ASSURED GUARANTY LTD 10-Q

ITEM 1. FINANCIAL STATEMENTS Assured Guaranty Ltd. Condensed Consolidated Balance Sheets (Unaudited) (dollars in millions except share data) As of March 31, 2023 December 31, 2022 Assets Investments: Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $ 69 and $ 65 (amortized cost of $ 7,359 and $ 7,707 ) $ 6,869 $ 7,119 Fixed-maturity securities, trading, at fair value 300 303 Short-term investments, at fair value 1,273 810 Other invested assets (includes $ 27 and $ 30 , at fair value) 140 133 Total investments 8,582 8,365 Cash 118 107 Premiums receivable, net of commissions payable 1,346 1,298 Deferred acquisition costs 151 147 Salvage and subrogation recoverable 258 257 Financial guaranty variable interest entities’ assets (includes $ 413 and $ 413 , at fair value) 415 416 Assets of consolidated investment vehicles (includes $ 5,067 and $ 5,363 , at fair value) 5,118 5,493 Goodwill and other intangible assets 6 163 Assets held for sale 227 — Other assets (includes $ 140 and $ 148 , at fair value) 557 597 Total assets $ 16,778 $ 16,843 Liabilities Unearned premium reserve $ 3,631 $ 3,620 Loss and loss adjustment expense reserve 291 296 Long-term debt 1,676 1,675 Credit derivative liabilities, at fair value 150 163 Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $ 692 and $ 702 , without recourse $ 12 and $ 13 ) 704 715 Liabilities of consolidated investment vehicles (includes $ 4,352 and $ 4,431 , at fair value) 4,458 4,625 Liabilities held for sale 51 — Other liabilities 402 457 Total liabilities 11,363 11,551 Commitments and contingencies (Note 12) Shareholders’ equity Common shares ($ 0.01 par value, 500,000,000 shares authorized; 59,274,112 and 59,013,040 shares issued and outstanding) 1 1 Retained earnings 5,638 5,577 Accumulated other comprehensive income (loss), net of tax of $( 69 ) and $( 84 ) ( 420 ) ( 515 ) Deferred equity compensation 1 1 Total shareholders’ equity attributable to Assured Guaranty Ltd. 5,220 5,064 Nonredeemable noncontrolling interests (Note 8) 195 228 Total shareholders’ equity 5,415 5,292 Total liabilities and shareholders’ equity $ 16,778 $ 16,843 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Operations (Unaudited) (dollars in millions except share data) Three Months Ended March 31, 2023 2022 Revenues Net earned premiums $ 81 $ 214 Net investment income 81 62 Asset management fees 26 34 Net realized investment gains (losses) ( 2 ) 3 Fair value gains (losses) on credit derivatives 15 ( 3 ) Fair value gains (losses) on committed capital securities ( 16 ) 1 Fair value gains (losses) on financial guaranty variable interest entities ( 5 ) 6 Fair value gains (losses) on consolidated investment vehicles 58 14 Foreign exchange gains (losses) on remeasurement 20 ( 30 ) Fair value gains (losses) on trading securities ( 2 ) ( 4 ) Other income (loss) 27 3 Total revenues 283 300 Expenses Loss and loss adjustment expenses (benefit) 4 57 Interest expense 21 20 Amortization of deferred acquisition costs 3 4 Employee compensation and benefit expenses 82 73 Other operating expenses 55 42 Total expenses 165 196 Income (loss) before income taxes and equity in earnings (losses) of investees 118 104 Equity in earnings (losses) of investees 2 ( 11 ) Income (loss) before income taxes 120 93 Less: Provision (benefit) for income taxes 23 18 Net income (loss) 97 75 Less: Noncontrolling interests 16 9 Net income (loss) attributable to Assured Guaranty Ltd. $ 81 $ 66 Earnings per share: Basic $ 1.37 $ 1.00 Diluted $ 1.34 $ 0.98 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (in millions) Three Months Ended March 31, 2023 2022 Net income (loss) $ 97 $ 75 Change in net unrealized gains (losses) on: Investments with no credit impairment, net of tax provision (benefit) of $ 14 and $( 63 ) 89 ( 338 ) Investments with credit impairment, net of tax provision (benefit) of $ 1 and $( 9 ) 5 ( 39 ) Change in net unrealized gains (losses) on investments 94 ( 377 ) Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax ( 1 ) — Other, net of tax 2 ( 1 ) Other comprehensive income (loss) 95 ( 378 ) Comprehensive income (loss) 192 ( 303 ) Less: Comprehensive income (loss) attributable to noncontrolling interests 16 9 Comprehensive income (loss) attributable to Assured Guaranty Ltd. $ 176 $ ( 312 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) (dollars in millions, except share data) For the Three Months Ended March 31, 2023 Shareholders’ Equity Attributable to Assured Guaranty Ltd. Common Shares Outstanding Common Shares Par Value Retained Earnings Accumulated Other Comprehensive Income (Loss) Deferred Equity Compensation Total Nonredeemable Noncontrolling Interests Shareholders’ Equity As of December 31, 2022 59,013,040 $ 1 $ 5,577 $ ( 515 ) $ 1 $ 5,064 $ 228 $ 5,292 Net income — — 81 — — 81 16 97 Dividends ($ 0.28 per share) — — ( 18 ) — — ( 18 ) — ( 18 ) Contributions — — — — — — 3 3 Common shares repurchases ( 36,369 ) — ( 2 ) — — ( 2 ) — ( 2 ) Share-based compensation 297,441 — — — — — — — Distributions — — — — — — ( 52 ) ( 52 ) Other comprehensive income — — — 95 — 95 — 95 As of March 31, 2023 59,274,112 $ 1 $ 5,638 $ ( 420 ) $ 1 $ 5,220 $ 195 $ 5,415 For the Three Months Ended March 31, 2022 Shareholders’ Equity Attributable to Assured Guaranty Ltd. Common Shares Outstanding Common Shares Par Value Retained Earnings Accumulated Other Comprehensive Income (Loss) Deferred Equity Compensation Total Nonredeemable Noncontrolling Interests Shareholders’ Equity As of December 31, 2021 67,518,424 $ 1 $ 5,990 $ 300 $ 1 $ 6,292 $ 186 $ 6,478 Net income — — 66 — — 66 10 76 Dividends ($ 0.25 per share) — — ( 17 ) — — ( 17 ) — ( 17 ) Contributions — — — — — — 5 5 Common shares repurchases ( 2,738,223 ) — ( 155 ) — — ( 155 ) — ( 155 ) Share-based compensation 263,346 — ( 6 ) — — ( 6 ) — ( 6 ) Distributions — — — — — — ( 8 ) ( 8 ) Other comprehensive loss — — — ( 378 ) — ( 378 ) — ( 378 ) As of March 31, 2022 65,043,547 $ 1 $ 5,878 $ ( 78 ) $ 1 $ 5,802 $ 193 $ 5,995 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited) (in millions) Three Months Ended March 31, 2023 2022 Net cash flows provided by (used in) operating activities $ 312 $ ( 892 ) Cash flows from investing activities: Fixed-maturity securities, available-for-sale: Purchases ( 225 ) ( 68 ) Sales 455 57 Maturities and paydowns 129 179 Short-term investments with original maturities of over three months: Purchases ( 12 ) ( 17 ) Sales 3 — Maturities and paydowns 15 — Net sales (purchases) of short-term investments with original maturities of less than three months ( 460 ) 656 Paydowns of financial guaranty variable interest entities’ assets 7 18 Purchases of other invested assets ( 10 ) ( 5 ) Sales and return of capital of other invested assets 5 31 Other ( 1 ) ( 1 ) Net cash flows provided by (used in) investing activities ( 94 ) 850 Cash flows from financing activities: Dividends paid ( 18 ) ( 17 ) Repurchases of common shares ( 2 ) ( 152 ) Net paydowns of financial guaranty variable interest entities’ liabilities ( 9 ) ( 41 ) Other ( 15 ) ( 10 ) Cash flows from consolidated investment vehicles: Proceeds from issuance of collateralized loan obligations — 371 Repayment of collateralized loan obligations — ( 372 ) Proceeds from issuance of warehouse financing debt — 215 Repayment of warehouse financing debt ( 152 ) — Borrowing (payment) under credit facilities ( 30 ) ( 1 ) Contributions from noncontrolling interests to consolidated investment vehicles — 3 Distributions to noncontrolling interests from consolidated investment vehicles ( 70 ) ( 6 ) Net cash flows provided by (used in) financing activities ( 296 ) ( 10 ) Effect of foreign exchange rate changes 1 ( 1 ) Increase (decrease) in cash and cash equivalents and restricted cash ( 77 ) ( 53 ) Cash and cash equivalents and restricted cash at beginning of period 207 342 Cash and cash equivalents and restricted cash at end of period $ 130 $ 289 (continued on next page) 5 Table of Contents Assured Guaranty Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited) - (Continued) (in millions) Three Months Ended March 31, 2023 2022 Supplemental cash flow information Interest paid on long-term debt $ 10 $ 9 Supplemental disclosure of non-cash activities: Puerto Rico Plan Consideration (see Note 3) Fixed-maturity securities, available-for-sale, received as salvage $ 1 $ 610 Fixed-maturity securities, available-for-sale, ceded to a reinsurer — 27 Fixed-maturity securities, trading, received as salvage — 184 Fixed-maturity securities, trading, ceded to a reinsurer — 6 Debt securities of financial guaranty variable interest entities received as salvage — 54 Contributions from noncontrolling interests 3 2 Distributions to noncontrolling interests 3 2 As of March 31, 2023 March 31, 2022 Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: Cash $ 118 $ 119 Restricted cash (included in other assets) — 12 Cash and cash equivalents of consolidated investment vehicles (See Note 8) ( 13 ) 158 Cash (included in assets held for sale) 25 — Cash and cash equivalents and restricted cash at the end of period $ 130 $ 289 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Business and Basis of Presentation Business Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (U.S.) and non-U.S. public finance (including infrastructure) and structured finance markets, as well as asset management services. Through its insurance subsidiaries, the Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (collectively, debt service), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions, including Western Europe, Canada and Australia. The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form. Through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM), the Company serves as investment advisor to collateralized loan obligations (CLOs) and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. AssuredIM has managed structured and public finance, credit and special situation investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. Transaction with Sound Point On April 5, 2023, Assured Guaranty entered into a transaction agreement (Transaction Agreement) pursuant to which it agreed to contribute to Sound Point Capital Management, LP (Sound Point) most of its asset management business, other than that conducted by Assured Healthcare Partners LLC (AssuredIM Contributed Business). In addition, AGM and AGC (U.S. Insurance Subsidiaries) entered into a letter agreement (Letter Agreement) pursuant to which they agreed that, after the closing of the transactions contemplated by the Transaction Agreement, they would (a) engage Sound Point as their sole alternative credit manager, (b) transition to Sound Point the management of certain existing alternative investments and related commitments, and (c) subject to regulatory approval, over time make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the transitioned alternative investments and commitments, will total $ 1 billion. See Note 7, Investments. Assured Guaranty will receive, subject to certain potential post-closing adjustments, common interests in Sound Point representing a 30 % participation percentage in Sound Point, and certain other interests in related Sound Point entities (the transactions contemplated under the Transaction Agreement and the Letter Agreement, the Sound Point Transaction). The Sound Point Transaction is expected to be completed in the third quarter of 2023, subject to certain customary closing conditions, including the receipt of certain consents and regulatory approval. Assets and Liabilities Held For Sale As of March 31, 2023, the AssuredIM assets and liabilities subject to the Transaction Agreement were classified as held for sale. Separately, Assured Guaranty has committed to a plan to sell the remaining AssuredIM operating entities associated with its healthcare strategy, and not part of the Sound Point Transaction, including Assured Healthcare Partners LLC, and has also classified those assets and liabilities as held for sale. The results of all of the AssuredIM entities that are classified as held for sale are reported in the Asset Management segment. See Note 2, Segment Information. In addition, the Company designated certain other assets and liabilities supporting the Insurance segment as held for sale in the first quarter of 2023. The disposal group consisting of the assets and liabilities classified as held for sale is measured at the lower of carrying amount or fair value less any costs associated with the transaction. The Company assessed the disposal group for impairment and determined no impairment existed as of March 31, 2023. Upon classification of the disposal group as held for sale, the Company ceased amortizing held for sale intangibles. Each of the components held for sale will be accounted for as dispositions of businesses. The Company is still evaluating the effect that the Sound Point Transaction, and the expected sales 7 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) of the remaining assets and liabilities held for sale, will have in the period in which the transactions are consummated, which is expected to be in the third quarter of 2023. The table below shows the components of assets and liabilities held for sale. Assets and Liabilities Held For Sale As of March 31, 2023 (in millions) Assets Short-term investments $ 1 Cash 25 Goodwill and other intangible assets 155 Other assets Deferred tax assets 5 Other 41 Total assets held for sale $ 227 Liabilities Other liabilities $ 51 Total liabilities held for sale $ 51 Revenues and expenses attributable to all businesses held for sale relate primarily to the AssuredIM entities in the asset management segment, which results are presented in Note 2, Segment Information. Substantially all of the entities in the asset management segment are held for sale. Once the Company executes the Sound Point Transaction and the sales of its held for sale businesses, which are expected to occur in the third quarter of 2023, the Company expects to deconsolidate the corresponding AssuredIM and other entities. The Company will account for its investment in Sound Point as an equity method investment. As of March 31, 2023, the effect of deconsolidating all the CIVs would have been a reduction in assets of $ 4,668 million, a reduction in liabilities of $ 4,458 million, and a reduction in non-controlling interests of $ 195 million. Basis of Presentation The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In management’s opinion, all material adjustments necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, including its consolidated variable interest entities (VIEs), are reflected in the periods presented and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim condensed consolidated financial statements are as of March 31, 2023 and cover the three-month period ended March 31, 2023 (first quarter 2023) and the three-month period ended March 31, 2022 (first quarter 2022). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current period’s presentation, except for assets and liabilities held for sale as described above. The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated financial guaranty VIEs (FG VIEs) and CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Intercompany accounts and transactions between and among all consolidated entities have been eliminated. 8 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (SEC). The Company’s principal insurance subsidiaries are: • Assured Guaranty Municipal Corp. (AGM), domiciled in New York; • Assured Guaranty Corp. (AGC), domiciled in Maryland; • Assured Guaranty UK Limited (AGUK), organized in the U.K.; • Assured Guaranty (Europe) SA (AGE), organized in France; • Assured Guaranty Re Ltd. (AG Re), domiciled in Bermuda; and • Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda. The Company’s principal asset management subsidiaries are: • Assured Investment Management LLC, organized in Delaware; • Assured Investment Management (London) LLP, organized in the U.K.; and • Assured Healthcare Partners LLC, organized in Delaware. AGM and AGC (collectively, the U.S. Insurance Subsidiaries), jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by AssuredIM (AssuredIM Funds). AGL directly or indirectly owns several holding companies, two of which - Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH and, together with AGUS, the U.S. Holding Companies) - have public debt outstanding. Recent Accounting Standards Adopted Targeted Improvements to the Accounting for Long-Duration Contracts In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts . The Company’s adoption of this ASU on January 1, 2023 did not have any effect on the Company’s consolidated financial statements. 2. Segment Information The Company reports its results of operations in two segments: Insurance and Asset Management, separate from its Corporate division and the effects of consolidating FG VIEs and CIVs, which is consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Insurance segment primarily consists of: (i) the Company’s insurance subsidiaries; and (ii) AGAS. The Asset Management segment consists of AssuredIM, which provides asset management services to third-party investors as well as to the U.S. Insurance Subsidiaries and AGAS. The Corporate division primarily consists of interest expense on the debt of the U.S. Holding Companies and any losses on extinguishment or repurchases of their debt, as well as other operating expenses attributed to the corporate activities of AGL and the U.S. Holding Companies. The Other category primarily includes the effect of consolidating FG VIEs and CIVs, intersegment eliminations and the reclassification of reimbursable fund expenses. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The segment results differ from the consolidated financial statements in certain respects. The Insurance segment includes: (i) premiums and losses from the financial guaranty insurance policies issued by the U.S. Insurance Subsidiaries which guarantee the FG VIEs’ debt; and (ii) AGAS’ share of earnings from investments in AssuredIM Funds in “equity in earnings (losses) of investees.” Under GAAP, (i) FG VIEs are consolidated by the U.S. Insurance Subsidiaries and the premiums and losses associated with the financial guaranty policies associated with the FG VIEs’ debt are eliminated, whereas 9 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) the reconciliation tables below present the FG VIEs and related eliminations in “other”, and (ii) CIVs are consolidated by AGUS, whereas in the reconciliation tables below, the CIVs and related eliminations of the Insurance segment’s “equity in earnings (losses) of investees” associated with AGAS’ interest in CIVs are presented in “other.” In addition, under GAAP, reimbursable fund expenses are shown as a component of asset management fees and included in total revenues, whereas in the Asset Management segment in the tables below, they are netted in “segment expenses”. The Company analyzes the operating performance of each segment using “segment adjusted operating income (loss).” Results for each segment include specifically identifiable expenses as well as intersegment expense allocations, as applicable, based on time studies and other cost allocation methodologies based on headcount or other metrics. Segment adjusted operating income is defined as “net income (loss) attributable to AGL”, adjusted for the following items: • Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. • Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. • Elimination of fair value gains (losses) on the Company’s committed capital securities (CCS) that are recognized in net income. • Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and loss adjustment expense (LAE) reserves that are recognized in net income. • Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. The Company does not report assets by reportable segment as the CODM does not assess performance and allocate resources based on assets. The following table presents information for the Company’s operating segments. Intersegment revenues include transactions between and among the segments, the corporate division and other. Segment Information Three Months Ended March 31, 2023 2022 Insurance Asset Management Insurance Asset Management (in millions) Third-party revenues $ 188 $ 25 $ 276 $ 30 Intersegment revenues 2 16 2 9 Segment revenues 190 41 278 39 Segment expenses 79 42 122 39 Segment equity in earnings (losses) of investees 30 — ( 1 ) — Less: Segment provision (benefit) for income taxes 24 — 22 — Segment adjusted operating income (loss) $ 117 $ ( 1 ) $ 133 $ — 10 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The tables below present a reconciliation of significant components of segment information to the comparable consolidated amounts. Reconciliation of Segment Information to Consolidated Information First Quarter 2023 Equity in Earnings (Losses) of Investees Less: Net Income (Loss) Attributable to AGL Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests (in millions) Segments: Insurance $ 190 $ 79 $ 30 $ 24 $ — $ 117 Asset Management 41 42 — — — ( 1 ) Total segments 231 121 30 24 — 116 Corporate division 2 48 — ( 2 ) — ( 44 ) Other 35 ( 4 ) ( 28 ) ( 1 ) 16 ( 4 ) Subtotal 268 165 2 21 16 68 Reconciling items: Realized gains (losses) on investments ( 2 ) — — — — ( 2 ) Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives 13 — — — — 13 Fair value gains (losses) on CCS ( 16 ) — — — — ( 16 ) Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves 20 — — — — 20 Tax effect — — — 2 — ( 2 ) Total consolidated $ 283 $ 165 $ 2 $ 23 $ 16 $ 81 11 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Reconciliation of Segment Information to Consolidated Information First Quarter 2022 Equity in Earnings (Losses) of Investees Less: Net Income (Loss) Attributable to AGL Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests (in millions) Segments: Insurance $ 278 $ 122 $ ( 1 ) $ 22 $ — $ 133 Asset Management 39 39 — — — — Total segments 317 161 ( 1 ) 22 — 133 Corporate division 1 34 — — — ( 33 ) Other 14 5 ( 10 ) — 9 ( 10 ) Subtotal 332 200 ( 11 ) 22 9 90 Reconciling items: Realized gains (losses) on investments 3 — — — — 3 Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives ( 7 ) ( 4 ) — — — ( 3 ) Fair value gains (losses) on CCS 1 — — — — 1 Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves ( 29 ) — — — — ( 29 ) Tax effect — — — ( 4 ) — 4 Total consolidated $ 300 $ 196 $ ( 11 ) $ 18 $ 9 $ 66 3. Outstanding Exposure The Company sells credit protection primarily in financial guaranty insurance form. The Company may also sell credit protection by issuing policies that guarantee payment obligations under credit default swaps (CDS). The Company’s contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for its financial guaranty insurance contracts. The Company has not entered into any new CDS in order to sell credit protection in the U.S. since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold by its U.S. Insurance Subsidiaries. The Company has, however, acquired or reinsured portfolios since 2009 that include financial guaranty contracts in credit derivative form. The Company seeks to limit its exposure to losses by underwriting obligations that it views to be investment grade at inception, although on occasion it may underwrite new issuances that it views to be below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled exposures. The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies or providing reinsurance on a portfolio of insurance; in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction. The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, generally requires subordination or collateral to protect it from loss. Reinsurance may be used in order to reduce net exposure to certain insured transactions. Public finance obligations insured by the Company primarily consist of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, healthcare facilities and government office buildings. The Company also includes within public finance obligations similar obligations issued by U.S. and non-U.S. sovereign and sub-sovereign issuers and governmental authorities. 12 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Structured finance obligations insured by the Company are generally issued by special purpose entities, including VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Unless otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated. The Company also writes specialty business that is consistent with its risk profile and benefits from its underwriting experience and other types of financial guaranties. Surveillance Categories The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review of each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and generally reflect an approach similar to that employed by the rating agencies, except that the Company’s internal credit ratings focus on future performance rather than lifetime performance. The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as being the higher of AA or their current internal rating. Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect its internal ratings. The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector. Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter, although the Company may also review a rating in response to developments impacting a credit when a ratings review is not scheduled. For assumed exposures, the Company may use the ceding company’s credit ratings of transactions where it is impractical for it to assign its own rating. Exposures identified as BIG are subjected to further review to determine the probability of a loss. See Note 4, Expected Loss to be Paid (Recovered), for additional information. Surveillance personnel then assign each BIG transaction to one of the three BIG surveillance categories described below based upon whether a future loss is expected and whether a claim has been paid. The Company uses the pre-tax book yield of the relevant subsidiary’s investment portfolio to calculate the present value of projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG surveillance category to a transaction. For financial statement measurement purposes, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss. More extensive monitoring and intervention are employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. For purposes of determining the appropriate surveillance category, the Company expects “future losses” on a transaction when the Company believes there is at least a 50 % chance that, on a present value basis, it will in the future pay claims on that transaction that will not be fully reimbursed. The three BIG surveillance categories are: • BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected. • BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims, which are claims that the Company expects to be reimbursed within one year ) have yet been paid. • BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid. Financial Guaranty Exposure The Company measures its financial guaranty exposure in terms of (i) gross and net par outstanding and (ii) gross and net debt service. 13 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company typically guarantees the payment of debt service when due. Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure. Gross par outstanding generally represents the principal amount of the insured obligation at a point in time. Net par outstanding equals gross par outstanding net of any reinsurance. The Company includes in its par outstanding calculation the impact of any consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date. Foreign denominated par outstanding is translated at the spot rate at the end of the reporting period. The Company has, from time to time, purchased securities that it has insured, and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The Company excludes amounts attributable to Loss Mitigation Securities from par and debt service outstanding and instead reports Loss Mitigation Securities in the investment portfolio because the Company manages such securities as investments and not insurance exposure. As of both March 31, 2023 and December 31, 2022, the Company excluded from net par outstanding $ 1.3 billion attributable to Loss Mitigation Securities. Gross debt service outstanding represents the sum of all estimated future debt service payments on the insured obligations, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any reinsurance. Future debt service payments include the impact of any consumer price index inflator after the reporting date, as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date. The Company calculates its debt service outstanding as follows: • for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company’s public finance transactions), as the total estimated contractual future debt service due through maturity, regardless of whether the obligations may be called and regardless of whether, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, the Company believes the obligations will be repaid prior to contractual maturity; and • for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (RMBS)), as the total estimated expected future debt service due on insured obligations through their respective expected terms, which includes the Company’s expectations as to whether the obligations may be called and, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity. The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates and assumptions for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract. Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors. 14 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Financial Guaranty Portfolio Debt Service and Par Outstanding As of March 31, 2023 As of December 31, 2022 Gross Net Gross Net (in millions) Debt Service Public finance $ 363,914 $ 363,717 $ 359,899 $ 359,703 Structured finance 10,784 10,758 10,273 10,248 Total financial guaranty $ 374,698 $ 374,475 $ 370,172 $ 369,951 Par Outstanding Public finance $ 226,902 $ 226,746 $ 224,254 $ 224,099 Structured finance 9,663 9,637 9,184 9,159 Total financial guaranty $ 236,565 $ 236,383 $ 233,438 $ 233,258 In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $ 808 million of public finance direct gross par and $ 1.4 billion of structured finance direct gross par as of March 31, 2023. These commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts. Financial Guaranty Portfolio by Internal Rating As of March 31, 2023 Public Finance U.S. Public Finance Non-U.S. Structured Finance U.S Structured Finance Non-U.S Total Rating Category Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % (dollars in millions) AAA $ 220 0.1 % $ 2,000 4.4 % $ 908 10.5 % $ 472 48.3 % $ 3,600 1.5 % AA 16,239 9.0 3,535 7.6 4,605 53.1 12 1.2 24,391 10.3 A 97,909 54.1 10,460 22.8 1,567 18.1 385 39.4 110,321 46.7 BBB 62,665 34.7 28,924 63.0 492 5.7 108 11.1 92,189 39.0 BIG 3,804 2.1 990 2.2 1,088 12.6 — — 5,882 2.5 Total net par outstanding $ 180,837 100.0 % $ 45,909 100.0 % $ 8,660 100.0 % $ 977 100.0 % $ 236,383 100.0 % Financial Guaranty Portfolio by Internal Rating As of December 31, 2022 Public Finance U.S. Public Finance Non-U.S. Structured Finance U.S Structured Finance Non-U.S Total Rating Category Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % Net Par Outstanding % (dollars in millions) AAA $ 222 0.1 % $ 1,967 4.4 % $ 926 11.2 % $ 469 50.4 % $ 3,584 1.5 % AA 16,241 9.1 3,497 7.9 4,633 56.3 12 1.3 24,383 10.5 A 96,807 53.9 9,271 20.9 1,075 13.1 340 36.5 107,493 46.1 BBB 62,570 34.8 28,747 64.6 479 5.8 110 11.8 91,906 39.4 BIG 3,796 2.1 981 2.2 1,115 13.6 — — 5,892 2.5 Total net par outstanding $ 179,636 100.0 % $ 44,463 100.0 % $ 8,228 100.0 % $ 931 100.0 % $ 233,258 100.0 % 15 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Financial Guaranty Portfolio Components of BIG Net Par Outstanding As of March 31, 2023 BIG Net Par Outstanding Net Par BIG 1 BIG 2 BIG 3 Total BIG Outstanding (in millions) Public finance: U.S. public finance $ 2,374 $ 109 $ 1,321 $ 3,804 $ 180,837 Non-U.S. public finance 990 — — 990 45,909 Public finance 3,364 109 1,321 4,794 226,746 Structured finance: U.S. RMBS 12 39 937 988 1,910 Other structured finance — 32 68 100 7,727 Structured finance 12 71 1,005 1,088 9,637 Total $ 3,376 $ 180 $ 2,326 $ 5,882 $ 236,383 Financial Guaranty Portfolio Components of BIG Net Par Outstanding As of December 31, 2022 BIG Net Par Outstanding Net Par BIG 1 BIG 2 BIG 3 Total BIG Outstanding (in millions) Public finance: U.S. public finance $ 2,364 $ 108 $ 1,324 $ 3,796 $ 179,636 Non-U.S. public finance 981 — — 981 44,463 Public finance 3,345 108 1,324 4,777 224,099 Structured finance: U.S. RMBS 18 39 953 1,010 1,956 Other structured finance — 34 71 105 7,203 Structured finance 18 73 1,024 1,115 9,159 Total $ 3,363 $ 181 $ 2,348 $ 5,892 $ 233,258 Financial Guaranty Portfolio BIG Net Par Outstanding and Number of Risks As of March 31, 2023 Net Par Outstanding Number of Risks (2) Description Financial Guaranty Insurance (1) Credit Derivatives Total Financial Guaranty Insurance (1) Credit Derivatives Total (dollars in millions) BIG: Category 1 $ 3,370 $ 6 $ 3,376 117 1 118 Category 2 170 10 180 15 2 17 Category 3 2,286 40 2,326 109 8 117 Total BIG $ 5,826 $ 56 $ 5,882 241 11 252 16 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Financial Guaranty Portfolio BIG Net Par Outstanding and Number of Risks As of December 31, 2022 Net Par Outstanding Number of Risks (2) Description Financial Guaranty Insurance (1) Credit Derivatives Total Financial Guaranty Insurance (1) Credit Derivatives Total (dollars in millions) BIG: Category 1 $ 3,357 $ 6 $ 3,363 122 1 123 Category 2 171 10 181 14 2 16 Category 3 2,307 41 2,348 111 10 121 Total BIG $ 5,835 $ 57 $ 5,892 247 13 260 _____________________ (1) Includes FG VIEs. (2) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. Exposure to Puerto Rico The Company had insured exposure to obligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) as well as its general obligation bonds aggregating $ 1.4 billion net par outstanding as of both March 31, 2023 and December 31, 2022. All of the Company’s insured exposure to Puerto Rico is rated BIG. The Company has paid claims as a result of payment defaults on all of its outstanding Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR), which have made their debt service payments on time. On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA established a seven-member Financial Oversight and Management Board (the FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under Chapter 9 of the United States Bankruptcy Code. After over five years of negotiations, a substantial portion of the Company’s Puerto Rico exposure was resolved in 2022 in accordance with four orders (including orders implementing the GO/PBA Plan and HTA Plan described below) entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico) related to the Company’s exposure to all insured Puerto Rico credits experiencing payment default in 2022 except Puerto Rico Electric Power Authority (PREPA) (2022 Puerto Rico Resolutions). As a result of the 2022 Puerto Rico Resolutions, during 2022 the Company’s obligations under its insurance policies covering debt of the Puerto Rico Convention Center District Authority (PRCCDA) and Puerto Rico Infrastructure Authority (PRIFA) were extinguished, and its insurance exposure to Puerto Rico general obligations (GO) bonds, Public Buildings Authority (PBA) bonds and Puerto Rico Highway and Transportation Authority (PRHTA) bonds were greatly reduced. Under 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 Company received cash, new general obligation bonds (New GO Bonds) and contingent value instruments (CVIs). Under the Modified Fifth Amended Title III Plan of Adjustment for PRHTA (HTA Plan), the Company received cash, new bonds backed by toll revenues (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds) and CVIs. Cash, New Recovery Bonds and CVIs received pursuant to the 2022 Puerto Rico Resolutions are collectively referred to as Plan Consideration. Plan Consideration is reported in either cash, investments or FG VIE assets as described below. • Investments and cash. Plan Consideration received in respect of bondholders whose principal on bonds insured by the Company were accelerated against the Commonwealth and became due and payable under the 2022 Puerto Rico Resolutions are reported in Cash and Investments. See Note 7, Investments, for the fair value of the Toll Bonds and CVIs remaining as of March 31, 2023. 17 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) • FG VIE assets. Plan Consideration received in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Plan Consideration that constitute distributions under the HTA Plan or the GO/PBA Plan are reported in FG VIE assets. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for the fair value of New Recovery Bonds remaining as of March 31, 2023 The Company has sold a portion of the New Recovery Bonds and CVIs and may sell in the future any New Recovery Bonds or CVIs it continues to hold. The fair value of any New Recovery Bonds and CVIs that the Company retains will fluctuate from their date of acquisition. Any gains or losses on sales of New Recovery Bonds and CVIs in the investment portfolio are reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE. The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time. Substantially all of the CVIs are reported in investments, rather than FG VIEs. The Company is continuing its efforts to resolve the one remaining Puerto Rico insured exposure that is in payment default, PREPA. Economic, political and legal developments, including inflation and increases in the cost of petroleum products, may impact any resolution of the Company’s PREPA insured exposure and the value of any remaining consideration received in connection with the 2022 Puerto Rico Resolutions or any future resolutions of the Company’s PREPA insured exposures. The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company’s results of operations and shareholders’ equity. Puerto Rico Par and Debt Service Schedules All Puerto Rico exposures are internally rated BIG. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. Puerto Rico Gross Par and Gross Debt Service Outstanding Gross Par Outstanding Gross Debt Service Outstanding As of As of March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 (in millions) Exposure to Puerto Rico $ 1,367 $ 1,378 $ 1,855 $ 1,899 18 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Puerto Rico Net Par Outstanding As of March 31, 2023 December 31, 2022 (in millions) Defaulted Puerto Rico Exposures PREPA $ 720 $ 720 Total Defaulted 720 720 Resolved Puerto Rico Exposures PRHTA (Transportation revenue) (1) 295 298 PRHTA (Highway revenue) (1) 182 182 Commonwealth of Puerto Rico - GO (1) 25 25 PBA (1) 4 4 Total Resolved 506 509 Other Puerto Rico Exposures MFA (2) 124 131 PRASA and U of PR (2) 1 1 Total Other 125 132 Total net exposure to Puerto Rico $ 1,351 $ 1,361 ____________________ (1) Resolved in pursuant to the 2022 Puerto Rico Resolutions. (2) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company. The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees payment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors. Amortization Schedule of Puerto Rico Net Par Outstanding and Net Debt Service Outstanding As of March 31, 2023 Scheduled Net Par Amortization Scheduled Net Debt Service Amortization (in millions) 2023 (April 1 - June 30) $ — $ 3 2023 (July 1 - September 30) 124 154 2023 (October 1 - December 31) — 3 Subtotal 2023 124 160 2024 110 170 2025 94 148 2026 149 200 2027 124 168 2028-2032 378 528 2033-2037 240 311 2038-2041 132 150 Total $ 1,351 $ 1,835 19 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) PREPA As of March 31, 2023, the Company had $ 720 million insured net par outstanding of PREPA obligations. The Company believes that the PREPA obligations are secured by a lien on the revenues of the electric system. On May 3, 2019, AGM and AGC entered into a restructuring support agreement with PREPA and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB (PREPA RSA). This agreement was terminated by Puerto Rico on March 8, 2022. On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that the mediation would terminate on June 1, 2022. Judge Swain has since extended the term of such mediation several times, most recently on April 24, 2023 extending the term to July 28, 2023. The FOMB initially filed a plan of adjustment and disclosure statement for PREPA with the Federal District Court of Puerto Rico on December 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan). The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation regarding whether that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to PREPA’s current and future revenue collections. The FOMB PREPA Plan provides for lower recoveries to bondholders than did previous agreements the FOMB reached with bondholders. The Federal District Court of Puerto Rico approved the PREPA disclosure statement on February 28, 2023, which allows bondholder solicitation on the FOMB PREPA Plan to begin. On March 22, 2023, the Federal District Court of Puerto Rico found that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. The Federal District Court of Puerto Rico also held, however, that PREPA bondholders do have recourse under the PREPA trust agreement in the form of an unsecured net revenue claim. The Federal District Court of Puerto Rico declined to value the amount of the claim but defined it as the value of the net revenues that would have, under the waterfall provisions of the PREPA trust agreement and applicable nonbankruptcy law, become collateral upon being deposited in the sinking fund and payable to PREPA bondholders over the remaining terms of the bonds. The ultimate value of the claim, according to the Federal District Court of Puerto Rico, should be determined through a claim estimations proceeding. On April 13, 2023, the Federal District Court of Puerto Rico issued an order regarding proposed procedures to estimate the value of the unsecured net revenue claim, pursuant to which the court established a discovery briefing and expert report schedule, indicated that a hearing would be held the week of June 5, 2023, and stated that it expected and directed the parties to engage in good faith mediation. The last revised fiscal plan for PREPA was certified by the FOMB on June 28, 2022. PRHTA As of March 31, 2023, the Company had $ 477 million of insured net par outstanding of PRHTA bonds: $ 295 million insured net par outstanding of PRHTA (transportation revenue) bonds and $ 182 million insured net par outstanding of PRHTA (highway revenue) bonds. PRHTA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds that constitute distributions under the HTA Plan. Puerto Rico GO and PBA As of March 31, 2023, the Company had remaining $ 25 million of insured net par outstanding of GO bonds and $ 4 million of insured net par outstanding of PBA bonds. GO/PBA net par outstanding represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New GO Bonds and CVIs that constitute distributions under the GO/PBA Plan. 20 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Other Puerto Rico Exposures All debt service payments for the Company’s remaining Puerto Rico exposures of $ 125 million insured net par outstanding have been made in full by the obligors as of the date of this filing. These exposures consist primarily of $ 124 million net par outstanding of MFA bonds, which are secured by a lien on local tax revenues. Puerto Rico Litigation Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its instrumentalities on debt service payments, and related matters, and the Company is a party to a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to Puerto Rico obligations which the Company insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party. A number of legal actions involving the Company and relating to the Commonwealth, PRCCDA and PRIFA, as well as claims related to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022, and all remaining legal actions involving the Company and relating to PRHTA were resolved on December 6, 2022, which together comprised the consummation of the 2022 Puerto Rico Resolutions. Except for one proceeding related to PREPA, all proceedings involving the Company and relating to the default by the Commonwealth or its instrumentalities remain stayed pending the Federal District Court of Puerto Rico's determination on plans of adjustment or other proceedings. The following Puerto Rico proceeding in which the Company is involved is no longer stayed: • On July 1, 2019, the FOMB initiated an adversary proceeding against U.S. Bank National Association, as trustee for PREPA’s bonds, objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing those bonds and seeking other relief. On September 30, 2022, the FOMB filed an amended complaint against the trustee (i) objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing PREPA’s bonds and (ii) arguing that PREPA bondholders’ recourse was limited to certain deposit accounts held by the trustee. On October 7, 2022, the court approved a stipulation permitting AGM and AGC to intervene as defendants. Summary judgment motions were filed by plaintiffs and defendants on October 24, 2022. As noted above, on March 22, 2023, the Federal District Court of Puerto Rico granted in part and denied in part each party’s cross-motions for summary judgment. The Federal District Court of Puerto Rico found that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. The Federal District Court of Puerto Rico also held that the PREPA bondholders do have recourse under the trust agreement in the form of an unsecured net revenue claim, but declined to value the unsecured net revenue claim. On April 13, 2023, the court issued an order proposing procedures to estimate the value of the unsecured net revenue claim, pursuant to which the court established a discovery and expert report schedule, and directed the parties to engage in good faith mediation. A hearing is expected to be held the week of June 5, 2023. On May 3, 2023, the Federal District Court of Puerto Rico denied PREPA bondholders’ request to certify their interlocutory appeal of the finding that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. The Company is likely to appeal portions of the decision, including the lien scope ruling and necessity of any claim estimation proceeding, once the FOMB PREPA Plan has been approved. The following Puerto Rico proceedings in which the Company is involved remain stayed: • On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court of Puerto Rico to compel the FOMB to certify the PREPA RSA for implementation under Title VI of PROMESA. On July 21, 2017, considering its PREPA Title III petition on July 2, 2017, the FOMB filed a notice of stay under PROMESA. • On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14, 2017, but on August 8, 2018, the United States Court of Appeals for the First Circuit vacated and remanded the court’s decision. On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver. Following termination of mediation without a resolution and the filing of a motion to dismiss PREPA’s Title III case or to lift the automatic stay 21 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) to allow for the appointment of a receiver, the court effectively stayed this matter until termination of the plan confirmation process. • On May 20, 2019, the FOMB and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court of Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. Relatedly, on January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court of Puerto Rico against AGM and AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims. These matters are currently stayed. On October 12, 2022, the court entered an order and judgment confirming the amended plan of adjustment for PRHTA filed by the FOMB with the court on September 6, 2022 (HTA Confirmation Order), and which provides that these adversary proceeding must be dismissed with prejudice within five business days of the HTA Confirmation Order becoming a final order, which should occur after all appeals of the HTA Confirmation Order have been resolved. • On September 30, 2019, certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims (Fuel Line Lenders) filed an amended adversary complaint against the FOMB and other parties, including AGC and AGM, seeking subordination of PREPA bondholder claims to Fuel Line Lenders’ claims. On November 12, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA. • On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. On November 7, 2019, the court granted a motion to intervene by AGC and AGM. On November 13, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA. Specialty Business The Company also guarantees specialty business with risk profiles similar to those of its structured finance exposures written in financial guaranty form. Specialty Insurance, Reinsurance and Guaranties As of March 31, 2023 As of December 31, 2022 Gross Exposure Net Exposure Gross Exposure Net Exposure (in millions) Life insurance transactions (1) $ 1,302 $ 974 $ 1,314 $ 986 Aircraft residual value insurance policies 355 200 355 200 Other guaranties 1,626 1,626 228 228 ____________________ (1) The life insurance transactions net exposure is projected to reach $ 1.1 billion in 2025. As of both March 31, 2023 and December 31, 2022, gross exposure of $ 144 million and net exposure of $ 84 million of aircraft residual value insurance was BIG. All other exposures in the table above are investment-grade quality. The Company’s subsidiary, AGRO, also guarantees other specialty business, including an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties with an internal rating of AA. These guaranties mature in 2042. The Company’s maximum potential exposure under these guaranties was $ 1.6 billion as of March 31, 2023. The Company accounts for such guaranties in accordance with Accounting Standards Codification (ASC) 460, Guarantees. 22 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 4. Expected Loss to be Paid (Recovered) Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted scenarios. Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s risk management activities. Expected loss to be paid (recovered) is important in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts. In circumstances where the Company purchased its own insured obligations that had expected losses, and in cases where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the Company are referred to as Loss Mitigation Securities and are recorded in the investment portfolio at fair value, excluding the value of the Company’s insurance. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 7, Investments, and Note 9, Fair Value Measurement. Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. The insured portfolio includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary models are: (1) insurance, as described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of these accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio. Loss Estimation Process The Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions, scenarios and the probabilities they assign to those scenarios based on actual developments during the period and their view of future performance. The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such financial guaranties. As a result, the Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the life of most contracts. 23 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities. Changes over a reporting period in the Company’s loss estimates for public finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables. Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables. Changes to estimates of net expected loss to be paid (recovered) and net economic loss development (benefit) over a reporting period may be attributable to a number of interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates, and dispute resolution. Actual losses will ultimately depend on future events, transaction performance or other factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to considerable volatility and may not reflect the Company’s ultimate claims paid. In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which uses cash but reduces projected future losses. Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) by Accounting Model Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit) As of First Quarter Accounting Model March 31, 2023 December 31, 2022 2023 2022 (in millions) Insurance (see Note 5) $ 205 $ 205 $ 6 $ ( 44 ) FG VIEs (see Note 8) 309 (1) 314 (1) 5 ( 4 ) Credit derivatives (see Note 6) 3 3 — 4 Total $ 517 $ 522 $ 11 $ ( 44 ) ____________________ (1) The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated. The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts, which are accounted for under one of the following accounting models: insurance, derivative and FG VIE. The Company used risk-free 24 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) rates for U.S. dollar denominated obligations that ranged from 3.44 % to 4.87 % with a weighted average of 3.75 % as of March 31, 2023 and 3.82 % to 4.69 % with a weighted average of 4.08 % as of December 31, 2022. Expected losses to be paid for U.S. dollar denominated transactions represented approximately 97.6 % and 98.5 % of the total as of March 31, 2023 and December 31, 2022, respectively. Net Expected Loss to be Paid (Recovered) Roll Forward First Quarter 2023 2022 (in millions) Net expected loss to be paid (recovered), beginning of period $ 522 $ 411 Economic loss development (benefit) due to: Accretion of discount 5 2 Changes in discount rates 10 ( 47 ) Changes in timing and assumptions ( 4 ) 1 Total economic loss development (benefit) 11 ( 44 ) Net (paid) recovered losses (1) ( 16 ) 65 Net expected loss to be paid (recovered), end of period $ 517 $ 432 ____________________ (1) Net (paid) recovered losses in 2022 include the net amounts received pursuant to the portion of the 2022 Puerto Rico Resolutions related to PRCCDA, PRIFA and GO/PBA exposures, as described in Note 3, Outstanding Exposure. Net Expected Loss to be Paid (Recovered) Roll Forward by Sector First Quarter 2023 Sector Net Expected Loss to be Paid (Recovered) as of December 31, 2022 Economic Loss Development (Benefit) Net (Paid) Recovered Losses (1) Net Expected Loss to be Paid (Recovered) as of March 31, 2023 (in millions) Public finance: U.S. public finance $ 403 $ 1 $ ( 24 ) $ 380 Non-U.S. public finance 9 4 — 13 Public finance 412 5 ( 24 ) 393 Structured finance: U.S. RMBS 66 5 11 82 Other structured finance 44 1 ( 3 ) 42 Structured finance 110 6 8 124 Total $ 522 $ 11 $ ( 16 ) $ 517 25 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) First Quarter 2022 Sector Net Expected Loss to be Paid (Recovered) as of December 31, 2021 Economic Loss Development (Benefit) Net (Paid) Recovered Losses (1) Net Expected Loss to be Paid (Recovered) as of March 31, 2022 (in millions) Public finance: U.S. public finance $ 197 $ ( 48 ) $ 32 $ 181 Non-U.S. public finance 12 ( 2 ) — 10 Public finance 209 ( 50 ) 32 191 Structured finance: U.S. RMBS 150 7 38 195 Other structured finance 52 ( 1 ) ( 5 ) 46 Structured finance 202 6 33 241 Total $ 411 $ ( 44 ) $ 65 $ 432 ____________________ (1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets”. The tables above include (a) net LAE paid of $ 3 million and $ 13 million for first quarter 2023 and first quarter 2022, respectively, and (b) net expected LAE to be paid of $ 9 million as of March 31, 2023 and $ 11 million as of December 31, 2022. U.S. RMBS Loss Projections The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities and tranching) of the RMBS and any expected representation and warranty (R&W) recoveries/payables to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates. Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend. The assumptions that the Company uses to project RMBS losses are shown in the sections below. Net Economic Loss Development (Benefit) U.S. RMBS First Quarter 2023 2022 (in millions) First lien U.S. RMBS $ — $ 18 Second lien U.S. RMBS 5 ( 11 ) First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period are one of the primary drivers of loss projections in this portfolio. In order to determine the number of defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third-party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories. 26 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) First Lien U.S. RMBS Liquidation Rates As of March 31, 2023 December 31, 2022 Current but recently delinquent Alt-A and Prime 20 % 20 % Option ARM 20 % 20 % Subprime 20 % 20 % 30 – 59 Days Delinquent Alt-A and Prime 35 % 35 % Option ARM 35 % 35 % Subprime 30 % 30 % 60 – 89 Days Delinquent Alt-A and Prime 40 % 40 % Option ARM 45 % 45 % Subprime 40 % 40 % 90+ Days Delinquent Alt-A and Prime 55 % 55 % Option ARM 60 % 60 % Subprime 45 % 45 % Bankruptcy Alt-A and Prime 45 % 45 % Option ARM 50 % 50 % Subprime 40 % 40 % Foreclosure Alt-A and Prime 60 % 60 % Option ARM 65 % 65 % Subprime 55 % 55 % Real Estate Owned All 100 % 100 % While the Company uses the liquidation rates above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a conditional default rate (CDR) curve. The start of that CDR curve is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans. In the most heavily weighted scenario (the base scenario), after the 36 -month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to a final CDR of 5 % of the plateau CDR. In the base scenario, the Company assumes the final CDR will be reached one year after the 36 -month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR trend after the first 36 -month period represent defaults attributable to borrowers that are currently performing or are projected to re-perform. Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. The Company assumes in the base scenario that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base scenario that the recent levels generally will continue for 27 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18 -month period, declining to 40 % in the base scenario over 2.5 years. The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS. Key Assumptions in Base Scenario Expected Loss Estimates First Lien U.S. RMBS As of March 31, 2023 As of December 31, 2022 Range Weighted Average Range Weighted Average Alt-A and Prime: Plateau CDR 0.8 % - 10.8 % 4.4 % 1.6 % - 11.5 % 5.1 % Final CDR 0.0 % - 0.5 % 0.2 % 0.1 % - 0.6 % 0.3 % Initial loss severity: 2005 and prior 50 % 50 % 2006 50 % 50 % 2007+ 50 % 50 % Option ARM: Plateau CDR 0.0 % - 7.6 % 3.9 % 2.0 % - 7.7 % 4.3 % Final CDR 0.0 % - 0.4 % 0.2 % 0.1 % - 0.4 % 0.2 % Initial loss severity: 2005 and prior 50 % 50 % 2006 50 % 50 % 2007+ 50 % 50 % Subprime: Plateau CDR 1.8 % - 8.7 % 5.2 % 2.7 % - 9.7 % 5.6 % Final CDR 0.1 % - 0.4 % 0.3 % 0.1 % - 0.5 % 0.3 % Initial loss severity: 2005 and prior 50 % 50 % 2006 50 % 50 % 2007+ 50 % 50 % The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary conditional prepayment rate (CPR) follows a pattern similar to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15 % in the base scenario. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for December 31, 2022. The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes, in the base scenario, that 20 % of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans. In first quarter 2023, in light of recent volatility in interest rates, the mortgage market, and home prices, the Company also began incorporating a 10 % recovery of deferred principal balances in the pessimistic scenario and a 50 % recovery in the optimistic scenario. The effect on expected losses of this refinement in methodology was less than $ 1 million. 28 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien U.S. RMBS transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5 % of the plateau CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of March 31, 2023 and December 31, 2022. Certain transactions benefit from excess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt linked to London Interbank Offered Rate (LIBOR). An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. ICE Benchmark Administration (IBA) and the Financial Conduct Authority have announced that LIBOR will be discontinued after June 30, 2023. The Company believes that the reference to LIBOR in such floating rate RMBS debt will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on the Secured Overnight Finance Rate (SOFR). The Company used a similar approach to establish its pessimistic and optimistic scenarios as of March 31, 2023 as it used as of December 31, 2022, increasing and decreasing the periods of stress from those used in the base scenario, but, as mentioned above, it updated the assumed recovery for deferred principal balances for the pessimistic and optimistic scenarios (to 10 % and 50 %, respectively) compared to December 31, 2022 (when 20 % was assumed in all scenarios). In the Company’s most stressful scenario where 10 % of deferred principal balances were recovered, loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 16 months, expected loss to be paid would increase from current projections by approximately $ 23 million for all first lien U.S. RMBS transactions. In the Company’s least stressful scenario where 50 % of deferred principal balances are recovered, the CDR plateau was six months shorter ( 30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over eight months ), expected loss to be paid would decrease from current projections by approximately $ 33 million for all first lien U.S. RMBS transactions. Second Lien U.S. RMBS Loss Projections Second lien U.S. RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the prepayment speeds of the collateral, the interest rate environment and assumptions about loss severity. The Company estimates the amount of loans that will default over the next several years by first calculating expected liquidation rates for delinquent loans, and applying liquidation rates to currently delinquent loans in order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults). Similar to first lien U.S. RMBS transactions, the Company then calculates a CDR that will cause the targeted amount of liquidations to occur during the plateau period. For the base scenario, the CDR (the plateau CDR) is held constant for 36 months. Once the plateau period ends, the CDR is assumed to trend down in uniform increments for one year to its final long-term steady state CDR ( 5 % of original plateau). HELOC loans generally permitted the borrower to pay only interest for an initial period (often ten years ) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. A substantial number of loans in the Company’s insured transactions had been modified to extend the interest-only period to 15 years. The majority of the modified loans had reset to fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years. Recently, the Company has observed the performance of the modified loans that have finally reset to full amortization (which represent the majority of extended loans), and noted low levels of delinquency, even with substantial increases in monthly payments. This observed performance lowers the level of uncertainty regarding this modified cohort as the remainder continue to reset. 29 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of March 31, 2023 and December 31, 2022, that it will generally recover 2 % of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time. A second lien on the borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual recoveries of charged-off loans observed from period to period and reasonable expectations of future recoveries. In instances where the Company is able to obtain information on the lien status of charged-off loans, it assumes there will be a certain level of future recoveries of the balance of the charged-off loans where the second lien is still intact. The Company’s base scenario recovery assumption for charged-off loans is 30 %, as shown in the table below, based on observed trends and reasonable expectations of future recoveries. Such recoveries are assumed to be received evenly over the next five years . In first quarter 2023, in light of recent volatility in interest rates, the mortgage market, and home prices, as with the first lien deferred principal balances detailed earlier, the Company also began incorporating a 10 % recovery of charged-off loan balances in the pessimistic scenario and a 50 % recovery in the optimistic scenario. The effect on expected losses of this refinement in methodology was less than $ 1 million. The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base scenario, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15 % for second lien U.S. RMBS transactions (in the base scenario), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is consistent with how the Company modeled the CPR as of December 31, 2022. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses. In estimating expected losses, the Company modeled and probability weighted five scenarios, each with a different CDR curve applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate are the primary drivers of the amount of losses the collateral will likely suffer. The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs. Key Assumptions in Base Scenario Expected Loss Estimates HELOCs As of March 31, 2023 As of December 31, 2022 Range Weighted Average Range Weighted Average Plateau CDR 0.9 % - 5.7 % 3.3 % 0.4 % - 8.4 % 3.5 % Final CDR trended down to 0.0 % - 0.3 % 0.2 % 0.0 % - 0.4 % 0.2 % Liquidation rates: Current but recently delinquent 20 % 20 % 30 – 59 Days Delinquent 30 30 60 – 89 Days Delinquent 40 40 90+ Days Delinquent 60 60 Bankruptcy 55 55 Foreclosure 55 55 Real Estate Owned 100 100 Loss severity on future defaults 98 % 98 % Projected future recoveries on previously charged-off loans 30 % 30 % The Company continues to evaluate the assumptions affecting its modeling results. The Company believes the most important driver of its projected second lien RMBS losses is the performance of its HELOC transactions. 30 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company modeled scenarios with a longer period of elevated defaults and others with a shorter period of elevated defaults. In the Company’s most stressful scenario, assuming 10 % recoveries on charged-off loans, increasing the CDR plateau to 42 months and increasing the ramp-down by four months to 16 months (for a total stress period of 58 months) would decrease the expected recovery by approximately $ 65 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, assuming 50 % recoveries on charged-off loans, reducing the CDR plateau to 30 months and decreasing the length of the CDR ramp-down to eight months (for a total stress period of 38 months) and lowering the ultimate prepayment rate to 10 % would increase the expected recovery by approximately $ 66 million for HELOC transactions. Structured Finance Excluding U.S. RMBS The Company projected that its total net expected loss to be paid across its troubled structured finance exposures, excluding U.S. RMBS, as of March 31, 2023 was $ 42 million. The largest component of these structured finance losses were student loan securitizations issued by private issuers with $ 46 million in BIG net par outstanding. In general, the projected losses of these student loan securitizations are due to: (i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed. The Company also had exposure to troubled life insurance transactions with BIG net par of $ 40 million as of March 31, 2023. Recovery Litigation and Dispute Resolution In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received in prior periods or prevent or reduce losses in the future. The impact, if any, of these and other proceedings on the amount of recoveries the Company ultimately receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements.. The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding Exposure, for a discussion of the Company’s exposure to Puerto Rico and related recovery litigation being pursued by the Company. 5. Contracts Accounted for as Insurance The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives, and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 6, Contracts Accounted for as Credit Derivatives, for amounts related to CDS and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs. Premiums Net Earned Premiums First Quarter 2023 2022 (in millions) Financial guaranty insurance: Scheduled net earned premiums $ 69 $ 79 Accelerations from refundings and terminations (1) 4 128 Accretion of discount on net premiums receivable 7 6 Financial guaranty insurance net earned premiums 80 213 Specialty net earned premiums 1 1 Net earned premiums $ 81 $ 214 ____________________ (1) First quarter 2022 accelerations included $ 104 million related to PRCCDA, PRIFA and GO/PBA exposures. See Note 3, Outstanding Exposure, for additional information. 31 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Gross Premium Receivable, Net of Commissions Payable on Assumed Business Roll Forward First Quarter 2023 2022 (in millions) Beginning of year $ 1,298 $ 1,372 Less: Specialty insurance premium receivable 1 1 Financial guaranty insurance premiums receivable 1,297 1,371 Gross written premiums on new business, net of commissions 79 61 Gross premiums received, net of commissions ( 64 ) ( 83 ) Adjustments: Changes in the expected term and debt service assumptions 6 8 Accretion of discount, net of commissions on assumed business 7 6 Foreign exchange gain (loss) on remeasurement 20 ( 29 ) Financial guaranty insurance premium receivable (1) 1,345 1,334 Specialty insurance premium receivable 1 1 March 31, $ 1,346 $ 1,335 Approximately 73 % and 74 % of gross premiums receivable, net of commissions payable at March 31, 2023 and December 31, 2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in the consumer price index, changes in expected lives and new business. Financial Guaranty Insurance Expected Future Premium Collections and Earnings As of March 31, 2023 Future Gross Premiums to be Collected (1) Future Net Premiums to be Earned (2) (in millions) 2023 (April 1 - June 30) $ 32 $ 70 2023 (July 1 - September 30) 38 70 2023 (October 1 - December 31) 19 69 Subtotal 2023 89 209 2024 111 267 2025 96 251 2026 94 235 2027 91 221 2028-2032 379 925 2033-2037 252 618 2038-2042 175 377 After 2042 364 528 Total $ 1,651 3,631 Future accretion 307 Total future net earned premiums $ 3,938 ____________________ (1) Net of assumed commissions payable. (2) Net of reinsurance. 32 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Selected Information for Financial Guaranty Insurance Policies with Premiums Paid in Installments As of March 31, 2023 December 31, 2022 (dollars in millions) Premiums receivable, net of commissions payable $ 1,345 $ 1,297 Deferred premium revenue 1,699 1,663 Weighted-average risk-free rate used to discount premiums 1.8 % 1.8 % Weighted-average period of premiums receivable (in years) 12.6 12.9 Losses and Recoveries Loss reserves and salvage are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 3.44 % to 4.87 % with a weighted average of 3.84 % as of March 31, 2023 and 3.82 % to 4.69 % with a weighted average of 4.15 % as of December 31, 2022. The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance. Net Reserve (Salvage) by Sector As of Sector March 31, 2023 December 31, 2022 (in millions) Public finance: U.S. public finance $ 52 $ 71 Non-U.S. public finance 1 1 Public finance 53 72 Structured finance: U.S. RMBS ( 62 ) ( 77 ) Other structured finance 41 42 Structured finance ( 21 ) ( 35 ) Total $ 32 $ 37 The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid, which represents the claim payments made and recoveries received that have not yet been recognized in the statements of operations; (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received); and (iii) loss reserves that have already been established (and therefore expensed but not yet paid). Reconciliation of Net Expected Loss to be Paid (Recovered) to Net Expected Loss to be Expensed Financial Guaranty Insurance Contracts As of March 31, 2023 (in millions) Net expected loss to be paid (recovered) - financial guaranty insurance $ 202 Contra-paid, net 22 Salvage and subrogation recoverable, net 257 Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance ( 286 ) Net expected loss to be expensed (present value) $ 195 33 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation. Net Expected Loss to be Expensed Financial Guaranty Insurance Contracts As of March 31, 2023 (in millions) 2023 (April 1 - June 30) $ 3 2023 (July 1 - September 30) 3 2023 (October 1 - December 31) 3 Subtotal 2023 9 2024 12 2025 12 2026 17 2027 15 2028-2032 61 2033-2037 49 2038-2042 8 After 2042 12 Net expected loss to be expensed 195 Future accretion 66 Total expected future loss and LAE $ 261 The following table presents the loss and LAE (benefit) reported in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance. Loss and LAE (Benefit) by Sector First Quarter Sector 2023 2022 (in millions) Public finance: U.S. public finance $ ( 4 ) $ 55 Non-U.S. public finance — — Public finance ( 4 ) 55 Structured finance: U.S. RMBS $ 6 $ 3 Other structured finance 2 ( 1 ) Structured finance 8 2 Loss and LAE (benefit) $ 4 $ 57 34 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The following tables provide information on financial guaranty insurance contracts categorized as BIG. Financial Guaranty Insurance BIG Transaction Loss Summary As of March 31, 2023 Gross Net Total BIG BIG 1 BIG 2 BIG 3 Total BIG (dollars in millions) Number of risks (1) 117 15 109 241 241 Remaining weighted-average period (in years) 11.2 8.5 7.4 9.7 9.7 Outstanding exposure: Par $ 3,376 $ 170 $ 2,296 $ 5,842 $ 5,826 Interest 2,172 77 872 3,121 3,117 Total (2) $ 5,548 $ 247 $ 3,168 $ 8,963 $ 8,943 Expected cash outflows (inflows) $ 263 $ 122 $ 1,704 $ 2,089 $ 2,077 Potential recoveries (3) ( 412 ) ( 79 ) ( 1,330 ) ( 1,821 ) ( 1,809 ) Subtotal ( 149 ) 43 374 268 268 Discount 40 ( 12 ) ( 94 ) ( 66 ) ( 66 ) Expected losses to be paid (recovered) $ ( 109 ) $ 31 $ 280 $ 202 $ 202 Deferred premium revenue $ 165 $ 15 $ 155 $ 335 $ 335 Reserves (salvage) $ ( 158 ) $ 23 $ 164 $ 29 $ 29 35 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Financial Guaranty Insurance BIG Transaction Loss Summary As of December 31, 2022 Gross Net Total BIG BIG 1 BIG 2 BIG 3 Total BIG (dollars in millions) Number of risks (1) 122 14 111 247 247 Remaining weighted-average period (in years) 11.3 8.7 7.6 9.8 9.8 Outstanding exposure: Par $ 3,363 $ 171 $ 2,318 $ 5,852 $ 5,835 Interest 2,177 77 894 3,148 3,144 Total (2) $ 5,540 $ 248 $ 3,212 $ 9,000 $ 8,979 Expected cash outflows (inflows) $ 128 $ 121 $ 1,771 $ 2,020 $ 2,008 Potential recoveries (3) ( 294 ) ( 79 ) ( 1,364 ) ( 1,737 ) ( 1,725 ) Subtotal ( 166 ) 42 407 283 283 Discount 35 ( 13 ) ( 104 ) ( 82 ) ( 82 ) Expected losses to be paid (recovered) $ ( 131 ) $ 29 $ 303 $ 201 $ 201 Deferred premium revenue $ 170 $ 15 $ 160 $ 345 $ 345 Reserves (salvage) $ ( 174 ) $ 21 $ 186 $ 33 $ 33 ____________________ (1) A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments. (2) Includes amounts related to FG VIEs. (3) Represents expected inflows from future payments by obligors pursuant to restructuring agreements, settlements, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past. 6. Contracts Accounted for as Credit Derivatives Amounts presented in this note relate only to contracts accounted for as derivatives. The Company’s credit derivatives (financial guaranty contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps. Credit derivative transactions, including CDS, are governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a CDS may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. In certain credit derivative transactions, the Company also specifically agreed to pay if the obligor were to become bankrupt or if the reference obligation were restructured. Furthermore, in certain credit derivative transactions the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a credit derivative contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions. The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 12.6 years and 12.8 years as of March 31, 2023 and December 31, 2022, respectively. 36 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Credit Derivatives (1) As of March 31, 2023 As of December 31, 2022 Sector Net Par Outstanding Net Fair Value Asset (Liability) Net Par Outstanding Net Fair Value Asset (Liability) (in millions) U.S. public finance $ 1,211 $ ( 73 ) $ 1,175 $ ( 79 ) Non-U.S. public finance 1,589 ( 54 ) 1,565 ( 58 ) U.S. structured finance 339 ( 18 ) 342 ( 22 ) Non-U.S. structured finance 123 ( 3 ) 121 ( 3 ) Total $ 3,262 $ ( 148 ) $ 3,203 $ ( 162 ) ____________________ (1) Expected loss to be paid was $ 3 million as of both March 31, 2023 and December 31, 2022. Distribution of Credit Derivative Net Par Outstanding by Internal Rating As of March 31, 2023 As of December 31, 2022 Rating Category Net Par Outstanding % of Total Net Par Outstanding % of Total (dollars in millions) AAA $ 1,283 39.3 % $ 1,260 39.3 % AA 1,071 32.8 1,064 33.2 A 254 7.8 232 7.2 BBB 598 18.4 590 18.5 BIG 56 1.7 57 1.8 Credit derivative net par outstanding $ 3,262 100.0 % $ 3,203 100.0 % Fair Value Gains (Losses) on Credit Derivatives First Quarter 2023 2022 (in millions) Realized gains (losses) and other settlements $ 1 $ ( 1 ) Net unrealized gains (losses) 14 ( 2 ) Fair value gains (losses) on credit derivatives $ 15 $ ( 3 ) The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date. CDS Spread on AGC (in basis points) As of March 31, 2023 As of December 31, 2022 As of March 31, 2022 As of December 31, 2021 Five-year CDS spread 83 63 71 49 One-year CDS spread 31 26 26 16 37 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Fair Value of Credit Derivative Assets (Liabilities) and Effect of AGC Credit Spread As of March 31, 2023 December 31, 2022 (in millions) Fair value of credit derivatives before effect of AGC credit spread $ ( 209 ) $ ( 207 ) Plus: Effect of AGC credit spread 61 45 Net fair value of credit derivatives $ ( 148 ) $ ( 162 ) The fair value of CDS contracts as of March 31, 2023, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor. 7. Investments The majority of the investment portfolio is managed by three outside managers and AssuredIM. The Company has established investment guidelines for its investment managers regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The remainder of the investment portfolio primarily consists of (i) Loss Mitigation Securities; (ii) New Recovery Bonds and CVIs received in connection with the consummation of the 2022 Puerto Rico Resolutions; and (iii) other investments including certain fixed-maturity and short-term securities, and equity method investments. Equity method investments primarily consist of generally less liquid alternative investments including: an investment in renewable and clean energy and private equity funds. The Company had unfunded commitments of $ 79 million as of March 31, 2023 related to certain of the Company’s alternative investments other than AssuredIM Funds. Investment Portfolio Carrying Value As of March 31, 2023 December 31, 2022 (in millions) Fixed-maturity securities, available-for-sale (1): Externally managed $ 5,498 $ 5,519 Loss Mitigation Securities and other 696 705 AssuredIM managed 539 537 Puerto Rico, New Recovery Bonds (2) 136 358 Fixed-maturity securities, trading - Puerto Rico, CVIs (2) 300 303 Short-term investments (3) 1,273 810 Other invested assets: Equity method investments 122 123 Other 18 10 Total $ 8,582 $ 8,365 ____________________ (1) 7.5 % and 7.4 % of fixed-maturity securities were rated BIG as of March 31, 2023 and December 31, 2022, respectively, consisting primarily of Loss Mitigation Securities. 2.9 % and 5.9 % were not rated, as of March 31, 2023 and December 31, 2022, respectively. (2) These securities are not rated. (3) Weighted average credit rating of AAA as of both March 31, 2023 and December 31, 2022, based on the lower of the Moody’s Investors Service, Inc. (Moody’s) and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications. The U.S. Insurance Subsidiaries, through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $ 750 million in affiliated alternative investment funds, which currently consist of investments in AssuredIM Funds. Adding inception-to-date distributed gains, the U.S. Insurance Subsidiaries may invest a total of up to $ 853 million in affiliated alternative investment funds. As of March 31, 2023, the U.S. Insurance Subsidiaries had total commitments to AssuredIM 38 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Funds of $ 613 million, of which $ 366 million represented net invested capital and $ 247 million was undrawn. This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance and healthcare structured capital. As of March 31, 2023 and December 31, 2022, the net asset value (NAV) of investments in AssuredIM Funds was $ 396 million and $ 569 million, respectively. The decline in the carrying value of AssuredIM Funds was primarily due to distributions from the municipal bond fund. As discussed in Note 1, Business and Basis of Presentation, Sound Point Transaction, the U.S. Insurance Subsidiaries agreed after the closing of the transactions contemplated by the Transaction Agreement to engage Sound Point as their sole alternative credit manager and to transition existing investments and commitments in AssuredIM Funds and make new investments in an aggregate amount totaling $ 1 billion over time, subject to regulatory approval for additional amounts, in funds, other vehicles and separately managed accounts managed by Sound Point as part of the Sound Point Transaction. As of March 31, 2023, current investments and commitments in AssuredIM Funds that will transfer to Sound Point management totaled $ 393 million, and such amount will be applied to the $ 1 billion commitment described above. The Company’s $ 853 million authorization is available for investment in funds, vehicles and separately managed accounts managed by Sound Point and for investment in healthcare strategies. AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not reported in “investments” on the condensed consolidated balance sheets, but rather, such AssuredIM Funds are consolidated and reported in “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles,” with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable noncontrolling interests (NCI). See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Accrued investment income, which is reported in “other assets,” was $ 76 million as of March 31, 2023 and $ 71 million as of December 31, 2022. In first quarter 2023 and first quarter 2022, the Company did not write off any accrued investment income. Available-for-Sale Fixed-Maturity Securities by Security Type As of March 31, 2023 Security Type Percent of Total (1) Amortized Cost Allowance for Credit Losses Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Weighted Average Credit Rating (2) (dollars in millions) Obligations of state and political subdivisions 43 % $ 3,161 $ ( 14 ) $ 46 $ ( 96 ) $ 3,097 A+ U.S. government and agencies 1 94 — 1 ( 7 ) 88 AA+ Corporate securities (3) 33 2,408 ( 6 ) 5 ( 254 ) 2,153 A Mortgage-backed securities (4): RMBS 6 429 ( 20 ) 3 ( 62 ) 350 BBB+ Commercial mortgage-backed securities (CMBS) 3 267 — — ( 9 ) 258 AAA Asset-backed securities: CLOs 6 453 — — ( 20 ) 433 A+ Other 6 426 ( 29 ) 20 ( 28 ) 389 CCC+ Non-U.S. government securities 2 121 — — ( 20 ) 101 AA- Total available-for-sale fixed-maturity securities 100 % $ 7,359 $ ( 69 ) $ 75 $ ( 496 ) $ 6,869 A 39 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Available-for-Sale Fixed-Maturity Securities by Security Type As of December 31, 2022 Security Type Percent of Total (1) Amortized Cost Allowance for Credit Losses Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Weighted Average Credit Rating (2) (dollars in millions) Obligations of state and political subdivisions 45 % $ 3,509 $ ( 14 ) $ 37 $ ( 138 ) $ 3,394 A U.S. government and agencies 2 118 — 1 ( 8 ) 111 AA+ Corporate securities (3) 31 2,387 ( 6 ) 2 ( 299 ) 2,084 A Mortgage-backed securities (4): RMBS 5 418 ( 19 ) 3 ( 62 ) 340 BBB CMBS 4 282 — — ( 11 ) 271 AAA Asset-backed securities: CLOs 6 449 — — ( 21 ) 428 A+ Other 5 423 ( 26 ) 22 ( 26 ) 393 CCC+ Non-U.S. government securities 2 121 — — ( 23 ) 98 AA- Total available-for-sale fixed-maturity securities 100 % $ 7,707 $ ( 65 ) $ 65 $ ( 588 ) $ 7,119 A ____________________ (1) Based on amortized cost. (2) Ratings represent the lower of the Moody’s and S&P classifications, except for Loss Mitigation Securities and certain other securities, which use internal ratings classifications. The Company’s portfolio primarily consists of high-quality, liquid instruments. New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions are not rated. (3) Includes securities issued by taxable universities and hospitals. (4) U.S. government-agency obligations were approximately 32 % and 30 % of mortgage-backed securities as of March 31, 2023 and December 31, 2022, respectively, based on fair value. Gross Unrealized Loss by Length of Time for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded As of March 31, 2023 Less than 12 months 12 months or more Total Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss (dollars in millions) Obligations of state and political subdivisions $ 667 $ ( 10 ) $ 614 $ ( 84 ) $ 1,281 $ ( 94 ) U.S. government and agencies 1 — 56 ( 7 ) 57 ( 7 ) Corporate securities 627 ( 14 ) 1,150 ( 191 ) 1,777 ( 205 ) Mortgage-backed securities: RMBS 117 ( 5 ) 51 ( 4 ) 168 ( 9 ) CMBS 114 ( 2 ) 143 ( 7 ) 257 ( 9 ) Asset-backed securities: CLOs 42 ( 1 ) 377 ( 19 ) 419 ( 20 ) Other 12 — 15 ( 1 ) 27 ( 1 ) Non-U.S. government securities 4 — 93 ( 20 ) 97 ( 20 ) Total $ 1,584 $ ( 32 ) $ 2,499 $ ( 333 ) $ 4,083 $ ( 365 ) Number of securities (1) 602 1,006 1,568 40 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Gross Unrealized Loss by Length of Time for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded As of December 31, 2022 Less than 12 months 12 months or more Total Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss (dollars in millions) Obligations of state and political subdivisions $ 1,763 $ ( 79 ) $ 163 $ ( 56 ) $ 1,926 $ ( 135 ) U.S. government and agencies 32 — 52 ( 8 ) 84 ( 8 ) Corporate securities 1,276 ( 95 ) 519 ( 147 ) 1,795 ( 242 ) Mortgage-backed securities: RMBS 147 ( 9 ) 3 ( 1 ) 150 ( 10 ) CMBS 270 ( 11 ) — — 270 ( 11 ) Asset-backed securities: CLOs 171 ( 7 ) 250 ( 14 ) 421 ( 21 ) Other 27 ( 2 ) — — 27 ( 2 ) Non-U.S. government securities 65 ( 10 ) 30 ( 13 ) 95 ( 23 ) Total $ 3,751 $ ( 213 ) $ 1,017 $ ( 239 ) $ 4,768 $ ( 452 ) Number of securities (1) 1,340 466 1,776 ___________________ (1) The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of March 31, 2023 and December 31, 2022 were related to higher interest rates rather than credit quality. As of March 31, 2023, the Company did not intend to and was not required to sell investments in an unrealized loss position prior to expected recovery in value. As of March 31, 2023, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 482 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2022, 567 securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $ 253 million as of March 31, 2023 and $ 329 million as of December 31, 2022. The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of March 31, 2023 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, 2023 Amortized Cost Estimated Fair Value (in millions) Due within one year $ 289 $ 283 Due after one year through five years 1,636 1,531 Due after five years through 10 years 1,720 1,636 Due after 10 years 3,018 2,811 Mortgage-backed securities: RMBS 429 350 CMBS 267 258 Total $ 7,359 $ 6,869 41 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Based on fair value, investments and other assets that are either held in trust for the benefit of third-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, totaled $ 229 million as of March 31, 2023 and $ 222 million as of December 31, 2022. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amounts of $ 1,146 million and $ 1,169 million based on fair value as of March 31, 2023 and December 31, 2022, respectively. Income from Investments 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. Puerto Rico CVIs in the investment portfolio are classified as trading securities. Equity in earnings (losses) of investees represents the Company’s interest in the earnings of its equity method investments. Income from Investments First Quarter 2023 2022 (in millions) Investment income: Externally managed $ 48 $ 48 Loss Mitigation Securities and other 26 11 Managed by AssuredIM (1) 8 4 Investment income 82 63 Investment expenses ( 1 ) ( 1 ) Net investment income $ 81 $ 62 Fair value gains (losses) on trading securities (2) $ ( 2 ) $ ( 4 ) Equity in earnings (losses) of investees (3) $ 2 $ ( 11 ) ____________________ (1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA. (2) Fair value losses on trading securities pertaining to securities still held as of March 31, 2023 were $ 2 million for first quarter 2023. Fair value losses on trading securities pertaining to securities still held as of March 31, 2022 were $ 4 million for first quarter 2022. (3) Fair value gains (losses) on investments where the fair value option (FVO) was elected utilizing the NAV as a practical expedient were $ 1 million in first quarter 2023 and $ 3 million in first quarter 2022. 42 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). Realized gains and losses on sales of investments are determined using the specific identification method. Net Realized Investment Gains (Losses) First Quarter 2023 2022 (in millions) Gross realized gains on sales of available-for-sale securities (1) $ 12 $ — Gross realized losses on sales of available-for-sale securities (2) ( 9 ) ( 2 ) Change in allowance for credit losses and intent to sell ( 5 ) ( 5 ) Other net realized gains (losses) (3) — 10 Net realized investment gains (losses) $ ( 2 ) $ 3 ____________________ (1) First quarter 2023 related primarily to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions. (2) First quarter 2023 related primarily to sales in externally managed portfolio and New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions. (3) First quarter 2022 net realized gains related primarily to the sale of one of the Company’s alternative investments. The following table presents the roll forward of allowance for the credit losses on available-for-sale fixed-maturity securities. Roll Forward of Allowance for Credit Losses for Available-for-Sale Fixed-Maturity Securities First Quarter 2023 2022 (in millions) Balance, beginning of period $ 65 $ 42 Additions for securities for which credit losses were not previously recognized — 4 Additions (reductions) for securities for which credit losses were previously recognized 4 1 Balance, end of period $ 69 $ 47 The Company recorded credit loss expenses of $ 4 million and $ 5 million in first quarter 2023 and first quarter 2022, respectively. The Company did not purchase any securities with credit deterioration in first quarter 2023 or first quarter 2022. Most of the Company’s securities with credit deterioration are Loss Mitigation Securities. 43 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles FG VIEs Structured Finance and Other FG VIEs The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction. The insurance subsidiaries are not primarily liable for the debt obligations issued by the structured finance and other FG VIEs (which excludes the Puerto Rico Trusts described below) they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the structured finance and other FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on structured finance and other FG VIEs’ liabilities. As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed to no longer have those protective rights, the VIE is deconsolidated. The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets. The Company has elected the FVO for all assets and all liabilities of the structured finance and other FG VIEs. The change in fair value of all structured finance and other FG VIEs assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIE liabilities, which is reported in other comprehensive income (OCI). As of both March 31, 2023 and December 31, 2022, the Company consolidated 25 structured finance and other FG VIEs. 44 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Puerto Rico Trusts As of March 31, 2023 and December 31, 2022, the Company consolidated 45 custodial trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) discussed in Note 3, Outstanding Exposure, Exposure to Puerto Rico. With respect to certain insured securities covered by the 2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and/or CVIs that constitute distributions under the 2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as each is paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest. The Company consolidated the Puerto Rico Trusts as its insurance subsidiaries are deemed to be the primary beneficiary given its power to collapse these trusts. The assets within the Puerto Rico Trusts are classified as follows: New Recovery Bonds as available-for-sale securities ($ 211 million fair value, $ 204 million amortized cost as of March 31, 2023 and $ 204 million fair value, $ 204 million amortized cost as of December 31, 2022) and CVIs as trading securities ($ 5 million fair value as of both March 31, 2023 and December 31, 2022). As of March 31, 2023, the available-for-sale securities had gross unrealized gains of $ 10 million and gross unrealized losses of $ 3 million. Twelve securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $ 3 million and had a fair value of $ 21 million. All of these securities were in a continuous unrealized loss position for more than 12 months. As of December 31, 2022, the available-for-sale securities had gross unrealized gains of $ 4 million and gross unrealized losses of $ 4 million. Fourteen securities in the Puerto Rico Trusts were in a gross unrealized loss position totaling $ 4 million and had a fair value of $ 110 million. All of these securities were in a continuous unrealized loss position for less than 12 months. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of March 31, 2023 and December 31, 2022 were primarily attributable to the change in interest rates, rather than credit quality. As of March 31, 2023 and December 31, 2022, the Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of March 31, 2023 and December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, six and eight securities, respectively, had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $ 2 million and $ 3 million as of March 31, 2023 and December 31, 2022, respectively. The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of March 31, 2023 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. New Recovery Bonds in FG VIEs’ Assets Distribution by Contractual Maturity As of March 31, 2023 Amortized Cost Estimated Fair Value (in millions) Due within one year $ 1 $ 1 Due after one year through five years 6 6 Due after five years through 10 years 42 43 Due after 10 years 155 161 Total $ 204 $ 211 45 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Components of FG VIE Assets and Liabilities Net fair value gains and losses on FG VIEs are expected to reverse to zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contracts. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered). The table below shows the carrying value of FG VIEs’ assets and liabilities segregated by type of collateral. Consolidated FG VIEs by Type of Collateral As of March 31, 2023 December 31, 2022 (in millions) FG VIEs’ assets: U.S. RMBS first lien $ 161 $ 167 U.S. RMBS second lien 30 30 Puerto Rico Trusts’ assets (includes $ 215 and $ 209 at fair value) (1) 217 212 Other 7 7 Total FG VIEs’ assets $ 415 $ 416 FG VIEs’ liabilities with recourse: U.S. RMBS first lien $ 173 $ 176 U.S. RMBS second lien 24 24 Puerto Rico Trusts’ liabilities 487 495 Other 8 7 Total FG VIEs’ liabilities with recourse $ 692 $ 702 FG VIEs’ liabilities without recourse: U.S. RMBS first lien $ 12 $ 13 Total FG VIEs’ liabilities without recourse $ 12 $ 13 ____________________ (1) Includes $ 2 million of cash as of December 31, 2022. The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIEs’ assets at FVO) held as of March 31, 2023 that was reported in the condensed consolidated statements of operations for first quarter 2023 was a loss of $ 1 million. The change in the ISCR of the FG VIEs’ assets at FVO held as of March 31, 2022 was a loss of $ 5 million for first quarter 2022. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield. The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the FVO) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period. 46 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Selected Information for FG VIEs’ Assets and Liabilities Measured under the FVO As of March 31, 2023 December 31, 2022 (in millions) Excess of unpaid principal over fair value of: FG VIEs’ assets $ 264 $ 265 FG VIEs’ liabilities with recourse 23 21 FG VIEs’ liabilities without recourse 16 15 Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due 32 34 Unpaid principal for FG VIEs’ liabilities with recourse (1) 715 723 ____________________ (1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2023 through 2041. CIVs CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses for which the Company is the primary beneficiary or has a controlling interest. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities. The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense are reported in “fair value gains (losses) on consolidated investment vehicles” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates. Number of Consolidated CIVs by Type As of CIV Type March 31, 2023 December 31, 2022 Funds (1) 7 8 CLOs 10 10 CLO warehouses 4 4 Total number of consolidated CIVs (1) 21 22 ____________________ (1) One fund was deconsolidated in first quarter 2023. (2) As of March 31, 2023, one CIV was a voting interest entity, and as of December 31, 2022, two CIVs were voting interest entities. Certain funds meet the criteria for a voting interest entity because the Company possesses substantially all of the economics and all of the decision-making authority. During both first quarter 2023 and first quarter 2022 no consolidated CLO warehouses became CLOs. 47 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Assets and Liabilities of CIVs As of March 31, 2023 December 31, 2022 (in millions) Assets: Fund assets: Cash and cash equivalents (4) $ ( 50 ) $ 59 Fund investments, at fair value Equity securities and warrants 339 434 Corporate securities 93 96 Structured products 94 128 Due from brokers and counterparties 1 — Other 1 1 CLO and CLO warehouse assets: Cash 37 38 CLO investments: Loans in CLOs, FVO 4,270 4,202 Loans in CLO warehouses, FVO 177 368 Short-term investments, at fair value 94 135 Due from brokers and counterparties 62 32 Total assets (1) $ 5,118 $ 5,493 Liabilities: CLO obligations, FVO (2) 4,155 4,090 Warehouse financing debt, FVO (3) 169 313 Due to brokers and counterparties 75 112 Other liabilities 59 110 Total liabilities $ 4,458 $ 4,625 ____________________ (1) Includes investments in AssuredIM Funds and other affiliated entities of $ 260 million and $ 392 million as of March 31, 2023 and December 31, 2022, respectively. Includes assets of a voting interest entity as of March 31, 2023 of $ 38 million, and assets and liabilities of voting interest entities of $ 58 million and $ 1 million, respectively, as of December 31, 2022. (2) The weighted average maturity of CLO obligations was 5.9 years as of March 31, 2023 and 6.2 years as of December 31, 2022. The weighted average interest rate of CLO obligations was 6.1 % as of March 31, 2023 and 5.3 % as of December 31, 2022. CLO obligations have stated final maturity dates from 2034 to 2035. (3) The weighted average maturity of warehouse financing debt of CLO warehouses was 0.5 years as of March 31, 2023 and 1.9 years as of December 31, 2022. The weighted average interest rate of warehouse financing debt of CLO warehouses was 5.0 % as of March 31, 2023 and 4.5 % as of December 31, 2022. Warehouse financing debt will mature at various dates from 2023 to 2031. (4) Negative cash as of March 31, 2023 is due to reporting the distribution of certain cash by an AssuredIM Fund to AGAS in the current period, while reporting the receipt of cash as a result of an investment sale by an AssuredIM Fund on a lag. The “equity securities and warrants” category in the table above includes $ 127 million as of December 31, 2022 related to a consolidated feeder’s investment in a municipal master fund that was unwound in January 2023 based on the December 31, 2022 valuation. On January 31, 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund. As of December 31, 2022, other liabilities in the table above include redeemable NCI. These liabilities were settled in first quarter 2023. As of March 31, 2023, the CIVs had unfunded commitments to invest $ 453 million. As of March 31, 2023 and December 31, 2022, the CIVs included derivative contracts with notional amounts totaling $ 39 million and $ 46 million, respectively, and average notional amounts of $ 43 million and $ 47 million, respectively. The fair 48 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $ 4 million in first quarter 2022. Certain of the CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or other Assured Guaranty subsidiaries. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or other Assured Guaranty subsidiaries. As of March 31, 2023, these credit facilities had varying maturities ranging from 2023 to 2031 with the aggregate principal amount not exceeding $ 1.6 billion. The available commitments were based on the amount of equity contributed to the warehouses which was $ 252 million. As of March 31, 2023, $ 138 million was drawn under credit facilities with interest rates ranging from 3-month Term SOFR plus 150 basis points (bps) to 3-month Euro InterBank Offered Rate (Euribor) plus 250 bps (with a floor on Euribor of zero ). The CLO warehouses were in compliance with all financial covenants as of March 31, 2023. As of March 31, 2023, 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 $ 110 million jointly and $ 71 million individually for the consolidated healthcare fund. The available commitment was based on the capital committed to the funds. As of March 31, 2023, $ 28 million was drawn 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, 2023. Noncontrolling Interest in CIVs NCI represents the proportion of the consolidated funds not owned by the Company and includes ownership interests of third parties, employees, and former employees. The NCI is non-redeemable and presented on the statement of shareholders’ equity. Other Consolidated VIEs In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $ 89 million and liabilities of $ 10 million as of March 31, 2023, and assets of $ 86 million and liabilities of $ 12 million as of December 31, 2022, primarily reported in “investments” and “credit derivative liabilities” on the condensed consolidated balance sheets. Non-Consolidated VIEs As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 15 thousand policies monitored as of March 31, 2023, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of March 31, 2023 and December 31, 2022, the Company identified 86 and 85 policies, respectively, that contain provisions and experienced events that may trigger consolidation. See above for information on VIEs that were consolidated based on management’s assessment of these potential triggers or events. The Company manages funds and CLOs that have been determined to be VIEs in which the Company concluded that it is not the primary beneficiary because it lacks a controlling financial interest. As such, the Company does not consolidate these entities. The Company’s equity interests in these entities are reported in “other invested assets” on the condensed consolidated balance sheets. The maximum exposure to loss is limited to the Company’s investment in equity interests (which is less than $ 1 million as of both March 31, 2023 and December 31, 2022) as well as foregone future management and performance fees. See Note 10, Asset Management Fees, for earnings and receivables from managing funds and CLOs. 49 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 9. Fair Value Measurement The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market). Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During first quarter 2023, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income. The Company’s valuation methods produce fair values that may not be indicative of net realizable value or future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date. The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization within the hierarchy is based on the lowest level of significant input to its valuation. Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market. Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs. Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. There were no transfers from or into Level 3 during the periods presented. Carried at Fair Value Fixed-Maturity Securities The fair value of fixed-maturity securities is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. 50 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. The valuation of fixed-maturity securities is more subjective when markets are less liquid due to the lack of market-based inputs. As of March 31, 2023, the Company used models to price 190 securities. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecasts; and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the security including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities. Short-Term Investments Short-term investments that are traded in active markets are classified as Level 1 as their value is based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value. Other Invested Assets Other invested assets that are carried at fair value primarily include equity method investments for which the Company elected the FVO using NAV, as a practical expedient, and, therefore, are excluded from the fair value hierarchy. Other Assets Committed Capital Securities Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM to issue an aggregate of $ 200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $ 50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The fair value of CCS, which is reported in other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value of the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the condensed consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, LIBOR curve projections, the Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3. Supplemental Executive Retirement Plans The Company classified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations. Contracts Accounted for as Credit Derivatives The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes in the 51 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) fair value reported in the condensed consolidated statements of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions were generally terminated for an amount that approximated the present value of future premiums or for a negotiated amount, rather than at fair value. The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative contracts in determining the fair value of these contracts. Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions. The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at March 31, 2023 were such that market prices of the Company’s CDS contracts were not available. Assumptions and Inputs The various inputs and assumptions that are key to the measurement of the Company’s fair value for CDS contracts are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided by or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company. The primary sources of information used to determine gross spread include: • Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available). • Transactions priced or closed during a specific quarter within a specific asset class and specific rating. • Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts. • Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity. The rates used to discount future expected premium cash flows ranged from 2.59 % to 5.06 % at March 31, 2023 and 2.78 % to 5.08 % at December 31, 2022. The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread 52 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) affects the pricing of its transactions. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS transactions that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a transaction generally decreases. In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount of unrealized gains that are recognized on certain CDS contracts. As of March 31, 2023 and December 31, 2022, the use of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC’s credit spreads. In general, when AGC’s credit spreads narrow, the cost to hedge AGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC’s credit spreads widen, the cost to hedge AGC’s name increases causing more transactions to price at established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s own credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture. The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions. A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are lower than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of such contract and discounting such amounts using the LIBOR corresponding to the weighted average remaining life of the contract. Strengths and Weaknesses of Model The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses. The primary strengths of the Company’s CDS modeling techniques are: • The model takes into account the transaction structure and the key drivers of market value. • The model maximizes the use of market-driven inputs whenever they are available. • The model is a consistent approach to valuing positions. The primary weaknesses of the Company’s CDS modeling techniques are: • There is no exit market or any actual exit transactions; therefore, the Company’s exit market is a hypothetical one based on the Company’s entry market. • There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model. • The markets for the inputs to the model are highly illiquid, which impacts their reliability. • Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market. 53 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) FG VIEs’ Assets and Liabilities FG VIEs include Puerto Rico Trusts and structured finance and other FG VIEs. Assets in the Puerto Rico Trusts, which consist of New Recovery Bonds and CVIs, are classified as Level 2. The Company elected the FVO for the Puerto Rico Trusts’ liabilities and they are classified as Level 3. See “ - Fixed Maturity Securities” above for a description of the fair value methodology for the New Recovery Bonds and CVIs in the Puerto Rico Trusts, which represent the majority of the assets in the Puerto Rico Trusts. For structured finance and other FG VIEs’ assets and liabilities the Company elected the FVO and they are classified as Level 3. The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. The Company records the fair value of structured finance and other FG VIEs’ assets and liabilities based on modeled prices. The fair value of the residential mortgage loan FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the fair value of the FG VIEs’ assets and the implied collateral losses within these transactions. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets. The third party utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds. The models used to price the FG VIEs’ liabilities (other than the liabilities of the Puerto Rico Trusts) generally apply the same inputs used in determining fair value of FG VIEs’ assets. For those liabilities insured by the Company, the benefit of the Company’s insurance policy guaranteeing the timely payment of debt service is also taken into account. The liabilities of the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries’ financial guaranty policies. Significant changes to any of the inputs described above could materially change the timing of expected losses within an insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse. The change in fair value of FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for (i) the change in fair value attributable to change in ISCR on FG VIEs’ liabilities, and (ii) unrealized gains and losses on the New Recovery Bonds in the Puerto Rico Trusts, which are reported OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs.” Investment income on the New Recovery Bonds and changes in fair value on the CVIs in the Puerto Rico Trusts are all reported in “fair value gains (losses) on FG VIEs” on the condensed consolidated statement of operations. Assets and Liabilities of CIVs The consolidated CLOs are collateralized financing entities (CFEs), and therefore, the debt issued by, and loans held by, the consolidated CLOs are measured under the FVO using the CFE practical expedient. Loans in CLOs are priced using a loan pricing service which aggregates quotes from loan market participants. The loans are all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt is measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs are measured at fair value and the debt of consolidated CLOs are measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is 54 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) allocated to the individual financial liabilities (other than the underlying financial liabilities to the beneficial interests retained by the Company). Prior to securitization, when loans are warehoused in an investment vehicle, such vehicle is not considered a CFE. The Company has elected the FVO to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitizes and becomes a CLO. Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third-party data generally at the average between the offer and bid prices. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; (vi) and/or evaluating information provided by management of these investments. These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments. Inputs are used in applying the various valuation techniques and broadly refer to the current assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors. Investments in private equity funds are generally valued utilizing NAV. Level 2 assets in the CIVs include assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the FVO). Level 3 liabilities of the CIVs include various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities. 55 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Amounts recorded at fair value in the Company’s financial statements are presented in the tables below. Fair Value Hierarchy of Financial Instruments Carried at Fair Value As of March 31, 2023 Fair Value Hierarchy Level 1 Level 2 Level 3 Total (in millions) Assets: Investments: Fixed-maturity securities, available-for-sale Obligations of state and political subdivisions $ — $ 3,050 $ 47 $ 3,097 U.S. government and agencies — 88 — 88 Corporate securities — 2,153 — 2,153 Mortgage-backed securities: RMBS — 176 174 350 CMBS — 258 — 258 Asset-backed securities — 27 795 822 Non-U.S. government securities — 101 — 101 Total fixed-maturity securities, available-for-sale — 5,853 1,016 6,869 Fixed-maturity securities, trading — 300 — 300 Short-term investments 1,240 33 — 1,273 Other invested assets (1) — — 5 5 FG VIEs’ assets — 216 197 413 Assets of CIVs (2): Fund investments: Equity securities and warrants — 5 329 334 Corporate securities — — 93 93 Structured products — 77 17 94 CLOs and CLO warehouse assets: Loans — 4,447 — 4,447 Short-term investments 94 — — 94 Total assets of CIVs 94 4,529 439 5,062 Assets held for sale 1 — — 1 Other assets 60 47 33 140 Total assets carried at fair value $ 1,395 $ 10,978 $ 1,690 $ 14,063 Liabilities: Credit derivative liabilities $ — $ — $ 150 $ 150 FG VIEs’ liabilities (3) — — 704 704 Liabilities of CIVs: CLO obligations of CFEs — — 4,155 4,155 Warehouse financing debt — 132 37 169 Securitized borrowing — — 28 28 Total liabilities of CIVs — 132 4,220 4,352 Liabilities held for sale — 7 — 7 Total liabilities carried at fair value $ — $ 139 $ 5,074 $ 5,213 56 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Fair Value Hierarchy of Financial Instruments Carried at Fair Value As of December 31, 2022 Fair Value Hierarchy Level 1 Level 2 Level 3 Total (in millions) Assets: Investments: Fixed-maturity securities, available-for sale Obligations of state and political subdivisions $ — $ 3,347 $ 47 $ 3,394 U.S. government and agencies — 111 — 111 Corporate securities — 2,084 — 2,084 Mortgage-backed securities: RMBS — 161 179 340 CMBS — 271 — 271 Asset-backed securities — 27 794 821 Non-U.S. government securities — 98 — 98 Total fixed-maturity securities, available-for-sale — 6,099 1,020 7,119 Fixed-maturity securities, trading — 303 — 303 Short-term investments 771 39 — 810 Other invested assets (1) 2 — 5 7 FG VIEs’ assets — 209 204 413 Assets of CIVs (2): Fund investments: Equity securities and warrants — 5 297 302 Corporate securities — — 96 96 Structured products — 82 46 128 CLOs and CLO warehouse assets: Loans — 4,570 — 4,570 Short-term investments 135 — — 135 Total assets of CIVs 135 4,657 439 5,231 Other assets 54 46 48 148 Total assets carried at fair value $ 962 $ 11,353 $ 1,716 $ 14,031 Liabilities: Credit derivative liabilities $ — $ — $ 163 $ 163 FG VIEs’ liabilities (3) — — 715 715 Liabilities of CIVs: CLO obligations of CFEs — — 4,090 4,090 Warehouse financing debt — 277 36 313 Securitized borrowing — — 28 28 Total liabilities of CIVs — 277 4,154 4,431 Other liabilities — 7 — 7 Total liabilities carried at fair value $ — $ 284 $ 5,032 $ 5,316 ___________________ (1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $ 22 million and $ 23 million of equity method investments measured at fair value under the FVO using the NAV as a practical expedient as of March 31, 2023 and December 31, 2022, respectively. (2) Excludes $ 5 million as of both March 31, 2023 and December 31, 2022, in investments in AssuredIM Funds for which the Company records a 100% NCI. The consolidation of these funds results in a gross up of assets and NCI on the consolidated financial statements; however, it results in no economic equity or net income attributable to AGL. As of December 31, 2022, excludes $ 127 million investment in the AssuredIM municipal relative value master fund, which is measured using NAV as a practical expedient. 57 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) (3) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Changes in Level 3 Fair Value Measurements The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during first quarter 2023 and first quarter 2022. Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis First Quarter 2023 Fixed-Maturity Securities, Available-for-Sale Assets of CIVs Obligations of State and Political Subdivisions RMBS Asset- Backed Securities FG VIEs’ Assets Equity Securities and Warrants Corporate Securities Structured Products Other (7) (in millions) Fair value as of December 31, 2022 $ 47 $ 179 $ 794 $ 204 $ 297 $ 96 $ 46 $ 50 Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) — 3 (1) 3 (1) 1 (2) 33 (4) ( 2 ) (4) 2 (4) ( 16 ) (3) Other comprehensive income (loss) 1 ( 1 ) ( 3 ) — — — — — Purchases — — 5 — 4 4 — — Sales — — — — ( 5 ) ( 5 ) ( 31 ) — Settlements ( 1 ) ( 7 ) ( 4 ) ( 8 ) — — — — Fair value as of March 31, 2023 $ 47 $ 174 $ 795 $ 197 $ 329 $ 93 $ 17 $ 34 Change in unrealized gains (losses) related to financial instruments held as of March 31, 2023 included in: Earnings $ — (2) $ 32 (4) $ ( 3 ) (4) $ — (4) $ ( 16 ) (3) OCI $ 1 $ ( 1 ) $ ( 3 ) $ — Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis First Quarter 2023 Credit Derivative Liability, net (5) FG VIEs’ Liabilities (8) Liabilities of CIVs (in millions) Fair value as of December 31, 2022 $ ( 162 ) $ ( 715 ) $ ( 4,154 ) Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) 15 (6) 3 (2) ( 62 ) (4) Other comprehensive income (loss) — ( 1 ) ( 8 ) Settlements ( 1 ) 9 4 Fair value as of March 31, 2023 $ ( 148 ) $ ( 704 ) $ ( 4,220 ) Change in unrealized gains (losses) related to financial instruments held as of March 31, 2023 included in: Earnings $ 14 (6) $ ( 2 ) (2) $ ( 65 ) (4) OCI $ ( 1 ) $ ( 8 ) 58 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis First Quarter 2022 Fixed-Maturity Securities, Available-for-Sale Assets of CIVs Obligations of State and Political Subdivisions RMBS Asset- Backed Securities FG VIEs’ Assets Equity Securities Corporate Securities Other (7) (in millions) Fair value as of December 31, 2021 $ 72 $ 216 $ 863 $ 260 $ 239 $ 91 $ 27 Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) — 4 (1) 3 (1) ( 3 ) (2) 10 (4) ( 1 ) (4) 1 (3) Other comprehensive income (loss) ( 5 ) ( 8 ) ( 7 ) ( 1 ) — — — Purchases 4 — 25 — — 1 — Sales — — ( 3 ) — ( 6 ) ( 8 ) — Settlements ( 1 ) ( 12 ) ( 39 ) ( 18 ) — — — Consolidations — — — 29 — — — Fair value as of March 31, 2022 $ 70 $ 200 $ 842 $ 267 $ 243 $ 83 $ 28 Change in unrealized gains (losses) related to financial instruments held as of March 31, 2022 included in: Earnings $ ( 3 ) (2) $ 8 $ ( 2 ) (4) $ 1 (3) OCI $ ( 5 ) $ ( 7 ) $ ( 7 ) $ ( 1 ) $ — Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis First Quarter 2022 Credit Derivative Liability, net (5) FG VIEs’ Liabilities (8) Liabilities of CIVs (in millions) Fair value as of December 31, 2021 $ ( 154 ) $ ( 289 ) $ ( 3,705 ) Total pre-tax realized and unrealized gains (losses) recorded in: Net income (loss) ( 3 ) (6) 15 (2) 64 (4) Other comprehensive income (loss) — — — Issuances — — ( 381 ) Settlements 1 41 372 Consolidations — ( 102 ) — Fair value as of March 31, 2022 $ ( 156 ) $ ( 335 ) $ ( 3,650 ) Change in unrealized gains (losses) related to financial instruments held as of March 31, 2022 included in: Earnings $ ( 3 ) (6) $ 38 (2) $ 41 (4) OCI $ — ____________________ (1) Included in “net realized investment gains (losses)” and “net investment income”. (2) Included in “fair value gains (losses) on FG VIEs”. (3) Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss)”. (4) Reported in “fair value gains (losses) on CIVs”. (5) Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the condensed consolidated balance sheets based on net exposure by transaction. (6) Reported in “fair value gains (losses) on credit derivatives”. (7) Includes CCS and other invested assets. (8) Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. 59 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Level 3 Fair Value Disclosures Quantitative Information About Level 3 Fair Value Inputs As of March 31, 2023 Financial Instrument Description Fair Value Assets (Liabilities) (in millions) Significant Unobservable Inputs Range Weighted Average (4) Investments (2): Fixed-maturity securities, available-for-sale (1): Obligations of state and political subdivisions $ 47 Yield 7.2 % - 12.8 % 9.1 % RMBS 174 CPR 2.2 % - 15.3 % 5.6 % CDR 1.5 % - 16.0 % 6.1 % Loss severity 50.0 % - 125.0 % 82.5 % Yield 7.1 % - 11.0 % 8.6 % Asset-backed securities: Life insurance transactions 340 Yield 11.4 % CLOs 433 Discount Margin 1.8 % - 4.0 % 2.9 % Others 22 Yield 6.7 % - 12.9 % 12.8 % FG VIEs’ assets (1) 197 CPR 2.3 % - 24.8 % 10.2 % CDR 1.3 % - 41.0 % 9.1 % Loss severity 45.0 % - 100.0 % 82.4 % Yield 7.4 % - 10.4 % 9.1 % Assets of CIVs (3): Equity securities and warrants 329 Yield 8.7 % Discount rate 20.4 % - 27.2 % 22.9 % Market multiple-enterprise value/revenue 1.05 x - 1.10 x 1.08 x Market multiple-enterprise value/EBITDA (6) 2.50 x - 11.50 x 10.67 x Market multiple-price to book 1.10 x Market multiple-price to earnings 5.25 x Terminal growth rate 3.0 % - 4.0 % 3.5 % Exit multiple-EBITDA 8.00 x - 12.00 x 10.14 x Exit multiple-price to book 1.30 x Exit multiple-price to earnings 5.50 x Cost 1.00 x Sale scenario - discount rate 4.4 % - 5.5 % 4.9 % Haircut to Holdback 30.0 % - 95.0 % 62.5 % Corporate securities 93 Discount rate 20.6 % - 21.1 % 20.7 % Yield 16.3 % Exit multiple-EBITDA 8.00 x Cost 1.00 x Market multiple-enterprise value/EBITDA 2.50 x - 2.75 x 2.63 x Sale scenario - discount rate 4.4 % - 5.5 % 4.9 % Haircut to Holdback 30.0 % - 95.0 % 62.5 % Structured products 17 Yield 15.7 % - 26.9 % 20.8 % Other assets (1) 31 Implied Yield 7.8 % - 8.3 % 8.0 % Term (years) 10 years 60 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Financial Instrument Description Fair Value Assets (Liabilities) (in millions) Significant Unobservable Inputs Range Weighted Average (4) Credit derivative liabilities, net (1) $ ( 148 ) Hedge cost (in bps) 15.0 - 33.0 20.6 Bank profit (in bps) 49.6 - 306.8 109.5 Internal credit rating AAA - CCC AA FG VIEs’ liabilities (1) ( 704 ) CPR 2.3 % - 24.8 % 10.2 % CDR 1.3 % - 41.0 % 9.1 % Loss severity 45.0 % - 100.0 % 82.4 % Yield 4.5 % - 10.4 % 5.7 % Liabilities of CIVs (1): CLO obligations of CFEs (5) ( 4,155 ) Yield 3.9 % - 21.5 % 6.5 % Warehouse financing debt ( 37 ) Yield 0.0 % - 9.5 % 6.9 % Securitized borrowing ( 28 ) Discount rate 23.7 % Terminal growth rate 3.0 % Exit multiple-EBITDA 11.00 x Market multiple-enterprise value/EBITDA 10.50 x - 11.50 x 11.00 x ___________________ (1) Discounted cash flow is used as the primary valuation technique. (2) Excludes several investments reported in “other invested assets” with a fair value of $ 5 million. (3) The primary valuation technique uses the income and/or market approach; the key inputs to the valuation are yield/discount rates and market multiples. (4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value. (5) See CFE fair value methodology described above for consolidated CLOs. (6) Earnings before interest, taxes, depreciation, and amortization (EBITDA). 61 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Quantitative Information About Level 3 Fair Value Inputs As of December 31, 2022 Financial Instrument Description Fair Value Assets (Liabilities) (in millions) Significant Unobservable Inputs Range Weighted Average (4) Investments (2): Fixed-maturity securities, available-for-sale (1): Obligations of state and political subdivisions $ 47 Yield 7.4 % - 13.5 % 9.4 % RMBS 179 CPR 3.8 % - 16.1 % 8.2 % CDR 1.5 % - 12.0 % 5.9 % Loss severity 50.0 % - 125.0 % 82.5 % Yield 7.5 % - 11.3 % 9.0 % Asset-backed securities: Life insurance transactions 342 Yield 11.3 % CLOs 428 Discount Margin 1.8 % - 4.1 % 3.0 % Others 24 Yield 7.4 % - 12.9 % 12.8 % FG VIEs’ assets (1) 204 CPR 0.9 % - 21.9 % 12.9 % CDR 1.3 % - 41.0 % 7.6 % Loss severity 45.0 % - 100.0 % 81.0 % Yield 6.6 % - 10.9 % 7.5 % Assets of CIVs (3): Equity securities and warrants 297 Yield 10.0 % Discount rate 19.8 % - 25.1 % 22.7 % Market multiple-enterprise value/revenue 1.05 x - 1.10 x 1.08 x Market multiple-enterprise value/EBITDA 2.50 x - 11.00 x 10.25 x Market multiple-price to book 1.15 x Market multiple-price to earnings 4.50 x Terminal growth rate 3.0 % - 4.0 % 3.5 % Exit multiple-EBITDA 8.00 x - 12.00 x 10.53 x Exit multiple-price to book 1.30 x Exit multiple-price to earnings 5.50 x Cost 1.00 x Corporate securities 96 Discount rate 20.8 % - 23.8 % 21.7 % Yield 16.3 % Exit multiple-EBITDA 8.00 x Cost 1.00 x Market multiple-enterprise value/EBITDA 2.50 x - 2.75 x 2.63 x Structured products 46 Yield 12.8 % - 37.1 % 18.9 % Other assets (1) 47 Implied Yield 7.7 % - 8.4 % 8.1 % Term (years) 10 years 62 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Financial Instrument Description Fair Value Assets (Liabilities) (in millions) Significant Unobservable Inputs Range Weighted Average (4) Credit derivative liabilities, net (1) ( 162 ) Year 1 loss estimates 11.5 % - 25.2 % 15.7 % Bank profit (in bps) 51.0 - 270.5 109.4 Internal credit rating AAA - CCC AA FG VIEs’ liabilities (1) ( 715 ) CPR 0.9 % - 21.9 % 6.3 % CDR 1.3 % - 41.0 % 3.7 % Loss severity 45.0 % - 100.0 % 39.9 % Yield 4.8 % - 10.9 % 5.9 % Liabilities of CIVs (1): CLO obligations of CFEs (5) ( 4,090 ) Yield 3.0 % - 27.4 % 5.5 % Warehouse financing debt ( 36 ) Yield 11.7 % - 16.9 % 12.9 % Securitized borrowing ( 28 ) Discount rate 20.9 % Terminal growth rate 3.0 % Exit multiple-EBITDA 11.00 x Market multiple-enterprise value/EBITDA 10.00 x - 11.00 x 10.50 x ____________________ (1) Discounted cash flow is used as the primary valuation technique. (2) Excludes several investments reported in “other invested assets” with a fair value of $ 5 million. (3) The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples. (4) Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value. (5) See CFE fair value methodology described above for consolidated CLOs. Not Carried at Fair Value Financial Guaranty Insurance Contracts Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, and also includes adjustments for stressed losses, ceding commissions and return on capital. The Company classified the fair value of financial guaranty insurance contracts as Level 3. Long-Term Debt Long-term debt issued by the U.S. Holding Companies is valued by broker-dealers using third-party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. Assets and Liabilities of CIVs Cash equivalents are recorded at cost which approximates fair value. Due from/to brokers and counterparties primarily consists of cash, margin deposits, cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date. Due from/to brokers and counterparties represents balances on a net-by counterparty basis on the condensed consolidated balance sheets where a contractual right of offset exists under an enforceable netting arrangement. The cash at brokers is partially related to collateral for securities sold short and derivative contracts; its use is therefore restricted until the securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy. 63 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Other Liabilities As of March 31, 2023 and December 31, 2022, $ 36 million and $ 35 million, respectively, of AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5 % of the senior and equity notes issued by certain consolidated European CLOs, which was required to comply with its European risk retention obligations, were included in “liabilities held for sale” and “other liabilities”, respectively. The maturity dates are in 2034 and 2035. AssuredIM’s obligation under the master repurchase agreement is not guaranteed by any Assured Guaranty insurance or holding companies. The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table. Fair Value of Financial Instruments Not Carried at Fair Value As of March 31, 2023 As of December 31, 2022 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (in millions) Assets (liabilities): Assets of CIVs (1) $ 64 $ 64 $ 46 $ 46 Assets held for sale 10 10 — — Other assets (including other invested assets) (2) 101 102 92 93 Financial guaranty insurance contracts (3) ( 2,296 ) ( 1,083 ) ( 2,335 ) ( 986 ) Long-term debt ( 1,676 ) ( 1,497 ) ( 1,675 ) ( 1,477 ) Liabilities of CIVs (4) ( 102 ) ( 102 ) ( 170 ) ( 170 ) Liabilities held for sale ( 36 ) ( 36 ) — — Other liabilities (5) ( 33 ) ( 33 ) ( 43 ) ( 43 ) ____________________ (1) Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value. (2) Primarily includes accrued interest, management fees receivables for December 31, 2022, a participation loan, and receivables for securities sold, for which carrying value approximates fair value. (3) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance. (4) Includes due to brokers and counterparties and fund’s loan payable. Carrying value approximates fair value. (5) Primarily includes accrued interest, repurchase agreement liability as of December 31, 2022, and payables for securities purchased for which carrying value approximates fair value. 10. Asset Management Fees The following table presents the sources of asset management fees on a consolidated basis. Asset Management Fees First Quarter 2023 2022 (in millions) Management fees: CLOs (1) $ 8 $ 9 Opportunity funds and liquid strategies 3 4 Wind-down funds — 1 Total management fees 11 14 Performance fees 12 14 Reimbursable fund expenses 3 6 Total asset management fees $ 26 $ 34 _____________________ (1) To the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs. 64 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company had management and performance fees receivable of $ 10 million as of both March 31, 2023 and December 31, 2022. These balances are in “assets held for sale” and “other assets” on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively. Performance fees were attributable to the healthcare and asset-based funds. 11. Income Taxes Overview AGL and its Bermuda subsidiaries AG Re, AGRO and Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries) are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be exempt from taxation in Bermuda until March 31, 2035. AGL’s U.S., U.K. and French subsidiaries are subject to income taxes imposed by U.S., U.K. and French authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code to be taxed as a U.S. domestic corporation. AGL is a tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda. AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries, AGRO and AG Intermediary Inc., file their own consolidated federal income tax return. Tax Assets (Liabilities) Deferred and Current Tax Assets (Liabilities) As of March 31, 2023 December 31, 2022 (in millions) Net deferred tax assets (liabilities) $ 89 $ 114 Net current tax assets (liabilities) 49 63 Valuation Allowance As of March 31, 2023 and December 31, 2022, the Company had $ 5 million in foreign tax credits (FTCs) due to the 2017 Tax Cuts and Jobs Act for use against regular tax in future years. FTCs will expire in 2027. In analyzing the future realizability of FTCs, the Company notes limitations on future foreign source income due to overall foreign losses as negative evidence. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not that the remaining FTCs of $ 5 million will not be utilized, and therefore maintained the valuation allowance from December 31, 2022 with respect to this tax attribute. The Company came to the conclusion that it is more likely than not that the remaining deferred tax assets will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years , and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with the remaining deferred tax assets. The Company will continue to analyze the need for a valuation allowance on a quarterly basis. Changes in market conditions during 2023 and 2022, including rising interest rates, resulted in the recording of deferred tax assets related to net unrealized tax capital losses. When assessing recoverability of these deferred tax assets, the Company considers the ability and intent to hold the underlying securities to recovery in value, if necessary, as well as other factors as noted above. As of March 31, 2023 and December 31, 2022, based on all available evidence, including capital loss carryback capacity, the Company concluded that the deferred tax assets related to the unrealized tax capital losses on the available-for-sale securities portfolios are, more likely than not, expected to be realized. 65 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Provision for Income Taxes The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year 2023. A discrete calculation of the provision is calculated for each interim period. The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 21 % and the French subsidiary 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. For the periods between April 1, 2017 and March 31, 2023, the U.K. corporation tax rate was 19 %. For periods subsequent to April 1, 2023, the U.K. corporation tax rate has been increased to 25 %. For the full year 2023, the U.K. subsidiaries will be taxed at the U.K. blended marginal corporate tax rate of 23.5 %. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions. A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below. Effective Tax Rate Reconciliation First Quarter 2023 2022 (in millions) Expected tax provision (benefit) $ 20 $ 14 Tax-exempt interest ( 3 ) ( 3 ) NCI ( 3 ) ( 2 ) State taxes 3 4 Foreign taxes 5 1 Stock based compensation 1 2 Other — 2 Total provision (benefit) for income taxes $ 23 $ 18 Effective tax rate 19.1 % 20.0 % The expected tax provision (benefit) is calculated as the sum of pre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pre-tax loss in one jurisdiction and pre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates. The following tables present pre-tax income and revenue by jurisdiction. Pre-tax Income (Loss) by Tax Jurisdiction First Quarter 2023 2022 (in millions) U.S. $ 108 $ 84 Bermuda 25 27 U.K. ( 11 ) ( 14 ) Other ( 2 ) ( 4 ) Total $ 120 $ 93 66 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Revenue by Tax Jurisdiction First Quarter 2023 2022 (in millions) U.S. $ 235 $ 269 Bermuda 35 33 U.K. 13 — Other — ( 2 ) Total $ 283 $ 300 Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate. Audits As of March 31, 2023, AGUS had open tax years with the U.S. Internal Revenue Service (IRS) for 2018 forward and is currently under audit for the 2018 and 2019 tax years. As of March 31, 2023, Assured Guaranty Overseas US Holdings Inc. had open tax years with the IRS for 2019 forward and is not currently under audit with the IRS. In September 2022, His Majesty’s Revenue & Customs completed a business risk review of Assured Guaranty that commenced in July 2022 and assigned a low-risk rating for corporate taxes in the U.K. The Company’s French subsidiary is not currently under examination and has open tax years of 2019 forward. 12. Commitments and Contingencies Legal Proceedings Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations or liquidity in a particular quarter or year. In addition, in the ordinary course of their respective businesses, certain of AGL’s insurance subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company is involved in a number of legal actions in the Federal District Court of Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See “Exposure to Puerto Rico” section of Note 3, Outstanding Exposure, for a description of such actions. Also in the ordinary course of their respective business, certain of AGL’s investment management subsidiaries are involved in litigation with third parties regarding fees, appraisals, or portfolio companies. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year. In first quarter 2023, the Company reduced its previously recorded accrual of $ 20 million to zero in connection with developments in litigation. The Company also receives subpoenas and interrogatories from regulators from time to time. Litigation On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial Products Inc. (AGFP), an affiliate of AGC which in the past had provided credit protection to counterparties under CDS. AGC acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the State of New York (the Court), asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination in December 2008 of nine credit derivative transactions between LBIE and AGFP and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination in July 2008 of 28 other credit derivative transactions between LBIE and AGFP and AGFP’s calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP properly terminated the 67 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) transactions in question in compliance with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP has calculated that LBIE owes AGFP approximately $ 4 million for the claims which were dismissed (as described below) and approximately $ 21 million in connection with the termination of the other credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $ 1.4 billion. AGFP filed a motion to dismiss the claims for breach of the implied covenant of good faith in LBIE’s complaint, and on March 15, 2013, the Court granted AGFP’s motion to dismiss in respect of the count relating to the nine credit derivative transactions and narrowed LBIE’s claim with respect to the 28 other credit derivative transactions. LBIE’s administrators disclosed in an April 10, 2015 report to LBIE’s unsecured creditors that LBIE’s valuation expert has calculated LBIE’s claim for damages in aggregate for the 28 transactions to range between a minimum of approximately $ 200 million and a maximum of approximately $ 500 million, depending on what adjustment, if any, is made for AGFP's credit risk. In addition, LBIE sought prejudgment interest from the time of termination onwards. A bench trial before Supreme Court Justice Melissa A. Crane was held from October 18 through November 19, 2021. On March 8, 2023, Justice Crane rendered her decision and found in favor of AGFP. On April 12, 2023, AGFP requested entry of judgment in its favor. The Court heard argument on that request on May 9, 2023, and the request is under consideration. The Company continues to evaluate developments related to this case including any issues associated with a potential appeal by the plaintiff. 13. Shareholders’ Equity Other Comprehensive Income The following tables present the changes in each component of accumulated other comprehensive income (AOCI) and the effect of reclassifications out of AOCI into the respective lines in the condensed consolidated statements of operations. Changes in Accumulated Other Comprehensive Income (Loss) by Component First Quarter 2023 Net Unrealized Gains (Losses) on Investments with: ISCR on FG VIEs’ Liabilities with Recourse Cumulative Translation Adjustment Cash Flow Hedge Total AOCI No Credit Impairment Credit Impairment (in millions) Balance, December 31, 2022 $ ( 343 ) $ ( 110 ) $ ( 23 ) $ ( 45 ) $ 6 $ ( 515 ) Other comprehensive income (loss) before reclassifications 91 1 ( 2 ) 2 — 92 Less: Amounts reclassified from AOCI to: Net realized investment gains (losses) 3 ( 5 ) — — — ( 2 ) Fair value gains (losses) on FG VIEs — — ( 1 ) — — ( 1 ) Total before tax 3 ( 5 ) ( 1 ) — — ( 3 ) Tax (provision) benefit ( 1 ) 1 — — — — Total amount reclassified from AOCI, net of tax 2 ( 4 ) ( 1 ) — — ( 3 ) Other comprehensive income (loss) 89 5 ( 1 ) 2 — 95 Balance, March 31, 2023 $ ( 254 ) $ ( 105 ) $ ( 24 ) $ ( 43 ) $ 6 $ ( 420 ) 68 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) Changes in Accumulated Other Comprehensive Income (Loss) by Component First Quarter 2022 Net Unrealized Gains (Losses) on Investments with: ISCR on FG VIEs’ Liabilities with Recourse Cumulative Translation Adjustment Cash Flow Hedge Total AOCI No Credit Impairment Credit Impairment (in millions) Balance, December 31, 2021 $ 375 $ ( 24 ) $ ( 21 ) $ ( 36 ) $ 6 $ 300 Other comprehensive income (loss) before reclassifications ( 339 ) ( 43 ) ( 1 ) ( 1 ) — ( 384 ) Less: Amounts reclassified from AOCI to: Net realized investment gains (losses) ( 1 ) ( 5 ) — — — ( 6 ) Fair value gains (losses) on FG VIEs — — ( 1 ) — — ( 1 ) Total before tax ( 1 ) ( 5 ) ( 1 ) — — ( 7 ) Tax (provision) benefit — 1 — — — 1 Total amount reclassified from AOCI, net of tax ( 1 ) ( 4 ) ( 1 ) — — ( 6 ) Other comprehensive income (loss) ( 338 ) ( 39 ) — ( 1 ) — ( 378 ) Balance, March 31, 2022 $ 37 $ ( 63 ) $ ( 21 ) $ ( 37 ) $ 6 $ ( 78 ) Share Repurchases As of May 9, 2023, the Company was authorized to purchase $ 201 million of its common shares. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date. Share Repurchases Period Number of Shares Repurchased Total Payments (in millions) Average Price Paid Per Share 2022 (January 1 - March 31) 2,738,223 $ 155 $ 56.62 2022 (April 1 - June 30) 2,605,947 151 58.03 2022 (July 1- September 30) 1,790,395 97 53.77 2022 (October 1- December 31) 1,713,416 100 58.34 Total 2022 8,847,981 $ 503 56.79 2023 (January 1 - May 9) 36,369 2 62.23 69 Table of Contents Assured Guaranty Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 14. Earnings Per Share Computation of Earnings Per Share First Quarter 2023 2022 (in millions, except per share amounts) Basic Earnings Per Share (EPS): Net income (loss) attributable to AGL $ 81 $ 66 Less: Distributed and undistributed income (loss) available to nonvested shareholders — — Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic $ 81 $ 66 Basic shares 59.1 66.3 Basic EPS $ 1.37 $ 1.00 Diluted EPS: Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic $ 81 $ 66 Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries — — Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted $ 81 $ 66 Basic shares 59.1 66.3 Dilutive securities: Restricted stock awards 1.3 1.1 Diluted shares 60.4 67.4 Diluted EPS $ 1.34 $ 0.98 Potentially dilutive securities excluded from computation of EPS because of antidilutive effect 0.1 0.2 70 Table of Contents