ASSURED GUARANTY LTD 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance. Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are: • significant changes in inflation, interest rates, the world’s credit markets or segments thereof, credit spreads, foreign exchange rates or general economic conditions, including the possibility of a recession; • geopolitical risk, including United States (U.S.)-China strategic competition and technology decoupling, Russia’s invasion of Ukraine and the resulting economic sanctions, fragmentation of global supply chains, volatility in energy prices, potential for increased cyberattacks, and risk of intentional or accidental escalation between NATO and Russia; • the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings; • the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, and the global consequences of the pandemic and such actions, including their impact on the factors listed in this section; • developments in the world’s financial and capital markets, including stresses in the financial condition of banking institutions in the U.S., that adversely affect repayment rates related to commercial real estate, municipalities and other insured obligors, Assured Guaranty’s insurance loss or recovery experience, investments of Assured Guaranty or assets it manages; • reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty’s insurance; • the loss of investors in Assured Guaranty’s asset management strategies or the failure to attract new investors to Assured Guaranty’s asset management business; • the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures; • insured losses, including losses with respect to related legal proceedings, in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the final resolution of Assured Guaranty’s remaining Puerto Rico exposures or the amounts recovered on securities received in connection with the resolution of Puerto Rico exposures already resolved; • increased competition, including from new entrants into the financial guaranty industry, nonpayment insurance and other forms of capital saving or risk syndication available to banks and insurers; • poor performance of Assured Guaranty’s asset management strategies compared to the performance of the asset management strategies of Assured Guaranty’s competitors; • the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity, or to unanticipated consequences; • the possibility that Assured Guaranty’s planned transactions pursuant to which Assured Guaranty will 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) and receive an ownership interest in Sound Point, fail to close or are delayed due to the failure to fulfill or waive certain customary closing conditions, which include the receipt of certain consents and regulatory approval, or due to other reasons; • the impacts of the announcement and the completion of Assured Guaranty’s planned transactions with Sound Point on Assured Guaranty and its relationships with its shareholders, regulators, rating agencies, employees and the obligors it insures and on the AssuredIM Contributed Business and on the business of Assured Healthcare Partners LLC and their relationships with their respective clients and employees; 71 Table of Contents • the possibility that strategic transactions made by Assured Guaranty, including the consummation of the planned transactions with Sound Point, do not result in the benefits anticipated or subject Assured Guaranty to negative consequences; • the inability to control the business, management or policies of entities in which the Company holds a minority interest; • the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, most of its financial guaranty contracts written in credit default swap (CDS) form, and certain consolidated variable interest entities (VIEs); • rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured; • the inability of Assured Guaranty to access external sources of capital on acceptable terms; • changes in applicable accounting policies or practices; • changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions; • difficulties with the execution of Assured Guaranty’s business strategy; • loss of key personnel; • the effects of mergers, acquisitions and divestitures; • natural or man-made catastrophes or pandemics; • the impact of climate change on our business and regulatory actions taken related to such risk; • other risk factors identified in AGL’s filings with the U.S. Securities and Exchange Commission (SEC); • other risks and uncertainties that have not been identified at this time; and • management’s response to these factors. The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in the Company’s 2022 Annual Report on Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity. For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Available Information The Company maintains an internet web site at www.assuredguaranty.com . The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings ) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance ) links to the Company’s Corporate Governance Guidelines, the Company’s Global Code of Ethics, AGL’s Bye-Laws and the charters for the committees of its Board of Directors. In addition, the SEC maintains a web site (at www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses ). The Company also maintains a social media account on LinkedIn ( www.linkedin.com/company/assured-guaranty/ ). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of 72 Table of Contents the Company’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, the Company’s web site or social media account is not incorporated by reference into, and is not a part of, this report. Overview Business The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s chief operating decision maker reviews the business to assess performance and allocate resources. The Company’s Corporate division and other activities (including financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs)) are presented separately. In the Insurance segment, the Company provides credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. In the Asset Management segment, the Company provides investment advisory services, which include the management of collateralized loan obligations (CLOs) and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 1, Financial Statements, Note 2, Segment Information. 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 the 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). AssuredIM anticipates transferring assets under management (AUM) of approximately $15.2 billion, including management of approximately $14.5 billion of collateralized loan obligations (CLOs), as of December 31, 2022, to Sound Point as part of the Sound Point Transaction, subject to the receipt of certain consents and regulatory approval. As a result, Sound Point, which had approximately $21.4 billion in CLO AUM and $32 billion in total AUM as of December 31, 2022, would become the fifth largest CLO manager by AUM in the world based on December 31, 2022 CreditFlux CLO manager rankings. 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. Economic Environment Real gross domestic product (GDP) increased 1.1% in the first quarter of 2023, compared to an increase of 2.6% in the fourth quarter of 2022, according to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA). At the end of March 2023, the U.S. unemployment rate, seasonally adjusted, stood at 3.5%, unchanged from where it had started the quarter, and down from the COVID-19 pandemic high of 14.7% in April 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default. According to the U.S. Bureau of Labor Statistics (BLS), the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending March 2023, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 5.0%, as compared to 6.5% for the 12-month period ending December 2022. The BLS reports that the 5.0% increase for the 12 73 Table of Contents months ending March 2023 was the smallest 12-month increase since the period ending May 2021. According to the United Kingdom’s (U.K.) Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) was 8.9% for the 12 months to March 2023, down from 9.2% for the 12 months ended December 2022. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $20.7 billion of net par outstanding as of March 31, 2023, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally. With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, the FOMC decided at its meeting in March 2022 to start again raising the target range for the federal funds rate and has continued to do so since then. In addition, the FOMC stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through May 3, 2023, the FOMC raised the target range for the federal funds rate nine times, from 0% to 0.25% where it started 2022 to 5.0% to 5.25% at its May 2-3, 2023 meeting, stating that it seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the FOMC indicated that it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. The level and direction of interest rates and credit spreads impact the Company in numerous ways. On the one hand, higher interest rates may present a more challenging environment for distressed residential mortgage-backed securities (RMBS) the Company insures to the extent they cause housing prices to decline. The National Association of Realtors (NAR) reported existing-home sales declined 22.0% in March 2023 from one year ago as home sales are trying to recover and are highly sensitive to changes in mortgage rates. The median existing-home price for all housing types in March 2023 was $375,700, a decline of 0.9% from March 2022 ($379,300). Higher interest rates may also reduce the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, dampen municipal bond issuance and negatively impact the finances of some of the obligors whose payments the Company insures. On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it can charge for those products. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.37% for the quarter ended March 2023, lower than the 3.71% average for the quarter ended December 2022, but considerably higher than the 2.00% average for the quarter ended March 2022. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 101 bps in the quarter ended March 2023, near the 103 bps average for the quarter ended December 2022, but significantly wider than the 72 bps average for the quarter ended March 2022. The Company believes that a further widening of credit spreads in 2023, should it occur, could permit it to increase its premium rates on new business. In addition, the Company believes that over time, higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities. Key Business Strategies The Company continually evaluates its business strategies and is currently pursuing key business strategies in three areas: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management. Insurance The Company seeks to grow the insurance business through new business production, acquisitions of remaining other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (legacy monoline insurers) or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio. Growth of the Insured Portfolio The Company seeks to grow its financial guaranty insurance portfolio through new business production in each of its markets: public finance (including infrastructure) and structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss 74 Table of Contents mitigation. The Company believes that its insurance: (i) encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds; (ii) enables institutional investors to operate more efficiently; and (iii) allows smaller, less well-known issuers to gain market access on a more cost-effective basis. The low interest rate environment and tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. After the onset of the COVID-19 pandemic in early 2020, credit spreads initially widened as a result of market concerns about the impact of the COVID-19 pandemic on some municipal credits, thereby improving demand for financial guaranty insurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that if credit spreads widen in 2023 demand for bond insurance may improve. In certain segments of the infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company’s business opportunities and its risk profile beyond U.S. public finance. The timing of new business production in the infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period. U.S. Municipal Market Data and Bond Insurance Penetration Rates (1) Based on Sale Date First Quarter 2023 First Quarter 2022 Year Ended December 31, 2022 (dollars in billions, except number of issues and percentages) Par: New municipal bonds issued $ 74.1 $ 96.8 $ 359.7 Total insured $ 5.7 $ 8.2 $ 28.8 Insured by Assured Guaranty $ 3.4 $ 4.8 $ 17.0 Number of issues: New municipal bonds issued 1,385 2,288 7,902 Total insured 260 408 1,420 Insured by Assured Guaranty 124 168 648 Bond insurance market penetration based on: Par 7.7 % 8.5 % 8.0 % Number of issues 18.8 % 17.8 % 18.0 % Single A par sold 38.3 % 36.5 % 30.2 % Single A transactions sold 63.3 % 57.7 % 59.0 % $25 million and under par sold 24.2 % 20.8 % 21.9 % $25 million and under transactions sold 22.3 % 20.7 % 21.4 % ____________________ (1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business. The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital. Loss Mitigation In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies. In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company’s role in the Detroit, Michigan and Stockton, California financial crises, and more recently by the Company’s role in negotiating various 75 Table of Contents agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. After over five years of negotiations, 2022 was a turning point for resolving a substantial portion of the Company’s Puerto Rico exposure in accordance with four orders 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 defaulting Puerto Rico credits except Puerto Rico Electric Power Authority (PREPA) (2022 Puerto Rico Resolutions) as discussed in Item 1. Financial Statements,Note 3, Outstanding Exposure—Exposure to Puerto Rico. As a result of the 2022 Puerto Rico Resolutions 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 was greatly reduced. The Company believes the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts. In connection with the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, new general obligation bonds (New GO Bonds) and new bonds backed by toll revenues (Toll Bonds, and together with New GO Bonds, New Recovery Bonds) and contingent value instruments (CVIs) associated with its direct exposures. The Company has sold some of the New Recovery Bonds and CVIs it had received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, PREPA. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Exposure, and the Insured Portfolio section below. The Company is and has for several years been working with the servicers of some of the RMBS transactions it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS. The Company also purchases attractively priced obligations, including below-investment-grade (BIG) obligations, 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 fair value of Loss Mitigation Securities as of March 31, 2023 (excluding the value of the Company’s insurance) was $497 million, with a par of $769 million. In some instances, the terms of the Company’s policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief. Asset Management and Alternative Investments As discussed above, on April 5, 2023, the Company announced the Sound Point Transaction, which further advances two of the objectives the Company has been pursuing since the BlueMountain Acquisition. The first objective was to establish a fee-based earnings stream independent of the risk-based premiums generated by the financial guaranty business. The Company’s 30% investment in the combined firm will advance this earnings diversification. The second objective was to enhance the alternative investment opportunities for our financial guaranty subsidiaries’ investment portfolios. The combined business, managed by Sound Point, will be strengthened by the addition of AssuredIM’s AUM. The Company believes that the Sound Point Transaction provides an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. Adding distributed gains from inception through March 31, 2023 to the original $750 million allocation, the U.S. Insurance Subsidiaries may invest a total of up to $853 million in in affiliated alternative investment funds through their jointly owned investment subsidiary, AG Asset Strategies LLC (AGAS). As of March 31, 2023, AGAS had committed $613 million to AssuredIM Funds, including $247 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, healthcare structured capital and asset-based finance. 76 Table of Contents Capital Management The Company has developed strategies to efficiently manage capital within the Assured Guaranty group. From 2013 through May 9, 2023, the Company has repurchased 141 million common shares for approximately $4.7 billion, representing approximately 73% of the total shares outstanding at the beginning of the repurchase program in 2013. As of May 9, 2023, the Company was authorized to purchase $201 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 13, Shareholders’ Equity, for additional information about the Company’s repurchases of its common shares. Summary of Share Repurchases Amount Number of Shares Average price per share (in millions, except per share data) 2013 - 2022 $ 4,661 140.875 $ 33.09 2023 (January 1 - May 9) 2 0.036 62.23 Cumulative repurchases since the beginning of 2013 $ 4,663 140.911 33.09 As of March 31, 2023, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $38.70 per share in shareholders’ equity attributable to AGL, $43.35 per share in adjusted operating shareholders’ equity and $77.44 per share in adjusted book value. The Company considers the appropriate mix of debt and equity in its capital structure. In 2021, the Company issued $500 million of 3.15% Senior Notes, due in 2031 and $400 million of 3.6% Senior Notes, due in 2051. The proceeds from these issuances were used to redeem $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, $230 million of AGMH’s 6.25% Notes due in 2102, $100 million of AGMH’s 5.60% Notes due in 2103, and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt. Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. Executive Summary This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to the Company’s 2022 Annual Report on Form 10-K. The primary drivers of volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs and committed capital securities (CCS), as well as loss and loss adjustment expense (LAE), foreign exchange gains (losses), the level of refundings of insured obligations, changes in the value of the Company’s alternative investments, the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds and amount of AUM affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 77 Table of Contents Financial Performance of Assured Guaranty Financial Results First Quarter 2023 2022 (in millions, except per share amounts) GAAP Net income (loss) attributable to AGL $ 81 $ 66 Net income (loss) attributable to AGL per diluted share $ 1.34 $ 0.98 Weighted average diluted shares 60.4 67.4 Non-GAAP Adjusted operating income (loss) (1) $ 68 $ 90 Adjusted operating income per diluted share $ 1.12 $ 1.34 Weighted average diluted shares 60.4 67.4 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income $ (4) $ (10) Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share $ (0.06) $ (0.14) Components of total adjusted operating income (loss) Insurance segment $ 117 $ 133 Asset Management segment (1) — Corporate division (44) (33) Other (2) (4) (10) Adjusted operating income (loss) $ 68 $ 90 Insurance Segment Gross written premiums (GWP) $ 86 $ 70 Present value of new business production (PVP) (1) 112 69 Gross par written 5,363 4,471 Asset Management Segment AUM (3) Inflows - third party $ 1 $ 91 Inflows - intercompany — — 78 Table of Contents As of March 31, 2023 As of December 31, 2022 Amount Per Share Amount Per Share (in millions, except per share amounts) Shareholders’ equity attributable to AGL $ 5,220 $ 88.07 $ 5,064 $ 85.80 Adjusted operating shareholders' equity (1) 5,606 94.58 5,543 93.92 Adjusted book value (1) 8,478 143.04 8,379 141.98 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity 13 0.22 17 0.28 Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value 8 0.15 11 0.19 Common shares outstanding (4) 59.3 59.0 ____________________ (1) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details. (2) Relates to the effect of consolidating FG VIEs and CIVs. (3) The Company was limited in its ability to raise third party AUM as a result of the pending Sound Point Transaction due to regulatory and practical considerations. (4) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases. 79 Table of Contents Condensed Consolidated Results of Operations Condensed Consolidated Results of Operations Three Months Ended March 31, 2023 2022 (in millions) 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 CCS (16) 1 Fair value gains (losses) on FG VIEs (5) 6 Fair value gains (losses) on CIVs 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 LAE (benefit) 4 57 Interest expense 21 20 Amortization of deferred acquisition cost (DAC) 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 Effective tax rate 19.1 % 20.0 % First Quarter 2023 Compared with First Quarter 2022 Net income attributable to AGL for the three-month period ended March 31, 2023 (first quarter 2023) was higher compared with the three-month period ended March 31, 2022 (first quarter 2022) primarily due to: • lower losses and LAE due primarily to higher losses on Puerto Rico exposures in first quarter 2022, • foreign exchange gains on remeasurement in first quarter 2023 compared with losses in first quarter 2022, • higher fair value gains on CIVs, and • higher net investment income, and other income. These increases were primarily offset in part by: • lower net earned premiums mainly attributable to accelerations on certain Puerto Rico exposures in first quarter 2022, and 80 Table of Contents • fair value losses on CCS in first quarter 2023 compared with gains in first quarter 2022. The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, 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 or as a U.S. controlled foreign corporation. Adjusted Operating Income Adjusted operating income in first quarter 2023 was $68 million, compared with $90 million in first quarter 2022. The decrease was primarily due to a benefit in first quarter 2022 of $63 million (after-tax) associated with the now extinguished exposures covered by the 2022 Puerto Rico Resolutions (which benefit consisted of premium accelerations, offset in part by recognition of loss expense that was previously embedded in unearned premium reserve). The benefit associated with the 2022 Puerto Rico Resolutions was offset in part by gains on alternative investments, higher net investment income and the release a litigation accrual reported in other income in 2023. See “— Results of Operations — Reconciliation to GAAP” for the reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss). Book Value and Adjusted Book Value Shareholders’ equity attributable to AGL as of March 31, 2023 increased compared with December 31, 2022, as net income and other comprehensive income were partially offset by dividends. Adjusted operating shareholders’ equity and adjusted book value increased primarily due to operating income offset in part by dividends, and in the case of adjusted book value, new business production in 2023, partially offset by dividends. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value. Other Matters Russia’s Invasion of Ukraine Russia’s invasion of Ukraine has led to the imposition of economic sanctions by many western countries against Russia and certain Russian individuals, dislocation in global energy markets, massive refugee movements, and payment default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to reduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company cannot predict all of the potential effects of the conflict on the world or on the Company. The Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, and have identified no material direct exposure to Ukraine or Russia. In fact, the Company’s direct insurance exposure to eastern Europe generally is limited to approximately $289 million in net par outstanding as of March 31, 2023, comprising $234 million net par exposure to the sovereign debt of Poland and $55 million net par exposure to a toll road in Hungary. The Company rates the toll road exposure BIG. Inflation By some key measures, consumer price inflation in the U.S. and the U.K. was higher in recent years than it has been in decades, and interest rates generally increased. Consumer price inflation in the U.K. impacts the Company directly by increasing exposure for certain index-linked U.K. debt with par that accretes with increasing inflation, and also increasing projected future installment premiums on the portion of such exposure that pays at least some of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments, and may be accompanied by higher interest rates that could impact the Company in several ways. After acknowledging the need to combat inflation, the FOMC of the Federal Reserve Board decided at its March 2022 meeting to start again raising the target federal funds rate, and raised the rate nine times from March 2022 through May 3, 2023. At its May 2-3, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 5.0% to 5.25%, its ninth consecutive increase, and stated that its decision to raise the target range of the federal funds rate was in support of its goals of achieving maximum employment and inflation at the rate of 2% over the longer run. In determining the extent to which additional federal 81 Table of Contents funds target rate increases are needed to return inflation to 2% over time, the FOMC indicated it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Higher interest rates impact the Company in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product. However, despite the increases in interest rates in 2022 and first quarter 2023, the pace of credit spread widening was more modest and market penetration of municipal bond insurance in the U.S. public finance market remained relatively flat compared to 2021. Over time, higher interest rates also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. Higher interest rates may present a more challenging environment for distressed RMBS the Company insures to the extent they cause housing prices to decline, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact the finances of some insured obligors. See “Overview — Economic Environment”. Income Taxes The U.S. Internal Revenue Service and Department of the Treasury issued final and proposed regulations in October 2020 relating to the tax treatment of passive foreign investment company (PFICs). The final regulations are not expected to have a material impact to the Company’s business operation or its shareholders and the proposed regulations are continuing to be evaluated. Results of Operations Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the condensed consolidated financial statements. Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially different in the future to reflect changes in these estimates and assumptions from time to time. The accounting policies that the Company believes are most dependent on the application of judgment, estimates and assumptions are listed below. See Part II. Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation , of the Company’s 2022 Annual Report on Form 10-K, for the Company’s significant accounting policies which includes a reference to the applicable note where further details regarding the significant estimates and assumptions are provided, as well as Part II. Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s 2022 Annual Report on Form 10-K, for further details regarding sensitivity analysis. • Expected loss to be paid (recovered) • Fair value of certain assets and liabilities, primarily: ▪ Investments ▪ Assets and liabilities of CIVs ▪ Assets and liabilities of FG VIEs ▪ Credit derivatives • Recoverability of goodwill and other intangible assets • Credit impairment of financial instruments • Revenue recognition • Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities) In addition, the valuation of AUM, which is the basis for calculating certain asset management fees, is based on estimates and assumptions. AUM valuations are often performed by independent pricing services based on observable and unobservable inputs. AUM may be impacted by a wide range of factors, including the condition of the global economy and 82 Table of Contents financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, see “— Results of Operations by Segment — Asset Management Segment”. Results of Operations by Segment The Company analyzes the operating performance of each segment using each segment’s adjusted operating income as described in Item 1, Financial Statements, Note 2, Segment Information. Insurance Segment Results Insurance Segment Results First Quarter 2023 2022 Segment revenues Net earned premiums and credit derivative revenues $ 84 $ 219 Net investment income 82 63 Fair value gains (losses) on trading securities (2) (4) Foreign exchange gains (losses) on remeasurement and other income (loss) 26 — Total segment revenues 190 278 Segment expenses Loss expense (benefit) 9 60 Interest expense — 1 Amortization of DAC 3 4 Employee compensation and benefit expenses 39 38 Other operating expenses 28 19 Total segment expenses 79 122 Equity in earnings (losses) of investees 30 (1) Segment adjusted operating income (loss) before income taxes 141 155 Less: Provision (benefit) for income taxes 24 22 Segment adjusted operating income (loss) $ 117 $ 133 Net Earned Premiums and Credit Derivative Revenues Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, or books of business acquired in a business combination. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information. Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis. Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policies under the 2022 Puerto Rico Resolutions. 83 Table of Contents Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s insurance obligation. Terminations have been more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable. Insurance Segment Net Earned Premiums and Credit Derivative Revenues First Quarter 2023 2022 (in millions) Net earned premiums: Financial guaranty insurance: Public finance Scheduled net earned premiums (1) $ 62 $ 71 Accelerations: Refundings 4 128 Terminations — — Total accelerations 4 128 Total public finance 66 199 Structured finance scheduled net earned premiums (1) 15 15 Specialty insurance and reinsurance 1 1 Total net earned premiums 82 215 Credit derivative revenues: Scheduled net earned premiums 2 2 Accelerations — 2 Total credit derivative revenues 2 4 Total net earned premiums and credit derivative revenues $ 84 $ 219 ____________________ (1) Includes accretion of discount. Net earned premiums and credit derivative revenues decreased in first quarter 2023 compared with first quarter 2022 primarily due to refundings of $104 million related to the resolution of PRCCDA, PRIFA and GO/PBA exposures that occurred in March 2022 discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of March 31, 2023, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts. 84 Table of Contents New Business Production Gross Written Premiums and New Business Production First Quarter 2023 2022 (in millions) GWP Public Finance—U.S. $ 22 $ 49 Public Finance—non-U.S. 36 16 Structured Finance—U.S. 28 5 Structured Finance—non-U.S. — — Total GWP $ 86 $ 70 PVP (1): Public Finance—U.S. $ 22 $ 49 Public Finance—non-U.S. 30 12 Structured Finance—U.S. 27 2 Structured Finance—non-U.S. (2) 33 6 Total PVP $ 112 $ 69 Gross Par Written (1): Public Finance—U.S. $ 2,907 $ 3,931 Public Finance—non-U.S. 360 223 Structured Finance—U.S. 582 60 Structured Finance—non-U.S. (2) 1,514 257 Total gross par written $ 5,363 $ 4,471 Average rating on new business written A A- ____________________ (1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “— Non-GAAP Financial Measures — PVP or Present Value of New Business Production.” (2) First quarter 2023 and 2022 PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under ASC 460, Guarantees . In first quarter 2023, structured finance GWP was almost six times GWP in first quarter 2022, and PVP was over seven times PVP in first quarter 2022. First quarter 2023 structured finance GWP primarily includes a large insurance securitization transaction. Structured finance PVP in first quarter 2023 includes the insurance securitization, as well as an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties for which no GWP was reported under GAAP because it is not accounted for as insurance. In first quarter 2023, non-U.S. public finance GWP and PVP were more than double the GWP and PVP in first quarter 2022. In first quarter 2023, new business primarily included the guaranty of a long-term sale and leaseback transaction with Glasgow City Council and several regulated utility transactions. U.S. public finance GWP and PVP in first quarter 2023 were lower than the comparable GWP and PVP in first quarter 2022, primarily due to reduced market issuance and fewer secondary market transactions in first quarter 2023. The average rating of U.S. public finance par written was A- in first quarter 2023 and first quarter 2022. The Company’s direct par written represented 60% of the total U.S. municipal market insured issuance in first quarter 2023, compared with 58% in first quarter 2022, and the Company’s penetration of all municipal issuance was 4.6% in first quarter 2023 compared with 4.9% in first quarter 2022. Business activity in the infrastructure (reported in non-US public finance) and structured finance sectors typically has long lead times and therefore may vary from period to period. 85 Table of Contents 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 on fixed-maturity securities 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. CVIs issued by Puerto Rico and received as part of the 2022 Puerto Rico Resolutions are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the consolidated statements on operations. The fair value of such instruments as of March 31, 2023 was $300 million. Equity method investments in the Insurance segment include investments that the U.S. Insurance Subsidiaries make in AssuredIM Funds, as well as other alternative investments. The income (loss) on such investments is reported in “equity in earnings (losses) of investees” and typically represents the change in net asset value (NAV) of AssuredIM Funds and the Company’s share of earnings of its other investees. The U.S. Insurance Subsidiaries are authorized to invest up to $750 million in affiliated alternative investment 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 Funds of $613 million, of which $366 million represented net invested capital and $247 million was undrawn. Insurance Segment Income from Investments First Quarter 2023 2022 (in millions) Net investment income Externally managed $ 48 $ 47 Internally managed: Loss Mitigation Securities 10 9 Managed by AssuredIM (1) 8 4 Short-term 10 — Other 5 3 Intercompany loans 3 2 Investment income 84 65 Investment expenses (2) (2) Net investment income $ 82 $ 63 Fair value gains (losses) on trading securities $ (2) $ (4) Equity in earnings (losses) of investees AssuredIM Funds $ 28 $ 11 Other 2 (12) Equity in earnings (losses) of investees $ 30 $ (1) ____________________ (1) Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an investment management agreement (IMA). Net investment income increased to $82 million in first quarter 2023 compared with $63 million in first quarter 2022, primarily due to the increase in short-term rates and higher average short-term balances, as well as higher income on floating rate CLO investments. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.82% as of March 31, 2023 and 3.15% as of March 31, 2022. Excluding the internally managed portfolio and portfolio managed by AssuredIM, pre-tax book yield was 3.17% as of March 31, 2023 and 2.93% as of March 31, 2022. 86 Table of Contents Equity in earnings of AssuredIM Funds were gains in first quarter 2023 and first quarter 2022 primarily attributable to higher valuations of assets held in the CLO and healthcare funds. Other Income (Loss) The increase in “other income (loss)” in first quarter 2023 compared with first quarter 2022 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million. See Item 1, Financial Statements, Note 12, Commitments and Contingencies, for additional information. Economic Loss Development The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Part II. Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), of the Company’s 2022 Annual Report on Form 10-K. For the accounting policies for measurement and recognition under GAAP for each type of contract, see the notes listed below in Part II. Item 8, Financial Statements and Supplementary Data, of the Company’s 2022 Annual Report on Form 10-K: • Note 5 for contracts accounted for as insurance; • Note 6 for contracts accounted for as credit derivatives; • Note 8 for FG VIEs; and • Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities. In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and, the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used. Current risk-free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported. Changes in risk-free rates used to discount losses affect economic loss development, and loss and LAE; however, the effect of changes in discount rates are not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) were 3.75% and 4.08% as of March 31, 2023 and December 31, 2022, respectively. The composition of economic loss development (benefit) by accounting model and by sector are presented in the tables that follow, and the drivers of economic loss development (benefit) are discussed below. 87 Table of Contents 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 $ 205 $ 205 $ 6 $ (44) FG VIEs 309 (1) 314 (1) 5 (4) Credit derivatives 3 3 — 4 Total $ 517 $ 522 $ 11 $ (44) Net exposure rated BIG $ 5,966 $ 5,976 ____________________ (1) The expected loss to be paid for FG VIEs primarily relates to Puerto Rico Trusts that were consolidated as a result of the 2022 Puerto Rico Resolutions. See Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered). 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 88 Table of Contents 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”. First Quarter 2023 Net Economic Loss Development Economic loss development of $11 million was primarily due to changes in discount rates of $10 million. First Quarter 2022 Net Economic Loss Development Public Finance: The economic benefit on U.S. exposures in first quarter 2022 was $48 million, and was primarily attributable to Puerto Rico exposures and changes in discount rates. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.7 billion as of March 31, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to for PRCCDA, PRIFA and GO/PBA exposures. The Company projected that its total net expected loss to be paid across its troubled U.S. public finance exposures as of March 31, 2022 would be $181 million, compared with $197 million as of December 31, 2021. U.S. RMBS: The economic loss development attributable to U.S. RMBS was $7 million and was mainly attributable to a $43 million loss related to lower excess spread, partially offset by a $22 million benefit related to changes in discount rates and an $11 million benefit related to improved performance in certain transactions. Insurance Segment Loss Expense The primary differences between net economic loss development and the amount reported as “loss and LAE (benefit)” in the consolidated statements of operations are that loss and LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (ii) eliminates loss and LAE related to FG VIEs; and (iii) does not include estimated losses on credit derivatives. Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives, without giving effect to eliminations related to the consolidation of FG VIEs. For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies. 89 Table of Contents While expected loss to be paid (recovered) is an important measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies. The amount of Insurance segment loss expense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense. Insurance Segment Loss Expense (Benefit) First Quarter 2023 2022 (in millions) U.S. public finance $ 1 $ 55 Non-U.S. public finance — — Structured finance: U.S. RMBS 6 6 Other structured finance 2 (1) Structured finance 8 5 Total Insurance segment loss expense (benefit) $ 9 $ 60 The difference between public finance loss expense and economic development in first quarter 2022 was primarily attributable to the release of unearned premium reserve related to PRCCDA, PRIFA and GO/PBA exposures. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were recognized for the remaining deferred premium revenue on the extinguished Puerto Rico exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance. Other Operating Expenses The increase in “other operating expenses” in first quarter 2023 compared with first quarter 2022 was primarily attributable to an increase in value added taxes. Financial Strength Ratings Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency assigning the rating, are shown in the table below. 90 Table of Contents S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (S&P) Kroll Bond Rating Agency Moody’s Investors Service, Inc. (Moody’s) A.M. Best Company, Inc. AGM AA (stable) (7/8/22) AA+ (stable) (10/21/22) A1 (stable) (3/18/22) — AGC AA (stable) (7/8/22) AA+ (stable) (10/21/22) (1) — Assured Guaranty Re Ltd. (AG Re) AA (stable) (7/8/22) — — — Assured Guaranty Re Overseas Ltd. (AGRO) AA (stable) (7/8/22) — — A+ (stable) (7/22/22) Assured Guaranty UK Limited (AGUK) AA (stable) (7/8/22) AA+ (stable) (10/21/22) A1 (stable) (3/18/22) — Assured Guaranty (Europe) SA (AGE) AA (stable) (7/8/22) AA+ (stable) (10/21/22) — — ____________________ (1) AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. Moody's rates AGC A2 (stable). Ratings are subject to continuous rating agency review and revision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL’s insurance subsidiaries in the future or cease to rate one or more of AGL’s insurance subsidiaries, either voluntarily or at the request of that subsidiary. For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “— Liquidity and Capital Resources — Insurance Subsidiaries” section below. Asset Management Segment Results Asset Management Segment Results First Quarter 2023 2022 (in millions) Segment revenues Management fees (1) 17 21 Performance fees 20 16 Foreign exchange gains (losses) on remeasurement and other income (loss) 4 2 Total segment revenues 41 39 Segment expenses Employee compensation and benefit expenses 34 29 Other operating expenses (1) (2) 8 10 Total segment expenses 42 39 Segment adjusted operating income (loss) before income taxes (1) — Less: Provision (benefit) for income taxes — — Segment adjusted operating income (loss) $ (1) $ — _____________________ (1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross as revenues. (2) Includes amortization of intangible assets of $2 million for first quarter 2023 and $3 million for first quarter 2022. 91 Table of Contents Management and Performance Fees Management fees are generated by CLOs, opportunity funds, liquid strategies and certain of the wind-down funds. CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO Equity that is held directly by AssuredIM Funds. Management fees from opportunity funds and liquid strategies include funds that were launched since the BlueMountain Acquisition in which the Insurance segment’s U.S. Insurance Subsidiaries invest as well as with two previously established opportunity funds in their harvest periods. The Company also generates fees from legacy hedge and opportunity funds now subject to an orderly wind-down. Management Fees First Quarter 2023 2022 (in millions) CLOs $ 12 $ 12 Opportunity funds and liquid strategies 5 8 Wind-down funds — 1 Total management fees $ 17 $ 21 Performance fees and related compensation expenses in first quarter 2023 and first quarter 2022 related to tax distributions from the healthcare and asset-based funds. Assets Under Management The Company uses AUM as a metric to measure progress in its Asset Management segment. Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM. However, the Company believes that AUM is a useful metric for assessing the relative size and scope of the Company’s asset management business. Investors also use AUM to evaluate companies that participate in the asset management business. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following: • the amount of aggregate collateral balance and principal cash of AssuredIM’s CLOs, including CLO Equity that may be held by AssuredIM Funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji), which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and continues to provide personnel and other services to BM Fuji associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and a personnel and services agreement, consistent with past practices; and • the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments. Changes in NAV attributable to movements in fund value of certain private equity funds are reported on a quarter lag. The Company’s calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which AssuredIM affiliates registered with the U.S. Securities and Exchange Commission (SEC) report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways. The Company also uses several other measurements of AUM to understand and measure its AUM in more detail and for various purposes, including its relative position in the market and its income and income potential: “Third-party AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in AssuredIM Funds. For CLOs, this also includes CLO Equity that may be held by AssuredIM Funds. “Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners’ investments of AssuredIM (or its affiliates) into the AssuredIM Funds. “Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs. 92 Table of Contents “Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse funds. “Fee earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors. “Non-fee earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors. AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company. Further, to the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by AssuredIM. Roll Forward of Assets Under Management First Quarter 2023 CLOs Opportunity Funds (1) Liquid Strategies Wind-Down Funds Total (in millions) AUM, December 31, 2022 $ 15,150 $ 1,884 $ 248 $ 182 $ 17,464 Inflows - third party — 1 — — 1 Inflows - intercompany — — — — — Outflows: Redemptions — — — — — Distributions (64) (133) — (48) (245) Total outflows (64) (133) — (48) (245) Net flows (64) (132) — (48) (244) Change in value 54 24 5 (1) 82 AUM, March 31, 2023 $ 15,140 $ 1,776 $ 253 $ 133 $ 17,302 _____________________ (1) As of March 31, 2023, AUM related to the AssuredIM Funds created prior to BlueMountain Acquisition was $67 million. Roll Forward of Assets Under Management First Quarter 2022 CLOs Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) AUM, December 31, 2021 $ 14,699 $ 1,824 $ 389 $ 582 $ 17,494 Inflows - third party — 91 — — 91 Inflows - intercompany — — — — — Outflows: Redemptions — — — — — Distributions (335) (104) — (135) (574) Total outflows (335) (104) — (135) (574) Net flows (335) (13) — (135) (483) Change in value (82) 63 (14) 12 (21) AUM, March 31, 2022 $ 14,282 $ 1,874 $ 375 $ 459 $ 16,990 93 Table of Contents Components of Assets Under Management CLOs (1) Opportunity Funds Liquid Strategies Wind-Down Funds Total (in millions) As of March 31, 2023: Funded AUM $ 15,008 $ 1,112 $ 253 $ 111 $ 16,484 Unfunded AUM 132 664 — 22 818 Fee-earning AUM $ 14,801 $ 1,526 $ 253 $ 77 $ 16,657 Non-fee earning AUM 339 250 — 56 645 Intercompany AUM Funded AUM $ 548 $ 164 $ 253 $ — $ 965 Unfunded AUM 132 115 — — 247 As of December 31, 2022: Funded AUM $ 15,047 $ 1,217 $ 248 $ 160 $ 16,672 Unfunded AUM 103 667 — 22 792 Fee-earning AUM $ 14,820 $ 1,640 $ 248 $ 87 $ 16,795 Non-fee earning AUM 330 244 — 95 669 Intercompany AUM Funded AUM $ 582 $ 192 $ 248 $ — $ 1,022 Unfunded AUM 103 115 — — 218 _____________________ (1) CLO AUM includes CLO Equity that is held by AssuredIM Funds. This CLO Equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM Funds. Corporate Division Results Corporate Division Results First Quarter 2023 2022 Revenues 2 1 Expenses Interest expense 23 21 Employee compensation and benefit expenses 9 6 Other operating expenses 16 7 Total expenses 48 34 Equity in earnings (losses) of investees — — Adjusted operating income (loss) before income taxes (46) (33) Less: Provision (benefit) for income taxes (2) — Adjusted operating income (loss) $ (44) $ (33) Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $2 million in both first quarter 2023 and first quarter 2022, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition. 94 Table of Contents Corporate division employee compensation and benefits expenses are an allocation of expenses based on time studies and represent the costs incurred and time spent on holding company activities, capital management, corporate oversight and governance including Board of Director expenses, legal fees and other direct or allocated expenses. In first quarter 2023, operating expenses also include expenses related to the Sound Point Transaction, and a higher charge for value added taxes. Other (Effect of Consolidating FG VIEs and CIVs) The effect of consolidating FG VIEs and CIVs, intersegment eliminations and reclassifications of reimbursable fund expenses to revenue are presented in “other.” See Item 1, Financial Statements, Note 2, Segment Information. The types of entities the Company consolidates when it is deemed to be the primary beneficiary primarily include: (i) entities whose debt obligations the insurance subsidiaries insure; (ii) custodial trusts established in connection with the consummation of the 2022 Puerto Rico Resolutions; and (iii) investment vehicles such as collateralized financing entities, CLO warehouses and AssuredIM Funds. The Company eliminates the effects of intercompany transactions between its FG VIEs and CIVs, and its insurance and asset management subsidiaries, as well as intercompany transactions between CIVs. Consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), has a significant gross-up effect on the consolidated financial statements, and includes: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (ii) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs. Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows, and includes: (i) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs; (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees; and (iv) establishing noncontrolling interest for amounts not owned by the Company. The economic effect of the U.S Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“assets of CIVs,” “liabilities of CIVs,” and redeemable and non-redeemable noncontrolling interest) on a consolidated basis. 95 Table of Contents The table below reflects the effect of consolidating FG VIEs and CIVs on the condensed consolidated statements of operations. The amounts represent: (i) the revenues and expenses of the FG VIEs and the CIVs; and (ii) the consolidation adjustments and eliminations between consolidated FG VIEs or CIVs and the operating and investment subsidiaries. Effect of Consolidating FG VIEs and CIVs on the Condensed Consolidated Statements of Operations Increase (Decrease) First Quarter 2023 2022 Effect on Financial Statement Line Item (in millions) Fair value gains (losses) on FG VIEs (1) $ (5) $ 6 Fair value gains (losses) on CIVs 58 14 Equity in earnings (losses) of investees (2) (28) (10) Other (3) (14) (11) Effect on income before tax 11 (1) Less: Tax provision (benefit) (1) — Effect on net income (loss) 12 (1) Less: Effect on noncontrolling interests (4) 16 9 Effect on net income (loss) attributable to AGL $ (4) $ (10) By Type of VIE FG VIEs $ (2) $ 2 CIVs (2) (12) Effect on net income (loss) attributable to AGL $ (4) $ (10) ____________________ (1) Changes in fair value of the FG VIEs’ assets and liabilities that are attributable to factors other than (i) changes in the Company’s own credit risk on FG VIE liabilities with recourse, and (ii) unrealized gains and losses on available-for-sale fixed maturity securities. (2) Represents the elimination of the equity in earnings (losses) of investees of AGAS and the other subsidiaries’ investments in the consolidated AssuredIM Funds. (3) Includes net earned premiums, net investment income, asset management fees, foreign exchange gains (losses) on remeasurement, other income (loss), loss and LAE (benefit) and other operating expenses. (4) Represents the proportion of consolidated AssuredIM Funds’ income that is not attributable to AGAS’ or any other subsidiaries’ ownership interest. Reconciliation to GAAP Reconciliation of Net Income (Loss) Attributable to AGL to Adjusted Operating Income (Loss) First Quarter 2023 2022 (in millions) Net income (loss) attributable to AGL $ 81 $ 66 Less pre-tax adjustments: Realized gains (losses) on investments (2) 3 Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives 13 (3) Fair value gains (losses) on CCS (16) 1 Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves 20 (29) Total pre-tax adjustments 15 (28) Less tax effect on pre-tax adjustments (2) 4 Adjusted operating income (loss) $ 68 $ 90 Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(1) and $0) included in adjusted operating income $ (4) $ (10) 96 Table of Contents Net Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). Net Realized Investment Gains (Losses) First Quarter 2023 2022 (in millions) Gross realized gains on sales of available-for-sale securities $ 12 $ — Gross realized losses on sales of available-for-sale securities (9) (2) Change in allowance for credit losses and intent to sell (5) (5) Other net realized gains (losses) — 10 Net realized investment gains (losses) $ (2) $ 3 Gross realized gains on sales of available-for-sale securities in first quarter 2023 were primarily attributable to sales of New Recovery Bonds received pursuant to the 2022 Puerto Rico Resolutions. Gross realized losses on sales of available-for-sale securities in first quarter 2023 were primarily attributable to sales in externally managed portfolio and of New Recovery Bonds received pursuant to the 2022 Puerto Rico Resolutions. Other net realized gains in first quarter 2022 related primarily to the sale of one of the Company’s alternative investments. Non-Credit Impairment-Related Unrealized Fair Value Gains (Losses) on Credit Derivatives Changes in the fair value of credit derivatives occur because of changes in the Company’s own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-credit impairment-related changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because they do not represent actual claims or losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods. The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads. The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market since 2009 and, as of March 31, 2023, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread and estimated contractual payments. See Item 1, Financial Statements, Note 9, Fair Value Measurement, for additional information. During first quarter 2023, non-credit impairment-related unrealized fair value gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection 97 Table of Contents on AGC, which management refers to as the CDS spread on AGC, increased, the implied spreads that the Company (or another comparable entity) would expect to receive on these transactions decreased. First quarter 2022 non-credit impairment-related unrealized fair value losses were generated primarily as a result of increases in the credit spread of underlying reference obligations, offset in part by the increased cost to buy protection on AGC, as the market cost of AGC’s protection increased during the period. Sensitivity to Changes in Credit Spread The following table summarizes the estimated change in fair value on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC. Effect of Changes in Credit Spread As of March 31, 2023 As of December 31, 2022 Credit Spreads (1) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain (Loss) (Pre-Tax) Estimated Net Fair Value (Pre-Tax) Estimated Change in Gain (Loss) (Pre-Tax) (in millions) Increase of 25 bps $ (219) $ (71) $ (233) $ (71) Base Scenario (148) — (162) — Decrease of 25 bps (87) 61 (99) 63 All transactions priced at floor (27) 121 (27) 135 ____________________ (1) Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread. Fair Value Gains (Losses) on CCS Fair value losses on CCS in first quarter 2023 were primarily due to a tightening in market spreads. Fair value gains on CCS in first quarter 2022 were primarily due to a significant increase in London Interbank Offered Rate (LIBOR). Fair value gains (losses) of CCS are heavily affected by, and in part fluctuate with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. Foreign Exchange Gain (Loss) on Remeasurement Foreign exchange gains and losses in all periods primarily relate to remeasurement of long-dated premiums receivable, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and, to a lesser extent, the euro relative to the U.S. dollar. Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves were gains of $20 million and losses of $29 million in first quarter 2023 and first quarter 2022, respectively. 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. Premiums on European infrastructure and structured finance transactions typically are paid, in whole or in part , on an installment basis, whereas premiums on U.S. public finance transactions are often paid upfront. The following table presents the foreign exchange rates as of balance sheet dates. Foreign Exchange Rates U.S. Dollar Per Foreign Currency As of March 31, 2023 As of December 31, 2022 As of March 31, 2022 As of December 31, 2021 Pound sterling $1.234 $1.208 $1.314 $1.353 Euro $1.084 $1.071 $1.107 $1.137 98 Table of Contents Non-GAAP Financial Measures The Company discloses both: (a) financial measures determined in accordance with GAAP; and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company. The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results. GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include: • FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and • CIVs in which certain subsidiaries invest and which are managed by AssuredIM. The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment. Management of the Company and AGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; and (4) PVP. Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy. Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases. The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below. Adjusted Operating Income Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile. 2) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present 99 Table of Contents value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss. 4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize. 5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. See “— Results of Operations — Reconciliation to GAAP”, for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss). Adjusted Operating Shareholders’ Equity and Adjusted Book Value Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss. Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following: 1) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. 2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss. 3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore would not recognize an economic gain or loss. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. Management uses adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following: 1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods. 2) Addition of the net present value of estimated net future revenue. See below. 100 Table of Contents 3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity. 4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments. The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors. Reconciliation of Shareholders’ Equity Attributable to AGL to Adjusted Operating Shareholders’ Equity and Adjusted Book Value As of March 31, 2023 As of December 31, 2022 After-Tax Per Share After-Tax Per Share (dollars in millions, except share amounts) Shareholders’ equity attributable to AGL $ 5,220 $ 88.07 $ 5,064 $ 85.80 Less pre-tax adjustments: Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives (59) (0.99) (71) (1.21) Fair value gains (losses) on CCS 32 0.53 47 0.80 Unrealized gain (loss) on investment portfolio (413) (6.97) (523) (8.86) Less taxes 54 0.92 68 1.15 Adjusted operating shareholders’ equity 5,606 94.58 5,543 93.92 Pre-tax adjustments: Less: Deferred acquisition costs 151 2.55 147 2.48 Plus: Net present value of estimated net future revenue 196 3.30 157 2.66 Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed 3,436 57.97 3,428 58.10 Plus taxes (609) (10.26) (602) (10.22) Adjusted book value $ 8,478 $ 143.04 8,379 141.98 Gain (loss) related to FG VIE and CIV consolidation included in: Adjusted operating shareholders’ equity (net of tax provision of $4 and $4) $ 13 $ 0.22 $ 17 $ 0.28 Adjusted book value (net of tax provision of $3 and $3) 8 0.15 11 0.19 Net Present Value of Estimated Net Future Revenue Management believes that this amount is a useful measure because it enables an evaluation of the present value of estimated net future revenue for non-financial guaranty insurance contracts. This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure. 101 Table of Contents PVP or Present Value of New Business Production Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production in the Insurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premiums and fees on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), regardless of form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums. Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual installment premiums may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation. Reconciliation of GWP to PVP First Quarter 2023 First Quarter 2022 Public Finance Structured Finance Public Finance Structured Finance U.S. Non - U.S. U.S. Non - U.S. Total U.S. Non - U.S. U.S. Non - U.S. Total (in millions) GWP $ 22 $ 36 $ 28 $ — $ 86 $ 49 $ 16 $ 5 $ — $ 70 Less: Installment GWP and other GAAP adjustments (1) 8 33 28 — 69 — 16 3 — 19 Upfront GWP 14 3 — — 17 49 — 2 — 51 Plus: Installment premiums and other (2) 8 27 27 33 95 — 12 — 6 18 PVP $ 22 $ 30 $ 27 $ 33 $ 112 $ 49 $ 12 $ 2 $ 6 $ 69 ___________________ (1) Includes the present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions and other GAAP adjustments. (2) Includes the present value of future premiums and fees on new business paid in installments, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturities such as Loss Mitigation Securities. This also includes the present value of future premiums and fees associated with other guaranties written by the Company that, under GAAP, are accounted for under Accounting Standards Codification (ASC) 460, Guarantees. Insured Portfolio Financial Guaranty Exposure The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure. The following table presents the financial guaranty portfolio by sector, net of cessions to reinsurers. It includes all financial guaranty contracts outstanding as of the dates presented, regardless of the form written (i.e., credit derivative form or traditional financial guaranty insurance form) or the applicable accounting model (i.e., insurance, derivative or FG VIE consolidation), along with each sector’s average rating. 102 Table of Contents Financial Guaranty Portfolio Net Par Outstanding and Average Internal Rating by Sector As of March 31, 2023 As of December 31, 2022 Sector Net Par Outstanding Average Rating Net Par Outstanding Average Rating (dollars in millions) Public finance: U.S. public finance: General obligation $ 72,562 A- $ 71,868 A- Tax backed 32,798 A- 33,752 A- Municipal utilities 27,009 A- 26,436 A- Transportation 20,140 A- 19,688 A- Healthcare 11,641 BBB+ 11,304 BBB+ Higher education 7,318 A- 7,137 A- Infrastructure finance 6,895 A- 6,955 A- Housing revenue 959 BBB- 959 BBB- Investor-owned utilities 331 A- 332 A- Renewable energy 171 A- 180 A- Other public finance 1,013 BBB 1,025 BBB Total U.S. public finance 180,837 A- 179,636 A- Non-U.S public finance: Regulated utilities 18,604 BBB+ 17,855 BBB+ Infrastructure finance 14,184 BBB 13,915 BBB Sovereign and sub-sovereign 9,904 A+ 9,526 A+ Renewable energy 2,114 A- 2,086 A- Pooled infrastructure 1,103 AAA 1,081 AAA Total non-U.S. public finance 45,909 BBB+ 44,463 BBB+ Total public finance 226,746 A- 224,099 A- Structured finance: U.S. structured finance: Life insurance transactions 4,378 AA- 3,879 AA- RMBS 1,910 BBB- 1,956 BBB- Pooled corporate obligations 617 AAA 625 AAA Financial products 452 AA- 453 AA- Consumer receivables 405 A 437 A Other structured finance 898 BBB+ 878 BBB+ Total U.S. structured finance 8,660 A 8,228 A Non-U.S. structured finance: Pooled corporate obligations 349 AAA 344 AAA RMBS 262 A- 263 A- Other structured finance 366 AA- 324 AA- Total non-U.S structured finance 977 AA 931 AA Total structured finance 9,637 A 9,159 A Total net par outstanding $ 236,383 A- $ 233,258 A- 103 Table of Contents Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary financial guarantor. The second-to-pay insured par outstanding as of both March 31, 2023 and December 31, 2022 was $4.3 billion. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were not investment grade was $16 million and $19 million as of March 31, 2023 and December 31, 2022, respectively. 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 March 31, 2023, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR). The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in Item 1, Financial Statements, Note 3, Outstanding Exposure. Exposure to Puerto Rico by Company As of March 31, 2023 Net Par Outstanding AGM AGC AG Re Eliminations (1) Total Net Par Outstanding Gross Par Outstanding (in millions) Defaulted Puerto Rico Exposures PREPA (2) $ 446 $ 69 $ 205 $ — $ 720 $ 730 Total Defaulted 446 69 205 — 720 730 Resolved Puerto Rico Exposures PRHTA (Transportation revenue) (2) 49 181 107 (42) 295 295 PRHTA (Highway revenue) (2) 140 30 12 — 182 182 Commonwealth of Puerto Rico - GO (2) — 19 6 — 25 25 PBA (2) 1 4 — (1) 4 4 Total Resolved 190 234 125 (43) 506 506 Other Puerto Rico Exposures MFA (3) 96 6 22 — 124 130 PRASA and U of PR (3) — 1 — — 1 1 Total Other 96 7 22 — 125 131 Total exposure to Puerto Rico $ 732 $ 310 $ 352 $ (43) $ 1,351 $ 1,367 ___________________ (1) Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary. (2) Resolved pursuant to the 2022 Puerto Rico Resolutions. Consideration received under the GO/PBA and HTA Plans related to the remaining insured exposure is reported in FG VIE assets (see Item 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles). (3) All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company. 104 Table of Contents The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of debt service when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only pay the shortfall between the debt service due in any given period and the amount paid by the obligors. Amortization Schedule of Net Par of Puerto Rico As of March 31, 2023 Scheduled Net Par Amortization 2023 (2Q) 2023 (3Q) 2023 (4Q) 2024 2025 2026 2027 2028 - 2032 2033 - 2037 2038 - 2041 Total (in millions) Defaulted Puerto Rico Exposures PREPA $ — $ 95 $ — $ 93 $ 68 $ 105 $ 105 $ 241 $ 13 $ — $ 720 Total Defaulted — 95 — 93 68 105 105 241 13 — 720 Resolved Puerto Rico Exposures PRHTA (Transportation revenue) — 10 — — 8 7 — 12 126 132 295 PRHTA (Highway revenue) — — — — — — — 81 101 — 182 Commonwealth of Puerto Rico - GO — — — — — 2 4 19 — — 25 PBA — 2 — — 2 — — — — — 4 Total Resolved — 12 — — 10 9 4 112 227 132 506 Other Puerto Rico Exposures MFA — 17 — 16 16 35 15 25 — — 124 PRASA and U of PR — — — 1 — — — — — — 1 Total Other Puerto Rico Exposures — 17 — 17 16 35 15 25 — — 125 Total $ — $ 124 $ — $ 110 $ 94 $ 149 $ 124 $ 378 $ 240 $ 132 $ 1,351 Amortization Schedule of Net Debt Service of Puerto Rico As of March 31, 2023 Scheduled Net Debt Service Amortization 2023 (2Q) 2023 (3Q) 2023 (4Q) 2024 2025 2026 2027 2028 - 2032 2033 - 2037 2038 - 2041 Total (in millions) Defaulted Puerto Rico Exposures PREPA $ 3 $ 109 $ 3 $ 122 $ 92 $ 126 $ 122 $ 274 $ 14 $ — $ 865 Total Defaulted 3 109 3 122 92 126 122 274 14 — 865 Resolved Puerto Rico Exposures PRHTA (Transportation revenue) — 17 — 15 23 22 14 81 181 150 503 PRHTA (Highway revenue) — 5 — 9 9 10 10 124 116 — 283 Commonwealth of Puerto Rico - GO — 1 — 1 1 3 6 21 — — 33 PBA — 2 — — 3 — — — — — 5 Total Resolved — 25 — 25 36 35 30 226 297 150 824 Other Puerto Rico Exposures MFA — 20 — 22 20 39 16 28 — — 145 PRASA and U of PR — — — 1 — — — — — — 1 Total Other Puerto Rico Exposures — 20 — 23 20 39 16 28 — — 146 Total $ 3 $ 154 $ 3 $ 170 $ 148 $ 200 $ 168 $ 528 $ 311 $ 150 $ 1,835 105 Table of Contents Financial Guaranty Exposure to U.S. RMBS The following table presents information in respect of the U.S. RMBS exposures to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered). U.S. RMBS exposures represent 0.8% of the total net par outstanding, and BIG U.S. RMBS represent 16.8% of total BIG net par outstanding as of March 31, 2023. Distribution of U.S. RMBS by Year Insured and Type of Exposure as of March 31, 2023 Year insured: Prime First Lien Alt-A First Lien Option ARMs Subprime First Lien Second Lien Total Net Par Outstanding (in millions) 2004 and prior $ 9 $ 8 $ — $ 332 $ 12 $ 361 2005 22 119 15 182 50 388 2006 24 25 1 41 105 196 2007 — 191 16 582 145 934 2008 — — — 31 — 31 Total exposures $ 55 $ 343 $ 32 $ 1,168 $ 312 $ 1,910 Exposures rated BIG $ 34 $ 203 $ 15 $ 625 $ 111 $ 988 Liquidity and Capital Resources AGL and its U.S. Holding Companies AGL directly owns (i) AG Re, an insurance company domiciled in Bermuda; and (ii) AGUS, a U.S. holding company with public debt. AGUS directly owns: (i) AGC, an insurance company domiciled in Maryland; and (ii) AGMH, a U.S. holding company with public debt outstanding. AGMH directly owns AGM, an insurance subsidiary domiciled in New York. AGUS and AGMH are collectively referred to as the U.S. Holding Companies. Sources and Uses of Funds The liquidity of AGL and its U.S. Holding Companies is largely dependent on dividends from their operating subsidiaries (see Insurance Subsidiaries, Distributions from Insurance Subsidiaries below for a description of dividend restrictions) and their access to external financing. The operating liquidity requirements of AGL and the U.S. Holding Companies include: • principal and interest on debt issued by AGUS and AGMH; • dividends on AGL’s common shares; and • the payment of operating expenses. AGL and its U.S. Holding Companies may also require liquidity to: • make capital investments in their operating subsidiaries; • fund acquisitions of new businesses; • purchase or redeem the Company’s outstanding debt; or • repurchase AGL’s common shares pursuant to AGL’s share repurchase authorization. In the ordinary course of business, the Company evaluates its liquidity needs and capital resources in light of holding company expenses and dividend policy, as well as rating agency considerations. The Company also subjects its cash flow projections and its assets to a stress test, maintaining a liquid asset balance of one and a half times its stressed operating company net cash flows. Management believes that AGL will have sufficient liquidity to satisfy its needs over the next twelve months. See “— Overview— Key Business Strategies, Capital Management” above for information on common share repurchases. 106 Table of Contents Long-Term Debt Obligations The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and Guarantor and U.S. Holding Companies' Summarized Financial Information , below. U.S. Holding Companies Long-Term Debt and Intercompany Loans As of March 31, 2023 As of December 31, 2022 (in millions) Effective Interest Rate Final Maturity Principal Amount AGUS - long-term debt 7% Senior Notes 6.40% 2034 $ 200 $ 200 5% Senior Notes 5.00% 2024 330 330 3.15% Senior Notes 3.15% 2031 500 500 3.6% Senior Notes 3.60% 2051 400 400 Series A Enhanced Junior Subordinated Debentures 3 month LIBOR +2.38% 2066 150 150 AGUS long-term debt 1,580 1,580 AGUS - intercompany loans from: AGC and AGM 3.50% 2030 250 250 AGRO 6 month LIBOR +3.00% 2023 20 20 AGUS intercompany loans 270 270 Total AGUS long-term debt and intercompany loans 1,850 1,850 AGMH Junior Subordinated Debentures 6.40% 2066 300 300 Total AGMH long-term debt 300 300 AGMH’s long-term debt purchased by AGUS (1) (154) (154) U.S. Holding Company long-term debt $ 1,996 $ 1,996 ____________________ (1) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS. The Series A Enhanced Junior Subordinated Debentures pay interest based on LIBOR. If the AGMH Junior Subordinated Debentures are outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at one-month LIBOR plus 2.215%. The Company believes that after June 2023 the reference to LIBOR will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on SOFR. From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October 25, 2013, AGL, as borrower, and AGUS, as lender, entered into a revolving credit facility pursuant to which AGL may, from time to time, borrow for general corporate purposes. Under the credit facility, AGUS committed to lend a principal amount not exceeding $225 million in the aggregate. The commitment under the revolving credit facility terminates on October 25, 2023 (the loan commitment termination date). The unpaid principal amount of each loan will bear semi-annual interest at a fixed rate equal to 100% of the then applicable interest rate as determined under Internal Revenue Code Section 1274(d). Accrued interest on all loans will be paid on the last day of each June and December and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility. For more information, see the Company’s 2022 Annual Report on Form 10-K, Part II. Item 8. Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities. 107 Table of Contents Guarantor and U.S. Holding Companies’ Summarized Financial Information AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,430 million aggregate principal amount of notes issued by the U.S. Holding Companies, and the $450 million aggregate principal amount of junior subordinated debentures issued by the U.S. Holding Companies, and the intercompany loans. The following tables include summarized financial information for AGL and the U.S. Holding Companies, excluding their investments in subsidiaries. As of March 31, 2023 AGL U.S. Holding Companies (in millions) Assets Fixed-maturity securities (1) $ 21 $ 4 Short-term investments, other invested assets and cash 8 149 Receivables from affiliates (2) 52 — Other assets 1 41 Liabilities Long-term debt — 1,676 Loans payable to affiliates — 270 Payable to affiliates (2) 19 9 Other liabilities 10 73 ____________________ (1) As of March 31, 2023, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.9 years and 4.4 years, respectively. (2) Represents receivable and payables with non-guarantor subsidiaries. First Quarter 2023 AGL U.S. Holding Companies (in millions) Revenues $ — 2 Expenses Interest expense — 23 Other expenses 17 7 Income (loss) before provision for income taxes and equity in earnings (losses) of investees (17) (28) Net income (loss) (17) (25) The following table presents significant cash flow items for AGL and the U.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities. 108 Table of Contents AGL and U.S. Holding Companies Selected Cash Flow Items First Quarter 2023 AGL U.S. Holding Companies (in millions) Dividends received from subsidiaries (1) $ 28 $ 60 Interest paid — (10) Investments in subsidiaries — (12) Dividends paid to AGL — (28) Dividends paid (18) — Repurchases of common shares (2) (2) — ____________________ (1) AGL’s dividends include dividends from AGUS. (2) See Item 1, Financial Statements, Note 13, Shareholders’ Equity, for additional information about share repurchases and authorizations. Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty. For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. External Financing From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company and, if available, the cost of such financing may not be acceptable to the Company. Insurance Subsidiaries The Company has several insurance subsidiaries. The U.S. Insurance Subsidiaries consist of AGM and AGC. AGM owns: (i) AGUK, an insurance subsidiary domiciled in the U.K; and (ii) AGE, an insurance company domiciled in France. AGUK and AGE are collectively referred to as the European Insurance Subsidiaries. AG Re is an insurance company domiciled in Bermuda, which owns AGRO, an insurance subsidiary, also domiciled in Bermuda. Sources and Uses of Funds Liquidity of the insurance subsidiaries is primarily used to pay for: • operating expenses, • claims on the insured portfolio, • dividends or other distributions to AGL, AGUS and/or AGMH, as applicable, • reinsurance premiums, • principal of, and interest on, surplus notes, where applicable, and • capital investments in their own subsidiaries, where appropriate. Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios, although the Company may enter into secured short-term loan facilities with financial institutions to provide short-term liquidity for the payment of insurance claims it anticipates making in connection with the future resolutions of other Puerto Rico exposures. The Company generally targets a balance of its most liquid assets including cash and short-term securities, U.S. Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. As of 109 Table of Contents March 31, 2023, the Company intended to hold and had the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost. Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company’s insurance subsidiaries, insurance regulations and rating agency capital requirements. Financial Guaranty Policies Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option. Premiums received on financial guaranty contracts are paid either upfront or in installments over the life of the insured obligations. Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. For example, the Company made substantial claim payments in 2022 in connection with the resolution of certain Puerto Rico credits. The Company is continuing its efforts to resolve the one remaining unresolved Puerto Rico insured exposure that is in payment default, PREPA. The Company had $720 million net par outstanding to PREPA on March 31, 2023. As described in Item 1, Financial Statements, Note 3, Outstanding Exposure, in connection with the implementation of the GO/PBA Plan and the HTA Plan, certain insured bondholders elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and CVIs, as relevant, that constitute distributions under the GO/PBA Plan or HTA Plan. For those who made the election, distributions under the GO/PBA Plan and HTA Plan 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 under the GO/PBA Plan or HTA Plan, as applicable, 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. As of March 31, 2023, the Company’s remaining net par outstanding for HTA and GO/PBA Puerto Rico exposures was $506 million, which consisted of bonds where the holders elected to receive custody receipts and exposures assumed from third-party financial guarantors. In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business. In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner. If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds. Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $404 million as of March 31, 2023. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As of March 31, 2023, approximately $1.9 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM. 110 Table of Contents The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled “pay-as-you-go” basis and to replicate the terms of a traditional financial guaranty insurance policy. The documentation for certain CDS were negotiated to require the Company to also pay if the obligor becomes bankrupt or if the reference obligation were restructured. Furthermore, some CDS documentation requires the Company to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis. Distributions From Insurance Subsidiaries The Company anticipates that, for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies’ liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Insurance Company Regulatory Requirements, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of the Company’s dividend restrictions applicable to AGC, AGM, AG Re and AGRO. Dividend restrictions by insurance subsidiary are as follows: • The maximum amount available during 2023 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is estimated to be approximately $193 million, of which approximately none is available for distribution in the second quarter of 2023. • The maximum amount available during 2023 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $102 million, of which approximately $24 million is available for distribution in the second quarter of 2023. • Based on the applicable law and regulations, in 2023 AG Re (a subsidiary of AGL) has the capacity to (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $209 million as of March 31, 2023. Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $181 million as of March 31, 2023, and (ii) the amount of statutory surplus, which as of March 31, 2023 was $29 million. • Based on the applicable law and regulations, in 2023 AGRO (an indirect subsidiary of AG Re) has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $98 million as of March 31, 2023. Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $365 million as of March 31, 2023, and (ii) the amount of statutory surplus, which as of March 31, 2023 was $263 million. Distributions From Insurance Company Subsidiaries First Quarter 2023 2022 (in millions) Dividends paid by AGC to AGUS $ 20 $ 125 Dividends paid by AGM to AGMH 40 96 111 Table of Contents Ratings Impact on Financial Guaranty Business A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Insurance Subsidiaries, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Assumed Reinsurance Some of the Company’s insurance subsidiaries (Assuming Subsidiaries) assumed financial guaranty insurance from legacy third-party bond insurers. The agreements under which such Assuming Subsidiaries assumed such business are generally subject to termination at the option of the ceding company (a) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (b) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (c) upon certain changes of control of the Assuming Subsidiary. Upon termination due to one of the above events, the Assuming Subsidiary typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the assumed business (plus in certain cases, an additional required amount), after which the Assuming Subsidiary would be released from liability with respect to such business. As of March 31, 2023, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $266 million, including $233 million by AGC and $33 million by AG Re. Committed Capital Securities Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty’s financial statements. The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC’s or AGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock. Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities is one-month LIBOR plus 200 bps. The Company believes that after June 2023 the reference to LIBOR in such CCS will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on SOFR. Investment Portfolio The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income. Approximately 66% of the total investment portfolio is managed by external parties. Each of the three external investment managers must maintain a minimum average rating of A+/A1/A+ by S&P , Moody’s and Fitch Ratings Inc., respectively. Changes in interest rates affect the value of the Company’s fixed-maturity securities. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of investment-grade, liquid instruments. Other invested assets include other alternative investments, which are generally less liquid. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 1, Financial 112 Table of Contents Statements, Note 7, Investments, and Note 9, Fair Value Measurement. Investment Portfolio Carrying Value As of March 31, 2023 December 31, 2022 (in millions) Fixed-maturity securities, available-for-sale (1) $ 6,869 $ 7,119 Fixed-maturity securities, trading (2) 300 303 Short-term investments 1,273 810 Other invested assets 140 133 Total $ 8,582 $ 8,365 ____________________ (1) As of March 31, 2023 and December 31, 2022, includes $136 million and $358 million, respectively, of New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions. (2) Represents CVIs received under the 2022 Rico Resolutions. The Company’s available-for-sale fixed-maturity securities had a duration of 4.1 years and 4.4 years as of March 31, 2023 and December 31, 2022, respectively. Available-for-Sale Fixed-Maturity Securities By Contractual Maturity The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Distribution of Available-for-Sale Fixed-Maturity Securities by Contractual Maturity As of March 31, 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 Commercial mortgage-backed securities 267 258 Total $ 7,359 $ 6,869 Available-for-Sale and Trading Fixed-Maturity Securities By Rating The following table summarizes the ratings distributions of the Company’s available-for-sale fixed-maturity securities as of March 31, 2023 and December 31, 2022. Ratings generally reflect the lower of Moody’s and S&P classifications, except for (i) Loss Mitigation Securities, which use Assured Guaranty’s internal ratings classifications, or (ii) Puerto Rico securities received under the 2022 Puerto Rico Resolutions, which are not rated. 113 Table of Contents Distribution of Available-for-Sale Fixed-Maturity Securities by Rating As of Rating March 31, 2023 December 31, 2022 AAA 14.7 % 14.2 % AA 37.9 37.1 A 25.3 24.4 BBB 11.7 11.0 BIG (1) 7.5 7.4 Not rated (2) 2.9 5.9 Total 100.0 % 100.0 % ____________________ (1) Includes primarily Loss Mitigation Securities. See Item 1, Financial Statements, Note 7, Investments, for additional information. (2) Primarily includes New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions. The Company also had $300 million and $303 million in trading fixed-maturity securities as of March 31, 2023 and December 31, 2022, respectively, representing CVIs received under the 2022 Puerto Rico Resolutions, which are not rated. Other Investments Other invested assets, which are generally less liquid than fixed-maturity securities primarily consist of investments in renewable and clean energy and private equity funds managed by a third party. The Insurance segment reports AGAS’ percentage ownership of AssuredIM Funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of March 31, 2023 and December 31, 2022, all of the funds in which AGAS directly invests are consolidated in the Company’s consolidated financial statements. The amounts in the table below represent the fair value of AGAS’ interests in the AssuredIM Funds. See Commitments below. Fair Value of AGAS’ Interest in AssuredIM Funds As of Strategy March 31, 2023 December 31, 2022 (in millions) CLOs $ 232 $ 272 Municipal bonds (1) — 105 Healthcare 73 91 Asset-based 91 101 Total $ 396 $ 569 ____________________ (1) In first quarter 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund. Equity in Earnings (Losses) of Investees of AGAS’ Investment in AssuredIM Funds First Quarter Strategy 2023 2022 (in millions) CLOs $ 19 $ 7 Municipal bonds — (4) Healthcare 8 3 Asset-based 1 5 Total $ 28 $ 11 114 Table of Contents Restricted Assets Based on fair value, investments and other assets that are either held in trust for the benefit of third-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, totaled $229 million and $222 million as of March 31, 2023 and December 31, 2022, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,146 million and $1,169 million, based on fair value, as of March 31, 2023 and December 31, 2022, respectively. Commitments The U.S. Insurance Subsidiaries are authorized to invest up to $750 million in affiliated alternative investment funds. Adding distributed gains from inception through March 31, 2023, 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 Insurance segment had total commitments to AssuredIM Funds of $613 million, of which $366 million represented net invested capital and $247 million was undrawn. In addition to its commitments to AssuredIM Funds, the Company had unfunded commitments of $79 million as of March 31, 2023 to other alternative investments. AssuredIM Sources and Uses of Funds Currently, AssuredIM’s sources of liquidity are: (1) cash from operations, including management and performance fees (which are unpredictable as to amount and timing); and (2) capital contributions from AGUS ($10 million and $15 million in first quarter 2023 and first quarter 2022, respectively, had been contributed to supplement cash from operations). As of March 31, 2023 and December 31, 2022, AssuredIM had $26 million and $41 million, respectively, in cash and short-term investments. AssuredIM’s liquidity needs primarily include: (1) paying operating expenses including compensation; (2) paying dividends or other distributions to AGUS; and (3) capital to support growth and expansion of the asset management business. See “ - Overview, Business.” for a discussion of Sound Point Transaction. Lease Obligations The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco, London, Paris, and other locations with various lease terms. See Part II, Item 8, Financial Statements and Supplementary Data, Note 17, Leases, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for a table of minimum lease obligations and other lease commitments. FG VIEs and CIVs The Company manages its liquidity needs by evaluating cash flows without the effect of consolidating FG VIEs and CIVs; however, the Company’s consolidated financial statements include the effect of consolidating FG VIEs and CIVs. The primary sources and uses of cash at Assured Guaranty’s FG VIEs and CIVs are as follows: • FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting the debt obligations, and the primary uses of cash are the payment of principal and interest due on the debt obligations. The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. For the Puerto Rico Trusts, the primary source of cash is the collection of debt service on the assets in the trusts and the primary use of cash is the payment of the trusts debt obligations. • CIVs. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses). The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the 115 Table of Contents Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. See Item. 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information. Credit Facilities of CIVs Certain of the Company’s CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or Assured Guaranty subsidiaries. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or 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 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. Condensed Consolidated Cash Flows The summarized condensed consolidated statements of cash flows in the table below present the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of consolidating FG VIEs and CIVs. 116 Table of Contents Summarized Condensed Consolidated Cash Flows First Quarter 2023 2022 (in millions) Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation $ (34) $ (640) Effect of FG VIEs and CIVs consolidation 346 (252) Net cash flows provided by (used in) operating activities 312 (892) Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation 102 831 Effect of FG VIEs and CIVs consolidation (196) 19 Net cash flows provided by (used in) investing activities (94) 850 Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation Dividends paid (18) (17) Repurchases of common shares (2) (152) Other (15) (10) Effect of FG VIEs and CIVs consolidation (261) 169 Net cash flows provided by (used in) financing activities (2) (296) (10) Effect of exchange rate changes, before effect of FG VIEs and CIVs consolidation 1 (1) Effect of FG VIEs and CIVs consolidation — — Effect of 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 the end of the period $ 130 $ 289 ____________________ (1) Claims paid on consolidated FG VIEs are presented in the condensed consolidated statements of cash flows as a component of paydowns on FG VIEs’ liabilities in financing activities as opposed to operating activities. Cash flows from operations, excluding the effect of consolidating FG VIEs and CIVs, was an outflow of $34 million in first quarter 2023 and an outflow of $640 million in first quarter 2022. The decrease in cash outflows during first quarter 2023 was primarily due to a $627 million decrease in net claim payments, primarily due to the 2022 Puerto Rico Resolutions. Cash flows from operations attributable to the effect of FG VIE and CIV consolidation were outflows in first quarter 2023 and first quarter 2022. The consolidated statements of cash flows present the investing activities of the consolidated AssuredIM Funds and CLOs as cash flows from operations. The increase in inflows in first quarter 2023 compared with first quarter 2022 is mainly due to a decrease of $813 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $205 million. Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments, and paydowns on and sales of FG VIEs’ assets. The decrease in investing cash inflows during first quarter 2023 was mainly attributable to an increase in net outflows of short-term investments of $1,093 million and an increase of $157 million for purchases of available-for-sale fixed-maturity securities in first quarter 2023, partially offset by lower disposals of $348 million of available-for-sale fixed-maturity securities. First quarter 2023 had net purchases of short-term investments compared to net sales of short-term investments in first quarter 2022 to fund share repurchases and claim payments in connection with the 2022 Puerto Rico Resolutions. See Item 1. Financial Statements, Note 3, Outstanding Exposure, for additional information. Financing activities primarily consist of share repurchases, dividends, and paydowns of FG VIEs’ liabilities, as well as CLO issuances and CLO warehouse financing activities. The CIVs’ financing cash flows mainly include issuances and repayments of CLOs and CLO warehouse financing debt. The decrease in financing cash flow activity from VIEs was primarily due to a decrease of $586 million million in issuances, partially offset by a decrease in repayments of $220 million by the consolidated CLOs and CLO warehouses. The proceeds from CLO issuances and CLO warehouse borrowings are used to fund 117 Table of Contents the purchases of loans. FG VIEs’ cash flows relate to the paydowns of FG VIEs’ liabilities. See Item 1. Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. From January 1, 2023 through May 9, 2023, the Company repurchased an additional 36 thousand of common shares. As of May 9, 2023, the Company was authorized to purchase $201 million of its common shares. For more information abou t th e Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 13, Shareholders’ Equity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2023, there were no material changes to the market risks to which the Company is exposed since December 31, 2022.