Employee Benefit Plans

Accounting Policy

Share-based compensation expense is based on the grant date fair value using the grant date closing price, the lattice, Monte Carlo or Black-Scholes-Merton (Black-Scholes) pricing models. The Company amortizes the fair value of share-based awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the exception of retirement‑eligible employees. For retirement-eligible employees, certain awards contain retirement provisions and therefore are amortized over the period through the date the employee first becomes eligible to retire and is no longer required to provide service to earn part or all of the award.

The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan is estimated at the beginning of each offering period using the Black-Scholes option valuation model.

The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with the exception of retirement eligible employees. For retirement eligible employees, the expense is recognized immediately.

Assured Guaranty Ltd. 2004 Long-Term Incentive Plan

Under the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended (the Incentive Plan), the number of AGL common shares that may be delivered under the Incentive Plan may not exceed 18,670,000. In the event of certain transactions affecting AGL's common shares, the number or type of shares subject to the Incentive Plan, the number and type of shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may be adjusted.

The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and full value awards that are based on AGL's common shares. The grant of full value awards may be in return for a participant's previously performed services, or in return for the participant surrendering other compensation that may be due, or may be contingent on the achievement of performance or other objectives during a specified period, or may be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become vested upon a change in control of AGL.

The Incentive Plan is administered by the Compensation Committee of the Board, except as otherwise determined by the Board. The Board may amend or terminate the Incentive Plan. As of December 31, 2018, 9,779,294 common shares were available for grant under the Incentive Plan.

Time Vested Stock Options

Stock options are generally granted once a year with exercise prices equal to the closing price on the date of grant. To date, the Company has only issued non-qualified stock options. All stock options, except for performance stock options, granted to employees vest in equal annual installments over a three-year period and expire seven years or ten years from the date of grant. Stock options granted to directors vest over one year and expire in seven years or ten years from grant date. None of the Company's options, except for performance stock options, have a performance or market condition.

Time Vested Stock Options



	Options for Common Shares		Weighted Average Exercise Price		Number of Exercisable Options
Balance as of December 31, 2017	838,954		$	17.41	838,954
Options granted	—		—
Options exercised	(465,326	)	16.32
Options forfeited/expired	—		—
Balance as of December 31, 2018	373,628		$	18.77	373,628

As of December 31, 2018, the aggregate intrinsic value and weighted average remaining contractual term of stock options outstanding were $7.3 million and 1.2 years, respectively. As of December 31, 2018, the aggregate intrinsic value and weighted average remaining contractual term of exercisable stock options were $7.3 million and 1.2 years, respectively.

No options were granted in 2018, 2017 and 2016. As of December 31, 2018, there were no unexpensed outstanding non-vested options.

The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $9.9 million, $6.6 million and $4.6 million, respectively. During the years ended December 31, 2018, 2017 and 2016, $2.4 million, $4.7 million and $12.0 million, respectively, was received from the exercise of stock options. In order to satisfy stock option exercises, the Company issues new shares.

Performance Stock Options

The Company grants performance stock options under the Incentive Plan. These awards are non-qualified stock options with exercise prices equal to the closing price of an AGL common share on the applicable date of grant. These awards vest 35%, 50% or 100%, if the price of AGL's common shares using the highest 40-day average share price reaches certain hurdles. If the share price is between the specified levels, the vesting level will be interpolated accordingly. These awards expire seven years from the date of grant.

Performance Stock Options



	Options for Common Shares		Weighted Average Exercise Price		Number of Exercisable Options
Balance as of December 31, 2017	190,901		$	17.80	190,901
Options granted	—		—
Options exercised	(163,349	)	17.55
Options forfeited/expired	—		—
Balance as of December 31, 2018	27,552		$	19.24	27,552

As of December 31, 2018, the aggregate intrinsic value and weighted average remaining contractual term of performance stock options outstanding were $0.5 million and 1.1 years, respectively. As of December 31, 2018, the aggregate intrinsic value and weighted average remaining contractual term of exercisable performance stock options were $0.5 million and 1.1 years, respectively.

No options were granted in 2018, 2017 and 2016. As of December 31, 2018, there were no unexpensed outstanding nonvested performance stock options.

The total intrinsic value of performance stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $3.8 million, $0.7 million and $0.04 million, respectively. During the years ended December 31, 2018, 2017 and 2016, $2.7 million, $0.2 million and $0.1 million, respectively, was received from the exercise of performance stock options. In order to satisfy stock option exercises, the Company issues new shares.

The tax benefit from time vested and performance stock options exercised during 2018 was $1.5 million

Restricted Stock Awards

Restricted stock awards are valued based on the closing price of the underlying shares at the date of grant. Restricted stock awards to employees generally vest in equal annual installments over a four-year period and restricted stock awards to outside directors vest in full in one year. Restricted stock awards to employees are amortized on a straight-line basis over the requisite service periods of the awards, and restricted stock awards to outside directors are amortized over one year, which are generally the vesting periods, with the exception of retirement‑eligible employees, discussed above.

Restricted Stock Award Activity



Nonvested Shares	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2017	50,225		$	37.93
Granted	51,746		35.56
Vested	(50,225	)	37.93
Forfeited	—		—
Nonvested at December 31, 2018	51,746		$	35.56

As of December 31, 2018 the total unrecognized compensation cost related to outstanding nonvested restricted stock awards was $0.7 million, which the Company expects to recognize over the weighted‑average remaining service period of 0.4 years. The total fair value of shares vested during the years ended December 31, 2018, 2017 and 2016 was $1.9 million, $1.5 million and $1.6 million, respectively.

Restricted Stock Units

Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. Restricted stock units awarded to employees have vesting terms similar to those of the restricted stock awards and are delivered on the vesting date. The Company has granted restricted stock units to directors of the Company.

Restricted Stock Unit Activity



Nonvested Stock Units	Number of Stock Units		Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2017	854,619		$	29.67
Granted	336,690		37.91
Vested	(290,588	)	26.31
Forfeited	(445	)	39.29
Nonvested at December 31, 2018	900,276		$	33.83

As of December 31, 2018, the total unrecognized compensation cost related to outstanding nonvested restricted stock units was $15.2 million, which the Company expects to recognize over the weighted‑average remaining service period of 1.7 years. The total fair value of restricted stock units vested during the years ended December 31, 2018, 2017 and 2016 was $8 million, $7 million and $2 million, respectively.

Performance Restricted Stock Units

The Company has granted performance restricted stock units under the Incentive Plan. These awards vest 35%, 50%, 100%, or 200%, if AGL's common share price during the relevant three-year performance period reaches certain hurdles. If the performance is between the specified levels, the vesting level will be interpolated accordingly.

Performance Restricted Stock Unit Activity



Performance Restricted Stock Units	Number of Performance Share Units		Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2017	606,864		$	33.80
Granted (1)	390,570		45.64
Vested	(400,706	)	14.16
Forfeited	—		—
Nonvested at December 31, 2018 (2)	596,728		$	39.42

____________________


(1)	Includes 200,353 performance restricted stock units that were granted prior to 2018 at a weighted average grant date fair value of $14.16, but met performance hurdles and vested in February 2018. The weighted average grant date fair value per share excludes these shares.


(2)	Excludes 226,317 performance restricted stock units that have met performance hurdles and will be eligible for vesting after December 31, 2018.

As of December 31, 2018, the total unrecognized compensation cost related to outstanding nonvested performance share units was $9.9 million, which the Company expects to recognize over the weighted‑average remaining service period of 1.7 years. The total value of performance restricted stock units vested during the years ended December 31, 2018, 2017 and 2016 was based on grant date fair value and was $6 million, $8 million and $2.1 million, respectively.

The Company uses a Monte Carlo model to value its performance restricted stock units.

Monte Carlo Pricing

Weighted Average Assumptions



	2018			2017			2016
Dividend yield	1.68		%	1.37		%	2.12		%
Expected volatility	27.65		%	25.19		%	30.84		%
Risk free interest rate	2.43		%	1.48		%	0.90		%
Weighted average grant date fair value	$	45.64		$	53.74		$	25.62

The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The expected volatility is estimated at the date of grant based on an average of the 3-year historical share price volatility and implied volatilities of certain at-the-money actively traded call options in the Company. The risk-free interest rate is the implied 3-year yield currently available on U.S. Treasury zero-coupon issues at the date of grant. The expected life is based on the 18-month term of the performance period.

Employee Stock Purchase Plan

The Company established the AGL Employee Stock Purchase Plan (Stock Purchase Plan) in accordance with Internal Revenue Code Section 423, and participation is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10% of the participant's compensation or, if less, shares having a value of $25,000. Participants may purchase shares at a purchase price equal to 85% of the lesser of the fair market value of the stock on the first day or the last day of the subscription period. The Company has reserved for issuance and purchases under the Stock Purchase Plan 600,000 Assured Guaranty Ltd. common shares.

The fair value of each award under the Stock Purchase Plan is estimated at the beginning of each offering period using the Black‑Scholes option‑pricing model and the following assumptions: a) the expected dividend yield is based on the current expected annual dividend and share price on the grant date; b) the expected volatility is estimated at the date of grant based on the historical share price volatility, calculated on a daily basis; c) the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; and d) the expected life is based on the term of the offering period.

Stock Purchase Plan



	Year Ended December 31,
	2018		2017		2016
	(dollars in millions)
Proceeds from purchase of shares by employees	$	1.2	$	1.0	$	0.9
Number of shares issued by the Company	39,532		33,666		39,055
Recorded in share-based compensation, net of deferral	$	0.3	$	0.3	$	0.2

Share‑Based Compensation Expense

The following table presents stock based compensation costs and the amount of such costs that are deferred as policy acquisition costs, pre-tax. Amortization of previously deferred stock compensation costs is not shown in the table below.

Share‑Based Compensation Expense Summary



	Year Ended December 31,
	2018		2017		2016
	(in millions)
Share‑based compensation expense	$	19	$	16	$	13
Share‑based compensation capitalized as DAC	0.8		0.6		0.4
Income tax benefit	3		2		3

Defined Contribution Plan

The Company maintains a savings incentive plan, which is qualified under Section 401(a) of the Internal Revenue Code for U.S. employees. The savings incentive plan is available to eligible full-time employees upon hire. Eligible participants could contribute a percentage of their salary subject to a maximum of $18,500 for 2018. Contributions are matched by the Company at a rate of 100% up to 6% of participant's compensation, subject to IRS limitations. Any amounts over the IRS limits are contributed to and matched by the Company into a nonqualified supplemental executive retirement plan for employees eligible to participate in such nonqualified plan. The Company also makes a core contribution of 6% of the participant's compensation to the qualified plan, subject to IRS limitations, and the nonqualified supplemental executive retirement plan for eligible employees, regardless of whether the employee contributes to the plan(s). Employees become fully vested in Company contributions after one year of service, as defined in the plan. Plan eligibility is immediate upon hire. The Company also maintains similar non-qualified plans for non-U.S. employees.

The Company recognized defined contribution expenses of $12 million, $11 million and $11 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Cash-Based Compensation Plans

The Company’s executive officers are eligible to receive compensation under a non-equity incentive plan. For an applicable performance year, the Compensation Committee establishes target financial performance measures and non-financial objectives for the executive officers. Most employees other than executive officers are eligible to receive discretionary bonuses.