# ASSURED GUARANTY LTD (AGO) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ASSURED GUARANTY LTD's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1273813/000127381324000007/ago-20231231.htm
Accession: 0001273813-24-000007
Filing date: 2024-02-28
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/AGO/mda/fy2024/ (FY 2024)

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 2022 results to 2021 results have been omitted in this Form 10-K. The Company’s comparison of 2022 results to 2021 results is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, 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 financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs)) are presented separately.

In the Insurance segment, the Company provides credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. Until July 1, 2023, the Company served as investment advisor to CLO and opportunity funds, through AssuredIM LLC and its investment management affiliates (together with AssuredIM LLC, AssuredIM). Beginning July 1, 2023, the Company participates in the asset management business through its ownership interest in Sound Point as described below.

The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) (the U.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, and Note 2, Segment Information.

Asset Management Transactions

On July 1, 2023, Assured Guaranty contributed to Sound Point, LP the AssuredIM Contributed Business, as contemplated by the Transaction Agreement entered into with Sound Point on April 5, 2023. As a result, Sound Point now manages CLOs consisting of $35.2 billion in AUM as of December 31, 2023, making Sound Point the fifth largest CLO manager globally by AUM (based on December 31, 2023 CreditFlux CLO manager rankings). Assured Guaranty received, subject to certain potential post-closing adjustments, approximately 30% of the common interests in Sound Point, LP, and certain other interests in Sound Point.

In addition, in accordance with the terms of the Letter Agreement, effective July 1, 2023, the U.S. Insurance Subsidiaries, (i) engaged Sound Point as their sole alternative credit manager, and (ii) transitioned to Sound Point the management of certain existing alternative investments and related commitments. The Letter Agreement also provides that, in the first two years of Sound Point’s engagement, the U.S. Insurance Subsidiaries, including through AGAS, would, subject to regulatory approval, make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the alternative investments and commitments transitioned from AssuredIM and any reinvestments (collectively, Sound Point Investments), and investments made by other Assured Guaranty affiliates, will total $1 billion. The Letter Agreement contemplates a long-term investment partnership between Sound Point and Assured Guaranty, whereby the U.S. Insurance Subsidiaries have agreed to reinvest all returns of capital from Sound Point Investments for a period of 15 years, until July 1, 2038. Similarly, the Letter Agreement provides for reinvestment by the U.S. Insurance Subsidiaries of all gains and dividends from Sound Point Investments in the first two years of Sound Point’s engagement, and reinvestment of half of all

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such gains and dividends thereafter until July 1, 2033 (the transactions contemplated under the Transaction Agreement and the Letter Agreement, the Sound Point Transaction). On July 1, 2028, the U.S. Insurance Subsidiaries may choose to reduce the amounts invested or required to be reinvested in certain Sound Point Investments under the Letter Agreement, subject to adjustment in Assured Guaranty’s portion of its ownership interest in Sound Point. To the extent not required to be reinvested by the Letter Agreement, all proceeds from Sound Point Investments received in accordance with their operative investment documents can be distributed to the U.S. Insurance Subsidiaries. See Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash.

In July 2023, Assured Guaranty sold all of its equity interests in Assured Healthcare Partners LLC (AHP), which manages healthcare funds, to an entity owned and controlled by the managing partner of AHP (AHP Transaction). In connection with the AHP Transaction, the Company agreed to remain a strategic investor in certain AHP managed funds, is retaining its portion of certain carried interest in certain AHP managed funds and received other consideration.

Economic Environment

    Real gross domestic product (GDP) increased 2.5% in 2023, compared to an increase of 1.9% in 2022, according to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA). Additionally, the BEA reported real GDP increased at an annual rate of 3.3% in the fourth quarter of 2023. At the end of December 2023, the U.S. unemployment rate, seasonally adjusted, stood at 3.7%, near where it started the year at 3.5%, 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 2023, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 3.4%, as compared to 6.5% for the 12-month period ending December 2022. According to the U.K.’s Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) was 4.2% in the 12 months through December 2023 as compared to 9.2% for the 12 months through December 2022. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $22.9 billion of net par outstanding as of December 31, 2023, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure.

With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, in March 2022 the FOMC began again raising the target range for the federal funds rate and stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through July 2023, the FOMC raised the federal funds rate from a target range of 0% to 0.25% to a range of 5.25% to 5.50%. The FOMC has repeatedly declared that it seeks to achieve maximum employment, and inflation at the rate of 2% over the longer run. In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the FOMC indicated that it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Since its July 2023 meeting, the FOMC has maintained the federal funds rate at 5.25% to 5.50%, including through its most recent meeting held January 30-31, 2024, stating that it would continue to assess additional information and its implications for monetary policy.

The level and direction of interest rates and credit spreads impact the Company in numerous ways. On the one hand, higher interest rates may reduce the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, dampen municipal bond issuance and negatively impact the finances of some of the obligors whose payments the Company insures. On the other hand, higher interest rates are often accompanied by wider spreads, which may make the Company’s credit enhancement products more attractive in the U.S. municipal bond market and increase the level of premiums it can charge for those products.

The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.65% for 2023, higher than the 3.00% and 1.54% average of 2022 and 2021, respectively. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 101 basis points (bps) in 2023. This represented an increase from an average of 90 bps and 70 bps in 2022 and 2021, respectively. The Company believes that, over time, wider spreads could permit it to increase its premium rates on new business, and higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.

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Additionally, the Company believes that higher interest rates are discouraging some homeowners from moving as many are locked into lower mortgage interest rates at the homes in which they reside, which, in turn, is restricting housing inventory and leading to an increase in home prices as demand outpaces supply. The increase in housing prices may benefit distressed RMBS the Company insures. The National Association of Realtors reported that year-over-year existing-home sales declined 6.2% from December 2022 to December 2023, while the median existing-home sales price increased 4.4% from December 2022 ($366,500) to December 2023 ($382,600).

Key Business Strategies

    The Company continually evaluates its business strategies and is currently pursuing key business strategies in three areas: (i) insurance; (ii) asset management and alternative investments; and (iii) capital management.

Insurance

    The Company seeks to grow the insurance business through new business production, acquisitions of legacy financial guarantors or reinsurance of their insured portfolios, and to continue to mitigate losses in its current insured portfolio.

    Growth of the Insured Portfolio

    The Company seeks to grow its financial guaranty insurance portfolio through new business production in each of its markets: public finance (including infrastructure) and structured finance. The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and Stockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance: (i) encourages retail investors, who typically have fewer resources than the Company for analyzing municipal bonds, to purchase such bonds; (ii) enables institutional investors to operate more efficiently; and (iii) allows smaller, less well-known issuers to gain market access on a more cost-effective basis.

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

    In certain segments of the infrastructure and structured finance markets, the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company’s guaranty. The Company considers its involvement in both infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company’s business opportunities and its risk profile beyond U.S. public finance. The timing of new business production in the infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.

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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, certain of 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 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, as well as Detroit, Michigan and Stockton, California. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, the Company initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations.

After over five years of negotiations, 2022 was a turning point for resolving a substantial portion of the Company’s Puerto Rico exposure in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico) related to the Company’s exposure to all defaulting Puerto Rico credits except PREPA (2022 Puerto Rico Resolutions) as discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure — Exposure to Puerto Rico.

As a result of the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the Puerto Rico Convention Center District Authority (PRCCDA) and Puerto Rico Infrastructure Authority (PRIFA) were extinguished, and its insurance exposure to Puerto Rico general obligations (GO) bonds, Public Buildings Authority (PBA) bonds and Puerto Rico Highway and Transportation Authority (PRHTA) bonds was greatly reduced. The Company believes the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts. In connection with the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, new general obligation bonds (New GO Bonds) and new bonds backed by toll revenues (Toll Bonds, and together with New GO Bonds, New Recovery Bonds) and contingent

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value instruments (CVIs) associated with its direct exposures. The Company has sold some of the New Recovery Bonds and CVIs it had received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, PREPA. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, and the Insured Portfolio section below.

The Company is, and for several years has 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 may also purchase 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, 2023 (excluding the value of the Company’s insurance) was $459 million.

    In some instances, the terms of the Company’s policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief.

Asset Management and Alternative Investments

    Until July 1, 2023, the Company pursued its asset management strategy through AssuredIM. With the consummation of the Sound Point Transaction and AHP Transaction, effective as of July 1, 2023, the Company participates in the asset management business through its ownership interest in Sound Point, and no longer directly manages investments for third parties.The Company’s ownership interest in Sound Point furthers its strategy of participating in a fee-based earnings stream independent of the risk-based premiums generated by its financial guaranty business. The Sound Point business was strengthened by the addition of AssuredIM’s AUM (excluding AUM relating to AHP). See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for a description of the Sound Point Transaction.

The Company expects its relationship with Sound Point to also enhance its alternative investment opportunities. Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including $1 billion in Sound Point managed investments, subject to regulatory approval. Of the $1.5 billion, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million plus previously distributed gains of $108 million for a total of $858 million as of December 31, 2023. As of December 31, 2023, AGAS commitments to funds managed by Sound Point and AHP were $775 million.

Capital Management

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

From 2013 through February 27, 2024, the Company has repurchased 145 million common shares for approximately $4.9 billion, representing approximately 75% of the total shares outstanding at the beginning of the repurchase program in 2013. On November 1, 2023, the AGL Board of Directors (the Board) authorized the repurchase of an additional $300 million of its common shares. Under this and previous authorizations, as of February 27, 2024, the Company was authorized to purchase $228 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.

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Summary of Share Repurchases

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

As of December 31, 2023, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $48.26 per share in shareholders’ equity attributable to AGL, $51.79 per share in adjusted operating shareholders’ equity, and $87.10 per share in adjusted book value.

In December 2023, the Maryland Insurance Administration approved, and AGC implemented, the redemption of $200 million of its shares of common stock from AGUS.

The Company considers the appropriate mix of debt and equity in its capital structure. In 2023, the Company issued $350 million in 6.125% Senior Notes due in 2028, and used the proceeds primarily to redeem $330 million of 5% Senior Notes due in 2024. In 2021, the Company also redeemed $600 million in long-dated high coupon debt using a portion of the proceeds from the issuance of $900 million in shorter-dated, lower coupon debt. Proceeds from the debt issuances that were not used to redeem debt were used for general corporate purposes, including share repurchases. Since the second quarter of 2017, AGUS has also purchased $154 million in principal of AGMH’s outstanding Junior Subordinated Debentures.

The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See “— Liquidity and Capital Resources — AGL and its U.S. Holding Companies”, 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: loss and LAE changes in fair value of credit derivatives, FG VIEs, CIVs, CVIs and CCS, as well as 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 transactions, settlements, commutations and loss mitigation strategies, among other factors. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 

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Financial Performance of Assured Guaranty

Financial Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions, except per share amounts)"],["GAAP"],["Net income (loss) attributable to AGL","$","739","","","$","124","","","$","389"],["Net income (loss) attributable to AGL per diluted share","$","12.30","","","$","1.92","","","$","5.23"],["Weighted average diluted shares","59.6","","","63.9","","","74.3"],["Non-GAAP"],["Adjusted operating income (loss) (1)","$","648","","","$","267","","","$","470"],["Adjusted operating income per diluted share","$","10.78","","","$","4.14","","","$","6.32"],["Weighted average diluted shares","59.6","","","63.9","","","74.3"],["Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income","$","(21)","","","$","(6)","","","$","30"],["Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share","$","(0.35)","","","$","(0.10)","","","$","0.41"],["Components of total adjusted operating income (loss)"],["Insurance segment","$","621","","","$","413","","","$","722"],["Asset Management segment","3","","","(6)","","","(19)"],["Corporate division","45","","","(134)","","","(263)"],["Other (2)","(21)","","","(6)","","","30"],["Adjusted operating income (loss)","$","648","","","$","267","","","$","470"],["Insurance Segment"],["Gross written premiums (GWP)","$","357","","","$","360","","","$","377"],["Present value of new business production (PVP) (1)","404","","","375","","","361"],["Gross par written","28,960","","","22,047","","","26,656"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31, 2023","","As of December 31, 2022"],["","","Amount","","Per Share","","Amount","","Per Share"],["","","(in millions, except per share amounts)"],["Shareholders\u2019 equity attributable to AGL","","$","5,713","","","$","101.63","","","$","5,064","","","$","85.80"],["Adjusted operating shareholders\u2019 equity (1)","","5,990","","","106.54","","","5,543","","","93.92"],["Adjusted book value (1)","","8,765","","","155.92","","","8,379","","","141.98"],["Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders\u2019 equity","","5","","","0.07","","","17","","","0.28"],["Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value","","\u2014","","","\u2014","","","11","","","0.19"],["Common shares outstanding (3)","","56.2","","","","","59.0"]]
[[/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,"],["","2023","","2022","","2021"],["","(in millions)"],["Revenues:"],["Net earned premiums","$","344","","","$","494","","","$","414"],["Net investment income","365","","","269","","","269"],["Asset management fees","53","","","93","","","88"],["Net realized investment gains (losses)","(14)","","","(56)","","","15"],["Fair value gains (losses) on credit derivatives","114","","","(11)","","","(58)"],["Fair value gains (losses) on CCS","(35)","","","24","","","(28)"],["Fair value gains (losses) on FG VIEs","8","","","22","","","23"],["Fair value gains (losses) on CIVs","88","","","17","","","127"],["Foreign exchange gains (losses) on remeasurement","53","","","(112)","","","(23)"],["Fair value gains (losses) on trading securities","74","","","(34)","","","\u2014"],["Gain on sale of asset management subsidiaries","262","","","\u2014","","","\u2014"],["Other income (loss)","61","","","17","","","21"],["Total revenues","1,373","","","723","","","848"],["Expenses:"],["Loss and LAE (benefit)","162","","","16","","","(220)"],["Interest expense","90","","","81","","","87"],["Loss on extinguishment of debt","\u2014","","","\u2014","","","175"],["Amortization of deferred acquisition cost (DAC)","13","","","14","","","14"],["Employee compensation and benefit expenses","251","","","258","","","230"],["Other operating expenses","217","","","167","","","179"],["Total expenses","733","","","536","","","465"],["Income (loss) before income taxes and equity in earnings (losses) of investees","640","","","187","","","383"],["Equity in earnings (losses) of investees","28","","","(39)","","","94"],["Income (loss) before income taxes","668","","","148","","","477"],["Less: Provision (benefit) for income taxes","(93)","","","11","","","58"],["Net income (loss)","761","","","137","","","419"],["Less: Noncontrolling interests","22","","","13","","","30"],["Net income (loss) attributable to Assured Guaranty Ltd.","$","739","","","$","124","","","$","389"],["Effective tax rate","(13.9)","%","","7.2","%","","12.2","%"]]
[[/GREPCENT_TABLE]]

Net income attributable to AGL in 2023 was higher compared with 2022 primarily due to the following:

•the gain associated with the Sound Point Transaction and AHP Transaction, net of transaction expenses, of $222 million (pre-tax),

•the benefit related to Bermuda tax law changes of $189 million,

•foreign exchange remeasurement gains in 2023, compared with losses on 2022,

•higher income from fixed-maturity and alternative investment portfolio,

•fair value gains on credit derivatives in 2023 compared with losses in 2022, and

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•fair value gains on trading securities in 2023 compared with losses in 2022.

These increases were partially offset by:

•lower net earned premiums in 2023 compared with 2022, which benefited from premium accelerations related to the 2022 Puerto Rico resolutions, and

•higher loss and LAE in 2023 compared with 2022.

The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19% prior to March 31, 2023 and 25% after April 1 2023, the French subsidiary taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda subsidiaries, unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. In 2023, the Company also recognized a benefit of $189 million attributable to changes in Bermuda tax laws and a $19 million benefit related to a change in New York State tax law. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14, Income Taxes.

Adjusted Operating Income

Adjusted operating income in 2023 was $648 million, compared with $267 million in 2022. The increase was primarily due to the gain associated with the Sound Point Transaction and AHP Transaction, the benefit attributable to Bermuda tax law changes, and fair value gains on trading securities, offset in part by higher loss expense and lower net earned premiums in 2023, compared with 2022 which included premium accelerations of $133 million related to the 2022 Puerto Rico Resolutions. 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, 2023 increased compared with December 31, 2022, due to net income and unrealized gains on investments, which was partially offset by dividends and share repurchases. Adjusted operating shareholders’ equity and adjusted book value increased primarily due to the gain on the Sound Point Transaction and AHP Transaction of $160 million after-tax and the benefit due attributable to Bermuda tax law change of $189 million, offset in part by dividends and share repurchases of $267 million, and in the case of adjusted book value, the increase was also primarily due to GWP of $357 million, partially offset by economic loss development of $164 million. See “— Non-GAAP Financial Measures” below for the reconciliation of shareholders’ equity attributable to AGL to adjusted operating shareholders' equity and adjusted book value.

    On a per share basis, shareholders’ equity attributable to AGL, adjusted operating shareholders’ equity, and adjusted book value increased as of December 31, 2023 compared with December 31, 2022, due in part to the accretive effect of the share repurchase program. 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

Inflation

By some key measures, consumer price inflation in the U.S. and the U.K. was higher in recent years than it has been in decades, and interest rates generally increased. Consumer price inflation in the U.K. impacts the Company directly by increasing exposure for certain index-linked U.K. debt with par that accretes with increasing inflation, and also increasing projected future installment premiums on the portion of such exposure that pays at least some of the premium on an installment basis over the term of the exposure. Consumer price inflation may also impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments, and may be accompanied by higher interest rates.

80

Higher interest rates impact the Company in numerous other ways. For example, higher interest rates are often accompanied by wider credit spreads, which may make the Company’s credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product. Despite the recent increases in interest rates since 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 compared to 2021 when interest rates were lower. Over time, higher interest rates also increase the amount the Company can earn on its largely fixed-maturity investment portfolio. However, higher interest rates may, in turn, reduce the fair value of its largely fixed-rate fixed-maturity investment portfolio, dampen municipal bond issuance and negatively impact the finances of some insured obligors.

See “— Overview — Economic Environment.”

Russia’s Invasion of Ukraine

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

The Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, and have identified no material direct exposure to Ukraine or Russia. In fact, the Company’s direct insurance exposure to eastern Europe generally is limited to approximately $263 million in net par outstanding as of December 31, 2023, comprising $220 million net par exposure to the sovereign debt of Poland and $43 million net par exposure to a toll road in Hungary. The Company rates all such exposure investment grade.

Middle East Conflict

In light of recent events in the Middle East, the Company’s surveillance and treasury functions have reviewed the Company’s insurance and investment portfolios, respectively, for exposures to the Middle East. After review, the Company’s surveillance and treasury functions have identified no material direct exposure to such area. The Company’s direct insurance exposure to the Middle East is generally limited to approximately $49 million in net par outstanding as of December 31, 2023, comprised of funded commitments to subscription finance facilities; however, such exposure may increase to a total of approximately $93 million to the extent all unfunded commitments under the facilities are ultimately funded. The Company rates all such insurance exposure investment grade.

Results of Operations

Critical Accounting Estimates

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

Critical estimates and assumptions are periodically evaluated 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 due to changes in these estimates and assumptions from time to time.

Listed below are the accounting policies and estimates that the Company believes are most dependent on the application of judgment and assumptions. 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 applicable note where further details regarding the significant estimates and assumptions are provided. In addition, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further details regarding the sensitivity analyses.

81

•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;

•Acquisition date fair value of equity method investment in Sound Point;

•Impairments of equity method investments and financial instruments; and

•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities) including the Bermuda deferred tax asset reported in 2023.

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 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.

Insurance Segment Results

Insurance Segment Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Segment revenues"],["Net earned premiums and credit derivative revenues","$","357","","","$","508","","","$","438"],["Net investment income","370","","","278","","","280"],["Fair value gains (losses) on trading securities","74","","","(34)","","","\u2014"],["Foreign exchange gains (losses) on remeasurement and other income (loss) (1)","54","","","5","","","15"],["Total segment revenues","855","","","757","","","733"],["Segment expenses"],["Loss expense (benefit)","161","","","12","","","(221)"],["Interest expense","\u2014","","","1","","","\u2014"],["Amortization of DAC","13","","","14","","","14"],["Employee compensation and benefit expenses","154","","","148","","","142"],["Other operating expenses","107","","","84","","","98"],["Total segment expenses","435","","","259","","","33"],["Equity in earnings (losses) of investees","82","","","(51)","","","144"],["Segment adjusted operating income (loss) before income taxes","502","","","447","","","844"],["Less: Provision (benefit) for income taxes","(119)","","","34","","","122"],["Segment adjusted operating income (loss)","$","621","","","$","413","","","$","722"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Other income (loss) consists of recurring items such as commutation gains (losses), 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

82

expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, or books of business acquired in business combinations. See Item 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 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, and the higher interest rates environment has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policies under the 2022 Puerto Rico Resolutions.

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

Insurance Segment

Net Earned Premiums and Credit Derivative Revenues

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Net earned premiums:"],["Financial guaranty insurance:"],["Public finance"],["Scheduled net earned premiums (1)","$","252","","","$","256","","","$","290"],["Refundings and terminations","29","","","179","","","57"],["Total public finance","281","","","435","","","347"],["Structured finance"],["Scheduled net earned premiums (1)","62","","","58","","","66"],["Terminations","\u2014","","","\u2014","","","2"],["Total structured finance","62","","","58","","","68"],["Specialty insurance and reinsurance","4","","","4","","","3"],["Total net earned premiums","347","","","497","","","418"],["Credit derivative revenues:"],["Scheduled net earned premiums","9","","","9","","","13"],["Terminations","1","","","2","","","7"],["Total credit derivative revenues","10","","","11","","","20"],["Total net earned premiums and credit derivative revenues","$","357","","","$","508","","","$","438"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Includes accretion of discount.

    Net earned premiums and credit derivative revenues decreased in 2023 compared with 2022 primarily due to refundings of $133 million in 2022 related to the 2022 Puerto Rico Resolutions discussed in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure. As of December 31, 2023, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.

83

New Business Production

Gross Written Premiums and New Business Production

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["GWP"],["Public finance\u2014U.S.","$","211","","","$","248","","","$","231"],["Public finance\u2014non-U.S.","82","","","75","","","89"],["Structured finance\u2014U.S.","59","","","37","","","51"],["Structured finance\u2014non-U.S.","5","","","\u2014","","","6"],["Total GWP","$","357","","","$","360","","","$","377"],["PVP (1):"],["Public finance\u2014U.S.","$","212","","","$","257","","","$","235"],["Public finance\u2014non-U.S.","83","","","68","","","79"],["Structured finance\u2014U.S.","68","","","43","","","42"],["Structured finance\u2014non-U.S. (2)","41","","","7","","","5"],["Total PVP","$","404","","","$","375","","","$","361"],["Gross Par Written (1):"],["Public finance\u2014U.S.","$","22,464","","","$","19,801","","","$","23,793"],["Public finance\u2014non-U.S.","1,544","","","624","","","1,117"],["Structured finance\u2014U.S.","1,886","","","1,077","","","1,316"],["Structured finance\u2014non-U.S. (2)","3,066","","","545","","","430"],["Total gross par written","$","28,960","","","$","22,047","","","$","26,656"]]
[[/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.” PVP was discounted at 4.0%, 2.5% and 3.0% in 2023, 2022 and 2021, respectively.

(2)    2023 PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under ASC 460, Guarantees.    

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 financial guaranty 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.

Total U.S. public finance GWP and PVP both declined in 2023 compared with 2022 primarily due to a decline in secondary market GWP and PVP of $71 million due to less market opportunity, offset in part by an increase in assumed GWP and PVP of $47 million and $46 million, respectively. Insured U.S. municipal bond market penetration, based on par written, was 8.8% in 2023 compared with 8.0% in 2022. In 2023, the Company insured 61% of the insured par of new issuances sold, compared with 59% in 2022.

Non-U.S. public finance GWP and PVP increased in 2023 compared with 2022. In 2023, non-U.S. public finance GWP and PVP includes included guarantees of transactions in the airport, university housing, regulated utility and transportation sector, as well as guarantees of local authority and social housing transactions.

84

Structured finance GWP and PVP increased in 2023 compared with 2022. 2023 structured finance GWP and PVP included several insurance securitizations and subscription finance facility transactions. Structured finance PVP in 2023 also included a large specialty business guaranty.

Business activity in the non .U.S. public finance and structured finance sectors often has long lead times and therefore may vary from period to period.

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) (7/13/23)","","AA+ (stable) (10/20/23)","","A1 (stable) (3/18/22)","","\u2014"],["AGC","AA (stable) (7/13/23)","","AA+ (stable) (10/20/23)","","(1)","","\u2014"],["AG Re","AA (stable) (7/13/23)","","\u2014","","\u2014","","\u2014"],["AGRO","AA (stable) (7/13/23)","","\u2014","","\u2014","","A+ (stable) (7/21/23)"],["AGUK","AA (stable) (7/13/23)","","AA+ (stable) (10/20/23)","","A1 (stable) (3/18/22)","","\u2014"],["AGE","AA (stable) (7/13/23)","","AA+ (stable) (10/20/23)","","\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. Moody's rates AGC A2 (stable).

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

For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “Item 1A. Risk Factors —A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries may adversely affect its business prospects. ”

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, 2023 and December 31, 2022 was $318 million and $303 million, respectively.

Equity method investments in the Insurance segment include investments that the U.S. Insurance Subsidiaries make in certain alternative investments, primarily Sound Point and AHP funds. The income (loss) on such investments is reported in “equity in earnings (losses) of investees” and typically represents the Company’s share of earnings of its other investees.

85

Insurance Segment

Income from Investments

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Net investment income"],["Fixed-maturity securities, available-for-sale:"],["Externally managed (1)","$","207","","","$","199","","","$","210"],["Loss Mitigation Securities","58","","","35","","","42"],["Puerto Rico, New Recovery Bonds","12","","","7","","","\u2014"],["Other (2)","20","","","19","","","23"],["Short-term investments","65","","","13","","","\u2014"],["Intercompany loans","10","","","10","","","10"],["Other investment assets","3","","","1","","","1"],["Investment income","375","","","284","","","286"],["Investment expenses","(5)","","","(6)","","","(6)"],["Net investment income","$","370","","","$","278","","","$","280"],["Fair value gains (losses) on trading securities","$","74","","","$","(34)","","","$","\u2014"],["Equity in earnings (losses) of investees"],["CLOs","$","50","","","$","(2)","","","$","29"],["Asset-based","5","","","5","","","19"],["Healthcare","19","","","(11)","","","30"],["Other","8","","","(43)","","","66"],["Equity in earnings (losses) of investees","$","82","","","$","(51)","","","$","144"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Includes income on the portion of the CLO portfolio that was managed by AssuredIM prior to July 1, 2023.

(2)    Include income on the portion of the municipal bond portfolio that was managed by AssuredIM prior to July 1, 2023.

Net investment income for 2023 increased compared to 2022, primarily due to the increase in short-term rates and higher average short-term balances, and higher income on loss mitigation securities. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 4.09% as of December 31, 2023 and 3.55% as of December 31, 2022.

Foreign Exchange Gains (Losses) on Remeasurement and Other Income (Loss)

“Foreign exchange gains (losses) on remeasurement and other income (loss)” in 2023 primarily relates to the reversal of a previously recorded litigation accrual of $20 million, commutation gains of $10 million and foreign exchange gain on remeasurement of $3 million. See Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, for additional information.

Economic Loss Development

     The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered). For the GAAP accounting policies for measurement and recognition 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.

86

    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) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; (ii) excess spread on underlying collateral, as applicable; and (iii) amounts ceded to reinsurers. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.

Current risk-free rates are used to discount expected losses at the end of each reporting period. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) for U.S. denominated exposures were 4.10%, 4.08% and 1.02% as of December 31, 2023, 2022 and 2021, respectively.

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

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

by Accounting Model

[[GREPCENT_TABLE]]
[["","","Net Expected Loss to be Paid (Recovered)","","Net Economic Loss Development (Benefit)"],["","","As of December 31,","","Year Ended December 31,"],["Accounting Model","","2023","","2022","","2023","","2022","","2021"],["","","(in millions)"],["Insurance","","$","263","","","$","205","","","$","174","","","$","(112)","","","$","(281)"],["FG VIEs (1)","","240","","","314","","","(11)","","","(17)","","","(20)"],["Credit derivatives","","2","","","3","","","1","","","4","","","14"],["Total","","$","505","","","$","522","","","$","164","","","$","(125)","","","$","(287)"],["Net exposure rated BIG","","$","5,521","","","$","5,976"]]
[[/GREPCENT_TABLE]]

____________________

(1)    The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts). See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).

Net Expected Loss to be Paid (Recovered)

Roll Forward by Sector

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023"],["Sector","","Net Expected Loss to be Paid (Recovered) as of December 31, 2022","","Net Economic Loss Development (Benefit)","","Net (Paid) Recovered Losses (1)","","Net Expected Loss to be Paid (Recovered) as of December 31, 2023"],["","","(in millions)"],["Public finance:"],["U.S. public finance","","$","403","","","$","201","","","$","(206)","","","$","398"],["Non-U.S. public finance","","9","","","11","","","\u2014","","","20"],["Public finance","","412","","","212","","","(206)","","","418"],["Structured finance:"],["U.S. RMBS","","66","","","(56)","","","33","","","43"],["Other structured finance","","44","","","8","","","(8)","","","44"],["Structured finance","","110","","","(48)","","","25","","","87"],["Total","","$","522","","","$","164","","","$","(181)","","","$","505"]]
[[/GREPCENT_TABLE]]

87

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2022"],["Sector","","Net Expected Loss to be Paid (Recovered) as of December 31, 2021","","Net 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]]

____________________

(1)    Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets.”

Effect of changes in the risk-free rates included in economic loss development (benefit) was a loss of $3 million in 2023 and a benefit of $115 million in 2022.

2023 Net Economic Loss Development

Public Finance: The economic loss development on U.S. exposures in 2023 was $201 million, which was primarily attributable to PREPA and healthcare exposures, partially offset by higher projected recoveries in other municipal exposures.

U.S. RMBS: The benefit attributable to U.S. RMBS of $56 million was primarily attributable to a $53 million benefit related to to higher recoveries for secured second lien charged-off loans and a $13 million benefit related to improved performance in certain transactions, partially offset by $17 million of loss development related to the return of certain previously received funds.

        2022 Net Economic Loss Development

Public Finance: 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.

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 representations and warranties (R&W) provider. These items were all partially offset by loss of $79 million related to lower excess spread.

Insurance Segment Loss Expense

    The primary differences between net economic loss development and the amount reported as “loss and LAE (benefit)” in the consolidated statements of operations are that loss and LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (ii) eliminates loss and LAE related to FG VIEs; and (iii) does not include estimated losses on credit derivatives.     

    Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives without giving effect to eliminations related to the consolidation of FG VIEs.

88

    For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in a business combination or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. Therefore, the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts generally relate to those policies.

While expected loss to be paid (recovered) is an important measure that provides the present value of amounts that the Company expects to pay or recover in future periods on all contracts, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies.

The amount of Insurance segment loss expense, which includes all policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense (benefit).

Insurance Segment

Loss Expense (Benefit)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["U.S. public finance","$","191","","","$","128","","","$","(146)"],["Non-U.S. public finance","\u2014","","","\u2014","","","(9)"],["Structured finance:"],["U.S. RMBS","(36)","","","(120)","","","(84)"],["Other structured finance","6","","","4","","","18"],["Structured finance","(30)","","","(116)","","","(66)"],["Total Insurance segment loss expense (benefit)","$","161","","","$","12","","","$","(221)"]]
[[/GREPCENT_TABLE]]

The difference between public finance loss expense and economic benefit in 2022 was primarily attributable to the release of unearned premium reserve related to 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.

    Employee Compensation and Benefit Expenses and Other Operating Expenses

The increase in 2023 from 2022 was primarily attributable to increases in value added taxes, certain employee benefit related costs, and legal expenses.

Provision (Benefit) for Income Taxes

The tax benefit in 2023 was primarily related to the $189 million benefit recognized in connection with the enactment of the 15% Bermuda corporate income tax in December 2023. The new Bermuda corporate income tax allows for a deferred tax asset associated with an ETA equal to the difference between the fair market value and the carrying value of assets and liabilities of each of the Company’s Bermuda insurance subsidiaries as of September 30, 2023. The ETA is expected to be utilized over 10 to 15 years, depending on the nature of the deferred tax asset component, beginning in 2025. This was partially offset by income tax expense in the Company’s other operating jurisdictions. The Company expects its Bermuda insurance subsidiaries to incur tax which will be offset by the realization of the deferred tax asset, beginning in 2025. See Item 8, Financial Statements and Supplementary Data, Note 14, Income Taxes, for additional information.

89

Asset Management Segment Results

Asset Management Segment Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Segment revenues","$","76","","","$","112","","","$","83"],["Segment expenses","78","","","119","","","108"],["Equity in earnings (losses) of investees","5","","","\u2014","","","\u2014"],["Segment adjusted operating income (loss) before income taxes","3","","","(7)","","","(25)"],["Less: Provision (benefit) for income taxes","\u2014","","","(1)","","","(6)"],["Segment adjusted operating income (loss)","$","3","","","$","(6)","","","$","(19)"]]
[[/GREPCENT_TABLE]]

Results in the table above represent (i) revenues (asset management and performance fees), amortization of intangible assets and compensation and other operating expenses of AssuredIM for 2021, 2022 and the first half of 2023, prior to the Sound Point Transaction and the AHP Transaction, as well as (ii) equity in earnings of Sound Point for the third quarter of 2023 (Sound Point results are reported on a one quarter lag), net of the amortization of finite-lived intangible assets associated with the basis difference in Sound Point and (iii) other asset management related income. See Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.

Assets Under Management

Until July 1, 2023, the effective date of the Sound Point Transaction and the AHP Transaction, the Company used AUM as one of the metrics to measure progress in its Asset Management segment. AUM refers to the assets managed, advised or serviced by an asset manager. AssuredIM AUM as of June 30, 2023 was $16.4 billion. As of July 1, 2023, the management of approximately $15.1 billion of AUM (of which $385 million was attributable to the Company) was transferred to Sound Point. Also in July 2023, the management of approximately $1.3 billion in remaining AUM (of which $185 million was attributable to the Company) was transferred with the sale of AHP to an entity owned and controlled by its managing partner. AHP will continue to manage the healthcare funds. In the second quarter of 2023, (i) the management of approximately $159 million in AUM in respect of certain wind-down and opportunity funds in their harvesting periods (when the funds are past their investment periods and the value of the investments are realized) were transferred to a third party liquidator and (ii) management of approximately $513 million at fair value in investment grade municipal bonds and CLOs under an investment management agreement was transferred to an internal manager and to one of the Company’s external fixed-maturity security managers. Effective with the Sound Point Transaction and the AHP Transaction, the Company no longer has any AUM. See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation.

90

Corporate Division Results

Corporate Division Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Revenues"],["Gain on sale of asset management subsidiaries","$","262","","","$","\u2014","","","$","\u2014"],["Other","13","","","4","","","2"],["Total revenues","275","","","4","","","2"],["Expenses"],["Interest expense","99","","","89","","","96"],["Loss on extinguishment of debt","\u2014","","","\u2014","","","175"],["Employee compensation and benefit expenses","38","","","30","","","21"],["Other operating expenses","79","","","24","","","20"],["Total expenses","216","","","143","","","312"],["Adjusted operating income (loss) before income taxes","59","","","(139)","","","(310)"],["Less: Provision (benefit) for income taxes","14","","","(5)","","","(47)"],["Adjusted operating income (loss)","$","45","","","$","(134)","","","$","(263)"]]
[[/GREPCENT_TABLE]]

The gain on sale of asset management subsidiaries relates to the Sound Point Transaction and AHP Transaction. See Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation.

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 2023, 2022 and 2021, related primarily to the $250 million AGUS debt issued to the U.S. Insurance Subsidiaries. On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS used the proceeds of this issuance to redeem $330 million of 5% Senior Notes due 2024. The interest expense in 2023 was higher than in 2022 due to additional interest expense on the 6.125% Senior Notes and higher interest on the variable rate AGMH Series A Enhanced Junior debentures. 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 including Board of Director expenses, legal fees and other direct or allocated expenses. In 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction and a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $40 million, consisting primarily of $25 million advisory and consent fees and $8 million legal fees.

The provision for income taxes in 2023 included a $19 million benefit attributable to a change in New York State tax law.

Other (Effect of Consolidating FG VIEs and CIVs)

    The effect of consolidating FG VIEs and CIVs, intersegment eliminations, and reclassifications of reimbursable fund expenses to revenue are presented in “other.” See Item 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 (a) Sound Point and AHP funds and (b) prior to July 1, 2023, collateralized financing entities and CLO warehouses. 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

91

and liabilities and related changes in fair value on the consolidated financial statements; (ii) eliminating the premiums and losses/recoveries associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs; and (iii) eliminating the investment balances associated with the insurance subsidiaries’ purchases of the debt obligations of the FG VIEs.

Consolidating CIVs (as opposed to accounting for them as equity method investments) has a significant effect on assets, liabilities and cash flows, and includes: (i) the establishment of the assets and liabilities of the CIVs, and related changes in fair value; (ii) eliminating the asset management fees earned by AssuredIM from the CIVs (prior to July 1, 2023); (iii) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings (losses) of investees; and (iv) establishing noncontrolling interest (NCI) for amounts not owned by the Company.

The economic effect of the U.S Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“fair value gains (losses) on consolidated investment vehicles” and “NCI”) on a consolidated basis. As a result of the Sound Point Transaction and AHP Transaction, the Company deconsolidated CIV assets of $4.7 billion and CIV liabilities of $4.4 billion.

The net effect of consolidating CIVs included a $16 million loss triggered by the Sound Point Transaction and AHP Transaction in 2023 and a $31 million gain on consolidation in 2021, as described in Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

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.

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

Increase (Decrease)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Effect on Financial Statement Line Item","","(in millions)"],["Fair value gains (losses) on FG VIEs (1)","","$","8","","","$","22","","","$","23"],["Fair value gains (losses) on CIVs","","88","","","17","","","127"],["Equity in earnings (losses) of investees (2)","","(59)","","","12","","","(50)"],["Other (3)","","(41)","","","(44)","","","(34)"],["Effect on income before tax","","(4)","","","7","","","66"],["Less: Tax provision (benefit)","","(5)","","","\u2014","","","6"],["Effect on net income (loss)","","1","","","7","","","60"],["Less: Effect on noncontrolling interests (4)","","22","","","13","","","30"],["Effect on net income (loss) attributable to AGL","","$","(21)","","","$","(6)","","","$","30"],["By Type of VIE"],["FG VIEs","","$","(4)","","","$","4","","","$","(1)"],["CIVs","","(17)","","","(10)","","","31"],["Effect on net income (loss) attributable to AGL","","$","(21)","","","$","(6)","","","$","30"]]
[[/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 certain alternative investments, primarily Sound Point and AHP funds (and prior to July 1, 2023, AssuredIM managed 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 funds managed by Sound Point and prior to July 1, 2023, AssuredIM funds’ income that is not attributable to AGAS’ or any other subsidiaries’ ownership interest.

92

Reconciliation to GAAP

Reconciliation of Net Income (Loss) Attributable to AGL

to Adjusted Operating Income (Loss)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Net income (loss) attributable to AGL","$","739","","","$","124","","","$","389"],["Less pre-tax adjustments:"],["Realized gains (losses) on investments","(14)","","","(56)","","","15"],["Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives","106","","","(18)","","","(64)"],["Fair value gains (losses) on CCS","(35)","","","24","","","(28)"],["Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves","51","","","(110)","","","(21)"],["Total pre-tax adjustments","108","","","(160)","","","(98)"],["Less tax effect on pre-tax adjustments","(17)","","","17","","","17"],["Adjusted operating income (loss)","$","648","","","$","267","","","$","470"],["Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(5), $- and $6 included in adjusted operating income","$","(21)","","","$","(6)","","","$","30"]]
[[/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,"],["","2023","","2022","","2021"],["","(in millions)"],["Gross realized gains on sales of available-for-sale securities","$","21","","","$","3","","","$","20"],["Gross realized losses on sales of available-for-sale securities","(19)","","","(45)","","","(5)"],["Net foreign currency gains (losses)","(1)","","","(4)","","","2"],["Change in allowance for credit losses and intent to sell","(14)","","","(21)","","","(7)"],["Other net realized gains (losses)","(1)","","","11","","","5"],["Net realized investment gains (losses)","$","(14)","","","$","(56)","","","$","15"]]
[[/GREPCENT_TABLE]]

Sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions were the primary components of gross realized gains on sales in 2023 and 2022 and gross realized losses on sales in 2022.

    Non-Credit Impairment-Related Unrealized Fair Value Gains (Losses) on Credit Derivatives

Changes in the fair value of credit derivatives occur because of changes in the Company’s own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-credit impairment-related changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because they do not represent actual claims or losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods. Except for underlying credit impairment, which is recognized as loss expense in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.

93

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 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 CDS spreads do not significantly affect the fair value of these CDS contracts. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.

The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market since 2009 and, as of December 31, 2023, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread and estimated contractual payments. See Item 8, Financial Statements and Supplementary Data, Note 9, Fair Value Measurement, for additional information.

    During 2023, non-credit impairment-related unrealized fair value gains were generated primarily as a result of generally lower collateral asset spreads.

    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.

Fair Value Gains (Losses) on CCS

    Fair value losses on CCS in 2023 were primarily due to a tightening in market spreads. Fair value gains on CCS in 2022 were primarily driven by an increase in LIBOR. Fair value gains (losses) of CCS are heavily affected by, and in part fluctuate with, changes in market spreads and interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

Foreign Exchange Gain (Loss) on Remeasurement

    Foreign exchange gains and losses in all periods primarily relate to remeasurement of long-dated premiums receivable, for which the Company records the present value of future installment premiums, and are mainly due to changes in the exchange rate of the pound sterling and, to a lesser extent, the euro relative to the U.S. dollar. Approximately 70% and 74% of gross premiums receivable, net of commissions payable at December 31, 2023 and December 31, 2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Premiums on European infrastructure and structured finance transactions typically are paid, in whole or in part, on an installment basis, whereas premiums on U.S. public finance transactions are often paid upfront.

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

Foreign Exchange Rates

U.S. Dollar Per Foreign Currency

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2023","","2022","","2021"],["Pound sterling","$1.273","","$1.208","","$1.353"],["Euro","$1.104","","$1.071","","$1.137"]]
[[/GREPCENT_TABLE]]

94

Non-GAAP Financial Measures

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

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

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

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

•CIVs in which certain subsidiaries invest.

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

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

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

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

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

Adjusted Operating Income

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

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

2)    Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present

95

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

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

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

96

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, 2023","","As of December 31, 2022"],["","After-Tax","","Per Share","","After-Tax","","Per Share"],["","(dollars in millions, except share amounts)"],["Shareholders\u2019 equity attributable to AGL","$","5,713","","","$","101.63","","","$","5,064","","","$","85.80"],["Less pre-tax adjustments:"],["Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives","34","","","0.61","","","(71)","","","(1.21)"],["Fair value gains (losses) on CCS","13","","","0.22","","","47","","","0.80"],["Unrealized gain (loss) on investment portfolio","(361)","","","(6.40)","","","(523)","","","(8.86)"],["Less taxes","37","","","0.66","","","68","","","1.15"],["Adjusted operating shareholders\u2019 equity","5,990","","","106.54","","","5,543","","","93.92"],["Pre-tax adjustments:"],["Less: Deferred acquisition costs","161","","","2.87","","","147","","","2.48"],["Plus: Net present value of estimated net future revenue","199","","","3.54","","","157","","","2.66"],["Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed","3,436","","","61.12","","","3,428","","","58.10"],["Plus taxes","(699)","","","(12.41)","","","(602)","","","(10.22)"],["Adjusted book value","$","8,765","","","$","155.92","","","$","8,379","","","$","141.98"],["Gain (loss) related to FG VIE and CIV consolidation included in:"],["Adjusted operating shareholders\u2019 equity (net of tax provision of $1 and $4)","$","5","","","$","0.07","","","$","17","","","$","0.28"],["Adjusted book value (net of tax provision (benefit) of $0 and $3)","\u2014","","","\u2014","","","11","","","0.19"]]
[[/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.

97

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, 2023"],["","Public Finance","","Structured Finance"],["","U.S.","","Non - U.S.","","U.S.","","Non - U.S.","","Total"],["","(in millions)"],["GWP","$","211","","","$","82","","","$","59","","","$","5","","","$","357"],["Less: Installment GWP and other GAAP adjustments (1)","109","","","74","","","59","","","5","","","247"],["Upfront GWP","102","","","8","","","\u2014","","","\u2014","","","110"],["Plus: Installment premiums and other (2)","110","","","75","","","68","","","41","","","294"],["PVP","$","212","","","$","83","","","$","68","","","$","41","","","$","404"]]
[[/GREPCENT_TABLE]]

[[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]]

98

[[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]]

_____________

(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-maturity securities such as Loss Mitigation Securities. The years 2023 and 2022 also include the present value of future premiums and fees associated with other guaranties written by the Company that, under GAAP, are accounted for under Accounting Standards Codification (ASC) 460, Guarantees.

Insured Portfolio

Financial Guaranty Exposure

The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure.

99

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).

Financial Guaranty Portfolio

Net Par Outstanding by Sector

[[GREPCENT_TABLE]]
[["","","As of December 31, 2023","","As of December 31, 2022"],["Sector","","(in millions)"],["Public finance:"],["U.S. public finance:"],["General obligation","","$","74,609","","","$","71,868"],["Tax backed","","33,060","","","33,752"],["Municipal utilities","","29,300","","","26,436"],["Transportation","","22,052","","","19,688"],["Healthcare","","12,604","","","11,304"],["Infrastructure finance","","8,796","","","6,955"],["Higher education","","7,250","","","7,137"],["Housing revenue","","1,152","","","959"],["Investor-owned utilities","","329","","","332"],["Renewable energy","","167","","","180"],["Other public finance","","970","","","1,025"],["Total U.S. public finance","","190,289","","","179,636"],["Non-U.S public finance:"],["Regulated utilities","","20,545","","","17,855"],["Infrastructure finance","","15,430","","","13,915"],["Sovereign and sub-sovereign","","9,869","","","9,526"],["Renewable energy","","2,030","","","2,086"],["Pooled infrastructure","","1,133","","","1,081"],["Total non-U.S. public finance","","49,007","","","44,463"],["Total public finance","","239,296","","","224,099"],["Structured finance:"],["U.S. structured finance:"],["Insurance securitizations","","4,379","","","3,879"],["RMBS","","1,774","","","1,956"],["Pooled corporate obligations","","631","","","625"],["Financial products","","464","","","453"],["Consumer receivables","","314","","","437"],["Subscription finance facilities","","178","","","72"],["Other structured finance","","892","","","806"],["Total U.S. structured finance","","8,632","","","8,228"],["Non-U.S. structured finance:"],["Subscription finance facilities","","444","","","219"],["Pooled corporate obligations","","425","","","344"],["RMBS","","252","","","263"],["Other structured finance","","104","","","105"],["Total non-U.S structured finance","","1,225","","","931"],["Total structured finance","","9,857","","","9,159"],["Total net par outstanding","","$","249,153","","","$","233,258"]]
[[/GREPCENT_TABLE]]

100

    Second-to-pay insured par outstanding represents transactions the Company has insured that are already insured by another financial guaranty insurer and where the Company’s obligation to pay under its insurance of such transactions arises only if both the obligor on the underlying insured obligation and the primary financial guaranty insurer default. The Company underwrites such transactions based on the underlying insured obligation without regard to the primary financial guaranty insurer and internally rates the transaction the higher of the rating of the underlying obligation and the rating of the primary financial guarantor. The second-to-pay insured par outstanding as of both December 31, 2023 and 2022 was $4.3 billion.

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, 2023.

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

As of December 31, 2023

[[GREPCENT_TABLE]]
[["","Net Par Outstanding","","Percent of Total U.S. Public Finance Net Par Outstanding","","Rating"],["","(dollars in millions)"],["New Jersey (State of)","$","2,905","","","1.5","%","","BBB"],["Pennsylvania (Commonwealth of)","2,196","","","1.1","","","BBB+"],["Metro Washington Airports Authority (Dulles Toll Road)","1,633","","","0.9","","","BBB+"],["New York Metropolitan Transportation Authority","1,481","","","0.8","","","A-"],["New York Power Authority","1,460","","","0.8","","","AA-"],["Foothill/Eastern Transportation Corridor Agency, California","1,326","","","0.7","","","BBB+"],["Alameda Corridor Transportation Authority, California","1,309","","","0.7","","","BBB+"],["North Texas Tollway Authority","1,295","","","0.7","","","A+"],["CommonSpirit Health, Illinois","1,000","","","0.5","","","A-"],["San Joaquin Hills Transportation, California","988","","","0.5","","","BBB"],["Total of top ten U.S. public finance exposures","$","15,593","","","8.2","%"]]
[[/GREPCENT_TABLE]]

Ten Largest U.S. Structured Finance Exposures

As of December 31, 2023

[[GREPCENT_TABLE]]
[["","Net Par Outstanding","","Percent of Total U.S. Structured Finance Net Par Outstanding","","Rating"],["","(dollars in millions)"],["Private US Insurance Securitization","$","1,100","","","12.7","%","","AA"],["Private US Insurance Securitization","950","","","11.0","","","A+"],["Private US Insurance Securitization","944","","","10.9","","","AA-"],["Private US Insurance Securitization","399","","","4.6","","","AA-"],["Private US Insurance Securitization","399","","","4.6","","","AA-"],["Private US Insurance Securitization","386","","","4.5","","","AA-"],["SLM Student Loan Trust 2007-A","163","","","1.9","","","AA"],["Private Middle Market CLO","129","","","1.5","","","AAA"],["Private US Insurance Securitization","125","","","1.5","","","AA"],["DB Master Finance LLC","119","","","1.4","","","BBB"],["Total of top ten U.S. structured finance exposures","$","4,714","","","54.6","%"]]
[[/GREPCENT_TABLE]]

101

Ten Largest Non-U.S. Exposures

As of December 31, 2023

[[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","","$","2,409","","","4.8","%","","BBB"],["Thames Water Utilities Finance PLC","United Kingdom","","2,106","","","4.2","","","BBB"],["Southern Gas Networks PLC","United Kingdom","","2,065","","","4.1","","","BBB+"],["Dwr Cymru Financing Limited","United Kingdom","","1,834","","","3.7","","","A-"],["Anglian Water Services Financing PLC","United Kingdom","","1,732","","","3.4","","","A-"],["National Grid Gas PLC","United Kingdom","","1,632","","","3.2","","","A-"],["Quebec Province","Canada","","1,436","","","2.8","","","AA-"],["Channel Link Enterprises Finance PLC","France, United Kingdom","","1,257","","","2.5","","","BBB"],["Yorkshire Water Services Finance Plc","United Kingdom","","1,087","","","2.2","","","BBB"],["British Broadcasting Corporation (BBC)","United Kingdom","","1,042","","","2.1","","","A+"],["Total of top ten non-U.S. exposures","","","$","16,600","","","33.0","%"]]
[[/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, 2023

[[GREPCENT_TABLE]]
[["Original Par Amount Per Issue","","Number ofIssues","","Net ParOutstanding","","% of PublicFinanceNet ParOutstanding"],["","(dollars in millions)"],["Less than $10 million","9,945","","","$","30,038","","","12.6","%"],["$10 million through $50 million","3,576","","","62,542","","","26.1"],["$50 million through $100 million","638","","","37,760","","","15.8"],["$100 million to $200 million","343","","","41,453","","","17.3"],["$200 million or greater","227","","","67,503","","","28.2"],["Total","14,729","","$","239,296","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Structured Finance Portfolio by Issue Size

As of December 31, 2023

[[GREPCENT_TABLE]]
[["Original Par Amount Per Issue","","Number ofIssues","","Net ParOutstanding","","% of StructuredFinanceNet ParOutstanding"],["","(dollars in millions)"],["Less than $10 million","103","","","$","90","","","0.9","%"],["$10 million through $50 million","139","","","1,033","","","10.4"],["$50 million through $100 million","53","","","1,248","","","12.7"],["$100 million to $200 million","54","","","1,990","","","20.2"],["$200 million or greater","83","","","5,496","","","55.8"],["Total","432","","$","9,857","","","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) aggregating $1.1 billion net par outstanding as of

102

December 31, 2023, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR).

    The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in “—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, 2023

[[GREPCENT_TABLE]]
[["","","Net Par Outstanding"],["","","AGM","","AGC","","AG Re","","Eliminations (1)","","Total Net Par Outstanding","","Gross Par Outstanding"],["","","(in millions)"],["Defaulted Puerto Rico Exposures"],["PREPA","","$","377","","","$","67","","","$","180","","","$","\u2014","","","$","624","","","$","633"],["Total Defaulted","","377","","","67","","","180","","","\u2014","","","624","","","633"],["Resolved Puerto Rico Exposures (2)"],["PRHTA (Transportation revenue)","","14","","","157","","","87","","","(14)","","","244","","","244"],["PRHTA (Highway revenue)","","109","","","11","","","8","","","\u2014","","","128","","","128"],["Total Resolved","","123","","","168","","","95","","","(14)","","","372","","","372"],["Other Puerto Rico Exposures (3)"],["MFA","","84","","","6","","","18","","","\u2014","","","108","","","114"],["PRASA and U of PR","","\u2014","","","1","","","\u2014","","","\u2014","","","1","","","1"],["Total Other","","84","","","7","","","18","","","\u2014","","","109","","","115"],["Total exposure to Puerto Rico","","$","584","","","$","242","","","$","293","","","$","(14)","","","$","1,105","","","$","1,120"]]
[[/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 pursuant to the 2022 Puerto Rico Resolutions. Consideration (e.g. Toll Bonds and CVIs) received under the HTA Plan related to the remaining insured exposure is reported in FG VIEs’ assets (see Item 8, Financial Statements and Supplementary Data, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles).

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

103

    The following tables show the scheduled amortization of the various obligations of Puerto Rico’s authorities and public corporations insured by the Company. The Company guarantees payments of debt service when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis. In the event that obligors default on their obligations, the Company would only pay the shortfall between the debt service due in any given period and the amount paid by the obligors.

Amortization Schedule of Net Par of Puerto Rico

As of December 31, 2023

[[GREPCENT_TABLE]]
[["","Scheduled Net Par Amortization"],["","2024 Q1","2024 Q2","2024 Q3","2024 Q4","2025","2026","2027","2028","2029 -2033","2034 -2038","2039 -2041","Total"],["","(in millions)"],["Defaulted Puerto Rico Exposures"],["PREPA","$","\u2014","","$","\u2014","","$","93","","$","\u2014","","$","68","","$","105","","$","105","","$","68","","$","176","","$","9","","$","\u2014","","$","624"],["Total Defaulted","\u2014","","\u2014","","93","","\u2014","","68","","105","","105","","68","","176","","9","","\u2014","","624"],["Resolved Puerto Rico Exposures"],["PRHTA (Transportation revenue)","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","127","","117","","244"],["PRHTA (Highway revenue)","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","44","","84","","\u2014","","128"],["Total Resolved","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","44","","211","","117","","372"],["Other Puerto Rico Exposures"],["MFA","\u2014","","\u2014","","16","","\u2014","","16","","35","","15","","13","","13","","\u2014","","\u2014","","108"],["PRASA and U of PR","\u2014","","\u2014","","1","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","1"],["Total Other Puerto Rico Exposures","\u2014","","\u2014","","17","","\u2014","","16","","35","","15","","13","","13","","\u2014","","\u2014","","109"],["Total","$","\u2014","","$","\u2014","","$","110","","$","\u2014","","$","84","","$","140","","$","120","","$","81","","$","233","","$","220","","$","117","","$","1,105"]]
[[/GREPCENT_TABLE]]

Amortization Schedule of Net Debt Service of Puerto Rico

As of December 31, 2023

[[GREPCENT_TABLE]]
[["","Scheduled Net Debt Service Amortization"],["","2024 Q1","2024 Q2","2024 Q3","2024 Q4","2025","2026","2027","2028","2029 -2033","2034 -2038","2039 -2041","Total"],["","(in millions)"],["Defaulted Puerto Rico Exposures"],["PREPA","$","12","","$","3","","$","105","","$","3","","$","92","","$","126","","$","122","","$","80","","$","199","","$","9","","$","\u2014","","$","751"],["Total Defaulted","12","","3","","105","","3","","92","","126","","122","","80","","199","","9","","\u2014","","751"],["Resolved Puerto Rico Exposures"],["PRHTA (Transportation revenue)","6","","\u2014","","6","","\u2014","","13","","13","","12","","13","","65","","172","","128","","428"],["PRHTA (Highway revenue)","3","","\u2014","","3","","\u2014","","7","","7","","7","","7","","76","","93","","\u2014","","203"],["Total Resolved","9","","\u2014","","9","","\u2014","","20","","20","","19","","20","","141","","265","","128","","631"],["Other Puerto Rico Exposures"],["MFA","3","","\u2014","","19","","\u2014","","20","","39","","17","","14","","13","","\u2014","","\u2014","","125"],["PRASA and U of PR","\u2014","","\u2014","","1","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","1"],["Total Other Puerto Rico Exposures","3","","\u2014","","20","","\u2014","","20","","39","","17","","14","","13","","\u2014","","\u2014","","126"],["Total","$","24","","$","3","","$","134","","$","3","","$","132","","$","185","","$","158","","$","114","","$","353","","$","274","","$","128","","$","1,508"]]
[[/GREPCENT_TABLE]]

In the fourth quarter of 2023, all of the Toll Bonds in the Puerto Rico Trusts were called, resulting in cash proceeds of $154 million. Such cash proceeds comprise the vast majority of the assets in the Puerto Rico Trusts as of December 31, 2023. In January 2024, such proceeds were used to pay down a portion of the liabilities of the Puerto Rico Trusts. The remaining liabilities of the Puerto Rico Trusts will be paid by the U.S. Insurance Subsidiaries under their financial guaranty policies and are no longer dependent on the credit of PRHTA.

104

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 0.7% of the total net par outstanding, and BIG U.S. RMBS represent 17.3% of total BIG net par outstanding as of December 31, 2023.

Distribution of U.S. RMBS by Year Insured and Type of Exposure as of December 31, 2023 

[[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","","$","8","","","$","7","","","$","\u2014","","","$","301","","","$","9","","","$","325"],["2005","","21","","","110","","","14","","","178","","","40","","","363"],["2006","","21","","","22","","","1","","","37","","","93","","","174"],["2007","","\u2014","","","179","","","15","","","554","","","134","","","882"],["2008","","\u2014","","","\u2014","","","\u2014","","","30","","","\u2014","","","30"],["Total exposures","","$","50","","","$","318","","","$","30","","","$","1,100","","","$","276","","","$","1,774"],["Exposures rated BIG","","$","30","","","$","191","","","$","14","","","$","602","","","$","104","","","$","941"]]
[[/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 outstanding. 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 and other distributions from their operating subsidiaries (see “— Insurance Subsidiaries — Distributions from Insurance Subsidiaries” below for a description of dividend and other capital distribution 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.

105

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.

U.S. Holding Companies

Long-Term Debt and Intercompany Loans

[[GREPCENT_TABLE]]
[["","","","","","As of December 31,"],["","","","","","2023","","2022"],["","","","","","(in millions)"],["","Effective Interest Rate","","Final Maturity","","Principal Amount"],["AGUS - long-term debt"],["5% Senior Notes","5.00%","","2024","","$","\u2014","","","$","330"],["6.125% Senior Notes","6.125%","","2028","","350","","","\u2014"],["3.15% Senior Notes","3.15%","","2031","","500","","","500"],["7% Senior Notes","6.40%","","2034","","200","","","200"],["3.6% Senior Notes","3.60%","","2051","","400","","","400"],["Series A Enhanced Junior Subordinated Debentures (1)","3 month CME Term SOFR +2.64%","","2066","","150","","","150"],["AGUS long-term debt","","","","","1,600","","","1,580"],["AGUS - intercompany loans from:"],["AGC and AGM","3.50%","","2029","","250","","","250"],["AGRO","5.00%","","2028","","20","","","20"],["AGUS intercompany loans","","","","","270","","","270"],["Total AGUS long-term debt and intercompany loans","","","","","1,870","","","1,850"],["AGMH"],["Junior Subordinated Debentures (2)","6.40%","","2066","","300","","","300"],["Total AGMH long-term debt","","","","","300","","","300"],["AGMH\u2019s long-term debt purchased by AGUS (3)","","","","","(154)","","","(154)"],["U.S. Holding Company long-term debt","","","","","$","2,016","","","$","1,996"]]
[[/GREPCENT_TABLE]]

 ____________________

(1)    Until June 30, 2023, the Series A Enhanced Junior Subordinated Debentures paid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Three-Month Chicago Mercantile Exchange (CME) Term Secured Overnight Finance Rate (SOFR).

(2)    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 CME Term SOFR plus 2.33%.

(3)     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,"],["","2023","","2022","","2021"],["","(in millions)"],["AGUS - long-term debt","$","68","","","$","68","","","$","50"],["AGUS - intercompany loans","10","","","10","","","10"],["Total AGUS","78","","","78","","","60"],["AGMH - long-term debt","19","","","19","","","40"],["AGMH\u2019s long-term debt purchased by AGUS","(10)","","","(10)","","","(10)"],["Total interest paid","$","87","","","$","87","","","$","90"]]
[[/GREPCENT_TABLE]]

On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS

106

redeemed $330 million of 5% Senior Notes due 2024. See Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.

U.S. Holding Companies

Expected Debt Service of Long-Term Debt

As of December 31, 2023

[[GREPCENT_TABLE]]
[["Year","","AGUS","","AGMH","","Eliminations (1)","","Total"],["","","(in millions)"],["2024","","$","95","","","$","19","","","$","(20)","","","$","94"],["2025","","136","","","19","","","(69)","","","86"],["2026","","134","","","19","","","(68)","","","85"],["2027","","131","","","19","","","(66)","","","84"],["2028","","492","","","19","","","(84)","","","427"],["2029-2048","","1,331","","","384","","","(249)","","","1,466"],["2049-2066","","755","","","646","","","(331)","","","1,070"],["Total","","$","3,074","","","$","1,125","","","$","(887)","","","$","3,312"]]
[[/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, 2033 (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 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 acquisition of BlueMountain Capital Management LLC (AssuredIM LLC, now known as Sound Point Luna LLC) and its associated entities, 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 Municipal Assurance Corp. In 2023, the maturity date was extended to December 2028. AGUS repaid $10 million in 2021 in outstanding principal as well as accrued and unpaid interest. There were no repayments in 2023 and 2022. As of December 31, 2023, $20 million remained outstanding.

Guarantor and U.S. Holding Companies’ Summarized Financial Information

AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,450 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.

107

[[GREPCENT_TABLE]]
[["","As of December 31, 2023"],["","AGL","","U.S. Holding Companies"],["","(in millions)"],["Assets"],["Fixed-maturity securities (1)","$","17","","","$","4"],["Investment in Sound Point","\u2014","","","429"],["Short-term investments, other invested assets and cash","23","","","325"],["Receivables from affiliates (2)","61","","","3"],["Receivable from U.S. Holding Companies","80","","","\u2014"],["Other assets","3","","","43"],["Liabilities"],["Long-term debt","\u2014","","","1,694"],["Loans payable to affiliates","\u2014","","","270"],["Payable to affiliates (2)","16","","","17"],["Payable to AGL","\u2014","","","80"],["Other liabilities","8","","","100"]]
[[/GREPCENT_TABLE]]

____________________

(1)    As of December 31, 2023, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.7 years and 4.2 years, respectively.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023"],["","AGL","","U.S. Holding Companies"],["","(in millions)"],["Revenues"],["Gain on sale of asset management subsidiaries","$","\u2014","","","$","265"],["Other income","\u2014","","","7"],["Expenses"],["Interest expense","\u2014","","","99"],["Other expenses","45","","","58"],["Income (loss) before provision for income taxes and equity in earnings (losses) of investees","(45)","","","115"],["Net income (loss)","(45)","","","105"]]
[[/GREPCENT_TABLE]]

108

The following table presents significant cash flow items for AGL and the U.S. Holding Companies (other than investment income, operating expenses and taxes) related to distributions from subsidiaries and outflows for debt service, dividends and other capital management activities.

AGL and U.S. Holding Companies

Selected Cash Flow Items

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023"],["","AGL","","U.S. Holding Companies"],["","(in millions)"],["Dividends received from subsidiaries (1)","$","306","","","$","370"],["Interest on intercompany loans","\u2014","","","(10)"],["Interest paid","\u2014","","","(87)"],["Investments in subsidiaries","\u2014","","","(17)"],["Return of capital from subsidiaries","\u2014","","","2"],["Redemption of stock by AGC","\u2014","","","200"],["Dividends paid to AGL","\u2014","","","(253)"],["Dividends paid by AGL","(67)","","","\u2014"],["Repurchases of common shares (2)","(199)","","","\u2014"],["Issuance of long-term debt, net of issuance costs","\u2014","","","345"],["Redemption of debt","\u2014","","","(330)"]]
[[/GREPCENT_TABLE]]

____________________

(1)    AGL’s dividends include dividends from AGUS.

(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.

External Financing

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

Insurance Subsidiaries

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

Sources and Uses of Funds

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

•operating expenses,

•claims on the insured portfolio,

•dividends or other distributions to parent,

•reinsurance premiums,

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

•capital investments in their own subsidiaries and in alternative investments, where appropriate.

109

    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. The Company generally targets a balance of its most liquid assets including cash and short-term securities, U.S. Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. As of December 31, 2023, the Company intended to hold and had the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost.

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

Financial Guaranty Policies

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

Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. For example, the Company made substantial claim payments in 2022 in connection with the resolution of certain Puerto Rico credits. The Company is continuing its efforts to resolve the one remaining unresolved Puerto Rico insured exposure that is in payment default, PREPA. The Company had $624 million in insured net par outstanding of PREPA obligations as of December 31, 2023. For more information, see Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

The terms of the Company’s CDS contracts generally are modified from standard CDS contract forms approved by International Swaps and Derivatives Association, Inc. such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for its financial guaranty insurance contracts. The 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.

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, 2023. 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 for past claims paid for policies in the public finance sector.

Estimated Expected Claim Payments

(Undiscounted)

[[GREPCENT_TABLE]]
[["","As of December 31, 2023"],["","(in millions)"],["Less than 1 year","$","388"],["1-3 years","172"],["3-5 years","51"],["More than 5 years","886"],["Total","$","1,497"]]
[[/GREPCENT_TABLE]]

110

Distributions From Insurance Subsidiaries to Holding Companies

    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 2024 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is approximately $265 million, of which approximately $47 million is available for distribution in the first quarter of 2024.

•The maximum amount available during 2024 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $117 million, of which approximately $35 million is available for distribution in the first quarter of 2024.

•Based on the applicable law and regulations, in 2024 AG Re has the capacity to: (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Bermuda Monetary Authority (the Authority); and (ii) declare and pay dividends in an aggregate amount up to approximately $226 million as of December 31, 2023. Such dividend capacity is further limited by: (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $138 million as of December 31, 2023; and (ii) the amount of statutory surplus, which, as of December 31, 2023, was $47 million.

Distributions From Insurance Company Subsidiaries

to Holding Companies

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Dividends paid by AGC to AGUS","$","102","","","$","207","","","$","94"],["Dividends paid by AGM to AGMH","257","","","266","","","291"],["Dividends paid by AG Re to AGL (1)","53","","","\u2014","","","150"],["Redemption of common stock by AGC from AGUS","200","","","\u2014","","","\u2014"]]
[[/GREPCENT_TABLE]]

____________________

(1)    2021 included fixed-maturity securities with a fair value of $46 million.

Committed Capital Securities

    Each of AGC and AGM is party to an arrangement that enables it to access, at its discretion, up to $200 million of capital, at any time, and has the right to use such capital for any purpose, including to pay claims.

The arrangement entails four custodial trusts (Woodbourne Capital Trust I, II, III and IV) relating to AGC and four custodial trusts (Sutton Capital Trust I, II, III and IV) relating to AGM, each of which issued $50 million face amount of “committed capital securities” and invested the proceeds of that issuance in eligible assets that would enable the trust to have the cash necessary to respond to AGC’s or AGM’s exercise, respectively, of a put option.

The put option consists of a right that each of AGC and AGM has, pursuant to separate put agreements that AGC and AGM entered into with each of the trusts, to issue to each trust $50 million of non-cumulative redeemable perpetual preferred stock, in exchange for an equivalent amount of cash (i.e., an aggregate of $200 million for each of AGC and AGM). When AGC or AGM exercises its put option, the relevant trust(s) must liquidate the portfolio of high-quality, liquid assets that it currently maintains and use the liquidation proceeds to purchase AGC or AGM preferred stock, as applicable.

The put agreements have no scheduled termination date or maturity, but may be terminated upon the occurrence of certain specified events.

111

None of the events that would give rise to a termination of the put agreements have occurred. Accordingly, each of AGC and AGM currently has the ability to exercise put options to raise up to $200 million of capital at any time.

Investment Portfolio

The Company’s principal objectives in managing its investment portfolio are to support the highest possible ratings for each operating company, to manage investment risk within the context of the underlying portfolio of insurance risk, to maintain sufficient liquidity to cover unexpected stress in the insurance portfolio, and to maximize after-tax net investment income. Approximately 60% of the total investment portfolio is managed by external parties. In accordance with the Company’s investment guidelines, each of the three external investment managers is required to maintain the Company’s investment portfolio with an overall credit quality rated at a minimum of A+/A1/A+ by S&P/Moody’s/Fitch Inc., respectively.

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

Investment Portfolio

Carrying Value

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2023","","2022"],["","(in millions)"],["Fixed-maturity securities, available-for-sale (1)","$","6,307","","","$","7,119"],["Fixed-maturity securities, trading (2)","318","","","303"],["Short-term investments","1,661","","","810"],["Other invested assets","829","","","133"],["Total","$","9,115","","","$","8,365"]]
[[/GREPCENT_TABLE]]

____________________

(1)    As of December 31, 2023 and December 31, 2022, includes $14 million and $358 million, respectively, of New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.

(2)    Represents CVIs received under the 2022 Puerto Rico Resolutions, which are not rated.

The Company’s available-for-sale fixed-maturity securities had a duration of 3.9 years as of December 31, 2023 and 4.4 years as of December 31, 2022, respectively.

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, 2023 and December 31, 2022. Ratings generally reflect the lower of Moody’s and S&P classifications, except for (i) Loss Mitigation Securities, which use Assured Guaranty’s internal ratings classifications, or (ii) Puerto Rico securities received under the 2022 Puerto Rico Resolutions, which are not rated.

112

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

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["Rating","","2023","","2022"],["AAA","","13.3","%","","14.2","%"],["AA","","38.2","","","37.1"],["A","","27.6","","","24.4"],["BBB","","11.7","","","11.0"],["BIG (1)","","7.8","","","7.4"],["Not rated (2)","","1.4","","","5.9"],["Total","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Includes primarily 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, primarily includes New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.

Portfolio of Obligations of State and Political Subdivisions

The Company’s fixed-maturity securities include 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 $2,661 million (fair value) of obligations of state and political subdivisions included in the Company’s available-for-sale fixed-maturity securities investment portfolio as of December 31, 2023.

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

As of December 31, 2023 (1)

[[GREPCENT_TABLE]]
[["State","","State General Obligation","","Local General Obligation","","Revenue Bonds","","Total Fair Value","","Amortized Cost"],["","","(in millions)"],["California","","$","49","","","$","65","","","$","260","","","$","374","","","$","380"],["New York","","4","","","41","","","258","","","303","","","309"],["Texas","","18","","","66","","","218","","","302","","","315"],["Florida","","\u2014","","","1","","","153","","","154","","","159"],["Washington","","28","","","40","","","83","","","151","","","155"],["Massachusetts","","58","","","\u2014","","","79","","","137","","","139"],["Illinois","","12","","","15","","","82","","","109","","","111"],["Pennsylvania","","14","","","5","","","71","","","90","","","91"],["Washington DC","","28","","","\u2014","","","41","","","69","","","69"],["Colorado","","\u2014","","","21","","","46","","","67","","","69"],["All others","","74","","","102","","","526","","","702","","","735"],["Total","","$","285","","","$","356","","","$","1,817","","","$","2,458","","","$","2,532"]]
[[/GREPCENT_TABLE]]

____________________

(1)    Excludes $203 million as of December 31, 2023 of pre-refunded bonds, at fair value.

113

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

Revenue Bonds

Sources of Funds 

As of December 31, 2023

[[GREPCENT_TABLE]]
[["Type","","Amortized Cost","","Fair Value"],["","","(in millions)"],["Tax revenue","","$","489","","","$","485"],["Transportation","","484","","","472"],["Utilities","","376","","","370"],["Education","","283","","","278"],["Healthcare","","148","","","144"],["All others","","84","","","68"],["Total","","$","1,864","","","$","1,817"]]
[[/GREPCENT_TABLE]]

Other Investments

Other invested assets, which are generally less liquid than fixed-maturity securities primarily consist of the investment in Sound Point and fund investments across a variety of strategies.

The Insurance segment reports the Company’s percentage ownership of Sound Point funds and AHP funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of December 31, 2023, three of the funds in which the Company invests are consolidated and the remaining are accounted as equity method investments in the Company’s consolidated financial statements. As of December 31, 2022, all of the funds in which the Company directly invested were consolidated in the consolidated financial statements. See “— Commitments” below.

Investment in Assets Managers and Alternative Investments by Strategy

As of December 31, 2023

[[GREPCENT_TABLE]]
[["","","Investments","","Eliminations","","Consolidated"],["","","(in millions)"],["Sound Point (1)","","$","429","","","$","\u2014","","","$","429"],["Alternative investments:"],["CLOs (2)","","315","","","(223)","","","92"],["Asset-based","","192","","","(82)","","","110"],["Healthcare","","102","","","\u2014","","","102"],["Other","","130","","","\u2014","","","130"],["Total (3)","","$","1,168","","","$","(305)","","","$","863"]]
[[/GREPCENT_TABLE]]

____________________

(1)    The investment in Sound Point is carried on the equity method.

(2)     Represents primarily investments in the equity of U.S. and European CLOs.

(3)    Includes $34 million in alternative investments reported in fixed-maturity securities, available-for-sale, on the consolidated balance sheets.

114

Alternative Investments by Strategy

As of December 31, 2022

[[GREPCENT_TABLE]]
[["","","Investments","","Eliminations","","Consolidated"],["","","(in millions)"],["CLOs","","$","272","","","$","(272)","","","$","\u2014"],["Asset-based","","101","","","(101)","","","\u2014"],["Healthcare","","91","","","(91)","","","\u2014"],["Municipal bonds (1)","","105","","","(105)","","","\u2014"],["Other","","133","","","\u2014","","","133"],["Total","","$","702","","","$","(569)","","","$","133"]]
[[/GREPCENT_TABLE]]

____________________

(1)     In the first quarter of 2023, the fund distributed substantially all of its available cash to the AGAS and other investors in the fund.

Change in Fair Value of Alternative Investments by Strategy

Year Ended December 31, 2023

[[GREPCENT_TABLE]]
[["","","Investments","","Eliminations","","Consolidated"],["","","(in millions)"],["Sound Point","","$","5","","","$","\u2014","","","$","5"],["CLOs","","49","","","(46)","","","3"],["Asset-based","","5","","","(4)","","","1"],["Healthcare","","19","","","(9)","","","10"],["Other","","9","","","\u2014","","","9"],["Total","","$","87","","","$","(59)","","","$","28"]]
[[/GREPCENT_TABLE]]

Change in Fair Value of Alternative Investments by Strategy

Year Ended December 31, 2022

[[GREPCENT_TABLE]]
[["","","Investments","","Eliminations","","Consolidated"],["","","(in millions)"],["CLOs","","$","(2)","","","$","2","","","$","\u2014"],["Asset-based","","5","","","(5)","","","\u2014"],["Healthcare","","(11)","","","13","","","2"],["Municipal bonds","","(2)","","","2","","","\u2014"],["Other","","(44)","","","\u2014","","","(44)"],["Total","","$","(54)","","","$","12","","","$","(42)"]]
[[/GREPCENT_TABLE]]

Change in Fair Value of Alternative Investments by Strategy

Year Ended December 31, 2021

[[GREPCENT_TABLE]]
[["","","Investments","","Eliminations","","Consolidated"],["","","(in millions)"],["CLOs","","$","29","","","$","(29)","","","$","\u2014"],["Asset-based","","19","","","(19)","","","\u2014"],["Healthcare","","30","","","\u2014","","","30"],["Municipal bonds","","2","","","(2)","","","\u2014"],["Other","","64","","","\u2014","","","64"],["Total","","$","144","","","$","(50)","","","$","94"]]
[[/GREPCENT_TABLE]]

Commitments

Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion in Sound Point managed investments, subject to regulatory approval, which includes $739 million of invested capital (at fair value), and $779

115

million in unfunded commitments. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for a description of the Sound Point Transaction.

Of the $1.5 billion mentioned above, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $750 million plus previously distributed gains of $108 million for a total of $858 million as of December 31, 2023. As of December 31, 2023, AGAS commitments to Sound Point and AHP funds were $775 million (of which $534 million was funded with a NAV of $571 million). This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance and healthcare structured capital. As of December 31, 2023, three of the eight funds in which AGAS invests are accounted for as CIVs.

Restricted Assets

    Based on fair value, fixed-maturity securities, short-term investments and cash 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 $234 million and $222 million, as of December 31, 2023 and December 31, 2022, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,154 million and $1,169 million, based on fair value as of December 31, 2023 and December 31, 2022, respectively.

Lease Obligations

The Company has entered into several lease agreements for office space in Bermuda; New York; San Francisco; Asheville, North Carolina; 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. In the fourth quarter of 2023, all of the Toll Bonds in the Puerto Rico Trusts were called, resulting in cash proceeds of $154 million. Such cash proceeds comprise the vast majority of the assets in the Puerto Rico Trusts as of December 31, 2023. In January 2024, such proceeds were used to pay down a portion of the liabilities of the Puerto Rico Trusts. The remaining liabilities of the Puerto Rico Trusts are payable by the U.S. Insurance Subsidiaries under their financial guaranty policies and are no longer dependent on the credit of PRHTA.

•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 borrowing funds to finance investments. 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.

116

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 businesses and holding companies, separately from the aggregate effect of consolidating FG VIEs and CIVs. In the third quarter of 2023, as a result of the Sound Point Transaction and AHP Transaction, the Company deconsolidated all CLOs and CLO warehouses and certain funds. As a result, beginning July 1, 2023, the Company’s cash flow statements will no longer include all the operating, investing and financing cash flow activity of the deconsolidated CIVs. See Item 8, Financial Statements and Supplementary Data, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.

Summarized Consolidated Cash Flows

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Net cash flows provided by (used in) operating activities, excluding FG VIEs and CIVs operating cash flows","$","(108)","","","$","(1,056)","","","$","420"],["FG VIEs and CIVs operating cash flows","569","","","(1,423)","","","(2,357)"],["Net cash flows provided by (used in) operating activities","461","","","(2,479)","","","(1,937)"],["Net cash flows provided by (used in) investing activities, excluding FG VIEs and CIVs investing cash flows","365","","","1,618","","","(156)"],["FG VIEs and CIVs investing cash flows","(79)","","","122","","","179"],["Net cash flows provided by (used in) investing activities","286","","","1,740","","","23"],["Net cash flows provided by (used in) financing activities, excluding FG VIEs and CIVs financing cash flows"],["Dividends paid","(67)","","","(64)","","","(66)"],["Repurchases of common shares","(199)","","","(500)","","","(496)"],["Issuance of long-term debt, net of issuance costs","345","","","\u2014","","","889"],["Redemptions and purchases of debt, including make-whole payment","(330)","","","\u2014","","","(619)"],["Other","(19)","","","(8)","","","(12)"],["FG VIEs and CIVs financing cash flows","(400)","","","1,184","","","2,264"],["Net cash flows provided by (used in) financing activities (1)","(670)","","","612","","","1,960"],["Effect of exchange rate changes,excluding FG VIEs and CIVs","2","","","(3)","","","(2)"],["Effect of exchange rate changes for FG VIEs and CIVs","\u2014","","","(5)","","","\u2014"],["Effect of exchange rate changes","2","","","(8)","","","(2)"],["Increase (decrease) in cash and cash equivalents and restricted cash","79","","","(135)","","","44"],["Cash and cash equivalents and restricted cash at beginning of period","207","","","342","","","298"],["Cash and cash equivalents and restricted cash at the end of the period","$","286","","","$","207","","","$","342"]]
[[/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 FG VIEs and CIVs, were an outflow of $108 million in 2023 and an outflow of $1,056 million in 2022. The decrease in outflows during 2023 was primarily due to a $964 million decrease in net claim payments, primarily due to the 2022 Puerto Rico Resolutions as well as a decrease of $101 million in tax payments. Cash flows from operations attributable to FG VIE and CIV were inflows in 2023 and outflows in 2022, primarily because all the CLOs and CLO warehouses, which generally reported significant operating cash flows, had limited operating activities and new issuances in the first half of 2023 pending the closing of the Sound Point Transaction and AHP Transaction, at which point the CLOs and CLO warehouses were deconsolidated. The consolidated statements of cash flows present the investing activities of the consolidated Sound Point funds, which were formerly known as AssuredIM funds, and CLOs as cash flows from operations. The increase in inflows in 2023 compared with 2022 was mainly due to a decrease of $3,084 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $1,122 million.

117

Investing activities primarily consisted of net sales (purchases) of debt and short-term investments, and paydowns on and sales of FG VIEs’ assets. The decrease in investing cash inflows in 2023 compared with 2022 was mainly attributable to an increase in short-term investments in 2023 compared to net sales of short-term and fixed-maturity securities in 2022. In 2022, investing inflows were used to fund claim payments under the 2022 Puerto Rico Resolutions and share repurchases. See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure, for additional information.

Financing activities primarily consist of (i) AGL share repurchases and dividends, (ii) paydowns of FG VIEs’ liabilities and (iii) CLO issuances and CLO warehouse financing activities. The CIVs’ financing cash flows mainly included issuances and repayments of CLOs and CLO warehouse financing debt in 2022. The decrease in financing cash flow activity from VIEs was primarily due to a decrease of $2,363 million in issuances, partially offset by a decrease in repayments of $1,002 million by the previously consolidated CLOs and CLO warehouses. The proceeds from CLO issuances and CLO warehouse borrowings were 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, 2024 through February 27, 2024, the Company repurchased an additional 951 thousand common shares. As of February 27, 2024, the Company was authorized to purchase $228 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.