ASSURED GUARANTY LTD

Real gross domestic product increased at an annual rate of 1.6% in the three-month period ended March 31, 2024 (first quarter 2024), compared to an increase of 3.4% in the fourth quarter of 2023, according to the first quarter 2024 advance estimate released by the U.S. Bureau of Economic Analysis. At the end of March 2024, the U.S. unemployment rate, seasonally adjusted, stood at 3.8%, near where it started the year at 3.7%. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default.

According to the U.S. Bureau of Labor Statistics, the inflation rate in the U.S. before seasonal adjustment for the 12-month period ending March 2024, as measured by the Consumer Price Index for All Urban Consumers, was 3.5%, as compared to 3.4% for the 12-month period ending December 2023. According to the United Kingdom’s (U.K.) Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs was 3.8% for the 12 months to March 2024, down from 4.2% for the 12 months ended December 2023. Consumer price inflation in the U.K. increases reported net par outstanding for certain U.K exposures with approximately $22.7 billion of net par outstanding as of March 31, 2024, and also increases projected future installment premiums on the portion of such exposure that pays at least a portion of the premium on an installment basis over the term of the exposure.

With the Federal Open Market Committee (FOMC) acknowledging the need to combat inflation, in March 2022 the FOMC began again raising the target range for the federal funds rate and stated that it would reduce its holdings of treasury securities and agency debt and agency mortgage-backed securities. From March 2022 through July 2023, the FOMC raised the federal funds rate from a range of 0% to 0.25% where it started 2022 to a target range of 5.25% to 5.50%. The FOMC has repeatedly declared that it seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the FOMC indicated that it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Since its July 2023 meeting, the FOMC has maintained the federal funds rate at 5.25% to 5.50%, including through its most recent meeting held April 30-May 1, 2024, stating that it would continue to assess additional information and its implications for monetary policy.

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

The 30-year AAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company’s largest financial guaranty insurance market, U.S. public finance. The MMD rate averaged 3.57% for the quarter ended March 2024, lower than the 4.06% average for the quarter ended December 2023, but higher than the 3.37% average for the quarter ended March 2023. Meanwhile, the difference, or credit spread, between the 30-year BBB-rated general obligation relative to the 30-year AAA MMD averaged 92 basis points (bps) in the quarter ended March 2024, which is narrower than the 100 bps average for the quarter ended December 2023, and narrower than the 101 bps average for the quarter ended March 2023. The Company believes that, over time, wider spreads could permit it to increase its premium rates on new business, and higher interest rates may also increase the amount the Company can earn on its largely fixed-maturity securities.

Additionally, the Company believes that higher interest rates are discouraging some homeowners from moving as many are locked into lower mortgage interest rates at the homes in which they reside, which, in turn, is restricting housing inventory and leading to an increase in home prices as demand outpaces supply. The increase in housing prices may benefit distressed residential mortgage-backed securities (RMBS) the Company insures. The National Association of Realtors reported that year-over-year existing-home sales declined 3.7% from March 2023 to March 2024, while the median existing-home sales price increased 4.8% from March 2023 ($375,300) to March 2024 ($393,500).