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Assured Guaranty
AGO
#3675
Rank
$3.67 B
Marketcap
๐Ÿ‡ง๐Ÿ‡ฒ
Country
$81.87
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0.31%
Change (1 day)
7.36%
Change (1 year)
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Categories
  1. Assured Guaranty
  2. Quarterly Reports (10-Q)
  3. Submitted on 2023-11-08

Assured Guaranty - 10-Q quarterly report FY


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2023
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition Period from              to       
Commission File No. 001-32141 
AG_300 - Logo.jpg
ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter) 
Bermuda98-0429991
(State or other jurisdiction of incorporation)(I.R.S. employer identification no.)
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
(Address of principal executive offices)
(441) 279-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading Symbol(s)Name of exchange on which registered
Common Shares$0.01 par value per shareAGONew York Stock Exchange
Assured Guaranty US Holdings Inc. 6.125% Senior Notes due 2028 (and the related guarantee of Registrant)AGO/28New York Stock Exchange
Assured Guaranty US Holdings Inc. 3.150% Senior Notes due 2031 (and the related guarantee of Registrant)AGO/31New York Stock Exchange
Assured Guaranty US Holdings Inc. 3.600% Senior Notes due 2051 (and the related guarantee of Registrant)AGO/51New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒
The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 6, 2023 was 57,256,573 (includes 38,464 unvested restricted shares).

ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q
  Page
1
1
 
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2023 and December 31, 2022
1
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022
2
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022
3
 
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022
4
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2023 and 2022
6
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
 
1. Business and Basis of Presentation
8
2. Segment Information
10
 
3. Outstanding Exposure
14
 
4. Expected Loss to be Paid (Recovered)
25
5. Contracts Accounted for as Insurance
34
6. Contracts Accounted for as Credit Derivatives
40
7. Investments
42
8. Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
48
 
9. Fair Value Measurement
54
10. Asset Management Fees
70
11. Long-Term Debt
71
 
12. Income Taxes
71
 
13. Commitments and Contingencies
74
 
14. Shareholders’ Equity
75
 
15. Earnings Per Share
78
79
Forward Looking Statements
79
Available Information
80
Overview
81
Business
81
Economic Environment
81
Key Business Strategies
82
 
Executive Summary
85
Financial Performance of Assured Guaranty
86
Other Matters
89
 
Results of Operations
89
Critical Accounting Estimates
90
Results of Operations by Segment
90
Insurance Segment
91
Asset Management Segment
101
Corporate
102
Other
102
Reconciliation to GAAP
104
 
Non-GAAP Financial Measures
106
 
Insured Portfolio
110
 
Liquidity and Capital Resources
114
AGL and its U.S. Holding Companies
114
Insurance Subsidiaries
117
Investment Portfolio
121
Lease Obligations
124
Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles
124
Condensed Consolidated Cash Flows
125
126
126
127
127
127
128
128
129
 

PART I.    FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS

Assured Guaranty Ltd.

Condensed Consolidated Balance Sheets (Unaudited) 

(dollars in millions except share data) 
As of
 September 30, 2023December 31, 2022
Assets  
Investments:  
Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $86 and $65 (amortized cost of $6,971 and $7,707)
$6,267 $7,119 
Fixed-maturity securities, trading, at fair value350 303 
Short-term investments, at fair value1,426 810 
Other invested assets 765 133 
Total investments8,808 8,365 
Cash108 107 
Premiums receivable, net of commissions payable1,376 1,298 
Deferred acquisition costs158 147 
Salvage and subrogation recoverable282 257 
Financial guaranty variable interest entities’ assets (includes $326 and $413, at fair value)
327 416 
Assets of consolidated investment vehicles (includes $318 and $5,363, at fair value)
330 5,493 
Goodwill and other intangible assets6 163 
Other assets (includes $112 and $148, at fair value)
549 597 
Total assets$11,944 $16,843 
Liabilities  
Unearned premium reserve$3,600 $3,620 
Loss and loss adjustment expense reserve361 296 
Long-term debt1,693 1,675 
Credit derivative liabilities, at fair value50 163 
Financial guaranty variable interest entities’ liabilities, at fair value (with recourse $531 and $702, without recourse $11 and $13)
542 715 
Liabilities of consolidated investment vehicles (includes $0 and $4,431, at fair value)
4 4,625 
Other liabilities393 457 
Total liabilities6,643 11,551 
Commitments and contingencies (Note 13)
Shareholders’ equity
Common shares ($0.01 par value, 500,000,000 shares authorized; 57,819,732 and 59,013,040 shares issued and outstanding)
1 1 
Retained earnings5,815 5,577 
Accumulated other comprehensive income (loss), net of tax of $(97) and $(84)
(565)(515)
Deferred equity compensation 1 1 
Total shareholders’ equity attributable to Assured Guaranty Ltd.5,252 5,064 
Nonredeemable noncontrolling interests (Note 8)
49 228 
Total shareholders’ equity5,301 5,292 
Total liabilities and shareholders’ equity$11,944 $16,843 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Assured Guaranty Ltd.

Condensed Consolidated Statements of Operations (Unaudited)
 
(dollars in millions except share data)
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Revenues
Net earned premiums$95 $89 $261 $385 
Net investment income100 67 270 191 
Asset management fees— 16 53 71 
Net realized investment gains (losses)(9)(14)(20)(39)
Fair value gains (losses) on credit derivatives9 (48)115 (42)
Fair value gains (losses) on committed capital securities(20)1 (35)12 
Fair value gains (losses) on financial guaranty variable interest entities6 11 (2)27 
Fair value gains (losses) on consolidated investment vehicles (4)8 60 25 
Foreign exchange gains (losses) on remeasurement(39)(80)9 (181)
Fair value gains (losses) on trading securities 4 (8)42 (30)
Gain on sale of asset management subsidiaries255 — 255 — 
Other income (loss)6 (1)38 12 
Total revenues403 41 1,046 431 
Expenses
Loss and loss adjustment expenses (benefit)100 (75)159 (29)
Interest expense24 20 67 60 
Amortization of deferred acquisition costs4 4 10 11 
Employee compensation and benefit expenses47 57 199 189 
Other operating expenses44 37 170 120 
Total expenses219 43 605 351 
Income (loss) before income taxes and equity in earnings (losses) of investees184 (2)441 80 
Equity in earnings (losses) of investees18 (20)25 (31)
Income (loss) before income taxes202 (22)466 49 
Less: Provision (benefit) for income taxes43 (27)84 (6)
Net income (loss)159 5 382 55 
Less: Noncontrolling interests2 (6)19 25 
Net income (loss) attributable to Assured Guaranty Ltd.$157 $11 $363 $30 
Earnings per share:
Basic$2.65 $0.18 $6.11 $0.47 
Diluted$2.60 $0.18 $5.99 $0.46 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Assured Guaranty Ltd.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
(in millions)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Net income (loss)$159 $5 $382 $55 
Change in net unrealized gains (losses) on:
Investments with no credit impairment, net of tax provision (benefit) of $(23), $(39), $(15) and $(139)
(113)(277)(54)(857)
Investments with credit impairment, net of tax provision (benefit) of $(2), $1, $(4) and $(18)
(8)2 (13)(81)
Change in net unrealized gains (losses) on investments(121)(275)(67)(938)
Change in instrument-specific credit risk on financial guaranty variable interest entities’ liabilities with recourse, net of tax10 (3)11 (1)
Other, net of tax4 (4)6 (13)
Other comprehensive income (loss)(107)(282)(50)(952)
Comprehensive income (loss)52 (277)332 (897)
Less: Comprehensive income (loss) attributable to noncontrolling interests2 (6)19 25 
Comprehensive income (loss) attributable to Assured Guaranty Ltd.$50 $(271)$313 $(922)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(dollars in millions, except share data)

For the Three Months Ended September 30, 2023

Shareholders’ Equity Attributable to Assured Guaranty Ltd.
 Common Shares OutstandingCommon 
Shares
Par Value		Retained EarningsAccumulated
Other
Comprehensive Income (Loss)		Deferred
Equity Compensation		TotalNonredeemable Noncontrolling Interests
Shareholders’ Equity
As of June 30, 202358,850,144 $1 $5,732 $(458)$1 $5,276 $179 $5,455 
Net income— — 157 — — 157 2 159 
Dividends ($0.28 per share)
— — (16)— — (16)— (16)
Common shares repurchases(1,065,902)— (64)— — (64)— (64)
Share-based compensation35,490 — 6 — — 6 — 6 
Other comprehensive loss— — — (107)— (107)— (107)
Deconsolidation of investment vehicles— — — — — — (132)(132)
As of September 30, 202357,819,732 $1 $5,815 $(565)$1 $5,252 $49 $5,301 

For the Three Months Ended September 30, 2022

Shareholders’ Equity Attributable to Assured Guaranty Ltd.
 Common Shares OutstandingCommon 
Shares
Par Value		Retained EarningsAccumulated
Other
Comprehensive Income (Loss)		Deferred
Equity Compensation		TotalNonredeemable Noncontrolling Interests
Shareholders’ Equity
As of June 30, 202262,475,739 $1 $5,672 $(370)$1 $5,304 $243 $5,547 
Net income (loss)— — 11 — — 11 (6)5 
Dividends ($0.25 per share)
— — (16)— — (16)— (16)
Common shares repurchases(1,790,395)— (97)— — (97)— (97)
Share-based compensation34,087 — 9 — — 9 — 9 
Contributions— — — — — — 23 23 
Distributions— — — — — — (36)(36)
Other comprehensive loss— — — (282)— (282)— (282)
As of September 30, 202260,719,431 $1 $5,579 $(652)$1 $4,929 $224 $5,153 


4
Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(dollars in millions, except share data)

For the Nine Months Ended September 30, 2023

Shareholders’ Equity Attributable to Assured Guaranty Ltd.
 Common Shares OutstandingCommon 
Shares
Par Value		Retained EarningsAccumulated
Other
Comprehensive Income (Loss)		Deferred
Equity Compensation		TotalNonredeemable Noncontrolling Interests
Shareholders’ Equity
As of December 31, 202259,013,040 $1 $5,577 $(515)$1 $5,064 $228 $5,292 
Net income— — 363 — — 363 19 382 
Dividends ($0.84 per share)
— — (51)— — (51)— (51)
Common shares repurchases(1,556,213)— (90)— — (90)— (90)
Share-based compensation362,905 — 16 — — 16 — 16 
Reclassification to liabilities — — — — — — (16)(16)
Contributions— — — — — — 20 20 
Distributions— — — — — — (70)(70)
Other comprehensive loss— — — (50)— (50)— (50)
Deconsolidation of investment vehicles— — — — — — (132)(132)
As of September 30, 202357,819,732 $1 $5,815 $(565)$1 $5,252 $49 $5,301 


For the Nine Months Ended September 30, 2022

Shareholders’ Equity Attributable to Assured Guaranty Ltd.
 Common Shares OutstandingCommon 
Shares
Par Value		Retained EarningsAccumulated
Other
Comprehensive Income (Loss)		Deferred
Equity Compensation		TotalNonredeemable Noncontrolling Interests
Shareholders’ Equity
As of December 31, 202167,518,424 $1 $5,990 $300 $1 $6,292 $186 $6,478 
Net income— — 30 — — 30 26 56 
Dividends ($0.75 per share)
— — (49)— — (49)— (49)
Common shares repurchases(7,134,565)— (403)— — (403)— (403)
Share-based compensation335,572 — 11 — — 11 — 11 
Contributions— — — — — — 63 63 
Distributions— — — — — — (51)(51)
Other comprehensive loss— — — (952)— (952)— (952)
As of September 30, 202260,719,431 $1 $5,579 $(652)$1 $4,929 $224 $5,153 



The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Assured Guaranty Ltd.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 (in millions)
 
 Nine Months Ended September 30,
 20232022
Net cash flows provided by (used in) operating activities$258 $(1,848)
Cash flows from investing activities:  
Fixed-maturity securities, available-for-sale:  
Purchases(458)(279)
Sales767 560 
Maturities and paydowns528 585 
Short-term investments with original maturities of over three months:
Purchases(16)(42)
Sales4 — 
Maturities and paydowns35 23 
Net sales (purchases) of short-term investments with original maturities of less than three months(638)64 
Sales of fixed-maturity securities, trading— 121 
Paydowns of financial guaranty variable interest entities’ assets88 74 
Purchases of other invested assets(128)(11)
Sales and return of capital of other invested assets16 35 
Sale of asset management subsidiaries, net of cash(14)— 
Other(1)(2)
Net cash flows provided by (used in) investing activities183 1,128 
Cash flows from financing activities:  
Dividends paid(51)(49)
Repurchases of common shares(90)(400)
Net paydowns of financial guaranty variable interest entities’ liabilities(141)(92)
Issuance of long-term debt, net of issuance costs345 — 
Redemption of debt(330)— 
Other (15)(6)
Cash flows from consolidated investment vehicles:
Proceeds from issuance of collateralized loan obligations— 1,372 
Repayment of collateralized loan obligations(1)(373)
Proceeds from issuance of warehouse financing debt— 882 
Repayment of warehouse financing debt(166)(758)
Borrowing (payment) under credit facilities(4)46 
Contributions from noncontrolling interests to consolidated investment vehicles— 52 
Distributions to noncontrolling interests from consolidated investment vehicles(80)(19)
Net cash flows provided by (used in) financing activities(533)655 
Effect of foreign exchange rate changes— (6)
Increase (decrease) in cash and cash equivalents and restricted cash(92)(71)
Cash and cash equivalents and restricted cash at beginning of period 207 342 
Cash and cash equivalents and restricted cash at end of period $115 $271 

(continued on next page)


6

Assured Guaranty Ltd.

Condensed Consolidated Statements of Cash Flows (Unaudited) - (Continued)

 (in millions)
Nine Months Ended September 30,
20232022
Supplemental cash flow information
Income taxes paid (received)$3 $97 
Interest paid on long-term debt55 47 
Supplemental disclosure of non-cash activities:
Puerto Rico Plan Consideration (see Note 3)
Fixed-maturity securities, available-for-sale, received as salvage$1 $610 
Fixed-maturity securities, available-for-sale, ceded to a reinsurer— 27 
Fixed-maturity securities, trading, received as salvage— 550 
Fixed-maturity securities, trading, ceded to a reinsurer— 6 
Debt securities of financial guaranty variable interest entities received as salvage— 54 
Contributions from noncontrolling interests20 32 
Distributions to noncontrolling interests27 53 
Sale of asset management subsidiaries (see Note 1)
Assets acquired444 — 
Assets transferred241 — 
Liabilities transferred66 — 
As of
September 30, 2023 September 30, 2022
Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets:
Cash$108 $131 
Restricted cash (included in other assets) — 1 
Cash and cash equivalents of consolidated investment vehicles (See Note 8)
7 139 
Cash and cash equivalents and restricted cash at the end of period$115 $271 


The accompanying notes are an integral part of these condensed consolidated financial statements.

7
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)

1.    Business and Basis of Presentation
 
Business
 
Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-based holding company that provides, through its wholly-owned operating subsidiaries, credit protection products to the United States (U.S.) and non-U.S. public finance (including infrastructure) and structured finance markets. Assured Guaranty also participates in the asset management business, as described below.

Insurance

Through its insurance subsidiaries, the Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer financial guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (collectively, debt service), the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The Company markets its financial guaranty insurance directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in the U.S. and the United Kingdom (U.K.) and also guarantees obligations issued in other countries and regions, including Western Europe. The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposure`s written in financial guaranty form.

Asset Management

Until July 1, 2023, the Company served as an investment advisor to collateralized loan obligations (CLOs) and opportunity funds, as well as certain legacy hedge and opportunity funds subject to an orderly wind-down, through Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM). Beginning July 1, 2023, the Company participates in the asset management business through its ownership interest in Sound Point Capital Management, LP (Sound Point), as described below.
On July 1, 2023, Assured Guaranty contributed to Sound Point most of its asset management business, other than that conducted by Assured Healthcare Partners LLC (AssuredIM Contributed Business), as contemplated by the transaction agreement entered into with Sound Point on April 5, 2023 (Transaction Agreement). In addition, in accordance with the terms of a letter agreement (Letter Agreement), effective July 1, 2023 Assured Guaranty Municipal Corp. and Assured Guaranty Corp. (collectively, the U.S. Insurance Subsidiaries) (i) engaged Sound Point as their sole alternative credit manager and (ii) transitioned to Sound Point the management of certain existing alternative investments and related commitments. The Letter Agreement also provides that, in the first two years of Sound Point’s engagement, the U.S. Insurance Subsidiaries would, subject to regulatory approval, make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the alternative investments and commitments transitioned from AssuredIM, will total $1 billion. See Note 7, Investments. Assured Guaranty received, subject to certain potential post-closing adjustments, common interests in Sound Point representing a 30% participation percentage in Sound Point, and certain other interests in related Sound Point entities (the transactions contemplated under the Transaction Agreement and the Letter Agreement, the Sound Point Transaction).

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

Upon closing of the Sound Point Transaction and the AHP Transaction the Company deconsolidated most of the corresponding AssuredIM entities (which had previously been classified as held-for-sale) and reported an investment in Sound Point that is accounted for under the equity method. In connection with the Sound Point Transaction and AHP Transaction, the Company reevaluated its consolidation conclusion for each consolidated investment vehicle (CIV) and deconsolidated all but three CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.



8
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table presents the calculation of the gain associated with the Sound Point Transaction and AHP Transaction.

Gain on Sound Point Transaction and AHP Transaction

 (in millions)
Fair value of investment in Sound Point$419 
Fair value of other consideration25 
   Total consideration444 
Less net asset carrying value of transferred AssuredIM subsidiaries (1)189 
Gain on sale of asset management subsidiaries (2)$255 
____________________
(1)    Consists primarily of goodwill and intangible assets of $155 million.
(2)     Consists of a $248 million gain on the Sound Point Transaction, and a $7 million gain on the AHP Transaction, which were both reported in the corporate division.

The Company’s interest in Sound Point is reported in other invested assets on the consolidated balance sheet. On the date of acquisition, the Company’s cost basis of its investment in Sound Point is the fair value of the Company’s ownership in Sound Point, and certain other interests in related Sound Point entities (collectively, Sound Point entities). The acquisition date cost basis includes a basis difference, which is the excess of the fair value of the Company’s ownership interest in Sound Point entities of $419 million, over the Company’s proportionate share of the equity of the Sound Point entities. The basis difference must be allocated between identifiable assets and liabilities. The carrying value on the date of acquisition is periodically adjusted for the Company’s share in the comprehensive income or loss of Sound Point entities (on a one-quarter lag), distributions, contributions and the amortization of definite-lived intangible assets. As of the filing of this report, the Company has not finalized the calculation of the basis difference or the allocation of such basis difference. The equity method investment in Sound Point is subject to a periodic other-than-temporary-impairment (OTTI) analysis.

The Company recognized expenses of $14 million and $46 million during the three-month period ended September 30, 2023 (third quarter 2023) and the nine-month period ended September 30, 2023 (nine months 2023), respectively, associated with the Sound Point Transaction and AHP Transaction.

Assets and Liabilities Held For Sale

The Company designated certain assets and liabilities supporting the Insurance segment as held for sale in the first quarter of 2023 and expects the sale of such assets to be completed in 2024. A disposal group is measured at the lower of carrying amount or fair value less any costs associated with the transaction. The Company assessed the disposal group for impairment and determined no impairment existed as of September 30, 2023. Upon classification of the disposal group as held for sale, the Company ceased depreciating held for sale fixed assets and amortizing held for sale intangibles. Assets held for sale were $28 million and liabilities held for sale were $2 million as of September 30, 2023 and were reported in “other assets” and “other liabilities,” respectively.

Basis of Presentation
 
The unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In management’s opinion, all material adjustments necessary for a fair statement of the financial condition, results of operations and cash flows of the Company, including its consolidated variable interest entities (VIEs), are reflected in the periods presented and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

These unaudited interim condensed consolidated financial statements are as of September 30, 2023 and cover third quarter 2023, the three-month period ended September 30, 2022 (third quarter 2022), nine months 2023 and the nine-month period ended September 30, 2022 (nine months 2022). Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed
9
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain prior year balances have been reclassified to conform to the current period’s presentation.

    The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated financial guaranty VIEs (FG VIEs) and CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.
 
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (SEC).

The Company’s principal insurance subsidiaries are:

•Assured Guaranty Municipal Corp. (AGM), domiciled in New York;
•Assured Guaranty Corp. (AGC), domiciled in Maryland;
•Assured Guaranty UK Limited (AGUK), organized in the U.K.;
•Assured Guaranty (Europe) SA (AGE), organized in France;
•Assured Guaranty Re Ltd. (AG Re), domiciled in Bermuda; and
•Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda.
        
The U.S. Insurance Subsidiaries jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invests in funds managed by Sound Point, AHP, and, prior to July 1, 2023, AssuredIM (Sound Point and AHP funds, some of which were formerly known as AssuredIM funds).

AGL directly or indirectly owns several holding companies, two of which - Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH and, together with AGUS, the U.S. Holding Companies) - have public debt outstanding. See Note 11, Long-Term Debt.

Recent Accounting Standards Adopted

Targeted Improvements to the Accounting for Long-Duration Contracts

    In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The Company’s adoption of this ASU on January 1, 2023 did not have any effect on the Company’s consolidated financial statements.

2.    Segment Information

     The Company reports its results of operations in two segments: Insurance and Asset Management, separate from its Corporate division and the effects of consolidating FG VIEs and CIVs, which is consistent with the manner in which the Company’s chief operating decision maker (CODM) reviews the business to assess performance and allocate resources.

The Insurance segment primarily consists of: (i) the Company’s insurance subsidiaries; and (ii) AGAS. Prior to July 1, 2023, the Asset Management segment consisted of AssuredIM, which provided asset management services to third-party investors as well as to the U.S. Insurance Subsidiaries and AGAS. Beginning in July 2023, the Company participates in the asset management business through its investment in Sound Point as described in Note 1, Business and Basis of Presentation. Beginning in third quarter 2023, the Asset Management segment primarily includes the results of the Company’s equity method investment in Sound Point entities, which are reported on a one-quarter lag.

    The Corporate division primarily consists of interest expense on the debt of the U.S. Holding Companies and any losses on extinguishment or repurchases of their debt, as well as any gains and losses and other operating expenses attributed to the corporate activities of AGL and the U.S. Holding Companies, including the gain associated with the Sound Point Transaction and the AHP Transaction.
    
10
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
    The Other category primarily includes the effect of consolidating FG VIEs and CIVs, intersegment eliminations and the reclassification of reimbursable fund expenses. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

    The segment results differ from the consolidated financial statements in certain respects. The Insurance segment includes: (i) premiums and losses from the financial guaranty insurance policies issued by the U.S. Insurance Subsidiaries which guarantee the FG VIEs’ debt; and (ii) AGAS’ share of earnings from investments in Sound Point and AHP funds in “equity in earnings (losses) of investees.” Under GAAP, (i) FG VIEs are consolidated by the U.S. Insurance Subsidiaries and the premiums and losses/recoveries associated with the financial guaranty policies associated with the FG VIEs’ debt are eliminated (the reconciliation tables below present the FG VIEs and related eliminations in “other”) and (ii) CIVs are consolidated by either AGUS or AGAS (in the reconciliation tables below, the CIVs and related eliminations of the Insurance segment’s “equity in earnings (losses) of investees” associated with AGAS’ ownership interest in CIVs are presented in “other”). Until July 1, 2023, under GAAP, reimbursable fund expenses were shown as a component of asset management fees and included in total revenues, whereas in the Asset Management segment in the tables below these expenses were netted in “segment expenses.”

The Company analyzes the operating performance of each segment using “segment adjusted operating income (loss).” Results for each segment include specifically identifiable expenses as well as intersegment expense allocations, as applicable, based on time studies and other cost allocation methodologies based on headcount or other metrics. Segment adjusted operating income is defined as “net income (loss) attributable to AGL,” adjusted for the following items, which primarily affect the Insurance segment and corporate division:
 
•Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading.
•Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments.
•Elimination of fair value gains (losses) on the Company’s committed capital securities (CCS) that are recognized in net income.
•Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and loss adjustment expense (LAE) reserves that are recognized in net income.
•Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

The Company does not report assets by reportable segment as the CODM does not assess performance and allocate resources based on assets.

The following table presents information for the Company’s operating segments. Intersegment revenues include transactions between and among the segments, the corporate division and other.

Segment Information

Third Quarter
20232022
InsuranceAsset ManagementInsuranceAsset Management
(in millions)
Third-party revenues$206 $— $145 $13 
Intersegment revenues2 — 2 8 
Segment revenues208 — 147 21 
Segment expenses165 — (16)24 
Segment equity in earnings (losses) of investees25 — (11)— 
Less: Segment provision (benefit) for income taxes9 — (7)— 
Segment adjusted operating income (loss)$59 $— $159 $(3)

11
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Nine Months
20232022
InsuranceAsset ManagementInsuranceAsset Management
(in millions)
Third-party revenues$615 $44 $558 $59 
Intersegment revenues7 27 6 29 
Segment revenues622 71 564 88 
Segment expenses354 75 147 91 
Segment equity in earnings (losses) of investees60 — (46)— 
Less: Segment provision (benefit) for income taxes46 (1)24 — 
Segment adjusted operating income (loss)$282 $(3)$347 $(3)

The tables below present a reconciliation of significant components of segment information to the comparable consolidated amounts.

Reconciliation of Segment Information to Consolidated Information
Three Months Ended September 30, 2023
Equity in Earnings (Losses) of InvesteesLess:Net Income (Loss) Attributable to AGL
 Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests 
 (in millions)
Segments:
Insurance$208 $165 $25 $9 $— $59 
Asset Management— — — — — — 
Total segments208 165 25 9 — 59 
Corporate division259 57 — 47 — 155 
Other(4)(3)(7)(2)2 (8)
Subtotal463 219 18 54 2 206 
Reconciling items:
Realized gains (losses) on investments(9)— — — — (9)
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives6 — — — — 6 
Fair value gains (losses) on CCS(20)— — — — (20)
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves(37)— — — — (37)
Tax effect— — — (11)— 11 
Total consolidated$403 $219 $18 $43 $2 $157 


12
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of Segment Information to Consolidated Information
Three Months Ended September 30, 2022
Equity in Earnings (Losses) of InvesteesLess:Net Income (Loss) Attributable to AGL
 Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests 
 (in millions)
Segments:
Insurance$147 $(16)$(11)$(7)$— $159 
Asset Management21 24 — — — (3)
Total segments168 8 (11)(7)— 156 
Corporate division1 34 — (3)— (30)
Other13 2 (9)1 (6)7 
Subtotal182 44 (20)(9)(6)133 
Reconciling items:
Realized gains (losses) on investments(14)— — — — (14)
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives(50)(1)— — — (49)
Fair value gains (losses) on CCS1 — — — — 1 
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves(78)— — — — (78)
Tax effect— — — (18)— 18 
Total consolidated$41 $43 $(20)$(27)$(6)$11 


Reconciliation of Segment Information to Consolidated Information
Nine Months Ended September 30, 2023
Equity in Earnings (Losses) of InvesteesLess:Net Income (Loss) Attributable to AGL
 Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests 
 (in millions)
Segments:
Insurance$622 $354 $60 $46 $— $282 
Asset Management71 75 — (1)— (3)
Total segments693 429 60 45 — 279 
Corporate division263 165 — 37 — 61 
Other28 12 (35)(8)19 (30)
Subtotal984 606 25 74 19 310 
Reconciling items:
Realized gains (losses) on investments(20)— — — — (20)
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives108 (1)— — — 109 
Fair value gains (losses) on CCS(35)— — — — (35)
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves9 — — — — 9 
Tax effect— — — 10 — (10)
Total consolidated$1,046 $605 $25 $84 $19 $363 


13
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Reconciliation of Segment Information to Consolidated Information
Nine Months Ended September 30, 2022
Equity in Earnings (Losses) of InvesteesLess:Net Income (Loss) Attributable to AGL
 Revenues Expenses Provision (Benefit) for Income Taxes Noncontrolling Interests 
 (in millions)
Segments:
Insurance$564 $147 $(46)$24 $— $347 
Asset Management88 91 — — — (3)
Total segments652 238 (46)24 — 344 
Corporate division3 104 — (3)— (98)
Other34 14 15 3 25 7 
Subtotal689 356 (31)24 25 253 
Reconciling items:
Realized gains (losses) on investments(39)— — — — (39)
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives(51)(5)— — — (46)
Fair value gains (losses) on CCS12 — — — — 12 
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves(180)— — — — (180)
Tax effect— — — (30)— 30 
Total consolidated$431 $351 $(31)$(6)$25 $30 


3.    Outstanding Exposure
 
The Company sells credit protection primarily in financial guaranty insurance form. The Company may also sell credit protection by issuing policies that guarantee payment obligations under credit default swaps (CDS). The Company’s contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for its financial guaranty insurance contracts.

The Company seeks to limit its exposure to losses by underwriting obligations that it views to be investment grade at inception, although on occasion it may underwrite new issuances that it views to be below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled exposures. The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies or providing reinsurance on a portfolio of insurance; in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction. The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, generally requires subordination or collateral to protect it from loss. Reinsurance may be used in order to reduce net exposure to certain insured transactions.

     Public finance obligations insured by the Company primarily consist of general obligation bonds supported by the taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects. The Company includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, healthcare facilities and government office buildings. The Company also includes within public finance obligations similar obligations issued by U.S. and non-U.S. sovereign and sub-sovereign issuers and governmental authorities.

    Structured finance obligations insured by the Company are generally issued by special purpose entities, including VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial obligations. Some of these VIEs are consolidated as described in Note 8, Financial Guaranty Variable Interest Entities and
14
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Consolidated Investment Vehicles. Unless otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated.

The Company also writes specialty business that is consistent with its risk profile and benefits from its underwriting experience and other types of financial guaranties.

Surveillance Categories
 
The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review of each exposure. BIG exposures include all exposures with internal credit ratings below BBB-.

The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and generally reflect an approach similar to that employed by the rating agencies, except that the Company’s internal credit ratings focus on future performance rather than lifetime performance.

The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as being the higher of AA or their current internal rating. Unless otherwise noted, ratings disclosed herein on the Company’s insured portfolio reflect its internal ratings.

The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector. Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter, although the Company may also review a rating in response to developments impacting a credit when a ratings review is not scheduled. For assumed exposures, the Company may use the ceding company’s credit ratings of transactions where it is impractical for it to assign its own rating.
 
Exposures identified as BIG are subjected to further review to determine the probability of a loss. See Note 4, Expected Loss to be Paid (Recovered). Surveillance personnel then assign each BIG transaction to one of the three BIG surveillance categories described below based upon whether a future loss is expected and whether a claim has been paid. The Company uses the pre-tax book yield of the relevant subsidiary’s investment portfolio to calculate the present value of projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG surveillance category to a transaction. For financial statement measurement purposes, the Company uses risk-free rates, which are determined each quarter, to calculate the expected loss.

    More extensive monitoring and intervention are employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. For purposes of determining the appropriate surveillance category, the Company expects “future losses” on a transaction when the Company believes there is at least a 50% chance that, on a present value basis, it will in the future pay claims on that transaction that will not be fully reimbursed. The three BIG surveillance categories are:
 
•BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses possible, but for which none are currently expected.
•BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no claims (other than liquidity claims, which are claims that the Company expects to be reimbursed within one year) have yet been paid.
•BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims (other than liquidity claims) have been paid.

Financial Guaranty Exposure

    The Company measures its financial guaranty exposure in terms of (i) gross and net par outstanding and (ii) gross and net debt service.

    The Company typically guarantees the payment of debt service when due. Since most of these payments are due in the future, the Company generally uses gross and net par outstanding as a proxy for its financial guaranty exposure. Gross par outstanding generally represents the principal amount of the insured obligation at a point in time. Net par outstanding equals gross par outstanding net of any reinsurance. The Company includes in its par outstanding calculation the impact of any
15
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date. Non-U.S. dollar denominated par outstanding is translated at the spot rate at the end of the reporting period.

    The Company has, from time to time, purchased securities that it has insured, and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The Company excludes amounts attributable to Loss Mitigation Securities from par and debt service outstanding and instead reports Loss Mitigation Securities in the investment portfolio. The Company manages such securities as investments and not insurance exposure. As of September 30, 2023 and December 31, 2022, the Company excluded net par outstanding of $1.2 billion and $1.3 billion, respectively, primarily attributable to Loss Mitigation Securities.

    Gross debt service outstanding represents the sum of all estimated future debt service payments on the insured obligations, on an undiscounted basis. Net debt service outstanding equals gross debt service outstanding net of any reinsurance. Future debt service payments include the impact of any consumer price index inflator after the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion after the reporting date.

    The Company calculates its debt service outstanding as follows:

•for insured obligations that are not supported by homogeneous pools of assets (which category includes most of the Company’s public finance transactions), as the total estimated contractual future debt service due through maturity, regardless of whether the obligations may be called and regardless of whether, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, the Company believes the obligations will be repaid prior to contractual maturity; and

•for insured obligations that are supported by homogeneous pools of assets that are contractually permitted to prepay principal (which category includes, for example, residential mortgage-backed securities (RMBS)), as the total estimated expected future debt service due on insured obligations through their respective expected terms, which includes the Company’s expectations as to whether the obligations may be called and, in the case of obligations where principal payments are due when an underlying asset makes a principal payment, when the Company expects principal payments to be made prior to contractual maturity.

    The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates and assumptions for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation. Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract.

    Actual debt service may differ from estimated debt service due to refundings, terminations, negotiated restructurings, prepayments, changes in interest rates on variable rate insured obligations, consumer price index behavior differing from that projected, changes in foreign exchange rates on non-U.S. dollar denominated insured obligations and other factors.

16
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio
Debt Service and Par Outstanding
As of September 30, 2023 As of December 31, 2022
  GrossNet GrossNet
 (in millions)
Debt Service
Public finance$372,908 $372,711 $359,899 $359,703 
Structured finance11,290 11,265 10,273 10,248 
Total financial guaranty$384,198 $383,976 $370,172 $369,951 
Par Outstanding
Public finance$231,871 $231,721 $224,254 $224,099 
Structured finance10,138 10,112 9,184 9,159 
Total financial guaranty$242,009 $241,833 $233,438 $233,258 

In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $1.5 billion of public finance direct gross par and $1.3 billion of structured finance direct gross par as of September 30, 2023. These commitments are contingent on the satisfaction of all conditions set forth in the guaranties and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

Financial Guaranty Portfolio by Internal Rating
As of September 30, 2023

 Public Finance
U.S.		Public Finance
Non-U.S.		Structured Finance
U.S		Structured Finance
Non-U.S		Total
Rating
Category		Net Par
Outstanding		%Net Par
Outstanding		%Net Par
Outstanding		%Net Par
Outstanding		%Net Par
Outstanding		%
 (dollars in millions)
AAA$212 0.1 %$2,004 4.4 %$860 9.6 %$457 40.2 %$3,533 1.5 %
AA16,994 9.1 3,298 7.2 4,545 50.7 12 1.0 24,849 10.3 
A101,243 54.5 10,545 23.1 1,932 21.5 568 50.0 114,288 47.2 
BBB64,220 34.5 29,083 63.5 586 6.5 100 8.8 93,989 38.9 
BIG3,304 1.8 818 1.8 1,052 11.7 — — 5,174 2.1 
Total net par outstanding$185,973 100.0 %$45,748 100.0 %$8,975 100.0 %$1,137 100.0 %$241,833 100.0 %

Financial Guaranty Portfolio by Internal Rating
As of December 31, 2022 

 Public Finance
U.S.		Public Finance
Non-U.S.		Structured Finance
U.S		Structured Finance
Non-U.S		Total
Rating
Category		Net Par
Outstanding		%Net Par
Outstanding		%Net Par
Outstanding		%Net Par
Outstanding		%Net Par
Outstanding		%
 (dollars in millions)
AAA$222 0.1 %$1,967 4.4 %$926 11.2 %$469 50.4 %$3,584 1.5 %
AA16,241 9.1 3,497 7.9 4,633 56.3 12 1.3 24,383 10.5 
A96,807 53.9 9,271 20.9 1,075 13.1 340 36.5 107,493 46.1 
BBB62,570 34.8 28,747 64.6 479 5.8 110 11.8 91,906 39.4 
BIG3,796 2.1 981 2.2 1,115 13.6 — — 5,892 2.5 
Total net par outstanding$179,636 100.0 %$44,463 100.0 %$8,228 100.0 %$931 100.0 %$233,258 100.0 %

17
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
As of September 30, 2023

 BIG Net Par OutstandingNet Par
 BIG 1BIG 2BIG 3Total BIGOutstanding
   (in millions)  
Public finance:
U.S. public finance$1,290 $926 $1,088 $3,304 $185,973 
Non-U.S. public finance 818 — — 818 45,748 
Public finance2,108 926 1,088 4,122 231,721 
Structured finance:
U.S. RMBS23 36 897 956 1,817 
Other structured finance— 28 68 96 8,295 
Structured finance23 64 965 1,052 10,112 
Total$2,131 $990 $2,053 $5,174 $241,833 

Financial Guaranty Portfolio
Components of BIG Net Par Outstanding
As of December 31, 2022

 BIG Net Par OutstandingNet Par
 BIG 1BIG 2BIG 3Total BIGOutstanding
   (in millions)  
Public finance:
U.S. public finance$2,364 $108 $1,324 $3,796 $179,636 
Non-U.S. public finance 981 — — 981 44,463 
Public finance3,345 108 1,324 4,777 224,099 
Structured finance:
U.S. RMBS18 39 953 1,010 1,956 
Other structured finance— 34 71 105 7,203 
Structured finance18 73 1,024 1,115 9,159 
Total$3,363 $181 $2,348 $5,892 $233,258 

Financial Guaranty Portfolio
BIG Net Par Outstanding and Number of Risks
As of September 30, 2023

 Net Par Outstanding
Number of Risks (2)
DescriptionFinancial
Guaranty
Insurance (1)		Credit
Derivatives		TotalFinancial
Guaranty
Insurance (1)		Credit
Derivatives		Total
 (dollars in millions)
BIG 1$2,115 $16 $2,131 102 2 104 
BIG 2980 10 990 13 2 15 
BIG 32,024 29 2,053 109 7 116 
Total BIG$5,119 $55 $5,174 224 11 235 

18
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
 Financial Guaranty Portfolio
BIG Net Par Outstanding and Number of Risks
As of December 31, 2022

 Net Par Outstanding
Number of Risks (2)
DescriptionFinancial
Guaranty
Insurance (1)		Credit
Derivatives		TotalFinancial
Guaranty
Insurance (1)		Credit
Derivatives		Total
 (dollars in millions)
BIG 1$3,357 $6 $3,363 122 1 123 
BIG 2171 10 181 14 2 16 
BIG 32,307 41 2,348 111 10 121 
Total BIG$5,835 $57 $5,892 247 13 260 
_____________________
(1)    Includes FG VIEs.
(2)    A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.

Exposure to Puerto Rico
    
    The Company had insured exposure to obligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) as well as its general obligation bonds aggregating $1.1 billion and $1.4 billion net par outstanding as of September 30, 2023 and December 31, 2022, respectively. All of the Company’s insured exposure to Puerto Rico is rated BIG. The Company has paid claims as a result of payment defaults on all of its outstanding Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR), each of which has continued to make timely debt service payments.

    On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA established a seven-member Financial Oversight and Management Board (the FOMB) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico. Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under Chapter 9 of the United States Bankruptcy Code.

After over five years of negotiations, a substantial portion of the Company’s Puerto Rico exposure was resolved in 2022 in accordance with four orders entered by the United States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico) related to the Company’s exposure to all insured Puerto Rico credits experiencing payment default in 2022 except Puerto Rico Electric Power Authority (PREPA) (2022 Puerto Rico Resolutions). As a result of the 2022 Puerto Rico Resolutions, during 2022 the Company’s obligations under its insurance policies covering debt of the Puerto Rico Convention Center District Authority (PRCCDA) and Puerto Rico Infrastructure Authority (PRIFA) were extinguished, and its insurance exposure to Puerto Rico general obligations (GO) bonds, Public Buildings Authority (PBA) bonds and Puerto Rico Highway and Transportation Authority (PRHTA) bonds was greatly reduced. As described below, on August 31, 2023, the Company extinguished its remaining exposure to GO and PBA bonds by satisfying its obligations to insured bondholders holding custody receipts representing interests in legacy insured GO and PBA bonds.

Under the Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority (GO/PBA Plan), the Company received cash, new general obligation bonds (New GO Bonds) and contingent value instruments (CVIs). In connection with the Modified Fifth Amended Title III Plan of Adjustment for PRHTA (HTA Plan) and related arrangements, the Company received cash and new bonds backed by toll revenues (Toll Bonds, and together with the New GO Bonds, New Recovery Bonds) from the PRHTA and CVIs from the Commonwealth. Cash, New Recovery Bonds and CVIs received pursuant to the 2022 Puerto Rico Resolutions are collectively referred to as Plan Consideration.

Plan Consideration is reported in either cash, investments or FG VIEs’ assets as described below.

•Investments and cash. Plan Consideration received in respect of bondholders whose principal of bonds insured by the Company were accelerated against the Commonwealth and became due and payable under the 2022 Puerto Rico
19
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Resolutions are reported in Cash and Investments. See Note 7, Investments, for the fair value of the New Recovery Bonds and CVIs remaining as of September 30, 2023.

•FG VIEs’ assets. Plan Consideration received in respect of insured bondholders who elected to receive custody receipts that represent an interest in custodial trusts that hold the legacy insurance policy plus Plan Consideration that constitute distributions under the HTA Plan or the GO/PBA Plan are reported in FG VIEs’ assets. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts. On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Company satisfied its obligations under such legacy insured bonds with respect to $108 million net par outstanding as of August 31, 2023, and the custodial trusts released to AGC and AGM New Recovery Bonds and CVIs with a fair value totaling $73 million as of August 31, 2023. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for the fair value of New Recovery Bonds remaining as of September 30, 2023.

The Company has sold a portion of New Recovery Bonds and CVIs it received and may sell in the future any New Recovery Bonds or CVIs it continues to hold. The fair value of any New Recovery Bonds and CVIs that the Company retains will fluctuate from their date of acquisition. Any gains or losses on sales of New Recovery Bonds and CVIs in the investment portfolio are reported as realized gains and losses on investments and fair value gains (losses) on trading securities, respectively, rather than loss and LAE.

The CVIs are intended to provide creditors with additional recoveries tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax (SUT) receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The notional amount of a CVI represents the sum of the maximum distributions the holder could receive under the CVI, subject to the cumulative and annual caps, if the SUT sufficiently exceeds 2020 certified fiscal plan projections, without any discount for time. As of September 30, 2023, all of the CVIs are reported in investments.

The Company is continuing its efforts to resolve the one remaining Puerto Rico insured exposure that is in payment default, PREPA. Economic, political and legal developments, including inflation and increases in the cost of petroleum products, may impact any resolution of the Company’s PREPA insured exposure and the value of any remaining consideration received in connection with the 2022 Puerto Rico Resolutions or any future resolutions of the Company’s PREPA insured exposures. The impact of developments relating to Puerto Rico during any quarter or year could be material to the Company’s results of operations and shareholders’ equity.

Puerto Rico Par and Debt Service Schedules

All Puerto Rico exposures are internally rated BIG. The following tables show the Company’s insured exposure to general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.

Puerto Rico
Gross Par and Gross Debt Service Outstanding
Gross Par OutstandingGross Debt Service Outstanding
As ofAs of
 September 30, 2023December 31, 2022September 30, 2023December 31, 2022
 (in millions)
Exposure to Puerto Rico$1,121 $1,378 $1,529 $1,899 

20
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico
Net Par Outstanding

As of
September 30, 2023December 31, 2022
 (in millions)
Defaulted Puerto Rico Exposures
PREPA$624 $720 
Total Defaulted624 720 
Resolved Puerto Rico Exposures
PRHTA (Transportation revenue) (1)244 298 
PRHTA (Highway revenue) (1)128 182 
Commonwealth of Puerto Rico - GO (1)
— 25 
PBA (1)— 4 
Total Resolved372 509 
Other Puerto Rico Exposures
MFA (2)108 131 
PRASA and U of PR (2)1 1 
Total Other 109 132 
Total net exposure to Puerto Rico$1,105 $1,361 
____________________
(1)    Resolved pursuant to the 2022 Puerto Rico Resolutions.
(2)    All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.

    The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations. The Company guarantees payment of interest and principal when those amounts are scheduled to be paid and cannot be required to pay on an accelerated basis, although in certain circumstances it may elect to do so. In the event that obligors default on their obligations, the Company would only be required to pay the shortfall between the debt service due in any given period and the amount paid by the obligors.

Amortization Schedule of Puerto Rico
Net Par Outstanding and Net Debt Service Outstanding
As of September 30, 2023
Scheduled Net Par AmortizationScheduled Net Debt Service Amortization
(in millions)
2023 (October 1 - December 31)$— $3 
2024 (January 1 - March 31)— 24 
2024 (April 1 - June 30)— 3 
2024 (July 1 - September 30)110 134 
2024 (October 1 - December 31)— 3 
Subtotal 2024110 164 
202584 132 
2026140 185 
2027120 158 
2028-2032293 427 
2033-2037235 302 
2038-2041123 140 
Total$1,105 $1,511 

21
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
PREPA

As of September 30, 2023, the Company had $624 million insured net par outstanding of PREPA obligations. The Company believes that the PREPA bonds are secured by a lien on the revenues of the electric system.

On April 8, 2022, Judge Laura Taylor Swain of the Federal District Court of Puerto Rico issued an order appointing as members of a PREPA mediation team U.S. Bankruptcy Judges Shelley Chapman (lead mediator), Robert Drain and Brendan Shannon. Judge Swain also entered a separate order establishing the terms and conditions of mediation, including that the mediation would terminate on June 1, 2022. Judge Swain has since extended the term of such mediation several times, most recently on September 29, 2023 extending the term to March 29, 2024. The FOMB filed an initial plan of adjustment and disclosure statement for PREPA with the Federal District Court of Puerto Rico on December 16, 2022, and filed an amended version on February 9, 2023 (FOMB PREPA Plan).

On March 22, 2023, the Federal District Court of Puerto Rico held that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control but did not have a lien in future revenues until deposited in those funds. The Federal District Court of Puerto Rico also held, however, that PREPA bondholders do have recourse under the PREPA trust agreement in the form of an unsecured net revenue claim. At that time, the Federal District Court of Puerto Rico declined to value the unsecured net revenue claim or the method for its determination. The ultimate value of the claim, according to the Federal District Court of Puerto Rico, should be determined through a claim estimation proceeding.

On June 6-8, 2023, the Federal District Court of Puerto Rico held a claim estimation proceeding and, on June 26, 2023, issued an opinion and order estimating the unsecured net revenue claim to be $2.4 billion as of July 3, 2017. This estimate included a determination that PREPA’s discounted cash flows, using FOMB’s base-case incremental net revenues over a 100-year collection period and a discount rate of 7%, would be $3.0 billion, and should be reduced by an additional 20% for collection risk. PREPA bondholders had sought an unsecured net revenue claim of approximately $8.5 billion.

The Company expects to appeal portions of the March 22, 2023 decision, including the lien scope ruling and the need for a claim estimation proceeding, as well as the June 26, 2023 claim estimation ruling, upon final adjudication by the Federal District Court of Puerto Rico of all claims and counterclaims in the PREPA lien challenge adversary proceeding.

On October 27, 2023, the FOMB filed with the Federal District Court of Puerto Rico the third modified third amended plan of adjustment for PREPA and supporting supplemental disclosure statement (FOMB PREPA Plan) based on the last revised PREPA fiscal plan certified by the FOMB on June 23, 2023 (2023 PREPA Fiscal Plan). The FOMB PREPA Plan would split bondholders into two groups: one that would settle litigation regarding whether creditor repayment is limited to existing accounts, and another group that would continue litigating whether bondholders are secured by PREPA’s current and future revenue collections. The FOMB PREPA Plan also would further split settling bondholders into two sub-groups: one consisting of certain original settling bondholders that would receive an enhanced recovery (compared to non-settling bondholders) plus other supporting creditor payments, while the second settling sub-group would receive only the enhanced recovery. The FOMB asserts that, other than for pension claims, PREPA’s debt capacity is $2.5 billion, of which approximately $1.4 billion is allocated to settling creditors. The remaining $1.1 billion is allocated pro rata to (i) non-settling bondholders, and (ii) general unsecured creditors (GUCs). The most recent revised FOMB PREPA Plan provides for reduced payments to bondholders since lower projected PREPA revenues are included in the 2023 PREPA Fiscal Plan than had been previously anticipated. The FOMB PREPA Plan estimates that non-settling bondholders will receive a recovery of 12.5% of their allowed unsecured net revenue claim. The Company is opposed to the FOMB PREPA Plan and has joined with a group of non-settling bondholders that continue to litigate whether creditor repayments will include future revenue collections.

The supplemental disclosure statement hearing for the FOMB PREPA Plan is scheduled for November 14, 2023. The confirmation hearing for the FOMB PREPA Plan is currently scheduled to occur in March 2024.

PRHTA

As of September 30, 2023, the Company had $372 million of insured net par outstanding of PRHTA bonds: $244 million insured net par outstanding of PRHTA (transportation revenue) bonds and $128 million insured net par outstanding of PRHTA (highway revenue) bonds. PRHTA net par outstanding primarily represents the Company’s exposure in respect of insured bondholders who elected to receive custody receipts that represent an interest in the legacy insurance policy plus Toll Bonds that constitute distributions under the HTA Plan.

22
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Puerto Rico GO and PBA

The Company’s exposure to GO bonds and PBA bonds was extinguished on August 31, 2023, and, therefore, as of September 30, 2023, the Company had no remaining insured net par outstanding of GO bonds and PBA bonds.

Other Puerto Rico Exposures

All debt service payments for the Company’s remaining Puerto Rico exposures of $109 million insured net par outstanding have been made in full by the obligors as of the date of this filing. These exposures consist primarily of $108 million net par outstanding of MFA bonds, which are secured by a lien on local tax revenues.

Puerto Rico Litigation
 
    Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its instrumentalities on debt service payments, and related matters, and the Company is a party to a number of them. The Company has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to Puerto Rico obligations which the Company insures. In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.

A number of legal actions involving the Company and relating to the Commonwealth, PRCCDA and PRIFA, as well as claims related to the clawback of certain excise taxes and revenues pledged to secure bonds issued by PRHTA, were resolved on March 15, 2022, and all remaining legal actions involving the Company and relating to PRHTA were resolved on December 6, 2022, which together comprised the consummation of the 2022 Puerto Rico Resolutions. Except for one proceeding related to PREPA, all proceedings involving the Company and relating to the default by the Commonwealth or its instrumentalities remain stayed pending the Federal District Court of Puerto Rico's determination on plans of adjustment or other proceedings.

The following Puerto Rico proceeding in which the Company is involved is no longer stayed:

•On July 1, 2019, the FOMB initiated an adversary proceeding against U.S. Bank National Association, as trustee for PREPA’s bonds, objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing those bonds and seeking other relief. On September 30, 2022, the FOMB filed an amended complaint against the trustee (i) objecting to and challenging the validity, enforceability, and extent of prepetition security interests securing PREPA’s bonds and (ii) arguing that PREPA bondholders’ recourse was limited to certain deposit accounts held by the trustee. On October 7, 2022, the court approved a stipulation permitting AGM and AGC to intervene as defendants. Summary judgment motions were filed by plaintiffs and defendants on October 24, 2022. As noted above, on March 22, 2023, the Federal District Court of Puerto Rico granted in part and denied in part each party’s cross-motions for summary judgment. The Federal District Court of Puerto Rico found that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. The Federal District Court of Puerto Rico also held that the PREPA bondholders do have recourse under the trust agreement in the form of an unsecured net revenue claim, but declined to value the unsecured net revenue claim. On April 13, 2023, the court issued an order proposing procedures to estimate the value of the unsecured net revenue claim arising from the Trustee’s ability to exercise remedies to obtain specific performance of PREPA’s covenants to fund the sinking fund, which must be done under the Bankruptcy Code for purposes of allowance. The order also set a discovery and expert report schedule, and directed the parties to engage in good faith mediation. A claim estimation hearing was held June 6-8, 2023, and in a June 26, 2023 opinion, the court estimated the PREPA bondholders’ allowed unsecured net revenue claim to be $2.4 billion, which the court calculated by largely adopting the conclusions in the FOMB’s expert report. On May 3, 2023, the court denied PREPA bondholders’ request to certify their interlocutory appeal of the finding that the PREPA bondholders had perfected liens only in revenues that had been deposited in the sinking fund established under the PREPA trust agreement and related funds over which the bond trustee had control. On May 15, 2023, the FOMB filed its motion to dismiss the Trustee’s and bondholders’ counterclaims. Unless mediation or a confirmed plan of adjustment leads to an acceptable outcome, AGM and AGC expect to appeal portions of the court’s decision, including the lien scope ruling and the result of the claim estimation proceeding, upon final adjudication by the court.

23
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following Puerto Rico proceedings in which the Company is involved remain stayed:

•On June 26, 2017, AGM and AGC filed a complaint in the Federal District Court of Puerto Rico to compel the FOMB to certify the PREPA RSA for implementation under Title VI of PROMESA. On July 21, 2017, considering its PREPA Title III petition on July 2, 2017, the FOMB filed a notice of stay under PROMESA.

•On July 18, 2017, AGM and AGC filed a motion for relief in the Federal District Court of Puerto Rico from the
automatic stay filed in the PREPA Title III Bankruptcy proceeding. The court denied the motion on September 14,
2017, but on August 8, 2018, the United States Court of Appeals for the First Circuit vacated and remanded the court’s decision. On October 3, 2018, AGM and AGC, together with other bond insurers, filed a motion with the court to lift the automatic stay to commence an action against PREPA for the appointment of a receiver. Following termination of mediation without a resolution and the filing of a motion to dismiss PREPA’s Title III case or to lift the automatic stay to allow for the appointment of a receiver, the court effectively stayed this matter until termination of the plan confirmation process.

•On May 20, 2019, the FOMB and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court of Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. Relatedly, on January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court of Puerto Rico against AGM and AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims. These matters are currently stayed. On October 12, 2022, the court entered an order and judgment confirming the amended plan of adjustment for PRHTA filed by the FOMB with the court on September 6, 2022 (HTA Confirmation Order), and which provides that these adversary proceeding must be dismissed with prejudice within five business days of the HTA Confirmation Order becoming a final order, which should occur after all appeals of the HTA Confirmation Order have been resolved.

•On September 30, 2019, certain parties that either had advanced funds to PREPA for the purchase of fuel or had succeeded to such claims (Fuel Line Lenders) filed an amended adversary complaint against the FOMB and other parties, including AGC and AGM, seeking subordination of PREPA bondholder claims to Fuel Line Lenders’ claims. On November 12, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.

•On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court of Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. On November 7, 2019, the court granted a motion to intervene by AGC and AGM. On November 13, 2019, AGC and AGM filed a motion to dismiss the amended adversary complaint. On September 29, 2022, the court entered an order terminating the motion to dismiss without prejudice, and indicating that the issues in the adversary proceeding will only be addressed, if necessary, after issues related to security and recourse of the PREPA bonds have been resolved or, if necessary, in connection with the confirmation of a plan of adjustment for PREPA.

24
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Specialty Business

The Company also guarantees specialty business with risk profiles similar to those of its structured finance exposures written in financial guaranty form.

Specialty Business

As of September 30, 2023 As of December 31, 2022
Gross ExposureNet ExposureGross ExposureNet Exposure
(in millions)
Life insurance transactions (1)
$1,325 $1,003 $1,314 $986 
Aircraft residual value insurance policies
355 200 355 200 
Other guaranties2,090 2,090 228 228 
____________________
(1)    The life insurance transactions net exposure is projected to reach $1.1 billion in 2024.

As of both September 30, 2023 and December 31, 2022, gross exposure of $144 million and net exposure of $84 million of aircraft residual value insurance was internally rated BIG. All other exposures in the table above are rated investment-grade.

Specialty business includes an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties with an internal rating of AA that matures in 2042. The Company’s maximum potential exposure under this guaranty, which is accounted for in accordance with Accounting Standards Codification (ASC) 460, Guarantees, was $1.6 billion as of September 30, 2023.

4.    Expected Loss to be Paid (Recovered)
 
    Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and
LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; and (ii) excess spread on underlying
collateral, as applicable. Cash flows are discounted at current risk-free rates. The Company updates the discount rates each quarter and reflects the effect of such changes in economic loss development. Net expected loss to be paid (recovered) is net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted scenarios.

Expected cash outflows and inflows are probability weighted cash flows that reflect management’s assumptions about the likelihood of all possible outcomes based on all information available to the Company. Those assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored through the Company’s surveillance and risk management functions. Expected loss to be paid (recovered) is important in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts.

In circumstances where the Company purchased its own insured obligations that had expected losses, and in cases
where issuers of insured obligations elected or the Company and an issuer mutually agreed as part of a negotiation to deliver the
underlying collateral, insured obligation or a new security to the Company, expected loss to be paid (recovered) is reduced and
the asset received is prospectively accounted for under the applicable guidance for that instrument. Insured obligations with expected losses that were purchased by the Company are referred to as Loss Mitigation Securities and are recorded in the investment portfolio at fair value, excluding the value of the Company’s insurance. For Loss Mitigation Securities, the difference between the purchase price of the insured obligation and the fair value excluding the value of the Company’s insurance (on the date of acquisition) is treated as a paid loss. See Note 7, Investments, and Note 9, Fair Value Measurement.

Economic loss development represents the change in net expected loss to be paid (recovered) attributable to the effects of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.

In order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio, management assigns ratings and calculates expected loss to be paid (recovered) in the same manner for all its exposures regardless of form or differing accounting models. The exposure reported in Note 3, Outstanding Exposure includes policies accounted for under various accounting models depending on the characteristics of the contract and the Company’s control rights. The three primary
25
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
models are: (1) insurance, as described in Note 5, Contracts Accounted for as Insurance; (2) derivatives, as described in Note 6, Contracts Accounted for as Credit Derivatives, and Note 9, Fair Value Measurement; and (3) FG VIE consolidation, as described in Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of these accounting models. This note provides information regarding expected claim payments to be made and/or recovered under all contracts in the insured portfolio.

Loss Estimation Process

    The Company’s loss reserve committees estimate expected loss to be paid (recovered) for all contracts by reviewing analyses that consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or, depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions, scenarios and the probabilities they assign to those scenarios based on actual developments during the period and their view of future performance.
    The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such financial guaranties. As a result, the Company’s estimate of ultimate loss on a policy is subject to significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market variability over the life of most contracts.

    The Company does not use traditional actuarial approaches to determine its estimates of expected losses. The determination of expected loss to be paid (recovered) is an inherently subjective process involving numerous estimates, assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic projections, governmental actions, negotiations, recovery rates, delinquency and prepayment rates (with respect to RMBS), timing of cash flows, and other factors that affect credit performance. These estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period, and have a material effect on the Company’s financial statements. Each quarter, the Company may revise its scenarios and update its assumptions, including the probability weightings of its scenarios based on public information as well as nonpublic information obtained through its surveillance and loss mitigation activities.

    Changes over a reporting period in the Company’s loss estimates for public finance obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported and general obligation public finance transactions generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers; developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates may also be affected by the Company’s loss mitigation efforts and other variables.

    Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the Company’s loss estimates for its RMBS transactions may be influenced by factors such as the level and timing of loan defaults experienced, changes in housing prices, results from the Company’s loss mitigation activities, and other variables.

    Net economic loss development (benefit) over a reporting period may be attributable to a number of interrelated factors such as changes in discount rates, improvement or deterioration of transaction performance, charge-offs, loss mitigation activity, changes to projected default curves, severity rates and dispute resolution. Actual losses will ultimately depend on future events, transaction performance or other factors that are difficult to predict. As a result, the Company’s current projections of losses may be subject to considerable volatility and may not reflect the Company’s ultimate claims paid.
26
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

In some instances, the terms of the Company’s policy or the terms of certain workout orders and resolutions give it the option to pay principal losses that have been recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in the future. The Company has sometimes exercised this option, which results in an acceleration of cash outflows but reduces overall losses paid.

Net Expected Loss to be Paid (Recovered) and Net Economic Loss Development (Benefit)
by Accounting Model
Net Expected Loss to be Paid (Recovered)Net Economic Loss Development (Benefit)
As ofThird QuarterNine Months
Accounting ModelSeptember 30, 2023December 31, 20222023202220232022
 (in millions)
Insurance (see Note 5)
$252 $205 $92 $(67)$160 $(137)
FG VIEs (see Note 8) (1)
235 314 (6)(6)(15)(16)
Credit derivatives (see Note 6)
3 3 1 1 2 5 
Total
$490 $522 $87 $(72)$147 $(148)
____________________
(1)    The net expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) that were consolidated.
    
The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts, which are accounted for under one of the following accounting models: insurance, derivative and FG VIE. The Company used risk-free rates for U.S. dollar denominated obligations that ranged from 4.51% to 5.45% with a weighted average of 4.80% as of September 30, 2023 and 3.82% to 4.69% with a weighted average of 4.08% as of December 31, 2022. Net expected losses to be paid for U.S. dollar denominated transactions represented approximately 98.2% and 98.5% of the total as of September 30, 2023 and December 31, 2022, respectively.

Net Expected Loss to be Paid (Recovered)
Roll Forward
 Third QuarterNine Months
2023202220232022
 (in millions)
Net expected loss to be paid (recovered), beginning of period$560 $442 $522 $411 
Economic loss development (benefit) due to:
Accretion of discount6 3 15 8 
Changes in discount rates(12)(25)(8)(114)
Changes in timing and assumptions93 (50)140 (42)
Total economic loss development (benefit)87 (72)147 (148)
Net (paid) recovered losses (1)(157)357 (179)464 
Net expected loss to be paid (recovered), end of period$490 $727 $490 $727 
____________________
(1)     Net (paid) recovered losses in 2023 include recoveries related to various Puerto Rico securities transferred to the Company's investment portfolio upon the maturity and extinguishment of certain GO, PBA and HTA insured exposure. Net (paid) recovered losses in 2022 include the net amounts received pursuant to the 2022 Puerto Rico Resolutions, as described in Note 3, Outstanding Exposure.

27
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector

Third Quarter 2023
SectorNet Expected Loss to be Paid (Recovered) as of June 30, 2023Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2023
 (in millions)
Public finance:
U.S. public finance$433 $135 $(169)$399 
Non-U.S. public finance 10 (1)— 9 
Public finance443 134 (169)408 
Structured finance:   
U.S. RMBS73 (48)13 38 
Other structured finance44 1 (1)44 
Structured finance117 (47)12 82 
Total$560 $87 $(157)$490 


Third Quarter 2022
SectorNet Expected Loss to be Paid (Recovered) as of June 30, 2022Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2022
 (in millions)
Public finance:
U.S. public finance$210 $24 $392 $626 
Non-U.S. public finance 7 (2)1 6 
Public finance217 22 393 632 
Structured finance:   
U.S. RMBS179 (95)(32)52 
Other structured finance46 1 (4)43 
Structured finance225 (94)(36)95 
Total$442 $(72)$357 $727 


Nine Months 2023
SectorNet Expected Loss to be Paid (Recovered) as of December 31, 2022Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2023
 (in millions)
Public finance:
U.S. public finance$403 $193 $(197)$399 
Non-U.S. public finance 9 — — 9 
Public finance412 193 (197)408 
Structured finance:   
U.S. RMBS66 (52)24 38 
Other structured finance44 6 (6)44 
Structured finance110 (46)18 82 
Total$522 $147 $(179)$490 


28
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Nine Months 2022
SectorNet Expected Loss to be Paid (Recovered) as of December 31, 2021Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2022
 (in millions)
Public finance:
U.S. public finance$197 $(16)$445 $626 
Non-U.S. public finance 12 (6)— 6 
Public finance209 (22)445 632 
Structured finance:
U.S. RMBS150 (127)29 52 
Other structured finance52 1 (10)43 
Structured finance202 (126)19 95 
Total$411 $(148)$464 $727 
____________________
(1)    Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets.”

The tables above include (i) net LAE paid of $9 million, $5 million, $17 million and $25 million for third quarter 2023, third quarter 2022, nine months 2023 and nine months 2022, respectively, and (ii) net expected LAE to be paid of $29 million and $11 million as of September 30, 2023 and December 31, 2022, respectively.

Public Finance

The largest component of public finance net expected losses to be paid (recovered) and net economic loss development (benefit) are U.S. exposures, including Puerto Rico exposures, which are discussed in Note 3, Outstanding Exposure.

U.S. RMBS Loss Projections
 
    The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the performance of the underlying pool of mortgages over time and then applying the structural features (e.g., payment priorities and tranching) of the RMBS and any expected representation and warranty (R&W) recoveries/payables to the projected performance of the collateral over time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates.
    
Each period the Company reviews the assumptions it uses to make RMBS loss projections with consideration of updates on the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general. To the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a more prolonged trend. The assumptions that the Company uses to project RMBS losses are shown in the sections below.

Net Economic Loss Development (Benefit)
U.S. RMBS
Third QuarterNine Months
2023202220232022
 (in millions)
First lien U.S. RMBS$(12)$(38)$(12)$(34)
Second lien U.S. RMBS(36)(57)(40)(93)

First Lien U.S. RMBS Loss Projections: Alt-A, Prime, Option ARM and Subprime

     The majority of projected losses in first lien U.S. RMBS transactions are expected to come from non-performing mortgage loans (those that are or have recently been two or more payments behind, have been modified, are in foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the previous period
29
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
are one of the primary drivers of loss projections in this portfolio. In order to project the number of defaults arising from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third-party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the rate at which loans are liquidated. Each quarter the Company reviews recent data and (if necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various non-performing and re-performing categories.

First Lien U.S. RMBS Liquidation Rates
As of
September 30, 2023December 31, 2022
Current but recently delinquent
Alt-A and Prime20%20%
Option ARM20%20%
Subprime20%20%
30 – 59 Days Delinquent
Alt-A and Prime35%35%
Option ARM35%35%
Subprime30%30%
60 – 89 Days Delinquent
Alt-A and Prime40%40%
Option ARM45%45%
Subprime40%40%
90+ Days Delinquent
Alt-A and Prime55%55%
Option ARM60%60%
Subprime45%45%
Bankruptcy
Alt-A and Prime45%45%
Option ARM50%50%
Subprime40%40%
Foreclosure
Alt-A and Prime60%60%
Option ARM65%65%
Subprime55%55%
Real Estate Owned
All100%100%

While the Company uses the liquidation rates above to project defaults of non-performing loans (including current loans that were recently modified or delinquent), it projects defaults on presently current loans by applying a conditional default rate (CDR) curve. The start of that CDR curve is based on the defaults the Company projects will emerge from currently nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, results in the projection of the defaults that are expected to emerge from the various delinquency categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting point for the CDR curve used to project defaults of the presently performing loans.
 
In the most heavily weighted scenario (the base scenario), after the 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to a final CDR of 5% of the plateau CDR. In the base scenario, the Company assumes the final CDR will be reached one year after the 36-month CDR plateau period. Under the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans that were recently modified or delinquent, or that are currently delinquent or in foreclosure, while the defaults projected to occur using the projected CDR
30
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
trend after the first 36-month period represent defaults attributable to borrowers that are currently performing or are projected to re-perform.

     Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property. The Company assumes in the base scenario that recent (still historically elevated) loss severities will improve after loans with accumulated delinquencies and foreclosure cost are liquidated. The Company is assuming in the base scenario that the recent levels generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations. The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning after the initial 18-month period, declining to 40% in the base scenario over 2.5 years.
 
The following table shows the range as well as the average, weighted by outstanding net insured par, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 first lien U.S. RMBS.

Key Assumptions in Base Scenario Expected Loss Estimates
First Lien U.S. RMBS
 
 As of September 30, 2023As of December 31, 2022
RangeWeighted AverageRangeWeighted Average
Alt-A and Prime:
Plateau CDR0.3 %-9.7%3.8%1.6 %-11.5%5.1%
Final CDR0.0 %-0.5%0.2%0.1 %-0.6%0.3%
Initial loss severity:
2005 and prior50%50%
200650%50%
2007+50%50%
Option ARM:
Plateau CDR0.0 %-9.2%3.6%2.0 %-7.7%4.3%
Final CDR0.0 %-0.5%0.2%0.1 %-0.4%0.2%
Initial loss severity:
2005 and prior50%50%
200650%50%
2007+50%50%
Subprime:
Plateau CDR0.2 %-9.6%4.7%2.7 %-9.7%5.6%
Final CDR0.0 %-0.5%0.2%0.1 %-0.5%0.3%
Initial loss severity:
2005 and prior50%50%
200650%50%
2007+50%50%
 
The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected (since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on the insured obligations). The assumption for the voluntary conditional prepayment rate (CPR) follows a pattern similar to that of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15% in the base scenario. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are the same as those the Company used for December 31, 2022.
 
31
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The Company incorporates a recovery assumption into its reserving model to reflect observed trends in recoveries of deferred principal balances of modified first lien loans that had been previously written off. For transactions where the Company has detailed loan information, the Company assumes, in the base scenario, that 30% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans. In the first quarter of 2023, in light of volatility in interest rates, the mortgage market and home prices, the Company began incorporating a 10% recovery of deferred principal balances in the most stressful scenario and a 50% recovery in the least stressful scenario. Additionally, in third quarter 2023, due to home prices reaching all time highs and high equity levels, the Company increased its scenario based recovery assumptions such that the weighted average recovery percentage increased from 20% to approximately 30%. The effect of these updated assumptions on expected losses was a benefit of $7 million.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien U.S. RMBS transactions by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the plateau CDR. The Company also stressed CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of September 30, 2023 and December 31, 2022.

Certain transactions benefit from excess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt linked to Secured Overnight Finance Rate (SOFR). An increase in projected SOFR decreases excess spread, while lower SOFR results in higher excess spread.

The Company used a similar approach to establish its scenarios as of September 30, 2023 as it used as of December 31, 2022, increasing and decreasing the periods of stress from those used in the base scenario, except as described above with regards to the increase in deferred principal recoveries. In the Company’s most stressful scenario where 10% of deferred principal balances were recovered, loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 16 months, expected loss to be paid would increase from current projections by approximately $28 million for all first lien U.S. RMBS transactions. In the Company’s least stressful scenario where 50% of deferred principal balances are assumed to be recovered, the CDR plateau was six months shorter (30 months, effectively assuming that liquidation rates would improve) and the CDR recovery was more pronounced (including an initial ramp-down of the CDR over eight months), expected loss to be paid would decrease from current projections by approximately $20 million for all first lien U.S. RMBS transactions.

Second Lien U.S. RMBS Loss Projections
 
Second lien U.S. RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the amount and timing of future losses or recoveries in the collateral pool supporting the transactions (including recoveries from previously charged-off loans). Expected losses are also a function of the structure of the transaction, the prepayment speeds of the collateral, the interest rate environment and assumptions about loss severity.
 
The Company estimates the amount of loans that will default over the next several years by first calculating expected liquidation rates for delinquent loans, and applying liquidation rates to currently delinquent loans in order to arrive at an expected dollar amount of defaults from currently delinquent collateral (plateau period defaults).

Similar to first lien U.S. RMBS transactions, the Company then calculates a CDR that will cause the targeted amount of liquidations to occur during the plateau period.

For the base scenario, the CDR (the plateau CDR) is held constant for 36 months. Once the plateau period ends, the CDR is assumed to trend down in uniform increments for one year to its final long-term steady state CDR (5% of original plateau).

HELOC loans generally permitted the borrower to pay only interest for an initial period (often ten years) and, after that period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. A substantial number of loans in the Company’s insured transactions had been modified to extend the interest-only period to 15 years. The majority of the modified loans had reset to fully amortizing by the end of 2022, and most of the remaining loans will reset over the next several years.

32
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Recently, the Company has observed the performance of the modified loans that have finally reset to full amortization (which represent the majority of extended loans), and noted low levels of delinquency, even with substantial increases in monthly payments. This observed performance lowers the level of uncertainty regarding this modified cohort as the remainder continue to reset.

When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of September 30, 2023 and December 31, 2022, that it will generally recover 2% of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time. A second lien on the borrower’s home may be retained in the Company’s second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed. If the second lien is retained and the value of the home increases, the servicer may be able to use the second lien to increase recoveries, either by arranging for the borrower to resume payments or by realizing value upon the sale of the underlying real estate. The Company evaluates its assumptions quarterly based on actual recoveries of charged-off loans observed from period to period and reasonable expectations of future recoveries. In instances where the Company is able to obtain information on the lien status of charged-off loans, it assumes there will be a certain level of future recoveries of the balance of the charged-off loans where the second lien is still intact. The Company’s base scenario recovery assumption for charged-off loans is 40% (up from 30% in the prior quarters), as shown in the table below, based on observed trends and reasonable expectations of future recoveries. Such recoveries are assumed to be received evenly over the next five years. In the first quarter of 2023, in light of volatility in interest rates, the mortgage market and home prices, as with the first lien deferred principal balances detailed earlier, the Company also expanded the range of potential recoveries as a percentage of charged off loan balances. In third quarter 2023, this range was further expanded to represent a potential for greater future recoveries due to home prices reaching new record highs. The assumptions for the current quarter ranged from a 10% recovery of charged-off loan balances in the most stressful scenario and an 80% recovery in the least stressful scenario. The effect of these updated assumptions on expected loss to be paid (recovered) was a benefit of $31 million.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread. In the base scenario, an average CPR (based on experience of the past year) is assumed to continue until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final CPR is assumed to be 15% for second lien U.S. RMBS transactions (in the base scenario), which is lower than the historical average but reflects the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is consistent with how the Company modeled the CPR as of December 31, 2022. To the extent that prepayments differ from projected levels, the Company’s projected excess spread and losses could materially change.
 
In estimating expected losses, the Company modeled and probability weighted five scenarios, each with a different CDR curve applicable to the period preceding the return to the long-term steady state CDR. The Company believes that the level of the elevated CDR and the length of time it will persist and the ultimate prepayment rate are the primary drivers of the amount of losses the collateral will likely suffer.

33
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.

Key Assumptions in Base Scenario Expected Loss Estimates
HELOCs

As of September 30, 2023As of December 31, 2022
RangeWeighted Average RangeWeighted Average
Plateau CDR0.4 %-8.7%2.7%0.4 %-8.4%3.5%
Final CDR trended down to0.0 %-0.4%0.1%0.0 %-0.4%0.2%
Liquidation rates:
Current but recently delinquent 20%20%
30 – 59 Days Delinquent3030
60 – 89 Days Delinquent4040
90+ Days Delinquent6060
Bankruptcy5555
Foreclosure5555
Real Estate Owned 100100
Loss severity on future defaults98%98%
Projected future recoveries on previously charged-off loans40%30%

The Company continues to evaluate the assumptions affecting its modeling results. The Company believes the most important driver of its projected second lien RMBS losses is the performance of its HELOC transactions.

The Company modeled scenarios with a longer period of elevated defaults and others with a shorter period of elevated defaults. In the Company’s most stressful scenario, assuming 10% recoveries on charged-off loans, increasing the CDR plateau to 42 months and increasing the ramp-down by four months to 16 months (for a total stress period of 58 months) would decrease the expected recovery by approximately $89 million for HELOC transactions. On the other hand, in the Company’s least stressful scenario, assuming 80% recoveries on charged-off loans, reducing the CDR plateau to 30 months and decreasing the length of the CDR ramp-down to eight months (for a total stress period of 38 months) and lowering the ultimate prepayment rate to 10% would increase the expected recovery by approximately $120 million for HELOC transactions.

Recovery Litigation and Dispute Resolution

    In the ordinary course of their respective businesses, certain of AGL’s subsidiaries are involved in litigation or other dispute resolution with third parties to recover insurance losses paid or return benefits received in prior periods or prevent or reduce losses in the future. The impact, if any, of these and other proceedings on the amount of recoveries the Company ultimately receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s financial statements.

    The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico. See Note 3, Outstanding Exposure, for a discussion of the Company’s exposure to Puerto Rico and related recovery litigation being pursued by the Company.

5.    Contracts Accounted for as Insurance

The portfolio of outstanding exposures discussed in Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered), includes contracts that are accounted for as insurance contracts, derivatives and consolidated FG VIEs. Amounts presented in this note relate only to contracts accounted for as insurance, unless otherwise specified. See Note 6, Contracts Accounted for as Credit Derivatives, for amounts related to CDS and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for amounts that are accounted for as consolidated FG VIEs.

34
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Premiums

Net Earned Premiums
 Third QuarterNine Months
 2023202220232022
 (in millions)
Financial guaranty insurance:
Scheduled net earned premiums$73 $70 $212 $219 
Accelerations from refundings and terminations (1)14 12 26 145 
Accretion of discount on net premiums receivable7 6 20 18 
Financial guaranty insurance net earned premiums94 88 258 382 
Specialty net earned premiums1 1 3 3 
  Net earned premiums$95 $89 $261 $385 
____________________
(1)    Nine months 2022 accelerations included $104 million related to PRCCDA, PRIFA and GO/PBA exposures. See Note 3, Outstanding Exposure.

Gross Premium Receivable,
Net of Commissions Payable on Assumed Business
Roll Forward 
 Nine Months
 20232022
 (in millions)
Beginning of year$1,298 $1,372 
Less: Specialty insurance premium receivable1 1 
Financial guaranty insurance premiums receivable1,297 1,371 
Gross written premiums on new business, net of commissions215 232 
Gross premiums received, net of commissions (170)(258)
Adjustments:
Changes in the expected term and debt service assumptions4 (5)
Accretion of discount, net of commissions on assumed business20 18 
Foreign exchange gain (loss) on remeasurement9 (181)
Financial guaranty insurance premium receivable1,375 1,177 
Specialty insurance premium receivable1 1 
September 30,$1,376 $1,178 

Approximately 70% and 74% of gross premiums receivable, net of commissions payable, at September 30, 2023 and December 31, 2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro.
 
The timing and cumulative amount of actual collections and net earned premiums may differ from those of expected collections and of expected net earned premiums in the table below due to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations, restructurings, changes in the consumer price indices, changes in expected lives and new business.

35
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance
Expected Future Premium Collections and Earnings
 As of September 30, 2023
Future Gross Premiums
to be Collected (1)		Future Net Premiums
to be Earned (2)
 (in millions)
2023 (October 1 - December 31)$45 $72 
2024134 277 
2025104 259 
2026100 243 
202797 230 
2028-2032402 958 
2033-2037264 635 
2038-2042182 390 
After 2042360 537 
Total$1,688 3,601 
Future accretion313 
Total future net earned premiums$3,914 
____________________
(1)    Net of assumed commissions payable.
(2)     Net of reinsurance.

Selected Information for Financial Guaranty Insurance Policies with Premiums Paid in Installments
As of
 September 30, 2023December 31, 2022
 (dollars in millions)
Premiums receivable, net of commissions payable$1,375$1,297
Deferred premium revenue1,7021,663
Weighted-average risk-free rate used to discount premiums1.9%1.8%
Weighted-average period of premiums receivable (in years)12.212.9
Losses and Recoveries

Loss reserves and salvage are discounted at risk-free rates for U.S. dollar denominated financial guaranty insurance obligations that ranged from 4.51% to 5.45% with a weighted average of 4.86% as of September 30, 2023 and 3.82% to 4.69% with a weighted average of 4.15% as of December 31, 2022.

36
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
    The following tables provide information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.

Net Reserve (Salvage) by Sector
As of
SectorSeptember 30, 2023December 31, 2022
 (in millions)
Public finance:
U.S. public finance$123 $71 
Non-U.S. public finance 1 1 
Public finance124 72 
Structured finance:
U.S. RMBS(89)(77)
Other structured finance42 42 
Structured finance(47)(35)
Total$77 $37 

The table below provides a reconciliation of net expected loss to be paid (recovered) for financial guaranty insurance contracts to net expected loss to be expensed. Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to: (i) the contra-paid, which represents the claim payments made and recoveries received that have not yet been recognized in the statements of operations; (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received); and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Net Expected Loss to be Paid (Recovered)
to Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
As of September 30, 2023
 (in millions)
Net expected loss to be paid (recovered) - financial guaranty insurance $249 
Contra-paid, net 21 
Salvage and subrogation recoverable, net281 
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance(355)
Net expected loss to be expensed (present value)$196 

37
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
    The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations, changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated in consolidation.

Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts 
 As of September 30, 2023
 (in millions)
2023 (October 1 - December 31)$2 
202413 
202512 
202615 
202716 
2028-203263 
2033-203749 
2038-204213 
After 204213 
Net expected loss to be expensed196 
Future accretion39 
Total expected future loss and LAE$235 
 
The following table presents the loss and LAE (benefit) reported in the condensed consolidated statements of operations by sector for insurance contracts. Amounts presented are net of reinsurance.

Loss and LAE (Benefit) by Sector
  
 Third QuarterNine Months
Sector2023202220232022
(in millions)
Public finance:
U.S. public finance$134 $1 $186 $67 
Non-U.S. public finance— — — — 
Public finance134 1 186 67 
Structured finance:
U.S. RMBS(35)(78)$(31)$(97)
Other structured finance1 2 4 1 
Structured finance(34)(76)(27)(96)
Loss and LAE (benefit)$100 $(75)$159 $(29)

38
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following tables provide information on financial guaranty insurance contracts categorized as BIG.

Financial Guaranty Insurance
BIG Transaction Loss Summary
As of September 30, 2023  
 GrossNet Total BIG
 BIG 1BIG 2BIG 3Total BIG
(dollars in millions)
Number of risks (1)102 13 109 224 224 
Remaining weighted-average period (in years)9.816.17.710.210.2
Outstanding exposure:    
Par$2,121 $980 $2,033 $5,134 $5,119 
Interest1,125 922 824 2,871 2,867 
Total (2)$3,246 $1,902 $2,857 $8,005 $7,986 
Expected cash outflows (inflows) $113 $180 $1,621 $1,914 $1,903 
Potential recoveries (3)(324)(78)(1,223)(1,625)(1,615)
Subtotal(211)102 398 289 288 
Discount60 (25)(74)(39)(39)
Expected losses to be paid (recovered)$(151)$77 $324 $250 $249 
Deferred premium revenue$96 $64 $146 $306 $306 
Reserves (salvage)$(178)$37 $215 $74 $74 
 
39
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2022 
 GrossNet Total BIG
 BIG 1BIG 2BIG 3Total BIG
(dollars in millions)
Number of risks (1)122 14 111 247 247 
Remaining weighted-average period (in years)11.38.77.69.89.8
Outstanding exposure: 
Par$3,363 $171 $2,318 $5,852 $5,835 
Interest2,177 77 894 3,148 3,144 
Total (2)$5,540 $248 $3,212 $9,000 $8,979 
Expected cash outflows (inflows) $128 $121 $1,771 $2,020 $2,008 
Potential recoveries (3)(294)(79)(1,364)(1,737)(1,725)
Subtotal(166)42 407 283 283 
Discount35 (13)(104)(82)(82)
Expected losses to be paid (recovered)$(131)$29 $303 $201 $201 
Deferred premium revenue$170 $15 $160 $345 $345 
Reserves (salvage)$(174)$21 $186 $33 $33 
____________________
(1)    A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of making debt service payments.
(2)Includes amounts related to FG VIEs.
(3)Represents expected inflows from future payments by obligors pursuant to restructuring agreements, settlements, excess spread on any underlying collateral and other estimated recoveries. Potential recoveries also include recoveries on certain investment grade credits, related mainly to exposures that were previously BIG and for which claims have been paid in the past.

6.    Contracts Accounted for as Credit Derivatives
 
Amounts presented in this note relate only to contracts accounted for as derivatives. The Company’s credit derivatives (contracts that meet the definition of a derivative in accordance with GAAP) are primarily CDS and also include interest rate swaps.
 
The Company’s credit derivatives are generally governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a CDS may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in full. In certain credit derivative transactions, the Company also specifically agreed to pay if the obligor were to become bankrupt or if the reference obligation were restructured. Furthermore, in certain credit derivative transactions, the Company may be required to make a payment due to an event that is unrelated to the performance of the obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an event of default or termination event, the Company may not unilaterally terminate a credit derivative contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 11.4 years and 12.8 years as of September 30, 2023 and December 31, 2022, respectively.
40
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
 Credit Derivatives (1) 
 As of September 30, 2023As of December 31, 2022
SectorNet Par
Outstanding		Net Fair Value Asset (Liability)Net Par
Outstanding		Net Fair Value Asset (Liability)
 (in millions)
U.S. public finance $1,074 $(15)$1,175 $(79)
Non-U.S. public finance 1,478 (19)1,565 (58)
U.S. structured finance327 (13)342 (22)
Non-U.S. structured finance 610 (2)121 (3)
Total$3,489 $(49)$3,203 $(162)
____________________
(1)    Expected loss to be paid was $3 million as of both September 30, 2023 and December 31, 2022.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating 

 As of September 30, 2023As of December 31, 2022
Rating CategoryNet Par
Outstanding		% of TotalNet Par
Outstanding		% of Total
 (dollars in millions)
AAA$1,255 36.0 %$1,260 39.3 %
AA1,020 29.2 1,064 33.2 
A 689 19.7 232 7.2 
BBB470 13.5 590 18.5 
BIG
55 1.6 57 1.8 
Credit derivative net par outstanding$3,489 100.0 %$3,203 100.0 %

 Fair Value Gains (Losses) on Credit Derivatives

Third QuarterNine Months
 2023202220232022
 (in millions)
Realized gains (losses) and other settlements$— $(1)$1 $(2)
Net unrealized gains (losses)9 (47)114 (40)
Fair value gains (losses) on credit derivatives$9 $(48)$115 $(42)
    
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates and other market conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural terms, the change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts generally also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date.
 
CDS Spread on AGC (in basis points)

  As of September 30,
2023		 As of December 31, 2022 As of September 30,
2022		 As of December 31, 2021
Five-year CDS spread98637049
One-year CDS spread41262816

41
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Fair Value of Credit Derivative Assets (Liabilities)
and Effect of AGC Credit Spread
As of
 September 30, 2023December 31, 2022
 (in millions)
Fair value of credit derivatives before effect of AGC credit spread$(80)$(207)
Plus: Effect of AGC credit spread31 45 
Net fair value of credit derivatives $(49)$(162)

The fair value of CDS contracts as of September 30, 2023, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.

7.    Investments

The majority of the investment portfolio comprises investment grade fixed-maturity securities managed by three outside managers. The Company has established investment guidelines for these investment managers regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.

The remainder of the investment portfolio primarily consists of (i) Loss Mitigation Securities; (ii) New Recovery Bonds and CVIs received in connection with the consummation of the 2022 Puerto Rico Resolutions; (iii) equity method investments; (iv) short-term investments and (iv) other investments. Equity method investments primarily consists of the investment in Sound Point and fund investments across a variety of strategies.

42
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Investment Portfolio
Carrying Value
As of
September 30, 2023December 31, 2022
 (in millions)
Fixed-maturity securities, available-for-sale (1):
Externally managed (2)$5,316 $5,824 
Loss Mitigation Securities495 548 
Puerto Rico, New Recovery Bonds (3) 78 358 
Other (4)378 389 
Fixed-maturity securities, trading - Puerto Rico, CVIs (3) 350 303 
Short-term investments
1,426 810 
Other invested assets:
Equity method investments:
Sound Point
419 — 
Alternative investments (5)331 123 
Other15 10 
Total$8,808 $8,365 
____________________
(1)    7.6% and 7.4% of fixed-maturity securities were rated BIG as of September 30, 2023 and December 31, 2022, respectively, consisting primarily of Loss Mitigation Securities. 2.4% and 5.9% were not rated, as of September 30, 2023 and December 31, 2022, respectively.
(2)    As of September 30, 2023 and December 31, 2022 amounts include $294 million and $305 million, respectively, of CLOs that had been managed internally by AssuredIM under an investment management agreement until it transitioned to an external manager in June 2023.
(3)    These securities are not rated. On August 31, 2023, the Company satisfied its obligations under certain Puerto Rico Trusts and as a result $68 million, at fair value, of Puerto Rico New Recovery Bonds and $5 million, at fair value, of CVIs were transferred from the consolidated Puerto Rico Trusts to AGC and AGM’s investment portfolios. See Note 3, Outstanding Exposure.
(4)    As of September 30, 2023 and December 31, 2022, amounts include $214 million and $232 million, respectively, of municipal bonds that had been managed by AssuredIM under an investment management agreement until June 2023, and are now managed by the U.S. Insurance Subsidiaries for their own accounts.
(5)     Excludes certain investments in funds that are consolidated and accounted for as CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.
    
Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval, which includes $630 million of invested capital (at fair value), and $890 million in unfunded commitments (of which $332 million is committed to specific funds). See 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 $132 million for a total of $882 million as of September 30, 2023. As of September 30, 2023, AGAS commitments to Sound Point and AHP funds were $703 million (of which $446 million was funded with a net asset value (NAV) of $469 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 September 30, 2023, three of the six funds in which AGAS invests are accounted for as CIVs. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

Accrued investment income, which is reported in “other assets,” was $78 million as of September 30, 2023 and $71 million as of December 31, 2022. In nine months 2023 and nine months 2022, the Company did not write off any accrued investment income.

43
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Available-for-Sale Fixed-Maturity Securities by Security Type 
As of September 30, 2023
Security TypePercent
of
Total (1)		Amortized
Cost		Allowance for Credit LossesGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
 (dollars in millions)
Obligations of state and political subdivisions42 %$2,938 $(14)$20 $(178)$2,766 
U.S. government and agencies1 65 — — (7)58 
Corporate securities (2)
33 2,321 (6)1 (307)2,009 
Mortgage-backed securities (3):
 
RMBS6 430 (20)2 (82)330 
Commercial mortgage-backed securities (CMBS)3 198 — — (10)188 
Asset-backed securities:
CLOs7 463 — 1 (10)454 
Other6 440 (46)6 (31)369 
Non-U.S. government securities2 116 — — (23)93 
Total available-for-sale fixed-maturity securities100 %$6,971 $(86)$30 $(648)$6,267 

Available-for-Sale Fixed-Maturity Securities by Security Type 
As of December 31, 2022 
Security TypePercent
of
Total (1)		Amortized
Cost		Allowance for Credit LossesGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
 (dollars in millions)
Obligations of state and political subdivisions45 %$3,509 $(14)$37 $(138)$3,394 
U.S. government and agencies2 118 — 1 (8)111 
Corporate securities (2)
31 2,387 (6)2 (299)2,084 
Mortgage-backed securities (3):
    
RMBS5 418 (19)3 (62)340 
CMBS4 282 — — (11)271 
Asset-backed securities:
CLOs6 449 — — (21)428 
Other5 423 (26)22 (26)393 
Non-U.S. government securities2 121 — — (23)98 
Total available-for-sale fixed-maturity securities100 %$7,707 $(65)$65 $(588)$7,119 
____________________
(1)Based on amortized cost.
(2)Includes securities issued by taxable universities and hospitals.
(3)U.S. government-agency obligations were approximately 38% and 30% of mortgage-backed securities as of September 30, 2023 and December 31, 2022, respectively, based on fair value.

44
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Gross Unrealized Loss by Length of Time
for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of September 30, 2023  

 Less than 12 months12 months or moreTotal
 Fair
Value		Gross Unrealized
Loss		Fair
Value		Gross Unrealized
Loss		Fair
Value		Gross Unrealized
Loss
 (dollars in millions)
Obligations of state and political subdivisions$1,610 $(39)$899 $(136)$2,509 $(175)
U.S. government and agencies21 — 32 (7)53 (7)
Corporate securities381 (14)1,396 (236)1,777 (250)
Mortgage-backed securities: 
RMBS55 (3)122 (14)177 (17)
CMBS3 — 184 (10)187 (10)
Asset-backed securities:
CLOs18 (2)402 (8)420 (10)
Other1 — 26 (2)27 (2)
Non-U.S. government securities4 — 89 (23)93 (23)
Total$2,093 $(58)$3,150 $(436)$5,243 $(494)
Number of securities (1) 795  1,308  2,079 
 
Gross Unrealized Loss by Length of Time
for Available-for-Sale Fixed-Maturity Securities for Which a Credit Loss was Not Recorded
As of December 31, 2022

 Less than 12 months12 months or moreTotal
 Fair
Value		Gross Unrealized
Loss		Fair
Value		Gross Unrealized
Loss		Fair
Value		Gross Unrealized
Loss
 (dollars in millions)
Obligations of state and political subdivisions$1,763 $(79)$163 $(56)$1,926 $(135)
U.S. government and agencies32 — 52 (8)84 (8)
Corporate securities1,276 (95)519 (147)1,795 (242)
Mortgage-backed securities:    
RMBS147 (9)3 (1)150 (10)
CMBS270 (11)— — 270 (11)
Asset-backed securities:
CLOs171 (7)250 (14)421 (21)
Other27 (2)— — 27 (2)
Non-U.S. government securities65 (10)30 (13)95 (23)
Total$3,751 $(213)$1,017 $(239)$4,768 $(452)
Number of securities (1) 1,340  466  1,776 
___________________
(1)    The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.

45
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company has determined that the unrealized losses recorded as of September 30, 2023 and December 31, 2022 were primarily related to higher interest rates rather than credit quality. As of September 30, 2023, the Company did not intend to and was not required to sell investments in an unrealized loss position prior to expected recovery in value. As of September 30, 2023, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 641 securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2022, 567 securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $351 million as of September 30, 2023 and $329 million as of December 31, 2022.

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of September 30, 2023 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Distribution of Available-for-Sale Fixed-Maturity Securities by Contractual Maturity
As of September 30, 2023
 Amortized
Cost		Estimated
Fair Value
 (in millions)
Due within one year$248 $239 
Due after one year through five years1,526 1,406 
Due after five years through 10 years1,760 1,629 
Due after 10 years2,809 2,475 
Mortgage-backed securities:  
RMBS430 330 
CMBS198 188 
Total$6,971 $6,267 

    Based on fair value, investments and other assets that are either held in trust for the benefit of third-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, totaled $224 million as of September 30, 2023 and $222 million as of December 31, 2022. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or are otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amounts of $1,107 million and $1,169 million based on fair value as of September 30, 2023 and December 31, 2022, respectively.

Income from Investments

Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments, and the size of such portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.

Puerto Rico CVIs in the investment portfolio are classified as trading securities. Equity in earnings (losses) of investees represents the Company’s interest in the earnings of its equity method investments.

46
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Income from Investments
 Third QuarterNine Months
 2023202220232022
(in millions)
Investment income:
Fixed-maturity securities, available-for-sale:
Externally managed (1)$51 $50 $156 $150 
Loss Mitigation Securities24 9 46 24 
Puerto Rico, New Recovery Bonds 1 1 5 5 
Other (2)5 4 12 11 
Short-term investments21 4 53 5 
Other invested assets— — 2 — 
Investment income102 68 274 195 
Investment expenses(2)(1)(4)(4)
Net investment income$100 $67 $270 $191 
Fair value gains (losses) on trading securities (3)$4 $(8)$42 $(30)
Equity in earnings (losses) of investees (4)18 (20)25 (31)
____________________
(1)    Amounts for 2022 include income on the portion of the CLO portfolio that was previously managed by AssuredIM.
(2)    Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM.
(3)    Fair value gains on trading securities pertaining to securities still held as of September 30, 2023 were $4 million for third quarter 2023 and $42 million for nine months 2023. Fair value losses on trading securities pertaining to securities still held as of September 30, 2022 were $2 million for third quarter 2022 and $18 million for nine months 2022.
(4)     Beginning in the fourth quarter of 2023, equity in earnings (losses) will include the Company’s share of the earnings of the Sound Point entities, which is reported on a one-quarter lag.

Realized Investment Gains (Losses)

    The table below presents the components of net realized investment gains (losses). Realized gains and losses on sales of investments are determined using the specific identification method.

Net Realized Investment Gains (Losses)
 Third QuarterNine Months
 2023202220232022
 (in millions)
Gross realized gains on sales of available-for-sale securities (1)$2 $— $21 $— 
Gross realized losses on sales of available-for-sale securities (1)(1)(10)(16)(33)
Net foreign currency gains (losses)(1)— (1)(3)
Change in allowance for credit losses and intent to sell (8)(4)(23)(13)
Other net realized gains (losses)(1)— (1)10 
Net realized investment gains (losses)$(9)$(14)$(20)$(39)
____________________
(1)    Gross realized gains and losses on sales in all periods related primarily to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.

The proceeds from sales of fixed-maturity securities classified as available-for-sale were $73 million in third quarter 2023, $207 million in third quarter 2022, $767 million in nine months 2023 and $560 million in nine months 2022.

47
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The following table presents the roll forward of allowance for the credit losses on available-for-sale fixed-maturity securities.

Roll Forward of Allowance for
Credit Losses for Available-for-Sale Fixed-Maturity Securities
 Third QuarterNine Months
 2023202220232022
 (in millions)
Balance, beginning of period$79 $51 $65 $42 
Additions for securities for which credit losses were not previously recognized— 1 — 4 
Additions for purchases of securities accounted for as purchased financial assets with credit deterioration— 2 — 2 
Additions (reductions) for securities for which credit losses were previously recognized7 3 21 9 
Balance, end of period$86 $57 $86 $57 

During third quarter 2022, the Company purchased a loss mitigation security with a fair value of $22 million that was accounted for as a purchased security with credit deterioration. At acquisition, this security had an unpaid principal on remaining collateral of $31 million, an allowance for credit losses of $2 million, and a non-credit related discount of $7 million. The Company did not purchase any securities with credit deterioration during third quarter 2023 and nine months 2023. Most of the Company’s securities with credit deterioration are Loss Mitigation Securities.


8.    Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles

FG VIEs

Structured Finance and Other FG VIEs
    
The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protection to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the insurance subsidiaries. In the case of first loss, the insurance subsidiaries’ financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

    The insurance subsidiaries are not primarily liable for the debt obligations issued by the structured finance and other FG VIEs (which excludes the Puerto Rico Trusts described below) they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the structured finance and other FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on structured finance and other FG VIEs’ liabilities.

As part of the terms of its financial guaranty contracts, the insurance subsidiaries obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager’s financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries’ control of the VIE typically increases. The Company
48
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidiaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the transaction’s servicer or collateral manager, which are characteristics specific to the Company’s financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance subsidiaries are deemed to no longer have those protective rights, the VIE is deconsolidated.

The structured finance and other FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because the insurance subsidiaries guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. The structured finance and other FG VIEs’ liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets.

The Company has elected the FVO for all assets and all liabilities of the structured finance and other FG VIEs. The change in fair value of all structured finance and other FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for the change in fair value attributable to change in instrument-specific credit risk (ISCR) on the structured finance and other FG VIEs’ liabilities, which is reported in other comprehensive income (OCI). As of both September 30, 2023 and December 31, 2022, the Company consolidated 25 structured finance and other FG VIEs.

Puerto Rico Trusts

With respect to certain insured securities covered by the 2022 Puerto Rico Resolutions, insured bondholders were permitted to elect to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and/or CVIs that constitute distributions under the 2022 Puerto Rico Resolutions. (At least one separate custodial trust was set up for each legacy insured bond, and the trusts are deconsolidated as they are paid off.) For those who made this election, distributions of Plan Consideration are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions of Plan Consideration are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest.

On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Company satisfied its obligations under such legacy insured bonds with respect to $108 million net par outstanding as of August 31, 2023, and the custodial trusts released to AGC and AGM New Recovery Bonds and/or CVIs with a fair value totaling $73 million as of August 31, 2023. As of September 30, 2023 and December 31, 2022, respectively, the Company consolidated 24 and 45 custodial trusts established as part of the 2022 Puerto Rico Resolutions discussed in Note 3, Outstanding Exposure, Exposure to Puerto Rico.

New Recovery Bonds
Reported in FG VIEs’ Assets
Available-for-Sale
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
 (dollars in millions)
As of September 30, 2023$136 $10 $— $146 
As of December 31, 2022204 4 (4)204 

As of September 30, 2023, no New Recovery Bonds in the Puerto Rico Trusts were in a gross unrealized loss position. As of December 31, 2022, 14 New Recovery Bonds in the Puerto Rico Trusts were in a gross unrealized loss position totaling $4 million and had a fair value of $110 million, all of which were in a continuous unrealized loss position for less than 12
49
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
months. The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss.

The Company has determined that the unrealized losses recorded as of December 31, 2022 were primarily attributable to the change in interest rates, rather than credit quality. The Company did not intend to and was not required to sell these investments prior to an expected recovery in value. As of December 31, 2022, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, eight securities had unrealized losses in excess of 10% of their carrying value. The total unrealized loss for these securities was $3 million.

The amortized cost and estimated fair value of available-for-sale New Recovery Bonds by contractual maturity as of September 30, 2023 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

New Recovery Bonds, Available-for-Sale
Reported in FG VIEs’ Assets
Distribution by Contractual Maturity
As of September 30, 2023
 Amortized
Cost		Estimated
Fair Value
 (in millions)
Due after five years through 10 years$28 $30 
Due after 10 years108 116 
Total$136 $146 

Components of FG VIEs’ Assets and Liabilities

Net fair value gains and losses on FG VIEs are expected to reverse to zero by the maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contracts. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 4, Expected Loss to be Paid (Recovered).

50
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
The table below shows the carrying value of FG VIEs’ assets and liabilities segregated by type of collateral.

Consolidated FG VIEs by Type of Collateral
As of
 September 30, 2023December 31, 2022
 (in millions)
FG VIEs’ assets:
U.S. RMBS first lien$146 $167 
U.S. RMBS second lien27 30 
Puerto Rico Trusts’ assets (includes $146 and $209 at fair value) (1)
147 212 
Other7 7 
Total FG VIEs’ assets$327 $416 
FG VIEs’ liabilities with recourse:
U.S. RMBS first lien$156 $176 
U.S. RMBS second lien20 24 
Puerto Rico Trusts’ liabilities347 495 
Other8 7 
Total FG VIEs’ liabilities with recourse$531 $702 
FG VIEs’ liabilities without recourse:
U.S. RMBS first lien$11 $13 
Total FG VIEs’ liabilities without recourse$11 $13 
____________________
(1)    Includes $2 million of cash as of December 31, 2022.

The change in the ISCR of the FG VIEs’ assets for which the Company elected the FVO (FG VIEs’ assets at FVO) held as of September 30, 2023 that was reported in the condensed consolidated statements of operations for third quarter 2023 and nine months 2023 were gains of $3 million and $1 million, respectively. The change in the ISCR of the FG VIEs’ assets at FVO held as of September 30, 2022 were gains of $15 million and $11 million for third quarter 2022 and nine months 2022, respectively. The ISCR amount is determined by using expected cash flows at the original date of consolidation, discounted at the effective yield, less current expected cash flows discounted at that same original effective yield.

    The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse (all of which are measured at fair value under the FVO) attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries’ CDS spread from the most recent date of consolidation to the current period.

Selected Information for FG VIEs’ Assets and Liabilities
Measured under the FVO
As of
 September 30, 2023December 31, 2022
 (in millions)
Excess of unpaid principal over fair value of:
FG VIEs’ assets$266 $265 
FG VIEs’ liabilities with recourse 51 21 
FG VIEs’ liabilities without recourse16 15 
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due29 34 
Unpaid principal for FG VIEs’ liabilities with recourse (1)
582 723 
____________________
(1)    FG VIEs’ liabilities with recourse will mature at various dates ranging from 2023 through 2041.

51
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
CIVs

In connection with the Sound Point Transaction and AHP Transaction the Company reevaluated its consolidation conclusion for each CIV and deconsolidated all but three CIVs. As of September 30, 2023, CIVs consist of certain funds managed by Sound Point, that were previously managed by AssuredIM. The Company consolidates investment vehicles when it is deemed to be the primary beneficiary, based on its power to direct the most significant activities of each VIE and its level of economic interest in the entities.

As a result of the Sound Point Transaction and AHP Transaction, during third quarter 2023 and nine months 2023, the Company deconsolidated CIV assets of $4.7 billion and CIV liabilities of $4.4 billion. The Company recognized a loss on deconsolidation of $16 million, which is reported in “fair value gains (losses) on CIVs”. During nine months 2022, the Company deconsolidated a CLO with assets and liabilities of $417 million.

The assets and liabilities of the Company’s CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company’s CIVs is not available for corporate liquidity needs, except to the extent of the Company’s investment in the funds, subject to redemption provisions. Changes in the fair value of assets and liabilities of CIVs, interest income and expense, and gains and losses on consolidation and deconsolidation of CIVs are reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. Interest income from CLO assets is recorded based on contractual rates.

Number of Consolidated CIVs by Type
 As of
CIV TypeSeptember 30, 2023December 31, 2022
Funds 3 8 
CLOs — 10 
CLO warehouses— 4 
Total number of consolidated CIVs (1)3 22 
____________________
(1)    As of December 31, 2022, two CIVs were voting interest entities (VOEs). Funds meet the criteria for consolidating a VOE when the Company possesses substantially all of the economics and all of the decision-making authority.

52
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Assets and Liabilities of CIVs
As of
September 30, 2023December 31, 2022
 (in millions)
Assets:
Fund assets:
Cash and cash equivalents$7 $59 
Fund investments, at fair value
Equity securities and warrants79 434 
Structured products239 128 
Corporate securities— 96 
Other5 1 
CLO and CLO warehouse assets:
Cash— 38 
CLO investments:
Loans in CLOs and CLO warehouses, FVO— 4,570 
Short-term investments, at fair value— 135 
Due from brokers and counterparties— 32 
Total assets (1)$330 $5,493 
Liabilities:
CLO obligations, FVO (2)
— 4,090 
Warehouse financing debt, FVO (3)— 313 
Due to brokers and counterparties4 112 
Other liabilities (4)— 110 
Total liabilities$4 $4,625 
____________________
(1)    Includes investments in AssuredIM funds and other affiliated entities of $392 million as of December 31, 2022. Includes assets and liabilities of a VOE of $58 million and $1 million, respectively, as of December 31, 2022.
(2)    As of December 31, 2022, the weighted average maturity of CLO obligations was 6.2 years and the weighted average interest rate of CLO obligations was 5.3%.
(3)    The weighted average maturity of warehouse financing debt of CLO warehouses was 1.9 years as of December 31, 2022. The weighted average interest rate of warehouse financing debt of CLO warehouses was 4.5% as of December 31, 2022.
(4)    As of December 31, 2022, includes redeemable noncontrolling interests (NCI).

As of September 30, 2023, the CIVs had unfunded commitments to invest of $143 million.

As of September 30, 2023 and December 31, 2022, the CIVs included derivative contracts with notional amounts totaling $36 million and $46 million, respectively, and average notional amounts of $41 million and $47 million, respectively. The fair value of derivative contracts is reported in the “assets of CIVs” or “liabilities of CIVs” in the condensed consolidated balance sheets. The net change in fair value is reported in “fair value gains (losses) on CIVs” in the condensed consolidated statements of operations. The net change in fair value of derivative contracts were gains of $7 million for nine months 2022.
NCI in CIVs

NCI represents the proportion of the consolidated funds not owned by the Company and includes ownership interests of third parties, employees, and former employees. The NCI is non-redeemable and presented on the statement of shareholders’ equity.

Other Consolidated VIEs

    In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the obligations under the original financial guaranty insurance or insured credit derivative contract, the Company classifies the assets and liabilities of that VIE in the line items that most accurately reflect the
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
nature of such assets and liabilities, as opposed to within FG VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $87 million and liabilities of $7 million as of September 30, 2023, and assets of $86 million and liabilities of $12 million as of December 31, 2022, primarily reported in “investments” and “credit derivative liabilities” on the condensed consolidated balance sheets.

Non-Consolidated VIEs
 
    As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 15 thousand policies monitored as of September 30, 2023, approximately 14 thousand policies are not within the scope of FASB ASC 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of September 30, 2023 and December 31, 2022, the Company identified 66 and 85, respectively, policies that contain provisions and experienced events that may trigger consolidation.
    
The Company holds variable interests in non-FG VIEs which are not consolidated, as the Company is not the primary beneficiary. As of September 30, 2023, the Company’s maximum exposure to losses relating to these non-FG VIEs was $251 million, which is limited to the carrying value of these investments of $239 million and other assets of $12 million.

9.    Fair Value Measurement
 
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or minimizes the amount paid for a liability (i.e., the most advantageous market).
 
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on either internally developed models that primarily use, as inputs, market-based or independently sourced market parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent third party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to reduce the Company’s credit exposure, such as collateral rights as applicable.

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions. During nine months 2023, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income.
 
The Company’s valuation methods produce fair values that may not be indicative of net realizable value or future fair values. The use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date.
 
The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes model inputs into three broad levels, with Level 1 being the highest and Level 3 the lowest. An asset’s or liability’s categorization within the hierarchy is based on the lowest level of significant input to its valuation.

Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask spread than an inactive market.
 
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other inputs derived from or corroborated by observable market inputs.
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
 
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

There was a transfer of fixed-maturity security in the investment portfolio from Level 3 to Level 2 during third quarter 2023 and nine months 2023. There were no other transfers from or into Level 3 during the periods presented.
 
Carried at Fair Value
 
Fixed-Maturity Securities

The fair value of fixed-maturity securities is generally based on prices received from third-party pricing services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of fair value using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news.

Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is dependent on the asset class and the market conditions. The valuation of fixed-maturity securities is more subjective when markets are less liquid due to the lack of market-based inputs.
 
    As of September 30, 2023, the Company used models to price 189 securities. All Level 3 securities were priced with the assistance of independent third parties. The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions; estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation rates based on macroeconomic forecasts; and recent trading activity. The yield used to discount the projected cash flows is determined by reviewing various attributes of the security including collateral type, weighted average life, sensitivity to losses, vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs could have materially changed the expected timing of cash flows within these securities which is a significant factor in determining the fair value of the securities.

Short-Term Investments
 
Short-term investments that are traded in active markets are classified as Level 1 as their value is based on quoted market prices. Securities such as discount notes are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.

Other Assets
 
Committed Capital Securities

Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM to issue an aggregate of $200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash. Each custodial trust was created for the primary purpose of issuing $50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.

The fair value of CCS, which is reported in other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security. The change in fair value of the AGC CCS and AGM CPS are reported in “fair value gains (losses) on committed capital securities” in the condensed consolidated statements of operations. The estimated current cost of the Company’s CCS is based on several factors, including AGM and AGC CDS spreads, the
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Company's publicly traded debt and the term the securities are estimated to remain outstanding. The AGC CCS and AGM CPS are classified as Level 3.

Supplemental Executive Retirement Plans

    The Company classified assets included in the Company’s various supplemental executive retirement plans as either Level 1 or Level 2. The fair value of these assets is based on the observable published daily values of the underlying mutual funds included in the plans (Level 1) or based upon the NAV of the funds if a published daily value is not available (Level 2). The NAVs are based on observable information. The change in fair value of these assets is reported in “other operating expenses” in the condensed consolidated statements of operations.
     
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes in the fair value reported in the condensed consolidated statements of operations. The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has from time-to-time mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does not have the right to terminate, such transactions were generally terminated for an amount that approximated the present value of future premiums or for a negotiated amount, rather than at fair value.
 
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management considers the non-standard terms of the Company’s credit derivative contracts in determining the fair value of these contracts.
 
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured credit derivatives are actively traded; therefore, management has determined that the exit market for the Company’s credit derivatives is a hypothetical one based on its entry market. These contracts are classified as Level 3 in the fair value hierarchy as there are multiple unobservable inputs deemed significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
 
The fair value of the Company’s credit derivative contracts represents the difference between the present value of remaining premiums the Company expects to receive and the estimated present value of premiums that a financial guarantor of comparable credit-worthiness would hypothetically charge at the reporting date for the same protection. The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract, expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at September 30, 2023 were such that market prices of the Company’s CDS contracts were not available.

Assumptions and Inputs

    The various inputs and assumptions that are key to the measurement of the Company’s fair value for CDS contracts are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost and the weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided by or obtained from market sources. The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction; the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company.
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

The primary sources of information used to determine gross spread include:
 
•Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
•Transactions priced or closed during a specific quarter within a specific asset class and specific rating.
•Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company’s CDS contracts.
•Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.
•Credit spreads provided by the counterparty of the CDS.
 
The rates used to discount future expected premium cash flows ranged from 3.62% to 5.41% at September 30, 2023 and 2.78% to 5.08% at December 31, 2022.

The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its transactions. The Company’s own credit risk is factored into the determination of net spread based on the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market prices on CDS referencing AGC. Due to the relatively low volume and characteristics of CDS contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The Company obtains the quoted price of CDS contracts traded on AGC from market data sources published by third parties. The cost to acquire CDS protection referencing AGC affects the amount of spread on CDS transactions that the Company retains and, hence, their fair value. As the cost to acquire CDS protection referencing AGC increases, the amount of premium the Company retains on a transaction generally decreases.

In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate that the Company would currently charge to assume similar risks. This assumption can have the effect of limiting the amount of unrealized gains that are recognized on certain CDS contracts. Given market conditions and the Company’s own credit spreads, approximately 11.2%, based on fair value, of the Company’s CDS contracts were fair valued using this minimum premium as of September 30, 2023. As of December 31, 2022, the use of the minimum premium did not have a significant effect on fair value. The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC’s credit spreads. In general, when AGC’s credit spreads narrow, the cost to hedge AGC’s name declines and more transactions price above previously established floor levels. Meanwhile, when AGC’s credit spreads widen, the cost to hedge AGC’s name increases causing more transactions to price at established floor levels. The Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC hedged by its counterparties, with independent third parties periodically. The implied credit risk of AGC, indicated by the trading level of AGC’s own credit spread, is a significant factor in the amount of exposure to AGC that a bank or transaction hedges. When AGC’s credit spreads widen, the hedging cost of a bank or originator increases. Higher hedging costs reduce the amount of contractual cash flows AGC can capture as premium for selling its protection, while lower hedging costs increase the amount of contractual cash flows AGC can capture.

The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company’s contracts typically do not require the posting of collateral by the guarantor. The extent of the hedge depends on the types of instruments insured and the current market conditions.

A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are lower than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining duration of each contract to the notional value of such contract and discounting such amounts using the applicable discount rate corresponding to the weighted average remaining life of the contract.
 
Strengths and Weaknesses of Model
 
The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
 
The primary strengths of the Company’s CDS modeling techniques are:
 
•The model takes into account the transaction structure and the key drivers of market value.
•The model maximizes the use of market-driven inputs whenever they are available.
•The model is a consistent approach to valuing positions.
The primary weaknesses of the Company’s CDS modeling techniques are:
 
•There is no exit market or any actual exit transactions; therefore, the Company’s exit market is a hypothetical one based on the Company’s entry market.
•There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.
•The markets for the inputs to the model are highly illiquid, which impacts their reliability. 
•Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that do not contain terms and conditions similar to those observed in the financial guaranty market.

FG VIEs’ Assets and Liabilities

FG VIEs include Puerto Rico Trusts and structured finance and other FG VIEs. Assets in the Puerto Rico Trusts, which consist of New Recovery Bonds and CVIs, are classified as Level 2. The Company elected the FVO for the Puerto Rico Trusts’ liabilities and they are classified as Level 3. See “ - Fixed Maturity Securities” above for a description of the fair value methodology for the New Recovery Bonds and CVIs in the Puerto Rico Trusts. Structured finance and other FG VIEs’ assets and liabilities are carried at fair value under the FVO and are classified as Level 3.

The fair value of the residential mortgage loan FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by market prices for similar securities; and, as applicable, house price depreciation/appreciation rates based on macroeconomic forecasts. Significant changes to some of these inputs could have materially changed the fair value of the FG VIEs’ assets and the implied collateral losses within these transactions. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets.

The prices of the assets and liabilities of the FG VIEs are generally determined with the assistance of an independent third party, based on a discounted cash flow approach. The third party pricing service utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives and other structural attributes specific to the security being priced. The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds.

The models used to price the FG VIEs’ liabilities (other than the liabilities of the Puerto Rico Trusts) generally apply the same inputs used in determining fair value of FG VIEs’ assets. For those liabilities insured by the Company, the benefit of the Company’s insurance policy guaranteeing the timely payment of debt service is also taken into account. The liabilities of the Puerto Rico Trusts are priced based on the value of the assets in the Puerto Rico Trusts including the value of the insurance subsidiaries’ financial guaranty policies.

Significant changes to any of the inputs described above could materially change the timing of expected losses within an insured transaction which is a significant factor in determining the implied benefit of the Company’s insurance policy guaranteeing the timely payment of principal and interest for the insured tranches of debt issued by the FG VIEs. In general, extending the timing of expected loss payments by the Company into the future typically could lead to a decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIEs’ liabilities with recourse, while a shortening of the timing of expected loss payments by the Company typically could lead to an increase in the value of the Company’s insurance and an increase in the fair value of the Company’s FG VIEs’ liabilities with recourse.

The change in fair value of FG VIEs’ assets and liabilities is reported in “fair value gains (losses) on FG VIEs” in the condensed consolidated statement of operations, except for (i) the change in fair value attributable to change in ISCR on FG
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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
VIEs’ liabilities, and (ii) unrealized gains and losses on the New Recovery Bonds in the Puerto Rico Trusts, which are reported in OCI. Interest income and interest expense are derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs.” Investment income on the New Recovery Bonds and changes in fair value on the CVIs in the Puerto Rico Trusts are all reported in “fair value gains (losses) on FG VIEs” on the condensed consolidated statement of operations.

Assets and Liabilities of CIVs

Investments held by CIVs which are listed or quoted on a national securities exchange or market are valued at their last reported sale price on the date of determination. Investments held by CIVs which are not listed or quoted on an exchange, but are traded over-the-counter, or are listed on an exchange which has no reported sales, are valued at their fair value as determined by the Company, after giving consideration to third-party data generally at the average between the offer and bid prices. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar investments; (ii) obtaining valuation-related information from issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information related to the investment that is an indication of value; (v) obtaining information provided by third parties; and/or (vi) evaluating information provided by management of these investments. These fair values are generally based on dealer quotes, indications of value or pricing models that consider the time value of money, the current market, contractual prices and potential volatilities of the underlying financial instruments. Inputs are used in applying the various valuation techniques and broadly refer to the current assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors. Investments in private equity funds are generally valued utilizing NAV.

Until July 1, 2023, the consolidated CLOs were collateralized financing entities (CFEs), and therefore, the debt issued by, and loans held by, the consolidated CLOs were measured under the FVO using the CFE practical expedient. Loans in CLOs were priced using a loan pricing service which aggregated quotes from loan market participants. The loans were all Level 2 assets, which are more observable than the fair value of the Level 3 debt issued by the consolidated CLOs. As a result, the less observable CLO debt was measured on the basis of the more observable CLO loans. Under the CFE practical expedient guidance, the loans of consolidated CLOs were measured at fair value and the debt of consolidated CLOs were measured as: (1) the sum of (i) the fair value of the financial assets, and (ii) the carrying value of any nonfinancial assets held temporarily; less (2) the sum of (iii) the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services), and (iv) the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount was allocated to the individual financial liabilities (other than the underlying financial liabilities to the beneficial interests retained by the Company).

Prior to securitization, when loans were warehoused in an investment vehicle, such vehicle was not considered a CFE. The Company had elected the FVO to measure the loans held and the debt issued by CLO warehouses to mitigate the accounting mismatch between such assets and liabilities when a CLO warehouse securitized and became a CLO.

As of December 31, 2022, Level 2 assets in the CIVs included assets of the consolidated CLOs and certain assets of the consolidated funds. Level 3 assets in the CIVs included the remainder of the invested assets of consolidated funds. Level 2 liabilities in the CIVs included senior warehouse financing debt used to fund a CLO warehouse (measured under the FVO). Level 3 liabilities of the CIVs included various tranches of CLO debt, first loss subordinated warehouse financing and securitized borrowing. Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.

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Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below. 

Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of September 30, 2023
 Fair Value Hierarchy
 Level 1Level 2Level 3Total
 (in millions)
Assets:   
Fixed-maturity securities, available-for-sale   
Obligations of state and political subdivisions$— $2,764 $2 $2,766 
U.S. government and agencies— 58 — 58 
Corporate securities— 2,009 — 2,009 
Mortgage-backed securities:
RMBS— 177 153 330 
CMBS— 188 — 188 
Asset-backed securities— 27 796 823 
Non-U.S. government securities— 93 — 93 
Total fixed-maturity securities, available-for-sale— 5,316 951 6,267 
Fixed-maturity securities, trading— 350 — 350 
Short-term investments 1,418 8 — 1,426 
Other invested assets (1)— — 3 3 
FG VIEs’ assets— 146 180 326 
Assets of CIVs:
Equity securities and warrants— 4 75 79 
Structured products— 66 173 239 
Total assets of CIVs— 70 248 318 
Other assets51 48 13 112 
Total assets carried at fair value$1,469 $5,938 $1,395 $8,802 
Liabilities:
Credit derivative liabilities$— $— $50 $50 
FG VIEs’ liabilities (3)— — 542 542 
Total liabilities carried at fair value$— $— $592 $592 

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Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2022  
 Fair Value Hierarchy
 Level 1Level 2Level 3Total
 (in millions)
Assets:   
Fixed-maturity securities, available-for sale   
Obligations of state and political subdivisions$— $3,347 $47 $3,394 
U.S. government and agencies— 111 — 111 
Corporate securities— 2,084 — 2,084 
Mortgage-backed securities:
RMBS— 161 179 340 
CMBS— 271 — 271 
Asset-backed securities— 27 794 821 
Non-U.S. government securities— 98 — 98 
Total fixed-maturity securities, available-for-sale— 6,099 1,020 7,119 
Fixed-maturity securities, trading— 303 — 303 
Short-term investments 771 39 — 810 
Other invested assets (1)2 — 5 7 
FG VIEs’ assets— 209 204 413 
Assets of CIVs (2):
Fund investments:
Equity securities and warrants— 5 297 302 
Corporate securities— — 96 96 
Structured products— 82 46 128 
CLOs and CLO warehouse assets:
Loans— 4,570 — 4,570 
Short-term investments135 — — 135 
Total assets of CIVs135 4,657 439 5,231 
Other assets54 46 48 148 
Total assets carried at fair value$962 $11,353 $1,716 $14,031 
Liabilities:
Credit derivative liabilities$— $— $163 $163 
FG VIEs’ liabilities (3)— — 715 715 
Liabilities of CIVs:
CLO obligations of CFEs— — 4,090 4,090 
Warehouse financing debt— 277 36 313 
Securitized borrowing— — 28 28 
Total liabilities of CIVs— 277 4,154 4,431 
Other liabilities— 7 — 7 
Total liabilities carried at fair value$— $284 $5,032 $5,316 
___________________
(1)    Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis.
(2)    As of December 31, 2022, excludes $5 million in investments in AssuredIM funds for which the Company recorded a 100% NCI. The consolidation of these funds resulted in a gross up of assets and NCI on the consolidated financial statements; however, it resulted in no economic equity or net income attributable to AGL.
(3)    Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse. See Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Level 3 Fair Value Measurements
 
The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during third quarter 2023, third quarter 2022, nine months 2023 and nine months 2022.

Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 2023
Fixed-Maturity Securities, Available-for-SaleAssets of CIVs
 Obligations
of State and
Political
Subdivisions		 RMBS Asset-
Backed
Securities		 FG VIEs’
Assets		Equity Securities and WarrantsCorporate SecuritiesStructured ProductsOther
(7)		 
 (in millions)
Fair value as of June 30, 2023$46 $162 $800 $188 $290 $84 $— $33 
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)— 4 (1)13 (1)1 (2)5 (4)— 7 (4)(20)(3)
Other comprehensive income (loss)(3)(6)(2) — — — — —  
Purchases— — —  — 3 — — —  
Sales— — — — (4)— — — 
Settlements(1)(7)(15)(9)— — — —  
Consolidations— — — — — — — — 
Deconsolidations— — — — (219)(84)166 — 
Transfers out of Level 3(40)— — — — — — — 
Fair value as of September 30, 2023$2 $153 $796 $180 $75 $— $173 $13 
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in:
Earnings$— $6 (4)$— $7 (4)$(20)(3)
OCI$— $(6)$3 $— 

Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 2023
 Credit Derivative
Liability, net (5)		 FG VIEs’ Liabilities (8)Liabilities of CIVs
 (in millions)
Fair value as of June 30, 2023$(57)$(699)$(4,199)
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)9 (6)17 (2)— 
Other comprehensive income (loss)—  13  — 
Settlements(1) 127 — 
Deconsolidations— — 4,199 
Fair value as of September 30, 2023$(49)$(542)$— 
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in:
Earnings$9 (6)$9 (2)$— 
OCI$13 $— 

62
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 2022
Fixed-Maturity Securities, Available-for-SaleAssets of CIVs
 Obligations
of State and
Political
Subdivisions		 RMBS Asset-
Backed
Securities		 FG VIEs’
Assets		Equity Securities and WarrantsCorporate SecuritiesStructured ProductsOther
(7)		 
 (in millions)
Fair value as of June 30, 2022$51 $184 $805 $223 $258 $90 $38 $37 
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)— 3 (1)2 (1)3 (2)(11)(4)(2)(4)(3)(4)1 (3)
Other comprehensive income (loss)(3)(8)1  — — — — —  
Purchases— 22 4  — 52 1 8 —  
Sales— — (1)— (2)(2)— — 
Settlements— (9)(5)(16)— — — —  
Fair value as of September 30, 2022$48 $192 $806 $210 $297 $87 $43 $38 
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in:
Earnings$3 (2)$(11)(4)$(2)(4)$(3)(4)$1 (3)
OCI$(3)$(8)$1 $— 

Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Third Quarter 2022
 Credit Derivative
Liability, net (5)		 FG VIEs’ Liabilities (8)Liabilities of CIVs
 (in millions)
Fair value as of June 30, 2022$(147)$(282)$(3,987)
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)(48)(6)8 (2)(31)(4)
Other comprehensive income (loss)—  (4) 41 
Issuances— — (8)
Sales— — 2 
Settlements1 27 — 
Consolidations— — (26)
Fair value as of September 30, 2022$(194)$(251)$(4,009)
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in:
Earnings$(46)(6)$8 (2)$(13)(4)
OCI$(4)$41 

63
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Nine Months 2023
Fixed-Maturity Securities, Available-for-SaleAssets of CIVs
 Obligations
of State and
Political
Subdivisions		 RMBS Asset-
Backed
Securities		 FG VIEs’
Assets		Equity Securities and WarrantsCorporate SecuritiesStructured ProductsOther
(7)		 
 (in millions)
Fair value as of December 31, 2022$47 $179 $794 $204 $297 $96 $46 $50 
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)1 (1)11 (1)13 (1)— 45 (4)(3)(4)9 (4)(33)(3)
Other comprehensive income (loss)(3)(14)(10) — — — — —  
Purchases— — 23  — 41 6 — —  
Sales— — (2)— (89)(15)(48)— 
Settlements(3)(23)(22)(24)— — — (4) 
Deconsolidations— — — — (219)(84)166 — 
Transfers out of Level 3(40)— — — — — — — 
Fair value as of September 30, 2023$2 $153 $796 $180 $75 $— $173 $13 
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in:
Earnings$(3)(2)$6 (4)$— $7 (4)$(33)(3)
OCI$— $(13)$— $— 


Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Nine Months 2023
 Credit Derivative
Liability, net (5)		 FG VIEs’ Liabilities (8)Liabilities of CIVs
 (in millions)
Fair value as of December 31, 2022$(162)$(715)$(4,154)
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)115 (6)18 (2)(45)(4)
Other comprehensive income (loss)—  14  (13)
Settlements(2) 141  13 
Deconsolidations— — 4,199 
Fair value as of September 30, 2023$(49)$(542)$— 
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2023 included in:
Earnings$114 (6)$11 (2)$— 
OCI$14 $— 

64
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Nine Months 2022
Fixed-Maturity Securities, Available-for-SaleAssets of CIVs
 Obligations
of State and
Political
Subdivisions		 RMBS Asset-
Backed
Securities		FG VIEs’
Assets		Equity SecuritiesCorporate SecuritiesStructured ProductsOther
(7)
 (in millions)
Fair value as of December 31, 2021
$72 $216 $863 $260 $239 $91 $— $27 
Total pre-tax realized and unrealized gains (losses) recorded in:
Net income (loss)— 13 (1)2 (1)— 15 (4)4 (4)(6)(4)12 (3)
Other comprehensive income (loss)(11)(27)(36)— — — — (1)
Purchases— 22 39 — 57 2 50 — 
Sales— — (13)— (14)(10)(21)— 
Settlements(13)(32)(49)(50)— — — — 
Consolidations— — — 15 — — — — 
Deconsolidations— — — (15)— — 20 — 
Fair value as of September 30, 2022$48 $192 $806 $210 $297 $87 $43 $38 
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in:
Earnings$1 (2)$7 (4)$3 (4)$(6)(4)$12 (3)
OCI$(13)$(25)$(35)$(1)

65
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Roll Forward of Level 3 Assets (Liabilities) at Fair Value on a Recurring Basis
Nine Months 2022
 Credit Derivative
Liability, net (5)		 FG VIEs’
Liabilities (8)		Liabilities of CIVs
 (in millions)
Fair value as of December 31, 2021
$(154)$(289)$(3,705)
Total pre-tax realized and unrealized gains (losses) recorded in:  
Net income (loss)(42)(6)34 (2)264 (4)
Other comprehensive income (loss)— (1)97 
Issuances— — (1,416)
Sales— — 2 
Settlements2 92 401 
Consolidations— (102)(26)
Deconsolidations— 15 374 
Fair value as of September 30, 2022
$(194)$(251)$(4,009)
Change in unrealized gains (losses) related to financial instruments held as of September 30, 2022 included in:
Earnings$(41)(6)$57 (2)$289 (4)
OCI$(1)$97 
____________________
(1)Included in “net realized investment gains (losses)” and “net investment income.”
(2)Included in “fair value gains (losses) on FG VIEs.”
(3)Reported in “fair value gains (losses) on CCS”, “net investment income” and “other income (loss).”
(4)Reported in “fair value gains (losses) on CIVs.”
(5)Represents the net position of credit derivatives. Credit derivative assets (reported in “other assets”) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the condensed consolidated balance sheets based on net exposure by transaction.
(6)Reported in “fair value gains (losses) on credit derivatives.”
(7)Includes CCS and other invested assets.
(8)Includes FG VIEs’ liabilities with recourse and FG VIEs’ liabilities without recourse.



66
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
As of September 30, 2023
Financial Instrument Description Fair Value Assets (Liabilities)
(in millions)		Significant Unobservable InputsRangeWeighted Average (4)
Investments (2):  
Fixed-maturity securities, available-for-sale (1):  
Obligations of state and political subdivisions$2 Yield8.8 %-21.5%9.1%
RMBS153 CPR0.0 %-15.0%3.9%
CDR1.4 %-16.0%5.7%
Loss severity50.0 %-125.0%82.6%
Yield8.2 %-11.9%9.7%
Asset-backed securities:
Life insurance transactions331 Yield8.1%
CLOs 454 Discount margin1.3 %-7.8%2.7%
Others11 Yield6.3 %-12.3%12.1%
FG VIEs’ assets (1)180 CPR0.1 %-21.2%8.0%
CDR1.3 %-41.0%9.3%
Loss severity45.0 %-100.0%82.6%
Yield8.1 %-11.5%10.1%
Assets of CIVs (3):
Equity securities and warrants75 Discount rate20.9%
Market multiple-price to book
1.10x
Market multiple-price to earnings
5.25x
Terminal growth rate4.0%
Exit multiple-price to book
1.10x
Exit multiple-price to earnings
5.25x
Structured products173 Yield7.5 %-28.1%17.9%
Other assets (1)12 Implied Yield7.7 %-8.2%7.9%
Term (years)10 years
Credit derivative liabilities, net (1)(49)Hedge cost (in bps)17.2-39.224.1
Bank profit (in bps)115.5-293.2155.7
Internal floor (in bps)10.0
Internal credit ratingAAA-CCCA
FG VIEs’ liabilities (1)(542)CPR0.1 %-21.2%8.0%
CDR1.3 %-41.0%9.3%
Loss severity45.0 %-100.0%82.6%
Yield5.5 %-11.5%6.5%
___________________
(1)    Discounted cash flow is used as the primary valuation technique.
(2)    Excludes several investments reported in “other invested assets” with a fair value of $3 million.
(3)    The primary valuation technique uses the income and/or market approach; the key inputs to the valuation are yield/discount rates and market multiples.
(4)    Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.

67
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Quantitative Information About Level 3 Fair Value Inputs
As of December 31, 2022
Financial Instrument Description Fair Value Assets (Liabilities)
(in millions)		Significant Unobservable InputsRangeWeighted Average (4)
Investments (2):   
Fixed-maturity securities, available-for-sale (1):  
Obligations of state and political subdivisions$47 Yield7.4 %-13.5%9.4%
RMBS179 CPR3.8 %-16.1%8.2%
CDR1.5 %-12.0%5.9%
Loss severity50.0 %-125.0%82.5%
Yield7.5 %-11.3%9.0%
Asset-backed securities:
Life insurance transactions342 Yield11.3%
CLOs428 Discount margin1.8 %-4.1%3.0%
Others24 Yield7.4 %-12.9%12.8%
FG VIEs’ assets (1)204 CPR0.9 %-21.9%12.9%
CDR1.3 %-41.0%7.6%
Loss severity45.0 %-100.0%81.0%
Yield6.6 %-10.9%7.5%
Assets of CIVs (3):
Equity securities and warrants297 Yield10.0%
Discount rate19.8%-25.1%22.7%
Market multiple-enterprise value/revenue
1.05x
-
1.10x
1.08x
Market multiple-enterprise value/EBITDA (6)
2.50x
-
11.00x
10.25x
Market multiple-price to book
1.15x
Market multiple-price to earnings
4.50x
Terminal growth rate3.0%-4.0%3.5%
Exit multiple-EBITDA
8.00x
-
12.00x
10.53x
Exit multiple-price to book
1.30x
Exit multiple-price to earnings
5.50x
Cost
1.00x
Corporate securities96 Discount rate20.8 %-23.8%21.7%
Yield16.3%
Exit multiple-EBITDA
8.00x
Cost
1.00x
Market multiple-enterprise value/EBITDA
2.50x
-
2.75x
2.63x
Structured products46 Yield12.8 %-37.1%18.9%
Other assets (1)
47 Implied Yield7.7 %-8.4%8.1%
Term (years)10 years
68
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Financial Instrument Description Fair Value Assets (Liabilities)
(in millions)		Significant Unobservable InputsRangeWeighted Average (4)
Credit derivative liabilities, net (1)(162)Year 1 loss estimates11.5 %-25.2%15.7%
Bank profit (in bps)51.0-270.5109.4
Internal credit ratingAAA-CCCAA
FG VIEs’ liabilities (1)(715)CPR0.9 %-21.9%6.3%
CDR1.3 %-41.0%3.7%
Loss severity45.0 %-100.0%39.9%
Yield4.8 %-10.9%5.9%
Liabilities of CIVs (1):
CLO obligations of CFEs (5)(4,090)Yield3.0 %-27.4%5.5%
Warehouse financing debt(36)Yield11.7 %-16.9%12.9%
Securitized borrowing(28)Discount rate20.9%
Terminal growth rate3.0%
Exit multiple-EBITDA
11.00x
Market multiple-enterprise value/EBITDA
10.00x
-
11.00x
10.50x
____________________
(1)    Discounted cash flow is used as the primary valuation technique.
(2)    Excludes several investments reported in “other invested assets” with a fair value of $5 million.
(3)    The primary valuation technique uses the income and/or market approach, the key inputs to the valuation are yield/discount rates and market multiples.
(4)    Weighted average is calculated as a percentage of current par outstanding for all categories except for assets of CIVs, for which it is calculated as a percentage of fair value.
(5)    See CFE fair value methodology described above for consolidated CLOs.
(6)    Earnings before interest, taxes, depreciation, and amortization (EBITDA).

Not Carried at Fair Value

Financial Guaranty Insurance Contracts

    Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, and also includes adjustments for stressed losses, ceding commissions and return on capital. The Company classified the fair value of financial guaranty insurance contracts as Level 3.
 
Long-Term Debt
 
Long-term debt issued by the U.S. Holding Companies is valued by broker-dealers using third-party independent pricing sources and standard market conventions and classified as Level 2 in the fair value hierarchy. The market conventions utilize market quotations, market transactions for the Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry.

Assets and Liabilities of CIVs

Cash equivalents are recorded at cost which approximates fair value. Due from/to brokers and counterparties primarily consists of cash, margin deposits, cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date. Due from/to brokers and counterparties represents balances on a net-by counterparty basis on the condensed consolidated balance sheets where a contractual right of offset exists under an enforceable netting arrangement. The cash at brokers is partially related to collateral for securities sold short and derivative contracts; its use is therefore restricted until the securities are purchased or the derivative contracts are closed. The carrying value approximates fair value of these items and are considered Level 1 in the fair value hierarchy.
69
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

Other Liabilities

As of December 31, 2022, $35 million of AssuredIM’s obligation under a master repurchase agreement to finance AssuredIM’s purchase of 5% of the senior and equity notes issued by certain consolidated European CLOs, which was required to comply with its European risk retention obligations, were included in “other liabilities.”
The carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value are presented in the following table.

Fair Value of Financial Instruments Not Carried at Fair Value
 As of September 30, 2023As of December 31, 2022
 Carrying
Amount		Estimated
Fair Value		Carrying
Amount		Estimated
Fair Value
 (in millions)
Assets (liabilities):    
Assets of CIVs (1)$21 $21 $46 $46 
Other assets (including other invested assets) (2)106 107 92 93 
Financial guaranty insurance contracts (3)(2,280)(1,712)(2,335)(986)
Long-term debt(1,693)(1,477)(1,675)(1,477)
Liabilities of CIVs (4)(4)(4)(170)(170)
Other liabilities (5)(17)(17)(43)(43)
____________________
(1)    Includes due from brokers and counterparties and cash equivalents. Carrying value approximates fair value.
(2)    Primarily includes accrued interest, a participation loan, and receivables for securities sold, for which carrying value approximates fair value. Also includes note receivable from Sound Point as of September 30, 2023 and management fees receivables as of December 31, 2022.
(3)    Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.
(4)    Includes due to brokers and counterparties and, as of December 31, 2022, fund’s loan payable. Carrying value approximates fair value.
(5)    Primarily includes accrued interest, repurchase agreement liability as of December 31, 2022, and payables for securities purchased for which carrying value approximates fair value.

10.    Asset Management Fees

    The following table presents the sources of asset management fees on a consolidated basis through the end of June 30, 2023. Upon closing of the Sound Point Transaction and the AHP Transaction, the Company deconsolidated the transferred AssuredIM subsidiaries and reports its investment in Sound Point as an equity method investment (on a one-quarter lag). As a result, the Company no longer has asset management fee revenues on its consolidated statement of operations.

Asset Management Fees
Third QuarterNine Months
2023202220232022
 (in millions)
Management fees$— $11 $21 $41 
Performance fees— 2 18 17 
Reimbursable fund expenses— 3 14 13 
Total asset management fees$— $16 $53 $71 

70
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
11.    Long-Term Debt

The principal and carrying values of the Company’s debt are presented in the table below.
 
Principal and Carrying Amounts of Long-Term Debt 
 As of September 30, 2023As of December 31, 2022
 PrincipalCarrying
Value		PrincipalCarrying
Value
 (in millions)
AGUS 5% Senior Notes
$— $— $330 $329 
AGUS 6.125% Senior Notes
350 345 — — 
AGUS 3.15% Senior Notes
500 495 500 495 
AGUS 7% Senior Notes
200 198 200 198 
AGUS 3.6% Senior Notes
400 395 400 395 
AGUS Series A Enhanced Junior Subordinated Debentures150 150 150 150 
AGMH Junior Subordinated Debentures (1)146 110 146 108 
Total$1,746 $1,693 $1,726 $1,675 
 ____________________
(1)    Carrying amounts are different than principal amounts primarily due to fair value adjustments at the date of the AGMH acquisition, which are accreted into interest expense over the remaining terms of these obligations. Net of AGMH’s long-term debt purchased by AGUS.

6.125% Senior Notes. On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028 (6.125% Senior Notes) for net proceeds of $345 million. The net proceeds from the issuance were used for the redemption on September 25, 2023, of $330 million of AGUS’s debt maturing in 2024. AGUS may redeem all or part of the 6.125% Senior Notes at any time or from time to time prior to August 15, 2028 (the date that is one month prior to the maturity of the 6.125% Senior Notes), at its option, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 6.125% Senior Notes being redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 6.125% Senior Notes being redeemed (excluding interest accrued to the redemption date) from the redemption date to August 15, 2028 discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the treasury rate plus 30 bps; plus, in each case, accrued and unpaid interest on the 6.125% Senior Notes to be redeemed to, but excluding, the redemption date. AGUS may redeem all or part of the 6.125% Senior Notes at any time or from time to time on and after August 15, 2028, at its option, at a redemption price equal to 100% of the principal amount of the 6.125% Senior Notes being redeemed, plus accrued and unpaid interest on the 6.125% Senior Notes to be redeemed to, but excluding, the redemption date. The 6.125% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by AGL. The 6.125% Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding. The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.

12.    Income Taxes

Overview
 
AGL and its Bermuda subsidiaries AG Re, AGRO and Cedar Personnel Ltd. (collectively, the Bermuda Subsidiaries) are not subject to any income, withholding or capital gains taxes under current Bermuda law. AGL’s U.S., U.K. and French subsidiaries are subject to income taxes imposed by U.S., U.K. and French authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the U.S. Internal Revenue Code to be taxed as a U.S. domestic corporation.

AGL is a tax resident in the U.K. although it remains a Bermuda-based company and its administrative and head office functions continue to be carried on in Bermuda.

AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries, AGRO and AG Intermediary Inc., file their own consolidated federal income tax return.

71
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
In July of 2023, the U.K. government passed legislation to implement the Organization for Economic Co-Operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two income inclusion rule. This includes a multinational top-up tax which will apply to large multinational corporations for accounting periods beginning on or after December 31, 2023. It is expected this will apply to AGL and subsidiaries, requiring a minimum effective rate of 15% in all jurisdictions in which it operates.

In addition, in August of 2023 the Bermuda government released the first of two public consultations for the introduction of a corporate income tax in Bermuda in response to the Pillar II initiatives. The Bermuda tax is expected to be enacted in 2023 to be effective in 2025. According to a second public consultation paper issued by the Ministry of Finance of the Bermuda Government, the Government of Bermuda believes it is reasonable and proportionate for any new Bermuda corporate income tax regime to supersede any existing tax assurances given to companies such as AGL and its Bermuda subsidiaries.

The Company is assessing the impact of both the U.K. legislation and the Bermuda proposal.

Tax Assets (Liabilities)

Deferred and Current Tax Assets (Liabilities)
As of
September 30, 2023December 31, 2022
(in millions)
Net deferred tax assets (liabilities)$82 $114 
Net current tax assets (liabilities)34 63 

Valuation Allowance
 
During 2023, the Company recorded a return to provision adjustment, which included the utilization of $3 million in foreign tax credits, thereby reducing the Company’s foreign tax credits (FTC) from $5 million as of December 31, 2022 to $2 million as of September 30, 2023. As of September 30, 2023, the Company believes that the weight of the positive evidence outweighs the negative evidence regarding the realization of the Company’s foreign tax credits, resulting in the release of the corresponding valuation allowance.

The Company came to the conclusion that it is more likely than not that the deferred tax assets will be fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that was considered included the cumulative income the Company has earned over the last three years and the significant unearned premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such, the Company believes that no valuation allowance is necessary in connection with the remaining deferred tax assets. The Company will continue to analyze the need for a valuation allowance on a quarterly basis.

Changes in market conditions during 2023 and 2022, including rising interest rates, resulted in the recording of deferred tax assets related to net unrealized tax capital losses. When assessing recoverability of these deferred tax assets, the Company considers the ability and intent to hold the underlying securities to recovery in value, if necessary, as well as other factors as noted above. As of September 30, 2023 and December 31, 2022, based on all available evidence, including capital loss carryback capacity, the Company concluded that the deferred tax assets related to the unrealized tax capital losses on the available-for-sale securities portfolios are, more likely than not, expected to be realized.

Provision for Income Taxes

    The Company’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pre-tax income for the full year 2023. A discrete calculation of the provision is calculated for each interim period.

    The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 21% and the French subsidiary taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda Subsidiaries unless subject to U.S. tax by election. For the periods between April 1, 2017 and March 31, 2023, the U.K. corporation tax rate was 19%. For periods
72
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
subsequent to April 1, 2023, the U.K. corporation tax rate has been increased to 25%. For the full year 2023, the U.K. subsidiaries will be taxed at the U.K. blended marginal corporate tax rate of 23.5%. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions.
 
A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory rates in taxable jurisdictions is presented below.

Effective Tax Rate Reconciliation  
 Third QuarterNine Months
 2023202220232022
 (in millions)
Expected tax provision (benefit)$45 $(6)$88 $6 
Tax-exempt interest(3)(3)(9)(10)
NCI(1)1 (4)(5)
Return to provision adjustment(6)(20)(6)(20)
State taxes1 2 8 10 
Foreign taxes7 (1)8 9 
Taxes on reinsurance(1)— (1)(1)
Stock based compensation2 — 2 4 
Other(1)— (2)1 
Total provision (benefit) for income taxes$43 $(27)$84 $(6)
Effective tax rate21.4 %123.5 %18.1 %(12.1)%

The expected tax provision (benefit) is calculated as the sum of pre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Where there is a pre-tax loss in one jurisdiction and pre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.

 The following tables present pre-tax income and revenue by jurisdiction.
 
Pre-tax Income (Loss) by Tax Jurisdiction
 Third QuarterNine Months
 2023202220232022
 (in millions)
U.S.$233 $3 $458 $112 
Bermuda(17)10 41 27 
U.K. (10)(30)(25)(75)
Other(4)(5)(8)(15)
Total$202 $(22)$466 $49 

Revenue by Tax Jurisdiction
 Third QuarterNine Months
 2023202220232022
 (in millions)
U.S.$373 $60 $901 $435 
Bermuda30 4 123 43 
U.K.1 (21)22 (39)
Other(1)(2)— (8)
Total$403 $41 $1,046 $431 
     
Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.

73
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Audits

As of September 30, 2023, AGUS had open tax years with the U.S. Internal Revenue Service (IRS) for 2018 forward and is currently under audit for the 2018 and 2019 tax years. As of September 30, 2023, Assured Guaranty Overseas US Holdings Inc. had open tax years with the IRS for 2019 forward and is not currently under audit with the IRS. In September 2022, His Majesty’s Revenue & Customs completed a business risk review of Assured Guaranty that commenced in July 2022 and assigned a low-risk rating for corporate taxes in the U.K. The Company’s French subsidiary is not currently under examination and has open tax years of 2019 forward.

13.    Commitments and Contingencies

Legal Proceedings

    Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the information available, that the expected outcome of litigation against the Company, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, although an adverse resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s results of operations or liquidity in a particular quarter or year.

    In addition, in the ordinary course of their respective businesses, certain of AGL’s insurance subsidiaries are involved in litigation with third parties to recover insurance losses paid in prior periods or prevent or reduce losses in the future. For example, the Company is involved in a number of legal actions in the Federal District Court of Puerto Rico to enforce or defend its rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See the “Exposure to Puerto Rico” section of Note 3, Outstanding Exposure, for a description of such actions. The impact, if any, of these and other proceedings on the amount of recoveries the Company receives and losses it pays in the future is uncertain, and the impact of any one or more of these proceedings during any quarter or year could be material to the Company’s results of operations in that particular quarter or year. In the first quarter of 2023, the Company reduced its previously recorded accrual of $20 million to zero in connection with developments in litigation.

    The Company also receives subpoenas and interrogatories from regulators from time to time.

Litigation

    On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial Products Inc. (AGFP), an affiliate of AGC, which, in the past, had provided credit protection to counterparties under CDS. AGC acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the State of New York (the Court), asserted a claim for breach of the implied covenant of good faith and fair dealing based on AGFP's termination in December 2008 of nine credit derivative transactions between LBIE and AGFP and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing based on AGFP’s termination in July 2009 of 28 other credit derivative transactions between LBIE and AGFP and AGFP’s calculation of the termination payment in connection with those 28 other credit derivative transactions. Following defaults by LBIE, AGFP had terminated the transactions in question in compliance with the agreement between AGFP and LBIE, and properly calculated that LBIE owes AGFP approximately $4 million for the claims which were dismissed (as described below) and approximately $21 million in connection with the termination of the other credit derivative transactions, whereas LBIE asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. On March 15, 2013, the Court granted AGFP’s motion to dismiss in respect of the count relating to the nine credit derivative transactions and narrowed LBIE’s claim with respect to the 28 other credit derivative transactions. Following a bench trial, on March 8, 2023, the Court rendered its decision and found in favor of AGFP. On June 30, 2023, the clerk entered judgment in favor of AGFP in the amount of approximately $54 million plus prejudgment simple interest at an annual rate of 8%. On September 22, 2023, LBIE appealed this judgment. On July 1, 2023, AGFP moved the Court to award it approximately $58 million for attorneys’ fees and expenses AGFP incurred through March 2023. The parties reached a confidential settlement with respect to this motion for attorneys’ fees, and AGFP withdrew the motion without prejudice on October 30, 2023. The Company did not accrue in its financial statements for the judgment it was awarded or the attorneys’ fees it sought.

74
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
14.    Shareholders’ Equity

Other Comprehensive Income
 
The following tables present the changes in each component of accumulated other comprehensive income (AOCI) and the effect of reclassifications out of AOCI into the respective lines in the condensed consolidated statements of operations.

Changes in Accumulated Other Comprehensive Income (Loss) by Component
Third Quarter 2023

Net Unrealized Gains (Losses) on Investments with:ISCR on
 FG VIEs’ Liabilities with Recourse		Cumulative
Translation
Adjustment		Cash Flow 
Hedge		Total AOCI
 No Credit ImpairmentCredit Impairment
(in millions)
Balance, June 30, 2023$(284)$(115)$(22)$(42)$5 $(458)
Other comprehensive income (loss) before reclassifications(115)(14)10 (1)— (120)
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)
(2)(7)— — — (9)
Fair value gains (losses) on CIVs
— — — (6)— (6)
Total before tax
(2)(7)— (6)— (15)
Tax (provision) benefit
— 1 — 1 — 2 
Total amount reclassified from AOCI, net of tax(2)(6)— (5)— (13)
Other comprehensive income (loss)(113)(8)10 4 — (107)
Balance, September 30, 2023$(397)$(123)$(12)$(38)$5 $(565)

Changes in Accumulated Other Comprehensive Income (Loss) by Component
Third Quarter 2022
Net Unrealized Gains (Losses) on Investments with:ISCR on
 FG VIEs’ Liabilities with Recourse		Cumulative
Translation
Adjustment		Cash Flow 
Hedge		Total AOCI
 No Credit ImpairmentCredit Impairment
(in millions)
Balance, June 30, 2022$(205)$(107)$(19)$(45)$6 $(370)
Other comprehensive income (loss) before reclassifications(286)(1)(3)(4)— (294)
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)
(11)(3)— — — (14)
Total before tax
(11)(3)— — — (14)
Tax (provision) benefit
2 — — — — 2 
Total amount reclassified from AOCI, net of tax(9)(3)— — — (12)
Other comprehensive income (loss)(277)2 (3)(4)— (282)
Balance, September 30, 2022$(482)$(105)$(22)$(49)$6 $(652)

75
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Changes in Accumulated Other Comprehensive Income (Loss) by Component
Nine Months 2023

Net Unrealized Gains (Losses) on Investments with:ISCR on
 FG VIEs’ Liabilities with Recourse		Cumulative
Translation
Adjustment		Cash Flow 
Hedge		Total AOCI
 No Credit ImpairmentCredit Impairment
(in millions)
Balance, December 31, 2022$(343)$(110)$(23)$(45)$6 $(515)
Other comprehensive income (loss) before reclassifications(54)(31)9 2 — (74)
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)
2 (22)— — — (20)
Fair value gains (losses) on FG VIEs
— — (2)— — (2)
Fair value gains (losses) on CIVs
— — — (6)— (6)
Interest expense— — — — 1 1 
Total before tax
2 (22)(2)(6)1 (27)
Tax (provision) benefit
(2)4 — 1 — 3 
Total amount reclassified from AOCI, net of tax— (18)(2)(5)1 (24)
Other comprehensive income (loss)(54)(13)11 7 (1)(50)
Balance, September 30, 2023$(397)$(123)$(12)$(38)$5 $(565)


Changes in Accumulated Other Comprehensive Income (Loss) by Component
Nine Months 2022

Net Unrealized Gains (Losses) on Investments with:ISCR on
 FG VIEs’ Liabilities with Recourse		Cumulative
Translation
Adjustment		Cash Flow 
Hedge		Total AOCI
 No Credit ImpairmentCredit Impairment
(in millions)
Balance, December 31, 2021$375 $(24)$(21)$(36)$6 $300 
Other comprehensive income (loss) before reclassifications(886)(92)(2)(13)— (993)
Less: Amounts reclassified from AOCI to:
Net realized investment gains (losses)
(35)(13)— — — (48)
Fair value gains (losses) on FG VIEs
— — (2)— — (2)
Total before tax
(35)(13)(2)— — (50)
Tax (provision) benefit
6 2 1 — — 9 
Total amount reclassified from AOCI, net of tax(29)(11)(1)— — (41)
Other comprehensive income (loss)(857)(81)(1)(13)— (952)
Balance, September 30, 2022$(482)$(105)$(22)$(49)$6 $(652)

76
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
Share Repurchases

    On November 1, 2023, the Board of Directors (the Board) authorized the repurchase of an additional $300 million of its common shares. Under this and previous authorizations, as of November 7, 2023, the Company was authorized to purchase $372 million of its common shares. The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company’s capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date.

Share Repurchases
PeriodNumber of Shares RepurchasedTotal Payments
(in millions)		Average Price Paid Per Share
2022 (January 1 - March 31)2,738,223 $155 $56.62 
2022 (April 1 - June 30)2,605,947 151 58.03 
2022 (July 1- September 30)1,790,395 97 53.77 
2022 (October 1- December 31)1,713,416 100 58.34 
Total 20228,847,981 $503 56.79 
2023 (January 1 - March 31)36,369 2 62.23 
2023 (April 1 - June 30)453,942 24 53.08 
2023 (July 1 - September 30)1,065,902 64 59.67 
2023 (October 1 - November 7)682,676 42 61.17 
Total 20232,238,889 $132 58.83 


77
Assured Guaranty Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
15.    Earnings Per Share
 
Computation of Earnings Per Share 
 Third QuarterNine Months
 2023202220232022
 (in millions, except per share amounts)
Basic Earnings Per Share (EPS):
Net income (loss) attributable to AGL$157 $11 $363 $30 
Less: Distributed and undistributed income (loss) available to nonvested shareholders2 — 3 — 
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic$155 $11 $360 $30 
Basic shares58.5 61.7 58.9 63.9 
Basic EPS$2.65 $0.18 $6.11 $0.47 
Diluted EPS:
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, basic$155 $11 $360 $30 
Plus: Re-allocation of undistributed income (loss) available to nonvested shareholders of AGL and subsidiaries— — — — 
Distributed and undistributed income (loss) available to common shareholders of AGL and subsidiaries, diluted$155 $11 $360 $30 
Basic shares58.5 61.7 58.9 63.9 
Dilutive securities:
Restricted stock awards1.1 1.2 1.1 1.2 
Diluted shares59.6 62.9 60.0 65.1 
Diluted EPS$2.60 $0.18 $5.99 $0.46 
Potentially dilutive securities excluded from computation of EPS because of antidilutive effect0.1 0.1 0.1 0.8 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.
 
Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ adversely are:

•significant changes in inflation, interest rates, the world’s credit markets or segments thereof, credit spreads, foreign exchange rates or general economic conditions, including the possibility of a recession or stagflation;
•geopolitical risk, including Russia’s invasion of Ukraine and the resulting economic sanctions, volatility in energy prices, potential for increased cyberattacks, and risk of intentional or accidental escalation between The North Atlantic Treaty Organization (NATO) and Russia, conflict in the Middle East, confrontation over Iran’s nuclear program, and United States (U.S.) – China strategic competition and the pursuit of technological independence;
•the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings;
•public health crises, including pandemics and endemics, and the governmental and private actions taken in response to such events;
•developments in the world’s financial and capital markets, including stresses in the financial condition of banking institutions in the U.S., that adversely affect repayment rates related to commercial real estate, municipalities and other insured obligors, Assured Guaranty’s insurance loss or recovery experience, or investments of Assured Guaranty;
•reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty’s insurance;
•the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures;
•insured losses, including losses with respect to related legal proceedings, in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the final resolution of Assured Guaranty’s remaining Puerto Rico exposures or the amounts recovered on securities received in connection with the resolution of Puerto Rico exposures already resolved;
•the impact of the Company satisfying its obligations under insurance policies with respect to legacy insured Puerto Rico bonds;
•increased competition, including from new entrants into the financial guaranty industry, nonpayment insurance and other forms of capital saving or risk syndication available to banks and insurers;
•the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity, or to other negative or unanticipated consequences;
•the impacts of the completion of Assured Guaranty’s transactions with Sound Point Capital Management, LP (Sound Point) and/or Assured Healthcare Partners LLC (AHP) on Assured Guaranty and its relationships with its shareholders, regulators, rating agencies, employees and the obligors it insures and on the asset management business contributed to Sound Point and on the business of AHP and their relationships with their respective clients and employees;
•the possibility that strategic transactions made by Assured Guaranty, including the consummation of the transactions with Sound Point and/or AHP, do not result in the benefits anticipated or subject Assured Guaranty to negative consequences;
•the inability to control the business, management or policies of entities in which the Company holds a minority interest;
79

•the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, contracts accounted for as derivatives, and certain consolidated variable interest entities (VIEs);
•rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured;
•the inability of Assured Guaranty to access external sources of capital on acceptable terms;
•changes in applicable accounting policies or practices;
•changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions;
•difficulties with the execution of Assured Guaranty’s business strategy;
•loss of key personnel;
•the effects of mergers, acquisitions and divestitures;
•natural or man-made catastrophes or pandemics;
•the impact of climate change on Assured Guaranty’s business and regulatory actions taken related to such risk;
•other risk factors identified in AGL’s filings with the U.S. Securities and Exchange Commission (SEC);
•other risks and uncertainties that have not been identified at this time; and
•management’s response to these factors.

The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements and risk factors that are included in this Form 10-Q, as well as the risk factors included in the Company’s 2022 Annual Report on Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s reports filed with the SEC.
 
If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.
 
For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Available Information
 
    The Company maintains an internet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance) links to the Company’s Corporate Governance Guidelines, the Company’s Global Code of Ethics, AGL’s Bye-Laws and the charters for the committees of its Board of Directors. In addition, the SEC maintains a web site (at www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses). The Company also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company’s web site as well as the Company’s social media account on LinkedIn, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company’s web site or social media account is not incorporated by reference into, and is not a part of, this report.
80

Overview

Business

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

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

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

Asset Management Transactions

On July 1, 2023, Assured Guaranty contributed to Sound Point most of its asset management business, other than that conducted by Assured Healthcare Partners LLC (AssuredIM Contributed Business), as contemplated by the transaction agreement entered into with Sound Point on April 5, 2023 (Transaction Agreement). In addition, in accordance with the terms of a letter agreement (Letter Agreement), effective July 1, 2023, Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC) (collectively, the U.S. Insurance Subsidiaries) (i) engaged Sound Point as their sole alternative credit manager, and (ii) transitioned to Sound Point the management of certain existing alternative investments and related commitments. The Letter Agreement also provides that, in the first two years of Sound Point’s engagement, the U.S. Insurance Subsidiaries would, subject to regulatory approval, make new investments in funds, other vehicles and separately managed accounts managed by Sound Point which, when aggregated with the alternative investments and commitments transitioned from AssuredIM, will total $1 billion. See Note 7, Investments. Assured Guaranty received, subject to certain potential post-closing adjustments, common interests in Sound Point representing a 30% participation percentage in Sound Point, and certain other interests in related Sound Point entities (the transactions contemplated under the Transaction Agreement and the Letter Agreement, the Sound Point Transaction). As of September 30, 2023, Sound Point is the fifth largest CLO manager by assets under management (AUM) in the world (based on September 30, 2023 CreditFlux CLO manager rankings).

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

Economic Environment
    
Real gross domestic product (GDP) increased at an annual rate of 4.9% in the three-month period ended September 30, 2023 (third quarter 2023), compared to an increase of 2.1% in the second quarter of 2023, according to the advance estimate released by the U.S. Bureau of Economic Analysis (BEA). At the end of September 2023, the U.S. unemployment rate, seasonally adjusted, stood at 3.8%, up slightly from the 3.6% rate where it had started the quarter, and down from the COVID-19 pandemic high of 14.7% in April 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default.

According to the U.S. Bureau of Labor Statistics (BLS), the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending September 2023, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 3.7%, as compared to 3.0% for the 12-month period ending June 2023. According to the United Kingdom’s (U.K.) Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) was 6.3% for the 12 months through September 2023, down from 7.3% for the 12 months ended June 2023. Consumer price inflation may impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally. In addition, consumer price inflation in the U.K. increases reported net par outstanding for certain U.K
81

exposures with approximately $21.2 billion of net par outstanding as of September 30, 2023, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure.

With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, 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 26, 2023, the FOMC raised the target range for the federal funds rate from a range of 0% to 0.25% where it started 2022 to a range of 5.25% to 5.50% at its July 25-26, 2023 meeting. 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 25-26, 2023 meeting, the FOMC has maintained the federal funds rate at 5.25% to 5.50%, including through its most recent meeting held October 31 – November 1, 2023, 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 3.77% for the quarter ended September 2023, higher than the 3.41% average for the quarter ended June 2023, and higher than the 3.22% average for the quarter ended September 2022. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 101 basis points (bps) in the quarter ended September 2023, which is the same spread as the quarter ended June 2023, but wider than the 95 bps average for the quarter ended September 2022. The Company believes that, over time, wider spreads could permit it to increase its premium rates on new business, and higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.

Additionally, the Company believes that higher interest rates are discouraging homeowners from moving as many are locked into lower mortgage interest rates at the homes in which they reside, which, in turn, is restricting housing inventory and leading to an increase in home prices as demand outpaces supply. The increase in housing prices may benefit distressed residential mortgage-backed securities (RMBS) the Company insures. According to the National Association of Realtors reported that existing home sales declined 15.4% in September 2023 from one year ago. The median existing-home price for all housing types in September 2023 was $394,300, a decrease of 3.9% from June 2023 ($410,200).

Key Business Strategies

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

Insurance

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

    Growth of the Insured Portfolio

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

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

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

U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
 Nine Months 2023Nine Months 2022Year Ended December 31, 2022
 (dollars in billions, except number of issues and percentages)
Par:
New municipal bonds issued $266.2 $292.2 $359.7 
Total insured$22.6 $22.9 $28.8 
Insured by Assured Guaranty$14.1 $12.9 $17.0 
Number of issues:
New municipal bonds issued5,393 6,420 7,902 
Total insured1,000 1,146 1,420 
Insured by Assured Guaranty467 529 648 
Bond insurance market penetration based on:
Par8.5 %7.8 %8.0 %
Number of issues18.5 %17.9 %18.0 %
Single A par sold34.3 %29.9 %30.2 %
Single A transactions sold61.4 %58.8 %59.0 %
$25 million and under par sold24.1 %21.6 %21.9 %
$25 million and under transactions sold22.7 %21.0 %21.4 %
____________________
(1)    Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business.

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

    Loss Mitigation
    
    In an effort to avoid, reduce or recover losses and potential losses in its insurance portfolio, the Company employs a number of strategies.
    
    In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company’s role in the Detroit, Michigan and Stockton, California financial crises, and more recently by the Company’s role in negotiating various agreements in connection with the restructuring of obligations of the Commonwealth of Puerto Rico and various obligations of
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its related authorities and public corporations. 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 Puerto Rico Electric Power Authority (PREPA) (2022 Puerto Rico Resolutions) as discussed in Item 1, Financial Statements, Note 3, Outstanding Exposure—Exposure to Puerto Rico.

As a result of the 2022 Puerto Rico Resolutions, the Company’s obligations under its insurance policies covering debt of the Puerto Rico Convention Center District Authority (PRCCDA) and Puerto Rico Infrastructure Authority (PRIFA) were extinguished, and its insurance exposure to Puerto Rico general obligations (GO) bonds, Public Buildings Authority (PBA) bonds and Puerto Rico Highway and Transportation Authority (PRHTA) bonds was greatly reduced. The Company believes the 2022 Puerto Rico Resolutions mark significant milestones in its Puerto Rico loss mitigation efforts. In connection with the 2022 Puerto Rico Resolutions, the Company received substantial amounts of cash, new general obligation bonds (New GO Bonds) and new bonds backed by toll revenues (Toll Bonds, and together with New GO Bonds, New Recovery Bonds) and contingent value instruments (CVIs) associated with its direct exposures. The Company has sold some of the New Recovery Bonds and CVIs it had received in connection with the 2022 Puerto Rico Resolutions and may continue to sell amounts it still retains, subject to market conditions. The Company continues to work to resolve its remaining unresolved defaulted Puerto Rico exposure, PREPA. For more information about developments in Puerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Exposure, and the Insured Portfolio section below.

The Company is, and 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 also purchases attractively priced obligations, including below-investment-grade (BIG) obligations, that it has insured and for which it had expected losses to be paid, in order to mitigate the economic effect of insured losses (Loss Mitigation Securities). The fair value of Loss Mitigation Securities as of September 30, 2023 (excluding the value of the Company’s insurance) was $448 million, with a par of $745 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 will no longer directly manage 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).

The Company also expects its relationship with Sound Point to enhance its alternative investment opportunities. Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval. See Note 1, Business and Basis of Presentation, for a description of the Sound Point Transaction. Of the $1.5 billion, the U.S. Insurance Subsidiaries through their jointly owned investment subsidiary, AG Asset Strategies LLC (AGAS), are authorized to invest up to $750 million plus previously distributed gains of $132 million for a total of $882 million as of September 30, 2023. As of September 30, 2023, AGAS commitments to funds managed by Sound Point, AHP, and, prior to July 1, 2023, AssuredIM (Sound Point and AHP funds, some of which were formerly known as AssuredIM funds) were $703 million.

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Capital Management

    The Company has developed strategies to efficiently manage capital within the Assured Guaranty group.
    
From 2013 through November 7, 2023, the Company has repurchased 143 million common shares for approximately $4.8 billion, representing approximately 74% 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 common shares. Under this and previous authorizations, as of November 7, 2023, the Company was authorized to purchase $372 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 1, Financial Statements, Note 14, Shareholders’ Equity, for additional information about the Company’s repurchases of its common shares.

Summary of Share Repurchases
AmountNumber of SharesAverage price
per share
(in millions, except per share data)
2013 - 2022$4,661 140.875 $33.09 
2023 (First Quarter)2 0.036 62.23 
2023 (Second Quarter)24 0.454 53.08 
2023 (Third Quarter)64 1.066 59.67 
2023 (through November 7)42 0.683 61.17 
Cumulative repurchases since the beginning of 2013$4,793 143.114 33.49 

As of September 30, 2023, the estimated accretive effect of the cumulative repurchases of common shares since the beginning of 2013 was approximately: $40.71 per share in shareholders’ equity attributable to AGL, $46.65 per share in adjusted operating shareholders’ equity and $81.29 per share in adjusted book value.

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 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” for the U.S. Holding Companies’ long-term debt.

Executive Summary
  
This executive summary of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to the Company’s 2022 Annual Report on Form 10-K.

The primary drivers of volatility in the Company’s net income include: loss and loss adjustment expense (LAE changes in fair value of credit derivatives, FG VIEs, CIVs and committed capital securities (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 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
 Third QuarterNine Months
 2023202220232022
 (in millions, except per share amounts)
GAAP
Net income (loss) attributable to AGL$157 $11 $363 $30 
Net income (loss) attributable to AGL per diluted share$2.60 $0.18 $5.99 $0.46 
Weighted average diluted shares 59.6 62.9 60.0 65.1 
Non-GAAP
Adjusted operating income (loss) (1)$206 $133 $310 $253 
Adjusted operating income per diluted share $3.42 $2.11 $5.12 $3.88 
Weighted average diluted shares59.6 62.9 60.0 65.1 
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income$(8)$7 $(30)$7 
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share$(0.13)$0.12 $(0.49)$0.11 
Components of total adjusted operating income (loss)
Insurance segment$59 $159 $282 $347 
Asset Management segment— (3)(3)(3)
Corporate division155 (30)61 (98)
Other (2)(8)7 (30)7 
Adjusted operating income (loss)$206 $133 $310 $253 
Insurance Segment
Gross written premiums (GWP)$40 $94 $221 $229 
Present value of new business production (PVP) (1)
46 95 249 240 
Gross par written5,948 3,846 20,285 15,012 

As of September 30, 2023As of December 31, 2022
AmountPer ShareAmountPer Share
(in millions, except per share amounts)
Shareholders’ equity attributable to AGL$5,252 $90.84 $5,064 $85.80 
Adjusted operating shareholders' equity (1)5,735 99.18 5,543 93.92 
Adjusted book value (1)8,559 148.03 8,379 141.98 
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating shareholders’ equity4 0.06 17 0.28 
Gain (loss) related to FG VIE and CIV consolidation included in adjusted book value(2)(0.03)11 0.19 
Common shares outstanding (3)57.8 59.0 
____________________
(1)    See “— Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted in the United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details.
(2)    Relates to the effect of consolidating FG VIEs and CIVs.
(3)    See “— Overview — Key Business Strategies — Capital Management” above for information on common share repurchases.
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Condensed Consolidated Results of Operations

Condensed Consolidated Results of Operations
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
 (in millions)
Revenues:
Net earned premiums$95 $89 $261 $385 
Net investment income100 67 270 191 
Asset management fees— 16 53 71 
Net realized investment gains (losses)(9)(14)(20)(39)
Fair value gains (losses) on credit derivatives9 (48)115 (42)
Fair value gains (losses) on CCS(20)1 (35)12 
Fair value gains (losses) on FG VIEs6 11 (2)27 
Fair value gains (losses) on CIVs(4)8 60 25 
Foreign exchange gains (losses) on remeasurement (39)(80)9 (181)
Fair value gains (losses) on trading securities4 (8)42 (30)
Gain on sale of asset management subsidiaries255 — 255 — 
Other income (loss)6 (1)38 12 
Total revenues403 41 1,046 431 
Expenses:
Loss and LAE (benefit)100 (75)159 (29)
Interest expense24 20 67 60 
Amortization of deferred acquisition cost (DAC)4 4 10 11 
Employee compensation and benefit expenses 47 57 199 189 
Other operating expenses44 37 170 120 
Total expenses219 43 605 351 
Income (loss) before income taxes and equity in earnings (losses) of investees184 (2)441 80 
Equity in earnings (losses) of investees18 (20)25 (31)
Income (loss) before income taxes202 (22)466 49 
Less: Provision (benefit) for income taxes43 (27)84 (6)
Net income (loss)159 5 382 55 
Less: Noncontrolling interests2 (6)19 25 
Net income (loss) attributable to Assured Guaranty Ltd.$157 $11 $363 $30 
Effective tax rate21.4 %123.5 %18.1 %(12.1)%

Third Quarter 2023 Compared with Third Quarter 2022

The increase in net income attributable to AGL in third quarter 2023 compared with the three-month period ended September 30, 2022 (third quarter 2022) was primarily due to:

•the gain associated with the Sound Point Transaction and AHP Transaction, net of transaction expenses, of $241 million (pre-tax),

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

•lower foreign exchange losses on remeasurement, and

•higher income from the fixed-maturity and alternative investment portfolio.
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These increases were offset in part by losses and LAE in third quarter 2023 compared with a benefit in third quarter 2022.

Nine Months 2023 Compared with Nine Months 2022
    
Net income attributable to AGL for the six-month period ended September 30, 2023 (nine months 2023) was higher compared with the nine-month period ended September 30, 2022 (nine months 2022) primarily due to:

•the gain associated with the Sound Point Transaction and AHP Transaction, net of transaction expenses, of $215 million (pre-tax),

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

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

•higher income from the fixed-maturity and alternative investment portfolio.

These increases were offset in part by:

•losses and LAE in nine months 2023 compared with a benefit in nine months 2022,

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

•higher operating expenses in nine months 2023 primarily due to $46 million in expenses associated with the Sound Point Transaction and AHP Transaction.

The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating subsidiaries, with U.S. subsidiaries generally taxed at the U.S. marginal corporate income tax rate of 21%, U.K. subsidiaries taxed at the U.K. marginal corporate tax rate of 19% prior to March 31, 2023 and 25% after April 1 2023, the French subsidiary taxed at the French marginal corporate tax rate of 25%, and no taxes for the Company’s Bermuda subsidiaries, unless subject to U.S. tax by election or as a U.S. controlled foreign corporation. See Item 1. Financial Statements, Note 12, Income Taxes.

Adjusted Operating Income

Adjusted operating income in third quarter 2023 was $206 million, compared with $133 million in third quarter 2022. The increase was primarily due to the gain associated with the Sound Point Transaction and AHP Transaction, offset in part by higher loss expense. Adjusted operating income in nine months 2023 was $310 million, compared with $253 million in nine months 2022. The increase was primarily due to the gain associated with the Sound Point Transaction and AHP Transaction, offset in part by higher loss expense and lower net earned premiums in nine months 2023, compared with nine months 2022 which included premium accelerations of $104 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 September 30, 2023 increased compared with December 31, 2022, due to net income, which was partially offset by dividends, share repurchases, and unrealized losses on investments. Adjusted operating shareholders’ equity and adjusted book value increased primarily due to operating income components of $310 million offset in part by dividends and share repurchases of $141 million, and in the case of adjusted book value, the increase was also primarily due to gross written premiums of $221 million, which was partially offset by economic loss development of $147 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.

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Other Matters

Inflation

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

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 $249 million in net par outstanding as of September 30, 2023, comprising $208 million net par exposure to the sovereign debt of Poland and $41 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 is limited to approximately $49 million in net par outstanding as of September 30, 2023, comprised of funded commitments to subscription finance facilities; however, such exposure may increase to a total of approximately $94 million to the extent all unfunded commitments under the facilities are ultimately funded. The Company rates all such insurance exposure investment grade.

Income Taxes

The U.S. Internal Revenue Service and Department of the Treasury issued final and proposed regulations in October 2020 relating to the tax treatment of passive foreign investment company. The final regulations are not expected to have a material impact to the Company’s business operation or its shareholders and the Company is continuing to evaluate the proposed regulations. See Note 12, Income Taxes.


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Results of Operations

Critical Accounting Estimates

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

Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially different in the future to reflect changes in these estimates and assumptions from time to time.

The accounting policies that the Company believes are most dependent on the application of judgment, estimates and assumptions are listed below. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, of the Company’s 2022 Annual Report on Form 10-K, for the Company’s significant accounting policies which includes a reference to the applicable note where further details regarding the significant estimates and assumptions are provided, as well as Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s 2022 Annual Report on Form 10-K, for further details regarding sensitivity analyses.

•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;
•Credit impairment of financial instruments;
•Other-than-temporary-impairment of equity method investments;
•Revenue recognition;
•Income tax assets and liabilities, including the recoverability of deferred tax assets (liabilities).


Results of Operations by Segment

The Company analyzes the operating performance of each segment using each segment’s adjusted operating income as described in Item 1, Financial Statements, Note 2, Segment Information.

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Table of Contents

Insurance Segment Results

Insurance Segment Results
 Third QuarterNine Months
2023202220232022
 
Segment revenues
Net earned premiums and credit derivative revenues$99 $92 $271 $397 
Net investment income101 69 273 198 
Fair value gains (losses) on trading securities4 (8)42 (30)
Foreign exchange gains (losses) on remeasurement and other income (loss)4 (6)36 (1)
Total segment revenues208 147 622 564 
Segment expenses
Loss expense (benefit)101 (75)154 (32)
Interest expense— — — 1 
Amortization of DAC4 4 10 11 
Employee compensation and benefit expenses37 34 112 107 
Other operating expenses23 21 78 60 
Total segment expenses165 (16)354 147 
Equity in earnings (losses) of investees25 (11)60 (46)
Segment adjusted operating income (loss) before income taxes68 152 328 371 
Less: Provision (benefit) for income taxes9 (7)46 24 
Segment adjusted operating income (loss)$59 $159 $282 $347 
    
    Net Earned Premiums and Credit Derivative Revenues

    Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, or books of business acquired in business combinations. See Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information.

Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis.
    
    Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity has led to a lower volume of refunding opportunities over the last several years, except for refundings of Puerto Rico policies under the 2022 Puerto Rico Resolutions.

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

Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
 
 Third QuarterNine Months
 2023202220232022
 (in millions)
Net earned premiums:
Financial guaranty insurance:
Public finance
Scheduled net earned premiums (1)$65 $62 $188 $196 
Accelerations:
Refundings14 12 26 145 
Total accelerations14 12 26 145 
Total public finance79 74 214 341 
Structured finance scheduled net earned premiums (1)16 15 47 44 
Specialty insurance and reinsurance1 1 3 3 
Total net earned premiums96 90 264 388 
Credit derivative revenues:
Scheduled net earned premiums2 2 6 7 
Accelerations1 — 1 2 
Total credit derivative revenues3 2 7 9 
Total net earned premiums and credit derivative revenues$99 $92 $271 $397 
____________________
(1)    Includes accretion of discount.

    Net earned premiums and credit derivative revenues increased in third quarter 2023 compared with third quarter 2022 primarily due to higher refundings in third quarter 2023 and updates to debt service assumptions in third quarter 2022. Net earned premiums and credit derivative revenues decreased in nine months 2023 compared with nine months 2022 primarily due to refundings of $104 million related to the resolution of PRCCDA, PRIFA and GO/PBA exposures discussed in Item 1. Financial Statements, Note 3, Outstanding Exposure. As of September 30, 2023, $3.6 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.
    
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New Business Production

Gross Written Premiums and
New Business Production
 Third QuarterNine Months
 2023202220232022
 (in millions)
GWP (1)
Public finance—U.S.$29 $54 $129 $160 
Public finance—non-U.S.(5)44 40 66 
Structured finance—U.S.15 (2)48 4 
Structured finance—non-U.S.1 (2)4 (1)
Total GWP$40 $94 $221 $229 
PVP (1):
Public finance—U.S.$30 $57 $129 $163 
Public finance—non-U.S.2 37 38 67 
Structured finance—U.S.12 1 42 3 
Structured finance—non-U.S. (2)2 — 40 7 
Total PVP$46 $95 $249 $240 
Gross Par Written (1):
Public finance—U.S.$5,098 $3,622 $15,752 $13,982 
Public finance—non-U.S. 61 194 670 624 
Structured finance—U.S.267 30 1,101 106 
Structured finance—non-U.S. (2)522 — 2,762 300 
Total gross par written$5,948 $3,846 $20,285 $15,012 
____________________
(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.” GWP may be negative due to changes in debt service assumptions.
(2)    Nine months 2023 and 2022 PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under Accounting Standards Codification (ASC) 460, Guarantees.

Third Quarter 2023

U.S. public finance GWP and PVP in third quarter 2023 were lower than the comparable GWP and PVP in third quarter 2022, due to a large transportation revenue transaction in third quarter 2022 that did not recur in third quarter 2023, and higher credit quality new business that carry lower premium rates in third quarter 2023, compared with third quarter 2022. The Company’s direct par written represented 61% of the total U.S. municipal market insured issuance in third quarter 2023, compared with 56% in third quarter 2022, and the Company’s penetration of all municipal issuance was 4.6% in third quarter 2023 compared with 3.2% in third quarter 2022.

Structured finance GWP and PVP in third quarter 2023 primarily includes an insurance securitization.

Nine Months 2023

U.S. public finance GWP and PVP in nine months 2023 were lower than the comparable GWP and PVP in nine months 2022 primarily due to fewer secondary market transactions in nine months 2023, compared with nine months 2022. The Company’s direct par written represented 62% of the total U.S. municipal market insured issuance in nine months 2023, compared with 56% in nine months 2022, and the Company’s penetration of all municipal issuance was 5.3% in nine months 2023 compared with 4.4% in nine months 2022.

In nine months 2023, non-U.S. public finance GWP and PVP were lower than GWP and PVP in nine months 2022 due to a large amount of secondary market transactions in nine months 2022. In nine months 2023, new business primarily included the guaranty of a long-term sale and leaseback transaction with Glasgow City Council and several regulated utility transactions.
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In nine months 2023, structured finance GWP and PVP were $52 million and $82 million, respectively, compared with GWP and PVP of $3 million and $10 million, respectively, in nine months 2022. Structured finance GWP and PVP in nine months 2023 includes an insurance securitization and several subscription finance guaranties, as well as an excess-of-loss guaranty of a minimum amount of billed rent on a diversified portfolio of real estate properties for which no GWP was reported under GAAP because it is not accounted for as insurance.

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

Income from Investments

Net investment income is a function of the yield that the Company earns on available-for-sale fixed-maturity securities and short-term investments and the size of such portfolio. The investment yield on fixed-maturity securities is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the securities in this portfolio.

CVIs issued by Puerto Rico and received as part of the 2022 Puerto Rico Resolutions are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the condensed consolidated statements on operations. The fair value of such instruments as of September 30, 2023 was $350 million.

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 change in net asset value (NAV) of these funds and the Company’s share of earnings of its other investees.

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Insurance Segment
Income from Investments

 Third QuarterNine Months
 2023202220232022
 (in millions)
Net investment income
Fixed-maturity securities, available-for-sale:
Externally managed (1)$51 $49 $156 $147 
Loss Mitigation Securities24 10 48 27 
Puerto Rico, New Recovery Bonds 1 1 5 5 
Other (2)5 4 12 11 
Short-term investments19 4 47 5 
Intercompany loans2 2 7 7 
Other investment assets— 1 2 1 
Investment income102 71 277 203 
Investment expenses(1)(2)(4)(5)
Net investment income$101 $69 $273 $198 
Fair value gains (losses) on trading securities$4 $(8)$42 $(30)
Equity in earnings (losses) of investees
Asset managers (3)$— $— $— $— 
CLOs7 6 23 (10)
Asset-based— — 3 7 
Healthcare12 3 21 (6)
Other 6 (20)13 (37)
Equity in earnings (losses) of investees$25 $(11)$60 $(46)
____________________
(1)    Amounts for 2022 include income on the portion of the CLO portfolio that was previously managed by AssuredIM.
(2)    Amounts for 2022 include income on the portion of the municipal bond portfolio that was previously managed by AssuredIM.
(3)    The Company acquired its investment in Sound Point on July 1, 2023 and reports its equity in earnings on this investment on a one quarter lag.

    Net investment income for third quarter 2023 increased compared to third quarter 2022 primarily due to higher income from loss mitigation securities and the increase in short-term rates and higher average short-term balances. Net investment income for nine months 2023 increased compared to nine months 2022, primarily due to the increase in short-term rates and higher average short-term balances, and loss mitigation securities. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 4.04% as of September 30, 2023 and 3.01% as of September 30, 2022.

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

The gain in “foreign exchange gains (losses) on remeasurement and other income (loss)” in nine months 2023 compared with nine months 2022 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million in nine months 2023, and foreign exchange gain on remeasurement of $1 million in nine months 2023, compared with a loss of $7 million in nine months 2022. See Item 1, Financial Statements, Note 13, Commitments and Contingencies, for additional information.

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Economic Loss Development
 
The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), of the Company’s 2022 Annual Report on Form 10-K. The GAAP accounting policies for measurement and recognition for each type of contract are described in the notes listed below in Part II, Item 8, Financial Statements and Supplementary Data, of the Company’s 2022 Annual Report on Form 10-K:

•Note 5 for contracts accounted for as insurance;
•Note 6 for contracts accounted for as credit derivatives;
•Note 8 for FG VIEs; and
•Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities.

    In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) primarily consists of the present value of future: expected claim and LAE payments; expected recoveries from issuers or excess spread; cessions to reinsurers; expected recoveries/payables stemming from breaches of representation and warranties (R&W); and the effects of other loss mitigation strategies. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery were consistent by sector regardless of the accounting model used.
Current risk-free rates are used to discount expected losses at the end of each reporting period. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) were 4.80% and 4.08% as of September 30, 2023 and December 31, 2022, respectively.

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

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

Net Expected Loss to be Paid (Recovered)Net Economic Loss Development (Benefit)
As ofThird QuarterNine Months
Accounting ModelSeptember 30, 2023December 31, 20222023202220232022
 (in millions)
Insurance$252 $205 $92 $(67)$160 $(137)
FG VIEs 235 (1)314 (1)(6)(6)(15)(16)
Credit derivatives3 3 1 1 2 5 
Total$490 $522 $87 $(72)$147 $(148)
Net exposure rated BIG$5,258 $5,976 
____________________
(1)    The expected loss to be paid for FG VIEs primarily relates to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts). See Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered).

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Net Expected Loss to be Paid (Recovered)
Roll Forward by Sector

Third Quarter 2023
SectorNet Expected Loss to be Paid (Recovered) as of June 30, 2023Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2023
 (in millions)
Public finance:
U.S. public finance$433 $135 $(169)$399 
Non-U.S. public finance 10 (1)— 9 
Public finance443 134 (169)408 
Structured finance:   
U.S. RMBS73 (48)13 38 
Other structured finance44 1 (1)44 
Structured finance117 (47)12 82 
Total$560 $87 $(157)$490 

Third Quarter 2022
SectorNet Expected Loss to be Paid (Recovered) as of June 30, 2022Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2022
 (in millions)
Public finance:
U.S. public finance$210 $24 $392 $626 
Non-U.S. public finance 7 (2)1 6 
Public finance217 22 393 632 
Structured finance:   
U.S. RMBS179 (95)(32)52 
Other structured finance46 1 (4)43 
Structured finance225 (94)(36)95 
Total$442 $(72)$357 $727 

Nine Months 2023
SectorNet Expected Loss to be Paid (Recovered) as of December 31, 2022Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2023
 (in millions)
Public finance:
U.S. public finance$403 $193 $(197)$399 
Non-U.S. public finance 9 — — 9 
Public finance412 193 (197)408 
Structured finance:   
U.S. RMBS66 (52)24 38 
Other structured finance44 6 (6)44 
Structured finance110 (46)18 82 
Total$522 $147 $(179)$490 


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Nine Months 2022
SectorNet Expected Loss to be Paid (Recovered) as of December 31, 2021Net Economic Loss
Development (Benefit)
Net (Paid)
Recovered
Losses (1)
Net Expected Loss to be Paid (Recovered) as of September 30, 2022
 (in millions)
Public finance:
U.S. public finance$197 $(16)$445 $626 
Non-U.S. public finance 12 (6)— 6 
Public finance209 (22)445 632 
Structured finance:
U.S. RMBS150 (127)29 52 
Other structured finance52 1 (10)43 
Structured finance202 (126)19 95 
Total$411 $(148)$464 $727 
____________________
(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.”

Third Quarter 2023 Net Economic Loss Development

Public Finance: The economic loss development on U.S. exposures in third quarter 2023 of $135 million was primarily attributable to PREPA.

U.S. RMBS: The economic benefit attributable to U.S. RMBS of $48 million was primarily attributable to a $37 million benefit related to higher recoveries for secured second lien charged-off loans, an $11 million benefit related to changes in discount rates, and a $6 million benefit related to higher assumed recoveries for deferred principal in first lien transactions, partially offset by losses related to lower excess spread.

See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered) for additional information.

Third Quarter 2022 Net Economic Loss Development

Public Finance: The economic loss development on U.S. exposures in third quarter 2022 was $24 million, and was primarily attributable to healthcare and Puerto Rico exposures, partially offset by the effect of changes in discount rates. Public finance expected loss to be paid primarily related to U.S. exposures, which had BIG net par outstanding of $4.2 billion as of September 30, 2022 compared with $5.4 billion as of December 31, 2021. The reduction in net par was primarily due to 2022 Puerto Rico Resolutions.

U.S. RMBS: The economic benefit attributable to U.S. RMBS was $95 million and was primarily attributable to a $27 million benefit related to the purchase of a loss mitigation security, a $26 million benefit related to updates in the projected conditional default rate (CDR) curves, a $17 million benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, a $16 million benefit related to improved performance in certain transactions, a $12 million benefit related to changes in discount rates and a $7 million benefit related to higher recoveries for secured second lien charged-off loans, partially offset by losses of $10 million related to lower excess spread.

Nine Months 2023 Net Economic Loss Development

Public Finance: The economic loss development on U.S. public finance exposures in nine months 2023 was $193 million, which was primarily attributable to PREPA and healthcare exposures, partially offset by higher projected recoveries in other municipal exposures.

U.S. RMBS: The net benefit attributable to U.S. RMBS was $52 million and was mainly attributable to a $50 million benefit related to higher recoveries for secured second lien charged-off loans, an $11 million benefit related to improved performance in certain transactions, a $9 million benefit related to changes in discount rates, and a $6 million benefit related to higher assumed recoveries for deferred principal in first lien transactions. These benefits were partially offset by a $18 million loss development related to the return of certain funds previously received and $6 million related to lower excess spread.
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Nine Months 2022 Net Economic Loss Development

Public Finance: The economic benefit on U.S. public finance exposures in nine months 2022 was $16 million, which was primarily attributable to changes in discount rates and higher projected revenues for certain exposures, partially offset by healthcare and Puerto Rico exposures.

U.S. RMBS: The net benefit attributable to U.S. RMBS was $127 million and was mainly related to a $56 million benefit related to changes in discount rates, a $43 million benefit related to improved performance in certain transactions, a $27 million benefit related to the purchase of a loss mitigation security, a $26 million benefit related to updates in the projected CDR curves, a $25 million benefit related to higher recoveries for secured second lien charged-off loans, a $17 million benefit on certain assumed RMBS transactions related to a settlement between a ceding company and a R&W provider, and an $12 million benefit related to lower severity assumptions, partially offset by losses 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.

    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 business combinations 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)
 Third QuarterNine Months
 2023202220232022
 (in millions)
U.S. public finance$138 $4 $184 $70 
Structured finance:
U.S. RMBS(38)(82)(35)(104)
Other structured finance1 3 5 2 
Structured finance(37)(79)(30)(102)
Total Insurance segment loss expense (benefit)$101 $(75)$154 $(32)

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    The difference between public finance loss expense and economic benefit in nine months 2022 was primarily attributable to the release of unearned premium reserve related to PRCCDA, PRIFA and GO/PBA exposures. As a result, the Company recognized loss and LAE expense that had not previously been reported in the statement of operations, and corresponding net earned premiums were recognized for the remaining deferred premium revenue on the extinguished Puerto Rico exposures. For additional information on the expected timing of net expected losses to be expensed see Item 1, Financial Statements, Note 5, Contracts Accounted for as Insurance.

Employee Compensation and Benefit Expenses and Other Operating Expenses
 
The increase in nine months 2023 compared with nine months 2022 was primarily attributable to an increase in value added taxes and increases in certain employee benefit related costs.

Financial Strength Ratings
 
    Demand for the financial guaranties issued by the Company’s insurance subsidiaries may be impacted by changes in the credit ratings assigned to them by the rating agencies. The financial strength ratings (or similar ratings) assigned to AGL’s insurance subsidiaries, along with the date of the most recent rating action (or confirmation) by the rating agency assigning the rating, are shown in the table below.

 S&P Global Ratings, a division of Standard & Poor’s Financial Services LLC (S&P)Kroll Bond Rating
Agency 		Moody’s Investors Service, Inc. (Moody’s)A.M. Best Company,
Inc.
AGMAA (stable) (7/13/23)AA+ (stable) (10/20/23)A1 (stable) (3/18/22)—
AGCAA (stable) (7/13/23)AA+ (stable) (10/20/23)(1)—
Assured Guaranty Re Ltd. (AG Re)AA (stable) (7/13/23)———
Assured Guaranty Re Overseas Ltd. (AGRO)AA (stable) (7/13/23)——A+ (stable) (7/21/23)
Assured Guaranty UK Limited (AGUK)AA (stable) (7/13/23)AA+ (stable) (10/20/23)A1 (stable) (3/18/22)—
Assured Guaranty (Europe) SA (AGE)AA (stable) (7/13/23)AA+ (stable) (10/20/23)——
____________________
(1)    AGC requested that Moody’s withdraw its financial strength ratings of AGC in January 2017, but Moody’s denied that request. Moody's rates AGC A2 (stable).

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

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

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Asset Management Segment Results

Asset Management Segment Results
Third QuarterNine Months
 2023202220232022
(in millions)
Segment revenues
Management fees $— $18 $35 $66 
Performance fees— 2 29 20 
Foreign exchange gains (losses) on remeasurement and other income (loss)— 1 7 2 
Total segment revenues— 21 71 88 
Segment expenses
Interest expense— — 1 — 
Employee compensation and benefit expenses— 16 59 62 
Other operating expenses — 8 15 29 
Total segment expenses— 24 75 91 
Segment adjusted operating income (loss) before income taxes— (3)(4)(3)
Less: Provision (benefit) for income taxes— — (1)— 
Segment adjusted operating income (loss)$— $(3)$(3)$(3)
    
In the first half of 2023, prior to the Sound Point Transaction and the AHP Transaction, the Company owned and consolidated AssuredIM and reported asset management fees (primarily from CLOs and opportunity funds) in revenues. Since July 1, 2023, the Company reports its ownership interest in Sound Point through equity in earnings of investees (on a one quarter lag).

Assets Under Management

Until July 1, 2023, the effective date of the Sound Point Transaction and the AHP Transaction, the Company used AUM as one of the metrics to measure progress in its Asset Management segment. AUM refers to the assets managed, advised or serviced by AssuredIM. 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 harvest period were transferred to a third party liquidator and (ii) management of approximately $513 million at fair value in investment grade municipal bonds and CLOs under an IMA was transferred to an internal manager and to one of the Company’s external fixed-maturity security managers. Effective with the Sound Point Transaction and the AHP Transaction, the Company no longer has any AUM. See Note 1, Business and Basis of Presentation.

    
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Corporate Division Results

Corporate Division Results

Third QuarterNine Months
 2023202220232022
 (in millions)
Revenues
Gain on sale of asset management subsidiaries$255 $— $255 $— 
Other4 1 8 3 
Total revenues259 1 263 3 
Expenses
Interest expense26 22 73 66 
Employee compensation and benefit expenses10 7 28 20 
Other operating expenses21 5 64 18 
Total expenses57 34 165 104 
Equity in earnings (losses) of investees— — — — 
Adjusted operating income (loss) before income taxes202 (33)98 (101)
Less: Provision (benefit) for income taxes47 (3)37 (3)
Adjusted operating income (loss)$155 $(30)$61 $(98)
    
Gain on sale of asset management subsidiaries relates to the Sound Point Transaction and AHP Transaction. See Item 1. Financial Statements, 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 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. Third quarter 2023 and nine months 2023 interest expense was higher than the comparable periods 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 Item 1. Financial Statements, Note 11, Long-Term Debt.

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 third quarter 2023 and nine months 2023, operating expenses also include expenses related to the Sound Point Transaction and AHP Transaction, and for nine months 2023 a higher charge for value added taxes. Transaction related expenses in the corporate division for Sound Point and AHP were $14 million for third quarter 2023 and $40 million for nine months 2023, consisting primarily of $25 million advisory and consent fees and $8 million legal fees.

Other (Effect of Consolidating FG VIEs and CIVs)
 
    The effect of consolidating FG VIEs and CIVs, intersegment eliminations and reclassifications of reimbursable fund expenses to revenue are presented in “other.” See Item 1, Financial Statements, Note 2, Segment Information.

The types of entities the Company consolidates when it is deemed to be the primary beneficiary primarily include: (i) entities whose debt obligations the insurance subsidiaries insure; (ii) custodial trusts established in connection with the consummation of the 2022 Puerto Rico Resolutions; and (iii) investment vehicles such as (a) collateralized financing entities, CLO warehouses until July 1, 2023, and (b) Sound Point and AHP funds. The Company eliminates the effects of intercompany transactions between its FG VIEs and CIVs and its insurance and asset management subsidiaries, as well as intercompany transactions between CIVs.

    Consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment) has a significant gross-up effect on the consolidated financial statements, and includes: (i) the establishment of the FG VIEs’ assets and liabilities and related changes in fair value on the condensed consolidated financial statements; (ii) eliminating the
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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 for amounts not owned by the Company. The economic effect of the U.S Insurance Subsidiaries’ ownership interests in CIVs is presented in the Insurance segment as equity in earnings (losses) of investees, while the effect of CIVs is presented as separate line items (“fair value gains (losses) on consolidated investment vehicles” and “noncontrolling interest) on a consolidated basis. 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 Company recognized a loss on deconsolidation of $16 million, which is reported in “fair value gains (losses) on CIVs”. See Item. 1, Financial Statements, Note 1, Business and Basis of Presentation and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.

The table below reflects the effect of consolidating FG VIEs and CIVs on the condensed consolidated statements of operations. The amounts represent: (i) the revenues and expenses of the FG VIEs and the CIVs; and (ii) the consolidation adjustments and eliminations between consolidated FG VIEs or CIVs and the operating and investment subsidiaries.

Effect of Consolidating FG VIEs and CIVs on the Condensed Consolidated Statements of Operations
Increase (Decrease)

 Third QuarterNine Months
 2023202220232022
Effect on Financial Statement Line Item(in millions)
Fair value gains (losses) on FG VIEs (1)$6 $11 $(2)$27 
Fair value gains (losses) on CIVs(4)8 60 25 
Equity in earnings (losses) of investees (2)(7)(9)(35)15 
Other (3)(3)(8)(42)(32)
Effect on income before tax(8)2 (19)35 
Less: Tax provision (benefit)(2)1 (8)3 
Effect on net income (loss)(6)1 (11)32 
Less: Effect on noncontrolling interests (4)2 (6)19 25 
Effect on net income (loss) attributable to AGL$(8)$7 $(30)$7 
By Type of VIE
FG VIEs$2 $6 $(13)$9 
CIVs(10)1 (17)(2)
Effect on net income (loss) attributable to AGL$(8)$7 $(30)$7 
____________________
(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.
(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.

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Reconciliation to GAAP
Reconciliation of Net Income (Loss) Attributable to AGL
to Adjusted Operating Income (Loss)
 Third QuarterNine Months
 2023202220232022
 (in millions)
Net income (loss) attributable to AGL$157 $11 $363 $30 
Less pre-tax adjustments:
Realized gains (losses) on investments(9)(14)(20)(39)
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives6 (49)109 (46)
Fair value gains (losses) on CCS (20)1 (35)12 
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves(37)(78)9 (180)
Total pre-tax adjustments(60)(140)63 (253)
Less tax effect on pre-tax adjustments11 18 (10)30 
Adjusted operating income (loss)$206 $133 $310 $253 
Gain (loss) related to FG VIE and CIV consolidation (net of tax provision (benefit) of $(2), $1, $(8) and $3) included in adjusted operating income$(8)$7 $(30)$7 
    
Net Realized Investment Gains (Losses)

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

Net Realized Investment Gains (Losses)
 
 Third QuarterNine Months
 2023202220232022
 (in millions)
Gross realized gains on sales of available-for-sale securities$2 $— $21 $— 
Gross realized losses on sales of available-for-sale securities(1)(10)(16)(33)
Net foreign currency gains (losses)(1)— (1)(3)
Change in allowance for credit losses and intent to sell(8)(4)(23)(13)
Other net realized gains (losses)(1)— (1)10 
Net realized investment gains (losses)$(9)$(14)$(20)$(39)

    Gross realized gains and losses on sales in all periods primarily relate to sales of New Recovery Bonds received as part of the 2022 Puerto Rico Resolutions.

Non-Credit Impairment-Related Unrealized Fair Value Gains (Losses) on Credit Derivatives
 
Changes in the fair value of credit derivatives occur because of changes in the Company’s own credit rating and credit spreads, collateral credit spreads, notional amounts, credit ratings of the referenced entities, expected terms, realized gains (losses) and other settlements, interest rates and other market factors. The components of changes in fair value of credit derivatives related to credit derivative revenues and changes in expected losses are included in Insurance segment results. Non-credit impairment-related changes in unrealized fair value gains and losses on credit derivatives are not included in the Insurance segment measure of adjusted operating income because they do not represent actual claims or losses and are expected to reverse to zero as the exposure approaches its maturity date. Changes in the fair value of the Company’s credit derivatives that do not reflect actual or expected claims or credit losses have no impact on the Company’s statutory claims-paying resources, rating agency capital or regulatory capital positions. Unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods. Except for underlying credit impairment, which is recognized as loss expense in the Insurance segment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.
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The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates and other market conditions at the time fair values are determined. In addition, since each transaction has unique collateral and structural terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC. Due to the relatively low volume and characteristics of credit default swaps (CDS) contracts remaining in AGM’s portfolio, changes in AGM’s credit spreads do not significantly affect the fair value of these CDS contracts. The Company determines its own credit risk based on quoted CDS prices traded on AGC at each balance sheet date. Generally, a widening of credit spreads of the underlying obligations results in unrealized losses and the tightening of credit spreads of the underlying obligations results in unrealized gains. A widening of the CDS prices traded on AGC has an effect of offsetting unrealized losses that result from widening general market credit spreads, while a narrowing of the CDS prices traded on AGC has an effect of offsetting unrealized gains that result from narrowing general market credit spreads.
 
The valuation of the Company’s credit derivative contracts requires the use of models that contain significant, unobservable inputs. The models used to determine fair value are primarily developed internally based on market conventions for similar transactions that the Company observed in the past. There has been very limited new issuance activity in this market since 2009 and, as of September 30, 2023, market prices for the Company’s credit derivative contracts were generally not available. Inputs to the estimate of fair value include various market indices, credit spreads, the Company’s own credit spread and estimated contractual payments. See Item 1, Financial Statements, Note 9, Fair Value Measurement, for additional information.

Third quarter 2023 non-credit impairment unrealized fair value gains were generated primarily as a result of generally lower collateral asset spreads. Nine months 2023 non-credit impairment unrealized fair value gains on credit derivatives were generated primarily as a result of generally lower collateral asset spreads and a widening of AGC spreads.

Third quarter 2022 non-credit impairment unrealized fair value losses were generated primarily as a result of wider asset spreads and a tightening of AGC spreads. Nine months 2022 non-credit impairment unrealized fair value losses on credit derivatives were generated primarily as a result of wider asset spreads, partially offset by a widening of AGC spreads and changes in discount rates.
Sensitivity to Changes in Credit Spread
 
The following table summarizes the estimated change in fair value on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company. The net spread is affected by the spread of the underlying collateral and the credit spreads on AGC.

Effect of Changes in Credit Spread
As of September 30, 2023As of December 31, 2022
Credit Spreads (1)Estimated Net
Fair Value
(Pre-Tax)		Estimated Change
in Gain (Loss)
(Pre-Tax)		Estimated Net
Fair Value
(Pre-Tax)		Estimated Change
in Gain (Loss)
(Pre-Tax)
 (in millions)
Increase of 25 bps$(112)$(63)$(233)$(71)
Base Scenario(49)— (162)— 
Decrease of 25 bps(33)16 (99)63 
All transactions priced at floor(19)30 (27)135 
 ____________________
(1)Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread.
    
Fair Value Gains (Losses) on CCS

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

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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 as of September 30, 2023 and December 31, 2022, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Premiums on European infrastructure and structured finance transactions typically are paid, in whole or in part, on an installment basis, whereas premiums on U.S. public finance transactions are often paid upfront.

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

Foreign Exchange Rates
U.S. Dollar Per Foreign Currency
As of September 30, 2023As of December 31, 2022As of September 30, 2022As of December 31, 2021
Pound sterling$1.220$1.208$1.117$1.353
Euro$1.057$1.071$0.980$1.137

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

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

    GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include:
•FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and
•CIVs in which certain subsidiaries invest.

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

Management of the Company and AGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; and (4) PVP.
    
    Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy.

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    Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation, enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.
 
The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.
 
Adjusted Operating Income

Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:
 
1)    Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.

2)    Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss.
 
3)    Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss.
 
4)    Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.
 
5)    Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

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

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

    Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:
 
1)    Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.
 
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.
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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.

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.

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Reconciliation of Shareholders’ Equity Attributable to AGL
to Adjusted Operating Shareholders’ Equity and Adjusted Book Value 

 As of September 30, 2023As of December 31, 2022
 After-TaxPer ShareAfter-TaxPer Share
 (dollars in millions, except share amounts)
Shareholders’ equity attributable to AGL$5,252 $90.84 $5,064 $85.80 
Less pre-tax adjustments:
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives38 0.66 (71)(1.21)
Fair value gains (losses) on CCS12 0.21 47 0.80 
Unrealized gain (loss) on investment portfolio(609)(10.52)(523)(8.86)
Less taxes76 1.31 68 1.15 
Adjusted operating shareholders’ equity5,735 99.18 5,543 93.92 
Pre-tax adjustments:
Less: Deferred acquisition costs158 2.73 147 2.48 
Plus: Net present value of estimated net future revenue190 3.28 157 2.66 
Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed3,404 58.88 3,428 58.10 
Plus taxes(612)(10.58)(602)(10.22)
Adjusted book value$8,559 $148.03 8,379 141.98 
Gain (loss) related to FG VIE and CIV consolidation included in:
Adjusted operating shareholders’ equity (net of tax provision (benefit) of $1 and $4)$4 $0.06 $17 $0.28 
Adjusted book value (net of tax provision (benefit) of $(1) and $3)(2)(0.03)11 0.19 

Net Present Value of Estimated Net Future Revenue
 
Management believes that this amount is a useful measure because it enables an evaluation of the present value of estimated net future revenue for non-financial guaranty insurance contracts. This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes.

    Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure.

PVP or Present Value of New Business Production

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

    Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as Loss Mitigation Securities. The
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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

Third Quarter 2023Third Quarter 2022
Public FinanceStructured FinancePublic FinanceStructured Finance
U.S.Non - U.S.U.S.Non - U.S.TotalU.S.Non - U.S.U.S.Non - U.S.Total
(in millions)
GWP$29 $(5)$15 $1 $40 $54 $44 $(2)$(2)$94 
Less: Installment GWP and other GAAP adjustments (1)6 (5)15 1 17 — 44 (3)(2)39 
Upfront GWP23 — — — 23 54 — 1 — 55 
Plus: Installment premiums and other (2)7 2 12 2 23 3 37 — — 40 
PVP$30 $2 $12 $2 $46 $57 $37 $1 $— $95 

Nine Months 2023Nine Months 2022
Public FinanceStructured FinancePublic FinanceStructured Finance
U.S.Non - U.S.U.S.Non - U.S.TotalU.S.Non - U.S.U.S.Non - U.S.Total
(in millions)
GWP$129 $40 $48 $4 $221 $160 $66 $4 $(1)$229 
Less: Installment GWP and other GAAP adjustments (1)55 37 48 4 144 — 66 1 (1)66 
Upfront GWP74 3 — — 77 160 — 3 — 163 
Plus: Installment premiums and other (2)55 35 42 40 172 3 67 — 7 77 
PVP$129 $38 $42 $40 $249 $163 $67 $3 $7 $240 
___________________
(1)    Includes the present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions and other GAAP adjustments.
(2)    Includes the present value of future premiums and fees on new business paid in installments, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturities such as Loss Mitigation Securities. Nine months 2023 and 2022 also include the present value of future premiums and fees associated with other guaranties written by the Company that, under GAAP, are accounted for under Accounting Standards Codification (ASC) 460, Guarantees.

Insured Portfolio
Financial Guaranty Exposure

    The following tables present information in respect of the financial guaranty insured portfolio to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.

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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

 As of September 30, 2023As of December 31, 2022
Sector(dollars in millions)
Public finance: 
U.S. public finance: 
General obligation$73,322 $71,868 
Tax backed32,982 33,752 
Municipal utilities28,541 26,436 
Transportation20,602 19,688 
Healthcare11,842 11,304 
Infrastructure finance8,808 6,955 
Higher education7,256 7,137 
Housing revenue1,141 959 
Investor-owned utilities329 332 
Renewable energy171 180 
Other public finance979 1,025 
Total U.S. public finance185,973 179,636 
Non-U.S public finance: 
Regulated utilities19,207 17,855 
Infrastructure finance14,031 13,915 
Sovereign and sub-sovereign9,403 9,526 
Renewable energy2,021 2,086 
Pooled infrastructure1,086 1,081 
Total non-U.S. public finance45,748 44,463 
Total public finance231,721 224,099 
Structured finance: 
U.S. structured finance: 
Life insurance transactions4,663 3,879 
RMBS1,817 1,956 
Pooled corporate obligations595 625 
Financial products447 453 
Consumer receivables342 437 
Other structured finance1,111 878 
Total U.S. structured finance8,975 8,228 
Non-U.S. structured finance: 
Pooled corporate obligations339 344 
RMBS248 263 
Other structured finance550 324 
Total non-U.S. structured finance1,137 931 
Total structured finance10,112 9,159 
Total net par outstanding $241,833 $233,258 

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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 September 30, 2023 and December 31, 2022 was $4.2 billion and $4.3 billion, respectively. The par on second-to-pay exposure where the ratings of the primary financial guaranty insurer and underlying insured transaction were not investment grade was $16 million and $19 million as of September 30, 2023 and December 31, 2022, respectively.

Exposure to Puerto Rico
         
    The Company had insured exposure to obligations of various authorities and public corporations of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) as well as its general obligation bonds aggregating $1.1 billion net par outstanding as of September 30, 2023, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR).

The following tables present information in respect of the Puerto Rico exposures to supplement the disclosures and discussions provided in Item 1, Financial Statements, Note 3, Outstanding Exposure.

Exposure to Puerto Rico by Company
As of September 30, 2023
Net Par Outstanding
 AGM AGCAG ReEliminations (1)Total
Net Par Outstanding 		Gross
Par Outstanding
 (in millions)
Defaulted Puerto Rico Exposures
PREPA$377 $67 $180 $— $624 $634 
Total Defaulted377 67 180 — 624 634 
Resolved Puerto Rico Exposures
PRHTA (Transportation revenue) (2)14 157 87 (14)244 244 
PRHTA (Highway revenue) (2)109 11 8 — 128 128 
Total Resolved123 168 95 (14)372 372 
Other Puerto Rico Exposures
MFA (3)84 6 18 — 108 114 
PRASA and U of PR (3)— 1 — — 1 1 
Total Other 84 7 18 — 109 115 
Total exposure to Puerto Rico$584 $242 $293 $(14)$1,105 $1,121 
 ___________________
(1)    Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary.
(2)    Resolved pursuant to the 2022 Puerto Rico Resolutions. Consideration received under the HTA Plan related to the remaining insured exposure is reported in FG VIEs’ assets (see Item 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles).
(3)    All debt service on these insured exposures have been paid to date without any insurance claim being made on the Company.

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

Amortization Schedule of Net Par of Puerto Rico
As of September 30, 2023

Scheduled Net Par Amortization
 2023 (4Q)2024 (1Q)2024 (2Q)2024 (3Q)2024 (4Q)2025202620272028 - 20322033 - 20372038 - 2041Total
 (in millions)
Defaulted Puerto Rico Exposures
PREPA$— $— $— $93 $— $68 $105 $105 $240 $13 $— $624 
Total Defaulted— — — 93 — 68 105 105 240 13 — 624 
Resolved Puerto Rico Exposures
PRHTA (Transportation revenue)— — — — — — — — — 121 123 244 
PRHTA (Highway revenue)— — — — — — — — 27 101 — 128 
Total Resolved— — — — — — — — 27 222 123 372 
Other Puerto Rico Exposures
MFA— — — 16 — 16 35 15 26 — — 108 
PRASA and U of PR— — — 1 — — — — — — — 1 
Total Other Puerto Rico Exposures— — — 17 — 16 35 15 26 — — 109 
Total$— $— $— $110 $— $84 $140 $120 $293 $235 $123 $1,105 

Amortization Schedule of Net Debt Service of Puerto Rico
As of September 30, 2023

Scheduled Net Debt Service Amortization
 2023 (4Q)2024 (1Q)2024 (2Q)2024 (3Q)2024 (4Q)2025202620272028 - 20322033 - 20372038 - 2041Total
 (in millions)
Defaulted Puerto Rico Exposures
PREPA$3 $12 $3 $105 $3 $92 $126 $122 $273 $14 $— $753 
Total Defaulted3 12 3 105 3 92 126 122 273 14 — 753 
Resolved Puerto Rico Exposures
PRHTA (Transportation revenue)— 6 — 6 — 13 13 12 65 173 140 428 
PRHTA (Highway revenue)— 3 — 3 — 7 7 7 61 115 — 203 
Total Resolved— 9 — 9 — 20 20 19 126 288 140 631 
Other Puerto Rico Exposures
MFA— 3 — 19 — 20 39 17 28 — — 126 
PRASA and U of PR— — — 1 — — — — — — — 1 
Total Other Puerto Rico Exposures— 3 — 20 — 20 39 17 28 — — 127 
Total$3 $24 $3 $134 $3 $132 $185 $158 $427 $302 $140 $1,511 

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Financial Guaranty Exposure to U.S. RMBS
 
The following table presents information in respect of the U.S. RMBS exposures to supplement the disclosures and discussion provided in Item 1, Financial Statements, Note 3, Outstanding Exposure, and Note 4, Expected Loss to be Paid (Recovered). U.S. RMBS exposures represent 0.8% of the total net par outstanding, and BIG U.S. RMBS represent 18.5% of total BIG net par outstanding as of September 30, 2023.
     
Distribution of U.S. RMBS by Year Insured and Type of Exposure as of September 30, 2023

Year
insured:		Prime
First Lien		Alt-A
First Lien		Option
ARMs		Subprime
First Lien		Second
Lien		Total Net Par
Outstanding
 (in millions)
2004 and prior$8 $7 $— $311 $10 $336 
200521 112 14 180 44 371 
200622 23 1 38 96 180 
2007— 184 16 562 138 900 
2008— — — 30 — 30 
Total exposures$51 $326 $31 $1,121 $288 $1,817 
Exposures rated BIG$31 $195 $14 $610 $106 $956 

    
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.

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Long-Term Debt Obligations
 
The Company has outstanding long-term debt issued by the U.S. Holding Companies. See Part II, Item 8, Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and — Guarantor and U.S. Holding Companies' Summarized Financial Information, below.    

U.S. Holding Companies
Long-Term Debt and Intercompany Loans

As of September 30, 2023As of December 31, 2022
 (in millions)
Effective Interest RateFinal MaturityPrincipal Amount
AGUS - long-term debt  
5% Senior Notes5.00%2024$— $330 
6.125% Senior Notes6.125%2028350 — 
3.15% Senior Notes3.15%2031500 500 
7% Senior Notes6.40%2034200 200 
3.6% Senior Notes3.60%2051400 400 
Series A Enhanced Junior Subordinated Debentures (1)3 month CME Term SOFR +2.64%2066150 150 
AGUS long-term debt1,600 1,580 
AGUS - intercompany loans from:
AGC and AGM3.50%2029250 250 
AGRO (2)5.00%202820 20 
AGUS intercompany loans270 270 
Total AGUS long-term debt and intercompany loans1,870 1,850 
AGMH 
Junior Subordinated Debentures (3)6.40%2066300 300 
Total AGMH long-term debt300 300 
AGMH’s long-term debt purchased by AGUS (4)(154)(154)
U.S. Holding Company long-term debt $2,016 $1,996 
____________________
(1)    Until June 30, 2023, the Series A Enhanced Junior Subordinated Debentures paid interest based on LIBOR. The reference to LIBOR in such debentures has been replaced with a rate based on Three-Month Chicago Mercantile Exchange (CME) Term Secured Overnight Finance Rate (SOFR).
(2)    In the second quarter of 2023, the final maturity of the AGRO loan was extended from 2023 to 2028 and the floating rate interest rate was converted to a fixed rate of 5%.
(3)     If the AGMH Junior Subordinated Debentures are outstanding after December 15, 2036, then the principal amount of the outstanding debentures will bear interest at One-Month CME Term SOFR plus 2.33%.
(4)     Represents principal amount of Junior Subordinated Debentures issued by AGMH that has been purchased by AGUS.

On August 21, 2023, AGUS issued $350 million of 6.125% Senior Notes due 2028. On September 25, 2023, AGUS redeemed $330 million of 5% Senior Notes due 2024. See Item 1. Financial Statements, Note 11, Long-Term Debt.

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
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of the loans, if any, by the third anniversary of the loan commitment termination date. AGL has not drawn upon the credit facility.

For more information, see the Company’s 2022 Annual Report on Form 10-K, Part II, Item 8. Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities.
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.

As of September 30, 2023
AGLU.S. Holding Companies
(in millions)
Assets
Fixed-maturity securities (1)$20 $4 
Investment in Sound Point— 419 
Short-term investments, other invested assets and cash23 56 
Receivables from affiliates (2)69 95 
Receivable from U.S. Holding Companies70 — 
Other assets3 64 
Liabilities
Long-term debt— 1,693 
Loans payable to affiliates— 270 
Payable to affiliates (2)13 40 
Payable to AGL— 70 
Other liabilities6 123 
____________________
(1)    As of September 30, 2023, weighted average durations of AGL’s and the U.S. Holding Companies’ fixed-maturity securities (excluding AGUS’s investment in AGMH’s debt) were 9.2 years and 4.1 years, respectively.
(2)    Represents receivable and payables with non-guarantor subsidiaries.

Nine Months 2023
AGLU.S. Holding Companies
(in millions)
Revenues
Gain on sale of asset management subsidiaries (1)$— $258 
Other income
1 6 
Expenses
Interest expense— 73 
Other expenses35 51 
Income (loss) before provision for income taxes and equity in earnings (losses) of investees(34)140 
Net income (loss)(34)105 
____________________
(1)    Excludes a $3 million write off of goodwill reported by a subsidiary of AGUS.
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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
Nine Months 2023
AGLU.S. Holding Companies
(in millions)
Dividends received from subsidiaries (1)$193 $153 
Interest paid— (55)
Investments in subsidiaries— (13)
Dividends paid to AGL— (140)
Dividends paid(51)— 
Repurchases of common shares (2)(90)— 
Issuance of long-term debt, net of issuance costs— 345 
Redemption of debt— (330)
____________________
(1)    AGL’s dividends include dividends from AGUS.
(2)    See Item 1, Financial Statements, Note 14, Shareholders’ Equity, for additional information about share repurchases and authorizations.

Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax. After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K., including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S. subsidiaries to U.K. resident persons entitled to the benefits of the treaty.
    
For more information, see also Part II, Item 8. Financial Statements and Supplementary Data, Note 12, Long-Term Debt and Credit Facilities, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

External Financing

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

Insurance Subsidiaries

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

Sources and Uses of Funds

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

•operating expenses,
•claims on the insured portfolio,
•dividends or other distributions to parent,
•reinsurance premiums,
•principal of, and interest on, surplus notes, where applicable, and
•capital investments in their own subsidiaries and in alternative investments, where appropriate.

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    Management believes that the insurance subsidiaries’ liquidity needs for the next twelve months can be met from current cash, short-term investments and operating cash flow, including premium collections and coupon payments as well as scheduled maturities and paydowns from their respective investment portfolios, although the Company may enter into secured short-term loan facilities with financial institutions to provide short-term liquidity for the payment of insurance claims it may make in connection with the future resolutions of other Puerto Rico exposures. The Company generally targets a balance of its most liquid assets including cash and short-term securities, U.S. Treasuries, agency RMBS and pre-refunded municipal bonds equal to 1.5 times its projected operating company cash flow needs over the next four quarters. As of September 30, 2023, the Company intended to hold and had the ability to hold securities in an unrealized loss position until the date of anticipated recovery of amortized cost.

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

Financial Guaranty Policies

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

Payments made in settlement of the Company’s obligations arising from its insured portfolio may, and often do, vary significantly from year to year, depending primarily on the frequency and severity of payment defaults and whether the Company chooses to accelerate its payment obligations in order to mitigate future losses. For example, the Company made substantial claim payments in 2022 in connection with the resolution of certain Puerto Rico credits. The Company is continuing its efforts to resolve the one remaining unresolved Puerto Rico insured exposure that is in payment default, PREPA. The Company had $624 million net par outstanding to PREPA on September 30, 2023. As described in Item 1, Financial Statements, Note 3, Outstanding Exposure, in connection with the implementation of the GO/PBA Plan and the HTA Plan, certain insured bondholders elected to receive custody receipts that represent an interest in the legacy insurance policy plus cash, New Recovery Bonds and CVIs, as relevant, that constitute distributions under the GO/PBA Plan or HTA Plan. For those who made the election, distributions under the GO/PBA Plan and HTA Plan are immediately passed through to insured bondholders under the custody receipts to the extent of any cash or proceeds of new securities held in the custodial trust, and are applied to make payments and/or prepayments of amounts due under the legacy insured bonds. The Company’s insurance policy continues to guarantee principal and interest coming due on the legacy insured bonds in accordance with the terms of such insurance policy on the originally scheduled legacy bond interest and principal payment dates to the extent that distributions under the GO/PBA Plan or HTA Plan, as applicable, are insufficient to pay or prepay such amounts after giving effect to the distributions described in the immediately preceding sentence. In the case of insured bondholders who elected to receive custody receipts, the Company retains the right to satisfy its obligations under the insurance policy with respect to the related legacy insured bonds at any time thereafter, with 30 days’ notice, by paying 100% of the then outstanding principal amount of insured bonds plus accrued interest.

On August 31, 2023, after notice to certain holders of custody receipts representing interests in legacy insured GO, PBA and HTA bonds, the Company satisfied its obligations under such legacy insured bonds with respect to $108 million net par outstanding as of August 31, 2023, and the custodial trusts released to AGC and AGM New Recovery Bonds and/or CVIs with a fair value totaling $73 million as of August 31, 2023. Consequently, as of September 30, 2023, the Company had extinguished its exposure to Puerto Rico GO/PBA and had remaining net par outstanding for Puerto Rico HTA of $372 million, which consisted of bonds where the holders elected to receive custody receipts and exposures assumed from a third-party financial guarantor.

In connection with the acquisition of AGMH, AGM agreed to retain the risks relating to the debt and strip policy portions of the leveraged lease business (described below). In a leveraged lease transaction, a tax-exempt entity (such as a transit agency) transfers tax benefits to a tax-paying entity by transferring ownership of a depreciable asset, such as subway cars. The tax-exempt entity then leases the asset back from its new owner.

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

Currently, all the leveraged lease transactions in which AGM acts as strip coverage provider are breaching a rating trigger related to AGM and are subject to early termination. However, early termination of a lease does not result in a draw on the AGM policy if the tax-exempt entity makes the required termination payment. If all the leases were to terminate early and the tax-exempt entities did not make the required early termination payments, then AGM would be exposed to possible liquidity claims on gross exposure of approximately $393 million as of September 30, 2023. To date, none of the leveraged lease transactions that involve AGM has experienced an early termination due to a lease default and a claim on the AGM policy. As of September 30, 2023, approximately $1.9 billion of cumulative strip par exposure had been terminated since 2008 on a consensual basis. The consensual terminations have resulted in no claims on AGM. 

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

Distributions From Insurance Subsidiaries

    The Company anticipates that, for the next twelve months, amounts paid by AGL’s direct and indirect insurance subsidiaries as dividends or other distributions will be a major source of the holding companies’ liquidity. The insurance subsidiaries’ ability to pay dividends depends upon their financial condition, results of operations, cash requirements, other potential uses for such funds, and compliance with rating agency requirements, and is also subject to restrictions contained in the insurance laws and related regulations of their states of domicile. For more information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Insurance Company Regulatory Requirements, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of the Company’s dividend restrictions applicable to AGC, AGM, AG Re and AGRO.
    
    Dividend restrictions by insurance subsidiary are as follows:

•The maximum amount available during 2023 for AGM (a subsidiary of AGMH) to distribute as dividends without regulatory approval is approximately $257 million. Approximately $157 million is available for distribution in the fourth quarter of 2023, of which $77 million was paid in October 2023

•The maximum amount available during 2023 for AGC (a subsidiary of AGUS) to distribute as ordinary dividends is approximately $102 million. Approximately $58 million is available for distribution in the fourth quarter of 2023, of which $16 million was paid in October 2023.

•Based on the applicable law and regulations, in 2023 AG Re (a subsidiary of AGL) paid dividends of $53 million in the first nine months of the year and has the capacity to (i) make capital distributions in an aggregate amount up to $129 million without the prior approval of the Bermuda Monetary Authority (the Authority) and (ii) declare and pay dividends in an aggregate amount up to approximately $209 million as of September 30, 2023. Such dividend capacity is further limited by (i) the actual amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $117 million as of September 30, 2023, and (ii) the amount of statutory surplus, which as of September 30, 2023 was a deficit of $41 million.

•Based on the applicable law and regulations, in 2023 AGRO (an indirect subsidiary of AG Re) has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $98 million as of September 30, 2023. Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately
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$364 million as of September 30, 2023, and (ii) the amount of statutory surplus, which as of September 30, 2023 was $259 million.

Distributions From Insurance Company Subsidiaries

Third QuarterNine Months
2023202220232022
(in millions)
Dividends paid by AGC to AGUS$— $16 $44 $165 
Dividends paid by AGM to AGMH60 77 100 173 
Dividends paid by AG Re to AGL24 — 53 — 
Dividends from AGUK to AGM— — 127 — 

Ratings Impact on Financial Guaranty Business
 
A downgrade of one of AGL’s insurance subsidiaries may result in increased claims under financial guaranties issued by the Company if counterparties exercise contractual rights triggered by the downgrade against insured obligors, and the insured obligors are unable to pay. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Insurance Subsidiaries, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Assumed Reinsurance

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

As of September 30, 2023, if each third-party company ceding business to an Assuming Subsidiary had a right to recapture such business, and chose to exercise such right, the aggregate amounts those subsidiaries could be required to pay to all such ceding companies would be approximately $264 million, including $237 million by AGC and $27 million by AG Re.

Committed Capital Securities

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

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

Prior to 2008 or 2007, the amounts paid on the CCS were established through an auction process. All of those auctions failed in 2008 or 2007, and the rates paid on the CCS increased to their respective maximums. As of July 2023, the annualized rate on the AGC CCS is one-month CME Term SOFR plus 261 bps, and the annualized rate on the AGM Committed Preferred Trust Securities is one-month CME Term SOFR plus 211 bps.

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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 61% of the total investment portfolio is managed by external parties. In accordance with the Company’s investment guidelines, each of the three external investment managers is required to maintain the Company’s investment portfolio with an overall credit quality rated at a minimum of A+/A1/A+ by S&P/Moody’s/Fitch Inc., respectively.

Changes in interest rates affect the value of the Company’s fixed-maturity securities. As interest rates fall, the fair value of fixed-maturity securities generally increases and, as interest rates rise, the fair value of fixed-maturity securities generally decreases. The Company’s portfolio of fixed-maturity securities primarily consists of investment-grade, liquid instruments. Other invested assets include other alternative investments, which are generally less liquid. For more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments, see Item 1, Financial Statements, Note 7, Investments, and Note 9, Fair Value Measurement.

Investment Portfolio
Carrying Value
As of
 September 30, 2023December 31, 2022
 (in millions)
Fixed-maturity securities, available-for-sale (1)$6,267 $7,119 
Fixed-maturity securities, trading (2)350 303 
Short-term investments1,426 810 
Other invested assets765 133 
Total$8,808 $8,365 
____________________
(1)    As of September 30, 2023 and December 31, 2022, includes $78 million and $358 million, respectively, of New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.
(2)    Represents CVIs received under the 2022 Puerto Rico Resolutions.

The Company’s available-for-sale fixed-maturity securities had a duration of 4.1 years and 4.4 years as of September 30, 2023 and December 31, 2022, respectively.

Available-for-Sale Fixed-Maturity Securities By Contractual Maturity

The amortized cost and estimated fair value of the Company’s available-for-sale fixed-maturity securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Available-for-Sale Fixed-Maturity Securities by Contractual Maturity
As of September 30, 2023
 
 Amortized
Cost		Estimated
Fair Value
 (in millions)
Due within one year$248 $239 
Due after one year through five years1,526 1,406 
Due after five years through 10 years1,760 1,629 
Due after 10 years2,809 2,475 
Mortgage-backed securities:  
RMBS430 330 
Commercial mortgage-backed securities198 188 
Total$6,971 $6,267 

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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 September 30, 2023 and December 31, 2022. Ratings generally reflect the lower of Moody’s and S&P classifications, except for (i) Loss Mitigation Securities, which use Assured Guaranty’s internal ratings classifications, or (ii) Puerto Rico securities received under the 2022 Puerto Rico Resolutions, which are not rated.

 Distribution of Available-for-Sale Fixed-Maturity Securities by Rating
 
As of
RatingSeptember 30, 2023December 31, 2022
AAA13.8 %14.2 %
AA38.4 37.1 
A26.2 24.4 
BBB11.6 11.0 
BIG (1)7.6 7.4 
Not rated (2)2.4 5.9 
Total100.0 %100.0 %
____________________
(1)Includes primarily Loss Mitigation Securities. See Item 1, Financial Statements, Note 7, Investments, for additional information.
(2)Primarily includes New Recovery Bonds received in connection with the consummation of the 2022 Puerto Rico Resolutions.

The Company also had $350 million and $303 million in trading fixed-maturity securities as of September 30, 2023 and December 31, 2022, respectively, representing CVIs received under the 2022 Puerto Rico Resolutions, which are not rated.

Other Investments

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

The Insurance segment reports AGAS’ percentage ownership of Sound Point and AHP funds’ as equity method investments with changes in NAV included in the Insurance segment adjusted operating income. As of September 30, 2023, three of the funds in which AGAS invests are consolidated and the remaining are accounted as equity method investments in the Company’s condensed consolidated financial statements. As of December 31, 2022, all of the funds in which AGAS directly invested were consolidated in the Company’s condensed consolidated financial statements. See — Commitments below.

Investment in Assets Managers and Alternative Investments by Strategy
As of September 30, 2023
InvestmentsEliminationsConsolidated
 (in millions)
Sound Point (1)$419 $— $419 
Alternative investments:
CLOs (2)246 (184)62 
Asset-based132 (88)44 
Healthcare103 — 103 
Other149 — 149 
Total$1,049 $(272)$777 
____________________
(1)    The investment in Sound Point is carried at the acquisition date fair value. On a one quarter lag, the acquisition date fair value will be adjusted for the Company’s interest in the earnings of Sound Point and amortization of intangible assets.
(2)     Represents primarily investments in the equity of U.S. and European CLOs as well as the first loss equity of CLOs.
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Alternative Investments by Strategy
As of December 31, 2022
InvestmentsEliminationsConsolidated
 (in millions)
CLOs$272 $(272)$— 
Asset-based101 (101)— 
Healthcare91 (91)— 
Municipal bonds (1)105 (105)— 
Other133 — 133 
Total$702 $(569)$133 
____________________
(1)     In the first quarter of 2023, the fund distributed substantially all of its available cash to AGAS and other investors in the fund.

Change in Fair Value of Alternative Investments by Strategy
Nine Months Ended September 30, 2023
InvestmentsEliminationsConsolidated
 (in millions)
CLOs$21 $(23)$(2)
Asset-based3 (3)— 
Healthcare21 (9)12 
Other 13 — 13 
Total $58 $(35)$23 

Change in Fair Value of Alternative Investments by Strategy
Nine Months Ended September 30, 2022
InvestmentsEliminationsConsolidated
 (in millions)
CLOs$(10)$10 $— 
Asset-based7 (7)— 
Healthcare(6)8 2 
Municipal bonds(4)4 — 
Other(34)— (34)
Total $(47)$15 $(32)

Beginning in third quarter 2023, the Company records an equity method investment in Sound Point pursuant to the Sound Point Transaction described in Item 1, Financial Statements, Note 1, Business and Basis of Presentation

Restricted Assets

    Based on fair value, investments and other assets that are either held in trust for the benefit of third-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, totaled $224 million and $222 million as of September 30, 2023 and December 31, 2022, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,107 million and $1,169 million, based on fair value, as of September 30, 2023 and December 31, 2022, respectively.

Commitments

Upon closing of the Sound Point Transaction and the AHP Transaction in July, the Company has increased the aggregate amount it has agreed to invest in alternative investments to $1.5 billion, including the $1 billion with Sound Point, subject to regulatory approval, which includes $630 million of invested capital (at fair value), and $890 million in unfunded commitments. See Item 1, Financial Statements, Note 1, Business and Basis of Presentation, for a description of the Sound Point Transaction.

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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 $132 million for a total of $882 million as of September 30, 2023. As of September 30, 2023, AGAS commitments to Sound Point and AHP funds were $703 million (of which $446 million was funded with a NAV of $469 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 September 30, 2023, three of the six funds in which AGAS invests are accounted for as CIVs.

Lease Obligations

The Company has entered into several lease agreements for office space in Bermuda, New York, San Francisco,
London, Paris, and other locations with various lease terms. See Part II, Item 8, Financial Statements and Supplementary Data, Note 17, Leases, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for a table of minimum lease obligations and other lease commitments.

FG VIEs and CIVs

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

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

•CIVs. The primary sources and uses of cash in the CIVs are raising capital from investors, using capital to make investments, generating cash income from investments, paying expenses, distributing cash flow to investors and 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. 1, Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.

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Condensed Consolidated Cash Flows
 
    The summarized condensed consolidated statements of cash flows in the table below present the cash flow effect for the aggregate of the Insurance and Asset Management business and holding companies, separately from the aggregate effect of consolidating FG VIEs and CIVs. In third quarter 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 1. Financial Statements, Note 1, Business and Basis of Presentation, and Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles, for additional information.    

Summarized Condensed Consolidated Cash Flows

 Third QuarterNine Months
 2023202220232022
 (in millions)
Net cash flows provided by (used in) operating activities, excluding FG VIEs and CIVs operating cash flows$(210)$87 $(217)$(534)
FG VIEs and CIVs operating cash flows32 (141)475 (1,314)
Net cash flows provided by (used in) operating activities(178)(54)258 (1,848)
Net cash flows provided by (used in) investing activities, excluding FG VIEs and CIVs investing cash flows250 25 358 1,006 
FG VIEs and CIVs investing cash flows61 45 (175)122 
Net cash flows provided by (used in) investing activities311 70 183 1,128 
Net cash flows provided by (used in) financing activities, excluding FG VIEs and CIVs financing cash flows
Dividends paid(16)(16)(51)(49)
Repurchases of common shares(64)(97)(90)(400)
Issuance of long-term debt, net of issuance costs345 — 345 — 
Redemption of debt(330)— (330)— 
Other— — (15)(6)
FG VIEs and CIVs financing cash flows(135)109 (392)1,110 
Net cash flows provided by (used in) financing activities (1)(200)(4)(533)655 
Effect of exchange rate changes,excluding FG VIEs and CIVs(2)(4)— (6)
Effect of exchange rate changes for FG VIEs and CIVs — — — — 
Effect of exchange rate changes(2)(4)— (6)
Increase (decrease) in cash and cash equivalents and restricted cash(69)8 (92)(71)
Cash and cash equivalents and restricted cash at beginning of period184 263 207 342 
Cash and cash equivalents and restricted cash at the end of the period$115 $271 $115 $271 
____________________
(1)     Claims paid on consolidated FG VIEs are presented in the condensed consolidated statements of cash flows as a component of paydowns on FG VIEs’ liabilities in financing activities as opposed to operating activities.

    Cash flows from operations, excluding FG VIEs and CIVs, were an outflow of $217 million in nine months 2023 and an outflow of $534 million in nine months 2022. The decrease in outflows during nine months 2023 was primarily due to a $362 million decrease in net claim payments, primarily due to the 2022 Puerto Rico Resolutions, as well as a decrease of $94 million in tax payments. Cash flows from operations attributable to FG VIE and CIV were inflows in nine months 2023 and outflows in nine months 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
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condensed consolidated statements of cash flows present the investing activities of the consolidated Sound Point funds, which were formerly known as AssuredIM funds, AssuredIM funds and CLOs as cash flows from operations. The increase in inflows in nine months 2023 compared with nine months 2022 was mainly due to a decrease of $2,714 million in investment purchases, partially offset by a decrease of investment sales, maturities and paydowns of $850 million.

Investing activities primarily consisted of net sales (purchases) of fixed-maturity and short-term investments and paydowns on and sales of FG VIEs’ assets. The decrease in investing cash inflows in nine months 2023 compared with nine months 2022 was mainly attributable to an increase in short-term investments in nine months 2023 compared to net sales of short-term and fixed-maturity investments in nine months 2022. In nine months 2022, investing inflows were used to fund claim payments under the 2022 Puerto Rico Resolutions and share repurchases. See Item 1. Financial Statements, Condensed Consolidated Statements of Cash Flows, and Note 3, Outstanding Exposure, for additional information.

Financing activities primarily consist of (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. The decrease in financing cash flow activity from VIEs was primarily due to a decrease of $2,254 million in issuances, partially offset by a decrease in repayments of $964 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 1. Financial Statements, Note 8, Financial Guaranty Variable Interest Entities and Consolidated Investment Vehicles.

From October 1, 2023 through November 7, 2023, the Company repurchased an additional 682,676 of common shares. As of November 7, 2023, the Company was authorized to purchase $372 million of its common shares. For more information about the Company’s share repurchases and authorizations, see Item 1, Financial Statements, Note 14, Shareholders’ Equity.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2023, there were no material changes to the market risks to which the Company is exposed since December 31, 2022.

ITEM 4.    CONTROLS AND PROCEDURES

Assured Guaranty’s management, with the participation of AGL’s President and Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are effective in recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission’s rules and forms, information required to be disclosed by AGL in the reports that it files or submits under the Exchange Act and ensuring that such information is accumulated and communicated to management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
Management of the Company, with the participation of its President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2023. Based on their evaluation as of September 30, 2023 covered by this Form 10-Q, the Company’s President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.

    There were no changes in the Company’s internal control over financial reporting during third quarter 2023 which were identified in connection with the evaluation required pursuant to Rules 13a-15 or 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




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PART II.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS
 
    The Company is subject to legal proceedings and claims, as described in Part I, Item 1, Financial Statements, Note 13, Commitments and Contingencies – Legal Proceedings and the “PREPA” and “Puerto Rico Litigation” sections of Note 3, Outstanding Exposure and the “Recovery Litigation and Dispute Resolution” section of Note 4, Expected Loss to be Paid (Recovered) contained in this Form 10-Q and is incorporated by reference herein. For additional information see the “Legal Proceedings” and “Litigation” sections of Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies, the “Recovery Litigation” section of Note 4, Expected Loss to be Paid (Recovered), and the “Puerto Rico Litigation” section of Note 3, Outstanding Exposure, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 1A.RISK FACTORS

    See the risk factors set forth in Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report) and Part II, “Item 1A. Risk Factors” for the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (Q2 Quarterly Report). Except for the risk factors entitled, “Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs) may expose it to increased credit, interest rate, liquidity and other risks” and “AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035, which may adversely affect the Company’s future results of operations and on an investment in the Company,” set forth in the 2022 Annual Report, which are removed and replaced in their entirety as set forth below, there have been no material changes to the risk factors disclosed in the 2022 Annual Report or the Q2 Quarterly Report during the nine months ended September 30, 2023.

Expansion of the categories and types of the Company’s investments (including those accounted for as CIVs), including allocations of investments to Sound Point and exclusivity arrangement with Sound Point may expose it to increased credit, interest rate, liquidity and other risks.

The Company is using Sound Point’s investment knowledge and experience to expand the categories and types of its alternative investments (including those accounted for as CIVs) by: (a) allocating $1 billion of capital in Sound Point managed funds; (b) redeploying initial amounts allocated to Sound Point in future Sound Point funds; and (c) having Sound Point serve as the U.S. Insurance Subsidiaries’ sole alternative credit manager. This expansion of categories and types of investments, allocations to Sound Point and exclusivity arrangement with Sound Point may increase the credit, interest rate and liquidity risk in the Company’s investments (including those accounted for as CIVs). In addition, the fair value of most of these assets are reported in results of operations and may be more volatile than other investments made by the Company. As a result of the Company’s expansion of the categories and types of its investments, as of September 30, 2023, the U.S. Insurance Subsidiaries had investments in Sound Point managed funds with a fair value of $378 million. In addition, the Company had $252 million of other non-Sound Point alternative investments reported in the consolidated financial statements. This expansion also has resulted in the Company investing a portion of its portfolio in assets that are less liquid than some of its other investments, and so may increase the risks described under “— Operational Risks — The ability of AGL and its subsidiaries to meet their liquidity needs may be limited”. Expanding the categories and types of Company investments (including those accounted for as CIVs), allocations to Sound Point and exclusivity arrangement with Sound Point may also expose the Company to other types of risks, including reputational risks.

AGL, AG Re and AGRO may become subject to taxes in Bermuda, which may adversely affect the Company’s future results of operations and an investment in the Company.

The Bermuda Minister of Finance, under Bermuda’s Exempted Undertakings Tax Protection Act 1966, as amended, has given AGL, AG Re and AGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or AGRO, or any of AGL’s or its subsidiaries’ operations, stocks, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, the Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035.

Further, on August 8, 2023, the Bermuda Government issued the first of a series of public consultation papers as part of its considerations on the introduction of a corporate income tax that would be taken into account in calculating the effective
127

tax rate of Bermuda businesses under the OECD’s global anti-base erosion (GloBE) rules. The second public consultation paper issued October 8, 2023, indicates that the Bermuda Government believes it is reasonable and proportionate for any new Bermuda corporate income tax regime to supersede any existing tax assurance certificates held by entities within the scope of the new Bermuda corporate income tax. Under the current proposal, Bermuda corporate income tax would apply only to large multinational enterprises (MNEs), as defined in the GloBE rules, with EUR 750 million or more in total global revenue in at least two of the previous four accounting periods. The proposed Bermuda corporate income tax legislation is currently anticipated to be effective for tax years beginning on or after January 1, 2025. The Bermuda Government is considering if amendments are necessary to the existing tax assurance certificate regime to ensure that tax may be collected in Bermuda from entities which are subject to the proposed Bermuda corporate income tax regime. Although we cannot predict when or if any new Bermuda corporate income tax law will be adopted or will become effective, the imposition of a Bermuda corporate income tax could, if applicable to the Company (or any Bermuda incorporated subsidiary of the Company), have an adverse effect on the Company's financial condition and results of operations.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Issuer’s Purchases of Equity Securities
 
The following table reflects purchases of AGL common shares made by the Company during third quarter 2023.
 
PeriodTotal
Number of
Shares
Purchased		Average
Price Paid
Per Share		Total Number of
Shares Purchased as
Part of Publicly
Announced Program (1)		Maximum Number
(or Approximate Dollar Value) of Shares that May Yet Be
Purchased
Under the Program (2)
July 1 - July 31257,066 $57.64 257,066 $162,128,831 
August 1 - August 31264,107 $59.73 261,580 $146,509,723 
September 1 - September 30547,256 $60.61 547,256 $113,343,260 
Total1,068,429 $59.67 1,065,902  
____________________
(1)    After giving effect to repurchases since the Board first authorized the repurchase program on January 18, 2013, through November 7, 2023, the Company has repurchased a total of 143 million common shares for approximately $4.8 billion, excluding commissions, at an average price of $33.49 per share. On November 1, 2023, the Company announced that the Board of Directors had authorized an additional $300 million of share repurchases. As of November 7, 2023, the remaining authorization the Company was authorized to purchase was $372 million of its common shares, on a settlement basis. The repurchase program has no expiration date and the Board has previously increased the authorization periodically.
(2)     Excludes commissions.

ITEM 5.    OTHER MATTERS

10b5-1 Trading Plans

During third quarter 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act).

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ITEM 6.EXHIBITS
 
The following exhibits are filed with this report:
 
Exhibit
Number		Description of Document
4.1 
10.1 
22.0 
31.1 
31.2 
32.1 
32.2 
101.1 The following financial information from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022; and (vi) Notes to Condensed Consolidated Financial Statements.
104.1 The Cover Page Interactive Data File from Assured Guaranty Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted, in Inline XBRL (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101).

* Management contract or compensatory plan
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Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 ASSURED GUARANTY LTD.
(Registrant)
  
Dated November 8, 2023By:/s/ ROBERT A. BAILENSON
   
  
Robert A. Bailenson
Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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