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 The North Atlantic Treaty Organization (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; • public health crises, including pandemics and endemics, and the governmental and private actions taken in response to such events; • 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, or investments of Assured Guaranty; • reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty’s insurance; • the risk that the Company’s investments in funds managed by Sound Point Capital Management, LP (Sound Point) do not result in the benefits anticipated or subject Assured Guaranty to negative consequences; • 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; • the impact of the Company satisfying its obligations under insurance policies with respect to legacy insured Puerto Rico bonds; • 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; • 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 impacts of the completion of Assured Guaranty’s transactions with Sound Point and/or Assured Healthcare Partners LLC (AHP) 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 AHP and their relationships with their respective clients and employees; • the possibility that strategic transactions made by Assured Guaranty, including the consummation of the transactions with Sound Point and/or AHP, 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; 81 Table of Contents • 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 Assured Guaranty’s 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 and risk factors 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 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. 82 Table of Contents 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. Until July 1, 2023, the Company served as investment advisor to collateralized loan obligations (CLOs) and opportunity funds, as well as certain legacy hedge and opportunity funds subject to an orderly wind-down, through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM). Beginning July 1, 2023, the Company participates in the asset management business through its ownership interest in Sound Point as described below. 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. Asset Management Transactions On July 1, 2023, Assured Guaranty contributed to Sound Point most of its asset management business, other than that conducted by Assured Healthcare Partners LLC (AssuredIM Contributed Business), as contemplated by the transaction agreement entered into with Sound Point on April 5, 2023 (Transaction Agreement). In addition, in accordance with the terms of a letter agreement (Letter Agreement), effective July 1, 2023, Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC) (collectively, the U.S. Insurance Subsidiaries) (i) engaged Sound Point as their sole alternative credit manager, and (ii) transitioned to Sound Point the management of certain existing alternative investments and related commitments. The Letter Agreement also provides that, in the first two years of Sound Point’s engagement, the U.S. Insurance Subsidiaries would, subject to regulatory approval, make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the alternative investments and commitments transitioned from AssuredIM, will total $1 billion. See Note 7, Investments. Assured Guaranty received, 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). Based on the combined assets under management (AUM) of AssuredIM and Sound Point as of March 31, 2023, Sound Point would be the fifth largest CLO manager by AUM in the world (based on March 31, 2023 CreditFlux CLO manager rankings). In July 2023, Assured Guaranty sold all of its equity interests in Assured Healthcare Partners LLC (AHP), which manages healthcare funds, to an entity owned and controlled by the managing partner of AHP (AHP Transaction). In connection with the AHP Transaction, the Company agreed to remain a strategic investor in certain AHP investment vehicles, is retaining certain carried interest in AHP entities and received other consideration. Economic Environment Real gross domestic product (GDP) increased 2.4% in the three-month period ended June 30, 2023 (second quarter 2023), compared to an increase of 2.0% in the first quarter of 2023, according to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA). At the end of June 2023, the U.S. unemployment rate, seasonally adjusted, stood at 3.6%, nearly 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 June 2023, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 3.0%, as compared to 5.0% for the 12-month period ending March 2023. The BLS reports that the 3.0% increase for the 12 months ending June 2023 was the smallest 12-month increase since the period ending March 2021. According to the United 83 Table of Contents Kingdom’s (U.K.) Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) was 7.3% for the 12 months to June 2023, down from 8.9% for the 12 months ended March 2023. Consumer price inflation may impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally. In addition, consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $22.0 billion of net par outstanding as of June 30, 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. 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 July 26, 2023, the FOMC raised the target range for the federal funds rate 11 times, from a range of 0% to 0.25% where it started 2022 to a range of 5.25% to 5.50% at its July 25-26, 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 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 3.41% for the quarter ended June 2023, slightly higher than the 3.37% average for the quarter ended March 2023, and higher than the 3.05% average for the quarter ended June 2022. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 101 basis points (bps) in the quarter ended June 2023, which is the same spread as the quarter ended March 2023, but wider than the 90 bps average for the quarter ended June 2022. The Company believes that, over time, wider spreads could permit it to increase its premium rates on new business, and higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities. Additionally, the Company believes that higher interest rates are discouraging homeowners from moving as many are locked into lower mortgage interest rates at the homes in which they reside, which, in turn, is restricting housing inventory and leading to an increase in home prices as demand outpaces supply. The increase in housing prices may benefit distressed residential mortgage-backed securities (RMBS) the Company insures. The National Association of Realtors reported existing-home sales declined 18.9% in June 2023 from one year ago with fewer Americans on the move. The median existing-home price for all housing types in June 2023 was $410,200, an increase of 9.2% from March 2023 ($375,700). 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 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 84 Table of Contents guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss 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. 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, over time, wider credit spreads may improve demand for bond insurance. 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 Six Months 2023 Six Months 2022 Year Ended December 31, 2022 (dollars in billions, except number of issues and percentages) Par: New municipal bonds issued $ 172.5 $ 200.8 $ 359.7 Total insured $ 15.6 $ 17.6 $ 28.8 Insured by Assured Guaranty $ 9.8 $ 9.9 $ 17.0 Number of issues: New municipal bonds issued 3,525 4,682 7,902 Total insured 622 840 1,420 Insured by Assured Guaranty 290 378 648 Bond insurance market penetration based on: Par 9.0 % 8.8 % 8.0 % Number of issues 17.6 % 17.9 % 18.0 % Single A par sold 36.8 % 35.7 % 30.2 % Single A transactions sold 62.3 % 59.0 % 59.0 % $25 million and under par sold 22.3 % 21.6 % 21.9 % $25 million and under transactions sold 21.2 % 20.8 % 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 85 Table of Contents Detroit, Michigan and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. After over five years of negotiations, 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 June 30, 2023 (excluding the value of the Company’s insurance) was $463 million, with a par of $761 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 Until July 1, 2023, the Company pursued its asset management strategy through AssuredIM. With the consummation of the Sound Point Transaction and AHP Transaction, effective as of July 1, 2023, the Company will participate in the asset management business through its ownership interest in Sound Point, and will no longer directly manage investments for third parties through its subsidiaries. The Company’s ownership interest in Sound Point furthers its strategy of participating in a fee-based earnings stream independent of the risk-based premiums generated by its financial guaranty business. The Sound Point business was strengthened by the addition of AssuredIM’s AUM (excluding AUM relating to AHP). The Company also expects its relationship with Sound Point to enhance its alternative investment opportunities. Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval. See Note 1, Business and Basis of Presentation for a description of the Sound Point Transaction. Of the $1.5 billion to be invested, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million plus previously distributed gains of $114 million for a total of $864 million as of June 30, 2023. As of July 1, 2023, AGAS commitments to funds previously managed by AssuredIM of $553 million are managed by Sound Point or by AHP. 86 Table of Contents Capital Management The Company has developed strategies to efficiently manage capital within the Assured Guaranty group. From 2013 through August 8, 2023, the Company has repurchased 142 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 August 8, 2023, the Company was authorized to purchase $158 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 (First Quarter) 2 0.036 62.23 2023 (Second Quarter) 24 0.454 53.08 2023 (through August 8) 19 0.321 58.32 Cumulative repurchases since the beginning of 2013 $ 4,706 $ 141.686 33.21 As of June 30, 2023, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $39.94 per share in shareholders’ equity attributable to AGL, $44.15 per share in adjusted operating shareholders’ equity and $78.42 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. Since the second quarter of 2017, AGUS has also purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt. 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 laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 87 Table of Contents Financial Performance of Assured Guaranty Financial Results Second Quarter Six Months 2023 2022 2023 2022 (in millions, except per share amounts) GAAP Net income (loss) attributable to AGL $ 125 $ (47) $ 206 $ 19 Net income (loss) attributable to AGL per diluted share $ 2.06 $ (0.74) $ 3.40 $ 0.29 Weighted average diluted shares (1) 60.1 63.8 60.3 66.2 Non-GAAP Adjusted operating income (loss) (2) $ 36 $ 30 $ 104 $ 120 Adjusted operating income per diluted share $ 0.60 $ 0.46 $ 1.72 $ 1.81 Weighted average diluted shares 60.1 65.0 60.3 66.2 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income $ (18) $ 10 $ (22) $ — Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share $ (0.30) $ 0.15 $ (0.35) $ — Components of total adjusted operating income (loss) Insurance segment $ 106 $ 55 $ 223 $ 188 Asset Management segment (2) — (3) — Corporate division (50) (35) (94) (68) Other (3) (18) 10 (22) — Adjusted operating income (loss) $ 36 $ 30 $ 104 $ 120 Insurance Segment Gross written premiums (GWP) $ 95 $ 65 $ 181 $ 135 Present value of new business production (PVP) (2) 91 76 203 145 Gross par written 8,974 6,695 14,337 11,166 Asset Management Segment AUM (4) Inflows - third party $ 2 $ 1,270 $ 3 $ 1,361 Inflows - intercompany — 154 — 154 88 Table of Contents As of June 30, 2023 As of December 31, 2022 Amount Per Share Amount Per Share (in millions, except per share amounts) Shareholders’ equity attributable to AGL $ 5,276 $ 89.65 $ 5,064 $ 85.80 Adjusted operating shareholders' equity (2) 5,628 95.64 5,543 93.92 Adjusted book value (2) 8,487 144.21 8,379 141.98 Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity (3) (0.04) 17 0.28 Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value (7) (0.12) 11 0.19 Common shares outstanding (5) 58.9 59.0 ____________________ (1) In periods where the Company recognized a net loss, the impact of potentially dilutive outstanding stock-based awards was excluded from the calculation of diluted loss per share as their inclusion would have an antidilutive effect. (2) See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details. (3) Relates to the effect of consolidating FG VIEs and CIVs. (4) The Company was limited in its ability to raise third party AUM in 2023 as a result of the pending Sound Point Transaction and AHP Transaction due to regulatory and practical considerations. (5) See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases. 89 Table of Contents Condensed Consolidated Results of Operations Condensed Consolidated Results of Operations Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in millions) Revenues: Net earned premiums $ 85 $ 82 $ 166 $ 296 Net investment income 89 62 170 124 Asset management fees 27 21 53 55 Net realized investment gains (losses) (9) (28) (11) (25) Fair value gains (losses) on credit derivatives 91 9 106 6 Fair value gains (losses) on CCS 1 10 (15) 11 Fair value gains (losses) on FG VIEs (3) 10 (8) 16 Fair value gains (losses) on CIVs 6 3 64 17 Foreign exchange gains (losses) on remeasurement 28 (71) 48 (101) Fair value gains (losses) on trading securities 40 (18) 38 (22) Other income (loss) 5 10 32 13 Total revenues 360 90 643 390 Expenses: Loss and LAE (benefit) 55 (11) 59 46 Interest expense 22 20 43 40 Amortization of deferred acquisition cost (DAC) 3 3 6 7 Employee compensation and benefit expenses 70 59 152 132 Other operating expenses 71 41 126 83 Total expenses 221 112 386 308 Income (loss) before income taxes and equity in earnings (losses) of investees 139 (22) 257 82 Equity in earnings (losses) of investees 5 — 7 (11) Income (loss) before income taxes 144 (22) 264 71 Less: Provision (benefit) for income taxes 18 3 41 21 Net income (loss) 126 (25) 223 50 Less: Noncontrolling interests 1 22 17 31 Net income (loss) attributable to Assured Guaranty Ltd. $ 125 $ (47) $ 206 $ 19 Effective tax rate 12.6 % (12.9) % 15.6 % 30.3 % Second Quarter 2023 Compared with Second Quarter 2022 The increase in net income attributable to AGL in second quarter 2023 compared with the three-month period ended June 30, 2022 (second quarter 2022) was primarily due to: • foreign exchange gains on remeasurement in second quarter 2023, compared with losses in second quarter 2022, • higher fair value gains on credit derivatives in second quarter 2023, • fair value gains on trading portfolio in second quarter 2023, compared with losses in second quarter 2022, and • higher net investment income. 90 Table of Contents These increases were offset in part by: • losses and LAE in second quarter 2023 compared with a benefit in second quarter 2022, and • higher operating expenses, primarily due to expenses of $24 million associated with the Sound Point Transaction and AHP Transaction. Six Months 2023 Compared with Six Months 2022 Net income attributable to AGL for the six-month period ended June 30, 2023 (six months 2023) was higher compared with the six-month period ended June 30, 2022 (six months 2022) primarily due to: • foreign exchange gains on remeasurement in six months 2023, compared with losses in six months 2022, • higher fair value gains on credit derivatives in six months 2023, • fair value gains on trading portfolio in six months 2023, compared with losses in six months 2022, • higher fair value gains on CIVs, and • higher net investment income. These increases were offset in part by: • lower net earned premiums in six months 2023 compared with six months 2022 which benefited from premium accelerations related to the 2022 Puerto Rico Resolutions, and • higher operating expenses in six months 2023 primarily due to expenses of $31 million associated with the Sound Point Transaction and AHP Transaction. 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% prior to March 31, 2023 and 25% after April 1 2023, 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 second quarter 2023 was $36 million, compared with $30 million in second quarter 2022. The increase was primarily due to fair value gains on the trading portfolio and higher net investment income, offset in part by higher losses and transaction expenses related to the Sound Point Transaction and the AHP transaction. Adjusted operating income in six months 2023 was $104 million, compared with $120 million in six months 2022. The decrease was primarily due to lower net earned premiums in six months 2023, compared with six months 2022 which included premium accelerations related to the 2022 Puerto Rico Resolutions, and higher operating expenses, partially offset by fair value gains on the trading portfolio and CIVs. 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 June 30, 2023 increased compared with December 31, 2022, as net income and other comprehensive income were partially offset by dividends and share repurchases. Adjusted operating shareholders’ equity and adjusted book value increased primarily due to operating income offset in part by dividends and share repurchases, and in the case of adjusted book value, the increase was also due to new business production. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value. 91 Table of Contents Other Matters 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 11 times from March 2022 through July 26, 2023. At its July 25-26, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 5.25% to 5.5%, 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 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. Despite the increases in interest rates in 2022 and first half of 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. However, higher interest rates may, in turn, 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”. 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 $271 million in net par outstanding as of June 30, 2023, comprising $216 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. 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. 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 92 Table of Contents 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) 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. 93 Table of Contents Insurance Segment Results Insurance Segment Results Second Quarter Six Months 2023 2022 2023 2022 Segment revenues Net earned premiums and credit derivative revenues $ 88 $ 86 $ 172 $ 305 Net investment income 90 66 172 129 Fair value gains (losses) on trading securities 40 (18) 38 (22) Foreign exchange gains (losses) on remeasurement and other income (loss) 6 5 32 5 Total segment revenues 224 139 414 417 Segment expenses Loss expense (benefit) 44 (17) 53 43 Interest expense — — — 1 Amortization of DAC 3 3 6 7 Employee compensation and benefit expenses 36 35 75 73 Other operating expenses 27 20 55 39 Total segment expenses 110 41 189 163 Equity in earnings (losses) of investees 5 (34) 35 (35) Segment adjusted operating income (loss) before income taxes 119 64 260 219 Less: Provision (benefit) for income taxes 13 9 37 31 Segment adjusted operating income (loss) $ 106 $ 55 $ 223 $ 188 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 business combinations. 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. 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. 94 Table of Contents Insurance Segment Net Earned Premiums and Credit Derivative Revenues Second Quarter Six Months 2023 2022 2023 2022 (in millions) Net earned premiums: Financial guaranty insurance: Public finance Scheduled net earned premiums (1) $ 61 $ 63 $ 123 $ 134 Accelerations: Refundings 8 5 12 133 Terminations — — — — Total accelerations 8 5 12 133 Total public finance 69 68 135 267 Structured finance scheduled net earned premiums (1) 16 14 31 29 Specialty insurance and reinsurance 1 1 2 2 Total net earned premiums 86 83 168 298 Credit derivative revenues: Scheduled net earned premiums 2 3 4 5 Accelerations — — — 2 Total credit derivative revenues 2 3 4 7 Total net earned premiums and credit derivative revenues $ 88 $ 86 $ 172 $ 305 ____________________ (1) Includes accretion of discount. Net earned premiums and credit derivative revenues increased in second quarter 2023 compared with second quarter 2022 primarily due to higher refundings. Net earned premiums and credit derivative revenues decreased in six months 2023 compared with six months 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 June 30, 2023, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts. 95 Table of Contents New Business Production Gross Written Premiums and New Business Production Second Quarter Six Months 2023 2022 2023 2022 (in millions) GWP Public Finance—U.S. $ 78 $ 57 $ 100 $ 106 Public Finance—non-U.S. 9 6 45 22 Structured Finance—U.S. 5 1 33 6 Structured Finance—non-U.S. 3 1 3 1 Total GWP $ 95 $ 65 $ 181 $ 135 PVP (1): Public Finance—U.S. $ 77 $ 57 $ 99 $ 106 Public Finance—non-U.S. 6 18 36 30 Structured Finance—U.S. 3 — 30 2 Structured Finance—non-U.S. (2) 5 1 38 7 Total PVP $ 91 $ 76 $ 203 $ 145 Gross Par Written (1): Public Finance—U.S. $ 7,747 $ 6,429 $ 10,654 $ 10,360 Public Finance—non-U.S. 249 207 609 430 Structured Finance—U.S. 252 16 834 76 Structured Finance—non-U.S. (2) 726 43 2,240 300 Total gross par written $ 8,974 $ 6,695 $ 14,337 $ 11,166 Average rating on new business written A- A 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) Six months 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 Accounting Standards Codification (ASC) 460, Guarantees . Second Quarter 2023 U.S. public finance GWP and PVP in second quarter 2023 were higher than the comparable GWP and PVP in second quarter 2022, due to $47 million in assumed GWP and $46 million in assumed PVP in second quarter 2023. These were offset in part by lower direct GWP and PVP of $31 million, primarily due to a decrease in secondary market business in second quarter 2023. The average rating of U.S. public finance par written was A- in second quarter 2023 and A in second quarter 2022. The Company’s direct par written represented 64% of the total U.S. municipal market insured issuance in second quarter 2023, compared with 54% in second quarter 2022, and the Company’s penetration of all municipal issuance was 6.5% in second quarter 2023 compared with 4.8% in second quarter 2022. In non-U.S. infrastructure markets, the Company wrote a guaranty on a U.K. regulated utility and, in the structured finance asset class, the Company wrote several subscription finance guaranties in second quarter 2023. Six Months 2023 U.S. public finance GWP and PVP in six months 2023 were comparable to GWP and PVP in six months 2022, with higher assumed business offsetting lower direct business that was primarily due to a decrease in secondary market business in six months 2023. The average rating of U.S. public finance par written was A- in both six months 2023 and six months 2022. The Company’s direct par written represented 63% of the total U.S. municipal market insured issuance in six months 2023, compared with 56% in six months 2022, and the Company’s penetration of all municipal issuance was 5.7% in six months 2023 compared with 4.9% in six months 2022. 96 Table of Contents In six months 2023, non-U.S. public finance GWP and PVP were higher than GWP and PVP in six months 2022. In six months 2023, new business primarily included the guaranty of a long-term sale and leaseback transaction with Glasgow City Council and several regulated utility transactions. In six months 2023, structured finance GWP and PVP were $36 million and $68 million, respectively, compared with GWP and PVP of $7 million and $9 million, respectively, in six months 2022. Structured finance PVP in six months 2023 includes an insurance securitization and several subscription finance guaranties, 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. Business activity in the non-U.S. public finance and structured finance sectors typically has long lead times and therefore may vary from period to period. 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 June 30, 2023 was $340 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. 97 Table of Contents Insurance Segment Income from Investments Second Quarter Six Months 2023 2022 2023 2022 (in millions) Net investment income Fixed-maturity securities, available-for-sale: Externally managed (1) $ 53 $ 49 $ 105 $ 98 Loss Mitigation Securities 12 7 24 17 Puerto Rico, New Recovery Bonds 1 3 4 4 Other (2) 4 4 7 7 Short-term investments 16 1 28 1 Intercompany loans 3 3 5 5 Other investment assets 2 — 2 — Investment income 91 67 175 132 Investment expenses (1) (1) (3) (3) Net investment income $ 90 $ 66 $ 172 $ 129 Fair value gains (losses) on trading securities $ 40 $ (18) $ 38 $ (22) Equity in earnings (losses) of investees AssuredIM Funds $ — $ (33) $ 28 $ (22) Other 5 (1) 7 (13) Equity in earnings (losses) of investees $ 5 $ (34) $ 35 $ (35) ____________________ (1) Amounts for 2022 include income on the portion of the CLO portfolio that was previously managed by AssuredIM. (2) Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM. Net investment income for second quarter 2023 and six months 2023 increased compared to second quarter 2022 and six months 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 3.89% as of June 30, 2023 and 2.95% as of June 30, 2022. Equity in earnings of AssuredIM Funds were gains in six months 2023 and were primarily attributable to higher valuations of assets held in the CLO and healthcare funds. Equity in earnings of AssuredIM Funds in second quarter 2022 and six months 2022 were losses and were primarily attributable to lower valuations of assets held in CLO funds and the dilutive impact of the subsequent close of a healthcare fund. Foreign Exchange Gains (Losses) on Remeasurement and Other Income (Loss) The increase in “foreign exchange gains (losses) on remeasurement and other income (loss)” in six months 2023 compared with six months 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. The GAAP accounting policies for measurement and recognition for each type of contract are described in 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: 98 Table of Contents • 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. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) were 4.34% and 4.08% as of June 30, 2023 and December 31, 2022, respectively. The composition of economic loss development (benefit) by accounting model and by sector is presented in the tables that follow, and the drivers of economic loss development (benefit) are discussed below. Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit) by Accounting Model Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit) As of Second Quarter Six Months Accounting Model June 30, 2023 December 31, 2022 2023 2022 2023 2022 (in millions) Insurance $ 262 $ 205 $ 62 $ (26) $ 68 $ (70) FG VIEs 295 (1) 314 (1) (14) (6) (9) (10) Credit derivatives 3 3 1 — 1 4 Total $ 560 $ 522 $ 49 $ (32) $ 60 $ (76) Net exposure rated BIG $ 5,718 $ 5,976 ____________________ (1) The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts). See Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered). 99 Table of Contents Net Expected Loss to be Paid (Recovered) Roll Forward by Sector Second Quarter 2023 Sector Net Expected Loss to be Paid (Recovered) as of March 31, 2023 Economic Loss Development (Benefit) Net (Paid) Recovered Losses (1) Net Expected Loss to be Paid (Recovered) as of June 30, 2023 (in millions) Public finance: U.S. public finance $ 380 $ 57 $ (4) $ 433 Non-U.S. public finance 13 (3) — 10 Public finance 393 54 (4) 443 Structured finance: U.S. RMBS 82 (9) — 73 Other structured finance 42 4 (2) 44 Structured finance 124 (5) (2) 117 Total $ 517 $ 49 $ (6) $ 560 Second Quarter 2022 Sector Net Expected Loss to be Paid (Recovered) as of March 31, 2022 Economic Loss Development (Benefit) Net (Paid) Recovered Losses (1) Net Expected Loss to be Paid (Recovered) as of June 30, 2022 (in millions) Public finance: U.S. public finance $ 181 $ 8 $ 21 $ 210 Non-U.S. public finance 10 (2) (1) 7 Public finance 191 6 20 217 Structured finance: U.S. RMBS 195 (39) 23 179 Other structured finance 46 1 (1) 46 Structured finance 241 (38) 22 225 Total $ 432 $ (32) $ 42 $ 442 Six Months 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 June 30, 2023 (in millions) Public finance: U.S. public finance $ 403 $ 58 $ (28) $ 433 Non-U.S. public finance 9 1 — 10 Public finance 412 59 (28) 443 Structured finance: U.S. RMBS 66 (4) 11 73 Other structured finance 44 5 (5) 44 Structured finance 110 1 6 117 Total $ 522 $ 60 $ (22) $ 560 100 Table of Contents Six Months 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 June 30, 2022 (in millions) Public finance: U.S. public finance $ 197 $ (40) $ 53 $ 210 Non-U.S. public finance 12 (4) (1) 7 Public finance 209 (44) 52 217 Structured finance: U.S. RMBS 150 (32) 61 179 Other structured finance 52 — (6) 46 Structured finance 202 (32) 55 225 Total $ 411 $ (76) $ 107 $ 442 ____________________ (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.” Second Quarter 2023 Net Economic Loss Development Public Finance: The economic loss development on U.S. exposures in second quarter 2023 was $57 million and was primarily attributable to $78 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $21 million in other municipal exposures. U.S. RMBS: The economic benefit attributable to U.S. RMBS was $9 million and was primarily attributable to a $7 million benefit related to higher recoveries for secured second lien charged-off loans, a $5 million benefit related to improved performance in certain transactions, and $3 million benefit related to changes in discount rates, partially offset by losses of $6 million related to lower excess spread. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information. Second Quarter 2022 Net Economic Loss Development Public Finance: The economic loss development on U.S. exposures in second quarter 2022 was $8 million, and was primarily attributable to Puerto Rico exposures, partially offset by the effect of changes in discount rate. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.6 billion as of June 30, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to PRCCDA, PRIFA and GO/PBA. U.S. RMBS: The economic benefit attributable to U.S. RMBS was $39 million and was primarily attributable to a $23 million benefit related to changes in discount rates, a $17 million benefit related to improved performance in certain transactions, a $14 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $26 million related to lower excess spread. Six Months 2023 Net Economic Loss Development The economic loss development on U.S. public finance exposures in six months 2023 was $58 million, which was primarily attributable to $81 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $23 million in other municipal exposures. The net benefit attributable to U.S. RMBS was $4 million and was mainly attributable to a $14 million benefit related to higher recoveries for second lien charged-off loans, and a $9 million benefit related to improved performance in certain transactions, partially offset by a $15 million loss related to the return of certain funds previously received, a $2 million loss related to changes in discount rates and a $2 million loss related to lower excess spread. 101 Table of Contents Six Months 2022 Net Economic Loss Development The economic benefit on U.S. public finance exposures in six months 2022 was $40 million, which was primarily attributable to changes in discount rates. The net benefit attributable to U.S. RMBS was $32 million and was mainly related to a $45 million benefit related to changes in discount rates, a $27 million benefit related to improved performance in certain transactions, an $18 million benefit related to higher recoveries for secured second lien charged-off loans, and a $11 million benefit related to lower initial severity assumptions for first lien U.S. RMBS transactions, partially offset by losses of $69 million related to lower excess spread. 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. 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 (benefit). Insurance Segment Loss Expense (Benefit) Second Quarter Six Months 2023 2022 2023 2022 (in millions) U.S. public finance $ 45 $ 11 $ 46 $ 66 Structured finance: U.S. RMBS (3) (28) 3 (22) Other structured finance 2 — 4 (1) Structured finance (1) (28) 7 (23) Total Insurance segment loss expense (benefit) $ 44 $ (17) $ 53 $ 43 The difference between public finance loss expense and economic benefit in six months 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 102 Table of Contents 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 six months 2023 compared with six months 2022 was primarily attributable to an increase in value added taxes and increases in certain employee benefit related costs. 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. 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) (7/13/23) AA+ (stable) (10/21/22) A1 (stable) (3/18/22) — AGC AA (stable) (7/13/23) AA+ (stable) (10/21/22) (1) — Assured Guaranty Re Ltd. (AG Re) AA (stable) (7/13/23) — — — Assured Guaranty Re Overseas Ltd. (AGRO) AA (stable) (7/13/23) — — A+ (stable) (7/21/23) Assured Guaranty UK Limited (AGUK) AA (stable) (7/13/23) AA+ (stable) (10/21/22) A1 (stable) (3/18/22) — Assured Guaranty (Europe) SA (AGE) AA (stable) (7/13/23) 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. 103 Table of Contents Asset Management Segment Results Asset Management Segment Results Second Quarter Six Months 2023 2022 2023 2022 (in millions) Segment revenues Management fees (1) 18 27 35 48 Performance fees 9 2 29 18 Foreign exchange gains (losses) on remeasurement and other income (loss) 3 (1) 7 1 Total segment revenues 30 28 71 67 Segment expenses Interest expense 1 — 1 — Employee compensation and benefit expenses 25 17 59 46 Other operating expenses (1) (2) 7 11 15 21 Total segment expenses 33 28 75 67 Segment adjusted operating income (loss) before income taxes (3) — (4) — Less: Provision (benefit) for income taxes (1) — (1) — Segment adjusted operating income (loss) $ (2) $ — $ (3) $ — _____________________ (1) The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross as revenues. (2) Includes amortization of intangible assets of $3 million for second quarter 2022, $2 million for six months 2023 and $6 million for six months 2022. The Company ceased amortizing the intangible assets when the asset management assets and liabilities were reclassified to held-for-sale. Management and Performance Fees Management fees in second quarter 2023 were primarily generated by CLOs, opportunity funds and liquid strategies. CLO fees represented the net management fees that AssuredIM retained after rebating the portion of these fees that pertained to the CLO equity that was held directly by AssuredIM Funds. Management Fees Second Quarter Six Months 2023 2022 2023 2022 (in millions) CLOs $ 13 $ 12 $ 25 $ 24 Opportunity funds and liquid strategies 5 15 10 23 Wind-down funds — — — 1 Total management fees $ 18 $ 27 $ 35 $ 48 Performance fees and related compensation expenses relate to tax distributions from the healthcare and asset-based funds. Expenses Employee compensation and benefit expenses increased in second quarter 2023 and six months 2023 primarily due to expenses related to the Sound Point Transaction and higher compensation due to the increase in performance fees. 104 Table of Contents Assets Under Management Until July 1, 2023, the effective date of the Sound Point Transaction and the AHP Transaction, the Company used AUM as one of the metrics to measure progress in its Asset Management Segment. AUM refers to the assets managed, advised or serviced by AssuredIM. In the first half of 2023, while the Sound Point Transaction and AHP Transaction were pending, the Company was limited in its ability to raise third party AUM due to regulatory and practical considerations. AUM as of June 30, 2023 was $16.4 billion. As of July 1, 2023, the management of approximately $15.1 billion of AUM (of which $385 million was attributable to the Company) was transferred to Sound Point. Also in July 2023, the management of approximately $1.3 billion in remaining AUM (of which $185 million was attributable to the Company) was transferred with the sale of AHP to an entity owned and controlled by its managing partner, and AHP will continue to manage the healthcare funds. See Note 1, Business and Basis of Presentation. In second quarter 2023, (i) the management of approximately $159 billion in AUM in respect of certain wind-down and opportunity funds in their harvest period were transferred to a third party liquidator and (ii) management of approximately $513 million at fair value in investment grade municipal bonds and CLOs under an IMA was transferred to an internal manager and to one of the Company’s external fixed-maturity security managers. Corporate Division Results Corporate Division Results Second Quarter Six Months 2023 2022 2023 2022 (in millions) Revenues $ 2 $ 1 $ 4 $ 2 Expenses Interest expense 24 23 47 44 Employee compensation and benefit expenses 9 7 18 13 Other operating expenses 27 6 43 13 Total expenses 60 36 108 70 Equity in earnings (losses) of investees — — — — Adjusted operating income (loss) before income taxes (58) (35) (104) (68) Less: Provision (benefit) for income taxes (8) — (10) — Adjusted operating income (loss) $ (50) $ (35) $ (94) $ (68) Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $3 million in both second quarter 2023 and second quarter 2022, and $5 million in both six months 2023 and six months 2022, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries. 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 second quarter 2023 and six months 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction, and for six months 2023 a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $21 million for second quarter 2023 and $25 million for six months 2023. 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 105 Table of Contents 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/recoveries 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 (“fair value gains (losses) on consolidated investment vehicles” and “noncontrolling interest) on a consolidated basis. The table below reflects the effect of consolidating FG VIEs and CIVs on the condensed consolidated statements of operations. The amounts represent: (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) Second Quarter Six Months 2023 2022 2023 2022 Effect on Financial Statement Line Item (in millions) Fair value gains (losses) on FG VIEs (1) $ (3) $ 10 $ (8) $ 16 Fair value gains (losses) on CIVs 6 3 64 17 Equity in earnings (losses) of investees (2) — 34 (28) 24 Other (3) (25) (13) (39) (24) Effect on income before tax (22) 34 (11) 33 Less: Tax provision (benefit) (5) 2 (6) 2 Effect on net income (loss) (17) 32 (5) 31 Less: Effect on noncontrolling interests (4) 1 22 17 31 Effect on net income (loss) attributable to AGL $ (18) $ 10 $ (22) $ — By Type of VIE FG VIEs $ (13) $ 1 $ (15) $ 3 CIVs (5) 9 (7) (3) Effect on net income (loss) attributable to AGL $ (18) $ 10 $ (22) $ — ____________________ (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. 106 Table of Contents Reconciliation to GAAP Reconciliation of Net Income (Loss) Attributable to AGL to Adjusted Operating Income (Loss) Second Quarter Six Months 2023 2022 2023 2022 (in millions) Net income (loss) attributable to AGL $ 125 $ (47) $ 206 $ 19 Less pre-tax adjustments: Realized gains (losses) on investments (9) (28) (11) (25) Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives 90 6 103 3 Fair value gains (losses) on CCS 1 10 (15) 11 Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves 26 (73) 46 (102) Total pre-tax adjustments 108 (85) 123 (113) Less tax effect on pre-tax adjustments (19) 8 (21) 12 Adjusted operating income (loss) $ 36 $ 30 $ 104 $ 120 Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(5), $2, $(6) and $2) included in adjusted operating income $ (18) $ 10 $ (22) $ — Net Realized Investment Gains (Losses) The table below presents the components of net realized investment gains (losses). Net Realized Investment Gains (Losses) Second Quarter Six Months 2023 2022 2023 2022 (in millions) Gross realized gains on sales of available-for-sale securities $ 7 $ — $ 19 $ — Gross realized losses on sales of available-for-sale securities (6) (21) (15) (23) Net foreign currency gains (losses) — (3) — (3) Change in allowance for credit losses and intent to sell (10) (4) (15) (9) Other net realized gains (losses) — — — 10 Net realized investment gains (losses) $ (9) $ (28) $ (11) $ (25) Gross realized gains and losses on sales in all periods primarily related to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions. 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. Except for underlying credit impairment, which is recognized as loss expense in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio. 107 Table of Contents The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. 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. 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 June 30, 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. Second quarter 2023 and six months 2023 non-credit impairment-related unrealized fair value gains were primarily generated by lower collateral asset spreads. For six months 2023, the increased cost to buy protection on AGC, as the market cost of AGC’s credit protection increased during the period, also contributed to the gain. Second quarter 2022 and six months 2022 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, and changes in discount rates. These gains were partially offset by an increase in the credit spread of certain underlying reference obligations. 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 June 30, 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 $ (126) $ (69) $ (233) $ (71) Base Scenario (57) — (162) — Decrease of 25 bps (40) 17 (99) 63 All transactions priced at floor (20) 37 (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 six months 2023 were primarily due to a tightening in market spreads. Fair value gains on CCS in second quarter 2022 and six months 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. 108 Table of Contents 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 $26 million and $46 million in second quarter 2023 and six months 2023, respectively, and losses of $73 million and $102 million in second quarter 2022 and six months 2022, respectively. Approximately 72% and 74% of gross premiums receivable, net of commissions payable at June 30, 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 the balance sheet dates. Foreign Exchange Rates U.S. Dollar Per Foreign Currency As of June 30, 2023 As of December 31, 2022 As of June 30, 2022 As of December 31, 2021 Pound sterling $1.270 $1.208 $1.218 $1.353 Euro $1.091 $1.071 $1.048 $1.137 Non-GAAP Financial Measures The Company discloses both: (i) financial measures determined in accordance with GAAP; and (ii) 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. 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. 109 Table of Contents 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 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. 110 Table of Contents 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. 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. 111 Table of Contents Reconciliation of Shareholders’ Equity Attributable to AGL to Adjusted Operating Shareholders’ Equity and Adjusted Book Value As of June 30, 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 $ 5,276 $ 89.65 $ 5,064 $ 85.80 Less pre-tax adjustments: Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives 31 0.52 (71) (1.21) Fair value gains (losses) on CCS 32 0.54 47 0.80 Unrealized gain (loss) on investment portfolio (463) (7.88) (523) (8.86) Less taxes 48 0.83 68 1.15 Adjusted operating shareholders’ equity 5,628 95.64 5,543 93.92 Pre-tax adjustments: Less: Deferred acquisition costs 155 2.63 147 2.48 Plus: Net present value of estimated net future revenue 192 3.27 157 2.66 Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed 3,445 58.53 3,428 58.10 Plus taxes (623) (10.60) (602) (10.22) Adjusted book value $ 8,487 $ 144.21 8,379 141.98 Gain (loss) related to FG VIE and CIV consolidation included in: Adjusted operating shareholders’ equity (net of tax provision (benefit) of $(1) and $4) $ (3) $ (0.04) $ 17 $ 0.28 Adjusted book value (net of tax provision (benefit) of $(3) and $3) (7) (0.12) 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. 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 112 Table of Contents 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 Second Quarter 2023 Second 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 $ 78 $ 9 $ 5 $ 3 $ 95 $ 57 $ 6 $ 1 $ 1 $ 65 Less: Installment GWP and other GAAP adjustments (1) 41 9 5 3 58 — 6 1 1 8 Upfront GWP 37 — — — 37 57 — — — 57 Plus: Installment premiums and other (2) 40 6 3 5 54 — 18 — 1 19 PVP $ 77 $ 6 $ 3 $ 5 $ 91 $ 57 $ 18 $ — $ 1 $ 76 Six Months 2023 Six Months 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 $ 100 $ 45 $ 33 $ 3 $ 181 $ 106 $ 22 $ 6 $ 1 $ 135 Less: Installment GWP and other GAAP adjustments (1) 49 42 33 3 127 — 22 4 1 27 Upfront GWP 51 3 — — 54 106 — 2 — 108 Plus: Installment premiums and other (2) 48 33 30 38 149 — 30 — 7 37 PVP $ 99 $ 36 $ 30 $ 38 $ 203 $ 106 $ 30 $ 2 $ 7 $ 145 ___________________ (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. Six months 2023 and 2022 also include 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. 113 Table of Contents Financial Guaranty Portfolio Net Par Outstanding and Average Internal Rating by Sector As of June 30, 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 $ 74,874 A- $ 71,868 A- Tax backed 32,911 A- 33,752 A- Municipal utilities 28,185 A- 26,436 A- Transportation 20,317 A- 19,688 A- Healthcare 11,661 BBB+ 11,304 BBB+ Infrastructure finance 8,667 A- 6,955 A- Higher education 7,237 A- 7,137 A- Housing revenue 937 BBB- 959 BBB- Investor-owned utilities 331 A- 332 A- Renewable energy 171 A- 180 A- Other public finance 1,032 BBB 1,025 BBB Total U.S. public finance 186,323 A- 179,636 A- Non-U.S public finance: Regulated utilities 19,836 BBB+ 17,855 BBB+ Infrastructure finance 14,756 BBB 13,915 BBB Sovereign and sub-sovereign 9,862 A+ 9,526 A+ Renewable energy 2,073 A- 2,086 A- Pooled infrastructure 1,131 AAA 1,081 AAA Total non-U.S. public finance 47,658 BBB+ 44,463 BBB+ Total public finance 233,981 A- 224,099 A- Structured finance: U.S. structured finance: Life insurance transactions 4,406 AA- 3,879 AA- RMBS 1,863 BBB- 1,956 BBB- Pooled corporate obligations 606 AAA 625 AAA Financial products 450 AA- 453 AA- Consumer receivables 373 A 437 A Other structured finance 1,129 BBB+ 878 BBB+ Total U.S. structured finance 8,827 A 8,228 A Non-U.S. structured finance: Pooled corporate obligations 352 AAA 344 AAA RMBS 263 A- 263 A- Other structured finance 590 A+ 324 AA- Total non-U.S. structured finance 1,205 AA- 931 AA Total structured finance 10,032 A 9,159 A Total net par outstanding $ 244,013 A- $ 233,258 A- Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary 114 Table of Contents financial guarantor. The second-to-pay insured par outstanding as of both June 30, 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 June 30, 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 $1.3 billion net par outstanding as of June 30, 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 June 30, 2023 Net Par Outstanding AGM AGC AG Re Eliminations (1) Total Net Par Outstanding Gross Par Outstanding (in millions) Defaulted Puerto Rico Exposures PREPA $ 446 $ 69 $ 205 $ — $ 720 $ 730 Total Defaulted 446 69 205 — 720 730 Resolved Puerto Rico Exposures PRHTA (Transportation revenue) (2) 49 181 105 (42) 293 293 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 190 234 123 (43) 504 504 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 $ 350 $ (43) $ 1,349 $ 1,365 ___________________ (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 VIEs’ 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. 115 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 June 30, 2023 Scheduled Net Par Amortization 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 — 12 126 130 293 PRHTA (Highway revenue) — — — — — — 81 101 — 182 Commonwealth of Puerto Rico - GO — — — — 2 4 19 — — 25 PBA 2 — — 2 — — — — — 4 Total Resolved 12 — — 10 9 4 112 227 130 504 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 $ 130 $ 1,349 Amortization Schedule of Net Debt Service of Puerto Rico As of June 30, 2023 Scheduled Net Debt Service Amortization 2023 (3Q) 2023 (4Q) 2024 2025 2026 2027 2028 - 2032 2033 - 2037 2038 - 2041 Total (in millions) Defaulted Puerto Rico Exposures PREPA $ 109 $ 3 $ 122 $ 92 $ 126 $ 122 $ 275 $ 14 $ — $ 863 Total Defaulted 109 3 122 92 126 122 275 14 — 863 Resolved Puerto Rico Exposures PRHTA (Transportation revenue) 17 — 15 23 22 14 80 180 148 499 PRHTA (Highway revenue) 5 — 9 10 10 10 124 115 — 283 Commonwealth of Puerto Rico - GO 1 — 1 1 3 6 21 — — 33 PBA 2 — — 3 — — — — — 5 Total Resolved 25 — 25 37 35 30 225 295 148 820 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 $ 154 $ 3 $ 170 $ 149 $ 200 $ 168 $ 528 $ 309 $ 148 $ 1,829 116 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 17.2% of total BIG net par outstanding as of June 30, 2023. Distribution of U.S. RMBS by Year Insured and Type of Exposure as of June 30, 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 $ — $ 321 $ 11 $ 349 2005 21 116 15 181 47 380 2006 23 24 1 40 101 189 2007 — 187 16 571 141 915 2008 — — — 30 — 30 Total exposures $ 53 $ 335 $ 32 $ 1,143 $ 300 $ 1,863 Exposures rated BIG $ 32 $ 200 $ 15 $ 614 $ 109 $ 970 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. 117 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 June 30, 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 (1) 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% 2029 250 250 AGRO (2) 5.00% 2028 20 20 AGUS intercompany loans 270 270 Total AGUS long-term debt and intercompany loans 1,850 1,850 AGMH Junior Subordinated Debentures (3) 6.40% 2066 300 300 Total AGMH long-term debt 300 300 AGMH’s long-term debt purchased by AGUS (4) (154) (154) U.S. Holding Company long-term debt $ 1,996 $ 1,996 ____________________ (1) Until June 30, 2023, the Series A Enhanced Junior Subordinated Debentures paid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Secured Overnight Finance Rate (SOFR). (2) In second quarter 2023, the final maturity of the AGRO loan was extended from 2023 to 2028 and the floating rate interest rate was converted to a fixed rate of 5%. (3) 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 SOFR plus 2.215%. (4) Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS. 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. 118 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 June 30, 2023 AGL U.S. Holding Companies (in millions) Assets Fixed-maturity securities (1) $ 21 $ 4 Short-term investments, other invested assets and cash 35 73 Receivables from affiliates (2) 57 — Receivable from U.S. Holding Companies 27 — Other assets 5 42 Liabilities Long-term debt — 1,677 Loans payable to affiliates — 270 Payable to affiliates (2) 12 13 Payable to AGL — 27 Other liabilities 10 56 ____________________ (1) As of June 30, 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 9.6 years and 4.2 years, respectively. (2) Represents receivable and payables with non-guarantor subsidiaries. Six Months 2023 AGL U.S. Holding Companies (in millions) Revenues $ 1 2 Expenses Interest expense — 47 Other expenses 27 31 Income (loss) before provision for income taxes and equity in earnings (losses) of investees (26) (76) Net income (loss) (26) (65) 119 Table of Contents The following table presents significant cash flow items for AGL and the U.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities. AGL and U.S. Holding Companies Selected Cash Flow Items Six Months 2023 AGL U.S. Holding Companies (in millions) Dividends received from subsidiaries (1) $ 112 $ 93 Interest paid — (41) Investments in subsidiaries — (12) Dividends paid to AGL — (83) Dividends paid (35) — Repurchases of common shares (2) (26) — ____________________ (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 parent, • 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 120 Table of Contents 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 June 30, 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 June 30, 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 June 30, 2023, the Company’s remaining net par outstanding for HTA and GO/PBA Puerto Rico exposures was $504 million, which consisted of bonds where the holders elected to receive custody receipts and exposures assumed from third-party financial guarantors. On July 28, 2023, the Company directed the trustee to notify certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds of its intent to satisfy on August 31, 2023 its obligations under the legacy insured bonds with respect to $108 million net par outstanding as of July 28, 2023 and, following payment of such obligations, AGC and AGM will receive the New Recovery Bonds and/or CVIs with notional amounts and maturity values totaling $94 million as of July 28, 2023 held as collateral with respect to the custodial trusts. 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. 121 Table of Contents 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 $398 million as of June 30, 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 June 30, 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. 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 $270 million, of which approximately $61 million is available for distribution in the third 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 none is available for distribution in the third quarter of 2023. • Based on the applicable law and regulations, in 2023 AG Re (a subsidiary of AGL) paid dividends of $29 million in the first half of the year and 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 June 30, 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 $167 million as of June 30, 2023, and (ii) the amount of statutory surplus, which as of June 30, 2023 was $25 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 June 30, 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 $394 million as of June 30, 2023, and (ii) the amount of statutory surplus, which as of June 30, 2023 was $265 million. 122 Table of Contents Distributions From Insurance Company Subsidiaries Second Quarter Six Months 2023 2022 2023 2022 (in millions) Dividends paid by AGC to AGUS $ 24 $ 24 $ 44 $ 149 Dividends paid by AGM to AGMH — — 40 96 Dividends paid by AG Re to AGL 29 — 29 — Dividends from AGUK to AGM 127 — 127 — 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 (i) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (ii) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (iii) 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 June 30, 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 $267 million, including $241 million by AGC and $26 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 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. Until June 30, 2023, the annualized rate on the AGC CCS was one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities was one-month LIBOR plus 200 bps. In July 2023, the reference to LIBOR in such CCS was replaced with a rate based on SOFR. 123 Table of Contents 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 62% of the total investment portfolio is managed by external parties. In accordance with the Company’s investment guidelines, each of the three external investment managers is required to maintain the Company’s investment portfolio with an overall credit quality rated at a minimum of A+/A1/A+ by S&P/Moody’s/Fitch 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 Statements, Note 7, Investments, and Note 9, Fair Value Measurement. Investment Portfolio Carrying Value As of June 30, 2023 December 31, 2022 (in millions) Fixed-maturity securities, available-for-sale (1) $ 6,488 $ 7,119 Fixed-maturity securities, trading (2) 340 303 Short-term investments 1,650 810 Other invested assets 146 133 Total $ 8,624 $ 8,365 ____________________ (1) As of June 30, 2023 and December 31, 2022, includes $36 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 Puerto Rico Resolutions. The Company’s available-for-sale fixed-maturity securities had a duration of 3.9 years and 4.4 years as of June 30, 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 June 30, 2023 Amortized Cost Estimated Fair Value (in millions) Due within one year $ 286 $ 280 Due after one year through five years 1,537 1,430 Due after five years through 10 years 1,696 1,597 Due after 10 years 2,871 2,625 Mortgage-backed securities: RMBS 440 352 Commercial mortgage-backed securities 214 204 Total $ 7,044 $ 6,488 124 Table of Contents 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 June 30, 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. Distribution of Available-for-Sale Fixed-Maturity Securities by Rating As of Rating June 30, 2023 December 31, 2022 AAA 13.9 % 14.2 % AA 38.6 37.1 A 26.9 24.4 BBB 11.4 11.0 BIG (1) 7.5 7.4 Not rated (2) 1.7 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 $340 million and $303 million in trading fixed-maturity securities as of June 30, 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 June 30, 2023 and December 31, 2022, all of the funds in which AGAS directly invests are consolidated in the Company’s consolidated financial statements. In July 2023, the management of the CLO fund and asset-based funds was transferred from AssuredIM to Sound Point. The amounts in the table below present the fair value of AGAS’ interests in the AssuredIM Funds. See Commitments below. Fair Value of AGAS’ Interest in AssuredIM Funds Insurance Segment As of Strategy June 30, 2023 December 31, 2022 (in millions) CLOs $ 189 $ 272 Municipal bonds (1) — 105 Healthcare 74 91 Asset-based 87 101 Total $ 350 $ 569 ____________________ (1) In the first quarter of 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund. 125 Table of Contents Equity in Earnings (Losses) of Investees of AGAS’ Investment in AssuredIM Funds Insurance Segment Second Quarter Six Months Strategy 2023 2022 2023 2022 (in millions) CLOs $ (3) $ (23) $ 16 $ (16) Municipal bonds — — — (4) Healthcare 1 (12) 9 (9) Asset-based 2 2 3 7 Total $ — $ (33) $ 28 $ (22) Beginning in the third quarter of 2023, the Company will record an equity method investment in Sound Point pursuant to the Sound Point Transaction described in Item 1, Financial Statements, Note 1, Business and Basis of Presentation 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 $230 million and $222 million as of June 30, 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 $1,149 million and $1,169 million, based on fair value, as of June 30, 2023 and December 31, 2022, respectively. Commitments Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval, which includes $510 million of investment capital (at fair value), and $991 million in unfunded commitments. See Note 1, Business and Basis of Presentation for a description of the Sound Point Transaction. Of the $1.5 billion to be invested, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million plus previously distributed gains of $114 million for a total of $864 million as of June 30, 2023. As of July 1, 2023, AGAS commitments to funds previously managed by AssuredIM were $553 million (of which $333 million was funded with a net asset value (NAV) of $350 million). This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance and healthcare structured capital and are managed by Sound Point or by AHP. As of June 30, 2023, all of the funds in which AGAS invests are accounted for as CIVs. AssuredIM Sources and Uses of Funds AssuredIM’s sources of liquidity were: (i) cash from operations, including management and performance fees (which are unpredictable as to amount and timing); and (ii) capital contributions from AGUS ($10 million and $15 million in six months 2023 and six months 2022, respectively, had been contributed to supplement cash from operations). As of June 30, 2023 and December 31, 2022, AssuredIM had $21 million and $41 million, respectively, in cash and short-term investments. AssuredIM’s liquidity needs primarily include: (i) paying operating expenses including compensation; (ii) paying dividends or other distributions to AGUS; and (iii) capital to support growth and expansion of the asset management business. See “ - Overview, Business.” for a discussion of Sound Point Transaction and AHP 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. 126 Table of Contents 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 CLO warehouses). The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. See Item. 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information. 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 June 30, 2023, these credit facilities had varying maturities ranging from 2023 to 2024 with the aggregate principal amount not exceeding $820 million. The available commitments were based on the amount of equity contributed to the warehouses which was $217 million. As of June 30, 2023, $134 million was drawn under credit facilities with an interest rate of Euro InterBank Offered Rate (Euribor) plus 300 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of June 30, 2023. As of June 30, 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 June 30, 2023, $54 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 June 30, 2023. 127 Table of Contents 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. Summarized Condensed Consolidated Cash Flows Second Quarter Six Months 2023 2022 2023 2022 (in millions) Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation $ 27 $ 19 $ (7) $ (621) Effect of FG VIEs and CIVs consolidation 97 (921) 443 (1,173) Net cash flows provided by (used in) operating activities 124 (902) 436 (1,794) Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation 6 150 108 981 Effect of FG VIEs and CIVs consolidation (40) 58 (236) 77 Net cash flows provided by (used in) investing activities (34) 208 (128) 1,058 Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation Dividends paid (17) (16) (35) (33) Repurchases of common shares (24) (151) (26) (303) Other — 4 (15) (6) Effect of FG VIEs and CIVs consolidation 4 832 (257) 1,001 Net cash flows provided by (used in) financing activities (1) (37) 669 (333) 659 Effect of exchange rate changes, before effect of FG VIEs and CIVs consolidation 1 (1) 2 (2) Effect of FG VIEs and CIVs consolidation — — — — Effect of exchange rate changes 1 (1) 2 (2) Increase (decrease) in cash and cash equivalents and restricted cash 54 (26) (23) (79) Cash and cash equivalents and restricted cash at beginning of period 130 289 207 342 Cash and cash equivalents and restricted cash at the end of the period $ 184 $ 263 $ 184 $ 263 ____________________ (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 $7 million in six months 2023 and an outflow of $621 million in six months 2022. The decrease in outflows during six months 2023 was primarily due to a $579 million decrease in net claim payments, primarily due to the 2022 Puerto Rico Resolutions, as well as a decrease of $95 million in tax payments. Cash flows from operations attributable to the effect of FG VIE and CIV consolidation were inflows in six months 2023 and outflows in six months 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 six months 2023 compared with six months 2022 is mainly due to a decrease of $2,104 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $570 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 in six months 2023 compared with six months 2022 was mainly attributable to an increase in short-term investments in six months 2023 compared to net sales of short term and fixed maturity investments in six months 2022. In six months 2022, investing inflows were used to fund claim 128 Table of Contents payments under the 2022 Puerto Rico Resolutions and share repurchases. See Item 1. Financial Statements, Condensed Consolidated Statements of Cash Flows and 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 $2,163 million in issuances, partially offset by a decrease in repayments of $949 million by the consolidated CLOs and CLO warehouses. The proceeds from CLO issuances and CLO warehouse borrowings are used to fund 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 July 1, 2023 through August 8, 2023, the Company repurchased an additional 320,646 of common shares. As of August 8, 2023, the Company was authorized to purchase $158 million of its common shares. For more information about the 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 June 30, 2023, there were no material changes to the market risks to which the Company is exposed since December 31, 2022.