ASSURED GUARANTY LTD

Insurance Segment Results

Insurance Segment Results

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 and the higher interest rate environment has led to a lower volume of refunding opportunities over the last several years.

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.

Net Earned Premiums and Credit Derivative Revenues

(1) Includes accretion of discount.

Net earned premiums and credit derivative revenues increased in six months 2024 compared with six months 2023 primarily due to a large refunded transaction in the first quarter of 2024. As of June 30, 2024, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.

New Business Production

Gross Written Premiums and

New Business Production

(1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “— Non-GAAP Financial Measures — PVP or Present Value of New Business Production.” PVP was discounted at 5.0% in second quarter 2024 and six months 2024 and 4.0% in second quarter 2023 and six months 2023.

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

U.S. public finance GWP and PVP in second quarter 2024 were higher than the comparable GWP and PVP in second quarter 2023, primarily due to two large transportation revenue transactions that were closed in second quarter 2024. The Company’s direct par written represented 58% of the total U.S. municipal market insured issuance in second quarter 2024, compared with 64% in second quarter 2023, and the Company’s penetration of all municipal issuance was 5.2% in second quarter 2024 compared with 6.5% in second quarter 2023.

In second quarter 2024, non-U.S. public finance GWP and PVP were higher than GWP and PVP in second quarter 2023 primarily due to secondary market guaranties of several U.K. regulated utility and airport transactions in second quarter 2024.

U.S. public finance GWP and PVP in six months 2024 were higher than GWP and PVP in six months 2023, primarily due to several large transportation revenue transactions. The Company’s direct par written represented 56% of the total U.S. municipal market insured issuance in six months 2024, compared with 63% in six months 2023, and the Company’s penetration of all municipal issuance was 4.6% in six months 2024 compared with 5.7% in six months 2023.

Six months 2024, non-U.S. public finance GWP and PVP were lower than GWP and PVP in six months 2023. New business in six months 2024 primarily included secondary market guaranties of several U.K. regulated utility and airport transactions, as well as the annual renewal of certain liquidity guarantees.

In six months 2024, structured finance GWP and PVP were $19 million and $25 million, respectively, compared with GWP and PVP of $36 million and $68 million, respectively, in six months 2023. Structured finance GWP and PVP in six months 2024 were primarily attributable to insurance securitization and subscription finance transactions.

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.

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.

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.

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 June 30, 2024 and December 31, 2023 was $221 million and $318 million, respectively.

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

Net investment income for second quarter 2024 and six months 2024 decreased compared to second quarter 2023 and six months 2023, primarily due to lower income on Loss Mitigation Securities and lower average balances in the externally managed portfolio, which were partially offset by higher short-term income as a result of higher short-term interest rates and higher average balances in the short-term investment portfolio. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 4.08% as of June 30, 2024 and 3.89% as of June 30, 2023.

Equity in earnings (losses) of investees for second quarter 2024 and six months 2024 increased compared to second quarter 2023 and six months 2023, primarily due to higher balances in the alternative investment portfolio and fair value gains on alternative investments.

Other Income (Loss)

The decrease in “other income (loss)” in six months 2024 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million in six months 2023. See Item 1, Financial Statements, Note 11, Contingencies, for additional information.

Economic Loss Development

The insured portfolio includes policies accounted for under several different accounting models depending on the characteristics of the contract and the Company’s control rights. For a discussion of methodologies and significant estimates for expected loss to be paid (recovered), see Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), of the Company’s 2023 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 2023 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) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; (ii) excess spread on underlying collateral, as applicable; and (iii) amounts ceded to reinsurers. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery are consistent by sector regardless of the accounting model used.

Current risk-free rates are used to discount expected losses at the end of each reporting period. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement in the period. The weighted average discount rates used to discount expected losses (recoveries) for U.S. denominated exposures were 4.55% and 4.10% as of June 30, 2024 and December 31, 2023, 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

(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).

Roll Forward by Sector

(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.”

(2) Effect of changes in the risk-free rates included in economic loss development (benefit) was a loss of $1 million in second quarter 2024, a benefit of $6 million in second quarter 2023, a benefit of $2 million in six months 2024 and a loss of $4 million in six months 2023.

Second Quarter 2024 Net Economic Loss Development

Public Finance: The economic loss development on U.S. and non-U.S public finance exposures in second quarter 2024 was $12 million and $17 million, respectively, and was primarily attributable to certain healthcare exposures.

U.S. RMBS: The economic benefit attributable to U.S. RMBS was $10 million and was primarily attributable to a $4 million benefit from improved transaction performance, $4 million of higher recoveries for secured second lien charged-off loans and a $2 million benefit from changes in discount rates.

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

Second Quarter 2023 Net Economic Loss Development

Public Finance: The economic loss development on U.S. exposures in second quarter 2023 was $57 million and was primarily attributable to $78 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $21 million in other municipal exposures.

U.S. RMBS: The economic benefit attributable to U.S. RMBS was $9 million and was primarily attributable to a $7 million benefit related to higher recoveries for secured second lien charged-off loans, a $5 million benefit related to improved performance in certain transactions, and $3 million benefit related to changes in discount rates, partially offset by losses of $6 million related to lower excess spread.

Six Months 2024 Net Economic Loss Development

Public Finance: The economic loss development on U.S. and non-U.S. public finance exposures in six months 2024 was $9 million and $17 million, respectively, and was primarily attributable to certain healthcare exposures.

U.S. RMBS: The economic benefit attributable to U.S. RMBS was $13 million and was mainly attributable to an $8 million benefit related to higher recoveries for second lien charged-off loans, a $4 million benefit related to improved performance in certain transactions and a $4 million benefit related to changes in discount rates, partially offset by a $3 million loss related to lower excess spread.

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

Six Months 2023 Net Economic Loss Development

Public Finance: The economic loss development on U.S. public finance exposures in six months 2023 was $58 million, which was primarily attributable to $81 million for certain Puerto Rico and healthcare exposures, partially offset by higher projected recoveries of $23 million in other municipal exposures.

U.S. RMBS: The net benefit attributable to U.S. RMBS was $4 million and was mainly attributable to a $14 million benefit related to higher recoveries for second lien charged-off loans, and a $9 million benefit related to improved performance in certain transactions, partially offset by a $15 million loss related to the return of certain funds previously received, a $2 million loss related to changes in discount rates and a $2 million loss related to lower excess spread.

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. To the extent that a BIG transaction has a large deferred premium revenue, the difference between economic development and loss and LAE may be significant.

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).

Loss Expense (Benefit)