# ASSURED GUARANTY LTD (AGO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ASSURED GUARANTY LTD's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1273813/000127381323000005/ago-20221231.htm
Accession: 0001273813-23-000005
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/AGO/
All MD&A years: /company/AGO/mda/
Previous year: /company/AGO/mda/fy2021/ (FY 2021)
Next year: /company/AGO/mda/fy2023/ (FY 2023)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, the following discussion and analysis of the Company’s financial condition and results of operations should be read in its entirety with the Company’s consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. The following discussion and analysis of the Company’s financial condition and results of operations contains forward looking statements that involve risks and uncertainties. See “Forward Looking Statements” for more information. The Company’s actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the headings “Risk Factors” and “Forward Looking Statements.”

Discussion related to the results of operations for the Company’s comparison of 2021 results to 2020 results have been omitted in this Form 10-K. The Company’s comparison of 2021 results to 2020 results is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Business

The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company’s Corporate division and other activities (including FG VIEs and CIVs) are presented separately.

In the Insurance segment, the Company provides credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. In the Asset Management segment, the Company provides investment advisory services, which include the management of CLOs and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. The Corporate division consists primarily of interest expense on the debt of AGUS and 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 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, and Note 2, Segment Information.

Economic Environment

    Real gross domestic product (GDP) increased 2.1% in 2022, compared to an increase of 5.9% in 2021, according to the second estimate released by the U.S. Bureau of Economic Analysis (BEA). Additionally, the BEA second estimate reported real GDP increased at an annual rate of 2.7% in the fourth quarter of 2022. At the end of December 2022, the U.S. unemployment rate, seasonally adjusted, stood at 3.5%, lower than where it started the year at 3.9%, 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, the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending December 2022, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 6.5%, as compared to 8.2% for the 12-month period ending September 2022. According to the U.K.’s Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose 9.2% in the 12 months to December 2022, up from 8.8% in September 2022. The CPIH 12-month rate started the year at 4.8%. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $19.8 billion of net par outstanding as of December 31, 2022, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally.

With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, the FOMC decided at its meeting in March 2022 to start again raising the target range for the federal funds rate and has continued to do so since then. In addition, the FOMC stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through December 2022, the FOMC raised the target range for the federal funds rate seven

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times, from 0% to 0.25% where it started the year to 4.25% to 4.50% at its mid-December 2022 meeting. Although acknowledging that a disinflationary process has begun, at the conclusion of its January 31-February 1, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 4.5% to 4.75%, its eighth consecutive increase, stating that it anticipates that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

The level and direction of interest rates and credit spreads impact the Company in numerous ways. On the one hand, higher interest rates may present a more challenging environment for distressed RMBS the Company insures to the extent it causes housing prices to decline. Data released for the November 2022 S&P CoreLogic Case-Shiller Indices show the recent trend of home prices declining across the U.S., with the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reporting a seasonally adjusted month-over-month decrease of 0.3%, and the 10-City and 20-City Composites both posting decreases of 0.5%. The National Association of Realtors reported existing-home sales in 2022 declined 17.8% from 2021 as 2022’s rapidly escalating interest rate environment weighed on the residential real estate market. Higher interest rates may also reduce the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, dampen municipal bond issuance and negatively impact the finances of some of the obligors whose payments the Company insures.

On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it can charge for those products. The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.00% for 2022, higher than the 1.54% average of 2021. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 90 bps in 2022. This represented an increase from an average of 70 bps in 2021 but remained well below the 121 bps average in 2020, which included a period of instability following the onset of the COVID-19 pandemic. Despite the significant increase in MMD rate for 2022, 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 at 8.0% of the par amount of new issuances sold for 2022 versus 8.2% in 2021. The Company believes that a widening of credit spreads in 2023, should it occur, could permit it to increase its premium rates on new business. In addition, over time, higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.

Key Business Strategies

    The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM, the Company has increased its focus on asset management and alternative investments. Currently, the Company is pursuing the following key business strategies in three areas: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.

Insurance

    The Company seeks to grow the insurance business through new business production, acquisitions of remaining other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (legacy monoline insurers) or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio.

    Growth of the Insured Portfolio

    The Company seeks to grow its insurance portfolio through new business production in each of its markets: public finance (including infrastructure) and structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance:

•encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds;

•enables institutional investors to operate more efficiently; and

•allows smaller, less well-known issuers to gain market access on a more cost-effective basis.

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    The low interest rate environment and tight U.S. municipal credit spreads from when the financial crisis began in 2008 through early 2020 dampened demand for bond insurance compared to the levels before the financial crisis that began in 2008. After the onset of the COVID-19 pandemic in early 2020, credit spreads initially widened as a result of market concerns about the impact of the COVID-19 pandemic on some municipal credits, thereby improving demand for financial guaranty insurance even in a low interest rate environment, before narrowing again in 2022. The Company believes that, if credit spreads widen in 2023, demand for bond insurance may improve. See Part I, Item 1, Business — Insurance – Competition.

    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

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

____________________

(1)    Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business.

    The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios, generally through reinsurance. These transactions enable the Company to improve its future earnings and deploy excess capital.

    Loss Mitigation

    In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies.

    In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company’s role in the Detroit, Michigan and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights.

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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 has been 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) as discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.

As a result of the consummation on March 15, 2022, of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification and the consummation on December 6, 2022 of the HTA Plan (together, the 2022 Puerto Rico Resolutions), including claim payments made by the Company under the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO, PBA and PRHTA was greatly reduced. In the twelve-month period ended December 31, 2022, the Company has reduced its total Puerto Rico exposure, all rated BIG, by $2.2 billion (from $3.6 billion as of December 31, 2021 to $1.4 billion as of December 31, 2022). The Company believes the consummations of the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts.

In connection with the consummation of the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, New Recovery Bonds and CVIs.

Under the GO/PBA Plan and in connection with its direct exposure the Company received (including amounts received in connection with the second election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):

•$530 million in cash, net of ceded reinsurance,

•$605 million of New GO Bonds (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of ceded reinsurance, and

•$258 million of CVIs (see Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles for additional information), which represents the original notional value, net of ceded reinsurance.

Under the PRCCDA Modification and the PRIFA Modification, on March 15, 2022, the Company received an aggregate of $47 million in cash and $98 million in notional amount of CVIs.

In connection with the resolution of its PRHTA exposures pursuant to both the HTA Plan and the GO/PBA Plan the Company received (including amounts received in connection with the election described in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, but excluding amounts received in connection with second-to-pay exposures):

•$251 million in cash,

•$807 million of Toll Bonds (see Note 7, Investments and Cash and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information), which represents the face value of current interest bonds and the maturity value of capital appreciation bonds and convertible capital appreciation bonds, and

•$672 million of CVIs (see Note 7, Investments and Cash, for additional information), which represents the original notional value.

The Company has sold some of the New Recovery Bonds and CVIs it received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The fair value of such securities held by the Company as of December 31, 2022, is included in the line items “fixed-maturity securities, available-for-sale, at fair value”, “fixed-maturity securities, trading, at fair value”, and “financial guaranty variable interest entities’ assets, at fair value” on the consolidated balance sheets.

The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, Puerto Rico Electric Power Authority (PREPA). For information about PREPA developments, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure and the Insured Portfolio section below.

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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 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 December 31, 2022 (excluding the value of the Company’s insurance) was $508 million, with a par of $778 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

    AssuredIM is a diversified asset manager that serves as investment adviser to CLOs, opportunity and liquid strategies, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As of December 31, 2022, AssuredIM is a top 25 CLO manager by AUM, as published by Creditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending strategies. Over time, the Company seeks to broaden and diversify its Asset Management business through strategic combinations.

The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing, and there can be no assurances that such discussions will result in any transaction. Please see Part I, Item 1A. Risk Factors, Strategic Risks captioned “Strategic transactions may not result in the benefits anticipated.”

The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussion of the AUM metric, see “— Results of Operations by Segment — Asset Management Segment.”

Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated $750 million of capital to invest in AssuredIM Funds plus $550 million aggregate of investment assets of the U.S. Insurance Subsidiaries’ to be managed by AssuredIM under an IMA. The Company has used these allocations to: (i) launch new products (CLOs and opportunity funds) on the AssuredIM platform; and (ii) enhance the returns of its own investment portfolio.

Adding distributed gains from inception through December 31, 2022 to the original $750 million allocation, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds through their jointly owned investment subsidiary, AGAS. As of December 31, 2022, AGAS had committed $755 million to AssuredIM Funds, including $219 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, healthcare structured capital, and asset-based finance.

Under the IMA with AssuredIM, AGM and AGC have together invested $250 million in municipal obligation strategies and $300 million to CLO strategies. All of these strategies are consistent with the investment strengths of AssuredIM and the Company’s plans to continue to grow its investment strategies.

Capital Management

The Company has developed strategies to efficiently manage capital within the Assured Guaranty group.

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From 2013 through February 28, 2023, the Company has repurchased 141 million common shares for approximately $4.7 billion, representing approximately 73% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 23, 2022 and August 3, 2022, the Board authorized the repurchase of an additional $350 million and $250 million, respectively, of its common shares. As of February 28, 2023, the Company was authorized to purchase $201 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity, for additional information about the Company’s repurchases of its common shares.

Summary of Share Repurchases

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

As of December 31, 2022, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $37.11 per share in shareholders’ equity attributable to AGL, $42.91 per share in adjusted operating shareholders’ equity, and $76.76 per share in adjusted book value.

The Company considers the appropriate mix of debt and equity in its capital structure. On May 26, 2021, the Company issued $500 million of 3.15% Senior Notes due in 2031 for net proceeds of $494 million. On July 9, 2021, a portion of the proceeds from the issuance of the 3.15% Senior Notes was used to redeem $200 million of AGMH debt as follows: all $100 million of AGMH’s 6 7/8% Quarterly Interest Bonds due in 2101, and $100 million of the $230 million of AGMH’s 6.25% Notes due in 2102. On August 20, 2021, the Company issued $400 million of 3.6% Senior Notes due in 2051 for net proceeds of $395 million. On September 27, 2021, all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem $400 million of AGMH and AGUS debt as follows: all $100 million of AGMH’s 5.60% Notes due in 2103; the remaining $130 million of AGMH 6.25% Notes due in 2102; and $170 million of the $500 million of AGUS 5% Senior Notes due in 2024. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies” for the U.S. Holding Companies’ long-term debt.

In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately $175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.

Since the second quarter of 2017, AGUS has purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies”, and Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.

Executive Summary

The primary drivers of volatility in the Company’s net income include: changes in fair value of credit derivatives, FG VIEs, CIVs, and CCS, as well as loss and LAE, foreign exchange gains (losses), the level of refundings of insured obligations, changes in the value of the Company’s alternative investments, the effects of any large settlements, commutations and loss mitigation strategies, among other factors. Changes in the fair value of AssuredIM Funds and amount of AUM affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 

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Financial Performance of Assured Guaranty

Financial Results

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","As of December 31, 2022","","As of December 31, 2021"],["","","Amount","","Per Share","","Amount","","Per Share"],["","","(in millions, except per share amounts)"],["Shareholders\u2019 equity attributable to AGL","","$","5,064","","","$","85.80","","","$","6,292","","","$","93.19"],["Adjusted operating shareholders\u2019 equity (1)","","5,543","","","93.92","","","5,991","","","88.73"],["Adjusted book value (1)","","8,379","","","141.98","","","8,823","","","130.67"],["Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders\u2019 equity","","17","","","0.28","","","32","","","0.47"],["Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value","","11","","","0.19","","","23","","","0.34"],["Common shares outstanding (3)","","59.0","","","","","67.5"]]
[[/GREPCENT_TABLE]]

____________________

(1)    See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details.

(2)    Relates to the effect of consolidating FG VIEs and CIVs.

(3)    See “— Overview— Key Business Strategies – Capital Management” above for information on common share repurchases.

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Consolidated Results of Operations

Consolidated Results of Operations 

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Revenues:"],["Net earned premiums","$","494","","","$","414","","","$","485"],["Net investment income","269","","","269","","","297"],["Asset management fees","93","","","88","","","89"],["Net realized investment gains (losses)","(56)","","","15","","","18"],["Fair value gains (losses) on credit derivatives","(11)","","","(58)","","","81"],["Fair value gains (losses) on CCS","24","","","(28)","","","(1)"],["Fair value gains (losses) on FG VIEs","22","","","23","","","(10)"],["Fair value gains (losses) on CIVs","17","","","127","","","41"],["Foreign exchange gains (losses) on remeasurement","(112)","","","(23)","","","39"],["Fair value gains (losses) on trading securities","(34)","","","\u2014","","","\u2014"],["Commutation gains (losses)","2","","","\u2014","","","38"],["Other income (loss)","15","","","21","","","38"],["Total revenues","723","","","848","","","1,115"],["Expenses:"],["Loss and LAE (benefit)","16","","","(220)","","","203"],["Interest expense","81","","","87","","","85"],["Loss on extinguishment of debt","\u2014","","","175","","","\u2014"],["Amortization of deferred acquisition cost (DAC)","14","","","14","","","16"],["Employee compensation and benefit expenses","258","","","230","","","228"],["Other operating expenses","167","","","179","","","197"],["Total expenses","536","","","465","","","729"],["Income (loss) before income taxes and equity in earnings (losses) of investees","187","","","383","","","386"],["Equity in earnings (losses) of investees","(39)","","","94","","","27"],["Income (loss) before income taxes","148","","","477","","","413"],["Less: Provision (benefit) for income taxes","11","","","58","","","45"],["Net income (loss)","137","","","419","","","368"],["Less: Noncontrolling interests","13","","","30","","","6"],["Net income (loss) attributable to Assured Guaranty Ltd.","$","124","","","$","389","","","$","362"],["Effective tax rate","7.2","%","","12.2","%","","10.9","%"]]
[[/GREPCENT_TABLE]]

Net income attributable to AGL in 2022 was lower compared with 2021 primarily due to the following:

•loss and LAE in 2022 compared with a benefit in 2021,

•losses on equity method alternative investments in 2022 compared with gains in 2021,

•realized and unrealized losses on the investment portfolio reported in realized gains (losses) on investments and fair value gains (losses) on trading securities compared with gains in 2021,

•lower fair value gains on CIVs, and

•higher foreign exchange remeasurement losses in 2022.

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These decreases were offset in part by:

•losses on extinguishment of debt in 2021 that did not recur in 2022,

•higher net earned premiums mainly attributable to accelerations on certain Puerto Rico exposures, and

•fair value gains on CCS in 2022 compared with losses in 2021.

The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19%, the French subsidiary taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda subsidiaries, unless subject to U.S. tax by election or as a U.S. CFC. The effective tax rate in 2022 was lower than in 2021 due primarily to differences in the portion of income generated by various jurisdictions as well as the Company’s ability to utilize foreign tax credits.

Adjusted Operating Income

Adjusted operating income in 2022 was $267 million, compared with $470 million in 2021. The decrease was primarily attributable to lower Insurance segment adjusted operating income due to losses in equity method alternative investments and benefits in Puerto Rico expected losses in 2021 that did not recur in 2022, offset by a lower corporate division loss due to a 2021 loss on extinguishment of debt that did not recur in 2022. 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 December 31, 2022 decreased compared with December 31, 2021, as net income was offset by other comprehensive loss, share repurchases and dividends. Adjusted operating shareholders’ equity and adjusted book value also decreased primarily due to share repurchases, and dividends and foreign exchange remeasurement losses, offset in part, in the case of adjusted book value, by new business development and favorable loss development.

    On a per share basis, shareholders’ equity attributable to AGL was $85.80 as of December 31, 2022, which was lower than shareholders’ equity attributable to AGL of $93.19 as of December 31, 2021, primarily due to unrealized losses on the investment portfolio caused largely by rising interest rates.

On a per share basis, adjusted operating shareholders’ equity increased to $93.92 as of December 31, 2022, from $88.73 as of December 31, 2021, and adjusted book value increased to $141.98 as of December 31, 2022 from $130.67 as of December 31, 2021, primarily due to the accretive effect of the share repurchase program, and in the case of adjusted book value, net premiums written and favorable loss development. See “— Non-GAAP Financial Measures” for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value.

Other Matters

Russia’s Invasion of Ukraine

Russia’s invasion of Ukraine has led to the imposition of economic sanctions by many western countries against Russia and certain Russian individuals, dislocation in global energy markets, massive refugee movements, and payment default by certain Russian credits. The economic sanctions imposed by western governments, along with decisions by private companies regarding their presence in Russia, continue to reduce western economic ties to Russia and to reshape global economic and political ties more generally, and the Company cannot predict all of the potential effects of the conflict on the world or on the Company.

The Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, and have identified no material direct exposure to Ukraine or Russia. In fact, the Company’s direct insurance exposure to eastern Europe generally is limited to approximately $300 million in net par outstanding as of December 31, 2022, comprising $237 million net par exposure to the sovereign debt of Poland and $63 million net par exposure to a toll road in Hungary. The Company rates the toll road exposure BIG.

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Inflation

By some key measures, consumer price inflation in the U.S. and the U.K. was higher in 2022 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 seven times from March 2022 through December 2022. At its January 31 - February 1, 2023 meeting, the FOMC raised the federal funds target rate by 25 bps to 4.5% to 4.75%, its eighth consecutive increase, stating that it anticipates that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

Higher interest rates impact the Company in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product. However, despite the increases in interest rates in 2022, 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 in 2022 versus 2021. Over time, higher interest rates also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. Higher interest rates may present a more challenging environment for distressed RMBS the Company insures to the extent it causes housing prices to decline, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact the finances of some insured obligors.

See “Overview — Economic Environment”.

LIBOR Sunset

IBA and FCA first announced in 2017 that the publication of LIBOR would cease at the end of 2021. Many legal documents entered into prior to that time did not include robust fallback language contemplating the permanent suspension of the publication of LIBOR. On March 5, 2021, IBA and FCA confirmed a representative panel of banks will continue setting 1, 3, 6 and 12-month U.S. dollar LIBOR through June 2023, rather than December 31, 2021 as originally announced. The publication of all sterling LIBOR rates ceased on December 31, 2021, as originally announced. To address the permanent cessation of U.S. dollar LIBOR, the U.S. Congress enacted the Adjustable Interest Rate (LIBOR) Act (AIRLA) on March 15, 2022, to provide a federal solution for replacing references to U.S. dollar LIBOR in existing contracts that either lack, or contain insufficient, LIBOR fallback provisions. In accordance with AIRLA, the Board of Governors of the Federal Reserve System adopted final rule 12. C.F.R. Part 253 “Regulation Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ)” (Rule 253), which identifies Secured Overnight Finance Rate (SOFR)-based benchmark rates that will replace U.S. dollar LIBOR in certain financial contracts after June 30, 2023. Rule 253 confirms that the AIRLA safe harbor provisions for LIBOR contracts that change over to SOFR, either by operation of law or the choice of a determining person, will apply.

The Company has outstanding exposure to LIBOR in the following areas:

Outstanding Insured Financial Guaranty Portfolio

The Company has insured net part outstanding on December 31, 2022 to obligors that the Company is aware have assets, liabilities or hedges that reference U.S. dollar LIBOR or sterling LIBOR. In each case, the transactions are generally governed by documentation entered into prior to the announcement that the publication of LIBOR would cease. These obligors, not the Company, are responsible for any financial cost of the transition away from LIBOR. The Company is impacted if such costs result in payment defaults of obligations the Company insures or increase the amount of losses the Company is required to pay for insured transactions already in payment default.

    U.S. Dollar LIBOR. The Company projects that in June 2023 it will have approximately $2.8 billion of insured net par outstanding to obligors that the Company is aware have assets, liabilities or hedges that reference U.S. dollar LIBOR. Of the $2.8 billion of insured net par, approximately $0.9 billion is currently rated BIG by the Company. As part of its insured portfolio surveillance process, the Company’s surveillance team evaluates the potential impact of the transition from U.S. dollar LIBOR on the Company’s insured exposures. The Company is generally in contact with relevant parties to insured

84

transactions most likely to be impacted by the transition from U.S. dollar LIBOR. In many instances it is difficult to amend the relevant documentation, so the enactment of AIRLA is very helpful. While most of the parties relevant to the Company’s exposure to U.S. dollar LIBOR have not yet expressly committed to a course of action, AIRLA provides a replacement rate and a safe harbor from liability as a result of the transition from U.S. LIBOR.

Sterling LIBOR. The Company also had $16 million of insured net par outstanding at December 31, 2022 to one obligor that the Company is aware has assets, liabilities or hedges that reference sterling LIBOR. The documentation for this transaction was recently amended and will instead reference Sterling Overnight Interbank Average Rate (SONIA) effective March 17, 2023.

Loss Mitigation and Other Securities

Certain securities, primarily Loss Mitigation Securities, with a fair value of approximately $504 million on December 31, 2022 that reference U.S. dollar LIBOR, are generally governed by documentation entered into prior to the announcement that the publication of LIBOR would cease. The transition away from U.S. dollar LIBOR may impact the fair value and total amounts eventually received from such investments.

Outstanding Debt Issued by AGMH and AGUS

The Company’s subsidiary AGUS has $150 million of debentures outstanding that bear a floating rate of interest tied to U.S. dollar LIBOR. In 2022, the Company paid $6 million of interest on those debentures. In addition, the Company’s subsidiary AGMH has $300 million of debentures outstanding ($154 million of which are held by AGUS) that will convert to a floating interest rate tied to U.S. dollar LIBOR after December 15, 2036.

Committed Capital Securities

The Company benefits from $400 million of CCS that pay a rate tied to U.S. dollar LIBOR. In 2022, the amount the Company paid on the CCS was $11 million.

CLOs

Certain CLOs issued and owned by the Company’s CIVs pay interest historically tied to U.S. dollar LIBOR. The relevant operative documents generally included from the outset or were amended or executed after the planned cessation of U.S. dollar LIBOR was announced to include robust fallback language with alternative procedures to transition to a new benchmark rate based on SOFR.

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 PFICs. The final regulations are not expected to have a material impact to the Company’s business operation or its shareholders and the proposed regulations are continuing to be evaluated.

Impact of COVID-19

The emergence and continuation of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Due to the nature of the Company’s business, COVID-19 and its global impact, directly and indirectly affected certain sectors in the insured portfolio.

Shortly after the pandemic reached the U.S. through early 2021, the Company’s surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various intermittent closures and capacity and travel restrictions or an economic downturn. Given significant federal funding to state and local governments in 2021 and the performance it observed, the Company’s surveillance department has reduced these supplemental procedures. However, the Company is still monitoring those sectors it identified as most at risk for any developments related to COVID-19. The Company has paid only relatively small insurance claims it

85

believes are due at least in part to credit stress arising specifically from COVID-19, and has already received reimbursement for most of those claims.

The Company began operating remotely in accordance with its business continuity plan in March 2020 in response to the COVID-19 pandemic, instituting mandatory remote work policies in its offices in Bermuda, U.S., U.K. and France. By the end of February 2022, the Company had reopened all of its offices, choosing a hybrid remote and office work model in response to employee feedback and as part of its commitment to providing a safe and healthy workplace. Whether its employees are working remotely or in a hybrid remote and office work model, the Company continues to provide the services and communications it normally would. For more information, see Part I, Item 1A, Risk Factors, Operational Risks captioned “The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security breach or failure in the Company’s or a vendor’s information technology system, or a data privacy breach of the Company’s or a vendor’s information technology system, could adversely affect the Company’s business.”

Results of Operations

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment and require the Company to make estimates and assumptions, based on available information, that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. The inputs into the Company’s estimates and assumptions consider the economic implications of COVID-19. Estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the Consolidated Financial Statements.

Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially 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 Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for the Company’s significant accounting policies which includes a reference to the note where further details regarding the significant estimates and assumptions are provided, as well as Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further details regarding sensitivity analysis.

•Expected loss to be paid (recovered)

•Fair value of certain assets and liabilities, primarily:

◦Investments

◦Assets and liabilities of CIVs

◦Assets and liabilities of FG VIEs

◦Credit derivatives

•Recoverability of goodwill and other intangible assets

•Credit impairment of financial instruments

•Revenue recognition

•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities)

In addition, the valuation of AUM, which is the basis for calculating certain asset management fees, is based on estimates and assumptions. AUM valuations are often performed by independent pricing services based on observable and unobservable inputs. AUM may be impacted by a wide range of factors, including the condition of the global economy and financial markets, the relative attractiveness of the investment strategies of AssuredIM, and regulatory or other governmental policies or actions. For an explanation of how the Company defines and uses the AUM metric and why it provides useful information to investors, see “— Results of Operations by Segment — Asset Management Segment”.

Results of Operations by Segment

The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company’s CODM reviews the business to assess performance and allocate resources. The following describes the components of each segment, along with the Corporate division and Other categories. The Insurance

86

and Asset Management segments and the Corporate division are presented without giving effect to the consolidation of FG VIEs and CIVs.

The Company analyzes the operating performance of each segment using each segment’s adjusted operating income as described in Item 8, Financial Statements and Supplementary Data, Note 2, Segment Information. Results for each segment include specifically identifiable expenses as well as allocations of expenses among legal entities based on time studies and other cost allocation methodologies based on headcount or other metrics.

Insurance Segment Results

Insurance Segment Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Segment revenues"],["Net earned premiums and credit derivative revenues","$","508","","","$","438","","","$","504"],["Net investment income","278","","","280","","","310"],["Fair value gains (losses) on trading securities","(34)","","","\u2014","","","\u2014"],["Commutation gains (losses)","2","","","\u2014","","","38"],["Foreign exchange gains (losses) on remeasurement and other income (loss) (1)","3","","","15","","","22"],["Total segment revenues","757","","","733","","","874"],["Segment expenses"],["Loss expense (benefit)","12","","","(221)","","","204"],["Interest expense","1","","","\u2014","","","\u2014"],["Amortization of DAC","14","","","14","","","16"],["Employee compensation and benefit expenses","148","","","142","","","143"],["Other operating expenses","84","","","98","","","83"],["Total segment expenses","259","","","33","","","446"],["Equity in earnings (losses) of investees","(51)","","","144","","","61"],["Segment adjusted operating income (loss) before income taxes","447","","","844","","","489"],["Less: Provision (benefit) for income taxes","34","","","122","","","60"],["Segment adjusted operating income (loss)","$","413","","","$","722","","","$","429"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Other income (loss) consists of recurring items such as ancillary fees on financial guaranty policies for commitments and consents, and if applicable, other revenue items on financial guaranty insurance and reinsurance contracts such as loss mitigation recoveries.

Net Earned Premiums and Credit Derivative Revenues

    Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, books of business acquired in a business combination or reassumptions of previously ceded business. See Item 8, Financial Statements and Supplementary Data, 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

87

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 are more common in the structured finance asset class, but may also occur in the public finance asset class. While each termination may have different terms, they all result in the expiration of the Company’s insurance risk, the acceleration of the recognition of the associated deferred premium revenue and the reduction of any remaining premiums receivable.

Insurance Segment

Net Earned Premiums and Credit Derivative Revenues

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

____________________

(1)    Includes accretion of discount.

    Net earned premiums and credit derivative revenues increased in 2022 compared with 2021 primarily due to refundings of $133 million related to the 2022 Puerto Rico Resolutions discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, offset in part by the scheduled decline in structured finance par outstanding and the effect of other refundings and terminations on scheduled net earned premiums. As of December 31, 2022, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.

88

    New Business Production

Gross Written Premiums and New Business Production

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["GWP"],["Public Finance\u2014U.S.","$","248","","","$","231","","","$","294"],["Public Finance\u2014non-U.S.","75","","","89","","","142"],["Structured Finance\u2014U.S.","37","","","51","","","18"],["Structured Finance\u2014non-U.S.","\u2014","","","6","","","\u2014"],["Total GWP","$","360","","","$","377","","","$","454"],["PVP (1):"],["Public Finance\u2014U.S.","$","257","","","$","235","","","$","292"],["Public Finance\u2014non-U.S.","68","","","79","","","82"],["Structured Finance\u2014U.S.","43","","","42","","","14"],["Structured Finance\u2014non-U.S. (2)","7","","","5","","","2"],["Total PVP","$","375","","","$","361","","","$","390"],["Gross Par Written (1):"],["Public Finance\u2014U.S.","$","19,801","","","$","23,793","","","$","21,198"],["Public Finance\u2014non-U.S.","624","","","1,117","","","1,434"],["Structured Finance\u2014U.S.","1,077","","","1,316","","","380"],["Structured Finance\u2014non-U.S. (2)","545","","","430","","","253"],["Total gross par written","$","22,047","","","$","26,656","","","$","23,265"],["Average rating on new business written","A-","","A-","","A-"]]
[[/GREPCENT_TABLE]]

____________________

(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)    2022 PVP and gross par written include the present value of future premiums and exposure, respectively, associated with a financial guarantee written by the Company that, under GAAP, is accounted for under ASC 460, Guarantees.    

GWP relates to insurance and reinsurance contracts for both financial guaranty and specialty business. Financial guaranty insurance and reinsurance GWP includes: (i) amounts collected upfront on new business written; (ii) the present value of future contractual or expected premiums on new business written (discounted at risk-free rates); and (iii) the effects of changes in the estimated lives of certain transactions in the in-force book of business. Specialty business GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore are not included in GWP.

The non-GAAP financial measure, PVP, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, for all contracts regardless of form or accounting model. See “— Non-GAAP Financial Measures” below.

U.S. public finance GWP increased in 2022 to $248 million from $231 million in 2021, and the corresponding PVP increased in 2022 to $257 million from $235 million in 2021. The increase was primarily due to a higher proportion of secondary market transactions. The Company’s direct par written represented 59% of the total U.S. municipal market insured issuance in 2022, compared with 60% in 2021, and the Company’s penetration of all municipal issuance was 4.7% in 2022, compared with 5.0% in 2021.

In 2022, non-U.S. public finance GWP and PVP included restructuring of several existing transactions that resulted in additional GWP and PVP, without an increase in gross par, and several large transactions involving secondary market guarantees for institutional investors and banks, and a U.K. water utility liquidity guarantee.

89

Structured finance GWP and PVP in 2022 were primarily attributable to large insurance securitization transactions and pooled corporate obligations. PVP also includes a guarantee of rental income cash flows, for which no GWP is reported under GAAP.

Business activity in the infrastructure 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 December 31, 2022 was $303 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 NAV of AssuredIM Funds and the Company’s share of earnings of its other investees. The U.S. Insurance Subsidiaries are authorized to invest up to $750 million in AssuredIM Funds. Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds. As of December 31, 2022, the U.S. Insurance Subsidiaries had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn.

Insurance Segment

Income from Investments

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Net investment income"],["Externally managed","$","186","","","$","202","","","$","231"],["Loss Mitigation Securities and other","66","","","58","","","69"],["Managed by AssuredIM (1)","22","","","16","","","8"],["Intercompany loans","10","","","10","","","10"],["Investment income","284","","","286","","","318"],["Investment expenses","(6)","","","(6)","","","(8)"],["Net investment income","$","278","","","$","280","","","$","310"],["Fair value gains (losses) on trading securities","$","(34)","","","$","\u2014","","","$","\u2014"],["Equity in earnings (losses) of investees"],["AssuredIM Funds","$","(10)","","","$","80","","","$","42"],["Other","(41)","","","64","","","19"],["Equity in earnings (losses) of investees","$","(51)","","","$","144","","","$","61"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Represents interest income on a portfolio of CLOs and municipal bonds managed by AssuredIM under an IMA.

Net investment income was consistent in 2022 compared with 2021. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 3.55% as of December 31, 2022 and 2.93% as of December 31, 2021. Externally managed portfolio’s pre-tax book yield was 3.09% as of December 31, 2022, compared with 2.92% as of December 31, 2021.

90

Equity in earnings of AssuredIM Funds in 2022 was a loss primarily attributable to the dilutive impact of a subsequent close of a healthcare fund. Equity in earnings of other investments was a loss in 2022 primarily due to mark-to-market losses in a private equity fund.

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 Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered). For the accounting policies for measurement and recognition under GAAP for each type of contract, see the notes listed below in Item 8, Financial Statements and Supplementary Data.

•Note 5 for contracts accounted for as insurance;

•Note 6 for contracts accounted for as credit derivatives;

•Note 8 for FG VIEs; and

•Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities.

In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and, the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.

Current risk-free rates are used to discount expected losses at the end of each reporting period and therefore changes in such rates from period to period affect the expected loss estimates reported. Changes in risk-free rates used to discount losses affect economic loss development, and loss and LAE; however, the effect of changes in discount rates are not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) were 4.08%, 1.02% and 0.60% as of December 31, 2022, 2021 and 2020, respectively.

The composition of economic loss development (benefit) by accounting model and by sector are presented in the tables that follow, and the drivers of economic loss development (benefit) are discussed below.

Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit)

by Accounting Model

[[GREPCENT_TABLE]]
[["","","Net Expected Loss to be Paid (Recovered)","","Net Economic Loss Development (Benefit)"],["","","As of December 31,","","Year Ended December 31,"],["Accounting Model","","2022","","2021","","2022","","2021","","2020"],["","","(in millions)"],["Insurance","","$","205","","","$","364","","","$","(112)","","","$","(281)","","","$","142"],["FG VIEs","","314","","(1)","42","","","(17)","","","(20)","","","1"],["Credit derivatives","","3","","","5","","","4","","","14","","","2"],["Total","","$","522","","","$","411","","","$","(125)","","","$","(287)","","","$","145"],["Net exposure rated BIG","","$","5,976","","","$","7,440"]]
[[/GREPCENT_TABLE]]

____________________

(1)    The increase in expected loss to be paid for FG VIEs primarily relates to Puerto Rico Trusts that were consolidated as a result of the 2022 Puerto Rico Resolutions. Prior to the 2022 Puerto Rico Resolutions, all Puerto Rico Exposures were accounted for as insurance. See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).

91

Net Expected Loss to be Paid (Recovered)

Roll Forward by Sector

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 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 December 31, 2022"],["","","(in millions)"],["Public finance:"],["U.S. public finance","","$","197","","","$","19","","","$","187","","","$","403"],["Non-U.S. public finance","","12","","","(2)","","","(1)","","","9"],["Public finance","","209","","","17","","","186","","","412"],["Structured finance:"],["U.S. RMBS","","150","","","(143)","","","59","","","66"],["Other structured finance","","52","","","1","","","(9)","","","44"],["Structured finance","","202","","","(142)","","","50","","","110"],["Total","","$","411","","","$","(125)","","","$","236","","","$","522"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["Sector","","Net Expected Loss to be Paid (Recovered) as of December 31, 2020","","Economic Loss Development (Benefit)","","Net (Paid) Recovered Losses (1)","","Net Expected Loss to be Paid (Recovered) as of December 31, 2021"],["","","(in millions)"],["Public finance:"],["U.S. public finance","","$","305","","","$","(182)","","","$","74","","","$","197"],["Non-U.S. public finance","","36","","","(22)","","","(2)","","","12"],["Public finance","","341","","","(204)","","","72","","","209"],["Structured finance:"],["U.S. RMBS","","148","","","(100)","","","102","","","150"],["Other structured finance","","40","","","17","","","(5)","","","52"],["Structured finance","","188","","","(83)","","","97","","","202"],["Total","","$","529","","","$","(287)","","","$","169","","","$","411"]]
[[/GREPCENT_TABLE]]

Effect of changes in the risk-free rates included in economic loss development (benefit) was a benefit of $115 million and $33 million in 2022 and 2021, respectively.

2022 Net Economic Loss Development

Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $3.8 billion as of December 31, 2022, compared with $5.4 billion as of December 31, 2021. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2022 was $403 million, compared with $197 million as of December 31, 2021. The economic loss development on U.S. exposures in 2022 was $19 million, which was primarily attributable to certain Puerto Rico and health care exposures, partially offset by the effect of changes in discount rates. In 2022, the Company had net recovered losses of $187 million in the U.S. public finance sector related primarily to the claims paid on $2.0 billion net par under the 2022 Puerto Rico Resolutions, net of recoveries, which were in the form of cash, New Recovery Bonds and CVIs. See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, for a discussion of Puerto Rico developments.

U.S. RMBS: The net benefit attributable to U.S. RMBS of $143 million was mainly related to a $58 million benefit related to changes in discount rates, a $49 million benefit related to improvement in transaction performance, a $30 million benefit related to higher recoveries on charged-off second lien loans, a $27 million benefit related to loss mitigation activity, a $26 million benefit related to updates in projected default curves, and a $17 million benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider. These items were all partially offset by loss of $79 million related to lower excess spread.

92

    2021 Net Economic Loss Development

Public Finance: Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $5.4 billion as of both December 31, 2021 and December 31, 2020. The Company projected that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2021 would be $197 million, compared with $305 million as of December 31, 2020. The economic benefit on U.S. exposures in 2021 was $182 million, which was primarily attributable to certain Puerto Rico exposures. In the fourth quarter of 2021, the Company sold a portion of its salvage and subrogation recoverables associated with certain matured Puerto Rico GO and PREPA exposures on which the Company had previously paid claims. This sale resulted in proceeds of $383 million, including $56 million that was settled in January 2022. The Company has continued to make such sales, and received an additional $133 million in proceeds in connection with additional such sales in 2022. Also in the fourth quarter of 2021, the Company increased its assumptions for the value of the remaining CVIs and New Recovery Bonds received under the GO/PBA Plan and HTA Plan. During 2021, the Company also incorporated refinements in certain terms of the Puerto Rico support agreements.

The economic benefit of $22 million for non-U.S. public finance exposures during 2021 was mainly due to the impact of higher Euro Interbank Offered Rate (Euribor), the restructuring of certain exposures and an improved performance outlook for certain road exposures.

U.S. RMBS: The net benefit attributable to U.S. RMBS of $100 million was mainly related to a $72 million benefit related to higher recoveries on charged-off second lien loans, a $28 million benefit related to improvement in transaction performance, a $23 million benefit related to assumed recovery on certain deferred principal balances in first lien loans, and a benefit of $18 million related to changes in discount rates, partially offset by loss of $41 million related to lower excess spread.

Other Structured Finance: The economic loss development attributable to structured finance, excluding U.S. RMBS, was $17 million, which was primarily attributable to LAE for certain transactions and deterioration of certain aircraft RVI exposures.

    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.

93

Insurance Segment

Loss Expense (Benefit)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["U.S. public finance","$","128","","","$","(146)","","","$","225"],["Non-U.S. public finance","\u2014","","","(9)","","","5"],["Structured finance:"],["U.S. RMBS","(120)","","","(84)","","","(36)"],["Other structured finance","4","","","18","","","10"],["Structured finance","(116)","","","(66)","","","(26)"],["Total Insurance segment loss expense (benefit)","$","12","","","$","(221)","","","$","204"]]
[[/GREPCENT_TABLE]]

The difference between public finance loss expense and economic development in 2022 was primarily attributable to the release of unearned premium reserve on policies that were extinguished under the 2022 Puerto Rico Resolutions. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were recognized for the remaining deferred premium revenue on the extinguished Puerto Rico exposures. For additional information on the expected timing of net expected losses to be expensed see Item 8, Financial Statements and Supplementary Data, Note 5, Contracts Accounted for as Insurance.

    Other Operating Expenses

The decrease in other operating expenses to $84 million in 2022 from $98 million in 2021 was primarily attributable to the write-off of a $16 million intangible asset attributable to Municipal Assurance Corp. (MAC) insurance licenses in 2021 that did not recur in 2022. MAC was merged with and into AGM on April 1, 2021. See Item 8, Financial Statements and Supplementary Data, Note 11, Goodwill and Other Intangible Assets, for additional information.

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.

[[GREPCENT_TABLE]]
[["","S&P","","KBRA","","Moody\u2019s","","A.M. Best Company, Inc."],["AGM","AA (stable) (7/8/22)","","AA+ (stable) (10/21/22)","","A1 (stable) (3/18/22)","","\u2014"],["AGC","AA (stable) (7/8/22)","","AA+ (stable) (10/21/22)","","(1)","","\u2014"],["AG Re","AA (stable) (7/8/22)","","\u2014","","\u2014","","\u2014"],["AGRO","AA (stable) (7/8/22)","","\u2014","","\u2014","","A+ (stable) (7/22/22)"],["AGUK","AA (stable) (7/8/22)","","AA+ (stable) (10/21/22)","","A1 (stable) (3/18/22)","","\u2014"],["AGE","AA (stable) (7/8/22)","","AA+ (stable) (10/21/22)","","\u2014","","\u2014"]]
[[/GREPCENT_TABLE]]

____________________

(1)    AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. On March 18, 2022, Moody’s upgraded the financial strength rating of AGC to A2 (stable) from A3 (stable).

    Ratings are subject to continuous rating agency review and revision or withdrawal at any time. In addition, the Company periodically assesses the value of each rating assigned to each of its companies, and as a result of such assessment may request that a rating agency add or drop a rating from certain of its companies. There can be no assurance that any of the rating agencies will not take negative action on the financial strength ratings (or similar ratings) of AGL’s insurance subsidiaries in the future or cease to rate one or more of AGL’s insurance subsidiaries, either voluntarily or at the request of that subsidiary.

For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “—Liquidity and Capital Resources — Insurance Subsidiaries” section below.

94

Asset Management Segment Results

Asset Management Segment Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Segment revenues"],["Management fees (1)","$","85","","","$","76","","","$","59"],["Performance fees","21","","","1","","","1"],["Foreign exchange gains (losses) on remeasurement and other income (loss)","6","","","6","","","6"],["Total segment revenues","112","","","83","","","66"],["Segment expenses"],["Employee compensation and benefit expenses","80","","","67","","","67"],["Interest expense","1","","","1","","","\u2014"],["Other operating expenses (1) (2)","38","","","40","","","61"],["Total segment expenses","119","","","108","","","128"],["Segment adjusted operating income (loss) before income taxes","(7)","","","(25)","","","(62)"],["Less: Provision (benefit) for income taxes","(1)","","","(6)","","","(12)"],["Segment adjusted operating income (loss)","$","(6)","","","$","(19)","","","$","(50)"]]
[[/GREPCENT_TABLE]]

_____________________

(1)    The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the consolidated statement of operations such reimbursable expenses are shown gross as revenues.

(2)    Includes amortization of intangible assets of $11 million in 2022, $12 million in 2021 and $13 million in 2020.

Management and Performance Fees

Management fees are generated by CLOs, opportunity funds, liquid strategies, and certain of the wind-down funds. CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO Equity that is held directly by AssuredIM Funds. Management fees from opportunity funds and liquid strategies include funds that were launched since the BlueMountain Acquisition in which the Insurance segment’s U.S. Insurance Subsidiaries invest as well as with two previously established opportunity funds in their harvest periods. The Company also generates fees from legacy hedge and opportunity funds now subject to an orderly wind-down.

Management Fees

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["CLOs","$","48","","","$","48","","","$","23"],["Opportunity funds and liquid strategies","35","","","20","","","11"],["Wind-down funds","2","","","8","","","25"],["Total management fees","$","85","","","$","76","","","$","59"]]
[[/GREPCENT_TABLE]]

Fees from opportunity funds increased primarily due to higher third party AUM in healthcare funds. Fees from the wind-down funds decreased as distributions to investors continued. As of December 31, 2022, AUM of the wind-down funds was $182 million compared with $582 million as of December 31, 2021.

Performance fees and increased compensation expenses in 2022 were attributable to the healthcare and asset-based funds.

Expenses

Expenses primarily consist of employee compensation and benefits, and also include other operating expenses such as rent, professional fees, placement fees, and depreciation. Amortization of finite-lived intangible assets mainly consist of AssuredIM’s CLO and investment management contracts and its CLO distribution network as discussed below.

95

Goodwill and Intangible Assets

As of December 31, 2022, the Company had $117 million in goodwill and $40 million in finite-lived intangible assets associated with the BlueMountain Acquisition. To date, there have been no impairments of goodwill or finite-lived intangible assets. Amortization expense associated with the finite-lived intangible assets was $11 million, $12 million and $13 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Assets Under Management

The Company uses AUM as a metric to measure progress in its Asset Management segment. Management fee revenue is based on a variety of factors and is not perfectly correlated with AUM. However, the Company believes that AUM is a useful metric for assessing the relative size and scope of the Company’s asset management business. The Company uses measures of its AUM in its decision-making process and uses a measure of change in AUM in its calculation of certain components of management compensation. Investors also use AUM to evaluate companies that participate in the asset management business. AUM refers to the assets managed, advised or serviced by the Asset Management segment and equals the sum of the following:

•the amount of aggregate collateral balance and principal cash of AssuredIM’s CLOs, including CLO Equity that may be held by AssuredIM Funds. This also includes CLO assets managed by BlueMountain Fuji Management, LLC (BM Fuji), which was sold to a third party in the second quarter of 2021. AssuredIM is not the investment manager of BM Fuji-advised CLOs, but following the sale, AssuredIM sub-advises and continues to provide personnel and other services to BM Fuji associated with the management of BM Fuji-advised CLOs pursuant to a sub-advisory agreement and a personnel and services agreement, consistent with past practices; and

•the net asset value of all funds and accounts other than CLOs, plus any unfunded commitments. Changes in NAV attributable to movements in fund value of certain private equity funds are reported on a quarter lag.

The Company’s calculation of AUM may differ from the calculation employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. The calculation also differs from the manner in which AssuredIM affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.

    The Company also uses several other measurements of AUM to understand and measure its AUM in more detail and for various purposes, including its relative position in the market and its income and income potential:

“Third-party AUM” refers to the assets AssuredIM manages or advises on behalf of third-party investors. This includes current and former employee investments in AssuredIM Funds. For CLOs, this also includes CLO Equity that may be held by AssuredIM Funds.

“Intercompany AUM” refers to the assets AssuredIM manages or advises on behalf of the Company. This includes investments from affiliates of Assured Guaranty along with general partners’ investments of AssuredIM (or its affiliates) into the AssuredIM Funds.

“Funded AUM” refers to assets that have been deployed or invested into the funds or CLOs.

“Unfunded AUM” refers to unfunded capital commitments from closed-end funds and CLO warehouse funds.

“Fee earning AUM” refers to assets where AssuredIM collects fees and has elected not to waive or rebate fees to investors.

“Non-fee earning AUM” refers to assets where AssuredIM does not collect fees or has elected to waive or rebate fees to investors. AssuredIM reserves the right to waive some or all fees for certain investors, including investors affiliated with AssuredIM and/or the Company. Further, to the extent that the Company’s wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance fees earned from the CLOs to the extent such fees are attributable to the wind-down and opportunity funds’ holdings of CLOs also managed by AssuredIM.

96

Roll Forward of Assets Under Management

Year Ended December 31, 2022

[[GREPCENT_TABLE]]
[["","CLOs (1)","","Opportunity Funds (2)","","Liquid Strategies (3)","","Wind-Down Funds","","Total"],["","(in millions)"],["AUM, December 31, 2021","$","14,699","","","$","1,824","","","$","389","","","$","582","","","$","17,494"],["Inflows - third party","1,049","","","315","","","21","","","\u2014","","","1,385"],["Inflows - intercompany","165","","","\u2014","","","105","","","\u2014","","","270"],["Outflows:"],["Redemptions","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Distributions","(525)","","","(290)","","","(252)","","","(399)","","","(1,466)"],["Total outflows","(525)","","","(290)","","","(252)","","","(399)","","","(1,466)"],["Net flows","689","","","25","","","(126)","","","(399)","","","189"],["Change in value","(238)","","","35","","","(15)","","","(1)","","","(219)"],["AUM, December 31, 2022","$","15,150","","","$","1,884","","","$","248","","","$","182","","","$","17,464"]]
[[/GREPCENT_TABLE]]

_____________________

(1)    CLOs inflows and outflows include $105 million in 2022 related to the transfer of assets between two CLO funds.

(2)    Opportunity funds inflows in 2022 are primarily related to the healthcare strategy fund. Distributions from opportunity funds include $115 million related to the AssuredIM Funds created prior to the BlueMountain Acquisition. As of December 31, 2022, AUM related to these funds was $68 million.

(3)    Liquid strategies’ inflows and outflows in 2022 relate to the transfer of assets between funds.

Year Ended December 31, 2021

[[GREPCENT_TABLE]]
[["","CLOs","","Opportunity Funds","","Liquid Strategies","","Wind-Down Funds","","Total"],["","(in millions)"],["AUM, December 31, 2020","$","13,856","","","$","1,486","","","$","383","","","$","1,623","","","$","17,348"],["Inflows - third party","2,608","","","363","","","\u2014","","","\u2014","","","2,971"],["Inflows - intercompany","227","","","16","","","\u2014","","","\u2014","","","243"],["Outflows:"],["Redemptions","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Distributions","(1,843)","","","(509)","","","\u2014","","","(1,017)","","","(3,369)"],["Total outflows","(1,843)","","","(509)","","","\u2014","","","(1,017)","","","(3,369)"],["Net flows","992","","","(130)","","","\u2014","","","(1,017)","","","(155)"],["Change in value","(149)","","","468","","","6","","","(24)","","","301"],["AUM, December 31, 2021","$","14,699","","","$","1,824","","","$","389","","","$","582","","","$","17,494"]]
[[/GREPCENT_TABLE]]

97

Components of Assets Under Management

[[GREPCENT_TABLE]]
[["","CLOs (1)","","Opportunity Funds","","Liquid Strategies","","Wind-Down Funds","","Total"],["","(in millions)"],["As of December 31, 2022:"],["Funded AUM","$","15,047","","","$","1,217","","","$","248","","","$","160","","","$","16,672"],["Unfunded AUM","103","","","667","","","\u2014","","","22","","","792"],["Fee earning AUM","$","14,820","","","$","1,640","","","$","248","","","$","87","","","$","16,795"],["Non-fee earning AUM","330","","","244","","","\u2014","","","95","","","669"],["Intercompany AUM:"],["Funded AUM","$","582","","","$","192","","","$","248","","","$","\u2014","","","$","1,022"],["Unfunded AUM","103","","","115","","","\u2014","","","\u2014","","","218"],["As of December 31, 2021:"],["Funded AUM","$","14,575","","","$","1,297","","","$","389","","","$","560","","","$","16,821"],["Unfunded AUM","124","","","527","","","\u2014","","","22","","","673"],["Fee earning AUM","$","14,252","","","$","1,527","","","$","389","","","$","408","","","$","16,576"],["Non-fee earning AUM","447","","","297","","","\u2014","","","174","","","918"],["Intercompany AUM:"],["Funded AUM","$","541","","","$","217","","","$","368","","","$","\u2014","","","$","1,126"],["Unfunded AUM","123","","","121","","","\u2014","","","\u2014","","","244"]]
[[/GREPCENT_TABLE]]

_____________________

(1)    CLO AUM includes CLO Equity that is held by various AssuredIM Funds. This CLO Equity corresponds to the majority of the non-fee earning CLO AUM, as AssuredIM typically rebates the CLO fees back to AssuredIM Funds.

Corporate Division Results

Corporate Division Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Revenues","$","4","","","$","2","","","$","9"],["Expenses"],["Interest expense","89","","","96","","","95"],["Loss on extinguishment of debt","\u2014","","","175","","","\u2014"],["Employee compensation and benefit expenses","30","","","21","","","18"],["Other operating expenses","24","","","20","","","19"],["Total expenses","143","","","312","","","132"],["Equity in earnings (losses) of investees","\u2014","","","\u2014","","","(6)"],["Adjusted operating income (loss) before income taxes","(139)","","","(310)","","","(129)"],["Less: Provision (benefit) for income taxes","(5)","","","(47)","","","(18)"],["Adjusted operating income (loss)","$","(134)","","","$","(263)","","","$","(111)"]]
[[/GREPCENT_TABLE]]

The Corporate division loss in 2021 was primarily due to the loss on extinguishment of debt of $175 million on a pre-tax basis ($138 million after-tax) associated with the redemption of AGMH and AGUS debt, which represented the difference between the amount paid to redeem the debt and the carrying value of the debt. The loss on extinguishment of debt primarily consisted of a $156 million acceleration of unamortized fair value adjustments that were originally recorded upon the

98

acquisition of AGMH in 2009, and a $19 million make-whole payment associated with the redemption of $170 million of AGUS 5% Senior Notes. See Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.

Corporate division interest expense primarily relates to debt issued by the U.S. Holding Companies, and also includes intersegment interest expense of $10 million in both 2022 and 2021, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies, Intercompany Loans Payable”, for additional information.

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. Other expenses include Board of Director expenses, legal fees and other direct or allocated expenses.

Other (Effect of FG VIEs and CIVs)

    The effect of consolidating FG VIEs and CIVs, intersegment eliminations, and reclassifications of reimbursable fund expenses to revenue are presented in “Other”. See Item 8, Financial Statements and Supplementary Data, Note 2, Segment Information.

The types of entities the Company consolidates when it is deemed to be the primary beneficiary primarily include: (i) entities whose debt obligations the insurance subsidiaries insure; (ii) custodial trusts established in connection with the consummation of the 2022 Puerto Rico Resolutions; and (iii) investment vehicles such as collateralized financing entities, CLO warehouses and AssuredIM Funds. The Company eliminates the effects of intercompany transactions between its FG VIEs and CIVs, and its insurance and asset management subsidiaries, as well as intercompany transactions between CIVs.

    Consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), has a significant gross-up effect on the consolidated financial statements, and includes: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the consolidated financial statements; (ii) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs.

Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows, and includes: (i) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs; (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees and (iv) establishing noncontrolling interest for amounts not owned by the Company. The economic effect of the U.S. Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“assets of CIVs,” “liabilities of CIVs,” and redeemable and non-redeemable noncontrolling interest) on a consolidated basis.

The table below reflects the effect of consolidating FG VIEs and CIVs on the 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.

99

Effect of Consolidating FG VIEs and CIVs on the Consolidated Statements of Operations

Increase (Decrease)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["Effect on Financial Statement Line Item","","(in millions)"],["Fair value gains (losses) on FG VIEs (1)","","$","22","","","$","23","","","$","(10)"],["Fair value gains (losses) on CIVs","","17","","","127","","","41"],["Equity in earnings (losses) of investees (2)","","12","","","(50)","","","(28)"],["Other (3)","","(44)","","","(34)","","","(12)"],["Effect on income before tax","","7","","","66","","","(9)"],["Less: Tax provision (benefit)","","\u2014","","","6","","","(3)"],["Effect on net income (loss)","","7","","","60","","","(6)"],["Less: Effect on noncontrolling interests (4)","","13","","","30","","","6"],["Effect on net income (loss) attributable to AGL","","$","(6)","","","$","30","","","$","(12)"],["By Type of VIE"],["FG VIEs","","$","4","","","$","(1)","","","$","(14)"],["CIVs","","(10)","","","31","","","2"],["Effect on net income (loss) attributable to AGL","","$","(6)","","","$","30","","","$","(12)"]]
[[/GREPCENT_TABLE]]

____________________

(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.

The net effect of consolidating CIVs in 2021 included a $31 million gain on consolidation as described in Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

100

Reconciliation to GAAP

Reconciliation of Net Income (Loss) Attributable to AGL

to Adjusted Operating Income (Loss)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Net income (loss) attributable to AGL","$","124","","","$","389","","","$","362"],["Less pre-tax adjustments:"],["Realized gains (losses) on investments","(56)","","","15","","","18"],["Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives","(18)","","","(64)","","","65"],["Fair value gains (losses) on CCS","24","","","(28)","","","(1)"],["Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves","(110)","","","(21)","","","42"],["Total pre-tax adjustments","(160)","","","(98)","","","124"],["Less tax effect on pre-tax adjustments","17","","","17","","","(18)"],["Adjusted operating income (loss)","$","267","","","$","470","","","$","256"],["Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $-, $6 and $(3)) included in adjusted operating income","$","(6)","","","$","30","","","$","(12)"]]
[[/GREPCENT_TABLE]]

Net Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses).

Net Realized Investment Gains (Losses) 

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Gross realized gains on sales of available-for-sale securities","$","3","","","$","20","","","$","27"],["Gross realized losses on sales of available-for-sale securities","(45)","","","(5)","","","(5)"],["Net foreign currency gains (losses)","(4)","","","2","","","6"],["Change in allowance for credit losses and intent to sell","(21)","","","(7)","","","(17)"],["Other net realized gains (losses)","11","","","5","","","7"],["Net realized investment gains (losses)","$","(56)","","","$","15","","","$","18"]]
[[/GREPCENT_TABLE]]

Gross realized losses on sales of available-for-sale securities in 2022 were primarily attributable to sales of Puerto Rico New Recovery Bonds. Other net realized gains in 2022 relate primarily to the sale of one of the Company’s alternative investments. The change in the allowance for credit losses in 2022 was primarily due to Loss Mitigation Securities.

    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.

101

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.

The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs, and are classified as Level 3 in the fair value hierarchy. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market since 2009 and, as of December 31, 2022, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread and estimated contractual payments. See Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement, for additional information.

    During 2022, non-credit impairment-related unrealized fair value losses were generated primarily as a result of wider asset spreads, partially offset by 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. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, increased, the implied spreads that the Company (or another comparable entity) would expect to receive on these transactions decreased.

    During 2021, non-credit impairment-related unrealized fair value losses were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC’s credit protection decreased during the period. Some of the unrealized fair value losses were partially offset by price improvement in certain underlying collateral and the termination of certain CDS transactions.

Fair Value Gains (Losses) on CCS

    Fair value gains on CCS in 2022 were primarily driven by an increase in LIBOR during the year. Fair value losses on CCS in 2021 were primarily driven by tightened market spreads during the year. Fair value gains (losses) of CCS are heavily affected by, and in part fluctuate with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

Foreign Exchange Gain (Loss) on Remeasurement

    Foreign exchange gains and losses in all periods primarily relate to remeasurement of long-dated premiums receivable, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and, to a lesser extent, the euro relative to the U.S. dollar. Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves were $(110) million and $(21) million in 2022 and 2021, respectively. Approximately 74% and 78% of gross premiums receivable, net of commissions payable at December 31, 2022 and December 31, 2021, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Premiums on European infrastructure and structured finance transactions typically are paid, in whole or in part , on an installment basis, whereas premiums on U.S. public finance transactions are often paid upfront.

The following table presents the foreign exchange rates as of balance sheet dates.

Foreign Exchange Rates

U.S. Dollar Per Foreign Currency

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2022","","2021","","2020"],["Pound sterling","$1.208","","$1.353","","$1.367"],["Euro","$1.071","","$1.137","","$1.222"]]
[[/GREPCENT_TABLE]]

102

Non-GAAP Financial Measures

The Company discloses both: (a) financial measures determined in accordance with GAAP; and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company. 

    The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.

GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include:

•FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and

•CIVs in which certain subsidiaries invest and which are managed by AssuredIM.

The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment.

Management of the Company and AGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; (4) PVP, and (5) gross third-party assets raised.

    Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy.

Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.

The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.

Adjusted Operating Income

Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

1)    Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.

103

2)    Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads and other market factors and are not expected to result in an economic gain or loss.

3)    Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss. 

4)    Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.

5)    Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

See “— Results of Operations — Reconciliation to GAAP”, for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).

Adjusted Operating Shareholders’ Equity and Adjusted Book Value

     Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.

    Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:

1)    Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. 

2)    Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss.

3)    Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore would not recognize an economic gain or loss.

 4)     Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

Management uses adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following:

1)    Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.

104

 2)    Addition of the net present value of estimated net future revenue. See below.

3)    Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.

4)     Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

    The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.

Reconciliation of Shareholders’ Equity Attributable to AGL

to Adjusted Operating Shareholders’ Equity and Adjusted Book Value 

[[GREPCENT_TABLE]]
[["","As of December 31, 2022","","As of December 31, 2021"],["","After-Tax","","Per Share","","After-Tax","","Per Share"],["","(dollars in millions, except share amounts)"],["Shareholders\u2019 equity attributable to AGL","$","5,064","","","$","85.80","","","$","6,292","","","$","93.19"],["Less pre-tax adjustments:"],["Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives","(71)","","","(1.21)","","","(54)","","","(0.80)"],["Fair value gains (losses) on CCS","47","","","0.80","","","23","","","0.34"],["Unrealized gain (loss) on investment portfolio","(523)","","","(8.86)","","","404","","","5.99"],["Less taxes","68","","","1.15","","","(72)","","","(1.07)"],["Adjusted operating shareholders\u2019 equity","5,543","","","93.92","","","5,991","","","88.73"],["Pre-tax adjustments:"],["Less: Deferred acquisition costs","147","","","2.48","","","131","","","1.95"],["Plus: Net present value of estimated net future revenue","157","","","2.66","","","160","","","2.37"],["Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed","3,428","","","58.10","","","3,402","","","50.40"],["Plus taxes","(602)","","","(10.22)","","","(599)","","","(8.88)"],["Adjusted book value","$","8,379","","","$","141.98","","","$","8,823","","","$","130.67"],["Gain (loss) related to FG VIE and CIV consolidation included in:"],["Adjusted operating shareholders\u2019 equity (net of tax provision of $4 and $5)","$","17","","","$","0.28","","","$","32","","","$","0.47"],["Adjusted book value (net of tax provision of $3 and $3)","11","","","0.19","","","23","","","0.34"]]
[[/GREPCENT_TABLE]]

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.

105

PVP or Present Value of New Business Production     

    Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production in the Insurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premiums and fees on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), regardless of form, which management believes GAAP gross written premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums.

Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction.

Actual installment premiums may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation.

Reconciliation of GWP to PVP

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","Public Finance","","Structured Finance"],["","U.S.","","Non - U.S.","","U.S.","","Non - U.S.","","Total"],["","(in millions)"],["GWP","$","248","","","$","75","","","$","37","","","$","\u2014","","","$","360"],["Less: Installment GWP and other GAAP adjustments (1)","40","","","75","","","30","","","\u2014","","","145"],["Upfront GWP","208","","","\u2014","","","7","","","\u2014","","","215"],["Plus: Installment premiums and other (2)","49","","","68","","","36","","","7","","","160"],["PVP","$","257","","","$","68","","","$","43","","","$","7","","","$","375"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["","Public Finance","","Structured Finance"],["","U.S.","","Non - U.S.","","U.S.","","Non - U.S.","","Total"],["","(in millions)"],["GWP","$","231","","","$","89","","","$","51","","","$","6","","","$","377"],["Less: Installment GWP and other GAAP adjustments (1)","43","","","65","","","44","","","6","","","158"],["Upfront GWP","188","","","24","","","7","","","\u2014","","","219"],["Plus: Installment premiums and other (2)","47","","","55","","","35","","","5","","","142"],["PVP","$","235","","","$","79","","","$","42","","","$","5","","","$","361"]]
[[/GREPCENT_TABLE]]

106

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2020"],["","Public Finance","","Structured Finance"],["","U.S.","","Non - U.S.","","U.S.","","Non - U.S.","","Total"],["","(in millions)"],["GWP","$","294","","","$","142","","","$","18","","","$","\u2014","","","$","454"],["Less: Installment GWP and other GAAP adjustments (1)","33","","","141","","","17","","","\u2014","","","191"],["Upfront GWP","261","","","1","","","1","","","\u2014","","","263"],["Plus: Installment premiums and other (2)","31","","","81","","","13","","","2","","","127"],["PVP","$","292","","","$","82","","","$","14","","","$","2","","","$","390"]]
[[/GREPCENT_TABLE]]

_____________

(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. The year 2022 also includes the present value of future premiums and fees associated with a financial guarantee written by the Company that, under GAAP, is accounted for under 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 8, Financial Statements and Supplementary Data, 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.

107

Financial Guaranty Portfolio

Net Par Outstanding and Average Internal Rating by Sector

[[GREPCENT_TABLE]]
[["","","As of December 31, 2022","","As of December 31, 2021"],["Sector","","Net Par Outstanding","","Average Rating","","Net Par Outstanding","","Average Rating"],["","","(dollars in millions)"],["Public finance:"],["U.S. public finance:"],["General obligation","","$","71,868","","","A-","","$","72,896","","","A-"],["Tax backed","","33,752","","","A-","","35,726","","","A-"],["Municipal utilities","","26,436","","","A-","","25,556","","","A-"],["Transportation","","19,688","","","A-","","17,241","","","BBB+"],["Healthcare","","11,304","","","BBB+","","9,588","","","BBB+"],["Higher education","","7,137","","","A-","","6,927","","","A-"],["Infrastructure finance","","6,955","","","A-","","6,329","","","A-"],["Housing revenue","","959","","","BBB-","","1,000","","","BBB-"],["Investor-owned utilities","","332","","","A-","","611","","","A-"],["Renewable energy","","180","","","A-","","193","","","A-"],["Other public finance","","1,025","","","BBB","","1,152","","","A-"],["Total U.S. public finance","","179,636","","","A-","","177,219","","","A-"],["Non-U.S public finance:"],["Regulated utilities","","17,855","","","BBB+","","18,814","","","BBB+"],["Infrastructure finance","","13,915","","","BBB","","16,475","","","BBB"],["Sovereign and sub-sovereign","","9,526","","","A+","","10,886","","","A+"],["Renewable energy","","2,086","","","A-","","2,398","","","A-"],["Pooled infrastructure","","1,081","","","AAA","","1,372","","","AAA"],["Total non-U.S. public finance","","44,463","","","BBB+","","49,945","","","BBB+"],["Total public finance","","224,099","","","A-","","227,164","","","A-"],["Structured finance:"],["U.S. structured finance:"],["Life insurance transactions","","3,879","","","AA-","","3,431","","","AA-"],["RMBS","","1,956","","","BBB-","","2,391","","","BB+"],["Pooled corporate obligations","","625","","","AAA","","534","","","AA+"],["Financial products","","453","","","AA-","","770","","","AA-"],["Consumer receivables","","437","","","A","","583","","","A+"],["Other structured finance","","878","","","BBB+","","665","","","BBB+"],["Total U.S. structured finance","","8,228","","","A","","8,374","","","A"],["Non-U.S. structured finance:"],["Pooled corporate obligations","","344","","","AAA","","351","","","AAA"],["RMBS","","263","","","A-","","325","","","A"],["Other structured finance","","324","","","AA-","","178","","","AA"],["Total non-U.S structured finance","","931","","","AA","","854","","","AA"],["Total structured finance","","9,159","","","A","","9,228","","","A"],["Total net par outstanding","","$","233,258","","","A-","","$","236,392","","","A-"]]
[[/GREPCENT_TABLE]]

    Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary financial guarantor. The second-to-pay insured par outstanding as of December 31, 2022 and 2021 was $4.3 billion and $4.9 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and

108

underlying insured transaction were not investment grade was $19 million and $43 million as of December 31, 2022 and December 31, 2021, respectively.

The tables below show the Company’s ten largest U.S. public finance, U.S. structured finance and non-U.S. exposures by revenue source, excluding related authorities and public corporations, as of December 31, 2022.

Ten Largest U.S. Public Finance Exposures by Revenue Source

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","Net Par Outstanding","","Percent of Total U.S. Public Finance Net Par Outstanding","","Rating"],["","(dollars in millions)"],["New Jersey (State of)","$","3,130","","","1.7","%","","BBB"],["Pennsylvania (Commonwealth of)","2,271","","","1.3","","","BBB+"],["Metro Washington Airports Authority (Dulles Toll Road)","1,630","","","0.9","","","BBB+"],["New York Metropolitan Transportation Authority","1,568","","","0.9","","","A-"],["Illinois (State of)","1,312","","","0.7","","","BBB-"],["Foothill/Eastern Transportation Corridor Agency, California","1,309","","","0.7","","","BBB+"],["Alameda Corridor Transportation Authority, California","1,261","","","0.7","","","BBB+"],["North Texas Tollway Authority","1,239","","","0.7","","","A+"],["Port Authority of New York and New Jersey","1,034","","","0.6","","","BBB"],["CommonSpirit Health, Illinois","1,000","","","0.6","","","A-"],["Total of top ten U.S. public finance exposures","$","15,754","","","8.8","%"]]
[[/GREPCENT_TABLE]]

Ten Largest U.S. Structured Finance Exposures

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","Net Par Outstanding","","Percent of Total U.S. Structured Finance Net Par Outstanding","","Rating"],["","(dollars in millions)"],["Private US Insurance Securitization","$","1,100","","","13.4","%","","AA"],["Private US Insurance Securitization","910","","","11.1","","","AA-"],["Private US Insurance Securitization","500","","","6.1","","","A"],["Private US Insurance Securitization","400","","","4.8","","","AA-"],["Private US Insurance Securitization","395","","","4.8","","","AA-"],["Private US Insurance Securitization","386","","","4.6","","","AA-"],["SLM Student Loan Trust 2007-A","215","","","2.6","","","AA"],["Private US Insurance Securitization","129","","","1.6","","","AA"],["Private Middle Market CLO","129","","","1.6","","","AAA"],["Option One 2007-FXD2","118","","","1.4","","","CCC"],["Total of top ten U.S. structured finance exposures","$","4,282","","","52.0","%"]]
[[/GREPCENT_TABLE]]

109

Ten Largest Non-U.S. Exposures

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","Country","","Net Par Outstanding","","Percent of Total Non-U.S. Net Par Outstanding","","Rating"],["","","","(dollars in millions)"],["Southern Water Services Limited","United Kingdom","","$","2,199","","","4.8","%","","BBB"],["Thames Water Utilities Finance Plc","United Kingdom","","1,811","","","4.0","","","BBB"],["Southern Gas Networks PLC","United Kingdom","","1,806","","","4.0","","","BBB"],["Dwr Cymru Financing Limited","United Kingdom","","1,635","","","3.6","","","A-"],["Quebec Province","Canada","","1,498","","","3.3","","","AA-"],["National Grid Gas PLC","United Kingdom","","1,390","","","3.1","","","BBB+"],["Anglian Water Services Financing PLC","United Kingdom","","1,215","","","2.7","","","A-"],["Channel Link Enterprises Finance PLC","France, United Kingdom","","1,159","","","2.5","","","BBB"],["Yorkshire Water Services Finance Plc","United Kingdom","","1,072","","","2.4","","","BBB"],["British Broadcasting Corporation (BBC)","United Kingdom","","1,047","","","2.3","","","A+"],["Total of top ten non-U.S. exposures","","","$","14,832","","","32.7","%"]]
[[/GREPCENT_TABLE]]

Financial Guaranty Portfolio by Issue Size

The Company seeks broad coverage of the market by insuring and reinsuring small and large issues alike. The following tables set forth the distribution of the Company’s portfolio by original size of the Company’s exposure.

Public Finance Portfolio by Issue Size

As of December 31, 2022

[[GREPCENT_TABLE]]
[["Original Par Amount Per Issue","","Number ofIssues","","Net ParOutstanding","","% of PublicFinanceNet ParOutstanding"],["","(dollars in millions)"],["Less than $10 million","10,135","","$","29,669","","","13.2","%"],["$10 through $50 million","3,535","","61,120","","","27.3"],["$50 through $100 million","620","","36,154","","","16.1"],["$100 million to $200 million","327","","37,816","","","16.9"],["$200 million or greater","205","","59,340","","","26.5"],["Total","14,822","","$","224,099","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Structured Finance Portfolio by Issue Size

As of December 31, 2022

[[GREPCENT_TABLE]]
[["Original Par Amount Per Issue","","Number ofIssues","","Net ParOutstanding","","% of StructuredFinanceNet ParOutstanding"],["","(dollars in millions)"],["Less than $10 million","110","","$","102","","","1.1","%"],["$10 through $50 million","148","","1,071","","","11.7"],["$50 through $100 million","42","","896","","","9.8"],["$100 million to $200 million","49","","1,413","","","15.4"],["$200 million or greater","83","","5,677","","","62.0"],["Total","432","","$","9,159","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Exposure to Puerto Rico

    The Company had insured exposure to obligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) as well as its general obligation bonds aggregating $1.4

110

billion net par outstanding as of December 31, 2022, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA) and the University of Puerto Rico (U of PR).

    The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in “—Liquidity and Capital Resources—Insurance Subsidiaries, Financial Guaranty Policies” below and Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.

Exposure to Puerto Rico by Company

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","","Net Par Outstanding"],["","","AGM","","AGC","","AG Re","","Eliminations (1)","","Total Net Par Outstanding","","Gross Par Outstanding"],["","","(in millions)"],["Resolved Puerto Rico Exposures"],["PRHTA (Transportation revenue) (2)","","$","49","","","$","183","","","$","108","","","$","(42)","","","$","298","","","$","298"],["PRHTA (Highway revenue) (2)","","140","","","30","","","12","","","\u2014","","","182","","","182"],["Commonwealth of Puerto Rico - GO (3)","","\u2014","","","19","","","6","","","\u2014","","","25","","","25"],["PBA (3)","","1","","","4","","","\u2014","","","(1)","","","4","","","4"],["Total Resolved","","190","","","236","","","126","","","(43)","","","509","","","509"],["Other Puerto Rico Exposures"],["PREPA (4)","","446","","","69","","","205","","","\u2014","","","720","","","730"],["MFA (5)","","101","","","6","","","24","","","\u2014","","","131","","","138"],["PRASA and U of PR (5)","","\u2014","","","1","","","\u2014","","","\u2014","","","1","","","1"],["Total Other","","547","","","76","","","229","","","\u2014","","","852","","","869"],["Total exposure to Puerto Rico","","$","737","","","$","312","","","$","355","","","$","(43)","","","$","1,361","","","$","1,378"]]
[[/GREPCENT_TABLE]]

____________________

(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 on December 6, 2022, pursuant to the Modified Fifth Amended Title III Plan of Adjustment of the Puerto Rico Highways and Transportation Authority.

(3)    Resolved on March 15, 2022, pursuant to the Modified Eighth Amended Title III Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority.

(4)    This exposure is in payment default.

(5)    All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.

    The following tables show the scheduled amortization of the general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of debt service when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event 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.

111

Amortization Schedule of Net Par of Puerto Rico

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","Scheduled Net Par Amortization"],["","2023 Q1","2023 Q2","2023 Q3","2023 Q4","2024","2025","2026","2027","2028 -2032","2033 -2037","2038 -2042","Total"],["","(in millions)"],["Resolved Puerto Rico Exposures"],["PRHTA (Transportation revenue)","$","\u2014","","$","\u2014","","$","10","","$","\u2014","","$","\u2014","","$","8","","$","8","","$","\u2014","","$","12","","$","127","","$","133","","$","298"],["PRHTA (Highway revenue)","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","81","","101","","\u2014","","182"],["Commonwealth of Puerto Rico - GO","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","2","","4","","19","","\u2014","","\u2014","","25"],["PBA","\u2014","","\u2014","","2","","\u2014","","\u2014","","2","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","4"],["Total Resolved","\u2014","","\u2014","","12","","\u2014","","\u2014","","10","","10","","4","","112","","228","","133","","509"],["Other Puerto Rico Exposures"],["PREPA","\u2014","","\u2014","","95","","\u2014","","93","","68","","105","","105","","241","","13","","\u2014","","720"],["MFA","\u2014","","\u2014","","18","","\u2014","","18","","18","","37","","15","","25","","\u2014","","\u2014","","131"],["PRASA and U of PR","\u2014","","\u2014","","\u2014","","\u2014","","1","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","1"],["Total Other","\u2014","","\u2014","","113","","\u2014","","112","","86","","142","","120","","266","","13","","\u2014","","852"],["Total","$","\u2014","","$","\u2014","","$","125","","$","\u2014","","$","112","","$","96","","$","152","","$","124","","$","378","","$","241","","$","133","","$","1,361"]]
[[/GREPCENT_TABLE]]

Amortization Schedule of Net Debt Service of Puerto Rico

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","Scheduled Net Debt Service Amortization"],["","2023 Q1","2023 Q2","2023 Q3","2023 Q4","2024","2025","2026","2027","2028 -2032","2033 -2037","2038 -2042","Total"],["","(in millions)"],["Resolved Puerto Rico Exposures"],["PRHTA (Transportation revenue)","$","8","","$","\u2014","","$","18","","$","\u2014","","$","15","","$","23","","$","22","","$","14","","$","82","","$","182","","$","151","","$","515"],["PRHTA (Highway revenue)","5","","\u2014","","5","","\u2014","","9","","9","","10","","10","","124","","116","","\u2014","","288"],["Commonwealth of Puerto Rico - GO","\u2014","","\u2014","","1","","\u2014","","2","","1","","3","","6","","21","","\u2014","","\u2014","","34"],["PBA","\u2014","","\u2014","","2","","\u2014","","\u2014","","3","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","5"],["Total Resolved","13","","\u2014","","26","","\u2014","","26","","36","","35","","30","","227","","298","","151","","842"],["Other Puerto Rico Exposures"],["PREPA","14","","3","","109","","3","","122","","92","","126","","122","","274","","14","","\u2014","","879"],["MFA","3","","\u2014","","21","","\u2014","","24","","22","","41","","17","","28","","\u2014","","\u2014","","156"],["PRASA and U of PR","\u2014","","\u2014","","\u2014","","\u2014","","1","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","1"],["Total Other","17","","3","","130","","3","","147","","114","","167","","139","","302","","14","","\u2014","","1,036"],["Total","$","30","","$","3","","$","156","","$","3","","$","173","","$","150","","$","202","","$","169","","$","529","","$","312","","$","151","","$","1,878"]]
[[/GREPCENT_TABLE]]

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 8, Financial Statements and Supplementary Data, 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 17.1% of total BIG net par outstanding as of December 31, 2022.

112

Distribution of U.S. RMBS by Year Insured and Type of Exposure as of December 31, 2022 

[[GREPCENT_TABLE]]
[["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","","$","10","","","$","8","","","$","\u2014","","","$","342","","","$","14","","","$","374"],["2005","","22","","","122","","","15","","","184","","","53","","","396"],["2006","","25","","","25","","","1","","","44","","","109","","","204"],["2007","","\u2014","","","196","","","16","","","590","","","149","","","951"],["2008","","\u2014","","","\u2014","","","\u2014","","","31","","","\u2014","","","31"],["Total exposures","","$","57","","","$","351","","","$","32","","","$","1,191","","","$","325","","","$","1,956"],["Exposures rated BIG","","$","38","","","$","208","","","$","16","","","$","633","","","$","115","","","$","1,010"]]
[[/GREPCENT_TABLE]]

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.

Long-Term Debt Obligations

    The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, and Guarantor and U.S. Holding Companies’ Summarized Financial Information, below.

113

U.S. Holding Companies

Long-Term Debt and Intercompany Loans

[[GREPCENT_TABLE]]
[["","","","","","As of December 31,"],["","","","","","2022","","2021"],["","","","","","(in millions)"],["","Effective Interest Rate","","Final Maturity","","Principal Amount"],["AGUS - long-term debt"],["7% Senior Notes","6.40%","","2034","","$","200","","","$","200"],["5% Senior Notes","5.00%","","2024","","330","","","330"],["3.15% Senior Notes","3.15%","","2031","","500","","","500"],["3.6% Senior Notes","3.60%","","2051","","400","","","400"],["Series A Enhanced Junior Subordinated Debentures","3 month LIBOR +2.38%","","2066","","150","","","150"],["AGUS long-term debt","","","","","1,580","","","1,580"],["AGUS - intercompany loans from:"],["AGC and AGM","3.50%","","2030","","250","","","250"],["AGRO","6 month LIBOR +3.00%","","2023","","20","","","20"],["AGUS intercompany loans","","","","","270","","","270"],["Total AGUS long-term debt and intercompany loans","","","","","1,850","","","1,850"],["AGMH"],["Junior Subordinated Debentures","6.40%","","2066","","300","","","300"],["Total AGMH long-term debt","","","","","300","","","300"],["AGMH\u2019s long-term debt purchased by AGUS (2)","","","","","(154)","","","(154)"],["U.S. Holding Company long-term debt","","","","","$","1,996","","","$","1,996"]]
[[/GREPCENT_TABLE]]

 ____________________

(1)    Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.

Interest Paid on U.S. Holding Companies’ Long-Term Debt and Intercompany Loans

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["AGUS - long-term debt","$","68","","","$","50","","","$","44"],["AGUS - intercompany loans","10","","","10","","","10"],["Total AGUS","78","","","60","","","54"],["AGMH - long-term debt","19","","","40","","","46"],["AGMH\u2019s long-term debt purchased by AGUS","(10)","","","(10)","","","(9)"],["Total interest paid","$","87","","","$","90","","","$","91"]]
[[/GREPCENT_TABLE]]

On May 26, 2021, AGUS issued $500 million in 3.15% Senior Notes. On July 9, 2021, a portion of the proceeds of the debt issuance was used to redeem $200 million in AGMH debt. On August 20, 2021, AGUS issued $400 million in 3.6% Senior Notes, and on September 27, 2021, the proceeds of the debt issuance were used to redeem $230 million in AGMH debt and $170 million in AGUS debt. See Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.

The Series A Enhanced Junior Subordinated Debentures pay interest based on LIBOR. If the AGMH Junior Subordinated Debentures are outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at one-month LIBOR plus 2.215%. The Company believes that after June 2023 the reference to LIBOR will be replaced, by operation of law in accordance with federal legislation enacted in March 2022 (AIRLA), with a rate based on SOFR. See “— Executive Summary — Other Matters — LIBOR Sunset” above.

114

U.S. Holding Companies

Expected Debt Service of Long-Term Debt

As of December 31, 2022

[[GREPCENT_TABLE]]
[["Year","","AGUS","","AGMH","","Eliminations (1)","","Total"],["","","(in millions)"],["2023","","$","102","","","$","19","","","$","(40)","","","$","81"],["2024","","401","","","19","","","(19)","","","401"],["2025","","111","","","19","","","(69)","","","61"],["2026","","109","","","19","","","(67)","","","61"],["2027","","108","","","19","","","(65)","","","62"],["2028-2047","","1,400","","","384","","","(302)","","","1,482"],["2048-2066","","720","","","665","","","(340)","","","1,045"],["Total","","$","2,951","","","$","1,144","","","$","(902)","","","$","3,193"]]
[[/GREPCENT_TABLE]]

 ____________________

(1)    Includes eliminations of intercompany loans payable and AGMH’s debt 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.

Intercompany Loans Payable

On October 1, 2019, the U.S. Insurance Subsidiaries made 10-year, 3.5% interest rate intercompany loans to AGUS, aggregating $250 million, to fund the BlueMountain Acquisition and the related capital contributions. Interest is payable annually in arrears on each anniversary of the note, and commenced on October 1, 2020. Interest accrues daily and is computed on a basis of a 360-day year from October 1, 2019 until the date on which the principal amount is paid in full. AGUS will pay 20% of the original principal amount of each note on the sixth, seventh, eighth, and ninth anniversaries. The remaining 20% of the original principal amount and all accrued and unpaid interest will be paid on the maturity date. AGUS has the right to prepay the principal amount of the notes in whole or in part at any time, or from time to time, without payment of any premium or penalty.

In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. In 2018, the maturity date was extended to November 2023. AGUS repaid $10 million in each of 2021 and 2020 in outstanding principal as well as accrued and unpaid interest. There were no repayments in 2022. As of December 31, 2022, $20 million remained outstanding.

Capital Contributions to AssuredIM

The Company contributed $60 million of cash to AssuredIM at closing, and contributed an additional $30 million in cash in February 2020, $15 million in both February 2021 and February 2022 and $10 million in February 2023.

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.

115

[[GREPCENT_TABLE]]
[["","As of December 31, 2022"],["","AGL","","U.S. Holding Companies"],["","(in millions)"],["Assets"],["Fixed-maturity securities (1)","$","21","","","$","3"],["Short-term investments, other invested assets and cash","5","","","143"],["Receivables from affiliates (2)","57","","","\u2014"],["Receivable from U.S. Holding Companies","18","","","\u2014"],["Other assets","1","","","53"],["Liabilities"],["Long-term debt","\u2014","","","1,675"],["Loans payable to affiliates","\u2014","","","270"],["Payable to affiliates (2)","15","","","9"],["Payable to AGL","\u2014","","","18"],["Other liabilities","7","","","72"]]
[[/GREPCENT_TABLE]]

____________________

(1)    As of December 31, 2022, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.9 years and 4.7 years, respectively.

(2)    Represents receivable and payables with non-guarantor subsidiaries.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","AGL","","U.S. Holding Companies"],["","(in millions)"],["Revenues","$","(1)","","","$","1"],["Expenses"],["Interest expense","\u2014","","","89"],["Other expenses","45","","","9"],["Income (loss) before provision for income taxes and equity in earnings (losses) of investees","(46)","","","(97)"],["Net income (loss)","(46)","","","(86)"]]
[[/GREPCENT_TABLE]]

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.

116

AGL and U.S. Holding Companies

Selected Cash Flow Items

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","AGL","","U.S. Holding Companies"],["","(in millions)"],["Dividends received from subsidiaries","$","437","","","$","476"],["Interest on intercompany loans","\u2014","","","(10)"],["Interest paid (1)","\u2014","","","(77)"],["Investments in subsidiaries","\u2014","","","(22)"],["Return of capital from subsidiaries","\u2014","","","9"],["Dividends paid to AGL","\u2014","","","(437)"],["Dividends paid","(64)","","","\u2014"],["Repurchases of common shares (2)","(500)","","","\u2014"]]
[[/GREPCENT_TABLE]]

____________________

(1)    See “Long-Term Debt Obligations” above for interest paid by subsidiary.

(2)    See Item 8, Financial Statements and Supplementary Data, Note 19, 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 Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.

External Financing

    From time to time, AGL and its subsidiaries have sought external debt or equity financing in order to meet their obligations. External sources of financing may or may not be available to the Company, and if available, the cost of such financing may not be acceptable to the Company.

Insurance Subsidiaries

The Company has several insurance subsidiaries. The U.S. Insurance Subsidiaries consist of AGM and AGC. AGM owns: (i) AGUK, an insurance subsidiary domiciled in the U.K; and (ii) AGE, an insurance company domiciled in France. AGUK and AGE are collectively referred to as the European Insurance Subsidiaries. AG Re is an insurance company domiciled in Bermuda, which owns AGRO, an insurance subsidiary, also domiciled in Bermuda.

Sources and Uses of Funds

Liquidity of the insurance subsidiaries is primarily used to pay for:

•operating expenses,

•claims on the insured portfolio,

•dividends or other distributions to AGL, AGUS and/or AGMH, as applicable,

•reinsurance premiums,

•principal of and, interest on, surplus notes, where applicable, and

•capital investments in their own subsidiaries, where appropriate.

    Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios, although the Company may enter into secured short-term loan facilities with financial institutions to provide short-term liquidity for the payment of insurance claims it anticipates making in connection with the future resolutions of other Puerto Rico exposures. The Company generally targets a

117

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 December 31, 2022, the Company intended to hold and had the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost.

Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company’s insurance subsidiaries, insurance regulations and rating agency capital requirements.

Financial Guaranty Policies

Insurance policies issued provide, in general, that payments of principal, interest and other amounts insured may not be accelerated by the holder of the obligation. Amounts paid by the Company therefore are typically in accordance with the obligation’s original payment schedule, unless the Company accelerates such payment schedule, at its sole option. Premiums received on financial guaranty contracts are paid either upfront or in installments over the life of the insured obligations.

Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. 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 December 31, 2022. As described in Item 8, Financial Statements and Supplementary Data, 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 December 31, 2022, the remaining net par outstanding for HTA and GO/PBA Resolved Puerto Rico exposures where the bondholders elected to receive custody receipts, or where the Company assumed exposure from another financial guarantor, was $509 million.

    The following table presents estimated probability weighted expected cash outflows under direct and assumed financial guaranty contracts, whether accounted for as insurance or credit derivatives, including claim payments under contracts in consolidated FG VIEs, as of December 31, 2022. This amount is not reduced for cessions under reinsurance contracts or recoveries attributable to Loss Mitigation Securities. This amount includes any benefit anticipated from excess spread or other recoveries within the contracts but does not reflect any benefit for recoveries under breaches of R&W. This amount also excludes estimated recoveries related to past claims paid for policies in the public finance sector.

Estimated Expected Claim Payments

(Undiscounted)

[[GREPCENT_TABLE]]
[["","As of December 31, 2022"],["","(in millions)"],["Less than 1 year","$","325"],["1-3 years","582"],["3-5 years","418"],["More than 5 years","321"],["Total","$","1,646"]]
[[/GREPCENT_TABLE]]

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

118

tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.

If the lease is terminated early, the tax-exempt entity must make an early termination payment to the lessor. A portion of this early termination payment is funded from monies that were pre-funded and invested at the closing of the leveraged lease transaction (along with earnings on those invested funds). The tax-exempt entity is obligated to pay the remaining, unfunded portion of this early termination payment (known as the strip coverage) from its own sources. AGM issued financial guaranty insurance policies (known as strip policies) that guaranteed the payment of these unfunded strip coverage amounts to the lessor, in the event that a tax-exempt entity defaulted on its obligation to pay this portion of its early termination payment. Following such events, AGM can then seek reimbursement of its strip policy payments from the tax-exempt entity, and can also sell the transferred depreciable asset and reimburse itself from the sale proceeds.

Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $418 million as of December 31, 2022. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As of December 31, 2022, approximately $1.9 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM.

The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. in order to provide for payments on a scheduled “pay-as-you-go” basis and to replicate the terms of a traditional financial guaranty insurance policy. The documentation for certain CDS were negotiated to require the Company to also pay if the obligor becomes bankrupt or if the reference obligation were restructured. Furthermore, some CDS documentation requires the Company to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the Company may be required to make a cash termination payment to its swap counterparty upon such termination. Any such payment would probably occur prior to the maturity of the reference obligation and be in an amount larger than the amount due for that period on a “pay-as-you-go” basis.

Distributions From Insurance Subsidiaries

    The Company anticipates that, for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies’ liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other 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 Item 8, Financial Statements and Supplementary Data, Note 15, Insurance Company Regulatory Requirements.

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 $209 million, of which approximately $40 million is available for distribution in the first quarter of 2023.

•The maximum amount available during 2023 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $102 million, of which approximately $20 million is available for distribution in the first quarter of 2023.

•Based on the applicable law and regulations, in 2023 AG Re (a subsidiary of AGL) has the capacity to: (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Authority; and (ii) declare and pay dividends in an aggregate amount up to approximately $210 million as of December 31, 2022. Such dividend capacity is further limited by: (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $138 million as of December 31, 2022; and (ii) the amount of statutory surplus, which, as of December 31, 2022, was a deficit of $19 million.

119

•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 December 31, 2022. Such dividend capacity is further limited by: (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $374 million as of December 31, 2022; and (ii) the amount of statutory surplus, which, as of December 31, 2022, was $253 million.

Distributions from / Contribution to Insurance Company Subsidiaries

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Dividends paid by AGC to AGUS","$","207","","","$","94","","","$","166"],["Dividends paid by AGM to AGMH","266","","","291","","","267"],["Dividends paid by AG Re to AGL (1)","\u2014","","","150","","","150"],["Dividends from AGUK to AGM (2)","\u2014","","","\u2014","","","124"],["Contributions from AGM to AGE (2)","\u2014","","","\u2014","","","(123)"]]
[[/GREPCENT_TABLE]]

____________________

(1)    The 2021 and 2020 amounts included fixed-maturity securities with a fair value of $46 million and $47 million, respectively.

(2)    In 2020, the dividend paid to AGM from AGUK was contributed to AGE.

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.

For example, the U.S. Insurance Subsidiaries have issued financial guaranty insurance policies in respect of the obligations of municipal obligors under interest rate swaps. The U.S. Insurance Subsidiaries insure periodic payments owed by the municipal obligors to the bank counterparties. In such cases, the U.S. Insurance Subsidiaries would be required to pay the termination payment owed by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial guaranty insurance policy, if: (i) the U.S. Insurance Subsidiaries have been downgraded below the rating trigger set forth in a swap under which they have insured the termination payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but has failed in, posting collateral, replacing the U.S. Insurance Subsidiaries or otherwise curing the downgrade of the U.S. Insurance Subsidiaries; (iii) the transaction documents include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded below the rating trigger set forth in such swap (which rating trigger varies on a transaction by transaction basis), and such condition has been met; (iv) the bank counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the municipal obligor has failed to make the termination payment payable by it. Conversely, no termination payment would be owed in such cases if the transaction documents include as a condition that an underlying event of default or termination event with respect to the municipal obligor has occurred, such as the rating of the municipal obligor being downgraded below a specified rating trigger, and such condition has not been met. Taking into consideration whether the rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of the U.S. Insurance Subsidiaries were downgraded below “A-” by S&P or below “A3” by Moody’s, and the conditions giving rise to the obligation of the U.S. Insurance Subsidiaries to make a payment under the swap policies were all satisfied, then the U.S. Insurance Subsidiaries could pay claims in an amount not exceeding approximately $13 million in respect of such termination payments.

As another example, with respect to variable rate demand obligations (VRDOs) for which a bank has agreed to provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus 2.00% – 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a

120

claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2022, AGM and AGC had insured approximately $1.5 billion net par of VRDOs, of which approximately $15 million of net par constituted VRDOs issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. As of December 31, 2022, none of the insured VRDOs were issued by municipal obligors rated BIG. The specific terms relating to the rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a downgrade by all rating agencies then rating the insurer, vary depending on the transaction.

In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations following a downgrade of the financial strength rating of AGM. A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM in respect to AGMH’s former GIC business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody’s. AGMH’s former subsidiary FSA Asset Management LLC is expected to have sufficient eligible and liquid assets to satisfy any expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.

Assumed Reinsurance

Some of the Company’s insurance subsidiaries (Assuming Subsidiaries) assumed financial guaranty insurance from legacy third-party bond insurers. The agreements under which such Assuming Subsidiaries assumed such business are generally subject to termination at the option of the ceding company (a) if the Assuming Subsidiary fails to meet certain financial and regulatory criteria; (b) if the Assuming Subsidiary fails to maintain a specified minimum financial strength rating; or (c) upon certain changes of control of the Assuming Subsidiary. Upon termination due to one of the above events, the Assuming Subsidiary typically would be required to return to the ceding company unearned premiums (net of ceding commissions) and loss reserves, calculated on a U.S. statutory basis, attributable to the assumed business (plus in certain cases, an additional required amount), after which the Assuming Subsidiary would be released from liability with respect to such business.

As of December 31, 2022, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $268 million, including $234 million by AGC and $34 million by AG Re.

Committed Capital Securities

    Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable. The Company is not the primary beneficiary of the trusts and therefore the trusts are not consolidated in Assured Guaranty’s financial statements.

The trusts provide AGC and AGM access to new equity capital at their respective sole discretion through the exercise of the put options. Upon AGC’s or AGM’s exercise of its put option, the relevant trust will liquidate its portfolio of eligible assets and use the proceeds to purchase AGC or AGM preferred stock, as applicable. AGC or AGM may use the proceeds from its sale of preferred stock to the trusts for any purpose, including the payment of claims. The put agreements have no scheduled termination date or maturity. However, each put agreement will terminate if (subject to certain grace periods) specified events occur. Both AGC and AGM continue to have the ability to exercise their respective put options and cause the related trusts to purchase their preferred stock.

    Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. The annualized rate on the AGC CCS is one-month LIBOR plus 250 bps, and the annualized rate on the AGM Committed Preferred Trust Securities (CPS) is one-month LIBOR plus 200 bps. The Company believes that after June 2023 the reference to LIBOR in such CCS will be replaced, by operation of law in accordance with federal legislation enacted in March 2022, with a rate based on SOFR. See “— Executive Summary — Other Matters — LIBOR Sunset” above.

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

121

sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income. Approximately 67% of the total investment portfolio is managed by external parties. Each of the three external investment managers must maintain a minimum average rating of A+/A1/A+ by S&P, Moody’s and Fitch Ratings Inc., respectively.

Changes in interest rates affect the value of the Company’s fixed-maturity securities. As interest rates fall, the fair value of fixed-maturity securities generally increases and as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of investment-grade, liquid instruments. Other invested assets include other alternative investments, which are generally less liquid. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement and Note 7, Investments and Cash.

Investment Portfolio

Carrying Value

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2022","","2021"],["","(in millions)"],["Fixed-maturity securities, available-for-sale (1)","$","7,119","","","$","8,202"],["Fixed-maturity securities, trading (2)","303","","","\u2014"],["Short-term investments","810","","","1,225"],["Other invested assets","133","","","181"],["Total","$","8,365","","","$","9,608"]]
[[/GREPCENT_TABLE]]

____________________

(1)    As of December 31, 2022, includes $358 million 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 4.4 years as of December 31, 2022 and 4.7 years as of December 31, 2021, 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 December 31, 2022

[[GREPCENT_TABLE]]
[["","Amortized Cost","","Estimated Fair Value"],["","(in millions)"],["Due within one year","$","290","","","$","282"],["Due after one year through five years","1,713","","","1,585"],["Due after five years through 10 years","1,778","","","1,667"],["Due after 10 years","3,226","","","2,974"],["Mortgage-backed securities:"],["RMBS","418","","","340"],["CMBS","282","","","271"],["Total","$","7,707","","","$","7,119"]]
[[/GREPCENT_TABLE]]

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 December 31, 2022 and December 31, 2021. 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.

122

 Distribution of Available-for-Sale Fixed-Maturity Securities by Rating 

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["Rating","","2022","","2021"],["AAA","","14.2","%","","14.6","%"],["AA","","37.1","","","38.2"],["A","","24.4","","","25.1"],["BBB","","11.0","","","13.7"],["BIG (1)","","7.4","","","7.5"],["Not rated (2)","","5.9","","","0.9"],["Total","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

____________________

(1)    The BIG category primarily includes Loss Mitigation Securities. See Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.

(2)    As of December 31, 2022, the not rated category primarily includes New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.

The Company also had $303 million in trading fixed-maturity securities as of December 31, 2022 representing CVIs received under the 2022 Puerto Rico Resolutions, which are not rated.

Portfolio of Obligations of State and Political Subdivisions

The Company’s fixed-maturity investment portfolio includes issuances by a wide number of municipal authorities across the U.S. and its territories. The following table presents the components of the Company’s $3,394 million (fair value) of obligations of state and political subdivisions included in the Company’s available-for-sale fixed-maturity portfolio as of December 31, 2022.

Fair Value of Available-for-Sale Fixed-Maturity Portfolio of Obligations of State and Political Subdivisions

As of December 31, 2022 (1)

[[GREPCENT_TABLE]]
[["State","","State General Obligation","","Local General Obligation","","Revenue Bonds","","Total Fair Value","","Amortized Cost","","Average Credit Rating"],["","","(in millions)"],["California","","$","47","","","$","65","","","$","287","","","$","399","","","$","414","","","A"],["Puerto Rico","","33","","","\u2014","","","327","","","360","","","362","","","Not Rated"],["New York","","3","","","37","","","298","","","338","","","352","","","AA"],["Texas","","16","","","73","","","245","","","334","","","351","","","AA"],["Washington","","45","","","53","","","94","","","192","","","198","","","AA"],["Florida","","\u2014","","","2","","","162","","","164","","","171","","","A+"],["Massachusetts","","63","","","\u2014","","","82","","","145","","","149","","","AA"],["Pennsylvania","","31","","","5","","","76","","","112","","","114","","","A+"],["Illinois","","12","","","16","","","77","","","105","","","109","","","A+"],["Colorado","","\u2014","","","22","","","51","","","73","","","76","","","AA"],["All others","","99","","","107","","","606","","","812","","","857","","","AA-"],["Total","","$","349","","","$","380","","","$","2,305","","","$","3,034","","","$","3,153","","","A"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Excludes $360 million as of December 31, 2022 of pre-refunded bonds, at fair value. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.

The revenue bond portfolio primarily consists of essential service revenue bonds issued by transportation authorities, utilities, and universities. 

123

Revenue Bonds

Sources of Funds 

As of December 31, 2022

[[GREPCENT_TABLE]]
[["Type","","Amortized Cost","","Fair Value"],["","","(in millions)"],["Tax revenue","","$","845","","","$","832"],["Transportation","","563","","","541"],["Utilities","","419","","","411"],["Education","","286","","","276"],["Healthcare","","172","","","165"],["All others","","96","","","80"],["Total","","$","2,381","","","$","2,305"]]
[[/GREPCENT_TABLE]]

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 December 31, 2022 and December 31, 2021, all of the funds in which AGAS directly invests are consolidated in the Company’s consolidated financial statements. The amounts in the table below represent the fair value of AGAS’ interests in the AssuredIM Funds. See Part I, Item 1. Business — Asset Management — Products, for a description of the fund strategies. See also Commitments below.

Fair Value of AGAS’ Interest in AssuredIM Funds

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["Strategy","","2022","","2021"],["","","(in millions)"],["CLOs","","$","272","","","$","228"],["Municipal bonds (1)","","105","","","107"],["Healthcare","","91","","","115"],["Asset-based","","101","","","93"],["Total","","$","569","","","$","543"]]
[[/GREPCENT_TABLE]]

____________________

(1)     The fund was unwound in January 2023 based on the December 31, 2022 valuation. On January 31, 2023 the fund distributed substantially all of its available cash to AGAS and other investors in the fund.

Equity in Earnings (Losses) of Investees of AGAS’ Investment in AssuredIM Funds

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Strategy","","2022","","2021","","2020"],["","","(in millions)"],["CLOs","","$","(2)","","","$","29","","","$","14"],["Municipal bonds","","(2)","","","2","","","5"],["Healthcare","","(11)","","","30","","","19"],["Asset-based","","5","","","19","","","4"],["Total","","$","(10)","","","$","80","","","$","42"]]
[[/GREPCENT_TABLE]]

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 $222 million and $243 million, as of December 31, 2022 and December 31, 2021, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the

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benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,169 million and $1,231 million, based on fair value as of December 31, 2022 and December 31, 2021, respectively.

Commitments

The U.S. Insurance Subsidiaries are authorized to invest up to $750 million in AssuredIM Funds. Adding distributed gains from inception through December 31, 2022, the U.S. Insurance Subsidiaries may invest a total of up to $810 million in AssuredIM Funds. As of December 31, 2022, the Insurance segment had total commitments to AssuredIM Funds of $755 million, of which $536 million represented net invested capital and $219 million was undrawn. In addition to its commitments to AssuredIM Funds, the Company had unfunded commitments of $78 million as of December 31, 2022 to other alternative investments.

AssuredIM

Sources and Uses of Funds

AssuredIM’s sources of liquidity are: (1) cash from operations, including management and performance fees (which are unpredictable as to amount and timing); and (2) capital contributions from AGUS ($15 million, $15 million and $30 million in 2022, 2021 and 2020, respectively, had been contributed to supplement cash from operations). As of December 31, 2022 and December 31, 2021, AssuredIM had $41 million and $37 million, respectively, in cash and short-term investments.

AssuredIM’s liquidity needs primarily include: (1) paying operating expenses including compensation; (2) paying dividends or other distributions to AGUS; and (3) capital to support growth and expansion of the asset management business. In each of 2022, 2021 and 2020, AssuredIM distributed $8.8 million to AGUS to fund AGUS’s interest payments on its intercompany debt to the U.S. Insurance Subsidiaries. That debt was incurred in October 2019 to fund the BlueMountain Acquisition. See “— AGL and U.S. Holding Companies — Intercompany Loans Payable” above for additional information.

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 Item 8, Financial Statements and Supplementary Data, Note 17, Leases, for a table of minimum lease obligations and other lease commitments.

FG VIEs and CIVs

    The Company manages its liquidity needs by evaluating cash flows without the effect of consolidating FG VIEs and CIVs; however, the Company’s consolidated financial statements include the effect of consolidating FG VIEs and CIVs. The primary sources and uses of cash at Assured Guaranty’s FG VIEs and CIVs are as follows:

•FG VIEs. The primary sources of cash in FG VIEs are the collection of principal and interest on the collateral supporting the debt obligations, and the primary uses of cash are the payment of principal and interest due on the debt obligations. The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. For the Puerto Rico Trusts, the primary source of cash is the collection of debt service on the assets in the trusts and the primary use of cash is the payment of the trusts debt obligations.

•CIVs. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and issuing debt or borrowing funds to finance investments (CLOs and warehouses). The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions.

See Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.

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Credit Facilities of CIVs

Certain of the Company’s CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs during the CLO warehouse stage. Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle. When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or Assured Guaranty subsidiaries. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or Assured Guaranty subsidiaries.

As of December 31, 2022, these credit facilities had varying maturities ranging from 2023 to 2031 with the aggregate principal amount not exceeding $1.6 billion. The available commitment was based on the amount of equity contributed to the warehouse which was $377 million. As of December 31, 2022, $284 million was drawn under credit facilities with interest rates ranging from 3-month SOFR plus 150 bps to 3-month Euribor plus 200 bps (with a floor on Euribor of zero). The CLO warehouses were in compliance with all financial covenants as of December 31, 2022.

As of December 31, 2022, a consolidated healthcare fund was a party to a credit facility (jointly with another healthcare fund that was not consolidated) with a maturity date of December 29, 2023 with the aggregate principal amount not to exceed $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 December 31, 2022, $58 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 December 31, 2022.

Consolidated Cash Flow Summary

    The summarized 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.    

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Summarized Consolidated Cash Flows

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(in millions)"],["Net cash flows provided by (used in) operating activities, before effect of FG VIEs and CIVs consolidation","$","(1,056)","","","$","420","","","$","67"],["Effect of FG VIEs and CIVs consolidation","(1,423)","","","(2,357)","","","(920)"],["Net cash flows provided by (used in) operating activities","(2,479)","","","(1,937)","","","(853)"],["Net cash flows provided by (used in) investing activities, before effect of FG VIEs and CIVs consolidation","1,618","","","(156)","","","478"],["Effect of FG VIEs and CIVs consolidation","122","","","179","","","310"],["Net cash flows provided by (used in) investing activities","1,740","","","23","","","788"],["Net cash flows provided by (used in) financing activities, before effect of FG VIEs and CIVs consolidation"],["Dividends paid","(64)","","","(66)","","","(69)"],["Repurchases of common shares","(500)","","","(496)","","","(446)"],["Issuance of long-term debt, net of issuance costs","\u2014","","","889","","","\u2014"],["Redemptions and purchases of debt, including make-whole payment","\u2014","","","(619)","","","(21)"],["Other","(8)","","","(12)","","","(11)"],["Effect of FG VIEs and CIVs consolidation","1,184","","","2,264","","","730"],["Net cash flows provided by (used in) financing activities (1)","612","","","1,960","","","183"],["Effect of exchange rate changes, before effect of FG VIEs and CIVs consolidation","(3)","","","(2)","","","(3)"],["Effect of FG VIEs and CIVs consolidation","(5)","","","\u2014","","","\u2014"],["Effect of exchange rate changes","(8)","","","(2)","","","(3)"],["Increase (decrease) in cash and cash equivalents and restricted cash","(135)","","","44","","","115"],["Cash and cash equivalents and restricted cash at beginning of period","342","","","298","","","183"],["Cash and cash equivalents and restricted cash at the end of the period","$","207","","","$","342","","","$","298"]]
[[/GREPCENT_TABLE]]

____________________

(1)     Claims paid on consolidated FG VIEs are presented in the 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 $1,056 million in 2022 and an inflow of $420 million in 2021. The increase in cash outflows during 2022 was primarily due to a $1.3 billion increase in net claim payments, which were primarily due to the 2022 Puerto Rico Resolutions as well as an increase of $81 million in tax payments. Cash flows from operations attributable to the effect of FG VIE and CIV consolidation were outflows in 2022 and 2021. The consolidated statements of cash flows present the investing activities of the consolidated AssuredIM Funds and CLOs as cash flows from operations. The decrease in outflows in 2022 compared with 2021 is mainly due to a decrease of $2,154 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $1,352 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 increase in investing cash inflows during 2022 was mainly attributable to a decrease of $865 million for purchases of available-for-sale fixed-maturity securities, $208 million in sales, maturities and paydowns of trading securities, and an increase in net sales of short-term investments of $786 million in 2022 to fund share repurchases and claim payments in connection with the 2022 Puerto Rico Resolutions, partially offset by lower disposals of $177 million of available-for-sale fixed-maturity securities. See Item 8, Financial Statements and Supplementary Data, 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. In 2021, it also included the issuance of 3.15% Senior Notes and 3.6% Senior Notes and redemptions of a portion of AGMH and AGUS debt. See Item 8, Financial Statements and Supplementary

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Data, Note 12, Long-Term Debt and Credit Facilities. 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 $2,251 million in issuances, and repayments of $1,192 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 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

From January 1, 2023 through February 28, 2023, the Company repurchased an additional 36 thousand common shares. As of February 28, 2023, the Company was authorized to repurchase $201 million of its common shares. For more information about the Company’s share repurchases and authorizations, see Item 8, Financial Statements and Supplementary Data, Note 19, Shareholders’ Equity.