pay down insured obligations prior to their originally scheduled maturities, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the nonrefundable deferred premium revenue remaining. The amortization of our outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years. Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations are more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable. 102 Table of Contents Net Earned Premiums and Credit Derivative Revenues Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Net earned premiums: Financial guaranty insurance: Public finance Scheduled net earned premiums (1) $ 73 $ 75 $ 217 $ 218 Accelerations: Refundings 8 17 37 58 Terminations — — 1 6 Total accelerations 8 17 38 64 Total public finance 81 92 255 282 Structured finance Scheduled net earned premiums (1) 22 17 52 51 Terminations — — 1 — Total structured finance 22 17 53 51 Specialty insurance and reinsurance — — 2 2 Total net earned premiums 103 109 310 335 Credit derivative revenues: Scheduled net earned premiums 4 3 10 9 Accelerations 7 1 7 1 Total credit derivative revenues 11 4 17 10 Total net earned premiums and credit derivative revenues $ 114 $ 113 $ 327 $ 345 ____________________ (1) Includes accretion. Net earned premiums and credit derivative revenues in Third Quarter 2021 increased slightly compared with Third Quarter 2020 primarily due to the increase in expected premiums on a legacy structured finance transaction, partially offset by lower refundings and terminations. Net earned premiums and credit derivative revenues in Nine Months 2021 decreased compared with Nine Months 2020 primarily due to lower refundings and terminations. As of September 30, 2021, $3.8 billion of net deferred premium revenue on financial guaranty insurance 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 investments AGM, AGC and, until its merger with AGM on April 1, 2021, MAC (collectively, the U.S. Insurance Subsidiaries) make in AssuredIM Funds, as well as other alternative investments. The income (loss) on such investments is reported in “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 U.S. Insurance Subsidiaries are authorized to invest up to $750 million in AssuredIM Funds. As of September 30, 2021, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $659 million, of which $380 million represented net invested capital and $279 million was undrawn. 103 Table of Contents Net Investment Income and Equity in Earnings of Investees Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Net investment income Managed by third parties $ 52 $ 54 $ 154 $ 178 Loss mitigation securities and other 12 17 44 56 Managed by AssuredIM (1) 4 3 12 4 Intercompany loans 2 3 7 8 Gross investment income 70 77 217 246 Investment expenses (1) (2) (4) (6) Net investment income $ 69 $ 75 $ 213 $ 240 Equity in earnings of investees AssuredIM Funds $ 23 $ 13 $ 70 $ 29 Other 10 7 30 8 Equity in earnings of investees $ 33 $ 20 $ 100 $ 37 ____________________ (1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA. Net investment income for Third Quarter 2021 and Nine Months 2021 decreased compared to Third Quarter 2020 and Nine Months 2020, primarily due to lower reinvestment yields and lower income on securities purchased for loss mitigation purposes. The overall pre-tax book yield was 3.10% as of September 30, 2021 and 3.40% as of September 30, 2020. Excluding the internally managed portfolio, pre-tax book yield was 2.87% as of September 30, 2021 and 3.00% as of September 30, 2020. Equity in earnings of AssuredIM Funds in Third Quarter 2021 and Nine Months 2021 was primarily attributable to changes in NAV of the healthcare and CLO funds. CLO funds’ performance was driven by continued tightening of yields. Healthcare fund performance was driven by improved financial projections for a number of the portfolio companies as well as upward movement in the traded market multiples of comparable public companies. 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 a commutation gain of $38 million in Nine Months 2020. Other Income (Loss) Other income (loss) consists of recurring items such as ancillary fees on financial guaranty policies for commitments and consents, foreign exchange gain (loss) on remeasurement, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries and other non-recurring items. Economic Loss Development The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies used in 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 5 for expected loss to be paid (recovered) • Note 6 for contracts accounted for as insurance • Note 7 for contracts accounted for as credit derivatives 104 Table of Contents • 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 (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. 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 (Recovery) for U.S. Dollar Denominated Obligations Range Weighted Average As of September 30, 2021 0.00 % - 2.13% 0.78 % As of June 30, 2021 0.00 % - 2.14% 0.73 % As of December 31, 2020 0.00 % - 1.72% 0.60 % 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 % 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 Net Economic Loss Development (Benefit) By Accounting Model Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit) As of Third Quarter Nine Months September 30, 2021 December 31, 2020 2021 2020 2021 2020 (in millions) Insurance $ 150 $ 471 $ (82) $ 65 $ (91) $ 96 FG VIEs 43 59 (10) (2) (17) 5 Credit derivatives 6 (1) (2) 7 7 — Total $ 199 $ 529 $ (94) $ 70 $ (101) $ 101 Net exposure rated below-investment-grade (BIG) $ 7,430 $ 7,988 105 Table of Contents Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) By Sector Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit) As of Third Quarter Nine Months September 30, 2021 December 31, 2020 2021 2020 2021 2020 (in millions) U.S. public finance $ (9) $ 305 $ (29) $ 56 $ (13) $ 142 Non-U.S. public finance 19 36 (2) 4 (15) 9 Structured finance U.S. RMBS 142 148 (65) 1 (82) (61) Other structured finance 47 40 2 9 9 11 Structured finance 189 188 (63) 10 (73) (50) Total $ 199 $ 529 $ (94) $ 70 $ (101) $ 101 Effect of changes in the risk-free rates included in economic loss development (benefit) $ (1) $ (2) $ (34) $ 30 Third Quarter 2021 Net Economic Loss Development Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.4 billion as of both September 30, 2021 and December 31, 2020. The Company projected that its total net expected recovery across its troubled U.S. public finance exposures as of September 30, 2021 will be $9 million, compared with a net expected loss of $305 million as of December 31, 2020. The economic benefit on U.S. exposures in Third Quarter 2021 was $29 million, which was primarily attributable to certain Puerto Rico exposures. U.S. RMBS: The economic benefit attributable to U.S. RMBS was $65 million and was mainly attributable to $56 million benefit for higher recoveries on charged-off second lien loans, and $19 million benefit for increased recoveries on certain deferred principal balances in first lien loans. In Third Quarter 2021, the Company also refined several assumptions based on consistently observed trends. The primary change was to include remaining COVID-19 forbearance loans in the relevant delinquency categories rather than applying a separate liquidation rate assumption to these loans.The change in assumption for COVID-19 forbearance loans, changes to the severity, conditional default rates and other assumptions, netted together, partially offset the benefit from recoveries on charged-of loans and deferred principal balances for Third Quarter 2021. Other Structured Finance: The economic loss development attributable to structured finance, excluding U.S. RMBS, was $2 million, which was primarily attributable to deterioration of certain aircraft residual value insurance exposures. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information. Third Quarter 2020 Net Economic Loss Development Public Finance : Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.4 billion as of September 30, 2020 compared with $5.8 billion as of December 31, 2019. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of September 30, 2020 would be $263 million, compared with $531 million as of December 31, 2019. Economic loss development on U.S. exposures in Third Quarter 2020 was $56 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $4 million for non-U.S. exposures during Third Quarter 2020 mainly due to the impact of lower Euro Interbank Offered Rate (Euribor). U.S. RMBS: The economic loss development attributable to U.S. RMBS was $1 million and was mainly related to reduction of excess spread of $6 million, and mostly offset by higher recoveries for secured charged-off loans and changes in 106 Table of Contents discount rates. The economic development attributable to changes in discount rates was a gain of $2 million in Third Quarter 2020. Other Structured Finance: 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. Nine Months 2021 Net Economic Loss Development Public Finance : The economic benefit on U.S. public finance exposures in Nine Months 2021 was $13 million, which was primarily attributable to changes in discount rates, improved cashflows for certain transactions and improvement in certain Puerto Rico exposures, partially offset by deterioration in a student housing transaction. The economic benefit was approximately $15 million for non-U.S. public finance exposures mainly due to the impact of higher Euribor and, separately, improved traffic and availability in certain road exposures. U.S. RMBS: The net benefit attributable to U.S. RMBS was $82 million and was mainly related to a $67 million benefit related to higher recoveries on charged-off second lien loans, a $22 million benefit related to changes in discount rates, and changes in assumptions related to recovery of certain deferred principal balances in first lien loans of $19 million, partially offset by $35 million in lower excess spread. Additional benefits from transaction improvement, changes to loss severity in certain sectors, and the reduction in the CDR floor were partially offset by higher assumed liquidation rates for remaining COVID-19 related forbearances. Other Structured Finance: The economic loss development attributable to structured finance, excluding U.S. RMBS, was $9 million, which was primarily attributable to loss adjustment expenses for certain transactions. Nine Months 2020 Net Economic Loss Development Public Finance : Economic loss development on U.S. public finance exposures in Nine Months 2020 was $142 million, which was primarily attributable to Puerto Rico exposures. The economic loss development was approximately $9 million for non-U.S. public finance exposures during Nine Months 2020 mainly due to the impact of lower Euribor. U.S. RMBS: 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. Insurance Segment Loss Expense (Benefit) The primary differences between net economic loss development and the amount reported as loss and LAE in the condensed consolidated statements of operations are that loss and LAE: (1) considers deferred premium revenue in the calculation of loss reserves and the corresponding 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 expense (benefit) reported in the Insurance segment adjusted operating income includes loss and LAE on financial guaranty insurance contracts without giving effect to eliminations related to consolidation of FG VIEs, and 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. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies. 107 Table of Contents The amount of loss expenses (benefit) 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 expense (benefit). Insurance Segment Loss Expense (Benefit) Third Quarter Nine Months 2021 2020 2021 2020 (in millions) U.S. public finance $ (23) $ 61 $ 7 $ 153 Non-U.S. public finance — 3 (9) 3 Structured finance U.S. RMBS (58) 6 (68) (32) Other structured finance 3 6 10 9 Structured finance (55) 12 (58) (23) Total loss expense (benefit) $ (78) $ 76 $ (60) $ 133 The primary components of the Insurance segment loss expense (benefit) were as follows: • The benefit in Third Quarter 2021 was mainly driven by U.S. RMBS exposures and certain Puerto Rico exposures. The benefit in Nine Months 2021 was mainly driven by a benefit in second lien U.S. RMBS exposures. • 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. 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 in Nine Months 2021 compared with Nine Months 2020 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. Ratings On October 20, 2021, Kroll Bond Rating Agency upgraded the financial strength rating of AGC from AA to AA+. 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. 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. 108 Table of Contents S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC Kroll Bond Rating Agency Moody’s Investors Service, Inc. A.M. Best Company, Inc. AGM AA (stable) (7/8/21) AA+ (stable) (10/20/21) A2 (stable) (8/13/19) — AGC AA (stable) (7/8/21) AA+ (stable) (10/20/21) (1) — AG Re AA (stable )(7/8/21) — — — AGRO AA (stable) (7/8/21) — — A+ (stable) (7/15/21) Assured Guaranty UK Limited (AGUK) AA (stable) (7/8/21) AA+ (stable) (10/20/21) A2 (stable) (8/13/19) — Assured Guaranty (Europe) SA (AGE) AA (stable) (7/8/21) AA+ (stable) (10/20/21) — — ____________________ (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). 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. 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 “— Liquidity and Capital Resources —” section below. Asset Management Segment Results Asset Management Results Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Revenues Management fees (1) $ 17 $ 12 $ 55 $ 40 Performance fees — — 1 — Other income 2 2 4 4 Total revenues 19 14 60 44 Expenses Employee compensation and benefit expenses 19 19 53 51 Amortization of intangible assets 3 3 9 9 Other operating expenses (1) 7 7 20 21 Total expenses 29 29 82 81 Adjusted operating income (loss) before income taxes (10) (15) (22) (37) Less: Provision (benefit) for income taxes (3) (3) (6) (7) Adjusted operating income (loss) $ (7) $ (12) $ (16) $ (30) _____________________ (1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross as revenues. Asset Management Fees 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 include funds that were launched since the BlueMountain Acquisition, in which the Insurance segment’s U.S. Insurance Subsidiaries invest, along with 109 Table of Contents 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. Management Fees Third Quarter Nine Months 2021 2020 2021 2020 (in millions) CLOs $ 12 $ 5 $ 36 $ 12 Opportunity funds and liquid strategies 4 2 13 7 Wind-down funds 1 5 6 21 Total management fees $ 17 $ 12 $ 55 $ 40 Management fees in Third Quarter 2021 increased to $17 million from $12 million in Third Quarter 2020. In Nine Months 2021, management fees were $55 million compared with $40 million in Nine Months 2020. The increase in management fees was primarily due to an increase in CLO fees as a result of (i) higher fee-earning CLO AUM due to the sale to third-parties of CLO equity from legacy funds and the issuance of new CLOs, and (ii) the higher level of deferrals of CLO fees in the prior year that did not recur in the current year. CLO fee-earning AUM was $14.1 billion, or 96%, of total CLO AUM as of September 30, 2021, compared with $10.2 billion, or 74%, of total CLO AUM as of December 31, 2020 and $8.0 billion, or 60%, of total CLO AUM as of September 30, 2020. As of September 30, 2021 substantially all of the CLO equity held by legacy funds has been sold to third parties, which ends the fee rebates made back to these funds. CLO AUM includes CLO equity that is held by various AssuredIM Funds of $186 million as of September 30, 2021, and $265 million as of December 31, 2020. In addition, the COVID-19 pandemic and downgrades in loan markets had triggered over-collateralization provisions in CLOs in the second and third quarters of 2020, resulting in the deferral of CLO management fees. As of September 30 2021, there were no CLOs managed by AssuredIM triggering over-collateralization provisions. The increase in fees from opportunity funds and liquid strategies was mainly attributable to funds created since the Company acquired BlueMountain Capital Management, LLC. In addition, opportunity funds and liquid strategies also includes fees from an IMA with the U.S. Insurance Subsidiaries, and two previously established funds. Fees from opportunity funds increased as AUM increased to $1.6 billion as of September 30, 2021 from $1.0 billion as of September 30, 2020. Fees from the wind-down funds decreased as distributions to investors continued. As of September 30, 2021, AUM of the wind-down funds was $0.8 billion compared with $2.3 billion as of September 30, 2020. Assets Under Management In Nine Months 2021, AUM increased from $17.3 billion to $17.6 billion, while fee-earning AUM increased by 26% from $12.9 billion as of December 31, 2020 to $16.3 billion as of September 30, 2021. 110 Table of Contents Roll Forward of Assets Under Management Third Quarter 2021 CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) AUM, June 30, 2021 $ 14,562 $ 1,463 $ 388 $ 1,179 $ 17,592 Inflows - third party 598 245 — — 843 Inflows - intercompany 57 16 — — 73 Outflows: Redemptions — — — — — Distributions (1) (424) (170) — (364) (958) Total outflows (424) (170) — (364) (958) Net flows 231 91 — (364) (42) Change in value (47) 80 — (6) 27 AUM, September 30, 2021 $ 14,746 $ 1,634 $ 388 $ 809 $ 17,577 _____________________ (1) Distributions from opportunity funds include $107 million related to the AssuredIM Funds created prior to BlueMountain Acquisition. Roll Forward of Assets Under Management Nine Months 2021 CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) AUM, December 31, 2020 $ 13,856 $ 1,486 $ 383 $ 1,623 $ 17,348 Inflows - third party 1,811 271 — — 2,082 Inflows - intercompany 166 16 — — 182 Outflows: Redemptions — — — — — Distributions (1) (1,007) (448) — (791) (2,246) Total outflows (1,007) (448) — (791) (2,246) Net flows 970 (161) — (791) 18 Change in value (80) 309 5 (23) 211 AUM, September 30, 2021 $ 14,746 $ 1,634 $ 388 $ 809 $ 17,577 _____________________ (1) Distributions from opportunity funds include $259 million related to the AssuredIM Funds created prior to BlueMountain Acquisition. 111 Table of Contents Components of Assets Under Management CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) As of September 30, 2021: Funded AUM $ 14,615 $ 1,071 $ 388 $ 787 $ 16,861 Unfunded AUM 131 563 — 22 716 Fee-earning AUM $ 14,083 $ 1,289 $ 388 $ 508 $ 16,268 Non-fee earning AUM 663 345 — 301 1,309 Intercompany AUM Funded AUM $ 496 $ 174 $ 367 $ — $ 1,037 Unfunded AUM 127 151 — — 278 As of December 31, 2020: Funded AUM $ 13,809 $ 992 $ 383 $ 1,601 $ 16,785 Unfunded AUM 47 494 — 22 563 Fee-earning AUM $ 10,248 $ 1,176 $ 383 $ 1,133 $ 12,940 Non-fee earning AUM 3,608 310 — 490 4,408 Intercompany AUM Funded AUM $ 405 $ 126 $ 362 $ — $ 893 Unfunded AUM 40 137 — — 177 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, the Company believes that 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), which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and continues to provide personnel and other services to BM Fuji associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and a personnel and services agreement, consistent with past practices, 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 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. 112 Table of Contents 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 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. 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. Corporate Division Results Corporate Results Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Revenues Net investment income $ 1 $ — $ 1 $ 1 Other income (loss) — 12 — 7 Total revenues 1 12 1 8 Expenses Interest expense 25 24 74 72 Loss on extinguishment of debt 175 — 175 — Employee compensation and benefit expenses 5 3 15 11 Other operating expenses 6 5 15 16 Total expenses 211 32 279 99 Equity in earnings of investees 1 — 1 (5) Adjusted operating income (loss) before income taxes (209) (20) (277) (96) Less: Provision (benefit) for income taxes (40) (2) (45) (13) Adjusted operating income (loss) $ (169) $ (18) $ (232) $ (83) The Corporate division loss in Third Quarter 2021 increased compared with Third Quarter 2020 primarily due to the loss on extinguishment of debt of $175 million on a pre-tax basis ($138 million after-tax) associated with the redemption of AGMH and AGUS debt, which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The loss on extinguishment of debt primarily consists of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the acquisition of AGMH in 2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS 5% Senior Notes. See Item 1. Financial Statements, Note 14, Long-Term Debt. 113 Table of Contents 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 AGUS purchases of AGMH debt in Nine Months 2020, recorded in other income (loss), is related to the AGUS purchase of a portion of the principal amount of AGMH’s outstanding Junior Subordinated Debentures. 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. Interest expense relates to debt issued by the U.S. Holding Companies. Intersegment interest expense of $2 million in Third Quarter 2021, $3 million in Third Quarter 2020, $7 million in Nine Months 2021 and $8 million in Nine Months 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. Equity in earnings of investees was a loss in Nine Months 2020 due to a write-down of AGUS’ investment in an investment firm that provides investment banking services in the global infrastructure sector. Other Other primarily consists of intersegment eliminations, reclassifications of reimbursable fund expenses 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. See Item 1, Financial Statements, Note 2, Segment Information. VIE Consolidation Effect on Net Income (Loss) Attributable to AGL Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Effect of consolidating: FG VIEs $ (4) $ (3) $ (1) $ (7) Investment vehicles — — 1 — VIE consolidation effect $ (4) $ (3) $ — $ (7) 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, CLO warehouses and AssuredIM Funds. 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 reported 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. 114 Table of Contents Reconciliation to GAAP Reconciliation of Net Income (Loss) Attributable to AGL To Adjusted Operating Income (Loss) Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Net income (loss) attributable to AGL $ 17 $ 86 $ 126 $ 214 Less pre-tax adjustments: Realized gains (losses) on investments 3 13 4 12 Non-credit impairment unrealized fair value gains (losses) on credit derivatives 9 (3) (41) 6 Fair value gains (losses) on CCS (3) (10) (28) 13 Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves (27) 40 (21) (15) Total pre-tax adjustments (18) 40 (86) 16 Less tax effect on pre-tax adjustments 1 (2) 15 (2) Adjusted operating income (loss) $ 34 $ 48 $ 197 $ 200 Gain (loss) related to VIE consolidation (net of tax provision (benefit) of $(2), $(1), $(1) and $(2)) included in adjusted operating income $ (4) $ (3) $ — $ (7) Net Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). Net Realized Investment Gains (Losses) Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Gross realized gains on available-for-sale securities $ 3 $ 16 $ 12 $ 39 Gross realized losses on available-for-sale securities ( 6 ) ( 3 ) ( 10 ) ( 12 ) Net realized gains (losses) on other invested assets 1 — 1 — Change in credit impairment and intent to sell 5 — 1 ( 15 ) Net realized investment gains (losses) $ 3 $ 13 $ 4 $ 12 Change in credit impairment was a benefit in Third Quarter 2021 and Nine Months 2021 primarily due to lower delinquencies on loss mitigation securities. Change in credit impairment in Nine Months 2020 was related primarily to 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. Non-Credit Impairment Unrealized Fair Value Gains (Losses) on Credit Derivatives Changes in the fair value of credit derivatives occur because of changes in the Company’s own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates, and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-economic changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because 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. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods. 115 Table of Contents The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market since 2009 and, as of September 30, 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. Third Quarter 2021 non-credit impairment unrealized fair value gains on credit derivatives were mainly attributable to the termination of several CDS policies, including several trust preferred securities transactions and one RMBS transaction. Nine Months 2021 non-credit impairment unrealized fair value losses on credit derivatives were generated primarily as a result of the tightening of AGC spreads, partially offset by general price improvements of the underlying collateral and the termination of several CDS policies, including several trust preferred securities transactions and one RMBS transaction. Except for underlying credit impairment, which is recognized as loss expense (benefit) in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio. Third Quarter 2020 non-credit impairment 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 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. Sensitivity to Changes in Credit Spread The following table summarizes the estimated change in fair value on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC. Effect of Changes in Credit Spread As of September 30, 2021 As of December 31, 2020 Credit Spreads (1) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain/(Loss) (Pre-Tax) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain/(Loss) (Pre-Tax) (in millions) Increase of 25 bps $ (231) $ (97) $ (221) $ (121) Base Scenario (134) — (100) — Decrease of 25 bps (73) 61 (81) 19 All transactions priced at floor (59) 75 (63) 37 ____________________ (1) Includes the effects of changes in the net spreads assumed by the Company. Fair Value Gains (Losses) on CCS Fair value changes on CCS in all periods presented were primarily driven by changes in market spreads during the reporting period. During Third Quarter 2021, Third Quarter 2020 and Nine Months 2021, there was a tightening of market 116 Table of Contents spreads; however, during Nine Months 2020, market spreads widened. 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 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. dollar. 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. 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. GAAP requires the Company to consolidate VIEs where it is deemed to be the primary beneficiary which include: • FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and • CIVs in which certain subsidiaries invest and which are managed by AssuredIM. 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 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. 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. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below. 117 Table of Contents Adjusted Operating Income 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: 1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. 2) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize. 5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. 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 defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. 2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss. 118 Table of Contents 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. Management uses adjusted book value, further adjusted for VIE consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in adjusted book value per share, further adjusted for VIE consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following: 1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods. 2) Addition of the net present value of estimated net future revenue. See below. 3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. 119 Table of Contents Reconciliation of Shareholders’ Equity Attributable to AGL To Adjusted Book Value As of September 30, 2021 As of December 31, 2020 Total Per Share Total Per Share (dollars in millions, except per share amounts) Shareholders’ equity attributable to AGL $ 6,300 $ 88.42 $ 6,643 $ 85.66 Less pre-tax adjustments: Non-credit impairment unrealized fair value gains (losses) on credit derivatives (32) (0.44) 9 0.12 Fair value gains (losses) on CCS 24 0.33 52 0.66 Unrealized gain (loss) on investment portfolio excluding foreign exchange effect 492 6.90 611 7.89 Less taxes (90) (1.26) (116) (1.50) Adjusted operating shareholders’ equity 5,906 82.89 6,087 78.49 Pre-tax adjustments: Less: Deferred acquisition costs 129 1.81 119 1.54 Plus: Net present value of estimated net future revenue 164 2.30 182 2.35 Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed 3,383 47.49 3,355 43.27 Plus taxes (597) (8.37) (597) (7.70) Adjusted book value $ 8,727 $ 122.50 8,908 114.87 Gain (loss) related to VIE consolidation included in adjusted operating shareholders' equity (net of tax (provision) benefit of $1 and $0) $ — $ — $ 2 $ 0.03 Gain (loss) related to VIE consolidation included in adjusted book value (net of tax benefit of $3 and $2) $ (9) $ (0.12) $ (8) $ (0.10) Net Present Value of Estimated Net Future Revenue Management believes that this amount is a useful measure because it enables an evaluation of the value of the present value of estimated net future revenue for contracts other than financial guaranty insurance contracts (such as specialty insurance and reinsurance contracts and credit derivatives). This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure. PVP or Present Value of New Business Production Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premium on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), whether in insurance or credit derivative contract form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums. 120 Table of Contents Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual installment premiums may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation. Reconciliation of GWP to PVP Third Quarter 2021 Third Quarter 2020 Public Finance Structured Finance Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP $ 52 $ 21 $ 29 $ 4 $ 106 $ 93 $ 28 $ 1 $ (1) $ 121 Less: Installment GWP and other GAAP adjustments (1) (1) 22 27 4 52 — 28 1 (1) 28 Upfront GWP 53 (1) 2 — 54 93 — — — 93 Plus: Installment premium PVP 2 18 19 3 42 — 24 — — 24 PVP $ 55 $ 17 $ 21 $ 3 $ 96 $ 93 $ 24 $ — $ — $ 117 Nine Months 2021 Nine Months 2020 Public Finance Structured Finance Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP $ 160 $ 70 $ 43 $ 4 $ 277 $ 182 $ 143 $ 10 $ (1) $ 334 Less: Installment GWP and other GAAP adjustments (1) 33 49 39 4 125 — 143 10 (1) 152 Upfront GWP 127 21 4 — 152 182 — — — 182 Plus: Installment premium PVP 38 42 28 3 111 — 73 9 — 82 PVP $ 165 $ 63 $ 32 $ 3 $ 263 $ 182 $ 73 $ 9 $ — $ 264 ___________________ (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. Insured Portfolio Financial Guaranty Exposure 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. 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) along with each sector’s average rating. 121 Table of Contents Financial Guaranty Portfolio Net Par Outstanding and Average Internal Rating by Sector As of September 30, 2021 As of December 31, 2020 Sector Net Par Outstanding Average Rating Net Par Outstanding Average Rating (dollars in millions) Public finance: U.S.: General obligation $ 72,302 A- $ 72,268 A- Tax backed 35,687 A- 34,800 A- Municipal utilities 25,861 A- 25,275 A- Transportation 16,740 BBB+ 15,179 BBB+ Healthcare 9,311 BBB+ 8,691 BBB+ Higher education 6,744 A- 6,127 A- Infrastructure finance 6,297 A- 5,843 A- Housing revenue 1,026 BBB- 1,149 BBB Investor-owned utilities 611 A- 644 A- Renewable energy 196 A- 204 A- Other public finance-U.S. 1,177 A- 1,417 A- Total public finance—U.S. 175,952 A- 171,597 A- Non-U.S.: Regulated utilities 18,494 BBB+ 19,370 BBB+ Infrastructure finance 16,837 BBB 17,819 BBB Sovereign and sub-sovereign 11,136 A+ 11,682 A+ Renewable energy 2,466 A- 2,708 A- Pooled infrastructure 1,372 AAA 1,449 AAA Total public finance—non-U.S. 50,305 BBB+ 53,028 A- Total public finance 226,257 A- 224,625 A- Structured finance: U.S.: Life insurance transactions 3,423 AA- 2,581 AA- RMBS 2,510 BBB- 2,990 BBB- Financial products 785 AA- 820 AA- Pooled corporate obligations 685 AA 1,193 AA Consumer receivables 625 A 768 A- Other structured finance 649 A- 600 A- Total structured finance—U.S. 8,677 A 8,952 A Non-U.S.: RMBS 332 A 357 A Pooled corporate obligations 226 AA- — — Other structured finance 176 AA- 219 A+ Total structured finance—non-U.S. 734 A+ 576 A Total structured finance 9,411 A 9,528 A Total net par outstanding $ 235,668 A- $ 234,153 A- 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 122 Table of Contents financial guarantor. The second-to-pay insured par outstanding as of September 30, 2021 and December 31, 2020 was $5.1 billion and $5.6 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were BIG was $45 million and $91 million as of September 30, 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 $3.6 billion net par outstanding as of September 30, 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 By Company As of September 30, 2021 Net Par Outstanding AGM AGC AG Re Eliminations (1) Total Net Par Outstanding Gross Par Outstanding (in millions) Puerto Rico Exposures Subject to a Support Agreement Commonwealth of Puerto Rico - GO (2) $ 574 $ 170 $ 353 $ — $ 1,097 $ 1,135 PBA (2) 2 122 — (2) 122 122 Subtotal - GO/PBA PSA 576 292 353 (2) 1,219 1,257 PRHTA (Transportation revenue) (2) 233 467 178 (79) 799 799 PRHTA (Highway revenue) (2) 381 51 25 — 457 457 PRCCDA — 152 — — 152 152 Subtotal - HTA/CCDA PSA 614 670 203 (79) 1,408 1,408 PREPA (2) 469 69 210 — 748 759 Puerto Rico Infrastructure Financing Authority (PRIFA) — 15 1 — 16 16 Subtotal Subject to a Support Agreement 1,659 1,046 767 (81) 3,391 3,440 Other Puerto Rico Exposures MFA 126 16 37 — 179 187 PRASA and U of PR — 2 — — 2 2 Subtotal Other Puerto Rico Exposures 126 18 37 — 181 189 Total exposure to Puerto Rico $ 1,785 $ 1,064 $ 804 $ (81) $ 3,572 $ 3,629 ___________________ (1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary. (2) As of the date of this filing, the seven-member financial oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) has certified a filing under Title III of PROMESA for these exposures. The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the 123 Table of Contents event that obligors default on their obligations, the Company would only pay the shortfall between the principal and interest due in any given period and the amount paid by the obligors. Amortization Schedule of Net Par of Puerto Rico As of September 30, 2021 Scheduled Net Par Amortization 2021 (4Q) 2022 (1Q) 2022 (2Q) 2022 (3Q) 2022 (4Q) 2023 2024 2025 2026 - 2030 2031 - 2035 2036 - 2040 2041 - 2042 Total (in millions) Puerto Rico Exposures Subject to a Support Agreement Commonwealth of Puerto Rico - GO $ — $ — $ — $ 37 $ — $ 14 $ 73 $ 68 $ 269 $ 491 $ 145 $ — $ 1,097 PBA — — — — — 7 — 6 54 38 17 — 122 Subtotal - GO/PBA PSA — — — 37 — 21 73 74 323 529 162 — 1,219 PRHTA (Transportation revenue) — — — 28 — 33 4 29 167 242 251 45 799 PRHTA (Highway revenue) — — — 40 — 32 32 34 40 227 52 — 457 PRCCDA — — — — — — — — 19 104 29 — 152 Subtotal - HTA/CCDA PSA — — — 68 — 65 36 63 226 573 332 45 1,408 PREPA — — — 28 — 95 93 68 362 102 — — 748 PRIFA — — — — — 2 — — — — 10 4 16 Subtotal Subject to a Support Agreement — — — 133 — 183 202 205 911 1,204 504 49 3,391 Other Puerto Rico Exposures MFA — — — 43 — 23 19 18 76 — — — 179 PRASA and U of PR — — — — — — 1 — — 1 — — 2 Subtotal Other Puerto Rico Exposures — — — 43 — 23 20 18 76 1 — — 181 Total $ — $ — $ — $ 176 $ — $ 206 $ 222 $ 223 $ 987 $ 1,205 $ 504 $ 49 $ 3,572 124 Table of Contents Amortization Schedule of Net Debt Service of Puerto Rico As of September 30, 2021 Scheduled Net Debt Service Amortization 2021 (4Q) 2022 (1Q) 2022 (2Q) 2022 (3Q) 2022 (4Q) 2023 2024 2025 2026 - 2030 2031 - 2035 2036 - 2040 2041 - 2042 Total (in millions) Puerto Rico Exposures Subject to a Support Agreement Commonwealth of Puerto Rico - GO $ — $ 29 $ — $ 65 $ — $ 70 $ 128 $ 119 $ 479 $ 623 $ 160 $ — $ 1,673 PBA — 3 — 3 — 13 6 13 71 49 18 — 176 Subtotal - GO/PBA PSA — 32 — 68 — 83 134 132 550 672 178 — 1,849 PRHTA (Transportation revenue) — 21 — 48 — 73 42 67 334 367 300 47 1,299 PRHTA (Highway revenue) — 12 — 52 — 54 53 53 123 277 55 — 679 PRCCDA — 3 — 4 — 7 7 7 51 127 30 — 236 Subtotal - HTA/CCDA PSA — 36 — 104 — 134 102 127 508 771 385 47 2,214 PREPA 3 15 2 43 3 129 121 91 427 110 — — 944 PRIFA — — — — — 3 1 1 4 3 13 4 29 Subtotal Subject to a Support Agreement 3 83 2 215 3 349 358 351 1,489 1,556 576 51 5,036 Other Puerto Rico Exposures MFA — 5 — 48 — 29 24 22 86 — — — 214 PRASA and U of PR — — — — — — 1 — — 1 — — 2 Subtotal Other Puerto Rico Exposures — 5 — 48 — 29 25 22 86 1 — — 216 Total $ 3 $ 88 $ 2 $ 263 $ 3 $ 378 $ 383 $ 373 $ 1,575 $ 1,557 $ 576 $ 51 $ 5,252 Financial Guaranty Exposure to U.S. RMBS 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). U.S. RMBS exposures represent 1.1% of the total net par outstanding, and BIG U.S. RMBS represent 17.7% of total BIG net par outstanding. Distribution of U.S. RMBS by Year Insured and Type of Exposure as of September 30, 2021 Year insured: Prime First Lien Alt-A First Lien Option ARMs Subprime First Lien Second Lien Total Net Par Outstanding (in millions) 2004 and prior $ 12 $ 12 $ — $ 414 $ 24 $ 462 2005 30 151 19 195 82 477 2006 31 31 1 94 145 302 2007 — 245 19 775 195 1,234 2008 — — — 35 — 35 Total exposures $ 73 $ 439 $ 39 $ 1,513 $ 446 $ 2,510 Exposures rated BIG $ 48 $ 250 $ 18 $ 838 $ 148 $ 1,302 125 Table of Contents Liquidity and Capital Resources 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: • principal and 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 or redeem the Company’s outstanding debt, or • repurchase AGL’s common shares pursuant to AGL’s share repurchase authorization. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. 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. 126 Table of Contents U.S. Holding Companies Long-Term Debt and Intercompany Loans As of September 30, 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 330 500 3.15% Senior Notes 3.15% 2031 500 — 3.6% Senior Notes 3.60% 2051 400 — Series A Enhanced Junior Subordinated Debentures 3 month LIBOR +2.38% 2066 150 150 AGUS long-term debt subtotal 1,580 850 AGUS - intercompany loans from insurance subsidiaries AGC/AGM/MAC 3.50% 2030 250 250 AGRO 6 month LIBOR +3.00% 2023 30 30 AGUS intercompany loans subtotal 280 280 Total AGUS 1,860 1,130 AGMH 6 7 / 8 % Quarterly Interest Bonds 6.88% 2101 — 100 6.25% Notes 6.25% 2102 — 230 5.6% Notes 5.60% 2103 — 100 Junior Subordinated Debentures 1 Month LIBOR +2.215% 2066 300 300 Total AGMH 300 730 AGMH's long-term debt purchased by AGUS (154) (154) U.S. Holding Company debt $ 2,006 $ 1,706 On May 26, 2021, AGUS issued $500 million in 3.15% Senior Notes. On July 9, 2021, a portion of the proceeds of the debt issuance was used to redeem $200 million in AGMH debt. On August 20, 2021, AGUS issued $400 million in 3.6% Senior Notes, and on September 27, 2021, the proceeds of the debt issuance were used to redeem $230 million in AGMH debt and $170 million in AGUS debt. See Item 1. Financial Statements, Note 14, Long-Term Debt. The following table presents the expected debt service of the Holding Companies’ long term debt as of December 31, 2020, compared with the expected debt service as of September 30, 2021, which reflects the new debt issuances and redemptions that occurred in 2021. 127 Table of Contents U.S. Holding Companies Expected Debt Service of Long-Term Debt As of September 30, 2021 As of December 31, 2020 (in millions) 2021 (October 1 - December 31) $ 19 $ 20 2022 74 79 2023 74 80 2024 397 567 2025 59 55 2026 59 56 2027-2036 1,180 726 2037-2046 298 423 2047-2056 617 418 Thereafter 439 2,098 Total $ 3,216 $ 4,522 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. For more information, see the Company’s 2020 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 14, Long-Term Debt and Credit Facilities. Guarantor and U.S. Holding Companies’ Summarized Financial Information AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,430 million aggregate principal amount of 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 intercompany loans. The following tables include summarized financial information for AGL and the U.S. Holding Companies, excluding their investments in subsidiaries. 128 Table of Contents As of September 30, 2021 AGL U.S. Holding Companies (in millions) Assets Investments and cash (1) $ 91 $ 296 Receivables from affiliates (2) 35 — Receivable from U.S. Holding Companies 40 — Other assets 3 50 Liabilities Long-term debt — 1,669 Loans payable to affiliate — 280 Payable to affiliates (2) 8 14 Payable to AGL — 40 Other liabilities 5 108 ____________________ (1) As of September 30, 2021, weighted average durations of AGL’s and the U.S. Holding Companies' fixed-maturity securities (excluding AGUS’ investment in AGMH’s debt) were 4.9 years and 3.4 years, respectively. (2) Represents receivable and payables with non-guarantor subsidiaries. Nine Months 2021 AGL U.S. Holding Companies (in millions) Revenues $ 1 $ — Expenses Interest expense — 74 Loss on extinguishment of debt — 175 Other expenses 25 5 Income (loss) before provision for income taxes and equity in earnings of investees (24) (254) Equity in earnings of investees — 1 Net income (loss) (24) (205) 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. 129 Table of Contents AGL and U.S. Holding Companies Significant Cash Flow Items Nine Months 2021 AGL U.S. Holding Companies (in millions) Dividends received from subsidiaries $ 275 $ 244 Interest paid — (50) Investments in subsidiaries — (15) Return of capital from subsidiaries — 9 Dividends paid to AGL — (275) Dividends paid (51) — Repurchases of common shares (1) (305) — Issuance of long-term debt, net of issuance costs — 889 Redemptions of debt, including make-whole — (619) ____________________ (1) See Item 1, Financial Statements, Note 15, Shareholders’ Equity, for additional information about share repurchases and authorizations. Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty. For more information, see also 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. 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: • operating expenses, • claims on the insured portfolio, • dividends or other distributions to AGL, AGUS and/or AGMH, as applicable, • reinsurance premiums, • principal of, and interest on, surplus notes, where applicable, and • capital investments in their own subsidiaries, where appropriate. Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios. The Company generally targets a balance of its most liquid assets including cash and short-term securities, U.S. Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. The Company intends to hold and has the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost. 130 Table of Contents 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. While it appears to the Company that significant federal funding in 2021 may have mitigated the financial stress from direct and indirect consequences of COVID-19 for most obligors and assets underlying obligations guaranteed by the Company, the pandemic may still result in further increases in claims and loss reserves. The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it, 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 $3.6 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. The Company anticipates potentially making substantial payments in connection with the possible resolution of most of these exposures beginning as early as December 2021 and through 2022 and possibly later, and is taking this into account in projecting its liquidity needs during these periods. 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. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner. If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds. Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $612 million as of September 30, 2021. 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, 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. The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled “pay-as-you-go” basis and to replicate the terms of a traditional financial guaranty insurance policy. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are 131 Table of Contents specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis. The transaction documentation with one counterparty for $35 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 September 30, 2021, the Company did not have to post collateral to satisfy these requirements and the maximum posting requirement was $35 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 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 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 2021 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $291 million, of which approximately $105 million is available for distribution in the fourth 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 $42 million is available for distribution in the fourth 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 September 30, 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 $284 million as of September 30, 2021, and (ii) the amount of statutory surplus, which as of September 30, 2021 was $201 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 September 30, 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 $405 million as of September 30, 2021, and (ii) the amount of statutory surplus, which as of September 30, 2021 was $289 million. 132 Table of Contents Distributions From / Contributions To Insurance Company Subsidiaries Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Dividends paid by AGC to AGUS $ 15 $ 15 $ 52 $ 124 Dividends paid by AGM to AGMH 104 87 186 159 Dividends from AGUK to AGM (1) — 124 — 124 Contributions from AGM to AGE (1) — (97) — (123) ____________________ (1) In 2020, the dividend paid to AGM from Assured Guaranty UK Limited (AGUK) was contributed to Assured Guaranty (Europe) SA (AGE). 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 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 September 30, 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 $266 million, including $231 million by AGC and $35 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 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. Upon AGC's or AGM's exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock. Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities is one-month LIBOR plus 200 bps. LIBOR may be discontinued. See “— Executive Summary — Other Matters — LIBOR Sunset” 133 Table of Contents 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Investment Portfolio 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. 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 8, Investments and Note 10, Fair Value Measurement. Investment Portfolio Carrying Value As of September 30, 2021 December 31, 2020 (in millions) Fixed-maturity securities $ 8,663 $ 8,773 Short-term investments 694 851 Other invested assets 260 214 Total $ 9,617 $ 9,838 The Company’s fixed-maturity securities and short-term investments had a duration of 4.5 years and 4.3 years as of September 30, 2021 and December 31, 2020, respectively. Generally, the Company’s fixed-maturity securities are designated as available-for-sale. 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. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Distribution of Fixed-Maturity Securities by Contractual Maturity As of September 30, 2021 Amortized Cost Estimated Fair Value (in millions) Due within one year $ 259 $ 265 Due after one year through five years 1,685 1,781 Due after five years through 10 years 1,912 2,018 Due after 10 years 3,511 3,761 Mortgage-backed securities: RMBS 486 484 Commercial mortgage-backed securities (CMBS) 335 354 Total $ 8,188 $ 8,663 134 Table of Contents Fixed-Maturity Securities By Rating The following table summarizes the ratings distributions of the Company’s investment portfolio as of September 30, 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 As of Rating September 30, 2021 December 31, 2020 AAA 15.0 % 15.5 % AA 38.1 38.3 A 24.4 25.4 BBB 13.8 12.0 BIG (1) 7.9 8.1 Not rated 0.8 0.7 Total 100.0 % 100.0 % ____________________ (1) Includes primarily loss mitigation and other risk management assets. See Item I, Financial Statements, Note 8, Investments, for additional information. Other Invested Assets Other invested assets primarily consist of investments in renewable and clean energy and private equity fund managed by a third party, and investments in AssuredIM Funds that are not consolidated. See Item. 1, Financial Statements, Note 9, Variable Interest Entities. The Insurance segment reports AGAS’s percentage ownership of AssuredIM Funds at NAV in the Insurance segment adjusted operating income. The table below presents the fair value of AGAS’s interests in the AssuredIM Funds. See Commitments below. Fair Value of AGAS’s Interest in AssuredIM Funds As of September 30, 2021 December 31, 2020 (in millions) AssuredIM Funds by strategy (1) CLOs $ 184 $ 100 Municipal bonds 107 105 Healthcare 102 97 Asset-based 72 43 Total $ 465 $ 345 ____________________ (1) Except for a healthcare fund with a NAV of $102 million as of September 30, 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 deemed to be 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 $254 million and $262 million as of September 30, 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 135 Table of Contents benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,236 million and $1,511 million, based on fair value, as of September 30, 2021 and December 31, 2020, respectively. Commitments The Company had unfunded commitments of $209 million as of September 30, 2021 related to certain of the Company’s other invested assets, including $121 million for the AssuredIM healthcare private equity fund. The Company is authorized to invest up to $750 million in AssuredIM Funds. As of September 30, 2021, the Insurance segment had total commitments to AssuredIM Funds of $659 million, of which $380 million represented net invested capital and $279 million was undrawn. AssuredIM 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 ($15 million and $30 million in Nine Months 2021 and Nine Months 2020, respectively, had been contributed to supplement working capital). As of September 30, 2021, AssuredIM had $22 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. In Third Quarter 2021 and 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. Leases 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 an additional 52,000 square feet of office space in the building where its New York City headquarters is located, in order to relocate AssuredIM. This sublease with an additional $32 million of future rental payments commenced in the first half of 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 condensed consolidated financial statements reflect the financial position of Assured Guaranty as well as Assured Guaranty's consolidated VIEs. See Item. 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: • FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting insured debt obligations, and the primary uses of cash are the payment of principal and interest due on the insured obligations. • Investment Vehicles. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses). Credit Facilities of CIVs Certain of the Company’s CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV 136 Table of Contents borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or the Company. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or the Company. As of September 30, 2021, these credit facilities had varying maturities ranging from April 21, 2022 to April 23, 2023 with the aggregate principal amount not exceeding $777 million. The available commitment was based on the amount of equity contributed to the warehouse which was $279 million. As of September 30, 2021, $216 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 85 bps to 3-month LIBOR plus 120 bps (with a floor on the LIBOR/Euribor rates of zero). The CLO warehouses were in compliance with all financial covenants as of September 30, 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 dated August 26, 2020 by EUR 2021-1 and AssuredIM, respectively. During the first quarter of 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 Third Quarter Nine Months 2021 2020 2021 2020 (in millions) Net cash flows provided by (used in) operating activities before effect of VIE consolidation $ (66) $ (176) $ (20) $ (97) Effect of VIE consolidation (1) (777) (43) (1,772) (567) Net cash flows provided by (used in) operating activities (843) (219) (1,792) (664) Net cash flows provided by (used in) investing activities before effect of VIE consolidation 400 158 57 566 Effect of VIE consolidation (1) 25 15 112 340 Net cash flows provided by (used in) investing activities 425 173 169 906 Dividends paid (16) (16) (51) (53) Repurchases of common shares (140) (40) (305) (320) Issuance of long-term debt, net of issuance costs 394 — 889 — Redemptions and purchases of debt, including make-whole (619) — (619) (21) Net cash flows provided by (used in) financing activities before effect of VIE consolidation 2 — (12) (13) Effect of VIE consolidation (1) 742 35 1,664 395 Net cash flows provided by (used in) financing activities (2) 363 (21) 1,566 (12) Effect of exchange rate changes (1) — (1) (7) Cash and restricted cash at beginning of period 296 473 298 183 Total cash and restricted cash at the end of the period $ 240 $ 406 $ 240 $ 406 ____________________ (1) VIE consolidation includes the effects of FG VIEs and CIVs. (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 $20 million in Nine Months 2021 and an outflow of $97 million in Nine Months 2020. The decrease in cash outflows during 2021 was primarily due to lower claims payments compared to the prior period, which were partially offset by cash received from a commutation during 2020. 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 in part by sales of investments. 137 Table of Contents 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 share repurchases. Financing activities primarily consist of share repurchases, dividends, debt extinguishment and paydowns of FG VIEs’ liabilities, as well and CLO issuances and CLO warehouse financing activities. In Nine Months 2021, it also included the issuance of 3.15% Senior Notes and 3.6% Senior Notes, and redemptions of a portion of AGMH and AGUS debt. See Item 1. Financial Statements, Note 14, Long-Term Debt. This increase in cash flow activity from VIEs was primarily due to the consolidation of additional CLOs. See Item 1. Financial Statements, Note 9 Variable Interest Entities. From October 1 through November 4, 2021, the Company repurchased an additional 1.5 million of common shares. As of November 4, 2021, the Company was authorized to purchase $220 million of its common shares, including a $350 million additional authorization that was approved by the Board on August 4, 2021. For more information abou t th e Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 15, Shareholders’ Equity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2021, there were no material changes to the market risks that the Company is exposed to since December 31, 2020.