ASSURED GUARANTY LTD 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance. Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are: • the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, the effectiveness, acceptance and distribution of COVID-19 vaccines and therapeutics, and the global consequences of the pandemic and such actions, including their impact on the factors listed below; • consequences of the conflict in Ukraine, including economic sanctions, volatility in energy prices, and the potential for increased cyberattacks; • changes in the world’s credit markets, segments thereof, interest rates, inflation, credit spreads or general economic conditions; • developments in the world’s financial and capital markets that adversely affect insured obligors’ repayment rates, Assured Guaranty’s insurance loss or recovery experience, investments of Assured Guaranty or assets it manages; • reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty’s insurance; • the loss of investors in Assured Guaranty’s asset management strategies or the failure to attract new investors to Assured Guaranty’s asset management business; • the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures; • insured losses in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the failure to resolve Assured Guaranty’s Puerto Rico exposures in a manner substantially consistent with the support agreements signed to date; • increased competition, including from new entrants into the financial guaranty industry; • poor performance of Assured Guaranty’s asset management strategies compared to the performance of the asset management strategies of Assured Guaranty’s competitors; • the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity, or to unanticipated consequences; • the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, most of its financial guaranty contracts written in credit default swap (CDS) form, and certain consolidated variable interest entities (VIEs); • rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured; • the inability of Assured Guaranty to access external sources of capital on acceptable terms; • changes in applicable accounting policies or practices; • changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions; • the possibility that acquisitions made by Assured Guaranty, including its acquisition of BlueMountain Capital Management LLC (BlueMountain, now known as Assured Investment Management LLC) and its associated entities (BlueMountain Acquisition), do not result in the benefits anticipated or subject Assured Guaranty to unanticipated consequences; • difficulties with the execution of Assured Guaranty’s business strategy; • loss of key personnel; • the effects of mergers, acquisitions and divestitures; 72 Table of Contents • natural or man-made catastrophes or pandemics; • other risk factors identified in AGL’s filings with the United States (U.S.) Securities and Exchange Commission (the SEC); • other risks and uncertainties that have not been identified at this time; and • management’s response to these factors. The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in the Company’s 2021 Annual Report on Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity. For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Available Information The Company maintains an internet web site at www.assuredguaranty.com . The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings ) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance ) links to the Company’s Corporate Governance Guidelines, the Company’s Global Code of Ethics, AGL’s Bye-Laws and the charters for the committees of its Board of Directors. In addition, the SEC maintains an Internet site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses ). The Company also maintains a social media account on LinkedIn ( www.linkedin.com/company/assured-guaranty/ ). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, the Company’s web site or social media account is not incorporated by reference into, and is not a part of, this report. Overview Business The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company’s Corporate division and other activities (including financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs)) are presented separately. In the Insurance segment, the Company provides credit protection products to the U.S. and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled 73 Table of Contents payment due on an obligation, including a debt service payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia. The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience, which are referred to as the specialty insurance and reinsurance business. Premiums are earned over the contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts. In the Asset Management segment, the Company provides investment advisory services, which include the management of CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM) have managed structured, public finance and credit investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. The establishment, in the fourth quarter of 2019, of the Asset Management segment diversifies the risk profile and revenue opportunities of the Company. As of March 31, 2022, AssuredIM had $17.0 billion of assets under management (AUM), including $1.4 billion that is managed on behalf of Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC). Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment. AssuredIM is compensated for its investment advisory services generally through management fees which are based on AUM, and may also earn performance fees calculated as a percentage of net profits or based on an internal rate of return referencing distributions made to investors, in each case, in respect of funds, collateralized loan obligations (CLOs) and/or accounts which it advises. The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 1, Financial Statements, Note 2, Segment Information. Economic Environment Economic activity in the U.S. and throughout the world expanded in 2021 and in the three month period ended March 31, 2022 (First Quarter 2022). According to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA), real gross domestic product (GDP) increased at an annual rate of 6.9% in the fourth quarter of 2021. Although an advance estimate released by the BEA showed that GDP decreased 1.4% in First Quarter 2022, the primary reason was reported to be as a result of trade, since net imports increased as supply chains improved and businesses continued to restock. More granular measures were positive, with a 4.7% increase in consumer spending and a 5.7% increase in business investment. At the end of March 2022, the U.S. unemployment rate, seasonally adjusted, stood at 3.6%, lower than where it started the quarter at 3.9%, and down from a pandemic high of 14.7% in April 2020. More globally, the Organization for Economic Co-operation and Development (OECD) estimates that GDP in the OECD area increased by 5.1% during 2021, with U.K. GDP estimated to have grown by 6.9% for the year, in each case after experiencing material contraction in 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default. According to the U.S. Bureau of Labor Statistics, the inflation rate in the U.S. over the 12-month period ending March 2022 (the latest data available), as measured by the consumer price index for all urban consumers, rose to 8.5% before seasonal adjustment, the highest since December of 1981. The energy index rose 32% and the food index 8.8% over the same 12-month period, the most since the period ending May 1981. According to the U.K.’s Office for National Statistics (ONS), the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 6.2% in the 12 months ending March 2022, up from 5.5% in the 12 months ending February 2022 and 1.0% in the 12 months ending March 2021. Consumer price inflation does not impact the Company’s primary businesses directly, but may impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The 30-year AAA MMD rate started First Quarter 2022 at 1.49% but rose more than 100 basis points (bps) to end the quarter at 2.53%. The average rate for the quarter was 2.00%, above the 1.54% average for 2021. With the onset of the COVID-19 pandemic, the Federal Open Market Committee (FOMC) lowered the target range 74 Table of Contents for the federal funds rate to 0% to 0.25% in March 2020. However, at the FOMC’s meeting in March 2022, the FOMC decided to raise the target range for the federal funds rate to 0.25% to 0.50%, stating that it anticipated that ongoing increases in the target range will be appropriate. In addition, the FOMC said that it expected to begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. At the conclusion of its May 3-4, 2022 meeting, the FOMC again raised the federal funds target range, this time to 0.75% to 1%, reiterating that it anticipated that ongoing increases in the target range would be appropriate. In addition, the FOMC announced that it would begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities on June 1, 2022. The level and direction of interest rates impact the Company in numerous ways. For example, higher interest rates may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product, and, over time, also increase the amount the Company can earn on its largely fixed-income investment portfolio. Specifically, the level of interest rates on the U.S. municipal bonds the Company enhances influences how high a premium the Company can charge for its public finance financial guaranty insurance product, with higher interest rates generally increasing the premium rates the Company may charge. On the other hand, high interest rates decrease the amount of excess spread available to support the distressed residential mortgage-backed securities (RMBS) the Company insures and reduce the market value of its largely fixed rate fixed-maturity securities in the investment portfolio. The Company believes further increases in interest rates and spreads in 2022, should it occur, could increase demand for insurance and permit it to increase its premium rates on new business. The difference, or credit spread, between the 30-year A-rated general obligation relative to the 30-year AAA MMD averaged 39 bps in First Quarter 2022 up from 33 bps in 2021 but still below the 42 bps in 2020. BBB credit spreads measured on the same basis averaged 72 bps in First Quarter 2022, up modestly from the 70 bps in full year 2021. The level of credit spreads also influences how high a premium the Company can charge for its financial guaranty insurance product, with tighter credit spreads generally lowering the premium rates the Company may charge. Home prices continued their recent surge in the First Quarter of 2022. According to the National Association of Realtors, the median existing-home price for all housing types in March 2022 was $375,300, a 15% year-over-year increase and up from $358,000 in December 2021. Existing home sales were 5.8 million in March 2022, up 4.5% year over year. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported an 19.8% annualized gain in February 2022 (the latest data available), compared to 19.1% in the previous month. The 10-City Composite annual increase came in at 18.6%, compared to 17.3% in the previous month. The 20-City Composite posted an 20.2% year-over-year gain, compared to 18.9% in the previous month. Home prices in the U.S. impact the performance of the Company's insured RMBS portfolio. Improved home prices generally result in fewer losses or more reimbursements with respect to the Company's distressed insured RMBS risks, and may impact the amount of losses or reimbursements it projects for its distressed legacy RMBS insured portfolio. Impact of COVID-19 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 to state and local governments in 2021 and the performance it observed, the Company’s surveillance department has reduced the supplemental procedures. However, it is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments. The Company 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. The Company began operating remotely in accordance with its business continuity plan in March 2020 in response to the COVID-19 pandemic, instituting mandatory remote work policies in its offices in Bermuda, U.S., U.K. and France. By the end of February 2022, the Company had reopened all of its offices, choosing a hybrid remote and office work model in response to employee feedback and as part of its commitment to providing a safe and healthy workplace. Whether its 75 Table of Contents employees are working remotely or in a hybrid remote and office work model, the Company continues to provide the services and communications it normally would. Key Business Strategies The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM the Company has increased its focus on asset management and alternative investments. Currently, the Company is pursuing the following key business strategies in three areas: (1) insurance, (2) asset management and alternative investments, and (3) capital management. Insurance The Company seeks to grow the insurance business through new business production, acquisitions of remaining legacy monoline insurers or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio. Growth of the Insured Portfolio The Company seeks to grow its insurance portfolio through new business production in each of its three markets: U.S. public finance, international infrastructure and global structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance: • encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds; • enables institutional investors to operate more efficiently; and • allows smaller, less well-known issuers to gain market access on a more cost-effective basis. On the other hand, the persistently low interest rate environment and relatively tight U.S. municipal credit spreads have dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. The Company believes that if interest rates further increase in 2022, demand for bond insurance may improve. In certain segments of the global infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company’s business opportunities and its risk profile beyond U.S. public finance. The timing of new business production in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period. 76 Table of Contents U.S. Municipal Market Data and Bond Insurance Penetration Rates (1) Based on Sale Date First Quarter 2022 First Quarter 2021 Year Ended December 31, 2021 (dollars in billions, except number of issues and percentages) Par: New municipal bonds issued $ 96.8 $ 104.5 $ 456.7 Total insured $ 8.2 $ 8.5 $ 37.5 Insured by Assured Guaranty $ 4.8 $ 5.5 $ 22.6 Number of issues: New municipal bonds issued 2,288 2,698 11,819 Total insured 408 514 2,198 Insured by Assured Guaranty 168 252 1,076 Bond insurance market penetration based on: Par 8.5 % 8.1 % 8.2 % Number of issues 17.8 % 19.1 % 18.6 % Single A par sold 36.5 % 27.0 % 26.6 % Single A transactions sold 57.7 % 56.7 % 56.6 % $25 million and under par sold 20.8 % 21.3 % 21.3 % $25 million and under transactions sold 20.7 % 21.9 % 21.7 % ____________________ (1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business. The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital. Loss Mitigation In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies. In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company’s role in the Detroit, Michigan and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. 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 the Puerto Rico Oversight, Management and Economic Stability Act (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 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 which 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 financial oversight and management board (the FOMB) (GO/PBA PSA). 77 Table of Contents • 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 PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO and PBA was greatly reduced. The Company believes the consummation of the March Puerto Rico Resolutions on March 15, 2022, mark a milestone in its Puerto Rico loss mitigation efforts. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Exposure and the Insured Portfolio section below. In connection with the consummation of the March Puerto Rico Resolutions the Company received substantial amounts of new recovery bonds and contingent value instruments (CVIs). The Company has sold some of the new recovery bonds and CVIs it received and may continue to sell amounts it still retains, subject to market conditions. The fair value of such securities held by the Company as of March 31, 2022, is included in the lines “fixed-maturity securities - Puerto Rico, available-for-sale” and “fixed-maturity securities - Puerto Rico, trading” in the table “Investment Portfolio Carrying Value” of Item 1, Financial Statements, Note 7, Investments. The Company is and has for several years been working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS. In some instances, the terms of the Company’s policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief. Asset Management and Alternative Investments AssuredIM is a diversified asset manager that serves as investment adviser to CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of March 31, 2022, AssuredIM was a top 25 CLO manager by AUM, as published by Creditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending and liquid strategies relating to municipal obligations. Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform. The Company intends to leverage the AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations. The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussion of the metric AUM, see “— Results of Operations by Segment — Asset Management Segment.” Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated $750 million of capital to invest in funds managed by AssuredIM plus $550 million of the AGM, AGC and, until its merger with AGM on April 1, 2021, MAC, (collectively, the U.S. Insurance Subsidiaries) invested assets now managed by AssuredIM under an Investment Management Agreement (IMA). The Company is using these allocations to: (a) launch new products (CLOs, opportunity funds and liquid strategy funds) on the AssuredIM platform; and (b) enhance the returns of its own investment portfolio. 78 Table of Contents As of March 31, 2022, AG Asset Strategies LLC (AGAS) had committed $702 million to funds managed by AssuredIM (AssuredIM Funds), including $229 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, asset-based finance, healthcare structured capital and municipal bonds. Under the IMA with AssuredIM, AGM and AGC have together invested $250 million to municipal obligation strategies and $300 million to CLO strategies. All of these strategies are consistent with the investment strengths of AssuredIM and the Company’s plans to continue to grow its investment strategies. Capital Management The Company has developed strategies to efficiently manage capital within the Assured Guaranty group. From 2013 through May 5, 2022, the Company has repurchased 135.8 million common shares for approximately $4,374 million, representing approximately 70.0% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 23, 2022, the AGL Board of Directors (the Board) authorized the repurchase of an additional $350 million of common shares. Under this and previous authorizations, as of May 5, 2022, the Company was authorized to purchase $240 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 14, Shareholders’ Equity, for additional information about the Company’s repurchases of its common shares. Summary of Share Repurchases Amount Number of Shares Average price per share (in millions, except per share data) 2013 - 2021 $ 4,158 132.0 $ 31.50 2022 (First Quarter) 155 2.7 56.62 2022 (through May 5) 61 1.0 59.86 Cumulative repurchases since the beginning of 2013 $ 4,374 135.8 32.21 Accretive Effect of Cumulative Repurchases (1) First Quarter 2022 As of March 31, 2022 (per share) Net income (loss) attributable to AGL $ 0.51 Adjusted operating income 0.75 Shareholders’ equity attributable to AGL $ 38.45 Adjusted operating shareholders' equity 39.16 Adjusted book value 68.20 _________________ (1) Represents the estimated accretive effect of cumulative repurchases since the beginning of 2013. The Company considers the appropriate mix of debt and equity in its capital structure. On May 26, 2021, the Company issued $500 million of 3.15% Senior Notes, due in 2031 for net proceeds of $494 million. On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes were used to redeem $200 million of AGMH debt as follows: all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and $100 million of the $230 million of AGMH’s 6.25% Notes due in 2102. On August 20, 2021, the Company issued $400 million of 3.6% Senior Notes, due in 2051 for net proceeds of $395 million. On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows: all $100 million of AGMH’s 5.60% Notes due in 2103; the remaining $130 million of AGMH 6.25% Notes due in 2102; and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt. 79 Table of Contents In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. Municipal Assurance Corp. Merger On April 1, 2021, Municipal Assurance Corp. (MAC) merged with and into AGM, with AGM as the surviving company. Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM. As a result, the Company wrote off the $16 million carrying value of MAC’s insurance licenses in the first quarter of 2021. This restructuring of the Company’s U.S. Insurance Subsidiaries simplified the organizational and capital structure, reduced costs, and increased the future dividend capacity of the U.S. Insurance Subsidiaries. Executive Summary This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to the Company’s 2021 Annual Report on Form 10-K. The primary drivers of volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs, and committed capital securities (CCS), loss and loss adjustment expense (LAE), foreign exchange gains (losses), the level of refundings of insured obligations, and changes in the value of the Company’s alternative investments, as well as the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 80 Table of Contents Financial Performance of Assured Guaranty Financial Results First Quarter 2022 2021 (in millions, except per share amounts) GAAP Net income (loss) attributable to AGL $ 66 $ 11 Net income (loss) attributable to AGL per diluted share $ 0.98 $ 0.14 Weighted average diluted shares 67.4 77.5 Non-GAAP Adjusted operating income (loss) (2) $ 90 $ 43 Adjusted operating income per diluted share $ 1.34 $ 0.55 Weighted average diluted shares 67.4 77.5 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income $ (10) $ — Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share $ (0.14) $ — Components of total adjusted operating income (loss) Insurance segment $ 133 $ 79 Asset Management segment — (7) Corporate division (33) (29) Other (1) (10) — Adjusted operating income (loss) $ 90 $ 43 Insurance Segment Gross written premiums (GWP) $ 70 $ 87 Present value of new business production (PVP) (2) 69 86 Gross par written 4,471 5,472 Asset Management Segment AUM Inflows - third party $ 91 $ 873 Inflows - intercompany — 145 81 Table of Contents As of March 31, 2022 As of December 31, 2021 Amount Per Share Amount Per Share (in millions, except per share amounts) Shareholders’ equity attributable to AGL $ 5,802 $ 89.20 $ 6,292 $ 93.19 Adjusted operating shareholders' equity (2) 5,860 90.09 5,991 88.73 Adjusted book value (2) 8,665 133.21 8,823 130.67 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity 22 0.34 32 0.47 Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value 13 0.19 23 0.34 Common shares outstanding (3) 65.0 67.5 ____________________ (1) Relates to the effect of consolidating FG VIEs and CIVs. (2) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details. (3) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases. Condensed Consolidated Results of Operations Condensed Consolidated Results of Operations Three Months Ended March 31, 2022 2021 (in millions) 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 CCS 1 (19) Fair value gains (losses) on FG VIEs 6 5 Fair value gains (losses) on CIVs 14 16 Foreign exchange gains (losses) on remeasurement (30) — Other income (loss) (1) — Total revenues 300 177 Expenses: Loss and LAE 57 30 Interest expense 20 21 Amortization of deferred acquisition costs (DAC) 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 Effective tax rate 20.0 % (0.9) % 82 Table of Contents Net income attributable to AGL for First Quarter 2022 was higher compared with the three month period ended March 31, 2021 (First Quarter 2021) primarily due to: • higher net earned premiums of $214 million in First Quarter 2022 compared with $103 million in First Quarter 2021, • fair value gains on CCS in First Quarter 2022 compared with losses in First Quarter 2021, and • lower fair value losses on credit derivatives in First Quarter 2022 compared with First Quarter 2021. These increases were offset in part by: • foreign exchange losses on remeasurement in First Quarter 2022, • higher loss expense in First Quarter 2022 compared First Quarter 2021, and • losses in equity method alternative investments. The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, French subsidiaries taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda subsidiaries, unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. The effective tax rate in First Quarter 2022 was higher than in First Quarter 2021 due primarily to differences in the portion of income generated by various jurisdictions. Adjusted Operating Income Adjusted operating income in First Quarter 2022 was $90 million, compared with $43 million in First Quarter 2021. The increase was primarily attributable to higher insurance segment adjusted operating income due to the March Puerto Rico Resolutions. See “— Results of Operations — Reconciliation to GAAP” below. Book Value and Adjusted Book Value Shareholders’ equity attributable to AGL declined mainly due to unrealized losses on the available-for-sale fixed-maturity investment portfolio that were a result of higher interest rates and share repurchases. Adjusted operating shareholders’ equity and adjusted book value declined from December 31, 2021, mainly due to share repurchases and dividends, partially offset, in the case of adjusted book value, by net written premiums on new business production. Shareholder’s equity attributable to AGL per share, adjusted operating shareholders’ equity per share and adjusted book value per share were $89.20, $90.09 and $133.21, respectively as of March 31, 2022. Shareholders’ equity per share declined primarily due to unrealized losses on the available-for-sale fixed maturity portfolio. The increase in adjusted operating shareholders’ equity per share and adjusted book value per share was primarily due to the accretive effect of the share repurchase program. In the case of adjusted book value per share, net premiums written in the Insurance segment also contributed to the increase compared with December 31, 2021. See “— Overview — Key Business Strategies , Accretive Effect of Cumulative Repurchases” table above. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value. Other Matters Russia’s Invasion of Ukraine Russia’s invasion of Ukraine has led to the imposition of economic sanctions by many western countries against Russia and certain Russian individuals, dislocation in global energy markets, massive refugee movements, and probable default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to reduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company cannot predict all of the potential effects of the conflict on the world or on the Company. 83 Table of Contents The Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, and have identified no material direct exposure to Ukraine or Russia. In fact, the Company’s direct insurance exposure to eastern Europe generally is limited to approximately $327 million in net par outstanding as of March 31, 2022, comprising $255 million net par exposure to the sovereign debt of Poland and $72 million net par exposure to a toll road in Hungary. The Company rates the toll road exposure below-investment-grade (BIG). Inflation As described above under "Overview -- Economic Environment", by some measures consumer inflation in the U.S. and the U.K. has been higher in the last few months than it has been in decades, and interest rates generally have increased. Concerns have been expressed in the financial press about inflation taking hold in the economy. Inflation and higher interest rates could impact the Company in numerous ways. For example, higher interest rates might make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product, and, over time, also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. On the other hand, high interest rates would decrease the amount of excess spread available to support the distressed RMBS the Company insures, would reduce the market value of its largely fixed rate fixed maturity investment portfolio and may make it more difficult for obligors to repay obligations the Company guarantees. The Federal Reserve Board has communicated its intention to raise interest rates, and the Company believes further increases in interest rates and spreads in 2022, should they occur, could increase demand for insurance and permit the Company to increase its premium rates on new business, although there can be no assurance that this would occur. LIBOR Sunset ICE Benchmark Administration (IBA) and U.K. Financial Conduct Authority (FCA) first announced in 2017 that the publication of London Interbank Offered Rate (LIBOR) would cease at the end of 2021. Many legal documents entered into prior to that time did not include robust fallback language contemplating the permanent suspension of the publication of LIBOR. On March 5, 2021, IBA and FCA confirmed a representative panel of banks will continue setting 1, 3, 6 and 12-month U.S. Dollar LIBOR through June 2023, rather than December 31, 2021 as originally announced. The Company believes that the continued publication of U.S. Dollar LIBOR on the current basis after June 2023 is unlikely. The publication of all sterling LIBOR rates ceased on December 31, 2021, as originally announced. The Company has exposure to LIBOR in the following areas: (i) issuers of obligations the Company insures have obligations, assets and hedges that reference LIBOR, and some loss mitigation securities held in the investment portfolio reference LIBOR, (ii) debt issued by the U.S. Holding Companies currently pay or will convert to, a floating interest rate tied to LIBOR, (iii) CCS from which the Company benefits pay interest tied to LIBOR, and (iv) certain obligations issued by, and certain assets owned by, the Company’s CIVs pay interest tied to LIBOR. U.S. Dollar LIBOR. On March 15, 2022, the U.S. president signed into law the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act) which provides, among other things, a transition to the Secured Overnight Finance Rate (SOFR) as a benchmark replacement for LIBOR-based contracts that do not have adequate fallback language or a replacement rate is not selected by a determining person. The LIBOR Act eliminates the need to seek amendments to our LIBOR-based contracts that do not contain adequate fallback language. New York and other states have also passed legislation similar to the LIBOR Act. Sterling LIBOR . The Company is cooperating with the relevant parties to amend the relevant documents referencing sterling LIBOR in its insured portfolio to instead reference Sterling Overnight Interbank Average Rate (SONIA), and the Company believes such amendments will be completed by year end 2022. In the meantime, the FCA has authorized temporary use of synthetic sterling LIBOR, which approximates what sterling LIBOR might have been. Income Taxes The U.S. Internal Revenue Service and Department of the Treasury issued final and proposed regulations in October 2020 relating to the tax treatment of passive foreign investment companies (PFIC). The final regulations are not expected to have a material impact to the Company’s business operation or its shareholders and the proposed regulations are continuing to be evaluated. 84 Table of Contents Results of Operations Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. The inputs into our estimates and assumptions consider the economic implications of COVID-19. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the Consolidated Financial Statements. Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time. The accounting policies that the Company believes are the most dependent on the application of judgment, estimates and assumptions are listed below. See Part II. Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, of the Company’s 2021 Annual Report on Form 10-K, for the Company’s significant accounting policies which includes a reference to the note where further details regarding the significant estimates and assumptions are provided, as well as Part II. Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s 2021 Annual Report on Form 10-K, for further details regarding sensitivity analysis. • Expected loss to be paid (recovered) • Fair value of certain assets and liabilities, primarily: ▪ Investments ▪ Assets and liabilities of CIVs ▪ Assets and liabilities of FG VIEs ▪ Credit derivatives • Recoverability of goodwill and other intangible assets • Credit impairment of financial instruments • Revenue recognition • Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities) In addition, the valuation of AUM, which is the basis for calculating certain asset management fees, is based on estimates and assumptions. AUM valuations are often performed by independent pricing services based on observable and unobservable inputs. AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, see “— Results of Operations by Segment — Asset Management Segment”. Results of Operations by Segment The Company analyzes the operating performance of each segment using each segment’s adjusted operating income as described in Item 1, Financial Statements, Note 2, Segment Information. 85 Table of Contents Insurance Segment Results Insurance Segment Results First Quarter 2022 2021 (in millions) Segment revenues Net earned premiums and credit derivative revenues $ 219 $ 107 Net investment income 63 73 Other income (loss) (4) (1) Total segment revenues 278 179 Segment expenses Loss expense 60 30 Interest expense 1 — Amortization of DAC 4 3 Employee compensation and benefit expenses 38 36 Other operating expenses 19 37 Total segment expenses 122 106 Equity in earnings (losses) of investees (1) 19 Segment adjusted operating income (loss) before income taxes 155 92 Less: Provision (benefit) for income taxes 22 13 Segment adjusted operating income (loss) $ 133 $ 79 Net Earned Premiums and Credit Derivative Revenues Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, books of business acquired in a business combination or reassumptions of previously ceded business. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information. Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis. Refundings occur in the public finance market when municipalities and other public finance issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When such issuers pay down insured obligations prior to their originally scheduled maturities, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of our outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico polices under the March Puerto Rico Resolutions. Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations are more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable. The Company has not written any new credit derivatives since 2009. Other than credit derivatives that may be acquired in business combinations and reinsurance agreements, or as part of loss mitigation strategies, credit derivative exposure is expected to decline. 86 Table of Contents Insurance Segment Net Earned Premiums and Credit Derivative Revenues First Quarter 2022 2021 (in millions) Net earned premiums: Financial guaranty insurance: Public finance Scheduled net earned premiums (1) $ 71 $ 72 Accelerations: Refundings 128 16 Terminations — — Total accelerations 128 16 Total public finance 199 88 Structured finance scheduled net earned premiums (1) 15 15 Specialty insurance and reinsurance 1 1 Total net earned premiums 215 104 Credit derivative revenues: Scheduled net earned premiums 2 3 Accelerations 2 — Total credit derivative revenues 4 3 Total net earned premiums and credit derivative revenues $ 219 $ 107 ____________________ (1) Includes accretion of discount. Net earned premiums and credit derivative revenues in First Quarter 2022 increased compared with First Quarter 2021 primarily due to refundings of $104 million associated with the March Puerto Rico Resolutions as discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of March 31, 2022, $3.6 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts. 87 Table of Contents New Business Production Gross Written Premiums and New Business Production First Quarter 2022 2021 (in millions) GWP Public Finance—U.S. $ 49 $ 79 Public Finance—non-U.S. 16 5 Structured Finance—U.S. 5 3 Structured Finance—non-U.S. — — Total GWP $ 70 $ 87 PVP (1): Public Finance—U.S. $ 49 $ 81 Public Finance—non-U.S. 12 3 Structured Finance—U.S. 2 2 Structured Finance—non-U.S. (1) 6 — Total PVP $ 69 $ 86 Gross Par Written (2): Public Finance—U.S. $ 3,931 $ 5,427 Public Finance—non-U.S. 223 — Structured Finance—U.S. 60 45 Structured Finance—non-U.S. (1) 257 — Total gross par written $ 4,471 $ 5,472 Average rating on new business written A- A- ____________________ (1) First Quarter 2022 PVP and gross par written includes the present value of future premiums and exposure, respectively, associated with a financial guarantee written by the Company that, under GAAP, is accounted for under ASC 460, Guarantees . (2) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “– Non-GAAP Financial Measures – PVP or Present Value of New Business Production.” U.S. public finance GWP and PVP in First Quarter 2022 was lower than the comparable GWP and PVP in First Quarter 2021, primarily due to a large transaction closed in First Quarter 2021 that did not recur. The average rating of U.S. public finance par written was A- in First Quarter 2022, which is consistent with the average rating in First Quarter 2021. The Company's direct par written represented 58% of the total U.S. municipal market insured issuance in First Quarter 2022, compared with 65% in First Quarter 2021, and the Company’s penetration of all municipal issuance was 4.9% in First Quarter 2022 compared with 5.3% in First Quarter 2021. In First Quarter 2022, non-U.S. public finance GWP and PVP were primarily attributable to a U.K. water liquidity guarantee and a restructuring of an existing U.K. water transaction. In First Quarter 2022, structured finance GWP is primarily attributable to U.S. credits. Non-U.S. structured finance PVP primarily includes guarantees of rental income cash flows, for which no GWP is reported under GAAP. 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. Equity method investments in the Insurance segment include investments that the U.S. Insurance Subsidiaries make in AssuredIM Funds, as well as other alternative investments. The income (loss) on such investments is reported in “equity in earnings (losses) of investees” and typically represents the change in net asset value (NAV) of AssuredIM Funds and the Company’s share of earnings of its other equity method alternative investments. The U.S. Insurance Subsidiaries are authorized 88 Table of Contents 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. Insurance Segment Income from Investment Portfolio First Quarter 2022 2021 (in millions) Net investment income Externally managed $ 47 $ 51 Loss mitigation securities and other 12 17 Managed by AssuredIM (1) 4 4 Intercompany loans 2 2 Investment income 65 74 Investment expenses (2) (1) Net investment income $ 63 $ 73 Other income: Unrealized gain (loss) on trading securities $ (4) $ — Equity in earnings (losses) of investees AssuredIM Funds $ 11 $ 10 Other (12) 9 Equity in earnings (losses) of investees $ (1) $ 19 ____________________ (1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA. Net investment income for First Quarter 2022 decreased compared to First Quarter 2021, primarily due to lower average balances in fixed-maturity securities as short term investments were accumulated to meet liquidity needs as a result of the consummation of the March Puerto Rico Resolutions on March 15, 2022. The overall pre-tax book yield was 3.15% as of March 31, 2022 and 3.23% as of March 31, 2021. Excluding the internally managed portfolio, pre-tax book yield was 2.93% as of March 31, 2022 and 2.94% as of March 31, 2021. Equity in earnings of AssuredIM Funds in First Quarter 2022 was primarily attributable to higher valuations of assets held in CLO, healthcare and asset-based funds. The fair value gains on investments in AssuredIM Funds in First Quarter 2021 was primarily attributable to changes in the NAV of CLO funds. Equity in earnings of other investments decreased in First Quarter 2022 compared with First Quarter 2021 primarily due to a stock price decline on a specific investment in a private equity fund. CVIs issued by Puerto Rico and received as part of the March Puerto Rico Resolutions are classified as trading with changes in fair value reported in other income. The fair value of such instruments as of March 31, 2022 was $174 million. Other Income (Loss) Other income (loss) consists of recurring items such as ancillary fees on financial guaranty policies for commitments and consents, foreign exchange gain (loss) on remeasurement, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries. Beginning in First Quarter 2022, other income (loss) also included unrealized gain (loss) on the portfolio of trading securities. Economic Loss Development The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies used in estimating the expected loss to be paid (recovered) for all contracts and the accounting policies for measurement and recognition under GAAP 89 Table of Contents for each type of contract, see the notes listed below in Part II. Item 8, Financial Statements and Supplementary Data, of the Company’s 2021 Annual Report on Form 10-K: • Note 6 for contracts accounted for as insurance; • Note 7 for contracts accounted for as credit derivatives; • Note 9 for FG VIEs; and • Note 10 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities. In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and, the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, and discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used. Current risk-free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported. Changes in risk-free rates used to discount losses affect economic loss development, and loss and LAE; however, the effect of changes in discount rates are not indicative of actual credit impairment or improvement in the period. The following table presents the range and weighted average discount rates used to discount expected losses (recoveries). Risk-Free Rates Used in Expected Loss (Recovery) for U.S. Dollar Denominated Obligations As of March 31, 2022 As of December 31, 2021 As of March 31, 2021 As of December 31, 2020 Range 0.00 % – 2.61% 0.00 % – 1.98% 0.00 % – 2.49% 0.0 % – 1.72% Weighted average 2.26% 1.02% 0.88% 0.60% The composition of economic loss development (benefit) by accounting model and by sector are presented in the tables that follow, and the drivers of economic loss development (benefit) are discussed below. Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) by Accounting Model Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit) As of First Quarter Accounting Model March 31, 2022 December 31, 2021 2022 2021 (in millions) Insurance $ 388 $ 364 $ (44) $ 16 FG VIEs 38 42 (4) (6) Credit derivatives 6 5 4 3 Total $ 432 $ 411 $ (44) $ 13 Net exposure rated below-investment-grade (BIG) $ 5,783 $ 7,440 90 Table of Contents Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) By Sector Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit) As of First Quarter Sector March 31, 2022 December 31, 2021 2022 2021 (in millions) U.S. public finance $ 181 $ 197 $ (48) $ 15 Non-U.S. public finance 10 12 (2) (12) Structured finance U.S. RMBS 195 150 7 11 Other structured finance 46 52 (1) (1) Structured finance 241 202 6 10 Total $ 432 $ 411 $ (44) $ 13 Effect of changes in the risk-free rates included in economic loss development (benefit) $ (47) $ (48) First Quarter 2022 Net Economic Loss Development Public Finance: The economic benefit on U.S. exposures in First Quarter 2022 was $48 million, and was primarily attributable to Puerto Rico exposures and changes in discount rates. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.7 billion as of March 31, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to the March Puerto Rico Resolutions discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. The Company projected that its total net expected loss to be paid across its troubled U.S. public finance exposures as of March 31, 2022 is $181 million, compared with $197 million as of December 31, 2021. U.S. RMBS: The economic loss development attributable to U.S. RMBS was $7 million and was mainly attributable to a $43 million loss related to lower excess spread, partially offset by a $22 million benefit related to changes in discount rates and an $11 million benefit related to improved performance in certain transactions. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information. First Quarter 2021 Net Economic Loss Development Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.4 billion as of March 31, 2021 compared with $5.4 billion as of December 31, 2020. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of March 31, 2021 was $228 million compared with $305 million as of December 31, 2020. Economic loss development on U.S. public finance exposures in First Quarter 2021 was $15 million, which was primarily attributable to Puerto Rico exposures. The economic benefit was approximately $12 million for non-U.S. public finance exposures during First Quarter 2021 mainly due to the restructuring of certain exposures and the impact of higher Euro Interbank Offered Rate (Euribor). U.S. RMBS: The economic loss development attributable to U.S. RMBS was $11 million and was mainly related to a reduction of excess spread of $58 million, partially offset by changes in discount rates, which was a gain of $33 million, and improved performance in certain transactions and higher recoveries for secured charged-off loans. Insurance Segment Loss Expense The primary differences between net economic loss development and the amount reported as “loss and LAE” in the consolidated statements of operations are that loss and LAE: (1) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (2) eliminates loss and LAE related to FG VIEs; and (3) does not include estimated losses on credit derivatives. Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives, without giving effect to eliminations related to consolidation of FG VIEs. 91 Table of Contents For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies. The amount of Insurance segment loss expense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. While expected loss to be paid (recovered) is an important liquidity measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies. The following table presents the Insurance segment loss expense. Insurance Segment Loss Expense First Quarter 2022 2021 (in millions) U.S. public finance $ 55 $ 26 Non-U.S. public finance — (8) Structured finance U.S. RMBS 6 12 Other structured finance (1) — Structured finance 5 12 Total Insurance segment loss expense $ 60 $ 30 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. Loss expense in First Quarter 2021 was mainly driven by certain Puerto Rico transactions and U.S. RMBS exposures. For First Quarter 2021, these losses were partially offset by a benefit in certain European exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Losses. Other Operating Expenses The decrease in other operating expenses in First Quarter 2022 compared with First Quarter 2021 was primarily attributable to the write-off of a $16 million intangible asset attributable to MAC insurance licenses in First Quarter 2021. MAC was merged with and into AGM on April 1, 2021. See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for additional information. 92 Table of Contents Financial Strength Ratings On March 18, 2022, Moody’s Investors Service, Inc. (Moody’s) upgraded the financial strength rating of AGM and AGUK to A1 (stable) from A2 (stable). Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency assigning the rating, are shown in the table below. S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC Kroll Bond Rating Agency Moody’s Investors Service, Inc. A.M. Best Company, Inc. AGM AA (stable) (7/8/21) AA+ (stable) (10/20/21) A1 (stable) (3/18/22) — AGC AA (stable) (7/8/21) AA+ (stable) (10/20/21) (1) — Assured Guaranty Re Ltd. (AG Re) AA (stable) (7/8/21) — — — Assured Guaranty Re Overseas Ltd. (AGRO) AA (stable) (7/8/21) — — A+ (stable) (7/15/21) Assured Guaranty UK Limited (AGUK) AA (stable) (7/8/21) AA+ (stable) (10/20/21) A1 (stable) (3/18/22) — Assured Guaranty (Europe) SA (AGE) AA (stable) (7/8/21) AA+ (stable) (10/20/21) — — ____________________ (1) AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. On March 18, 2022, Moody’s upgraded the financial strength rating of AGC to A2 (stable) from A3 (stable). Ratings are subject to continuous rating agency review and revision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL’s insurance subsidiaries in the future or cease to rate one or more of AGL’s insurance subsidiaries, either voluntarily or at the request of that subsidiary. For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “— Liquidity and Capital Resources —” section below. 93 Table of Contents Asset Management Segment Results Asset Management Segment Results First Quarter 2022 2021 (in millions) Segment revenues Management fees (1) $ 21 $ 19 Performance fees 16 1 Other income (loss) 2 — Total segment revenues 39 20 Segment expenses Employee compensation and benefit expenses 29 19 Other operating expenses (1) (2) 10 10 Total segment expenses 39 29 Segment adjusted operating income (loss) before income taxes — (9) Less: Provision (benefit) for income taxes — (2) Segment adjusted operating income (loss) $ — $ (7) _____________________ (1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross as revenues. (2) Includes amortization of intangible assets of $3 million in both First Quarter 2022 and First Quarter 2021. Management and Performance Fees Management fees are generated by CLOs, opportunity funds, liquid strategies, and the wind-down funds. CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO Equity that is held directly by AssuredIM Funds. Management fees from opportunity funds and liquid strategies include funds that were launched since the BlueMountain Acquisition in which the Insurance segment’s U.S. Insurance Subsidiaries invest along with two previously established opportunity funds in their harvest periods. The Company also generates fees from legacy hedge and opportunity funds now subject to an orderly wind-down. Management Fees First Quarter 2022 2021 (in millions) CLOs $ 12 $ 12 Opportunity funds and liquid strategies 8 4 Wind-down funds 1 3 Total management fees $ 21 $ 19 Fees from opportunity funds increased primarily due to higher AUM of $1.9 billion March 31, 2022 compared with $1.5 billion as of March 31, 2021. Fees from the wind-down funds decreased as distributions to investors continued. As of March 31, 2022, AUM of the wind-down funds was $0.5 billion compared with $1.3 billion as of March 31, 2021 and $0.6 billion as of December 31, 2021. CLO fee-earning AUM was $13.9 billion, or 97%, of total CLO AUM as of March 31, 2022, compared with $12.0 billion, or 83%, of total CLO AUM as of March 31, 2021. Performance fees and increased compensation expenses in First Quarter 2022 were attributable to the performance of the healthcare and asset-based funds. Assets Under Management The Company uses AUM as a metric to measure progress in its Asset Management segment. Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM. However, the Company believes that AUM is a useful 94 Table of Contents metric for assessing the relative size and scope of our asset management business. The Company uses measures of its AUM in its decision-making process and uses a measure of change in AUM in its calculation of certain components of management compensation. Investors also use AUM to evaluate companies that participate in the asset management business. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following: • the amount of aggregate collateral balance and principal cash of AssuredIM’s CLOs, including CLO Equity that may be held by AssuredIM Funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji), which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and continues to provide personnel and other services to BM Fuji associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and a personnel and services agreement, consistent with past practices; and • the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments. Changes in NAV attributable to movements in fund value of certain private equity funds are reported on a quarter lag. The Company’s calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which AssuredIM affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways. The Company also uses several other measurements of AUM to understand and measure its AUM in more detail and for various purposes, including its relative position in the market and its income and income potential: “Third-party AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in AssuredIM Funds. For CLOs, this also includes CLO Equity that may be held by AssuredIM Funds. “Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners’ investments of AssuredIM (or its affiliates) into the AssuredIM Funds. “Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs. “Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse funds. “Fee earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors. “Non-fee earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors. AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company. Further, to the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by AssuredIM. 95 Table of Contents Roll Forward of Assets Under Management First Quarter 2022 CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) AUM, December 31, 2021 $ 14,699 $ 1,824 $ 389 $ 582 $ 17,494 Inflows - third party (1) — 91 — — 91 Inflows - intercompany — — — — — Outflows: Redemptions — — — — — Distributions (2) (335) (104) — (135) (574) Total outflows (335) (104) — (135) (574) Net flows (335) (13) — (135) (483) Change in value (82) 63 (14) 12 (21) AUM, March 31, 2022 $ 14,282 $ 1,874 $ 375 $ 459 $ 16,990 _____________________ (1) Opportunity funds inflows in First Quarter 2022 is primarily related to the healthcare strategy fund. (2) Distributions from opportunity funds include $48 million related to the AssuredIM Funds created prior to BlueMountain Acquisition. As of March 31, 2022, AUM related to these funds was $128 million. Components of Assets Under Management CLOs (1) Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) As of March 31, 2022: Funded AUM $ 14,172 $ 1,265 $ 375 $ 437 $ 16,249 Unfunded AUM 110 609 — 22 741 Fee-earning AUM $ 13,889 $ 1,597 $ 375 $ 280 $ 16,141 Non-fee earning AUM 393 277 — 179 849 Intercompany AUM Funded AUM $ 557 $ 212 $ 355 $ — $ 1,124 Unfunded AUM 108 121 — — 229 As of December 31, 2021: Funded AUM $ 14,575 $ 1,297 $ 389 $ 560 $ 16,821 Unfunded AUM 124 527 — 22 673 Fee-earning AUM $ 14,252 $ 1,527 $ 389 $ 408 $ 16,576 Non-fee earning AUM 447 297 — 174 918 Intercompany AUM Funded AUM $ 541 $ 217 $ 368 $ — $ 1,126 Unfunded AUM 123 121 — — 244 _____________________ (1) CLO AUM includes CLO Equity that is held by various AssuredIM Funds. This CLO Equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM Funds. 96 Table of Contents Corporate Division Results Corporate Division Results First Quarter 2022 2021 (in millions) Revenues $ 1 $ — Expenses Interest expense 21 23 Employee compensation and benefit expenses 6 5 Other operating expenses 7 4 Total expenses 34 32 Equity in earnings (losses) of investees — — Adjusted operating income (loss) before income taxes (33) (32) Less: Provision (benefit) for income taxes — (3) Adjusted operating income (loss) $ (33) $ (29) Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $2 million in both First Quarter 2022 and First Quarter 2021 related primarily to the $250 million AGUS debt to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition. Corporate division employee compensation and benefits expenses are based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance. Other expenses include Board of Director expenses, legal fees and other direct or allocated expenses. Other (Effect of FG VIEs and CIVs) The effect of consolidating FG VIEs and CIVs, intersegment eliminations, and reclassifications of reimbursable fund expenses to revenue are presented in “Other.” See Item 1, Financial Statements, Note 2, Segment Information. The types of entities the Company consolidates when it is deemed to be the primary beneficiary primarily include: (1) entities whose debt obligations the insurance subsidiaries insure; (2) custodial trusts established in connection with the consummation of the March Puerto Rico Resolutions; and (3) investment vehicles such as collateralized financing entities, CLO warehouses and AssuredIM Funds. The Company eliminates the effects of intercompany transactions between its FG VIEs and CIVs, and its insurance and asset management subsidiaries, as well as intercompany transactions between CIVs. The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), has a significant gross-up effect on the consolidated financial statements, and includes: (1) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; (3) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs, and establishing the noncontrolling interests. The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on assets, liabilities and cash flows, and includes: (1) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (2) eliminating the asset management fees earned by AssuredIM from the CIVs; (3) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees and (4) establishing non-controlling interest for amounts not owned by the Company. The economic effect of the Company’s ownership interest in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, and as separate line items (“assets of CIVs,” “liabilities of CIVs,” and redeemable and non-redeemable non-controlling interest) on a consolidated basis. The table below reflects the effect of consolidating FG VIEs and CIVs on the condensed consolidated statements of operations. The amounts represent: (1) the revenues and expenses of the FG VIEs and the CIVs; and (2) the amounts eliminated between consolidated FG VIEs or CIVs and the operating and investment subsidiaries. 97 Table of Contents Effect of Consolidating FG VIEs and CIVs on the Condensed Consolidated Statements of Operations Increase (Decrease) First Quarter 2022 2021 Effect on Financial Statement Line Item (in millions) Fair value gains (losses) on FG VIEs (1) $ 6 $ 5 Fair value gains (losses) on CIVs 14 16 Equity in earnings (losses) of investees (2) (10) (10) Other (3) (11) (7) Effect on income before tax (1) 4 Less: Tax provision (benefit) — — Effect on net income (loss) (1) 4 Less: Effect on noncontrolling interests (4) 9 4 Effect on net income (loss) attributable to AGL $ (10) $ — By Type of VIE FG VIEs $ 2 $ — CIVs (12) — Effect on net income (loss) attributable to AGL $ (10) $ — ____________________ (1) Changes in fair value of the FG VIEs’ assets and liabilities that are attributable to factors other than (i) changes in the Company’s own credit risk on FG VIE liabilities with recourse, and (ii) unrealized gains and losses on available-for-sale fixed maturity securities. (2) Represents the elimination of the equity in earnings (losses) of investees of AGAS and the other subsidiaries’ investments in the consolidated AssuredIM Funds. (3) Includes net earned premiums, net investment income, asset management fees, other income (loss), loss and LAE and other operating expenses. (4) Represents the proportion of consolidated AssuredIM Funds’ income that is not attributable to AGAS’ or any other subsidiaries’ ownership interest. Fair value gains on CIVs in First Quarter 2022 and First Quarter 2021 were attributable to realized gains or losses, changes in underlying investment prices and investment interest, net of fees and expenses. Fair value gains on FG VIEs for First Quarter 2022 were attributable to price depreciation on insured fixed rate debt that were negatively impacted due to the increase in interest rates. Fair value gains on FG VIEs for First Quarter 2021 were attributable to price depreciation on insured fixed rate debt that were negatively impacted due to the assumptions in forward interest rates. 98 Table of Contents Reconciliation to GAAP Reconciliation of Net Income (Loss) Attributable to AGL to Adjusted Operating Income (Loss) First Quarter 2022 2021 (in millions) Net income (loss) attributable to AGL $ 66 $ 11 Less pre-tax adjustments: Realized gains (losses) on investments 3 (3) Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives (3) (19) Fair value gains (losses) on CCS 1 (19) Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves (29) 1 Total pre-tax adjustments (28) (40) Less tax effect on pre-tax adjustments 4 8 Adjusted operating income (loss) $ 90 $ 43 Gain (loss) related to FG VIE and CIV consolidation, net of tax, included in adjusted operating income $ (10) $ — Net Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). 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) 10 1 Net realized investment gains (losses) $ 3 $ (3) O ther net realized gains in First Quarter 2022 related primarily to the sale of one of the Company’s alternative investments. Non-Credit Impairment-Related Unrealized Fair Value Gains (Losses) on Credit Derivatives Changes in the fair value of credit derivatives occur because of changes in the Company’s own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates, and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-credit impairment-related changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because they do not represent actual claims or losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods. The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. Due to the 99 Table of Contents 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 determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market since 2009 and, as of March 31, 2022, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread, and estimated contractual payments. See Item 1, Financial Statements, Note 9, Fair Value Measurement, for additional information. First Quarter 2022 non-credit impairment-related 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 protection increased during the period. First Quarter 2021 non-credit impairment-related 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. These losses were partially offset by the higher discount rates. Sensitivity to Changes in Credit Spread The following table summarizes the estimated change in fair value on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC. Effect of Changes in Credit Spread As of March 31, 2022 As of December 31, 2021 Credit Spreads (1) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain (Loss) (Pre-Tax) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain (Loss) (Pre-Tax) (in millions) Increase of 25 bps $ (241) $ (85) $ (250) $ (96) Base Scenario (156) — (154) — Decrease of 25 bps (86) 70 (83) 71 All transactions priced at floor (32) 124 (37) 117 ____________________ (1) Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread. Fair Value Gains (Losses) on CCS Fair value gains on CCS in First Quarter 2022 were primarily due to a significant increase in LIBOR. Fair value losses on CCS in First Quarter 2021 were primarily due to a tightening in market spreads. Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. Foreign Exchange Gain (Loss) on Remeasurement Foreign exchange gains and losses in all periods primarily relate to remeasurement of long-dated premiums receivables, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and euro relative to the U.S. dollar. 100 Table of Contents Non-GAAP Financial Measures The Company discloses both: (a) financial measures determined in accordance with GAAP; and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company. The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results. GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include: • FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and • CIVs in which certain subsidiaries invest and which are managed by AssuredIM. The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment. Management of the Company and AGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; (4) PVP, and (5) gross third-party assets raised. Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy. Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases. The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below. Adjusted Operating Income Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. 101 Table of Contents 2) 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. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize. 5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. See “— Results of Operations — Reconciliation to GAAP”, for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss). Adjusted Operating Shareholders’ Equity and Adjusted Book Value Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss. Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. 2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore would not recognize an economic gain or loss. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. Management uses adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following: 1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods. 102 Table of Contents 2) Addition of the net present value of estimated net future revenue. See below. 3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. Reconciliation of Shareholders’ Equity Attributable to AGL to Adjusted Operating Shareholders’ Equity and Adjusted Book Value As of March 31, 2022 As of December 31, 2021 After-Tax Per Share After-Tax Per Share (dollars in millions, except share amounts) Shareholders’ equity attributable to AGL $ 5,802 $ 89.20 $ 6,292 $ 93.19 Less pre-tax adjustments: Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives (57) (0.88) (54) (0.80) Fair value gains (losses) on CCS 24 0.38 23 0.34 Unrealized gain (loss) on investment portfolio excluding foreign exchange effect (26) (0.41) 404 5.99 Less taxes 1 0.02 (72) (1.07) Adjusted operating shareholders’ equity 5,860 90.09 5,991 88.73 Pre-tax adjustments: Less: Deferred acquisition costs 135 2.07 131 1.95 Plus: Net present value of estimated net future revenue 164 2.52 160 2.37 Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed 3,369 51.79 3,402 50.40 Plus taxes (593) (9.12) (599) (8.88) Adjusted book value $ 8,665 $ 133.21 8,823 130.67 Gain (loss) related to FG VIE and CIV consolidation included in: Adjusted operating shareholders’ equity (net of tax provision (benefit) of $5 and $5) $ 22 $ 0.34 $ 32 $ 0.47 Adjusted book value (net of tax provision (benefit) of $3 and $3) 13 0.19 23 0.34 Net Present Value of Estimated Net Future Revenue Management believes that this amount is a useful measure because it enables an evaluation of the present value of estimated net future revenue for non-financial guaranty insurance contracts. This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to 103 Table of Contents changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure. PVP or Present Value of New Business Production Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production in the Insurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premiums and fees on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), regardless of form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as loss mitigation securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual installment premiums may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation. Reconciliation of GWP to PVP First Quarter 2022 First Quarter 2021 Public Finance Structured Finance Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP $ 49 $ 16 $ 5 $ — $ 70 $ 79 $ 5 $ 3 $ — $ 87 Less: Installment GWP and other GAAP adjustments (1) — 16 3 — 19 34 3 1 — 38 Upfront GWP 49 — 2 — 51 45 2 2 — 49 Plus: Installment premiums and other (2) — 12 — 6 18 36 1 — — 37 PVP $ 49 $ 12 $ 2 $ 6 $ 69 $ 81 $ 3 $ 2 $ — $ 86 ___________________ (1) This includes the present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions and other GAAP adjustments. (2) This includes the present value of future premiums and fees on new business paid in installments discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturities such as loss mitigation securities. This also includes the present value of future premiums and fees associated with a financial guarantee written by the Company that, under GAAP, is accounted for under ASC 460, Guarantees. Insured Portfolio The Company’s financial guaranty and specialty exposures, as well as a guarantee are described in Item 1, Financial Statements, Note 3, Outstanding Exposure. Financial Guaranty Exposure The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure. 104 Table of Contents The following table presents the financial guaranty portfolio by sector, net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or FG VIE consolidation), along with each sector’s average rating. Financial Guaranty Portfolio Net Par Outstanding and Average Internal Rating by Sector As of March 31, 2022 As of December 31, 2021 Sector Net Par Outstanding Average Rating Net Par Outstanding Average Rating (dollars in millions) Public finance: U.S. public finance: General obligation $ 71,993 A- $ 72,896 A- Tax backed 34,698 A- 35,726 A- Municipal utilities 25,238 A- 25,556 A- Transportation 18,252 BBB+ 17,241 BBB+ Healthcare 9,780 BBB+ 9,588 BBB+ Higher education 6,871 A- 6,927 A- Infrastructure finance 6,298 A- 6,329 A- Housing revenue 999 BBB- 1,000 BBB- Investor-owned utilities 509 A- 611 A- Renewable energy 183 A- 193 A- Other public finance 1,136 A- 1,152 A- Total U.S. public finance 175,957 A- 177,219 A- Non-U.S public finance: Regulated utilities 18,732 BBB+ 18,814 BBB+ Infrastructure finance 15,723 BBB 16,475 BBB Sovereign and sub-sovereign 10,574 A+ 10,886 A+ Renewable energy 2,231 A- 2,398 A- Pooled infrastructure 1,246 AAA 1,372 AAA Total non-U.S. public finance 48,506 BBB+ 49,945 BBB+ Total public finance 224,463 A- 227,164 A- Structured finance: U.S. structured finance: Life insurance transactions 3,443 AA- 3,431 AA- RMBS 2,277 BB+ 2,391 BB+ Financial products 600 AA- 770 AA- Consumer receivables 545 A+ 583 A+ Pooled corporate obligations 518 AA+ 534 AA+ Other structured finance 718 BBB+ 665 BBB+ Total U.S. structured finance 8,101 A 8,374 A Non-U.S. structured finance: Pooled corporate obligations 342 AAA 351 AAA RMBS 310 A 325 A Other structured finance 163 AA 178 AA Total non-U.S structured finance 815 AA 854 AA Total structured finance 8,916 A 9,228 A Total net par outstanding $ 233,379 A- $ 236,392 A- Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company 105 Table of Contents underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary financial guarantor. The second-to-pay insured par outstanding as of March 31, 2022 and December 31, 2021 was $4.7 billion and $4.9 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were BIG was $39 million and $43 million as of March 31, 2022 and December 31, 2021, respectively. Exposure to Puerto Rico The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $2.2 billion net par outstanding as of March 31, 2022, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR). The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in Item 1, Financial Statements, Note 3, Outstanding Exposure. Exposure to Puerto Rico By Company As of March 31, 2022 Net Par Outstanding AGM AGC AG Re Eliminations (1) Total Net Par Outstanding Gross Par Outstanding (in millions) Puerto Rico Exposures Subject to a Plan or Support Agreement Commonwealth of Puerto Rico - GO (2) $ 6 $ 28 $ 13 $ — $ 47 $ 47 PBA (2) 1 5 — (1) 5 5 Total GO/PBA Plan 7 33 13 (1) 52 52 Puerto Rico Highways and Transportation Authority (PRHTA) (Transportation revenue) 233 467 178 (79) 799 799 PRHTA (Highway revenue) 381 51 25 — 457 457 Total HTA/CCDA PSA 614 518 203 (79) 1,256 1,256 Total Subject to a Plan or Support Agreement 621 551 216 (80) 1,308 1,308 Other Puerto Rico Exposures PREPA 469 69 210 — 748 759 MFA (3) 126 16 37 — 179 187 PRASA and U of PR (3) — 2 — — 2 2 Total Other Puerto Rico Exposures 595 87 247 — 929 948 Total exposure to Puerto Rico $ 1,216 $ 638 $ 463 $ (80) $ 2,237 $ 2,256 ___________________ (1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary. (2) 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. (3) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company. The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of debt service when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event 106 Table of Contents that obligors default on their obligations, the Company would only pay the shortfall between the debt service due in any given period and the amount paid by the obligors. Amortization Schedule of Net Par of Puerto Rico As of March 31, 2022 Scheduled Net Par Amortization 2022 (2Q) 2022 (3Q) 2022 (4Q) 2023 2024 2025 2026 2027 - 2031 2032 - 2036 2037 - 2041 2042 Total (in millions) Puerto Rico Exposures Subject to a Plan or Support Agreement Commonwealth of Puerto Rico - GO $ — $ 20 $ — $ — $ — $ — $ 2 $ 25 $ — $ — $ — $ 47 PBA — — — 3 — 2 — — — — — 5 Total - GO/PBA Plan — 20 — 3 — 2 2 25 — — — 52 PRHTA (Transportation revenue) — 28 — 34 4 29 24 164 310 201 5 799 PRHTA (Highway revenue) — 40 — 31 33 34 1 78 240 — — 457 Total - HTA/CCDA PSA — 68 — 65 37 63 25 242 550 201 5 1,256 Total Subject to a Plan or Support Agreement — 88 — 68 37 65 27 267 550 201 5 1,308 Other Puerto Rico Exposures PREPA — 28 — 95 93 68 106 332 26 — — 748 MFA — 43 — 23 18 18 37 40 — — — 179 PRASA and U of PR — — — — 1 — — — 1 — — 2 Total Other Puerto Rico Exposures — 71 — 118 112 86 143 372 27 — — 929 Total $ — $ 159 $ — $ 186 $ 149 $ 151 $ 170 $ 639 $ 577 $ 201 $ 5 $ 2,237 Amortization Schedule of Net Debt Service of Puerto Rico As of March 31, 2022 Scheduled Net Debt Service Amortization 2022 (2Q) 2022 (3Q) 2022 (4Q) 2023 2024 2025 2026 2027 - 2031 2032 - 2036 2037 - 2041 2042 Total (in millions) Puerto Rico Exposures Subject to a Plan or Support Agreement Commonwealth of Puerto Rico - GO $ — $ 22 $ — $ 2 $ 2 $ 1 $ 3 $ 28 $ — $ — $ — $ 58 PBA — — — 3 — 2 — — — — — 5 Total - GO/PBA Plan — 22 — 5 2 3 3 28 — — — 63 PRHTA (Transportation revenue) — 48 — 73 42 67 61 323 423 237 5 1,279 PRHTA (Highway revenue) — 52 — 54 52 53 18 159 279 — — 667 Total - HTA/CCDA PSA — 100 — 127 94 120 79 482 702 237 5 1,946 Total Subject to a Plan or Support Agreement — 122 — 132 96 123 82 510 702 237 5 2,009 Other Puerto Rico Exposures PREPA 3 43 3 128 122 92 126 380 29 — — 926 MFA — 48 — 29 24 22 41 45 — — — 209 PRASA and U of PR — — — — 1 — — — 1 — — 2 Total Other Puerto Rico Exposures 3 91 3 157 147 114 167 425 30 — — 1,137 Total $ 3 $ 213 $ 3 $ 289 $ 243 $ 237 $ 249 $ 935 $ 732 $ 237 $ 5 $ 3,146 Financial Guaranty Exposure to U.S. RMBS The following table presents information in respect of the U.S. RMBS exposures to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid 107 Table of Contents (Recovered). U.S. RMBS exposures represent 1.0% of the total net par outstanding, and BIG U.S. RMBS represent 21.8% of total BIG net par outstanding. Distribution of U.S. RMBS by Year Insured and Type of Exposure as of March 31, 2022 Year insured: Prime First Lien Alt-A First Lien Option ARMs Subprime First Lien Second Lien Total Net Par Outstanding (in millions) 2004 and prior $ 11 $ 10 $ — $ 384 $ 20 $ 425 2005 25 136 16 191 69 437 2006 29 29 1 54 127 240 2007 — 215 18 737 172 1,142 2008 — — — 33 — 33 Total exposures $ 65 $ 390 $ 35 $ 1,399 $ 388 $ 2,277 Exposures rated BIG $ 43 $ 226 $ 16 $ 807 $ 137 $ 1,229 Liquidity and Capital Resources AGL and its U.S. Holding Companies AGL directly owns (i) AG Re, an insurance company domiciled in Bermuda, and (ii) AGUS, a U.S. Holding Company with public debt. AGUS directly owns: (i) AGC, an insurance company domiciled in Maryland; and (ii) AGMH, a U.S. Holding Company with public debt outstanding. AGMH directly owns AGM, an insurance subsidiary domiciled in New York. AGUS and AGMH are collectively referred to as the U.S. Holding Companies. Sources and Uses of Funds The liquidity of AGL and its U.S. Holding Companies is largely dependent on dividends from their operating subsidiaries (see Insurance Subsidiaries, Distributions from Insurance Subsidiaries below for a description of dividend restrictions) and their access to external financing. The operating liquidity requirements of AGL and the U.S. Holding Companies include: • principal and interest on debt issued by AGUS and AGMH; • dividends on AGL’s common shares; and • the payment of operating expenses. AGL and its U.S. Holding Companies may also require liquidity to: • make capital investments in their operating subsidiaries; • fund acquisitions of new businesses; • purchase or redeem the Company’s outstanding debt; or • repurchase AGL’s common shares pursuant to AGL’s share repurchase authorization. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one time its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See “— Overview— Key Business Strategies, Capital Management” above for information on common share repurchases. Long-Term Debt Obligations The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and Guarantor and U.S. Holding Companies' Summarized Financial Information , below. 108 Table of Contents U.S. Holding Companies Long-Term Debt and Intercompany Loans As of March 31, 2022 As of December 31, 2021 (in millions) Effective Interest Rate Final Maturity Principal Amount AGUS - long-term debt 7% Senior Notes 6.40% 2034 $ 200 $ 200 5% Senior Notes 5.00% 2024 330 330 3.15% Senior Notes 3.15% 2031 500 500 3.6% Senior Notes 3.60% 2051 400 400 Series A Enhanced Junior Subordinated Debentures 3 month LIBOR +2.38% 2066 150 150 AGUS long-term debt subtotal 1,580 1,580 AGUS - intercompany loans from insurance subsidiaries AGC and AGM 3.50% 2030 250 250 AGRO 6 month LIBOR +3.00% 2023 20 20 AGUS intercompany loans subtotal 270 270 Total AGUS 1,850 1,850 AGMH Junior Subordinated Debentures 6.40% 2066 300 300 Total AGMH 300 300 AGMH’s long-term debt purchased by AGUS (1) (154) (154) U.S. Holding Company debt $ 1,996 $ 1,996 ____________________ (1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS. The Series A Enhanced Junior Subordinated Debentures pay interest based on LIBOR. If the AGMH Junior Subordinated Debentures are outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at one-month LIBOR plus 2.215%. The continuation of LIBOR on the current basis will not be guaranteed after June 2023. See the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part 1, Item 1A, Risk Factors, of the Company’s 2021 Annual Report on Form 10-K. From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility. For more information, see the Company’s 2021 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities. Guarantor and U.S. Holding Companies’ Summarized Financial Information AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,430 million aggregate principal amount of notes issued by the U.S. Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by the U.S. Holding Companies, and the intercompany loans. The following tables include summarized financial information for AGL and the U.S. Holding Companies, excluding their investments in subsidiaries. 109 Table of Contents As of March 31, 2022 AGL U.S. Holding Companies (in millions) Assets Fixed-maturity securities (1) $ 83 $ 4 Short-term investments, other invested assets and cash 59 305 Receivables from affiliates (2) 35 — Receivable from U.S. Holding Companies 50 — Other assets 1 34 Liabilities Long-term debt — 1,671 Loans payable to affiliates — 270 Payable to affiliates (2) 16 11 Payable to AGL — 50 Other liabilities 4 102 ____________________ (1) As of March 31, 2022, weighted average durations of AGL’s and the U.S. Holding Companies' fixed-maturity securities (excluding AGUS’ investment in AGMH’s debt) were 6.3 years and 5.0 years, respectively. (2) Represents receivable and payables with non-guarantor subsidiaries. First Quarter 2022 AGL U.S. Holding Companies (in millions) Revenues $ 1 $ — Expenses Interest expense — 21 Other expenses 11 2 Income (loss) before provision for income taxes and equity in earnings (losses) of investees (10) (23) Net income (loss) (10) (20) The following table presents significant cash flow items for AGL and the U.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities. AGL and U.S. Holding Companies Significant Cash Flow Items First Quarter 2022 AGL U.S. Holding Companies (in millions) Dividends received from subsidiaries (1) $ 135 $ 224 Interest paid — (9) Investments in subsidiaries — (15) Dividends paid to AGL — (135) Dividends paid (17) — Repurchases of common shares (2) (152) — ____________________ (1) AGL’s dividends include dividends from AGUS. (2) See Item 1, Financial Statements, Note 14, Shareholders’ Equity, for additional information about share repurchases and authorizations. 110 Table of Contents Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty. For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 13, Long-Term Debt and Credit Facilities of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. External Financing From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company. Insurance Subsidiaries The Company has several insurance subsidiaries. The U.S. Insurance Subsidiaries consist of AGM and AGC. AGM owns: (i) AGUK, an insurance subsidiary domiciled in the U.K; and (ii) AGE SA, an insurance company domiciled in France. AGUK and AGE are collectively referred to as the European Insurance Subsidiaries. AG Re is an insurance company domiciled in Bermuda, which owns AGRO, an insurance subsidiary, also domiciled in Bermuda. Sources and Uses of Funds Liquidity of the insurance subsidiaries is primarily used to pay for: • operating expenses, • claims on the insured portfolio, • dividends or other distributions to AGL, AGUS and/or AGMH, as applicable, • reinsurance premiums, • principal of, and interest on, surplus notes, where applicable, and • capital investments in their own subsidiaries, where appropriate. Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios, although the Company may enter into secured short-term loan facilities with financial institutions, as described below, to provide short-term liquidity for the payment of insurance claims it anticipates making in connection with the future resolutions of other Puerto Rico exposures. The Company generally targets a balance of its most liquid assets including cash and short-term securities, U.S. Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. As of March 31, 2022, the Company intended to hold and had the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost. Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company’s insurance subsidiaries, insurance regulations and rating agency capital requirements. Financial Guaranty Policies Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option. Premiums received on financial guaranty contracts are paid either upfront or in installments over the life of the insured obligations. Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. While it appears to the Company that significant federal funding in 2021 may have mitigated the financial stress from direct and indirect consequences of COVID-19 for most obligors and assets underlying obligations guaranteed by the Company, the pandemic may still result in further 111 Table of Contents increases in claims and loss reserves. The Company believes that state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various intermittent closures and capacity and travel restrictions or an economic downturn, are most at risk for increased claims. The size and depth of the COVID-19 pandemic, its course and duration and the direct and indirect consequences of governmental and private responses to it, and the effectiveness and acceptance of vaccines and therapeutics for it, remain unknown, so the Company cannot predict the ultimate size of any increases in claims that may result from the pandemic. In addition, as of March 31, 2022, the Company has financial guaranty exposure to the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations aggregating $2.2 billion net par outstanding, all of which is rated BIG. As set forth in Item 1, Financial Statements, Note 3, Outstanding Exposure, its $1.3 billion net outstanding par exposure to PRHTA is subject to a plan of adjustment filed by the FOMB with the Title III Court on May 2, 2022 (HTA Plan). The Company anticipates making substantial claim payments in connection with the consummation of the HTA Plan, should consummation occur, and is taking this into account in projecting its liquidity needs. While the Company has the capacity to generate sufficient liquidity internally to fund the full amount of the gross claim payments it would be required to pay under the HTA Plan, the Company may enter into a secured short-term loan facility to partially fund such gross claim payments until it sells the securities it expects to receive under the HTA Plan. See Item 1. Financial Statements Note 11, Credit Facilities, for a description of the secured short-term facility it used to partially fund the claim payments it made in connection with the consummation of the March Puerto Rico Resolutions in March 2022. In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner. If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds. Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $446 million as of March 31, 2022. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As of March 31, 2022, approximately $1.9 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM. The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled “pay-as-you-go” basis and to replicate the terms of a traditional financial guaranty insurance policy. The documentation for certain CDS were negotiated to require the Company to also pay if the obligor becomes bankrupt or if the reference obligation were restructured. Furthermore, some CDS documentation requires the Company to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis. Distributions From Insurance Subsidiaries The Company anticipates that, for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies’ liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other 112 Table of Contents potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16, Insurance Company Regulatory Requirements, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a complete discussion of the Company’s dividend restrictions applicable to AGC, AGM, AG Re and AGRO. Dividend restrictions by insurance subsidiary are as follows: • The maximum amount available during 2022 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $291 million, but none is available for distribution in the second quarter of 2022. • The maximum amount available during 2022 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $207 million, of which approximately $25 million is available for distribution in the second quarter of 2022. • Based on the applicable law and regulations, in 2022 AG Re (a subsidiary of AGL) has the capacity to (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $236 million as of March 31, 2022. Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $146 million as of March 31, 2022, and (ii) the amount of statutory surplus, which as of March 31, 2022 was $42 million. • Based on the applicable law and regulations, in 2021 AGRO (an indirect subsidiary of AGRe) has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $106 million as of March 31, 2022. Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $396 million as of March 31, 2022, and (ii) the amount of statutory surplus, which as of March 31, 2022 was $270 million. Distributions From Insurance Company Subsidiaries First Quarter 2022 2021 (in millions) Dividends paid by AGC to AGUS $ 125 $ 13 Dividends paid by AGM to AGMH 96 82 Ratings Impact on Financial Guaranty Business A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay. See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Assumed Reinsurance Some of the Company’s insurance subsidiaries (Assuming Subsidiaries) assumed financial guaranty insurance from legacy third-party bond insurers. The agreements under which such Assuming Subsidiaries assumed such business are generally subject to termination at the option of the ceding company (a) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (b) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (c) upon certain changes of control of the Assuming Subsidiary. Upon termination due to one of the above events, the Assuming Subsidiary typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the assumed business (plus in certain cases, an additional required amount), after which the Assuming Subsidiary would be released from liability with respect to such business. 113 Table of Contents As of March 31, 2022, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $268 million, including $237 million by AGC and $31 million by AG Re. Committed Capital Securities Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty’s financial statements. The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC’s or AGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock. Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities is one-month LIBOR plus 200 bps. LIBOR may be discontinued. See “— Executive Summary — Other Matters — LIBOR Sunset” above and the Risk Factor captioned “The Company may be adversely impacted by the transition from LIBOR as a reference rate” under Operational Risks in Part I, Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Investment Portfolio The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income. Approximately 71% of the total investment portfolio is managed by external parties. Each of the three external investment managers must maintain a minimum average rating of A+/A1/A+ by S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P), Moody’s and Fitch Ratings Inc., respectively. Changes in interest rates affect the value of the Company’s fixed-maturity securities. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of investment-grade, liquid instruments. Other invested assets include other alternative investments. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 1, Financial Statements, Note 7, Investments and Note 9, Fair Value Measurement. 114 Table of Contents Investment Portfolio Carrying Value As of March 31, 2022 December 31, 2021 (in millions) Fixed-maturity securities, available-for-sale (1) $ 8,156 $ 8,202 Fixed-maturity securities - Puerto Rico, trading 174 — Short-term investments 585 1,225 Other invested assets 152 181 Total $ 9,067 $ 9,608 ____________________ (1) Include $514 million of new recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions. The Company’s available-for-sale fixed-maturity securities had a duration of 4.3 years and 4.7 years as of March 31, 2022 and December 31, 2021, respectively. Generally, the Company’s fixed-maturity securities are designated as available-for-sale, except for CVIs received under the March Puerto Rico Resolutions, which are classified as trading. Available-for-Sale Fixed-Maturity Securities By Contractual Maturity The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Distribution of 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 Commercial mortgage-backed securities (CMBS) 321 322 Total $ 8,227 $ 8,156 Available-for-Sale Fixed-Maturity Securities By Rating The following table summarizes the ratings distributions of the Company’s available-for-sale fixed-maturity securities as of March 31, 2022 and December 31, 2021. Ratings reflect the lower of Moody’s and S&P classifications, except for bonds purchased for loss mitigation and certain other securities, which use Assured Guaranty’s internal ratings classifications, or are not rated, such as the Puerto Rico securities received under the March Puerto Rico Resolutions. 115 Table of Contents Distribution of Available-for-Sale Fixed-Maturity Securities by Rating As of Rating March 31, 2022 December 31, 2021 AAA 13.8 % 14.6 % AA 36.0 38.2 A 23.6 25.1 BBB 12.1 13.7 BIG (1) 7.3 7.5 Not rated (2) 7.2 0.9 Total 100.0 % 100.0 % ____________________ (1) Includes primarily loss mitigation securities. See Item I, Financial Statements, Note 7, Investments, for additional information. (2) As of March 31, 2022, primarily represent new recovery bonds received in connection with the consummation of the March Puerto Rico Resolutions. Other Investments Other invested assets reported on the condensed consolidated balance sheets primarily consist of investments in renewable and clean energy and private equity funds managed by a third party. The Insurance segment reports AGAS’s percentage ownership of AssuredIM Funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of March 31, 2022 and December 31, 2021, all of the funds in which AGAS invests are consolidated in the Company’s consolidated financial statements. The amounts in the table below represent the fair value of AGAS’s interests in the AssuredIM Funds. See Commitments below. Fair Value of AGAS’s Interest in AssuredIM Funds As of Strategy March 31, 2022 December 31, 2021 (in millions) CLOs $ 245 $ 228 Municipal bonds 103 107 Healthcare 103 115 Asset-based 108 93 Total $ 559 $ 543 Equity in Earnings (Losses) of Investees of AGAS’s Investment in AssuredIM Funds First Quarter Strategy 2022 2021 (in millions) CLOs $ 7 $ 7 Municipal bonds (4) 1 Healthcare 3 — Asset-based 5 2 Total $ 11 $ 10 Restricted Assets Based on fair value, investments and other assets that are either held in trust for the benefit of third-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, totaled $229 million and $243 million as of March 31, 2022 and December 31, 2021, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the 116 Table of Contents benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,160 million and $1,231 million, based on fair value, as of March 31, 2022 and December 31, 2021, respectively. Commitments The Company is authorized to invest up to $750 million in AssuredIM Funds. As of March 31, 2022, the Insurance segment had total commitments to AssuredIM Funds of $702 million, of which $473 million represented net invested capital and $229 million was undrawn. The Company had unfunded commitments of $96 million as of March 31, 2022 related to certain of the Company’s other alternative investments. AssuredIM Sources and Uses of Funds AssuredIM’s sources of liquidity are: (1) cash from operations, including management and performance fees (which are unpredictable as to amount and timing); and (2) capital contributions from AGUS ($15 million and $15 million in First Quarter 2022 and First Quarter 2021, respectively, had been contributed to supplement cash from operations). As of March 31, 2022, AssuredIM had $24 million in cash and short-term investments. AssuredIM’s liquidity needs primarily include: (1) paying operating expenses including compensation; (2) paying dividends or other distributions to AGUS; and (3) capital to support growth and expansion of the asset management business. Lease Obligations The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco, London, Paris, and other locations with various lease terms. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Leases, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, for a table of minimum lease obligations and other lease commitments. FG VIEs and CIVs The Company manages its liquidity needs by evaluating cash flows without the effect of consolidating FG VIEs and CIVs; however, the Company’s consolidated financial statements include the effect of consolidating FG VIEs and CIVs. The primary sources and uses of cash at Assured Guaranty’s FG VIEs and CIVs are as follows: • FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting the debt obligations, and the primary uses of cash are the payment of principal and interest due on the debt obligations. The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. For the Puerto Rico Trusts, the primary source of cash is the collection of debt service on the assets in the trusts and the primary use of cash is the payment of the trusts debt obligations. • CIVs. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses). 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. See Item. 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information. 117 Table of Contents Credit Facilities of CIVs Certain of the Company’s CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or 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 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. Condensed Consolidated Cash Flows The summarized condensed consolidated statements of cash flow in the table below presents the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of FG VIEs and CIVs. 118 Table of Contents Condensed Consolidated Cash Flow Summary First Quarter 2022 2021 (in millions) Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation $ (640) $ (42) Effect of FG VIEs and CIVs consolidation (1) (252) (424) Net cash flows provided by (used in) operating activities (892) (466) Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation 831 81 Effect of FG VIEs and CIVs consolidation (1) 19 44 Net cash flows provided by (used in) investing activities 850 125 Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation Dividends paid (17) (18) Repurchases of common shares (152) (77) Other (10) (12) Effect of FG VIEs and CIVs consolidation (1) 169 496 Net cash flows provided by (used in) financing activities (2) (10) 389 Effect of exchange rate changes (1) — Increase (decrease) in cash and cash equivalents and restricted cash (53) 48 Cash and cash equivalents and restricted cash at beginning of period 342 298 Cash and cash equivalents and restricted cash at the end of the period $ 289 $ 346 ____________________ (1) This includes the effects of consolidating FG VIEs and CIVs. (2) Claims paid on consolidated FG VIEs are presented in the condensed consolidated statements of cash flows as a component of paydowns on FG VIEs’ liabilities in financing activities as opposed to operating activities. Cash flows from operations, excluding the effect of consolidating VIEs, was an outflow of $640 million in First Quarter 2022 and an outflow of $42 million in First Quarter 2021. The increase in cash outflows during 2022 was primarily due to claim payments made net of cash recoveries received in connection with the March Puerto Rico Resolutions. See Item 1. Financial Statements, Note 3, Outstanding Exposure, for additional information. Cash flows from operations attributable to the effect of VIE consolidation was negative in 2022 and 2021 due to the inclusion of investing activities of CIVs, which included cash outflows for purchases of investments, offset in part by sales of investments. Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs’ assets. The increase in investing cash inflows during 2022 was mainly attributable to higher sales of short-term investments in 2022 to fund share repurchases and claim payments in connection with the March Puerto Rico Resolutions. See Item 1. Financial Statements, Note 3, Outstanding Exposure, for additional information. Financing activities primarily consist of share repurchases, dividends, and paydowns of FG VIEs’ liabilities, as well and CLO issuances and CLO warehouse financing activities. The decrease in financing cash flow activity from VIEs was primarily due to First Quarter 2021 including the consolidation of an additional CLO and securitization of a previously consolidated CLO warehouse. See Item 1. Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. From March 1 through May 5, 2022, the Company repurchased an additional 1.0 million of common shares. As of May 5, 2022, the Company was authorized to purchase $240 million of its common shares. For more information abou t th e Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders’ Equity. 119 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2022, there were no material changes to the market risks to which the Company is exposed since December 31, 2021.