ASSURED GUARANTY LTD 10-Q

ITEM 1. FINANCIAL STATEMENTS Assured Guaranty Ltd. Condensed Consolidated Balance Sheets (Unaudited) (dollars in millions except share data) As of March 31, 2022 December 31, 2021 Assets Investments: Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $ 47 and $ 42 (amortized cost of $ 8,227 and $ 7,822 ) $ 8,156 $ 8,202 Fixed-maturity securities, trading, at fair value 174 — Short-term investments, at fair value 585 1,225 Other invested assets (includes $ 24 and $ 31 , at fair value) 152 181 Total investments 9,067 9,608 Cash 119 120 Premiums receivable, net of commissions payable 1,335 1,372 Deferred acquisition costs 135 131 Salvage and subrogation recoverable 529 801 Financial guaranty variable interest entities’ assets, at fair value 307 260 Assets of consolidated investment vehicles (includes $ 5,404 and $ 4,902 , at fair value) 5,700 5,271 Goodwill and other intangible assets 172 175 Other assets (includes $ 132 and $ 132 , at fair value) 481 470 Total assets $ 17,845 $ 18,208 Liabilities Unearned premium reserve $ 3,596 $ 3,716 Loss and loss adjustment expense reserve 718 869 Long-term debt 1,673 1,673 Credit derivative liabilities, at fair value 157 156 Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $ 316 and $ 269 , without recourse $ 19 and $ 20 ) 335 289 Liabilities of consolidated investment vehicles (includes $ 3,994 and $ 3,849 , at fair value) 4,854 4,436 Other liabilities 496 569 Total liabilities 11,829 11,708 Commitments and contingencies (Note 13) Redeemable noncontrolling interests (Note 8) 21 22 Shareholders’ equity Common shares ($ 0.01 par value, 500,000,000 shares authorized; 65,043,547 and 67,518,424 shares issued and outstanding) 1 1 Retained earnings 5,878 5,990 Accumulated other comprehensive income (loss), net of tax of $( 12 ) and $ 60 ( 78 ) 300 Deferred equity compensation 1 1 Total shareholders’ equity attributable to Assured Guaranty Ltd. 5,802 6,292 Nonredeemable noncontrolling interests (Note 8) 193 186 Total shareholders’ equity 5,995 6,478 Total liabilities, redeemable noncontrolling interests and shareholders’ equity $ 17,845 $ 18,208 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Operations (Unaudited) (dollars in millions except share data) Three Months Ended March 31, 2022 2021 Revenues Net earned premiums $ 214 $ 103 Net investment income 62 70 Asset management fees 34 24 Net realized investment gains (losses) 3 ( 3 ) Fair value gains (losses) on credit derivatives ( 3 ) ( 19 ) Fair value gains (losses) on committed capital securities 1 ( 19 ) Fair value gains (losses) on financial guaranty variable interest entities 6 5 Fair value gains (losses) on consolidated investment vehicles 14 16 Foreign exchange gains (losses) on remeasurement ( 30 ) — Other income (loss) ( 1 ) — Total revenues 300 177 Expenses Loss and loss adjustment expenses 57 30 Interest expense 20 21 Amortization of deferred acquisition costs 4 3 Employee compensation and benefit expenses 73 60 Other operating expenses 42 57 Total expenses 196 171 Income (loss) before income taxes and equity in earnings (losses) of investees 104 6 Equity in earnings (losses) of investees ( 11 ) 9 Income (loss) before income taxes 93 15 Less: Provision (benefit) for income taxes 18 — Net income (loss) 75 15 Less: Noncontrolling interests 9 4 Net income (loss) attributable to Assured Guaranty Ltd. $ 66 $ 11 Earnings per share: Basic $ 1.00 $ 0.14 Diluted $ 0.98 $ 0.14 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (in millions) Three Months Ended March 31, 2022 2021 Net income (loss) $ 75 $ 15 Change in net unrealized gains (losses) on: Investments with no credit impairment, net of tax provision (benefit) of $( 63 ) and $( 20 ) ( 338 ) ( 119 ) Investments with credit impairment, net of tax provision (benefit) of $( 9 ) and $( 1 ) ( 39 ) ( 6 ) Change in net unrealized gains (losses) on investments ( 377 ) ( 125 ) Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax — ( 1 ) Other, net of tax ( 1 ) 1 Other comprehensive income (loss) ( 378 ) ( 125 ) Comprehensive income (loss) ( 303 ) ( 110 ) Less: Comprehensive income (loss) attributable to noncontrolling interests 9 4 Comprehensive income (loss) attributable to Assured Guaranty Ltd. $ ( 312 ) $ ( 114 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) (dollars in millions, except share data) For the Three Months Ended March 31, 2022 Shareholders’ Equity Attributable to Assured Guaranty Ltd. Common Shares Outstanding Common Shares Par Value Retained Earnings Accumulated Other Comprehensive Income Deferred Equity Compensation Total Nonredeemable Noncontrolling Interests Shareholders’ Equity Balance at December 31, 2021 67,518,424 $ 1 $ 5,990 $ 300 $ 1 $ 6,292 $ 186 $ 6,478 Net income — — 66 — — 66 10 76 Dividends ($ 0.25 per share) — — ( 17 ) — — ( 17 ) — ( 17 ) Contributions — — — — — — 5 5 Common shares repurchases ( 2,738,223 ) — ( 155 ) — — ( 155 ) — ( 155 ) Share-based compensation 263,346 — ( 6 ) — — ( 6 ) — ( 6 ) Distributions — — — — — — ( 8 ) ( 8 ) Other comprehensive loss — — — ( 378 ) — ( 378 ) — ( 378 ) Balance at March 31, 2022 65,043,547 $ 1 $ 5,878 $ ( 78 ) $ 1 $ 5,802 $ 193 $ 5,995 For the Three Months Ended March 31, 2021 Shareholders’ Equity Attributable to Assured Guaranty Ltd. Common Shares Outstanding Common Shares Par Value Retained Earnings Accumulated Other Comprehensive Income Deferred Equity Compensation Total Nonredeemable Noncontrolling Interests Shareholders’ Equity Balance at December 31, 2020 77,546,896 $ 1 $ 6,143 $ 498 $ 1 $ 6,643 $ 41 $ 6,684 Net income — — 11 — — 11 4 15 Dividends ($ 0.22 per share) — — ( 17 ) — — ( 17 ) — ( 17 ) Contributions — — — — — — 3 3 Common shares repurchases ( 1,986,534 ) — ( 77 ) — — ( 77 ) — ( 77 ) Share-based compensation 375,020 — ( 5 ) — — ( 5 ) — ( 5 ) Distributions — — — — — — ( 6 ) ( 6 ) Other comprehensive loss — — — ( 125 ) — ( 125 ) — ( 125 ) Balance at March 31, 2021 75,935,382 $ 1 $ 6,055 $ 373 $ 1 $ 6,430 $ 42 $ 6,472 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited) (in millions) Three Months Ended March 31, 2022 2021 Net cash flows provided by (used in) operating activities $ ( 892 ) $ ( 466 ) Investing activities Fixed-maturity securities: Purchases ( 68 ) ( 396 ) Sales 57 120 Maturities and paydowns 179 225 Short-term investments with original maturities of over three months: Purchases ( 17 ) — Maturities and paydowns — 30 Net sales (purchases) of short-term investments with original maturities of less than three months 656 120 Paydowns of financial guaranty variable interest entities’ assets 18 14 Purchases of other invested assets ( 5 ) ( 32 ) Return of capital from and sales of other invested assets 31 45 Other ( 1 ) ( 1 ) Net cash flows provided by (used in) investing activities 850 125 Financing activities Dividends paid ( 17 ) ( 18 ) Repurchases of common shares ( 152 ) ( 77 ) Net paydowns of financial guaranty variable interest entities’ liabilities ( 41 ) ( 13 ) Other ( 10 ) 7 Cash flows from consolidated investment vehicles: Proceeds from issuance of collateralized loan obligations 371 752 Repayment of collateralized loan obligations ( 372 ) — Proceeds from issuance of warehouse financing debt 215 217 Repayment of warehouse financing debt — ( 476 ) Payments under credit facilities ( 1 ) — Contributions from noncontrolling interests to consolidated investment vehicles 3 3 Distributions to noncontrolling interests from consolidated investment vehicles ( 6 ) ( 6 ) Net cash flows provided by (used in) financing activities ( 10 ) 389 Effect of foreign exchange rate changes ( 1 ) — Increase (decrease) in cash and restricted cash ( 53 ) 48 Cash and restricted cash at beginning of period 342 298 Cash and restricted cash at end of period $ 289 $ 346 (continued on next page) 5 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited) - (Continued) (in millions) Three Months Ended March 31, 2022 2021 Supplemental cash flow information Interest paid on long-term debt $ 9 $ 8 Supplemental disclosure of non-cash activities: Fixed-maturity securities, available-for-sale, received as salvage $ 610 $ — Fixed-maturity securities, available-for-sale, ceded to a reinsurer 27 — Fixed-maturity securities, trading, received as salvage 184 — Fixed-maturity securities, trading, ceded to a reinsurer 6 — Debt securities of financial guaranty variable interest entities received as salvage 54 — As of March 31, 2022 March 31, 2021 Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: Cash $ 119 $ 95 Restricted cash (included in other assets) 12 1 Cash and cash equivalents of consolidated investment vehicles (Note 8) 158 250 Cash and cash equivalents and restricted cash at the end of period $ 289 $ 346 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Business and Basis of Presentation Business Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (U.S.) and international public finance (including infrastructure) and structured finance markets, as well as asset management services. Through its insurance subsidiaries, the Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (collectively, debt service), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance 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 specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. Through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM), the Company significantly increased its participation in the asset management business with the completion on October 1, 2019, of its acquisition of all of the outstanding equity interests in BlueMountain Capital Management, LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities. AssuredIM is a diversified asset manager that serves as investment advisor to collateralized loan obligations (CLOs), opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. AssuredIM has managed structured and public finance, credit and special situation investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. Basis of Presentation The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In management’s opinion, all material adjustments necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, including its consolidated variable interest entities (VIEs), are reflected in the periods presented and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim condensed consolidated financial statements are as of March 31, 2022 and cover the three month period ended March 31, 2022 (First Quarter 2022) and the three month period ended March 31, 2021 (First Quarter 2021). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current year’s presentation. The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs). See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (SEC). 7 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued The Company’s principal insurance subsidiaries are: • Assured Guaranty Municipal Corp. (AGM), domiciled in New York; • Assured Guaranty Corp. (AGC), domiciled in Maryland; • Assured Guaranty UK Limited (AGUK), organized in the U.K.; • Assured Guaranty (Europe) SA (AGE), organized in France; • Assured Guaranty Re Ltd. (AG Re), domiciled in Bermuda; and • Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda. The Company’s principal asset management subsidiaries are: • Assured Investment Management LLC; • Assured Investment Management (London) LLP; and • Assured Healthcare Partners LLC. Until April 1, 2021, Municipal Assurance Corp. (MAC) was also a principal insurance subsidiary domiciled in New York. On April 1, 2021, MAC was merged with and into AGM, with AGM as the surviving company. As a result, the Company wrote-off the $ 16 million carrying value of MAC’s insurance licenses in First Quarter 2021, which was recorded in other operating expenses in the Insurance segment. AGM, AGC and, until its merger with AGM on April 1, 2021, MAC, (collectively, the U.S. Insurance Subsidiaries), jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by AssuredIM (AssuredIM Funds). AGL directly or indirectly owns several holding companies, two of which - Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (collectively, the U.S. Holding Companies) - have public debt outstanding. Recent Accounting Standards Adopted Reference Rate Reform In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU only apply to contracts that reference the London Interbank Offered Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform. This ASU became effective upon issuance and may be applied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022 (the Reference Rate Transition Period). In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope , which clarifies the scope of relief related to ASU 2020-04. This ASU became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively for contract modifications made on or before December 31, 2022. The Company adopted the optional relief afforded by these ASUs in the third quarter of 2021 on a prospective basis, and the guidance will be followed until the optional relief terminates on December 31, 2022. The Company has identified insurance contracts, derivatives and other financial instruments that are directly or indirectly influenced by LIBOR, and will be applying the accounting relief as relevant contract modifications are made during the Reference Rate Transition Period. There was no impact to the Company’s consolidated financial statements upon the initial adoption of these ASUs. Recent Accounting Standards Not Yet Adopted Targeted Improvements to the Accounting for Long-Duration Contracts In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts . The amendments in this ASU: 8 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued • improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows, • simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, • simplify the amortization of deferred acquisition costs (DAC), and • improve the effectiveness of the required disclosures. This ASU does not affect the Company’s financial guaranty insurance contracts, but may affect its accounting for certain specialty (non-financial guaranty) insurance contracts. In November 2020, the FASB deferred the effective date of this ASU to January 1, 2023 with early adoption permitted. If early adoption is elected, there is transition relief allowing for the transition date to be either the beginning of the prior period presented or the beginning of the earliest period presented. If early adoption is not elected, the transition date is required to be the beginning of the earliest period presented. The Company does not expect this ASU to have a material effect on its consolidated financial statements. 2. Segment Information The Company reports its results of operations in two segments: Insurance and Asset Management, separate from its Corporate division and the effects of consolidating FG VIEs and CIVs, which is consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Insurance segment primarily consists of: (i) the Company’s insurance subsidiaries; and (ii) AGAS. The Asset Management segment consists of AssuredIM, which provides asset management services to third-party investors as well as to the U.S. Insurance Subsidiaries and AGAS. The Corporate division primarily consists of interest expense on the debt of the U.S. Holding Companies and any losses on extinguishment or repurchases of their debt, as well as other operating expenses attributed to the corporate activities of AGL and the U.S. Holding Companies. The Other category primarily includes the effect of consolidating FG VIEs and CIVs, intersegment eliminations and the reclassification of reimbursable fund expenses. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The segments differ from the consolidated financial statements in certain respects. The Insurance segment includes: (i) premiums and losses from the financial guaranty insurance policies issued by the U.S. Insurance Subsidiaries which guarantee the FG VIEs’ debt; and (ii) AGAS’s share of earnings from investments in AssuredIM Funds in “equity in earnings (losses) of investees.” Under GAAP, (i) FG VIEs are consolidated by the U.S. Insurance Subsidiaries and the premiums and losses associated with their financial guaranty policies associated with the FG VIEs’ debt is eliminated, whereas the reconciliation tables below present the FG VIEs and related eliminations in “Other”, and (ii) CIVs are consolidated by AGUS, a U.S. holding company, whereas in the reconciliation tables below, the CIVs and related eliminations of the Insurance segment’s “equity in earnings (losses) of investees” associated with AGAS’s interest in CIVs are presented in “Other.” In addition, under GAAP, reimbursable fund expenses are shown as a component of asset management fees and included in total revenues, whereas in the Asset Management segment in the tables below, they are netted in segment expenses. The Company analyzes the operating performance of each segment using “segment adjusted operating income.” Results for each segment include specifically identifiable expenses as well as intersegment expense allocations, as applicable, based on time studies and other cost allocation methodologies based on headcount or other metrics. Segment adjusted operating income is defined as net income (loss) attributable to AGL, adjusted for the following items: • Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. • Elimination of non-credit impairment-related 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. • Elimination of fair value gains (losses) on the Company’s committed capital securities (CCS) that are recognized in net income. • Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and loss adjustment expense (LAE) reserves that are recognized in net income. 9 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued • 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 Company does not report assets by reportable segment as the CODM does not use assets to assess performance and allocate resources. The following table presents information for the Company’s operating segments. Segment Information Three Months Ended March 31, 2022 2021 Insurance Asset Management Insurance Asset Management (in millions) Third-party revenues $ 276 $ 30 $ 177 $ 18 Intersegment revenues 2 9 2 2 Segment revenues 278 39 179 20 Segment expenses 122 39 106 29 Segment equity in earnings (losses) of investees ( 1 ) — 19 — Less: Segment provision (benefit) for income taxes 22 — 13 ( 2 ) Segment adjusted operating income (loss) $ 133 $ — $ 79 $ ( 7 ) The tables below present a reconciliation of significant components of segment information to the comparable consolidated amounts. Reconciliation of Segment Information to Consolidated Information First Quarter 2022 Equity in Earnings (Losses) of Investees Less: Net Income (Loss) Attributable to AGL Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests (in millions) Segments: Insurance $ 278 $ 122 $ ( 1 ) $ 22 $ — $ 133 Asset Management 39 39 — — — — Total segments 317 161 ( 1 ) 22 — 133 Corporate division 1 34 — — — ( 33 ) Other 14 5 ( 10 ) — 9 ( 10 ) Subtotal 332 200 ( 11 ) 22 9 90 Reconciling items: Realized gains (losses) on investments 3 — — — — 3 Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives ( 7 ) ( 4 ) — — — ( 3 ) Fair value gains (losses) on CCS 1 — — — — 1 Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves ( 29 ) — — — — ( 29 ) Tax effect — — — ( 4 ) — 4 Total consolidated $ 300 $ 196 $ ( 11 ) $ 18 $ 9 $ 66 10 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Reconciliation of Segment Information to Consolidated Information First Quarter 2021 Equity in Earnings (Losses) of Investees Less: Net Income (Loss) Attributable to AGL Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests (in millions) Segments: Insurance $ 179 $ 106 $ 19 $ 13 $ — $ 79 Asset Management 20 29 — ( 2 ) — ( 7 ) Total segments 199 135 19 11 — 72 Corporate division — 32 — ( 3 ) — ( 29 ) Other 21 7 ( 10 ) — 4 — Subtotal 220 174 9 8 4 43 Reconciling items: Realized gains (losses) on investments ( 3 ) — — — — ( 3 ) Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives ( 22 ) ( 3 ) — — — ( 19 ) Fair value gains (losses) on CCS ( 19 ) — — — — ( 19 ) Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves 1 — — — — 1 Tax effect — — — ( 8 ) — 8 Total consolidated $ 177 $ 171 $ 9 $ — $ 4 $ 11 3. Outstanding Exposure The Company sells credit protection primarily in financial guaranty insurance form. Until 2009, the Company also sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily credit default swaps (CDS). The Company’s contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for its financial guaranty insurance contracts. The Company has not entered into any new CDS in order to sell credit protection in the U.S. since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributed to the Company not entering into such new CDS in the U.S. since 2009. The Company has, however, acquired or reinsured portfolios since 2009 that include financial guaranty contracts in credit derivative form. The Company also writes specialty insurance and reinsurance that is consistent with its risk profile and benefits from its underwriting experience and other types of financial guarantees not subject to insurance accounting guidance. The Company seeks to limit its exposure to losses by underwriting obligations that it views to be investment grade at inception, although on occasion it may underwrite new issuances that it views to be below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled exposures. The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies, providing reinsurance on a portfolio of insurance or reassuming a portfolio of reinsurance it had previously ceded; in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction. The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, generally requires subordination or collateral to protect it from loss. Reinsurance may be used in order to reduce net exposure to certain insured transactions. Public finance obligations insured by the Company primarily consist of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public 11 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued purposes, including utilities, toll roads, healthcare facilities and government office buildings. The Company also includes within public finance obligations similar obligations issued by territorial and non-U.S. sovereign and sub-sovereign issuers and governmental authorities. Structured finance obligations insured by the Company are generally issued by special purpose entities, including VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Unless otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated. The Company also provides specialty insurance and reinsurance on transactions without special purpose entities but with risk profiles similar to those of its structured finance exposures written in financial guaranty form. Surveillance Categories The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review of each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and generally reflect an approach similar to that employed by the rating agencies, except that the Company’s internal credit ratings focus on future performance rather than lifetime performance. The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as being the higher of ‘AA’ or their current internal rating. Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect its internal ratings. The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector. Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter, although the Company may also review a rating in response to developments impacting a credit when a ratings review is not scheduled. For assumed exposures, the Company may use the ceding company’s credit ratings of transactions where it is impractical for it to assign its own rating. Exposures identified as BIG are subjected to further review to determine the probability of a loss. See Note 4, Expected Loss to be Paid (Recovered), for additional information. Surveillance personnel then assign each BIG transaction to one of the three BIG surveillance categories described below based upon whether a future loss is expected and whether a claim has been paid. The Company uses the tax-equivalent yield of the relevant subsidiary’s investment portfolio to calculate the present value of projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG surveillance category to a transaction. For financial statement measurement purposes, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss. More extensive monitoring and intervention are employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. For purposes of determining the appropriate surveillance category, the Company expects “future losses” on a transaction when the Company believes there is at least a 50 % chance that, on a present value basis, it will in the future pay claims on that transaction that will not be fully reimbursed. The three BIG surveillance categories are: • BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected. • BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims, which are claims that the Company expects to be reimbursed within one year ) have yet been paid. • BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid. 12 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Impact of COVID-19 Pandemic Variants of COVID-19 continue to spread throughout the world, while the production, acceptance, and distribution of vaccines and therapeutics 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 and therapeutics 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. 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 intermittent closures and capacity and travel restrictions or an economic downturn. Given significant federal funding in 2021 and the performance it observed, the Company’s surveillance department has reduced these supplemental procedures, but 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 has paid only relatively small insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19, and has already received reimbursement for most of those claims. Financial Guaranty Exposure The Company measures its financial guaranty exposure in terms of (i) gross and net par outstanding and (ii) gross and net debt service. The Company typically guarantees the payment of debt service when due. Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure. Gross par outstanding generally represents the principal amount of the insured obligation at a point in time. Net par outstanding equals gross par outstanding net of any reinsurance. The Company includes in its par outstanding calculation the impact of any consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date. Foreign denominated net par outstanding is translated at the spot rate at the end of the reporting period. The Company has, from time to time, purchased securities that it has insured, and for which it had expected losses to be paid (loss mitigation securities), in order to mitigate the economic effect of insured losses. The Company excludes amounts attributable to loss mitigation securities from par and debt service outstanding, and instead includes such amounts in the investment portfolio, because the Company manages such securities as investments and not insurance exposure. As of March 31, 2022 and December 31, 2021, the Company excluded from net par outstanding $ 1.2 billion and $ 1.3 billion, respectively, attributable to loss mitigation securities. Gross debt service outstanding represents the sum of all estimated future debt service payments on the insured obligations, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any reinsurance. Future debt service payments include the impact of any consumer price index inflator after the reporting date, as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date. The Company calculates its debt service outstanding as follows: • for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company’s public finance transactions), as the total estimated contractual future debt service due through maturity, regardless of whether the obligations may be called and regardless of whether, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, the Company believes the obligations will be repaid prior to contractual maturity; and • for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (RMBS)), as the total estimated expected future debt service due on insured obligations through their respective expected terms, which includes the Company’s expectations as to whether the obligations may be called and, in the case of obligations where 13 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity. The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates and assumptions for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract. Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors. Financial Guaranty Portfolio Debt Service and Par Outstanding As of March 31, 2022 As of December 31, 2021 Gross Net Gross Net (in millions) Debt Service Public finance $ 352,611 $ 352,285 $ 357,694 $ 357,314 Structured finance 9,734 9,704 10,076 10,046 Total financial guaranty $ 362,345 $ 361,989 $ 367,770 $ 367,360 Par Outstanding Public finance $ 224,763 $ 224,463 $ 227,507 $ 227,164 Structured finance 8,946 8,916 9,258 9,228 Total financial guaranty $ 233,709 $ 233,379 $ 236,765 $ 236,392 In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $ 1,174 million of public finance direct gross par and $ 860 million of structured finance direct gross par as of March 31, 2022. These commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts. Financial Guaranty Portfolio by Internal Rating As of March 31, 2022 Public Finance U.S. Public Finance Non-U.S. Structured Finance U.S Structured Finance Non-U.S Total Rating Category Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % (dollars in millions) AAA $ 270 0.2 % $ 2,102 4.3 % $ 757 9.3 % $ 482 59.1 % $ 3,611 1.5 % AA 16,472 9.4 3,975 8.2 4,633 57.2 21 2.7 25,101 10.8 A 94,442 53.6 10,382 21.4 801 9.9 156 19.1 105,781 45.3 BBB 61,039 34.7 31,486 64.9 566 7.0 156 19.1 93,247 40.0 BIG 3,734 2.1 561 1.2 1,344 16.6 — — 5,639 2.4 Total net par outstanding $ 175,957 100.0 % $ 48,506 100.0 % $ 8,101 100.0 % $ 815 100.0 % $ 233,379 100.0 % 14 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Financial Guaranty Portfolio by Internal Rating As of December 31, 2021 Public Finance U.S. Public Finance Non-U.S. Structured Finance U.S Structured Finance Non-U.S Total Rating Category Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % (dollars in millions) AAA $ 272 0.2 % $ 2,217 4.5 % $ 806 9.6 % $ 493 57.7 % $ 3,788 1.6 % AA 16,372 9.2 4,205 8.4 4,760 56.8 22 2.6 25,359 10.7 A 94,459 53.3 10,659 21.3 813 9.7 160 18.7 106,091 44.9 BBB 60,744 34.3 32,264 64.6 611 7.3 179 21.0 93,798 39.7 BIG 5,372 3.0 600 1.2 1,384 16.6 — — 7,356 3.1 Total net par outstanding $ 177,219 100.0 % $ 49,945 100.0 % $ 8,374 100.0 % $ 854 100.0 % $ 236,392 100.0 % Financial Guaranty Portfolio Components of BIG Net Par Outstanding As of March 31, 2022 BIG Net Par Outstanding Net Par BIG 1 BIG 2 BIG 3 Total BIG Outstanding (in millions) Public finance: U.S. public finance $ 1,462 $ 116 $ 2,156 $ 3,734 $ 175,957 Non-U.S. public finance 518 — 43 561 48,506 Public finance 1,980 116 2,199 4,295 224,463 Structured finance: U.S. RMBS 53 81 1,095 1,229 2,277 Other structured finance — 39 76 115 6,639 Structured finance 53 120 1,171 1,344 8,916 Total $ 2,033 $ 236 $ 3,370 $ 5,639 $ 233,379 Financial Guaranty Portfolio Components of BIG Net Par Outstanding As of December 31, 2021 BIG Net Par Outstanding Net Par BIG 1 BIG 2 BIG 3 Total BIG Outstanding (in millions) Public finance: U.S. public finance $ 1,765 $ 116 $ 3,491 $ 5,372 $ 177,219 Non-U.S. public finance 556 — 44 600 49,945 Public finance 2,321 116 3,535 5,972 227,164 Structured finance: U.S. RMBS 121 24 1,120 1,265 2,391 Other structured finance 1 41 77 119 6,837 Structured finance 122 65 1,197 1,384 9,228 Total $ 2,443 $ 181 $ 4,732 $ 7,356 $ 236,392 15 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Financial Guaranty Portfolio BIG Net Par Outstanding and Number of Risks As of March 31, 2022 Net Par Outstanding Number of Risks (2) Description Financial Guaranty Insurance (1) Credit Derivatives Total Financial Guaranty Insurance (1) Credit Derivatives Total (dollars in millions) BIG: Category 1 $ 2,027 $ 6 $ 2,033 108 1 109 Category 2 225 11 236 20 2 22 Category 3 3,327 43 3,370 127 8 135 Total BIG $ 5,579 $ 60 $ 5,639 255 11 266 Financial Guaranty Portfolio BIG Net Par Outstanding and Number of Risks As of December 31, 2021 Net Par Outstanding Number of Risks (2) Description Financial Guaranty Insurance (1) Credit Derivatives Total Financial Guaranty Insurance (1) Credit Derivatives Total (dollars in millions) BIG: Category 1 $ 2,429 $ 14 $ 2,443 117 2 119 Category 2 177 4 181 16 1 17 Category 3 4,687 45 4,732 129 8 137 Total BIG $ 7,293 $ 63 $ 7,356 262 11 273 _____________________ (1) Includes FG VIEs. (2) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. Exposure to Puerto Rico The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $ 2,237 million net par outstanding as of March 31, 2022, a decrease of $ 1,335 million from the $ 3,572 million net par outstanding as of December 31, 2021. All of the Company’s insured exposure to Puerto Rico is rated BIG. The Company has paid claims as a result of payment defaults on all of its outstanding Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR). On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA established a seven-member Financial Oversight and Management Board (the FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under Chapter 9 of the United States Bankruptcy Code (Bankruptcy Code). After over five years of negotiations, on March 15, 2022, a substantial portion of the Company’s Puerto Rico exposure was resolved in accordance with three orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico): • On January 18, 2022, the Federal District Court of Puerto Rico, acting under Title III of PROMESA, entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority (GO/PBA Plan). The GO/PBA Plan restructured approximately $ 35 billion of 16 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued debt (including the Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) bonds insured by the Company) and other claims against the government of Puerto Rico and certain entities as well as $ 50 billion in pension obligations (none of the pension obligations are insured by the Company), all consistent with the terms of the settlement embodied in a revised GO and PBA plan support agreement (PSA) entered into by AGM and AGC on February 22, 2021, with certain other stakeholders, the Commonwealth, and the FOMB (GO/PBA PSA). • On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of the Puerto Rico Convention Center District Authority (PRCCDA). • On January 20, 2022, the Federal District Court of Puerto Rico, acting under Title VI of PROMESA, entered another order under Title VI of PROMESA (PRIFA Modification) modifying certain debt of the Puerto Rico Infrastructure Financing Authority (PRIFA). As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification (together, the March Puerto Rico Resolutions), including claim payments made by the Company under the March Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO and PBA was greatly reduced. The Company is continuing its efforts to resolve two other Puerto Rico insured exposures that are in payment default, the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Electric Power Authority (PREPA). Both economic and political developments, including those related to the COVID-19 pandemic, may impact any resolution of the Company’s PRHTA and PREPA insured exposures and the value of the consideration the Company has received in connection with the March Puerto Rico Resolutions or may receive in the future in connection with any future resolutions of the Company’s PRHTA and/or PREPA insured exposures. The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company’s results of operations and shareholders’ equity. Puerto Rico GO and PBA As of March 31, 2022, the Company had remaining $ 47 million of insured net par outstanding of GO bonds and $ 5 million of insured net par outstanding of PBA bonds, consisting of direct exposure, second-to-pay exposure, and assumed reinsurance exposure. Direct Second-to-Pay Assumed Total (in millions) GO $ 36 $ 10 $ 1 $ 47 PBA 5 — — 5 Total GO and PBA $ 41 $ 10 $ 1 $ 52 Under the GO/PBA Plan the Company received (including amounts received in connection with the second election described further below): • $ 530 million in cash, net of ceded reinsurance, • $ 605 million of new recovery bonds (see Note 7, Investments and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and • $ 258 million of contingent value instruments (CVIs) (see Note 7, Investments and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the original notional value, net of ceded reinsurance. The Company expects to receive amounts in addition to the amounts listed above (and to make additional payments) in connection with its $ 1 million in net outstanding par of assumed reinsurance and $ 10 million in net outstanding par of second-to-pay exposure. The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The Company has sold a portion of the new recovery bonds and CVIs it received on March 15, 2022, and may sell in the future 17 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued any new recovery bonds or CVIs it continues to hold. The fair value of any new recovery bonds or CVIs the Company retains will fluctuate. Any gains or losses on sales of new recovery bonds and CVIs relative to their values on March 15, 2022, were and will be reported as realized gains and losses on investments, rather than loss and LAE. The notional amount of the CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time. In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of payments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the principal of all GO bonds and PBA bonds insured by the Company was accelerated against the Commonwealth and became due and payable as of March 15, 2022. With respect to certain insured securities covered by the GO/PBA Plan, insured bondholders were permitted to elect either: (i) to receive on March 15, 2022, 100 % of the then outstanding principal amount of insured bonds plus accrued interest; or (ii) to receive custody receipts that represent an interest in the legacy insurance policy plus cash, new recovery bonds and CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan. For those who made the second election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100 % of the then outstanding principal amount of insured bonds plus accrued interest. As of March 31, 2022, the net insured par outstanding under the legacy GO and PBA insurance policies was $ 41 million, and constituted all of the Company’s remaining net par exposure to the GO and PBA bonds it had directly insured. PRCCDA and PRIFA As of March 31, 2022, the Company had no insured net par outstanding of PRCCDA or PRIFA obligations remaining. Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $ 47 million in cash (net of ceded reinsurance) and $ 98 million in notional amount of CVIs (net of ceded reinsurance). PRHTA As of March 31, 2022, the Company had $ 1.3 billion of insured net par outstanding that is covered by a PSA with respect to PRHTA entered into on May 5, 2021, by AGM and AGC and certain other stakeholders, the Commonwealth, and the FOMB (the HTA PSA): $ 799 million insured net par outstanding of PRHTA (transportation revenue) bonds and $ 457 million insured net par outstanding of PRHTA (highway revenue) bonds. The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on taxes on crude oil, unfinished oil and derivative products. The highway revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls. The HTA PSA provides for payments to AGM and AGC consisting of: (i) cash; (ii) new bonds expected to be backed by toll revenue (Toll Bonds); and (iii) a CVI. The HTA PSA contemplates a Title III proceeding requiring court approval of a disclosure statement, solicitation and voting process, and a plan confirmation hearing. On May 2, 2022, the FOMB took the first step in this process by filing with the Title III Court a plan of adjustment for HTA (HTA Plan) which it believes to be consistent with the HTA PSA. The HTA PSA includes a number of conditions and the HTA Plan is subject to confirmation by the Title III Court, so there can be no assurance that the consensual resolution for PRHTA embodied in the HTA PSA will be achieved in its current form, or at all. On February 22, 2022, the FOMB certified a revised fiscal plan for PRHTA generally consistent with the HTA PSA. PREPA As of March 31, 2022, the Company had $ 748 million insured net par outstanding of PREPA obligations. The PREPA obligations are secured by a lien on the revenues of the electric system. On May 3, 2019, AGM and AGC entered into a restructuring support agreement with respect to PREPA with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022. 18 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order, in an action initiated by AGM and ACG in 2017, appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that mediation shall terminate on June 1, 2022, unless extended by the PREPA mediation team to July 1, 2022. The last revised fiscal plan for PREPA was certified by the FOMB on May 27, 2021. Other Puerto Rico Exposures All debt service payments for the Company’s remaining Puerto Rico exposures have been made in full by the obligors as of the date of this filing. Such exposures comprise: MFA. As of March 31, 2022, the Company had $ 179 million insured net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues. U of PR. As of March 31, 2022, the Company had $ 1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds. PRASA. As of March 31, 2022, the Company had $ 1 million insured net par outstanding of PRASA obligations. The Company’s insured PRASA obligations are secured by a lien on the gross revenues of the water and sewer system. Puerto Rico Litigation Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its instrumentalities on debt service payments, and related matters, and the Company is a party to a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to Puerto Rico obligations which the Company insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party. A number of legal actions involving the Company and relating to PRCCDA and PRIFA, as well as claims related to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022 in connection with the consummation of the March Puerto Rico Resolutions. All other proceedings remain stayed pending the Court’s determination on plans of adjustment or other proceedings related to PRHTA and PREPA. Remaining Stayed Proceedings . The following Puerto Rico proceedings in which the Company is involved remain stayed: • On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court of Puerto Rico to compel the FOMB to certify the PREPA RSA for implementation under Title VI of PROMESA. On July 21, 2017, considering its PREPA Title III petition on July 2, 2017, the FOMB filed a notice of stay under PROMESA. • On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14, 2017, but on August 8, 2018, the First Circuit vacated and remanded the court’s decision. On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver. On May 3, 2019, AGM and AGC entered into the PREPA RSA, but on March 8, 2022, the Commonwealth and PREPA terminated the PREPA RSA. Given the termination of the PREPA RSA, the Company is considering several options to enforce its rights in respect of insured PREPA bonds, including, among other things, a renewal of the motion to lift the automatic stay and seek the appointment of a receiver. On April 8, 2022, Judge Swain issued an order appointing as members of the PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that mediation shall terminate on June 1, 2022, unless extended by the PREPA mediation team to July 1, 2022. 19 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued • On May 20, 2019, the FOMB and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court of Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters, which include this proceeding, through November 30, 2019, with a mandatory mediation element; Judge Swain extended the stay through December 31, 2019, and subsequently extended the stay again pending further order of the court on the understanding that these issues will be resolved in other proceedings. • On September 30, 2019, certain fuel line lenders filed an amended adversary complaint against the FOMB and other parties, including AGC and AGM, seeking subordination of PREPA bondholder claims to fuel line lender claims. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Title III Court issued an order to that effect. • On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Title III Court issued an order to that effect. • On January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court of Puerto Rico against AGM and AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims. Considering the PSA, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC. Puerto Rico Par and Debt Service Schedules All Puerto Rico exposures are internally rated BIG. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. Puerto Rico Gross Par and Gross Debt Service Outstanding Gross Par Outstanding Gross Debt Service Outstanding As of As of March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 (in millions) Exposure to Puerto Rico $ 2,256 $ 3,629 $ 3,169 $ 5,322 20 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Puerto Rico Net Par Outstanding As of March 31, 2022 December 31, 2021 (in millions) Puerto Rico Exposures Subject to a Plan or Support Agreement Commonwealth of Puerto Rico - GO (1) $ 47 $ 1,097 PBA (1) 5 122 Total GO/PBA Plan 52 1,219 PRHTA (Transportation revenue) 799 799 PRHTA (Highway revenue) 457 457 PRCCDA (2) — 152 Total HTA/CCDA PSA 1,256 1,408 PRIFA (2) — 16 Total Subject to a Plan or Support Agreement 1,308 2,643 Other Puerto Rico Exposures PREPA 748 748 MFA (3) 179 179 PRASA and U of PR (3) 2 2 Total Other Puerto Rico Exposures 929 929 Total net exposure to Puerto Rico $ 2,237 $ 3,572 ____________________ (1) On March 15, 2022, the Modified Eighth Amended Title III Joint Plan of Adjustment, confirmed on January 18, 2022, was consummated, pursuant to which the Company, among other things, fully paid claims on all of its directly insured Puerto Rico GO bonds, other than certain GO bonds whose holders made certain elections. On the same date and pursuant to the same Plan of Adjustment, the Company fully paid claims on all of its directly insured PBA bonds, other than certain PBA bonds whose holders made certain elections. (2) On March 15, 2022, the Company fully paid claims on all of its insured PRCCDA and PRIFA bonds, eliminating its exposure to insured PRCCDA and PRIFA bonds, pursuant to Title VI orders entered on January 20, 2022. (3) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company. The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees payments of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors. 21 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Amortization Schedule of Puerto Rico Net Par Outstanding and Net Debt Service Outstanding As of March 31, 2022 Scheduled Net Par Amortization Scheduled Net Debt Service Amortization (in millions) 2022 (April 1 - June 30) $ — $ 3 2022 (July 1 - September 30) 159 213 2022 (October 1 - December 31) — 3 Subtotal 2022 159 219 2023 186 289 2024 149 243 2025 151 237 2026 170 249 2027-2031 639 935 2032-2036 577 732 2037-2041 201 237 2042 5 5 Total $ 2,237 $ 3,146 Exposure to the U.S. Virgin Islands As of March 31, 2022, the Company had $ 443 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rated $ 185 million BIG (down from $ 469 million BIG as of December 31, 2021). During First Quarter 2022, the Company upgraded $ 256 million insured par net outstanding of USVI bonds in anticipation of a legal defeasance of such bonds, which occurred on April 6, 2022. The $ 185 million of BIG USVI net par outstanding consisted of: (i) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI; and (ii) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system. The COVID-19 pandemic and evolving governmental and private responses to the pandemic have been impacting the USVI economy, especially the tourism sector. The USVI continues to benefit from the federal response to the 2017 hurricanes and COVID-19, has seen improvement in portions of the tourism sector, recently took actions to address its pension shortfalls, and has made its debt service payments to date. Specialty Insurance and Reinsurance Exposure The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. As of both March 31, 2022 and December 31, 2021, gross exposure of $ 144 million and net exposure of $ 84 million of aircraft residual value insurance was rated BIG. All other exposures in the table below are investment-grade quality. Specialty Insurance and Reinsurance Exposure As of March 31, 2022 As of December 31, 2021 Gross Exposure Net Exposure Gross Exposure Net Exposure (in millions) Life insurance transactions (1) $ 1,261 $ 890 $ 1,250 $ 871 Aircraft residual value insurance policies 355 200 355 200 Total $ 1,616 $ 1,090 $ 1,605 $ 1,071 ____________________ (1) The life insurance transactions’ net exposure is projected to reach $ 1.1 billion by March 31, 2026. Guarantee On March 31, 2022, the Company’s subsidiary, AGRO, entered into an agreement (internally rated AA) which guarantees the receipt of a minimum rental income from a multifamily and commercial real estate portfolio. AGRO’s attachment point is significantly below current annual rental income, and further protective provisions are triggered when rental 22 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued income falls below a certain level. In addition, AGRO is entitled to be reimbursed for any claims made on the guarantee from future rental income generated by the portfolio. The Company’s maximum potential exposure under the guarantee was $ 257 million as of March 31, 2022. The Company accounts for the guarantee in accordance with Accounting Standards Codification (ASC) 460, Guarantees. 4. Expected Loss to be Paid (Recovered) Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted estimates of all possible scenarios. Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to it. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk management activities. Expected loss to be paid (recovered) is important from a liquidity perspective in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts. Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio. The Company monitors and assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio. In circumstances where the Company has purchased its own insured obligations that had expected losses, and in cases where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and the asset received is prospectively accounted for under the applicable guidance for that instrument. Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. The insured portfolio includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary models are: (1) insurance, as described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under the following accounting models : insurance, derivative and FG VIE. Loss Estimation Process The Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions, scenarios and the probabilities they assign to those scenarios based on actual developments during the period and their view of future performance. The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such financial guaranties. As a result, the Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over 23 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the life of most contracts. The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities. Such information includes management’s view of the potential impact of COVID-19 on its distressed exposures. Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction. Changes over a reporting period in the Company’s loss estimates for municipal obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables. Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables. Actual losses will ultimately depend on future events or transaction performance and may be influenced by many interrelated factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to considerable volatility and may not reflect the Company’s ultimate claims paid. In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which uses cash but reduces projected future losses. 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 First Quarter Accounting Model March 31, 2022 December 31, 2021 2022 2021 (in millions) Insurance (see Note 5) $ 388 $ 364 $ ( 44 ) $ 16 FG VIEs (see Note 8) 38 42 ( 4 ) ( 6 ) Credit derivatives (see Note 6) 6 5 4 3 Total $ 432 $ 411 $ ( 44 ) $ 13 The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under , which are accounted for under one of the following accounting models: insurance, derivative and FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 0.00 % to 2.61 % with a weighted average of 2.26 % as of March 31, 2022 and 0.00 % to 1.98 % with a weighted average of 1.02 % as of December 31, 2021. Expected losses to be paid 24 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued for U.S. dollar denominated transactions represented approximately 98.0 % and 97.2 % of the total as of March 31, 2022 and December 31, 2021, respectively. Net Expected Loss to be Paid (Recovered) Roll Forward First Quarter 2022 2021 (in millions) Net expected loss to be paid (recovered), beginning of period $ 411 $ 529 Economic loss development (benefit) due to: Accretion of discount 2 1 Changes in discount rates ( 47 ) ( 48 ) Changes in timing and assumptions 1 60 Total economic loss development (benefit) ( 44 ) 13 Net (paid) recovered losses 65 ( 70 ) Net expected loss to be paid (recovered), end of period $ 432 $ 472 Net Expected Loss to be Paid (Recovered) Roll Forward by Sector First Quarter 2022 Sector Net Expected Loss to be Paid (Recovered) as of December 31, 2021 Economic Loss Development (Benefit) Net (Paid) Recovered Losses (1) Net Expected Loss to be Paid (Recovered) as of March 31, 2022 (in millions) Public finance: U.S. public finance $ 197 $ ( 48 ) $ 32 $ 181 Non-U.S. public finance 12 ( 2 ) — 10 Public finance 209 ( 50 ) 32 191 Structured finance: U.S. RMBS 150 7 38 195 Other structured finance 52 ( 1 ) ( 5 ) 46 Structured finance 202 6 33 241 Total $ 411 $ ( 44 ) $ 65 $ 432 25 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued First Quarter 2021 Sector Net Expected Loss to be Paid (Recovered) as of December 31, 2020 Economic Loss Development (Benefit) Net (Paid) Recovered Losses (1) Net Expected Loss to be Paid (Recovered) as of March 31, 2021 (in millions) Public finance: U.S. public finance $ 305 $ 15 $ ( 92 ) $ 228 Non-U.S. public finance 36 ( 12 ) — 24 Public finance 341 3 ( 92 ) 252 Structured finance: U.S. RMBS 148 11 22 181 Other structured finance 40 ( 1 ) — 39 Structured finance 188 10 22 220 Total $ 529 $ 13 $ ( 70 ) $ 472 ____________________ (1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in other assets. The tables above include (a) LAE paid of $ 13 million and $ 4 million for First Quarter 2022 and First Quarter 2021, respectively, and (b) expected LAE to be paid of $ 17 million as of March 31, 2022 and $ 26 million as of December 31, 2021. Ceded expected loss to be recovered (paid) was $( 2 ) million as of March 31, 2022 and $ 10 million as of December 31, 2021. Selected U.S. Public Finance Transactions The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $ 2.2 billion net par outstanding as of March 31, 2022, all of which was BIG. For additional information regarding the Company’s Puerto Rico exposure, see “Exposure to Puerto Rico” in Note 3, Outstanding Exposure. On March 15, 2022, the GO/PBA Plan, PRCCDA Modification, and PRIFA Modification were consummated, as described under “Exposure to Puerto Rico” in Note 3, Outstanding Exposure. The fair value of recoveries received under these March Puerto Rico Resolutions (which included cash, new recovery bonds and CVIs) was higher than expected. The Company also updated its assumptions for certain other defaulted Puerto Rico credits that have not yet been settled. On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the Bankruptcy Code became effective. As of March 31, 2022, the Company’s net par outstanding subject to the plan consisted of $ 100 million of pension obligation bonds. As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth. The Company projects its total net expected loss to be paid across its troubled U.S. public finance exposures as of March 31, 2022, including those mentioned above, to be $ 181 million, compared with $ 197 million as of December 31, 2021. The economic benefit for U.S. public finance transactions was $ 48 million during First Quarter 2022, which was primarily attributable to Puerto Rico exposures and changes in discount rates. The changes attributable to the Company’s Puerto Rico exposures reflect adjustments the Company made to the assumptions it used in its scenarios and valuation of certain recovery components based on the public information as discussed under “Exposure to Puerto Rico” in Note 3, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period. Selected Non - U.S. Public Finance Transactions Expected loss to be paid for non-U.S. public finance transactions was $ 10 million as of March 31, 2022, compared with $ 12 million as of December 31, 2021. The economic benefit for non-U.S. public finance transactions was approximately $ 2 million during First Quarter 2022. 26 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued U.S. RMBS Loss Projections The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any expected representation and warranty (R&W) recoveries/payables to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend. The assumptions that the Company uses to project RMBS losses are shown in the sections below. Net Economic Loss Development (Benefit) U.S. RMBS First Quarter 2022 2021 First lien U.S. RMBS $ 18 $ 25 Second lien U.S. RMBS ( 11 ) ( 14 ) First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss projections in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third-party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories. 27 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued First Lien Liquidation Rates As of March 31, 2022 December 31, 2021 Current but recently delinquent Alt-A and Prime 20 % 20 % Option ARM 20 20 Subprime 20 20 30 – 59 Days Delinquent Alt-A and Prime 35 35 Option ARM 35 35 Subprime 30 30 60 – 89 Days Delinquent Alt-A and Prime 40 40 Option ARM 45 45 Subprime 40 40 90+ Days Delinquent Alt-A and Prime 55 55 Option ARM 60 60 Subprime 45 45 Bankruptcy Alt-A and Prime 45 45 Option ARM 50 50 Subprime 40 40 Foreclosure Alt-A and Prime 60 60 Option ARM 65 65 Subprime 55 55 Real Estate Owned All 100 100 While the Company uses the liquidation rates above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a conditional default rate (CDR) curve. The start of that CDR curve is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans. In the most heavily weighted scenario (the base case), after the initial 36 -month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20 % of its CDR plateau); that intermediate CDR is held constant and then steps to a final CDR of 5 % of the CDR plateau. In the base case, the Company assumes the final CDR will be reached 1.25 years after the initial 36 -month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36 -month period represent defaults attributable to borrowers that are currently performing or are projected to re-perform. Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. The Company assumes in the base case that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base case that the recent levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities 28 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued begin returning to levels consistent with underwriting assumptions beginning after the initial 18 -month period, declining to 40 % in the base case over 2.5 years. The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS. Key Assumptions in Base Case Expected Loss Estimates First Lien U.S. RMBS As of March 31, 2022 As of December 31, 2021 Range Weighted Average Range Weighted Average Alt-A and Prime: Plateau CDR 1.7 % - 14.0 % 6.1 % 0.9 % - 11.6 % 5.9 % Final CDR 0.1 % - 0.7 % 0.3 % 0.0 % - 0.6 % 0.3 % Initial loss severity: 2005 and prior 60 % 60 % 2006 60 % 60 % 2007+ 60 % 60 % Option ARM: Plateau CDR 1.2 % - 11.1 % 5.3 % 1.8 % - 11.9 % 5.6 % Final CDR 0.1 % - 0.6 % 0.3 % 0.1 % - 0.6 % 0.3 % Initial loss severity: 2005 and prior 60 % 60 % 2006 60 % 60 % 2007+ 60 % 60 % Subprime: Plateau CDR 2.5 % - 9.8 % 6.1 % 2.9 % - 10.0 % 6.0 % Final CDR 0.1 % - 0.5 % 0.3 % 0.1 % - 0.5 % 0.3 % Initial loss severity: 2005 and prior 60 % 60 % 2006 60 % 60 % 2007+ 60 % 60 % The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary conditional prepayment rate (CPR) follows a pattern similar to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15 % in the base case. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for December 31, 2021. The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes that 20 % of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans. In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5 % of the initial CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of March 31, 2022 and December 31, 2021. 29 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Total expected loss to be paid on all first lien U.S. RMBS was $ 204 million and $ 167 million as of March 31, 2022 and December 31, 2021, respectively. T he $ 18 million economic loss development in First Quarter 2022 for first lien U.S. RMBS transactions was primarily attributable to lower excess spread, offset in part by changes in discount rates. Certain transactions benefit from exc ess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt lin ked to LIBOR. An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. LIBOR is anticipated to be discontinued after June 30, 2023, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio refer encing LIBOR. The Company used a similar approach to establish its pessimistic and optimistic scenarios as of March 31, 2022 as it used as of December 31, 2021, increasing and decreasing the periods of stress from those used in the base case. In the Company’s most stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 15 months, expected loss to be paid would increase from current projections by approximately $ 20 million for all first lien U.S. RMBS transactions. In the Company’s least stressful scenario where the CDR plateau was six months shorter ( 30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over nine months ), expected loss to be paid would decrease from current projections by approximately $ 12 million for all first lien U.S. RMBS transactions. Second Lien U.S. RMBS Loss Projections Second lien RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions. Expected losses are also a function of the structure of the transaction, the CPR of the collateral, the interest rate environment and assumptions about loss severity. In second lien transactions, the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six months by calculating current representative liquidation rates. Similar to first liens, the Company then calculates a CDR for six months , which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau CDR period that follows the embedded plateau losses. For the base case scenario, the CDR (the plateau CDR) was held constant for six months . Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, representing six months of delinquent loan liquidations, followed by 28 months of decrease to the steady state CDR, the same as of December 31, 2021. HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years ) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. The HELOC loans underlying the Company’s insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans were modified to extend the original interest-only period. The Company does not apply a CDR increase when such loans are projected to reach their principal amortization period due to the likelihood that those loans will either prepay or once again have their interest-only periods extended. The Company applies a CDR floor of 1.0 % for the future steady state CDR on all its HELOC transactions. When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of March 31, 2022 and December 31, 2021, that it will generally recover 2 % of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time. A second lien on the borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual 30 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued recoveries of charged-off loans observed from period to period. In instances where the Company is able to obtain information on the lien status of charged-off loans, it assumes there will be a certain level of future recoveries of the balance of the charged-off loans where the second lien is still intact. The Company’s recovery assumption for charged-off loans is 30 %, as shown in the table below, based on recent observed trends. Such recoveries are assumed to be received evenly over the next five years . If the recovery rate decreases to 20 %, expected loss to be paid would increase from current projections by approximately $ 40 million. If the recovery rate increases to 40 %, expected loss to be paid would decrease from current projections by approximately $ 40 million. The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base case, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15 % for second lien transactions (in the base case), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is consistent with how the Company modeled the CPR as of December 31, 2021. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses. In estimating expected losses, the Company modeled and probability weighted five scenarios, each with a different CDR curve applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate are the primary drivers behind the amount of losses the collateral will likely suffer. The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs. Key Assumptions in Base Case Expected Loss Estimates HELOCs As of March 31, 2022 As of December 31, 2021 Range Weighted Average Range Weighted Average Plateau CDR 3.4 % - 35.3 % 15.8 % 6.5 % - 39.6 % 16.4 % Final CDR trended down to 1.0 % 1.0 % Liquidation rates: Current but recently delinquent 20 % 20 % 30 – 59 Days Delinquent 30 30 60 – 89 Days Delinquent 40 40 90+ Days Delinquent 60 60 Bankruptcy 55 55 Foreclosure 55 55 Real Estate Owned 100 100 Loss severity on future defaults 98 % 98 % Projected future recoveries on previously charged-off loans 30 % 30 % The Company continues to evaluate the assumptions affecting its modeling results. The Company believes the most important driver of its projected second lien RMBS losses is the performance of its HELOC transactions. Total net expected recovery for all second lien U.S. RMBS was $ 9 million as of March 31, 2022 and the net expected recovery was $ 17 million as of December 31, 2021. The economic development in First Quarter 2022 was a benefit of $ 11 million and was primarily driven by improved transaction performance, higher recoveries for previously charged-off loans and changes in discount rates, partially offset by lower excess spread. The Company’s base case assumed a six-month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. In the Company’s most stressful scenario, increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months) would increase the expected loss by approximately $ 5 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, reducing the 31 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10 % would decrease the expected loss by approximately $ 6 million for HELOC transactions. Structured Finance Excluding U.S. RMBS The Company projected that its total net expected loss to be paid across its troubled structured finance exposures, excluding U.S. RMBS, as of March 31, 2022 was $ 46 million. The largest component of these structured finance losses were student loan securitizations issued by private issuers with $ 53 million in BIG net par outstanding. In general, the projected losses of these student loan securitizations are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The Company also had exposure to troubled life insurance transactions with BIG net par of $ 40 million as of March 31, 2022. The economic benefit across all structured finance transactions, excluding U.S. RMBS, during First Quarter 2022 was $ 1 million. Recovery Litigation In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements. The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding Exposure, for a discussion of the Company’s exposure to Puerto Rico and related recovery litigation being pursued by the Company. 5. Contracts Accounted for as Insurance The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 6, Contracts Accounted for as Credit Derivatives, for amounts related to CDS and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs. Premiums Net Earned Premiums First Quarter 2022 2021 (in millions) Financial guaranty insurance: Scheduled net earned premiums $ 79 $ 81 Accelerations from refundings and terminations (1) 128 16 Accretion of discount on net premiums receivable 6 5 Financial guaranty insurance net earned premiums 213 102 Specialty net earned premiums 1 1 Net earned premiums $ 214 $ 103 ____________________ (1) First Quarter 2022 accelerations include $ 104 million related to the March Puerto Rico Resolutions. See Note 3, Outstanding Exposure for additional information. 32 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Gross Premium Receivable, Net of Commissions Payable on Assumed Business Roll Forward First Quarter 2022 2021 (in millions) Beginning of year $ 1,372 $ 1,372 Less: Specialty insurance premium receivable 1 1 Financial guaranty insurance premiums receivable 1,371 1,371 Gross written premiums on new business, net of commissions 61 84 Gross premiums received, net of commissions ( 83 ) ( 103 ) Adjustments: Changes in the expected term 8 2 Accretion of discount, net of commissions on assumed business 6 4 Foreign exchange gain (loss) on remeasurement ( 29 ) — Financial guaranty insurance premium receivable 1,334 1,358 Specialty insurance premium receivable 1 1 March 31, $ 1,335 $ 1,359 Approximately 77 % and 78 % of gross premiums receivable, net of commissions payable at March 31, 2022 and December 31, 2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in expected lives and new business. Financial Guaranty Insurance Expected Future Premium Collections and Earnings As of March 31, 2022 Future Premiums to be Collected (1) Future Net Premiums to be Earned (2) (in millions) 2022 (April 1 - June 30) $ 42 $ 76 2022 (July 1 - September 30) 39 75 2022 (October 1 - December 31) 33 73 Subtotal 2022 114 224 2023 108 279 2024 99 257 2025 88 233 2026 84 217 2027-2031 352 892 2032-2036 246 617 2037-2041 162 366 After 2041 339 505 Total $ 1,592 3,590 Future accretion 259 Total future net earned premiums $ 3,849 ____________________ (1) Net of assumed commissions payable. (2) Net of reinsurance. 33 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Selected Information for Financial Guaranty Insurance Policies with Premiums Paid in Installments As of March 31, 2022 December 31, 2021 (dollars in millions) Premiums receivable, net of commissions payable $ 1,334 $ 1,371 Deferred premium revenue 1,639 1,663 Weighted-average risk-free rate used to discount premiums 1.6 % 1.6 % Weighted-average period of premiums receivable (in years) 12.6 12.7 Losses Loss reserves are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 0.00 % to 2.61 % with a weighted average of 2.26 % as of March 31, 2022 and 0.00 % to 1.98 % with a weighted average of 1.02 % as of December 31, 2021. The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance. Net Reserve (Salvage) by Sector As of Sector March 31, 2022 December 31, 2021 (in millions) Public finance: U.S. public finance $ 127 $ 60 Non-U.S. public finance 1 1 Public finance 128 61 Structured finance: U.S. RMBS 18 ( 24 ) Other structured finance 42 42 Structured finance 60 18 Total $ 188 $ 79 Components of Net Reserve (Salvage) As of March 31, 2022 December 31, 2021 (in millions) Loss and LAE reserve $ 718 $ 869 Reinsurance recoverable on unpaid losses (1) ( 3 ) ( 5 ) Loss and LAE reserve, net 715 864 Salvage and subrogation recoverable ( 529 ) ( 801 ) Salvage and subrogation reinsurance payable (2) 2 16 Salvage and subrogation recoverable, net ( 527 ) ( 785 ) Net reserve (salvage) $ 188 $ 79 ____________________ (1) Reported in “other assets” on the condensed consolidated balance sheets. (2) Reported in “other liabilities” on the condensed consolidated balance sheets. The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid, which represents the claim payments made and recoveries received that have not yet been recognized in the statements of operations, (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid 34 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been established (and therefore expensed but not yet paid). Reconciliation of Net Expected Loss to be Paid (Recovered) to Net Expected Loss to be Expensed Financial Guaranty Insurance Contracts As of March 31, 2022 (in millions) Net expected loss to be paid (recovered) - financial guaranty insurance $ 383 Contra-paid, net 21 Salvage and subrogation recoverable 527 Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance ( 710 ) Net expected loss to be expensed (present value) $ 221 The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation. Net Expected Loss to be Expensed Financial Guaranty Insurance Contracts As of March 31, 2022 (in millions) 2022 (April 1 - June 30) $ 5 2022 (July 1 - September 30) 5 2022 (October 1 - December 31) 5 Subtotal 2022 15 2023 19 2024 18 2025 17 2026 20 2027-2031 73 2032-2036 47 2037-2041 9 After 2041 3 Net expected loss to be expensed 221 Future accretion 167 Total expected future loss and LAE $ 388 The following table presents the loss and LAE reported in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance. 35 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Loss and LAE by Sector First Quarter Sector 2022 2021 (in millions) Public finance: U.S. public finance $ 55 $ 26 Non-U.S. public finance — ( 8 ) Public finance 55 18 Structured finance: U.S. RMBS $ 3 $ 12 Other structured finance ( 1 ) — Structured finance 2 12 Loss and LAE $ 57 $ 30 In each of the years presented, the primary component of U.S. public finance loss and LAE was Puerto Rico exposures. Loss expense is a function of economic loss development, as well as the amortization of unearned premium reserve. In First Quarter 2022, the largest component of loss expense was from the public finance sector, which had loss expense of $ 55 million primarily attributable to Puerto Rico exposures. The public finance sector also had an economic benefit of $ 50 million, which was also primarily attributable to Puerto Rico exposures. The difference between public finance loss expense and economic benefit was primarily attributable to the release of unearned premium reserve associated with extinguished Puerto Rico policies that previously had expected losses. The following tables provide information on financial guaranty insurance contracts categorized as BIG. Financial Guaranty Insurance BIG Transaction Loss Summary As of March 31, 2022 Gross Net Total BIG BIG 1 BIG 2 BIG 3 Total BIG (dollars in millions) Number of risks (1) 108 20 127 255 255 Remaining weighted-average period (in years) 7.6 7.9 8.3 8.1 8.1 Outstanding exposure: Par $ 2,035 $ 225 $ 3,347 $ 5,607 $ 5,579 Interest 867 41 1,173 2,081 2,077 Total (2) $ 2,902 $ 266 $ 4,520 $ 7,688 $ 7,656 Expected cash outflows (inflows) $ 72 $ 68 $ 3,326 $ 3,466 $ 3,453 Potential recoveries (3) ( 394 ) ( 48 ) ( 2,473 ) ( 2,915 ) ( 2,903 ) Subtotal ( 322 ) 20 853 551 550 Discount 24 ( 3 ) ( 189 ) ( 168 ) ( 167 ) Expected losses to be paid (recovered) $ ( 298 ) $ 17 $ 664 $ 383 $ 383 Deferred premium revenue $ 71 $ 9 $ 235 $ 315 $ 313 Reserves (salvage) $ ( 317 ) $ 15 $ 484 $ 182 $ 183 36 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Financial Guaranty Insurance BIG Transaction Loss Summary As of December 31, 2021 Gross Net Total BIG BIG 1 BIG 2 BIG 3 Total BIG (dollars in millions) Number of risks (1) 117 16 129 262 262 Remaining weighted-average period (in years) 7.6 8.9 8.9 8.5 8.5 Outstanding exposure: Par $ 2,437 $ 177 $ 4,745 $ 7,359 $ 7,293 Interest 1,000 36 1,942 2,978 2,962 Total (2) $ 3,437 $ 213 $ 6,687 $ 10,337 $ 10,255 Expected cash outflows (inflows) $ 111 $ 40 $ 4,820 $ 4,971 $ 4,918 Potential recoveries (3) ( 656 ) ( 10 ) ( 3,829 ) ( 4,495 ) ( 4,430 ) Subtotal ( 545 ) 30 991 476 488 Discount 19 ( 3 ) ( 145 ) ( 129 ) ( 129 ) Expected losses to be paid (recovered) $ ( 526 ) $ 27 $ 846 $ 347 $ 359 Deferred premium revenue $ 85 $ 2 $ 350 $ 437 $ 435 Reserves (salvage) $ ( 549 ) $ 25 $ 584 $ 60 $ 74 ____________________ (1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. (2) Includes amounts related to FG VIEs. (3) Represents expected inflows for future payments by obligors pursuant to restructuring agreements, settlements, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past. 6. Contracts Accounted for as Credit Derivatives The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and FG VIEs. Amounts presented in this note relate only to contracts accounted for as derivatives. See Note 5, Contracts Accounted for as Insurance for amounts that relate to insurance and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as FG VIEs. The Company’s credit derivatives (financial guaranty contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps. Credit derivative transactions are governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions. Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a CDS contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions. 37 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 13.4 years and 13.2 years as of March 31, 2022 and December 31, 2021, respectively. Credit Derivatives (1) As of March 31, 2022 As of December 31, 2021 Sector Net Par Outstanding Net Fair Value Asset (Liability) Net Par Outstanding Net Fair Value Asset (Liability) (in millions) U.S. public finance $ 1,487 $ ( 81 ) $ 1,705 $ ( 72 ) Non-U.S. public finance 1,586 ( 46 ) 1,800 ( 48 ) U.S. structured finance 370 ( 27 ) 400 ( 32 ) Non-U.S. structured finance 131 ( 2 ) 135 ( 2 ) Total $ 3,574 $ ( 156 ) $ 4,040 $ ( 154 ) ____________________ (1) Expected loss to be paid was $ 6 million as of March 31, 2022 and $ 5 million as of December 31, 2021. Distribution of Credit Derivative Net Par Outstanding by Internal Rating As of March 31, 2022 As of December 31, 2021 Rating Category Net Par Outstanding % of Total Net Par Outstanding % of Total (dollars in millions) AAA $ 1,359 38.0 % $ 1,503 37.2 % AA 1,217 34.1 1,283 31.8 A 407 11.4 514 12.7 BBB 531 14.8 677 16.7 BIG 60 1.7 63 1.6 Credit derivative net par outstanding $ 3,574 100.0 % $ 4,040 100.0 % Fair Value Gains (Losses) on Credit Derivatives First Quarter 2022 2021 (in millions) Realized gains (losses) and other settlements $ ( 1 ) $ 1 Net unrealized gains (losses) ( 2 ) ( 20 ) Fair value gains (losses) on credit derivatives $ ( 3 ) $ ( 19 ) During First Quarter 2022 unrealized fair value losses were generated primarily as a result of increases in the credit spread of underlying reference obligations, offset in part by the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, increased, the implied spreads that the Company would expect to receive on these transactions, all else being held equal, decreased. During First Quarter 2021, unrealized fair value losses were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC’s credit protection decreased during the period. The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date. 38 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued CDS Spread on AGC (in basis points) As of March 31, 2022 As of December 31, 2021 As of March 31, 2021 As of December 31, 2020 Five-year CDS spread 71 49 97 132 One-year CDS spread 26 16 19 36 Fair Value of Credit Derivative Assets (Liabilities) and Effect of AGC Credit Spread As of March 31, 2022 December 31, 2021 (in millions) Fair value of credit derivatives before effect of AGC credit spread $ ( 229 ) $ ( 225 ) Plus: Effect of AGC credit spread 73 71 Net fair value of credit derivatives $ ( 156 ) $ ( 154 ) The fair value of CDS contracts as of March 31, 2022, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor. 7. Investments Investment Portfolio The investment portfolio consists of both externally and internally managed portfolios. The majority of the investment portfolio is managed by three outside managers and AssuredIM, for which the Company has established investment guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The internally managed portfolio primarily consists of the Company’s investments in: (i) securities acquired for loss mitigation purposes; (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM; (iii) new recovery bonds and CVIs received in connection with the consummation of the March Puerto Rico Resolutions and (iv) other investments including certain fixed-maturity and short-term securities and equity method investments. Equity method investments primarily consist of generally less liquid alternative investments including: an investment in renewable and clean energy and private equity funds. The Company had unfunded commitments of $ 96 million as of March 31, 2022 related to certain of the Company’s alternative investments. 39 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Investment Portfolio Carrying Value As of March 31, 2022 December 31, 2021 (in millions) Fixed-maturity securities, available-for-sale (1): Externally managed $ 6,316 $ 6,843 Loss mitigation securities and other 789 818 AssuredIM managed 537 541 Fixed-maturity securities - Puerto Rico (2) 514 — Fixed-maturity securities - Puerto Rico, trading (3) 174 — Short-term investments (4) 585 1,225 Other invested assets: Equity method investments 145 169 Other 7 12 Total $ 9,067 $ 9,608 ____________________ (1) 7.3 % and 7.5 % of fixed-maturity securities were rated BIG as of March 31, 2022 and December 31, 2021, respectively, consisting primarily of loss mitigation securities. 7.2 % and 0.9 % were not rated, as of March 31, 2022 and December 31, 2021, respectively. (2) Represents new recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions. These securities are not rated. (3) Represents CVIs received in connection with the consummation of the March Puerto Rico Resolutions. These securities are not rated. (4) Weighted average credit rating of AAA as of both March 31, 2022 and December 31, 2021, based on the lower of the Moody’s and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications. The U.S. Insurance Subsidiaries, through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $ 750 million in AssuredIM Funds. As of March 31, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $ 702 million, of which $ 473 million represented net invested capital and $ 229 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, healthcare structured capital and municipal bonds. As of March 31, 2022 and December 31, 2021, the fair value of AGAS’ interest in AssuredIM Funds was $ 559 million and $ 543 million, respectively. AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not reported in “investments” on the condensed consolidated balance sheets, but rather, such AssuredIM Funds are consolidated and reported in “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles”, with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable non-controlling interests. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Accrued investment income, which is recorded in “other assets,” was $ 77 million as of March 31, 2022 and $ 69 million as of December 31, 2021. In First Quarter 2022 and First Quarter 2021, the Company did not write off any accrued investment income. 40 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Available-for-Sale Fixed-Maturity Securities by Security Type As of March 31, 2022 Security Type Percent of Total (1) Amortized Cost Allowance for Credit Losses Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value AOCI (5) Pre-tax Gain (Loss) on Securities with Credit Loss Weighted Average Credit Rating (2) (dollars in millions) Obligations of state and political subdivisions 47 % $ 3,893 $ ( 13 ) $ 115 $ ( 54 ) $ 3,941 $ ( 3 ) A U.S. government and agencies 2 122 — 5 ( 5 ) 122 — AA+ Corporate securities (3) 30 2,469 ( 5 ) 26 ( 102 ) 2,388 ( 44 ) A Mortgage-backed securities (4): RMBS 5 437 ( 18 ) 10 ( 29 ) 400 ( 28 ) BBB+ Commercial mortgage-backed securities (CMBS) 4 321 — 2 ( 1 ) 322 — AAA Asset-backed securities: CLOs 5 440 — — ( 3 ) 437 — A+ Other 5 422 ( 11 ) 22 ( 3 ) 430 ( 2 ) CCC+ Non-U.S. government securities 2 123 — — ( 7 ) 116 ( 1 ) AA- Total available-for-sale fixed-maturity securities 100 % $ 8,227 $ ( 47 ) $ 180 $ ( 204 ) $ 8,156 $ ( 78 ) A- 41 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Available-for-Sale Fixed-Maturity Securities by Security Type As of December 31, 2021 Security Type Percent of Total (1) Amortized Cost Allowance for Credit Losses Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value AOCI Pre-tax Gain (Loss) on Securities with Credit Loss Weighted Average Credit Rating (2) (dollars in millions) Obligations of state and political subdivisions 43 % $ 3,386 $ ( 12 ) $ 290 $ ( 4 ) $ 3,660 $ — AA- U.S. government and agencies 2 123 — 7 ( 2 ) 128 — AA+ Corporate securities (3) 32 2,516 ( 1 ) 111 ( 21 ) 2,605 ( 4 ) A Mortgage-backed securities (4): RMBS 6 454 ( 17 ) 24 ( 24 ) 437 ( 24 ) BBB+ CMBS 4 332 — 14 — 346 — AAA Asset-backed securities: CLOs 6 457 — 1 — 458 — AA- Other 5 420 ( 12 ) 26 ( 2 ) 432 ( 2 ) CCC+ Non-U.S. government securities 2 134 — 5 ( 3 ) 136 — AA- Total available-for-sale fixed-maturity securities 100 % $ 7,822 $ ( 42 ) $ 478 $ ( 56 ) $ 8,202 $ ( 30 ) A+ ____________________ (1) Based on amortized cost. (2) Ratings represent the lower of the Moody’s and S&P classifications, except for loss mitigation and certain other securities, which use internal ratings classifications. The Company’s portfolio primarily consists of high-quality, liquid instruments. New recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions are not rated. (3) Includes securities issued by taxable universities and hospitals. (4) U.S. government-agency obligations were approximately 30 % of mortgage-backed securities as of March 31, 2022 and 31 % as of December 31, 2021 based on fair value. (5) Accumulated other comprehensive income (AOCI). 42 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Gross Unrealized Loss by Length of Time for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded As of March 31, 2022 Less than 12 months 12 months or more Total Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss (dollars in millions) Obligations of state and political subdivisions $ 849 $ ( 47 ) $ 28 $ ( 4 ) $ 877 $ ( 51 ) U.S. government and agencies 26 ( 1 ) 32 ( 4 ) 58 ( 5 ) Corporate securities 825 ( 50 ) 49 ( 8 ) 874 ( 58 ) Mortgage-backed securities: RMBS 74 ( 1 ) — — 74 ( 1 ) CMBS 100 ( 1 ) — — 100 ( 1 ) Asset-backed securities: CLOs 327 ( 3 ) 54 — 381 ( 3 ) Other 17 ( 1 ) — — 17 ( 1 ) Non-U.S. government securities 82 ( 4 ) 12 ( 2 ) 94 ( 6 ) Total $ 2,300 $ ( 108 ) $ 175 $ ( 18 ) $ 2,475 $ ( 126 ) Number of securities (1) 740 81 814 Gross Unrealized Loss by Length of Time for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded As of December 31, 2021 Less than 12 months 12 months or more Total Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss (dollars in millions) Obligations of state and political subdivisions $ 117 $ ( 3 ) $ 10 $ ( 1 ) $ 127 $ ( 4 ) U.S. government and agencies 26 — 32 ( 2 ) 58 ( 2 ) Corporate securities 407 ( 12 ) 70 ( 5 ) 477 ( 17 ) Mortgage-backed securities: RMBS 4 — — — 4 — Asset-backed securities: CLOs 226 — — — 226 — Non-U.S. government securities 24 ( 2 ) 8 ( 1 ) 32 ( 3 ) Total $ 804 $ ( 17 ) $ 120 $ ( 9 ) $ 924 $ ( 26 ) Number of securities (1) 355 60 410 ___________________ (1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of March 31, 2022 and December 31, 2021 were not related to credit quality, and in the case of First Quarter 2022, primarily attributable to rising interest rates. In addition, as of March 31, 2022 the Company did not intend to and was not required to sell investments in an unrealized loss position prior to expected recovery in value. As of March 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 187 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2021, 23 securities had unrealized 43 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $ 56 million as of March 31, 2022 and $ 6 million as of December 31, 2021. The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of March 31, 2022 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 Available-for-Sale Fixed-Maturity Securities by Contractual Maturity As of March 31, 2022 Amortized Cost Estimated Fair Value (in millions) Due within one year $ 202 $ 203 Due after one year through five years 1,956 1,948 Due after five years through 10 years 1,869 1,853 Due after 10 years 3,442 3,430 Mortgage-backed securities: RMBS 437 400 CMBS 321 322 Total $ 8,227 $ 8,156 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 $ 229 million as of March 31, 2022 and $ 243 million as of December 31, 2021. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements, in the amounts of $ 1,160 million and $ 1,231 million, based on fair value as of March 31, 2022 and December 31, 2021, respectively. Income from Investment Portfolio Net investment income is a function of the yield that the Company earns on available-for-sale 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. Income from Investment Portfolio First Quarter 2022 2021 (in millions) Investment income: Externally managed $ 48 $ 51 Loss mitigation securities and other 11 16 Managed by AssuredIM (1) 4 4 Investment income 63 71 Investment expenses ( 1 ) ( 1 ) Net investment income $ 62 $ 70 Unrealized gain (loss) on trading securities (2) $ ( 4 ) $ — Equity in earnings (losses) of investees (3) $ ( 11 ) $ 9 ____________________ (1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA. (2) Reported in “other income (loss)”. First Quarter 2022 amount relates to securities still held as of March 31, 2022. (3) First Quarter 2022 includes $ 3 million related to fair value gains on investments where the fair value option was elected utilizing the net asset value (NAV), as a practical expedient. In addition, the Company received $ 5 million in dividends related to the same investment. Fair value losses in First Quarter 2021 were de minimis. 44 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). Realized gains and losses on sales of investments are determined using the specific identification method. Net Realized Investment Gains (Losses) First Quarter 2022 2021 (in millions) Gross realized gains on sales available-for-sale securities $ — $ 1 Gross realized losses on sales available-for-sale securities ( 2 ) ( 2 ) Net foreign currency gains (losses) — 1 Change in credit impairment and intent to sell ( 5 ) ( 4 ) Other net realized gains (losses) (1) 10 1 Net realized investment gains (losses) $ 3 $ ( 3 ) ____________________ (1) Net realized gains in First Quarter 2022 related primarily to the sale of one of the Company’s alternative investments. The following table presents the roll forward of the credit losses on available-for-sale fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2022 and 2021. Roll Forward of Credit Losses for Available-for-Sale Fixed-Maturity Securities First Quarter 2022 2021 (in millions) Balance, beginning of period $ 42 $ 78 Additions for securities for which credit impairments were not previously recognized 4 1 Additions (reductions) for credit losses on securities for which credit impairments were previously recognized 1 2 Balance, end of period $ 47 $ 81 The Company recorded credit loss expenses of $ 5 million in First Quarter 2022 and $ 3 million in First Quarter 2021. The Company did not purchase any securities with credit deterioration during the periods presented. Most of the Company’s securities with credit deterioration are loss mitigation securities. 8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles FG VIEs Structured Finance and Other FG VIEs The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction. 45 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued The insurance subsidiaries are not primarily liable for the debt obligations issued by the structured finance and other FG VIEs (which excludes the Puerto Rico Trusts described below) they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on structured finance and other FG VIEs’ liabilities. As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed no longer to have those protective rights, the VIE is deconsolidated. The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets. The Company has elected the fair value option for all assets and all liabilities of the structured finance and other FG VIEs. The change in fair value of all structured finance and other FG VIEs assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIE liabilities, which is reported in other comprehensive income (OCI). As of March 31, 2022 and December 31, 2021, the Company consolidated 26 and 25 structured finance and other FG VIEs, respectively. Puerto Rico Trusts In First Quarter 2022, the Company consolidated nine custodial trusts established as part of the GO/PBA Plan (Puerto Rico Trusts) discussed in Note 3, Outstanding Exposure, Exposures to Puerto Rico. With respect to certain insured securities covered by the GO/PBA Plan, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, new recovery bonds and CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan. For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given their power to collapse these trusts. The assets within the Puerto Rico Trusts are classified as follows: new recovery bonds and certain trust certificates as available-for-sale securities ($ 45 million fair value, $ 48 million amortized cost as of March 31, 2022), and CVIs as trading securities ($ 8 million fair value as of March 31, 2022, de minimis unrealized gains on trading securities for the First Quarter 2022). The new recovery bonds, CVIs, and trust certificates have maturity dates ranging from 2022 to 2046. For the measurement of liabilities of the Puerto Rico Trusts, the Company elected the fair value option in order to simplify the accounting for these instruments. 46 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Investment income on the new recovery bonds and trust certificates, unrealized gains and losses on the CVIs and the change in fair value of the Puerto Rico Trusts’ liabilities, which are all with recourse, are all reported in “fair value gains (losses) on FG VIEs” on the condensed consolidated statement of operations. Unrealized gains and losses on the new recovery bonds and trust certificates are reported in OCI. During First Quarter 2022, the consolidation of the nine Puerto Rico Trusts resulted in a $ 4 million loss on consolidation, which was also reported in “fair value gains (losses) on FG VIEs.” Components of FG VIE Assets and Liabilities Net fair value gains and losses on FG VIEs are expected to reverse to zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered). The table below shows the carrying value of all of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated balance sheets, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities. Consolidated FG VIEs by Type of Collateral As of March 31, 2022 December 31, 2021 (in millions) FG VIEs’ assets: U.S. RMBS first lien $ 204 $ 221 U.S. RMBS second lien 35 39 Puerto Rico securities 53 — Other 15 — Total FG VIEs’ assets $ 307 $ 260 FG VIEs’ liabilities with recourse: U.S. RMBS first lien $ 209 $ 227 U.S. RMBS second lien 36 42 Puerto Rico Trust liabilities 56 — Other 15 — Total FG VIEs’ liabilities with recourse $ 316 $ 269 FG VIEs’ liabilities without recourse: U.S. RMBS first lien $ 19 $ 20 Total FG VIEs’ liabilities without recourse $ 19 $ 20 The change in the ISCR of the FG VIEs’ assets for which the Company elected the fair value option (FG VIE assets at FVO) held as of March 31, 2022 that was reported in the condensed consolidated statements of operations for First Quarter 2022 was a loss of $ 5 million. The change in the ISCR of the FG VIEs’ assets at FVO held as of March 31, 2021 was a loss of $ 3 million for First Quarter 2021. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield. The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the fair value option) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. In general, if the insurance subsidiaries’ CDS spread tightens, more value will be assigned to insurance subsidiaries’ credit; however, if the insurance subsidiaries’ CDS spread widens, less value is assigned to the insurance subsidiaries’ credit. 47 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Selected Information for FG VIEs Assets and Liabilities Measured under the Fair Value Option As of March 31, 2022 December 31, 2021 (in millions) Excess of unpaid principal over fair value of: FG VIEs’ assets $ 260 $ 255 FG VIEs’ liabilities with recourse 17 12 FG VIEs’ liabilities without recourse 15 15 Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due 47 52 Unpaid principal for FG VIEs’ liabilities with recourse (1) 333 281 ____________________ (1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2022 through 2038. CIVs CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses in which the Company is the primary beneficiary. The table below summarizes the number of consolidated CIVs by type as of March 31, 2022 and December 31, 2021. As of both dates, the Company consolidated one CIV that meets the criteria for a voting interest entity, because the Company possesses substantially all of the economics and all of the decision-making of that CIV. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities. The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates. Number of Consolidated CIVs by Type As of CIV Type March 31, 2022 December 31, 2021 Funds 8 8 CLOs 9 9 CLO warehouses 3 3 Total number of consolidated CIVs 20 20 The table below summarizes the change in the number of consolidated CIVs during each of the periods. During 2022, no consolidated CLO warehouses became CLOs. During 2021, one consolidated CLO warehouse became a CLO. Roll Forward of Number of Consolidated CIVs First Quarter 2022 2021 Beginning of year 20 11 Consolidated — 2 Deconsolidated — ( 1 ) March 31, 20 12 48 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Assets and Liabilities of CIVs As of March 31, 2022 December 31, 2021 (in millions) Assets: Fund assets: Cash and cash equivalents $ 68 $ 64 Fund investments, at fair value Equity securities and warrants (1) 255 252 Obligations of state and political subdivisions 126 101 Corporate securities 85 98 Structured products (2) 74 62 Due from brokers and counterparties 16 49 Other 1 1 CLO and CLO warehouse assets: Cash 90 156 CLO investments: Loans in CLOs, fair value option 3,865 3,913 Loans in CLO warehouses, fair value option 834 331 Short-term investments, at fair value 165 145 Due from brokers and counterparties 121 99 Total assets (3) $ 5,700 $ 5,271 Liabilities: CLO obligations, fair value option (4) 3,598 3,665 Warehouse financing debt, fair value option (5) 339 126 Securities sold short, at fair value 36 41 Due to brokers and counterparties 844 570 Other liabilities 37 34 Total liabilities $ 4,854 $ 4,436 ____________________ (1) Includes investments in AssuredIM Funds and other affiliated entities of $ 200 million and $ 198 million as of March 31, 2022 and December 31, 2021, respectively. (2) Includes investments in affiliated entities of $ 23 million and $ 25 million as of March 31, 2022 and December 31, 2021, respectively. (3) Includes assets of a voting interest entity as of March 31, 2022 and December 31, 2021 of $ 17 million and $ 12 million, respectively. (4) The weighted average maturity of CLO obligations was 6.7 years as of March 31, 2022 and 6.6 years as of December 31, 2021. The weighted average interest rate of CLO obligations was 1.9 % as of March 31, 2022 and 1.8 % as of December 31, 2021. CLO obligations have stated final maturity dates from 2034 to 2035. (5) The weighted average maturity of warehouse financing debt of CLO warehouses was 0.6 years as of March 31, 2022 and 1.8 years as of December 31, 2021. The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.3 % as of March 31, 2022 and 1.1 % as of December 31, 2021. Warehouse financing debt will mature at various dates from 2022 to 2023. Noncontrolling Interests in CIVs Noncontrolling interest in CIVs represents the proportion of the consolidated funds not owned by the Company, including third parties, employees, and former employees. The majority of the noncontrolling interest is non-redeemable and presented on the statement of shareholders’ equity. The table below presents the rollforward of redeemable noncontrolling interest in CIVs. 49 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Redeemable Noncontrolling Interests in CIVs First Quarter 2022 2021 (in millions) Beginning balance $ 22 $ 21 Net income (loss) attributable to the redeemable noncontrolling interest ( 1 ) — March 31, $ 21 $ 21 As of March 31, 2022 the CIVs had commitments to invest $ 345 million. As of March 31, 2022 and December 31, 2021, the CIVs included derivative contracts with notional amounts totaling $ 68 million and $ 49 million, respectively, and average notional amounts of $ 59 million and $ 34 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $ 4 million and $ 2 million in First Quarter 2022 and First Quarter 2021, respectively. Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity 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 borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or other Assured Guaranty subsidiaries. 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 other Assured Guaranty subsidiaries. As of March 31, 2022, these credit facilities had varying maturities ranging from April 28, 2022 to September 15, 2023 with the aggregate principal amount not exceeding $ 1.0 billion. The available commitment was based on the amount of equity contributed to the warehouse which was $ 591 million. As of March 31, 2022, $ 310 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 100 basis points (bps) to 3-month LIBOR plus 100 bps (with a floor on the Euribor/LIBOR rates of zero ). The CLO warehouses were in compliance with all financial covenants as of March 31, 2022. As of March 31, 2022, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $ 80 million jointly and $ 48 million individually for the consolidated healthcare fund. The available commitment was based on the amount of equity contributed to the funds. As of March 31, 2022, $ 15 million was drawn down by the consolidated fund under the credit facility with an interest rate of Prime (with a Prime Floor of 3 %). The fund was in compliance with all financial covenants as of March 31, 2022. Other Consolidated VIEs In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the original insured financial guaranty insurance or credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $ 92 million and liabilities of $ 12 million as of March 31, 2022, and assets of $ 96 million and liabilities of $ 11 million as of December 31, 2021, primarily reported in “investments” and “credit derivative liabilities” on the condensed consolidated balance sheets. Non-Consolidated VIEs As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 16 thousand policies monitored as of March 31, 2022, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. With respect to structured finance and other FG VIEs, as of March 31, 2022 and December 31, 2021, the Company identified 63 and 69 policies, respectively, that contain provisions and experienced events that may trigger consolidation. Based on management’s 50 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued assessment of these potential triggers or events, the Company consolidated 26 and 25 structured finance and other FG VIEs as of March 31, 2022 and December 31, 2021, respectively. In addition, as of March 31, 2022 the Company consolidated nine Puerto Rico Trusts. The Company’s exposure through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Exposure. The Company manages funds and CLOs that have been determined to be VIEs, in which the Company concluded that it is not the primary beneficiary, because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests in these entities are reported in “other invested assets” on the condensed consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $ 1 million as of both March 31, 2022 and December 31, 2021) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs. 9. Fair Value Measurement The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market). Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During First Quarter 2022, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income. The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date. The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization is based on the lowest level of significant input to its valuation. Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market. Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs. Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. 51 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued There were no transfers from or into Level 3 during the periods presented. Carried at Fair Value Fixed-Maturity Securities The fair value of fixed-maturity securities is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. The valuation of fixed-maturity securities is more subjective when markets are less liquid due to the lack of market-based inputs. As of March 31, 2022, the Company used models to price 190 securities, including securities that were purchased or obtained for loss mitigation, with a Level 3 fair value of $ 1.1 billion. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecasts and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the security including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities. Short-Term Investments Short-term investments that are traded in active markets are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices. Securities such as discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value. Other Invested Assets Other invested assets that are carried at fair value primarily include: (i) equity securities traded in active markets that are classified within Level 1 in the fair value hierarchy as their value is based on quoted market prices; and (ii) equity method investments for which the Company elected the fair value option using NAV, as a practical expedient, which are excluded from the fair value hierarchy. Other Assets Committed Capital Securities Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM 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 fair value of CCS, which is reported in other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value of the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the condensed consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, LIBOR 52 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued curve projections, the Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3 in the fair value hierarchy. Supplemental Executive Retirement Plans The Company classifies assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations. Contracts Accounted for as Credit Derivatives The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes in the fair value reported in the condensed consolidated statements of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions are generally terminated for an amount that approximates the present value of future premiums or for a negotiated amount, rather than at fair value. The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative contracts in determining the fair value of these contracts. Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions. The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at March 31, 2022 were such that market prices of the Company’s CDS contracts were not available. Assumptions and Inputs The various inputs and assumptions that are key to the measurement of the Company’s fair value for CDS contracts are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company. 53 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. It is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these transactions from its financial statements. Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from trading desks for the specific asset in question. The Company validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness. In addition, the Company compares the relative change in price quotes received from one quarter to another with the relative change experienced by published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market sources are unpublished spread quotes from market participants or market traders who are not trustees. The Company obtains this information as the result of direct communication with these sources as part of the valuation process. The following spread hierarchy is utilized in determining which source of gross spread to use. • Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available). • Transactions priced or closed during a specific quarter within a specific asset class and specific rating. • Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts. • Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity. The rates used to discount future expected premium cash flows ranged from 0.45 % to 2.93 % at March 31, 2022 and 0.11 % to 1.78 % at December 31, 2021. The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its transactions. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. 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 Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS transactions that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a transaction generally decreases. In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. As of March 31, 2022 and December 31, 2021, the use of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC’s credit spreads. In general, when AGC’s credit spreads narrow, the cost to hedge AGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC’s credit spreads widen, the cost to hedge AGC’s name increases causing more transactions to price at established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s own credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture. The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions. A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are lower than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer 54 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of such contract and discounting such amounts using the LIBOR corresponding to the weighted average remaining life of the contract. Strengths and Weaknesses of Model The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses. The primary strengths of the Company’s CDS modeling techniques are: • The model takes into account the transaction structure and the key drivers of market value. • The model maximizes the use of market-driven inputs whenever they are available. • The model is a consistent approach to valuing positions. The primary weaknesses of the Company’s CDS modeling techniques are: • There is no exit market or any actual exit transactions; therefore, the Company’s exit market is a hypothetical one based on the Company’s entry market. • There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model. • The markets for the inputs to the model are highly illiquid, which impacts their reliability. • Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market. FG VIEs’ Assets and Liabilities The Company elected the fair value option for the structured finance and other FG VIEs’ assets and liabilities and classifies them as Level 3 in the fair value hierarchy. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. For the assets in the Puerto Rico Trusts, new recovery bonds are classified as available-for-sale as Level 2 on the fair value hierarchy, CVIs are classified as trading securities as Level 2 on the fair value hierarchy, and trust certificates are classified as available-for-sale as Level 3 on the fair value hierarchy. The liabilities of the Puerto Rico Trusts are measured under the fair value option as Level 3 on the fair value hierarchy. See “ - Fixed Maturity Securities” above for a description of the fair value methodology for the recovery bonds and CVIs in the Puerto Rico Trusts, which represent the majority of the assets in the Puerto Rico Trusts. The fair value of the residential mortgage loan FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the market value of the FG VIEs’ assets and the implied collateral losses within the transaction. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets. The third party utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds. The models used to price the FG VIEs’ liabilities (other than the liabilities of the Puerto Rico Trusts) generally apply the same inputs used in determining fair value of FG VIEs’ assets. For those liabilities insured by the Company, the benefit of the Company’s insurance policy guaranteeing the timely payment of debt service is also taken into account. The liabilities of 55 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries financial guaranty policies. Significant changes to any of the inputs described above could materially change the timing of expected losses within the insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse. The net change in the fair value of FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on financial guaranty variable interest entities” in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in ISCR which is separately presented in other comprehensive income (OCI), and the change in fair value of available-for-sale securities, which is reported as a component of the change in unrealized gains (losses) on investments in OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on financial guaranty variable interest entities”. The FG VIEs issued securities that are typically collateralized by first lien and second lien residential mortgage loans, or, in the case of the Puerto Rico Trusts, the Plan Consideration received under the GO/PBA Plan. Assets and Liabilities of CIVs The consolidated CLOs are collateralized financing entities (CFEs), and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured under the fair value option using the CFE practical expedient. Loans in CLOs are priced using a loan pricing service which aggregates quotes from loan market participants. The loans are all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt is measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by the Company). Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE. The Company has elected the fair value option to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO. Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third-party data generally at the average between the offer and bid prices. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; (vi) and/or evaluating information provided by management of these investments. These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments. Inputs are used in applying the various valuation techniques and broadly refer to the current assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors. Investments in private equity funds are generally valued utilizing NAV. Level 2 assets in the CIVs include assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the fair value option), securities sold short and derivative liabilities. Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities. 56 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Amounts recorded at fair value in the Company’s financial statements are presented in the tables below. Fair Value Hierarchy of Financial Instruments Carried at Fair Value As of March 31, 2022 Fair Value Hierarchy Level 1 Level 2 Level 3 Total (in millions) Assets: Investments: Fixed-maturity securities, available-for-sale Obligations of state and political subdivisions $ — $ 3,871 $ 70 $ 3,941 U.S. government and agencies — 122 — 122 Corporate securities — 2,388 — 2,388 Mortgage-backed securities: RMBS — 200 200 400 CMBS — 322 — 322 Asset-backed securities — 25 842 867 Non-U.S. government securities — 116 — 116 Total fixed-maturity securities, available-for-sale — 7,044 1,112 8,156 Fixed-maturity securities, trading — 174 — 174 Short-term investments 568 17 — 585 Other invested assets (1) 2 — 5 7 FG VIEs’ assets — 40 267 307 Assets of CIVs (2): Fund investments: Equity securities and warrants — 6 243 249 Obligations of state and political subdivisions — 126 — 126 Corporate securities — 2 83 85 Structured products — 74 — 74 CLOs and CLO warehouse assets: Loans — 4,699 — 4,699 Short-term investments 165 — — 165 Total assets of CIVs 165 4,907 326 5,398 Other assets 55 51 26 132 Total assets carried at fair value $ 790 $ 12,233 $ 1,736 $ 14,759 Liabilities: Credit derivative liabilities $ — $ — $ 157 $ 157 FG VIEs’ liabilities (3) — — 335 335 Liabilities of CIVs: CLO obligations of CFEs — — 3,598 3,598 Warehouse financing debt — 308 31 339 Securities sold short — 36 — 36 Securitized borrowing — — 21 21 Total liabilities of CIVs — 344 3,650 3,994 Other liabilities — 3 — 3 Total liabilities carried at fair value $ — $ 347 $ 4,142 $ 4,489 57 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Fair Value Hierarchy of Financial Instruments Carried at Fair Value As of December 31, 2021 Fair Value Hierarchy Level 1 Level 2 Level 3 Total (in millions) Assets: Investments: Fixed-maturity securities, available-for sale Obligations of state and political subdivisions $ — $ 3,588 $ 72 $ 3,660 U.S. government and agencies — 128 — 128 Corporate securities — 2,605 — 2,605 Mortgage-backed securities: RMBS — 221 216 437 CMBS — 346 — 346 Asset-backed securities — 27 863 890 Non-U.S. government securities — 136 — 136 Total fixed-maturity securities, available-for-sale — 7,051 1,151 8,202 Short-term investments 1,225 — — 1,225 Other invested assets (1) 6 — 6 12 FG VIEs’ assets — — 260 260 Assets of CIVs (2): Fund investments: Equity securities and warrants — 7 239 246 Obligations of state and political subdivisions — 101 — 101 Corporate securities — 7 91 98 Structured products — 62 — 62 CLOs and CLO warehouse assets: Loans — 4,244 — 4,244 Short-term investments 145 — — 145 Total assets of CIVs 145 4,421 330 4,896 Other assets 53 54 25 132 Total assets carried at fair value $ 1,429 $ 11,526 $ 1,772 $ 14,727 Liabilities: Credit derivative liabilities $ — $ — $ 156 $ 156 FG VIEs’ liabilities (3) — — 289 289 Liabilities of CIVs: CLO obligations of CFEs — — 3,665 3,665 Warehouse financing debt — 103 23 126 Securities sold short — 41 — 41 Securitized borrowing — — 17 17 Total liabilities of CIVs — 144 3,705 3,849 Other liabilities — 1 — 1 Total liabilities carried at fair value $ — $ 145 $ 4,150 $ 4,295 ___________________ (1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $ 17 million and $ 19 million of equity method investments measured at fair value under the fair value option using the NAV as a practical expedient as of March 31, 2022 and December 31, 2021, respectively. (2) Excludes $ 6 million as of both March 31, 2022 and December 31, 2021 in investments in AssuredIM Funds for which the Company records a 100% noncontrolling interest. The consolidation of these funds results in a gross up of assets and noncontrolling interest on the consolidated financial statements; however, it results in no economic equity or net income attributable to AGL. (3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. 58 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Changes in Level 3 Fair Value Measurements The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during First Quarter 2022 and First Quarter 2021. Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis First Quarter 2022 Fixed-Maturity Securities, Available-for-Sale Assets of CIVs Obligations of State and Political Subdivisions RMBS Asset- Backed Securities FG VIEs’ Assets Equity Securities and Warrants Corporate Securities Other (7) (in millions) Fair value as of December 31, 2021 $ 72 $ 216 $ 863 $ 260 $ 239 $ 91 $ 27 Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) — 4 (1) 3 (1) ( 3 ) (2) 10 (4) ( 1 ) (4) 1 (3) Other comprehensive income (loss) ( 5 ) ( 8 ) ( 7 ) ( 1 ) — — — Purchases 4 — 25 — — 1 — Sales — — ( 3 ) — ( 6 ) ( 8 ) — Settlements ( 1 ) ( 12 ) ( 39 ) ( 18 ) — — — Consolidations — — — 29 — — — Fair value as of March 31, 2022 $ 70 $ 200 $ 842 $ 267 $ 243 $ 83 $ 28 Change in unrealized gains (losses) related to financial instruments held as of March 31, 2022 included in: Earnings $ ( 3 ) (2) $ 8 (4) $ ( 2 ) (4) $ 1 (3) OCI $ ( 5 ) $ ( 7 ) $ ( 7 ) $ ( 1 ) $ — Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis First Quarter 2022 Credit Derivative Asset (Liability), net (5) FG VIEs’ Liabilities (8) Liabilities of CIVs (in millions) Fair value as of December 31, 2021 $ ( 154 ) $ ( 289 ) $ ( 3,705 ) Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) ( 3 ) (6) 15 (2) 64 (4) Other comprehensive income (loss) — — — Issuances — — ( 381 ) Settlements 1 41 372 Consolidations — ( 102 ) — Fair value as of March 31, 2022 $ ( 156 ) $ ( 335 ) $ ( 3,650 ) Change in unrealized gains (losses) related to financial instruments held as of March 31, 2022 included in: Earnings $ ( 3 ) (6) $ 38 (2) $ 41 (4) OCI $ — 59 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Roll Forward of Level 3 Assets at Fair Value on a Recurring Basis First Quarter 2021 Fixed-Maturity Securities, Available-for-Sale Obligations of State and Political Subdivisions Corporate Securities RMBS Asset- Backed Securities FG VIEs’ Assets Assets of CIVs - Equity Securities Other (7) (in millions) Fair value as of December 31, 2020 $ 101 $ 30 $ 255 $ 940 $ 296 $ 2 $ 54 Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) 1 (1) 2 (1) 2 (1) 6 (1) ( 1 ) (2) 2 (4) ( 18 ) (3) Other comprehensive income (loss) 2 ( 4 ) — 5 — — 1 Purchases — — — 94 — 8 — Sales — — — ( 42 ) — ( 11 ) — Settlements ( 1 ) — ( 11 ) ( 62 ) ( 14 ) — — Fair value as of March 31, 2021 $ 103 $ 28 $ 246 $ 941 $ 281 $ 1 $ 37 Change in unrealized gains (losses) related to financial instruments held as of March 31, 2021 included in: Earnings $ — (2) $ 3 (4) $ ( 19 ) (3) OCI $ 2 $ ( 4 ) $ — $ 5 $ 1 Roll Forward of Level 3 Liabilities at Fair Value on a Recurring Basis First Quarter 2021 Credit Derivative Asset (Liability), net (5) FG VIEs’ (8) Liabilities of CIVs (in millions) Fair value as of December 31, 2020 $ ( 100 ) $ ( 333 ) $ ( 1,227 ) Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) ( 19 ) (6) 3 (2) 6 (4) Other comprehensive income (loss) — ( 1 ) — Issuances — — ( 752 ) Settlements ( 1 ) 13 — Fair value as of March 31, 2021 $ ( 120 ) $ ( 318 ) $ ( 1,973 ) Change in unrealized gains (losses) related to financial instruments held as of March 31, 2021 included in: Earnings $ ( 20 ) (6) $ 5 (2) $ 6 (4) OCI $ ( 1 ) ____________________ (1) Included in “net realized investment gains (losses)” and “net investment income”. (2) Included in “fair value gains (losses) on FG VIEs”. (3) Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income”. (4) Reported in “fair value gains (losses) on CIVs”. (5) Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the condensed consolidated balance sheets based on net exposure by transaction. (6) Reported in “fair value gains (losses) on credit derivatives”. (7) Includes CCS and other invested assets. (8) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. 60 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Level 3 Fair Value Disclosures Quantitative Information About Level 3 Fair Value Inputs As of March 31, 2022 Financial Instrument Description Fair Value (in millions) Significant Unobservable Inputs Range Weighted Average (4) Assets (2): Fixed-maturity securities available-for-sale (1): Obligations of state and political subdivisions $ 70 Yield 2.6 % - 27.1 % 6.7 % RMBS 200 CPR 0.0 % - 22.5 % 11.0 % CDR 1.6 % - 12.0 % 5.8 % Loss severity 50.0 % - 125.0 % 85.0 % Yield 4.8 % - 6.4 % 5.6 % Asset-backed securities: Life insurance transactions 370 Yield 6.0 % CLOs 437 Discount margin 1.0 % - 3.1 % 2.1 % Others 35 Yield 5.0 % - 10.3 % 10.2 % FG VIEs’ assets (1) 267 CPR 0.9 % - 25.5 % 13.2 % CDR 1.0 % - 26.9 % 7.2 % Loss severity 45.0 % - 100.0 % 77.1 % Yield 1.7 % - 8.6 % 5.4 % Assets of CIVs (3): Equity securities and warrants 243 Yield 8.0 % Discount rate 13.0 % - 24.2 % 21.8 % Cost 1.00x Market multiple-enterprise value/revenue 1.10x Market multiple-enterprise value/EBITDA (6) 3.00x - 10.50x 9.21x Market multiple-price to book 1.85x Exit multiple-EBITDA 8.00x - 12.00x 10.43x Exit multiple-price to book 1.30x Exit multiple 11.00x Exit cap rate 12.0 % Terminal growth rate 4.0 % Corporate securities 83 Discount rate 21.4 % - 23.7 % 22.3 % Yield 17.2 % Cost 1.00x Market multiple-enterprise value/EBITDA 3.00x Exit multiple-EBITDA 8.00x Other assets (1) 25 Implied Yield 3.1 % - 3.7 % 3.4 % Term (years) 10 years 61 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Financial Instrument Description Fair Value (in millions) Significant Unobservable Inputs Range Weighted Average (4) Liabilities (1): Credit derivative liabilities, net $ ( 156 ) Year 1 loss estimates 0.0 % - 87.0 % 1.9 % Hedge cost (in bps) 11.9 - 53.2 21.8 Bank profit (in bps) 0.0 - 211.3 72.2 Internal floor (in bps) 8.8 Internal credit rating AAA - CCC AA FG VIEs’ liabilities ( 335 ) CPR 0.9 % - 25.5 % 12.3 % CDR 1.0 % - 26.9 % 6.7 % Loss severity 45.0 % - 100.0 % 72.0 % Yield 0.6 % - 7.8 % 4.4 % Liabilities of CIVs: CLO obligations of CFEs (5) ( 3,598 ) Yield 1.6 % - 14.2 % 2.2 % Warehouse financing debt ( 31 ) Yield 16.2 % - 27.7 % 23.7 % Securitized borrowing ( 21 ) Discount rate 24.2 % ___________________ (1) Discounted cash flow is used as the primary valuation technique. (2) Excludes several investments recorded in “other invested assets” with a fair value of $ 5 million. (3) The primary valuation technique uses the income and/or market approach; the key inputs to the valuation are yield/discount rates and market multiples. (4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value. (5) See CFE fair value methodology described above for consolidated CLOs. (6) Earnings before interest, taxes, depreciation, and amortization (EBITDA). 62 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Quantitative Information About Level 3 Fair Value Inputs As of December 31, 2021 Financial Instrument Description Fair Value (in millions) Significant Unobservable Inputs Range Weighted Average (4) Assets (2): Fixed-maturity securities, available-for-sale (1): Obligations of state and political subdivisions $ 72 Yield 4.4 % - 24.5 % 6.2 % RMBS 216 CPR 0.0 % - 22.7 % 10.4 % CDR 1.4 % - 12.0 % 5.9 % Loss severity 50.0 % - 125.0 % 84.9 % Yield 3.8 % - 5.6 % 4.5 % Asset-backed securities: Life insurance transactions 367 Yield 5.0 % CLOs 458 Discount margin 0.0 % - 2.9 % 1.8 % Others 38 Yield 3.2 % - 7.9 % 7.9 % FG VIEs’ assets (1) 260 CPR 0.9 % - 24.5 % 13.3 % CDR 1.4 % - 26.9 % 7.6 % Loss severity 45.0 % - 100.0 % 81.6 % Yield 1.4 % - 8.0 % 4.6 % Assets of CIVs (3): Equity securities and warrants 239 Yield 7.7 % Discount rate 14.7 % - 23.9 % 21.6 % Market multiple-enterprise value/revenue 1.10x Market multiple-enterprise value/EBITDA 3.00x - 10.50x 8.95x Market multiple-price to book 1.85x Corporate securities 91 Discount rate 14.7 % - 21.4 % 17.8 % Yield 16.4 % Other assets (1) 23 Implied Yield 2.7 % - 3.3 % 3.0 % Term (years) 10 years Liabilities (1): Credit derivative liabilities, net ( 154 ) Year 1 loss estimates 0.0 % - 85.8 % 0.1 % Hedge cost (in bps) 8.0 - 37.1 12.6 Bank profit (in bps) 0.0 - 187.8 67.9 Internal floor (in bps) 8.8 Internal credit rating AAA - CCC AA FG VIEs’ liabilities ( 289 ) CPR 0.9 % - 24.5 % 13.3 % CDR 1.4 % - 26.9 % 7.6 % Loss severity 45.0 % - 100.0 % 81.6 % Yield 1.4 % - 8.0 % 3.7 % Liabilities of CIVs: CLO obligations of CFEs (5) ( 3,665 ) Yield 1.6 % - 13.7 % 2.1 % Warehouse financing debt ( 23 ) Yield 12.6 % - 16.0 % 13.8 % Securitized borrowing ( 17 ) Discount rate 23.9 % Market multiple-enterprise value/revenue 10.50x ____________________ (1) Discounted cash flow is used as the primary valuation technique. (2) Excludes several investments reported in “other invested assets” with a fair value of $ 6 million. (3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples. (4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value. (5) See CFE fair value methodology described above for consolidated CLOs. 63 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Not Carried at Fair Value Financial Guaranty Insurance Contracts Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, and also includes adjustments for stressed losses, ceding commissions and return on capital. The Company classified the fair value of financial guaranty insurance contracts as Level 3. Long-Term Debt Long-term debt issued by the U.S. Holding Companies is valued by broker-dealers using third party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. Assets and Liabilities of CIVs Cash equivalents are recorded at cost which approximates fair value. Due from/to brokers and counterparties primarily consists of cash, margin deposits, and cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date. Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the condensed consolidated balance sheets where a contractual right of offset exists under an enforceable netting arrangement. The cash at brokers is partially related to collateral for securities sold short and derivative contracts; its use is therefore restricted until the securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy. Other Liabilities Other liabilities in the table below include $ 36 million and $ 37 million as of March 31, 2022 and December 31, 2021, respectively, for AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5 % of the senior and equity notes issued by certain BlueMountain European CLOs, which was required to comply with its European risk retention obligations. The maturity dates are in 2034 and 2035. AssuredIM’s obligation under the master repurchase agreement is not guaranteed by any Assured Guaranty insurance or holding companies. 64 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table. Fair Value of Financial Instruments Not Carried at Fair Value As of March 31, 2022 As of December 31, 2021 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (in millions) Assets (liabilities): Assets of CIVs (1) $ 176 $ 176 $ 171 $ 171 Other assets (including other invested assets) (2) 98 99 134 135 Financial guaranty insurance contracts (3) ( 2,422 ) ( 1,677 ) ( 2,394 ) ( 2,315 ) Long-term debt ( 1,673 ) ( 1,677 ) ( 1,673 ) ( 1,832 ) Liabilities of CIVs (4) ( 859 ) ( 859 ) ( 586 ) ( 586 ) Other liabilities (5) ( 61 ) ( 61 ) ( 45 ) ( 45 ) ____________________ (1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value. (2) Includes accrued interest, receivable for an unsettled sale of a portion of the Puerto Rico salvage and subrogation recoverable, management fees receivables and receivables for securities sold for which carrying value approximates fair value. (3) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance. (4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value. (5) Includes accrued interest, repurchase agreement liability and payables for securities purchased for which carrying value approximates fair value. 10. Asset Management Fees The following table presents the sources of asset management fees and performance fees on a consolidated basis. Asset Management Fees First Quarter 2022 2021 (in millions) Management fees: CLOs (1) $ 9 $ 11 Opportunity funds and liquid strategies 4 4 Wind-down funds 1 3 Total management fees 14 18 Performance fees 14 1 Reimbursable fund expenses 6 5 Total asset management fees $ 34 $ 24 _____________________ (1) 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 fees earned from the CLOs. Gross management fees from CLOs, before rebates, we re $ 9 million and $ 14 million for First Quarter 2022 and First Quarter 2021, respectively. The Company had management and performance fees receivable, which are included in other assets on the condensed consolidated balance sheets, of $ 7 million as of March 31, 2022 and $ 8 million as of December 31, 2021. Performance fees in First Quarter 2022 were attributable to the healthcare and asset-based funds. 65 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 11. Credit Facilities On February 3, 2022, the Company entered into a secured short-term loan facility with a major financial institution to partially fund gross payments in connection with the resolution of a portion of its Puerto Rico exposures. See Note 3, Outstanding Exposure. The short-term loan facility permitted the Company to borrow up to $ 550 million for up to thirty days and up to $ 150 million for up to six months . The Company borrowed $ 400 million under the thirty days portion of this facility on March 14, 2022, and repaid it in full, with interest, on March 16, 2022. The Company did not borrow any amounts under the six months portion of the facility. The one month component bore interest at 1.10 % per annum and the six months component would have borne a floating interest rate equal to the forward-looking term Secured Overnight Financing Rate for a tenor of one month provided by CME Group Benchmark Administration Limited, plus 1.10 % per annum. The ability of the Company to borrow under the facility has expired. 12. Income Taxes Overview AGL and its Bermuda subsidiaries AG Re, AGRO, and Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries) are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL’s U.S., U.K. and French subsidiaries are subject to income taxes imposed by U.S., U.K. and French authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code (the Code) to be taxed as a U.S. domestic corporation. AGL is tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO and AG Intermediary Inc. file their own consolidated federal income tax return. Tax Assets (Liabilities) Deferred and Current Tax Assets (Liabilities) (1) As of March 31, 2022 December 31, 2021 (in millions) Net deferred tax assets (liabilities) $ 42 $ ( 33 ) Net current tax assets (liabilities) ( 61 ) ( 43 ) ____________________ (1) Included in “other assets” or “other liabilities” on the condensed consolidated balance sheets. Valuation Allowance As of March 31, 2022, and December 31, 2021, the Company had $ 24 million of foreign tax credit (FTC) due to the 2017 Tax Cuts and Jobs Act (TCJA) for use against regular tax in future years. FTCs will expire in 2027. In analyzing the future realizability of FTCs, the Company notes limitations on future foreign source income due to overall foreign losses as negative evidence. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the FTC of $ 24 million will not be utilized, and therefore maintained the valuation allowance from December 31, 2021 with respect to this tax attribute. The Company came to the conclusion that it is more likely than not that the remaining deferred tax assets will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years , and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with the remaining deferred tax assets. The Company will continue to analyze the need for a valuation allowance on a quarterly basis. 66 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Provision for Income Taxes The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year 2021. A discrete calculation of the provision is calculated for each interim period. The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries 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 %, the French subsidiary taxed at the French marginal corporate tax rate of 25.0 % in 2022 and 27.5 % in 2021, and no taxes for the Company’s Bermuda Subsidiaries unless subject to U.S. tax by election. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions. A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below. Effective Tax Rate Reconciliation First Quarter 2022 2021 (in millions) Expected tax provision (benefit) $ 14 $ ( 1 ) Tax-exempt interest ( 3 ) ( 4 ) State taxes 4 3 Foreign taxes 1 2 Stock based compensation 2 — Total provision (benefit) for income taxes $ 18 $ — Effective tax rate 20.0 % ( 0.9 ) % The expected tax provision (benefit) is calculated as the sum of pre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pre-tax loss in one jurisdiction and pre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates. The following tables present pre-tax income and revenue by jurisdiction. Pre-tax Income (Loss) by Tax Jurisdiction First Quarter 2022 2021 (in millions) U.S. $ 84 $ ( 4 ) Bermuda 27 20 U.K. ( 14 ) 1 Other ( 4 ) ( 2 ) Total $ 93 $ 15 Revenue by Tax Jurisdiction First Quarter 2022 2021 (in millions) U.S. $ 269 $ 134 Bermuda 33 30 U.K. — 13 Other ( 2 ) — Total $ 300 $ 177 67 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate. Audits As of March 31, 2022, AGUS and Assured Guaranty Overseas US Holdings Inc. had open tax years with the U.S. Internal Revenue Service (IRS) for 2018 forward and AGUS is currently under audit for the 2018 and 2019 tax years. The Company’s U.K. subsidiaries are not currently under examination and have open tax years of 2020 forward. The Company’s French subsidiary is not currently under examination and has open tax years of 2019 forward. 13. Commitments and Contingencies Legal Proceedings Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position or liquidity, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations in a particular quarter or year. In addition, in the ordinary course of their respective businesses, certain of AGL’s insurance subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company is involved in a number of legal actions in the Federal District Court for Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See “Exposure to Puerto Rico” section of Note 3, Outstanding Exposure, for a description of such actions. Also in the ordinary course of their respective business, certain of AGL’s investment management subsidiaries are involved in litigation with third parties regarding fees, appraisals, or portfolio companies. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year. The Company also receives subpoenas and interrogatories from regulators from time to time. Litigation On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial Products Inc. (AGFP), an affiliate of AGC which in the past had provided credit protection to counterparties under CDS. AGC acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the State of New York (the Supreme Court), asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination in December 2008 of nine credit derivative transactions between LBIE and AGFP and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination in July 2008 of 28 other credit derivative transactions between LBIE and AGFP and AGFP’s calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP properly terminated the transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP has calculated that LBIE owes AGFP approximately $ 4 million for the claims which were dismissed and approximately $ 21 million in connection with the termination of the other credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $ 1.4 billion. AGFP filed a motion to dismiss the claims for breach of the implied covenant of good faith in LBIE’s complaint, and on March 15, 2013, the court granted AGFP’s motion to dismiss in respect of the count relating to the nine credit derivative transactions and narrowed LBIE’s claim with respect to the 28 other credit derivative transactions. LBIE’s administrators disclosed in an April 10, 2015 report to LBIE’s unsecured creditors that LBIE’s valuation expert has calculated LBIE’s claim for damages in aggregate for the 28 transactions to range between a minimum of approximately $ 200 million and a maximum of approximately $ 500 million, depending on what adjustment, if any, is made for AGFP's credit risk. In addition, LBIE seeks prejudgment interest from the time of termination onwards. AGFP filed a motion for summary judgment on the remaining causes of action asserted by LBIE and on AGFP’s counterclaims, and on July 2, 2018, the court granted in part and denied in part AGFP’s motion. The court dismissed, in its entirety, LBIE’s remaining claim for breach of the implied covenant of good faith and fair dealing and also dismissed LBIE’s claim for breach of contract solely to the extent that it is based upon AGFP’s conduct in connection with the auction. With respect to LBIE’s claim for breach of contract, the court held that there are triable issues of fact regarding 68 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued whether AGFP calculated its loss reasonably and in good faith. On October 1, 2018, AGFP filed an appeal with the Appellate Division of the Supreme Court of the State of New York, First Judicial Department, seeking reversal of the portions of the lower court’s ruling denying AGFP’s motion for summary judgment with respect to LBIE’s sole remaining claim for breach of contract. On January 17, 2019, the Appellate Division affirmed the Supreme Court’s decision, holding that the lower court correctly determined that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith. The trial was originally scheduled for March 9, 2020, but was postponed due to COVID-19. On November 3, 2020, LBIE moved to reopen its Chapter 15 case in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) and remove this action to the United States District Court for the Southern District of New York for assignment to the Bankruptcy Court. On March 22, 2021, the Bankruptcy Court denied the motion and remanded the action to the Supreme Court. On March 29, 2021, the action was reassigned to Justice Melissa A. Crane. A bench trial was held from October 18, 2021 through November 19, 2021; a decision is pending subject to post-trial briefing and argument. 14. Shareholders’ Equity Other Comprehensive Income The following tables present the changes in each component of AOCI and the effect of reclassifications out of AOCI into the respective lines in the condensed consolidated statements of operations. Changes in Accumulated Other Comprehensive Income (Loss) by Component First Quarter 2022 Net Unrealized Gains (Losses) on Investments with: ISCR on FG VIEs’ Liabilities with Recourse Cumulative Translation Adjustment Cash Flow Hedge Total AOCI No Credit Impairment Credit Impairment (in millions) Balance, December 31, 2021 $ 375 $ ( 24 ) $ ( 21 ) $ ( 36 ) $ 6 $ 300 Other comprehensive income (loss) before reclassifications ( 339 ) ( 43 ) ( 1 ) ( 1 ) — ( 384 ) Less: Amounts reclassified from AOCI to: Net realized investment gains (losses) ( 1 ) ( 5 ) — — — ( 6 ) Fair value gains (losses) on FG VIEs — — ( 1 ) — — ( 1 ) Total before tax ( 1 ) ( 5 ) ( 1 ) — — ( 7 ) Tax (provision) benefit — 1 — — — 1 Total amount reclassified from AOCI, net of tax ( 1 ) ( 4 ) ( 1 ) — — ( 6 ) Other comprehensive income (loss) ( 338 ) ( 39 ) — ( 1 ) — ( 378 ) Balance, March 31, 2022 $ 37 $ ( 63 ) $ ( 21 ) $ ( 37 ) $ 6 $ ( 78 ) 69 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued Changes in Accumulated Other Comprehensive Income (Loss) by Component First Quarter 2021 Net Unrealized Gains (Losses) on Investments with: ISCR on FG VIEs’ Liabilities with Recourse Cumulative Translation Adjustment Cash Flow Hedge Total AOCI No Credit Impairment Credit Impairment (in millions) Balance, December 31, 2020 $ 577 $ ( 30 ) $ ( 20 ) $ ( 36 ) $ 7 $ 498 Other comprehensive income (loss) before reclassifications ( 119 ) ( 8 ) ( 2 ) 1 — ( 128 ) Less: Amounts reclassified from AOCI to: Net realized investment gains (losses) — ( 3 ) — — — ( 3 ) Fair value gains (losses) on FG VIEs — — ( 1 ) — — ( 1 ) Total before tax — ( 3 ) ( 1 ) — — ( 4 ) Tax (provision) benefit — 1 — — — 1 Total amount reclassified from AOCI, net of tax — ( 2 ) ( 1 ) — — ( 3 ) Other comprehensive income (loss) ( 119 ) ( 6 ) ( 1 ) 1 — ( 125 ) Balance, March 31, 2021 $ 458 $ ( 36 ) $ ( 21 ) $ ( 35 ) $ 7 $ 373 Share Repurchases On February 23, 2022, the Board of Directors (the Board) authorized the repurchase of an additional $ 350 million of its common shares. Under this and previous authorizations, as of May 5, 2022, the Company was authorized to purchase $ 240 million of its common shares. The Company expects to repurchase shares 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. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date. Share Repurchases Period Number of Shares Repurchased Total Payments (in millions) Average Price Paid Per Share 2021 (January 1 - March 31) 1,986,534 $ 77 $ 38.83 2021 (April 1 - June 30) 1,887,531 88 46.63 2021 (July 1- September 30) 2,918,993 140 47.76 2021 (October 1 - December 31) 3,725,982 191 51.47 Total 2021 10,519,040 $ 496 47.19 2022 (January 1 - March 31) (1) 2,738,223 155 56.62 2022 (April 1 - May 5) 1,007,045 61 59.86 Total 2022 3,745,268 $ 216 57.49 ____________________ (1) Includes $ 3 million of share repurchases that was prepaid in December 2021 and settled in First Quarter 2022. 70 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 15. Earnings Per Share Computation of Earnings Per Share First Quarter 2022 2021 (in millions, except per share amounts) Basic Earnings Per Share (EPS): Net income (loss) attributable to AGL $ 66 $ 11 Less: Distributed and undistributed income (loss) available to nonvested shareholders — — Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic $ 66 $ 11 Basic shares 66.3 76.7 Basic EPS $ 1.00 $ 0.14 Diluted EPS: Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic $ 66 $ 11 Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries — — Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted $ 66 $ 11 Basic shares 66.3 76.7 Dilutive securities: Options and restricted stock awards 1.1 0.8 Diluted shares 67.4 77.5 Diluted EPS $ 0.98 $ 0.14 Potentially dilutive securities excluded from computation of EPS because of antidilutive effect 0.2 0.3 71 Table of Contents