8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)—April 8, 2022

ASSURED GUARANTY LTD.

(Exact name of registrant as specified in its charter)

Bermuda	001-32141	98-0429991
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

30 Woodbourne Avenue

Hamilton HM 08 Bermuda

(Address of principal executive offices)

Registrant’s telephone number, including area code: (441) 279-5700

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

☐    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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 share	AGO	New York Stock Exchange
Assured Guaranty US Holdings Inc. 5.000% Senior Notes due 2024 (and the related guarantee of Registrant)		AGO 24	New York Stock Exchange
Assured Guaranty US Holdings Inc. 3.150% Senior Notes due 2031 (and the related guarantee of Registrant)		AGO/31	New York Stock Exchange
Assured Guaranty US Holdings Inc. 3.600% Senior Notes due 2051 (and the related guarantee of Registrant)		AGO/51	New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

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. ☐

Item 7.01	Regulation FD Disclosure   On April 8, 2022, Assured Guaranty Ltd. made available in the Investor Information section of its website the following materials, which can be obtained from such website at the links provided below:
	•the Assured Guaranty Municipal Corp. December 31, 2021 Financial Supplement (http://agltd.com/investor-information/by-company/agm)
	•the Assured Guaranty Corp. December 31, 2021 Financial Supplement (http://agltd.com/investor-information/by-company/agc)
	•its Fixed Income Investor Presentation for the period ended December 31, 2021 (http://assuredguaranty.com/investor-information/by-company/assured-guaranty-ltd/presentations-webcasts)
Item 8.01	Other Events Assured Guaranty Ltd. is filing this Current Report on Form 8-K to supplement its Annual Report on Form 10-K for the period ended December 31, 2021 with the Assured Guaranty Corp. December 31, 2021 Consolidated Financial Statements, which are attached as Exhibit 99.1 and incorporated by reference herein.
Item 9.01	Financial Statements and Exhibits. (d) Exhibits
Exhibit Number	Description
23.1	Accountant's Consent
99.1	Assured Guaranty Corp. December 31, 2021 Consolidated Financial Statements (filed)
104.1	Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document

2

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 hereunto duly authorized.

Assured Guaranty Ltd.
By:	/s/ ROBERT A. BAILENSON
	Name: Robert A. Bailenson Title: Chief Financial Officer

DATE: April 8, 2022

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-238919) and Form S-8 (Nos. 333-232235, 333-198248, 333-189703, 333-178625, 333-160008, 333-159325, 333-159324, 333-122326, and 333-115893) of Assured Guaranty Ltd. of our report dated April 8, 2022 relating to the financial statements of Assured Guaranty Corp., which appears in Exhibit 99.1 to the Current Report on Form 8-K of Assured Guaranty Ltd. dated April 8, 2022.

/s/ PricewaterhouseCoopers LLP

New York, New York

April 8, 2022

EX-99.1

Exhibit 99.1

Assured Guaranty Corp.

Consolidated Financial Statements

December 31, 2021, 2020 and 2019

Assured Guaranty Corp.

Index to Consolidated Financial Statements

December 31, 2021, 2020 and 2019

	Page(s)
Report of Independent Auditors	1
Consolidated Balance Sheets as of December 31, 2021 and 2020	2
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019	3
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019	4
Consolidated Statements of Shareholder’s Equity for the years ended December 31, 2021, 2020 and 2019	5
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019	6
Notes to Consolidated Financial Statements	8

Report of Independent Auditors

To the Board of Directors of Assured Guaranty Corp.

Opinion

We have audited the accompanying consolidated financial statements of Assured Guaranty Corp. and its subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income (loss), of shareholder’s equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (US GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are available to be issued.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with US GAAS, we:

•Exercise professional judgment and maintain professional skepticism throughout the audit.

•Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, no such opinion is expressed.

•Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.

•Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

/s/ PricewaterhouseCoopers LLP

New York, New York

April 8, 2022

1

Assured Guaranty Corp.

Consolidated Balance Sheets

(dollars in thousands except share data)

	As of December 31,
	2021		2020
Assets
Investments:
Fixed-maturity securities, available-for-sale, at fair value, net of allowance for credit loss of $24,081 and $17,707 (amortized cost of $2,254,766 and $2,172,529)	$	2,397,328	$	2,368,822
Short-term investments, at fair value	231,374		65,609
Equity method investments	225,038		414,292
Other invested assets (includes $1,166 and $1,409, at fair value)	1,166		1,415
Total investments	2,854,906		2,850,138
Cash	55,603		56,103
Loan receivable from parent	87,500		87,500
Premiums receivable, net of commissions payable	302,427		269,756
Ceded unearned premium reserve	193,144		200,219
Reinsurance recoverable on unpaid losses	150,424		165,318
Salvage and subrogation recoverable	367,709		420,894
Financial guaranty variable interest entities’ assets, at fair value	30,586		38,811
Other assets (includes $42,156 and $46,994, at fair value)	181,697		154,261
Total assets	$	4,223,996	$	4,243,000
Liabilities
Unearned premium reserve	$	795,436	$	796,939
Loss and loss adjustment expense reserve	464,021		528,006
Reinsurance balances payable, net	134,059		139,240
Note payable to affiliate	300,000		300,000
Credit derivative liabilities, at fair value	153,799		97,282
Financial guaranty variable interest entities’ liabilities, at fair value (with recourse of $26,144 and $36,775, without recourse of $2,351 and $1,254)	28,495		38,029
Other liabilities	110,846		78,496
Total liabilities	1,986,656		1,977,992
Commitments and contingencies (Note 14)
Shareholder’s equity
Preferred stock ($1,000 par value, 200,004 shares authorized; no shares issued or outstanding)	—		—
Common stock (493,339 shares authorized, 14,173 shares issued and outstanding, with par value of $1,058.38)	15,000		15,000
Additional paid-in capital	742,015		742,015
Retained earnings	1,341,061		1,318,989
Accumulated other comprehensive income, net of tax of $25,313 and $35,233	139,264		189,004
Total shareholder’s equity	2,237,340		2,265,008
Total liabilities and shareholder’s equity	$	4,223,996	$	4,243,000

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

2

Assured Guaranty Corp.

Consolidated Statements of Operations

(in thousands)

	Year Ended December 31,
	2021		2020		2019
Revenues
Net earned premiums	$	85,662	$	121,166	$	125,146
Net investment income	90,950		97,590		134,833
Net realized investment gains (losses)	(5,371)		8,877		8,428
Fair value gains (losses) on credit derivatives	(52,047)		75,498		(7,431)
Fair value gains (losses) on committed capital securities	(15,104)		222		(9,998)
Fair value gains (losses) on financial guaranty variable interest entities	4,257		1		10,039
Commutation gains (losses)	7,187		—		—
Other income (loss)	9,960		10,470		11,960
Total revenues	125,494		313,824		272,977
Expenses
Loss and loss adjustment expenses (benefit)	(59,326)		137,976		44,445
Interest expense on note payable to affiliate	10,500		10,500		10,500
Employee compensation and benefit expenses	35,757		35,900		37,026
Other expenses	27,140		24,184		27,418
Total expenses	14,071		208,560		119,389
Income (loss) before income taxesand equity in earnings of investees	111,423		105,264		153,588
Equity in earnings of investees	30,062		15,963		692
Income (loss) before income taxes	141,485		121,227		154,280
Provision (benefit) for income taxes
Current	(2,664)		(3,268)		(8,835)
Deferred	24,260		18,340		28,039
Provision (benefit) for income taxes	21,596		15,072		19,204
Equity in after-tax earnings (loss) of investee	(3,717)		14,178		18,396
Net income (loss)	$	116,172	$	120,333	$	153,472

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

3

Assured Guaranty Corp.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Year Ended December 31,
	2021		2020		2019
Net income (loss)	$	116,172	$	120,333	$	153,472
Change in net unrealized gains (losses) on:
Investments with no credit impairment, net of tax provision (benefit) of $(9,786), $7,842 and $17,832	(49,237)		33,442		71,921
Investments with credit impairment, net of tax provision (benefit) of $(159), $(249) and $(14,862)	(599)		(937)		(55,910)
Change in net unrealized gains (losses) on investments	(49,836)		32,505		16,011
Change in instrument-specific credit risk on financial guaranty variable interest entities' liabilities with recourse, net of tax	96		853		1,393
Other comprehensive income (loss)	(49,740)		33,358		17,404
Comprehensive income (loss)	$	66,432	$	153,691	$	170,876

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

4

Assured Guaranty Corp.

Consolidated Statements of Shareholder’s Equity

Years Ended December 31, 2021, 2020 and 2019

(in thousands)

	Assured Guaranty Corp. Common Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholder’s Equity
Balance at December 31, 2018	16,393	$	15,000	$	841,997	$	1,333,884	$	138,242	$	2,329,123
Net income	—	—		—		153,472		—		153,472
Dividends	—	—		—		(122,700)		—		(122,700)
Common stock repurchases (see Note 12)	(2,220)	—		(99,982)		—		—		(99,982)
Other comprehensive income	—	—		—		—		17,404		17,404
Balance at December 31, 2019	14,173	15,000		742,015		1,364,656		155,646		2,277,317
Net income	—	—		—		120,333		—		120,333
Dividends	—	—		—		(166,000)		—		(166,000)
Other comprehensive income	—	—		—		—		33,358		33,358
Balance at December 31, 2020	14,173	15,000		742,015		1,318,989		189,004		2,265,008
Net income	—	—		—		116,172		—		116,172
Dividends	—	—		—		(94,100)		—		(94,100)
Other comprehensive loss	—	—		—		—		(49,740)		(49,740)
Balance at December 31, 2021	14,173	$	15,000	$	742,015	$	1,341,061	$	139,264	$	2,237,340

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

5

Assured Guaranty Corp.

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2021		2020		2019
Cash flows from operating activities:
Net income (loss)	$	116,172	$	120,333	$	153,472
Adjustments to reconcile net income to net cash flows provided by operating activities:
Net amortization of premium (discount) on investments	(10,739)		(15,063)		(38,902)
Provision (benefit) for deferred income taxes	24,260		18,340		28,039
Net realized investment losses (gains)	5,371		(8,877)		(8,428)
Fair value losses (gains) on committed capital securities	15,104		(222)		9,998
Equity in earnings of investees	(26,345)		(30,141)		(19,088)
Change in premiums receivable, net of premiums and commissions payable	(15,362)		(13,646)		(29,159)
Change in ceded unearned premium reserve	(17,347)		18,588		2,084
Change in unearned premium reserve	(1,503)		(106,527)		(78,337)
Change in loss and loss adjustment expense reserve, net	(74,662)		(30,814)		(6,812)
Change in deferred ceding commissions, net	1,289		(413)		13,912
Change in credit derivative assets and liabilities, net	46,251		(77,061)		(476)
Change in financial guaranty variable interest entities’ assets and liabilities, net	(2,711)		677		(9,328)
Dividends received from equity method investments	457		5,679		31,017
Other	37,399		11,446		(5,953)
Net cash flows provided by (used in) operating activities	$	97,634	$	(107,701)	$	42,039
Cash flows from investing activities:
Fixed-maturity securities:
Purchases	$	(184,066)	$	(223,253)	$	(284,340)
Sales	59,216		253,100		404,595
Maturities and paydowns	220,375		223,544		285,611
Short-term investments with original maturities of over three months:
Purchases	—		—		(10,614)
Sales	—		2,000		—
Maturities and paydowns	—		2,750		11,751
Net sales (purchases) of short-term investments with original maturities of less than three months	(165,766)		17,196		37,798
Net proceeds from paydowns on financial guaranty variable interest entities’ assets	13,348		11,153		66,854
Return of capital from and sales of equity method investments	66,055		7,732		10,248
Investment in AG Asset Strategies LLC	—		—		(175,000)
Loan made to parent	—		—		(87,500)
Other	(1,240)		(1,238)		3,716
Net cash flows provided by (used in) investing activities	$	7,922	$	292,984	$	263,119

(continued)

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

6

Assured Guaranty Corp.

Consolidated Statements of Cash Flows, Continued

(in thousands)

	Year Ended December 31,
	2021		2020		2019
Cash flows from financing activities:
Dividends paid	$	(94,100)	$	(166,000)	$	(122,700)
Net paydowns of financial guaranty variable interest entities’ liabilities	(11,825)		(10,233)		(64,779)
Repurchases of common stock	—		—		(99,982)
Net cash flows provided by (used in) financing activities	(105,925)		(176,233)		(287,461)
Effect of foreign exchange rate changes	(99)		17		(48)
Increase (decrease) in cash and restricted cash	(468)		9,067		17,649
Cash and restricted cash at beginning of period	57,502		48,435		30,786
Cash and restricted cash at end of period	$	57,034	$	57,502	$	48,435
Supplemental cash flow information
Income taxes paid (received)	$	(3,669)	$	(1,178)	$	(1,237)
Interest paid on note payable to affiliate	10,500		10,500		10,500
Supplemental disclosure of non-cash investing activities:
MAC Transaction (Note 1):
Fixed-maturity securities received from affiliate in consideration of the reassumption of remaining cessions to Municipal Assurance Corp. and the distribution of Municipal Assurance Corp.’s earned surplus	$	(166,042)	$	—	$	—
Purchases of fixed-maturity securities	—		—		(5,538)
	As of December 31,
	2021		2020		2019
Reconciliation of cash and restricted cash to the consolidated balance sheets:
Cash	$	55,603	$	56,103	$	48,407
Restricted cash (included in other assets)	1,431		1,399		28
Cash and restricted cash at the end of period	$	57,034	$	57,502	$	48,435

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

7

Assured Guaranty Corp.

Notes to Consolidated Financial Statements

1.    Business and Basis of Presentation

Business

Assured Guaranty Corp. (AGC and, together with its subsidiaries, the Company), a Maryland domiciled insurance company, is an indirect and wholly-owned subsidiary of Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty). AGL is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (U.S.) and international public finance (including infrastructure) and structured finance markets, as well as asset management services.

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 Australia and Western Europe.

Basis of Presentation

The 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. Certain prior year balances have been reclassified to conform to the current year’s presentation.

The consolidated financial statements include the accounts of AGC, its subsidiaries, and its consolidated financial guaranty VIEs (FG VIEs). Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

    The Company’s most significant interest in an unconsolidated entity as of December 31, 2021 was a 35% ownership interest in AG Asset Strategies LLC (AGAS). AGAS is an investment subsidiary that invests in funds (AssuredIM Funds) managed by its affiliate, Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM).

Prior to April 1, 2021, the Company had a 39.3% ownership interest in Municipal Assurance Holdings Inc. (MAC Holdings), incorporated in Delaware. AGC’s affiliate, Assured Guaranty Municipal Corp. (AGM), owned the remaining 60.7% of MAC Holdings. MAC Holdings owned 100% of Municipal Assurance Corp. (MAC), a New York domiciled insurance company.

On February 24, 2021, Assured Guaranty received the last regulatory approval required to execute a multi-step transaction to merge MAC with and into AGM, with AGM as the surviving company. The steps leading up to the merger of MAC with and into AGM, with AGM as the surviving company (the MAC Transaction), were effective April 1, 2021, and included (i) the reassumption by AGM and AGC of their respective remaining cessions to MAC, (ii) distributing MAC’s earned surplus to AGM and AGC in accordance with their respective 60.7% and 39.3% direct ownership interests in MAC Holdings, and (iii) AGC’s sale to AGM of its 39.3% interest in MAC Holdings. The Company recognized the effects of the multi-step process in the second quarter of 2021, based on outstanding balances on April 1, 2021.

The table below presents the effects of the MAC Transaction.

8

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Effects of the MAC Transaction

Year Ended December 31, 2021

	Increase (Decrease)
	(in thousands)
Fixed-maturity securities	$	166,042
Equity method investments - MAC Holdings	(216,451)
Cash	66,778
Ceded unearned premium reserve	(24,422)
Other assets/liabilities, net	(2,105)
Net income	$	(2,100)
Accumulated other comprehensive income	(8,058)
Total shareholder’s equity	$	(10,158)
Net par outstanding	$	2,128,089

Significant Accounting Policies

    The Company revalues assets, liabilities, revenue and expenses denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates. Gains and losses relating to translating transactions in foreign denominations are reported in the consolidated statements of operations.

AGC participates in AGL's long term incentive plans. AGL follows the fair value recognition provisions for share based compensation expense. The Company is allocated its proportionate share of all compensation expense based on time studies conducted annually, in accordance with the Amended and Restated Service Agreement (the Group Service Agreement). See Note 13, Related Party Transactions for additional information.

Other accounting policies are included in the following notes.

Accounting Policies

Note Name	Note Number
Expected loss to be paid (recovered)	Note 3
Contracts accounted for as insurance	Note 4
Contracts accounted for as credit derivatives	Note 5
Reinsurance	Note 6
Investments and cash	Note 7
Variable interest entities	Note 8
Fair value measurement	Note 9
Note payable to affiliate and credit facilities	Note 10
Income taxes	Note 11
Commitments and contingencies	Note 14
Shareholder’s equity	Note 15

Recent Accounting Standards Adopted

Simplification of the Accounting for Income Taxes

    In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses and annual effective tax rate calculations. The ASU was effective for interim and annual periods beginning after December 15, 2020. This ASU did not have an impact on the Company’s consolidated financial statements.

9

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Reference Rate Reform

    In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU only apply to contracts that reference the London Interbank Offered Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform. This ASU became effective upon issuance and may be applied prospectively for contract modifications that occur from March 12, 2020 through December 31, 2022 (the Reference Rate Transition Period).

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies the scope of relief related to ASU 2020-04. This ASU became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively for contract modifications made on or before December 31, 2022.

The Company adopted the optional relief afforded by these ASUs in the third quarter of 2021 on a prospective basis, and the guidance will be followed until the optional relief terminates on December 31, 2022. The Company has identified insurance contracts, derivatives and other financial instruments that are directly or indirectly influenced by LIBOR, and will be applying the accounting relief as relevant contract modifications are made during the Reference Rate Transition Period. There was no impact to the Company’s consolidated financial statements upon the initial adoption of these ASUs.

2.    Outstanding Exposure

    The Company sells credit protection primarily in financial guaranty insurance form. Until 2009, the Company also sold credit protection by issuing policies that guaranteed payment obligations under credit derivatives, primarily 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 has not entered into any new CDS in order to sell credit protection in the U.S. since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and Consumer Protection Act also contributed to the Company not entering into such new CDS in the U.S. since 2009. The Company has, however, acquired or reinsured portfolios since 2009 that include financial guaranty contracts in credit derivative form.

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, 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, typically 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 territorial 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, Variable Interest Entities. 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.

10

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Significant Risk Management Activities

    The Portfolio Risk Management Committee of the Company’s indirect parent, AGL, which includes members of Assured Guaranty’s senior management and senior risk and surveillance officers, is responsible for enterprise risk management for Assured Guaranty and focuses on measuring and managing insurance credit, market and liquidity risk for Assured Guaranty. This committee establishes Assured Guaranty-wide credit policy for Assured Guaranty’s direct and assumed insurance business. It implements specific insurance underwriting procedures and limits for Assured Guaranty and allocates underwriting capacity among AGL’s insurance subsidiaries, including the Company. All insurance transactions in new asset classes or new jurisdictions must be approved by this committee.

The Company’s risk management committee conducts an in-depth review of the Company’s insured portfolio, focusing on varying portions of the portfolio at each meeting. It reviews and may revise internal ratings assigned to the insured transactions and review sector reports, monthly product line surveillance reports and compliance reports.

All transactions in the insured portfolio are assigned internal credit ratings by the relevant underwriting committee at inception, which credit ratings are updated by the relevant risk management committee based on changes in transaction credit quality. As part of the surveillance process, the Company monitors trends and changes in transaction credit quality and recommends such remedial actions as may be necessary or appropriate. The Company also develops strategies to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage the Company’s litigation proceedings.

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 3, Expected Loss to be Paid (Recovered), for additional information. 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 generally uses the tax-equivalent yield of its 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.

11

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

•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.

Impact of COVID-19 Pandemic

    The coronavirus disease known as COVID-19 was declared a pandemic by the World Health Organization in early 2020 and it (including its variants) continues to spread throughout the world. Several vaccines and therapeutics have been developed and approved by governments, and distribution of vaccines and therapeutics is proceeding unevenly across the globe. The emergence of COVID-19 and reactions to it, including various closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. While the COVID-19 pandemic has been impacting the global economy and the Company for almost two years, its ultimate size, depth, course and duration, and the effectiveness, acceptance and distribution of vaccines and therapeutics for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Consequently, and due to the nature of the Company’s business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time. For information about how the COVID-19 pandemic has impacted the Company’s loss projections, see Note 3, Expected Loss to be Paid (Recovered).

From shortly after the pandemic reached the U.S. through early 2021 the Company’s surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn. Given significant federal funding in 2021 and the performance it observed, the Company’s surveillance department has reduced these supplemental procedures, but is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments. The Company’s internal ratings and loss projections reflect its supplemental COVID-19 surveillance activity. Through April 6, 2022, the Company has paid less than $0.3 million on an insurance claim it believes is due at least in part to credit stress arising specifically from COVID-19. The Company currently projects nearly full reimbursement of this claim.

Components of Outstanding 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 consumer price index inflator to the reporting date as well as, in the case of accreting (zero-coupon) obligations, accretion to the reporting date. Foreign denominated net 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 includes such amounts in the investment portfolio, because the Company manages such securities as investments and not insurance exposure. As of December 31, 2021 and December 31, 2020, the Company excluded from net par outstanding $508.8 million and $545.2 million, respectively, 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.

12

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

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.    

Financial Guaranty Portfolio

Debt Service and Par Outstanding

	As of December 31, 2021				As of December 31, 2020
	Gross		Net		Gross		Net
	(in thousands)
Debt Service Outstanding
Public finance	$	38,419,487	$	29,048,428	$	39,463,781	$	25,415,590
Structured finance	6,595,874		3,754,171		6,500,863		4,050,527
Total financial guaranty	$	45,015,361	$	32,802,599	$	45,964,644	$	29,466,117
Par Outstanding
Public finance	$	23,559,146	$	17,841,786	$	24,215,419	$	15,738,698
Structured finance	6,326,533		3,523,885		6,136,131		3,744,691
Total financial guaranty	$	29,885,679	$	21,365,671	$	30,351,550	$	19,483,389

In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $884.4 million of structured finance direct gross par as of December 31, 2021. These commitments are contingent on the satisfaction of all conditions set forth in them 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.

13

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Financial Guaranty Portfolio by Internal Rating

As of December 31, 2021

	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 thousands)
AAA	$	8,866	0.2	%	$	757,528	19.7	%	$	382,976	12.8	%	$	291,126	55.4	%	$	1,440,496	6.7	%
AA	3,041,589		21.7		167,850		4.4		1,388,140		46.3		30,278		5.8		4,627,857		21.7
A	5,365,540		38.3		294,139		7.6		460,999		15.4		154,469		29.4		6,275,147		29.4
BBB	4,314,261		30.8		2,557,628		66.4		384,086		12.8		50,001		9.4		7,305,976		34.2
BIG	1,261,899		9.0		72,486		1.9		381,810		12.7		—		—		1,716,195		8.0
Total net par outstanding	$	13,992,155	100.0	%	$	3,849,631	100.0	%	$	2,998,011	100.0	%	$	525,874	100.0	%	$	21,365,671	100.0	%

Financial Guaranty Portfolio by Internal Rating

As of December 31, 2020

	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 thousands)
AAA	$	16,649	0.2	%	$	823,696	18.7	%	$	538,754	15.6	%	$	50,510	17.7	%	$	1,429,609	7.3	%
AA	2,599,468		22.9		200,896		4.6		1,429,242		41.3		8,816		3.1		4,238,422		21.8
A	3,718,789		32.8		407,703		9.2		609,996		17.6		136,699		47.9		4,873,187		25.0
BBB	3,672,693		32.4		2,859,146		64.8		388,510		11.2		89,440		31.3		7,009,789		36.0
BIG	1,320,187		11.7		119,471		2.7		492,724		14.3		—		—		1,932,382		9.9
Total net par outstanding	$	11,327,786	100.0	%	$	4,410,912	100.0	%	$	3,459,226	100.0	%	$	285,465	100.0	%	$	19,483,389	100.0	%

14

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Financial Guaranty Portfolio

Par Outstanding by Sector

	Gross Par Outstanding				Net Par Outstanding
	As of December 31,				As of December 31,
Sector	2021		2020		2021		2020
	(in thousands)
Public finance:
U.S. public finance:
General obligation	$	4,223,248	$	4,306,344	$	3,402,588	$	1,927,620
Tax backed	3,737,547		3,445,960		3,145,417		2,670,755
Transportation	3,279,892		3,111,626		2,634,675		2,283,159
Infrastructure finance	2,135,544		2,106,288		1,830,544		1,795,801
Municipal utilities	1,520,246		1,787,217		1,205,084		935,471
Higher education	429,667		407,998		355,706		210,277
Healthcare	389,221		453,208		326,718		357,714
Investor-owned utilities	410,833		426,929		321,233		336,587
Renewable energy	173,015		176,120		123,706		125,926
Housing revenue	110,635		130,112		89,176		103,599
Other public finance	763,964		803,690		557,308		580,877
Total U.S. public finance	17,173,812		17,155,492		13,992,155		11,327,786
Non-U.S. public finance:
Regulated utilities	3,324,278		3,296,523		1,733,458		1,730,724
Infrastructure finance	1,375,997		1,674,441		1,130,079		1,404,850
Pooled infrastructure	1,371,825		1,448,659		685,913		724,330
Sovereign and sub-sovereign	238,873		289,167		238,873		289,167
Renewable energy	74,361		351,137		61,308		261,841
Total non-U.S. public finance	6,385,334		7,059,927		3,849,631		4,410,912
Total public finance	23,559,146		24,215,419		17,841,786		15,738,698
Structured finance:
U.S. structured finance:
Life insurance transactions	3,345,793		2,456,759		950,535		716,106
RMBS	770,709		1,079,208		676,905		928,067
Pooled corporate obligations	528,349		1,192,579		486,320		947,947
Consumer receivables	400,244		520,685		330,123		428,374
Other structured finance	687,387		569,479		554,128		438,732
Total U.S. structured finance	5,732,482		5,818,710		2,998,011		3,459,226
Non-U.S. structured finance:
Pooled corporate obligations	327,711		334		278,554		251
RMBS	185,996		194,266		183,393		190,945
Other structured finance	80,344		122,821		63,927		94,269
Total non-U.S. structured finance	594,051		317,421		525,874		285,465
Total structured finance	6,326,533		6,136,131		3,523,885		3,744,691
Total par outstanding	$	29,885,679	$	30,351,550	$	21,365,671	$	19,483,389

    Actual maturities of insured obligations could differ from contractual maturities because borrowers have the right to call or prepay certain obligations. The expected maturities of structured finance obligations are, in general, considerably shorter than the contractual maturities for such obligations.

15

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Expected Amortization of Net Par Outstanding

As of December 31, 2021

	Public Finance		Structured Finance		Total
	(in thousands)
0 to 5 years	$	3,735,109	$	1,436,350	$	5,171,459
5 to 10 years	3,767,323		927,998		4,695,321
10 to 15 years	3,863,312		488,501		4,351,813
15 to 20 years	3,250,618		428,491		3,679,109
20 years and above	3,225,424		242,545		3,467,969
Total net par outstanding	$	17,841,786	$	3,523,885	$	21,365,671

Financial Guaranty Portfolio

Components of BIG Net Par Outstanding

As of December 31, 2021

	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in thousands)
Public finance:
U.S. public finance	$	162,425	$	52,985	$	1,046,489	$	1,261,899	$	13,992,155
Non-U.S. public finance	72,325		—		161		72,486		3,849,631
Public finance	234,750		52,985		1,046,650		1,334,385		17,841,786
Structured finance:
U.S. RMBS	21,987		18,582		326,964		367,533		676,905
Other structured finance	1,096		1,635		11,546		14,277		2,846,980
Structured finance	23,083		20,217		338,510		381,810		3,523,885
Total	$	257,833	$	73,202	$	1,385,160	$	1,716,195	$	21,365,671

Financial Guaranty Portfolio

Components of BIG Net Par Outstanding

As of December 31, 2020

	BIG Net Par Outstanding								Net Par
	BIG 1		BIG 2		BIG 3		Total BIG		Outstanding
					(in thousands)
Public finance:
U.S. public finance	$	216,644	$	11,083	$	1,092,460	$	1,320,187	$	11,327,786
Non-U.S. public finance	119,290		—		181		119,471		4,410,912
Public finance	335,934		11,083		1,092,641		1,439,658		15,738,698
Structured finance:
U.S. RMBS	78,151		20,368		362,224		460,743		928,067
Other structured finance	18,105		2,190		11,686		31,981		2,816,624
Structured finance	96,256		22,558		373,910		492,724		3,744,691
Total	$	432,190	$	33,641	$	1,466,551	$	1,932,382	$	19,483,389

16

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Financial Guaranty Portfolio

BIG Net Par Outstanding and Number of Risks

As of December 31, 2021

	Net Par Outstanding						Number of Risks (2)
Description	Financial Guaranty Insurance (1)		Credit Derivative		Total		Financial Guaranty Insurance (1)	Credit Derivative	Total
	(dollars in thousands)
BIG:
Category 1	$	246,175	$	11,658	$	257,833	56	2	58
Category 2	69,955		3,247		73,202		12	1	13
Category 3	1,347,016		38,144		1,385,160		102	8	110
Total BIG	$	1,663,146	$	53,049	$	1,716,195	170	11	181

Financial Guaranty Portfolio

BIG Net Par Outstanding and Number of Risks

As of December 31, 2020

	Net Par Outstanding						Number of Risks (2)
Description	Financial Guaranty Insurance (1)		Credit Derivative		Total		Financial Guaranty Insurance (1)	Credit Derivative	Total
	(dollars in thousands)
BIG:
Category 1	$	373,183	$	59,007	$	432,190	65	6	71
Category 2	30,166		3,475		33,641		14	1	15
Category 3	1,427,289		39,262		1,466,551		101	7	108
Total BIG	$	1,830,638	$	101,744	$	1,932,382	180	14	194

 ____________________

(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.

The Company seeks to maintain a diversified portfolio of insured obligations designed to spread its risk across a number of geographic areas.

17

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Geographic Distribution of Net Par Outstanding

As of December 31, 2021

	Number of Risks	Net Par Outstanding		Percent of Total Net Par Outstanding
	(dollars in thousands)
U.S.:
U.S. public finance:
California	293	$	4,250,412	19.9	%
Texas	240	1,603,090		7.5
New Jersey	44	1,122,004		5.3
Puerto Rico	16	1,063,717		5.0
Illinois	94	645,887		3.0
Florida	53	621,348		2.9
New York	117	538,817		2.5
Pennsylvania	109	446,388		2.1
Virginia	13	434,311		2.0
District of Columbia	1	412,588		1.9
Other	509	2,853,593		13.4
Total U.S public finance	1,489	13,992,155		65.5
U.S. structured finance:	312	2,998,011		14.0
Total U.S.	1,801	16,990,166		79.5
Non-U.S.:
United Kingdom	75	3,151,689		14.8
Australia	5	233,398		1.1
France	6	173,647		0.8
Mexico	2	151,202		0.7
Italy	6	135,997		0.6
Other	32	529,572		2.5
Total non-U.S.	126	4,375,505		20.5
Total	1,927	$	21,365,671	100.0	%

Exposure to Puerto Rico

    The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $1.1 billion net par outstanding as of December 31, 2021, all of which was rated BIG. Beginning on January 1, 2016, a number of Puerto Rico exposures defaulted on bond payments, and the Company has now paid claims 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).

    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 (Bankruptcy Code).

The Company negotiated with the FOMB and other stakeholders over approximately five years and entered into support agreements covering $1.0 billion, or 98% of the Company’s insured net par outstanding, of Puerto Rico exposures as of December 31, 2021. All of the Company’s Puerto Rico exposures that were in payment default on December 31, 2021 were covered by support agreements on that date. The plan of adjustment contemplated by one of those support agreements, covering $291.3 million, or 27% of the Company’s insured net par outstanding of Puerto Rico exposures, was consummated on March 15, 2022, while on March 8, 2022, Puerto Rico terminated another of the support agreements, covering $69.5 million of the Company’s insured net par outstanding of Puerto Rico exposures, leaving one support agreement, covering $518.1 million

18

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

of the Company’s insured net par outstanding of Puerto Rico exposures, in effect after the consummation of the support agreement on March 15, 2022. Both economic and political developments, including those related to the COVID-19 pandemic, may impact implementation of the resolution of the Company’s remaining Puerto Rico exposures and the value of the consideration the Company has received or may receive in the future in connection with any such resolutions. 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.

Plan of Adjustment

On January 18, 2022, an order and judgment confirming 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) was entered by the United States District Court of the District of Puerto Rico acting under Title III of PROMESA (the Title III Court). The GO/PBA Plan restructured approximately $35 billion of debt (including the Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) bonds insured by the Company) and other claims against the government of Puerto Rico and certain entities and $50 billion in pension obligations (none of which is insured by the Company) consistent with the terms of the settlement embodied in a revised GO and PBA plan support agreement (PSA) entered into by AGM and AGC on February 22, 2021, with certain other stakeholders, the Commonwealth, and the FOMB (GO/PBA PSA). The GO/PBA Plan was consummated on March 15, 2022 (GO/PBA Effective Date.)

As of December 31, 2021, the Company had $169.9 million of insured net par outstanding of GO bonds and $121.4 million insured net par of PBA bonds covered by the GO/PBA Plan, consisting of direct exposure, second-to-pay exposure, and assumed reinsurance exposure.

	Direct		Second-to-Pay		Assumed		Total
	(in thousands)
GO	$	155,363	$	10,875	$	3,720	$	169,958
PBA	71,369		—		50,000		121,369
Total GO and PBA	$	226,732	$	10,875	$	53,720	$	291,327

On the GO/PBA Effective Date the Company paid claims to its beneficiaries covering all principal and accrued interest for, and extinguishing the Company’s insurance obligations on, all of the $226.7 million in net outstanding par of GO and PBA bonds the Company directly insured except $41.1 million in net outstanding par covered by the second election described in the second paragraph below. In return, under the GO/PBA Plan the Company received (excluding amounts received in connection with the second election described in the second paragraph below):

•$144.0 million in cash, net of outbound reinsurance,

•$130.3 million of new recovery bonds, which represents the face value of current interest bonds and the maturity value of capital appreciation bonds, net of outbound reinsurance ($140.3 million gross of outbound reinsurance), and

•$61.7 million of contingent value instruments (CVI), which represents the original notional value, net of outbound reinsurance ($65.9 million gross of outbound reinsurance).

The Company expects to make additional payments and receive additional amounts in connection with its $53.7 million in net outstanding par of assumed reinsurance and $10.9 million in net outstanding par of second-to-pay exposure.

The CVI is intended to provide creditors with additional returns tied to the outperformance of the Puerto Rico 5.5% Sales and Use Tax receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps. The net financial statement impact of the GO/PBA settlement, which includes the impact of both the claims paid and recoveries received on the GO/PBA Settlement Date and future investment gains and losses on the GO/PBA recovery bonds and CVI, will fluctuate based on changes in fair value of the recovery bonds and CVIs after the GO/PBA Effective Date. AGC will retain the gross amount of recovery bonds and CVIs until they mature or are sold, at which time, AGC will settle with its reinsurers.

In August 2021, the Company exercised certain elections under the GO/PBA Plan that impact the timing of payments under its insurance policies. In accordance with the terms of the GO/PBA Plan, the payment of the principal of all GO bonds and PBA bonds insured by the Company was accelerated against the Commonwealth and became due and payable as of the GO/PBA Effective Date. In accordance with the terms of its insurance policies, the Company elected to pay 100% of the then outstanding principal amount of insured bonds plus accrued interest thereon to the date of payment (Acceleration Price) on the

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

GO/PBA Effective Date to holders of directly insured securities with a net par outstanding of $172.6 million as of December 31, 2021. With respect to the remaining directly insured securities covered by the GO/PBA Plan of approximately $54.1 million net par outstanding as of December 31, 2021, insured bondholders were permitted to elect either: (1) to receive the Acceleration Price on the GO/PBA Effective Date; or (2) to receive custody receipts that represent an interest in the legacy insurance policy and cash, new recovery bonds and CVIs (in aggregate, Plan Consideration) that constitute distributions under the GO/PBA Plan. Insured bondholders made the first election with respect to approximately $13.0 million net par outstanding of these bonds, while insured bondholders made the second election with respect to the remaining $41.1 million net par outstanding of these bonds. For those making the second 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 such amounts after giving effect to the distributions described in the immediately preceding sentence. Copies of the documents governing the terms of the custody receipts are available for review by insured bondholders in connection with the distribution of a supplement to the GO/PBA Plan. Further, 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 the applicable Acceleration Price. Retention by the Company of the right to satisfy its obligations under its insurance policy with respect to the relevant insured bonds by paying the Acceleration Price is authorized by the GO/PBA Plan and the Company’s rights under its related insurance policies and is reflected in the applicable custodial trust documentation.

Support Agreements

In addition to the GO/PBA PSA, the Company has entered into the support agreements described below (Support Agreements):

•HTA/CCDA PSA: A PSA with certain other stakeholders, the Commonwealth, and the FOMB with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA), entered into by AGM and AGC on May 5, 2021.

• PRIFA PSA: A PSA signed on July 27, 2021 by certain other stakeholders, the Commonwealth, and the FOMB with respect to the Puerto Rico Infrastructure Financing Authority (PRIFA) and joined by AGC on July 28, 2021.

•PREPA RSA: A restructuring support agreement with the Puerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and the FOMB with respect to PREPA, entered into by AGM and AGC on May 3, 2019. This agreement was terminated by Puerto Rico on March 8, 2022. The Company is still evaluating the potential impact of the termination of this agreement on the financial statements.

HTA/CCDA PSA. As of December 31, 2021, the Company had $670.4 million of insured net par outstanding that is now covered by the HTA/CCDA PSA: $467.0 million insured net par outstanding of PRHTA (transportation revenue) bonds; $51.1 million insured net par outstanding of PRHTA (highway revenue) bonds; and $152.3 million insured net par outstanding of PRCCDA bonds. The transportation revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls, plus a first lien on taxes on crude oil, unfinished oil and derivative products. The highway revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees and certain tolls. The PRCCDA bonds are secured by certain hotel tax revenues. The FOMB has filed a petition under Title III of PROMESA with respect to PRHTA.

The HTA/CCDA PSA provides for payments to AGC consisting of (i) cash; (ii) in the case of PRHTA, new bonds expected to be backed by toll revenue (Toll Bonds); and (iii) a CVI. Under the HTA/CCDA PSA, bondholders and bond insurers of PRHTA will receive, in the aggregate, $389 million of cash; $1.2 billion par in Toll Bonds; and the CVI. Under the HTA/CCDA PSA, bondholders and bond insurers of PRCCDA receive, in the aggregate, $112 million in cash and the CVI. On January 20, 2022, the United States District Court of the District of Puerto Rico (Federal District Court for Puerto Rico) entered an order under Title VI of PROMESA modifying the PRCCDA debt consistent with the HTA/CCDA PSA (PRCCDA Modification). On March 15, 2022 the PRCCDA Modification was consummated and the Company paid claims to its beneficiaries covering all principal and accrued interest for, and extinguishing the Company’s insurance obligations on, all of its PRCCDA exposures. The Company expects its PRHTA exposure to be resolved under a Title III proceeding requiring court approval of a disclosure statement, voting and a hearing, rather than the simpler Title VI procedure used for its PRCCDA

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

exposure. The HTA/CCDA PSA includes a number of conditions and PRHTA’s plan of adjustment must be approved by the Title III Court, so there can be no assurance that the consensual resolution for PRHTA embodied in the HTA/CCDA PSA will be achieved in its current form, or at all.

On May 27, 2021 the FOMB certified a revised fiscal plan for PRHTA. The revised certified PRHTA fiscal plan will need to be further revised to be consistent with the HTA/CCDA PSA.

PREPA RSA. As of December 31, 2021, the Company had $69.5 million insured net par outstanding of PREPA obligations subject to the PREPA RSA. The PREPA obligations are secured by a lien on the revenues of the electric system. The Company has been making claim payments on these bonds since July 1, 2017. On July 2, 2017, the FOMB commenced proceedings for PREPA under Title III of PROMESA.

    The PREPA RSA contemplated the exchange of PREPA’s existing revenue bonds for new securitization bonds issued by a special purpose corporation and secured by a segregated transition charge assessed on electricity bills. On March 8, 2022, Puerto Rico terminated the PREPA RSA. The Company is still evaluating the potential impact of the termination of this agreement on the financial statements.

On May 27, 2021, the FOMB certified a revised fiscal plan for PREPA.

    PRIFA PSA. As of December 31, 2021, the Company had $15.3 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to PRIFA and its bondholders of a portion of federal excise taxes paid on rum.

The PRIFA PSA provides for payments to AGC consisting of: (i) cash; (ii) CVI; and (iii) a contingent value instrument based on potential outperformance of Puerto Rico’s general fund rum tax collections relative to projections in the 2021 certified fiscal plan (Rum Tax CVI). Under the PRIFA PSA, bondholders and bond insurers of PRIFA receive, in the aggregate, $204 million in cash, the CVI, and the Rum Tax CVI. On January 20, 2022, the Federal District Court for Puerto Rico entered an order under Title VI of PROMESA modifying the PRIFA debt consistent with the PRIFA PSA (PRIFA Modification). On March 15, 2022 the PRIFA Modification was consummated, and the Company paid claims to its beneficiaries covering all principal and accrued interest for, and extinguishing the Company’s insurance obligations on, all of its PRIFA exposures.

Other Puerto Rico Exposures

All debt service payments for the Company’s remaining Puerto Rico exposures have been made in full by the obligors as of the date of this filing. Such exposures comprise:

MFA. As of December 31, 2021, the Company had $15.7 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues.

    U of PR. As of December 31, 2021, the Company had $0.7 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.

    PRASA. As of December 31, 2021, the Company had $0.8 million of insured net par outstanding of PRASA obligations. The Company's insured PRASA obligations are secured by a lien on the gross revenues of the water and sewer system.

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.

Actions That Were Resolved on the GO/PBA Effective Date. As of the GO/PBA Effective Date, the following litigation matters were settled, with all related claims and causes of action against the Company and the other parties being satisfied and discharged:

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

•Declaratory judgment and injunction sought by AGM and AGC against Governor Alejandro García Padilla et al., filed on January 17, 2016 in the United States District Court of the District of Puerto Rico (Federal District Court for Puerto Rico).

•Declaratory judgment sought by AGM and AGC against Puerto Rico’s fiscal plan, filed on May 23, 2018 in the Federal District Court for Puerto Rico.

•Motion for relief from the automatic stay or, in the alternative, for adequate protection against Puerto Rico’s diversion of revenues securing the PRHTA bonds (solely as it relates to the Commonwealth), filed on January 16, 2020 in the Federal District Court for Puerto Rico.

•Motion concerning application of the automatic stay to the revenues securing the PRCCDA bonds, filed January 16, 2020 in the Federal District Court for Puerto Rico.

•Motion concerning application of the automatic stay to the revenues securing the PRIFA rum tax bonds, filed on January 16, 2020 in the Federal District Court for Puerto Rico.

•Declaratory judgment sought by the FOMB to disallow administrative rent claims, filed December 21, 2018 in the Federal District Court for Puerto Rico.

•Declaratory judgment sought by the FOMB that Commonwealth general obligation bonds are not secured by consensual or statutory liens, filed May 2, 2019 in the Federal District Court for Puerto Rico.

•Adversary complaint by the FOMB against AGC and others seeking to disallow claims based on PRIFA bonds insured by AGC and others, filed January 16, 2020 in the Federal District Court for Puerto Rico.

•Adversary complaint by the FOMB against AGC and others seeking to disallow claims based on PRCCDA bonds insured by AGC and others, filed January 16, 2020 in the Federal District Court for Puerto Rico.

•Adversary complaint by the FOMB against AGM, AGC and others seeking to disallow claims in the Commonwealth Title III proceedings based on PRHTA bonds insured by AGM, AGC and others, filed January 16, 2020 in the Federal District Court for Puerto Rico.

Remaining Stayed Proceedings. 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 for 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 for 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 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. On May 3, 2019, AGM and AGC entered into the PREPA RSA, but on March 8, 2022, the Commonwealth and PREPA terminated the PREPA RSA. Given the termination of the PREPA RSA, the Company is considering several options to enforce its rights in respect of insured PREPA bonds, including, among other things, a renewal of the motion to lift the automatic stay and seek the appointment of a receiver.

•On May 20, 2019, the FOMB and the Official Committee of Unsecured Creditors filed an adversary complaint in the Federal District Court for Puerto Rico challenging the validity, enforceability, and extent of security interests in PRHTA revenues. On July 24, 2019, Judge Swain announced a court-imposed stay of a series of adversary proceedings and contested matters, which include this proceeding, through November 30, 2019, with a mandatory mediation element; Judge Swain extended the stay through December 31, 2019, and subsequently extended the stay again pending further order of the court on the understanding that these issues will be resolved in other proceedings.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

•On September 30, 2019, certain 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 lender claims. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Title III Court issued an order to that effect.

•On October 30, 2019, the retirement system for PREPA employees (SREAEE) filed an amended adversary complaint in the Federal District Court for Puerto Rico against the FOMB and other parties, seeking subordination of PREPA bondholder claims to SREAEE claims. The FOMB filed a status report on May 15, 2020 regarding PREPA’s financial condition and its request for approval of the PREPA RSA settlement, in which it requested that it be permitted to file an updated report by July 31, 2020, that all proceedings related to the approval of the PREPA RSA settlement continue to be adjourned, and that the hearing in this adversary proceeding scheduled for June 3, 2020 be adjourned. On May 22, 2020, the Title III Court issued an order to that effect.

•On January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court for 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. Considering the Plan Support Agreement, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

Dismissed Complaint. On June 26, 2021, the GDB Debt Recovery Authority, through its servicer and collateral monitor and as a holder of PRHTA subordinated debt, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and others challenging the resolution of the PRHTA priority issues set forth in the HTA/CCDA PSA. On August 26, 2021, AGM and AGC filed a motion to dismiss the complaint, which was granted on October 29, 2021.

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 Outstanding				Gross Debt Service Outstanding
	As of December 31,				As of December 31,
	2021		2020		2021		2020
	(in thousands)
Exposure to Puerto Rico	$	1,279,236	$	1,340,097	$	1,985,497	$	2,114,897

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Puerto Rico

Net Par Outstanding

	As of December 31,
	2021		2020
	(in thousands)
Puerto Rico Exposures Subject to a Plan or Support Agreement
Commonwealth of Puerto Rico - GO (1)	$	169,958	$	184,835
PBA (1)	121,369		134,094
Total GO/PBA Plan	291,327		318,929
PRHTA (Transportation revenue)	467,024		472,365
PRHTA (Highway revenue)	51,094		62,723
PRCCDA (2)	152,250		152,250
Total HTA/CCDA PSA	670,368		687,338
PRIFA (2)	15,335		15,335
Total Subject to a Plan or Support Agreement	977,030		1,021,602
Other Puerto Rico Exposures
PREPA	69,459		70,858
MFA (3)	15,673		23,074
PRASA and U of PR (3)	1,555		1,843
Total Other Puerto Rico Exposures	86,687		95,775
Total net exposure to Puerto Rico	$	1,063,717	$	1,117,377

____________________

(1)On March 15, 2022, the Modified Eighth Amended Title III Joint Plan of Adjustment, confirmed on January 18, 2022, was consummated, pursuant to which the Company, among other things, fully paid claims on all of its directly insured Puerto Rico GO bonds (other than certain GO bonds whose holders made certain elections), reducing the Company's direct net par exposure to insured Puerto Rico GO bonds by approximately $124.4 million. On the same date and pursuant to the same Plan of Adjustment, the Company fully paid claims on all of its directly insured PBA bonds (other than certain PBA bonds whose holders made certain elections), reducing its direct net exposure by $61.2 million. The Company has yet to receive reports on the impact of the consummation of the GO/PBA Plan on its assumed reinsurance or second-to-pay GO and PBA exposure.

(2)    On March 15, 2022, the Company fully paid claims on all of its insured PRCCDA and PRIFA bonds, eliminating its exposure to insured PRCCDA and PRIFA bonds as of March 15, 2022, pursuant to Title VI orders entered on January 20, 2022.

(3)    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 payments 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. The following table does not reflect the impact of the GO/PBA Plan, the PRCCDA Modification or the PRIFA Modification consummated on March 15, 2022.

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Amortization Schedule of Puerto Rico Net Par Outstanding

and Net Debt Service Outstanding

As of December 31, 2021

	Scheduled Net Par Amortization		Scheduled Net Debt Service Amortization
	(in thousands)
2022 (January 1 - March 31)	$	—	$	26,981
2022 (April 1 - June 30)	—		52
2022 (July 1 - September 30)	34,820		61,801
2022 (October 1 - December 31)	—		52
Subtotal 2022	34,820		88,886
2023	40,087		92,264
2024	16,348		66,486
2025	38,480		87,778
2026	64,950		112,240
2027-2031	254,399		439,475
2032-2036	505,203		616,956
2037-2041	104,430		124,533
2042	5,000		5,250
Total	$	1,063,717	$	1,633,868

Exposure to the U.S. Virgin Islands

As of both December 31, 2021 and December 31, 2020, the Company had $11.2 million insured net par outstanding to the U.S. Virgin Islands and its related authorities (USVI), of which it rated $9.2 million BIG. The BIG USVI net par outstanding consisted of bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system. The COVID-19 pandemic and evolving governmental and private responses to the pandemic have been impacting the USVI economy, especially the tourism sector. The USVI is benefiting from the federal response to the 2017 hurricanes and COVID-19 and has made its debt service payments to date, but is experiencing fiscal pressure.

3.    Expected Loss to be Paid (Recovered)

Accounting Policy

    Expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and loss adjustment expense (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 also net of amounts ceded to reinsurers. The Company’s net expected loss to be paid (recovered) incorporates management’s probability weighted estimates of all possible 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 risk-management activities. Expected loss to be paid (recovered) is important from a liquidity perspective in that it represents the present value of amounts that the Company expects to pay or recover in future periods for all contracts.

Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively evaluate and manage the economics and liquidity of the entire insured portfolio. The Company monitors and 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. This note provides information regarding expected claim payments to be made under all contracts in the insured portfolio.

In circumstances where the Company has 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

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

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 Cash 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 assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts.

The insured portfolio includes policies accounted for under three separate accounting models depending on the characteristics of the contract and the Company's control rights. The three models are: (1) insurance as described in “Financial Guaranty Insurance Losses” in Note 4, Contracts Accounted for as Insurance, (2) derivatives as described in Note 9, Fair Value Measurement and Note 5, Contracts Accounted for as Credit Derivatives, and (3) FG VIE consolidation as described in Note 8, Variable Interest Entities. The Company has paid and expects to pay future losses and/or recover past losses on policies which fall under each of the three accounting models.

Loss Estimation Process

    The Company’s loss reserve committee estimates 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 committee reviews and refreshes its loss projection assumptions, scenarios and the probabilities it assigns to those scenarios based on actual developments during the period and its 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. Such information includes management's view of the potential impact of COVID-19 on its distressed exposures. Management assesses the possible implications of such information on each insured obligation, considering the unique characteristics of each transaction.

    Changes over a reporting period in the Company’s loss estimates for municipal 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 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;

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Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

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.

    Actual losses will ultimately depend on future events or transaction performance and may be influenced by many interrelated 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.

    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 uses cash but reduces projected future losses.

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 of December 31,				Year Ended December 31,
Accounting Model	2021		2020		2021		2020		2019
	(in thousands)
Insurance (see Notes 4 and 6)	$	178,855	$	239,595	$	(111,128)	$	76,517	$	11,614
FG VIEs (see Note 8)	(7,158)		(495)		(7,234)		(2,777)		(5,930)
Credit derivatives (see Note 5)	3,731		(1,572)		12,523		1,123		8,540
Total	$	175,428	$	237,528	$	(105,839)	$	74,863	$	14,224

    The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under all accounting models (insurance, derivative and FG VIE). The Company used risk-free rates for U.S. dollar denominated obligations, that ranged from 0.00% to 1.98% with a weighted average of 0.85% as of December 31, 2021 and 0.00% to 1.72% with a weighted average of 0.55% as of December 31, 2020. Expected losses to be paid for U.S. dollar denominated transactions represented approximately 99.0% and 98.6% of the total as of December 31, 2021 and December 31, 2020, respectively.

Net Expected Loss to be Paid (Recovered)

Roll Forward

	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Net expected loss to be paid (recovered), beginning of period	$	237,528	$	312,071	$	353,005
Economic loss development (benefit) due to:
Accretion of discount	3,747		4,652		8,368
Changes in discount rates	(15,007)		22,290		(1,387)
Changes in timing and assumptions	(94,579)		47,921		7,243
Total economic loss development (benefit)	(105,839)		74,863		14,224
Net (paid) recovered losses	43,739		(149,406)		(55,158)
Net expected loss to be paid (recovered), end of period	$	175,428	$	237,528	$	312,071

27

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Net Expected Loss to be Paid (Recovered)

Roll Forward by Sector

	Year Ended December 31, 2021
Sector	Net Expected Loss to be Paid (Recovered) as of December 31, 2020		Economic  Loss Development (Benefit)		Net (Paid) Recovered Losses(1)		Net Expected Loss to be Paid (Recovered) as of December 31, 2021
	(in thousands)
Public finance:
U.S. public finance	$	199,041	$	(77,357)	$	27,787	$	149,471
Non-U.S. public finance	3,122		(1,419)		(7)		1,696
Public finance	202,163		(78,776)		27,780		151,167
Structured finance:
U.S. RMBS	73,701		(31,220)		22,276		64,757
Other structured finance	(38,336)		4,157		(6,317)		(40,496)
Structured finance	35,365		(27,063)		15,959		24,261
Total	$	237,528	$	(105,839)	$	43,739	$	175,428

	Year Ended December 31, 2020
Sector	Net Expected Loss to be Paid (Recovered) as of December 31, 2019		Economic  Loss Development (Benefit)		Net (Paid) Recovered Losses(1)		Net Expected Loss to be Paid (Recovered) as of December 31, 2020
	(in thousands)
Public finance:
U.S. public finance	$	246,995	$	121,488	$	(169,442)	$	199,041
Non-U.S. public finance	2,625		499		(2)		3,122
Public finance	249,620		121,987		(169,444)		202,163
Structured finance:
U.S. RMBS	90,709		(29,953)		12,945		73,701
Other structured finance	(28,258)		(17,171)		7,093		(38,336)
Structured finance	62,451		(47,124)		20,038		35,365
Total	$	312,071	$	74,863	$	(149,406)	$	237,528

	Year Ended December 31, 2019
Sector	Net Expected Loss to be Paid (Recovered) as of December 31, 2018		Economic  Loss Development (Benefit)		Net (Paid) Recovered Losses(1)		Net Expected Loss to be Paid (Recovered) as of December 31, 2019
	(in thousands)
Public finance:
U.S. public finance	$	313,747	$	75,581	$	(142,333)	$	246,995
Non-U.S. public finance	3,733		(1,107)		(1)		2,625
Public finance	317,480		74,474		(142,334)		249,620
Structured finance:
U.S. RMBS	122,612		(60,352)		28,449		90,709
Other structured finance	(87,087)		102		58,727		(28,258)
Structured finance	35,525		(60,250)		87,176		62,451
Total	$	353,005	$	14,224	$	(55,158)	$	312,071

____________________

(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) LAE paid of $17.2 million, $10.0 million and $14.5 million for the years ended December 31, 2021, 2020 and 2019, respectively; and (ii) expected LAE to be paid of $12.2 million as of December 31, 2021 and $7.9 million as of December 31, 2020.

28

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Selected U.S. Public Finance Transactions

    The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $1.1 billion net par outstanding as of December 31, 2021, all of which was BIG. For additional information regarding the Company’s Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 2, Outstanding Exposure.    

In the fourth quarter of 2021, the Company sold a portion of its salvage and subrogation recoverable asset associated with certain matured Puerto Rico GO and PREPA exposures on which the Company had previously paid claims. This sale resulted in proceeds of $132.8 million, which is included in “net (paid) recovered losses” in the tables above, including $46.5 million net of reinsurance that was settled in January 2022. Also in the fourth quarter of 2021, the Company updated its assumptions for the value of the CVIs and recovery bonds to be received under the GO/PBA Plan and other settlements. During 2021, the Company also incorporated refinements to reflect certain terms of the Puerto Rico support agreements.

    The Company projects its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2021, including those mentioned above, to be $149.5 million, compared with a net expected loss of $199.0 million as of December 31, 2020.

    The economic benefit for U.S. public finance transactions was $77.4 million in 2021, which was primarily attributable to Puerto Rico exposures. The changes attributable to the Company’s Puerto Rico exposures reflect adjustments the Company made to the assumptions it used in its scenarios based on the public information as discussed under “Exposure to Puerto Rico” in Note 2, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period.

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 (i.e., 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.

The further behind mortgage borrowers fall in making payments, the more likely it is that they will default. The rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.

Mortgage borrowers that are not behind on payments and have not fallen two or more payments behind in the last two years (generally considered performing borrowers) have demonstrated an ability and willingness to pay through challenging economic periods, and as a result are viewed as less likely to default than delinquent borrowers or those that have experienced delinquency recently. Performing borrowers that eventually default will also need to progress through delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from liquidation rates into a vector of conditional default rates (CDR), then projecting how the CDR will develop over time. Loans that are defaulted pursuant to the CDR after the near-term liquidation of currently delinquent loans represent defaults of currently performing loans and projected re-performing loans. A CDR is the outstanding principal amount of defaulted loans liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (collateral pool balance). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole principal prepayments, and defaults.

In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net proceeds from the disposal of the underlying property. The Company projects loss severities by sector and vintage based on its experience to date. The Company continues to update its evaluation of these loss severities as new information becomes available.

The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above;

29

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.

Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of 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, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a 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

	Year Ended December 31,
	2021		2020		2019
	(in thousands)
First lien U.S. RMBS	$	(5,371)	$	(20,155)	$	(14,745)
Second lien U.S. RMBS	(25,849)		(9,798)		(45,607)

As of December 31, 2021, the Company had a net R&W receivable of $5.8 million from R&W counterparties, compared with $7.9 million as of December 31, 2020. The Company’s agreements with providers of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers.

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

    The majority of projected losses in first lien 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 are one of the primary drivers of loss projections in this portfolio. In order to determine the number of defaults resulting 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.

30

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

First Lien Liquidation Rates

	As of December 31,
	2021	2020
Current but recently delinquent (1)
Alt-A and Prime	20%	20%
Option ARM	20	20
Subprime	20	20
30 – 59 Days Delinquent
Alt-A and Prime	35	35
Option ARM	35	35
Subprime	30	30
60 – 89 Days Delinquent
Alt-A and Prime	40	40
Option ARM	45	45
Subprime	40	40
90+ Days Delinquent
Alt-A and Prime	55	55
Option ARM	60	60
Subprime	45	45
Bankruptcy
Alt-A and Prime	45	45
Option ARM	50	50
Subprime	40	40
Foreclosure
Alt-A and Prime	60	60
Option ARM	65	65
Subprime	55	55
Real Estate Owned
All	100	100

___________________

(1)    Prior to the third quarter of 2021, the Company included current loans that had missed one payment (30 + days delinquent) within the last 12 months in this category. The Company observed that during the COVID-19 pandemic: (i) loans that became 60+ days delinquent may have elevated future default risk for longer than a year; and (ii) there may be an increased number of loans that missed only a single payment that should not be considered at elevated risk of default. Based on this view, starting in the third quarter of 2021, the Company includes only current loans that had been 60+ days delinquent within the last 24 months in this category, rather than current loans that had been 30+ days delinquent in the past 12 months.

Towards the end of the first quarter of 2020, lenders began offering mortgage borrowers the option to forbear interest and principal payments of their loans due to the COVID -19 pandemic, and to repay such amounts at a later date. This resulted in an increase in early-stage delinquencies in RMBS transactions during the second quarter of 2020 and late-stage delinquencies during the second half of 2020. Until the third quarter of 2021, the Company’s expected loss estimate assumed that some delinquencies were due to COVID-19 related forbearances, and had applied a liquidation rate of 20% to such loans, which was the same liquidation rate assumption used when estimating expected losses for current loans that were recently modified or delinquent. A substantial portion of the loans have resolved favorably, and the Company now expects that the loans that continue to be delinquent will default at a higher rate than the original overall assumption of 20%. Therefore, the Company discontinued the segregation of COVID-19 related forbearances and the application of a special 20% liquidation rate to such COVID-19 forbearances. Beginning in the third quarter of 2021, the Company includes remaining COVID-19 forbearance loans in the relevant delinquency categories consistent with all other loans. Assuming all other variables are held constant, applying the higher liquidation rates to the previously forborne loans that remain delinquent, rather than the previous assumption of 20% that was applied to all COVID-19 forborne loans, did not significantly increase expected losses on this cohort.

While the Company uses liquidation rates as described 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 CDR

31

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

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, would be sufficient to produce approximately the amount of defaults that was calculated 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 case), after the initial 36-month CDR plateau period, each transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that intermediate CDR is held constant and then steps to a final CDR of 5% of the CDR plateau. In the base case, the Company assumes the final CDR will be reached 1.5 years after the initial 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 trend after the first 36-month period represent defaults attributable to borrowers that are currently performing or are projected to reperform.

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 case 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 case 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 case 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 Case Expected Loss Estimates

First Lien U.S. RMBS

	As of December 31, 2021		As of December 31, 2020
	Range	Weighted Average	Range	Weighted Average
Alt-A and Prime
Plateau CDR	0.9% - 10.6%	5.5%	0.0% - 6.2%	4.7%
Final CDR	0.0% - 0.5%	0.3%	0.0% - 0.3%	0.2%
Initial loss severity:
2005 and prior	60%		60%
2006	60%		70%
2007+	60%		70%
Option ARM
Plateau CDR	1.8% - 11.9%	8.3%	2.3% - 10.0%	7.3%
Final CDR	0.1% - 0.6%	0.4%	0.1% - 0.5%	0.4%
Initial loss severity:
2005 and prior	60%		60%
2006	60%		60%
2007+	60%		60%
Subprime
Plateau CDR	2.9% - 10.0%	4.9%	2.7% - 10.2%	5.4%
Final CDR	0.1% - 0.5%	0.2%	0.1% - 0.5%	0.3%
Initial loss severity:
2005 and prior	60%		60%
2006	60%		70%
2007+	60%		70%

32

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

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 case. 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, 2020.

In the third quarter of 2021, the Company implemented a new 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. The Company now assumes that 20% of the deferred loan balances will eventually be recovered upon sale of the collateral or refinancing of the loans. The addition of this new assumption resulted in an economic benefit of $8.9 million.

In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien 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 initial 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 December 31, 2021 and December 31, 2020.

    Total expected loss to be paid on all first lien U.S. RMBS was $86.4 million and $82.8 million as of December 31, 2021 and December 31, 2020, respectively. The $5.4 million economic benefit in 2021 for first lien U.S. RMBS transactions was primarily attributable to the implementation of a recovery assumption for deferred principal balances that had previously been written off, changes in discount rates and improved performance in certain transactions, partially offset by lower excess spread.

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 LIBOR. An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread. LIBOR is anticipated to be discontinued after June 30, 2023, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio referencing LIBOR.

The Company used a similar approach to establish its pessimistic and optimistic scenarios as of December 31, 2021 as it used as of December 31, 2020, increasing and decreasing the periods of stress from those used in the base case.

    In the Company’s most stressful scenario where 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 15 months, expected loss to be paid would increase from current projections by approximately $6.6 million for all first lien U.S. RMBS transactions. In the Company's least stressful scenario where 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 nine months), expected loss to be paid would decrease from current projections by approximately $2.6 million for all first lien U.S. RMBS transactions.

Second Lien U.S. RMBS Loss Projections

    Second lien 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. Expected losses are also a function of the structure of the transaction, the CPR of the collateral, the interest rate environment, and assumptions about loss severity.

    In second lien transactions, the projection of near-term defaults from currently delinquent loans is relatively straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over the next six months by calculating current representative liquidation rates. Second lien transactions have seen an increase in delinquencies because of COVID-19 related forbearances. As in the case of first lien transactions, starting in the third quarter of 2021, the Company includes remaining COVID-19 forbearance loans in the relevant delinquency categories consistent with all other loans. Assuming all other variables are held constant, applying the higher liquidation rates to the previously forborne

33

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

loans that remain delinquent, rather than the previous assumption of 20% that was applied to all COVID-19 forborne loans, increased expected losses by approximately $2.8 million for second lien transactions.

Similar to first liens, the Company then calculates a CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR is then used as the basis for the plateau CDR period that follows the embedded plateau losses.

For the base case scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period has ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at underwriting.)In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore, the total stress period for second lien transactions is 34 months, representing six months of delinquent loan liquidations, followed by 28 months of decrease to the steady state CDR, the same as of December 31, 2020.

HELOC loans generally permit 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.

The HELOC loans underlying the Company’s insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans were modified to extend the original interest-only period. The Company does not apply a CDR increase when such loans are projected to reach their principal amortization period due to the likelihood that those loans will either prepay or once again have their interest-only periods extended. In addition, based on recent trends, in the third quarter of 2021, the Company reduced the CDR floor from 2.5% to 1.0%, as the future steady state CDR on all its HELOC transactions.

When a second lien loan defaults, there is generally a low recovery. The Company assumed, as of December 31, 2021 and December 31, 2020, 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. 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. In the third quarter of 2021, the Company increased its recovery assumption for charged-off loans from 20% to 30%, as shown in the table below, based on recent observed trends. The higher recovery assumption, together with higher actual recoveries and other information obtained on charged-off loans, resulted in a $15.8 million increase in expected recoveries. Such recoveries are assumed to be received evenly over the next five years. If the recovery rate increases to 40%, expected loss to be paid would decrease from current projections by approximately $10.0 million. If the recovery rate decreases to 20% expected loss to be paid would increase from current projections by approximately $10.0 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 case, 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 transactions (in the base case), 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, 2020. To the extent that prepayments differ from projected levels it could materially change the Company’s projected excess spread and losses.

     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 behind the amount of losses the collateral will likely suffer.

    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.

34

Assured Guaranty Corp.

Notes to Consolidated Financial Statements, Continued

Key Assumptions in Base Case Expected Loss Estimates

HELOCs

	As of December 31, 2021		As of December 31, 2020
	Range	Weighted Average	Range	Weighted Average
Plateau CDR	6.5% - 28.9%	15.1%	5.0% - 15.8%	12.5%
Final CDR trended down to	1.0%		2.5%
Liquidation rates:
Current but recently delinquent (1)	20%		20%
30 – 59 Days Delinquent	30		30
60 – 89 Days Delinquent	40		40
90+ Days Delinquent	60		60
Bankruptcy	55		55
Foreclosure	55		55
Real Estate Owned	100		100
Loss severity on future defaults	98%		98%
Projected future recoveries on previously charged-off loans	30%		20%

___________________

(1)    Prior to the third quarter of 2021, the Company included current loans that had missed one payment (30 + days delinquent) within the last 12 months in this category. The Company observed that during the COVID-19 pandemic: (i) loans that became 60+ days delinquent may have elevated future default risk for longer than a year; and (ii) there may be an increased number of loans that missed only a single payment that should not be considered at elevated risk of default. Based on this view, starting in the third quarter of 2021, the Company includes only current loans that had been 60+ days delinquent within the last 24 months in this category, rather than current loans that had been 30+ days delinquent in the past 12 months.

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. Total expected recovery on all second lien U.S. RMBS was $21.7 million as of December 31, 2021 and $9.1 million as of December 31, 2020. The $25.8 million economic benefit in 2021 was primarily attributable to higher recoveries on previously charged-off loans and improved performance in certain transactions.

The Company’s base case assumed a six month CDR plateau and a 28 month ramp-down (for a total stress period of 34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period of elevated defaults. In the Company's most stressful scenario, increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months (for a total stress period of 39 months) would increase the expected loss by approximately $1.2 million for HELOC transactions. On the other hand, in the Company's least stressful scenario, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months (for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by approximately $1.4 million for HELOC transactions.

Structured Finance Excluding U.S. RMBS

    The Company projected that total net expected recovery across its troubled structured finance exposures excluding U.S. RMBS as of December 31, 2021 was $40.5 million, which was primarily attributable to a financial guaranty life insurance transaction. The BIG net par outstanding in this sector was $14.3 million consisting of a life insurance transaction, consumer receivable transactions and other structured finance transactions. The economic loss development during 2021 was $4.2 million, primarily due to LAE for certain transactions, partially offset by higher expected reinsurance recoverables for a life insurance transaction..

Recovery Litigation

    In the ordinary course of its business, the Company asserts claims in legal proceedings against third parties to recover insurance losses paid 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 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.

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