ASSURED GUARANTY LTD

Insurance Segment Results

Insurance Segment Results

Net Earned Premiums and Credit Derivative Revenues

Premiums are earned over the contractual lives, or in the case of insured obligations backed by homogeneous pools of assets, the remaining expected lives, of financial guaranty insurance contracts. The Company periodically estimates remaining expected lives of its insured obligations backed by homogeneous pools of assets and makes prospective adjustments for such changes in expected lives. Scheduled net earned premiums decrease each year unless replaced by a higher amount of new business, or books of business acquired in business combinations. See Item 8, Financial Statements and Supplementary Data, Note 5, Contracts Accounted for as Insurance, Premiums, for additional information.

Net earned premiums due to accelerations are attributable to changes in the expected lives of insured obligations driven by: (i) refundings of insured obligations; or (ii) terminations of insured obligations either through negotiated agreements or the exercise of the Company’s contractual rights to make claim payments on an accelerated basis.

Refundings occur in the public finance market when municipalities and other public finance issuers pay down insured obligations prior to their originally scheduled maturities. Refundings tend to increase when issuers can refinance their debt obligations at lower rates than they are currently paying. The premiums associated with the insured obligations of municipalities and other public finance issuers are generally received upfront when the obligations are issued and insured. When issuers pay down insured obligations, the Company is no longer on risk for payment defaults, and therefore accelerates the recognition of the remaining nonrefundable deferred premium revenue. The amortization of the Company’s outstanding book of business along with the previously high levels of refunding activity and the higher interest rate environment has led to a lower volume of refunding opportunities over the last several years.

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

Net Earned Premiums and Credit Derivative Revenues

(1) Includes accretion of discount.

Net earned premiums and credit derivative revenues increased in 2024 compared with 2023 primarily due to a large refunded transaction in the first quarter of 2024. As of December 31, 2024, $3.7 billion of net deferred premium revenue on financial guaranty insurance remained to be earned over the life of the insurance contracts.

New Business Production

Gross Written Premiums and New Business Production

(1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. See “— Non-GAAP Financial Measures — PVP or Present Value of New Business Production.” PVP was discounted at 5.0%, 4.0% and 2.5% in 2024, 2023 and 2022, respectively.

GWP relates to insurance and reinsurance contracts for both financial guaranty and specialty business. Financial guaranty insurance and reinsurance GWP includes: (i) amounts collected upfront on new business written; (ii) the present value of future contractual or expected premiums on new financial guaranty business written (discounted at risk-free rates); and (iii) the effects of changes in the estimated premium or lives of certain transactions in the in-force book of business. Specialty business GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore not included in GWP. PVP and gross par written include the present value of future gross revenues and exposure, respectively, associated with a financial guaranty written by the Company that, under GAAP, is accounted for under Accounting Standards Codification (ASC) 460, Guarantees.

The non-GAAP financial measure, PVP, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, for all contracts regardless of form or accounting model. See “— Non-GAAP Financial Measures” below.

U.S. public finance GWP and PVP in 2024 were higher than GWP and PVP in 2023 primarily due to a large transportation revenue transaction. The Company’s direct par written represented 58% of the total U.S. primary municipal market insured par sold in 2024, compared with 61% in 2023, and the Company’s penetration of all municipal issuance was 4.8% in 2024 compared with 5.4% in 2023.

Non-U.S. public finance GWP increased while PVP decreased in 2024 compared with 2023. GWP in 2024 includes the present value of additional future premiums on a large existing transaction, which is not captured in PVP. New business in 2024 primarily included secondary market guaranties of several U.K. regulated utility and airport transactions, as well as new and renewed liquidity guarantees in the infrastructure sector.

In 2024, structured finance GWP and PVP decreased compared with 2023. Structured finance GWP and PVP in 2024 were primarily attributable to insurance securitizations, bank balance sheet relief transactions, a guaranty of a diversified real estate portfolio and subscription finance transactions.

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

Financial Strength Ratings

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

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

For a discussion of the effects of rating actions on the Company beyond potential effects on the demand for its insurance products, see “Item 1A. Risk Factors —A downgrade of the financial strength or financial enhancement ratings of any of the Company’s insurance or reinsurance subsidiaries may adversely affect its business prospects.”

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

CVIs issued by Puerto Rico and received as part of the 2022 Puerto Rico Resolutions are classified as trading with changes in fair value reported in “fair value gains (losses) on trading securities” in the consolidated statements of operations. The fair value of remaining CVIs as of December 31, 2024 and December 31, 2023 was $123 million and $318 million, respectively.

Equity method investments in the Insurance segment include investments that AG Asset Strategies LLC (AGAS) makes in certain alternative investments, primarily Sound Point and AHP funds. The income (loss) on such investments is reported in “equity in earnings (losses) of investees” and typically represents the Company’s share of earnings of its investees. As part of the August 5, 2024 AG stock redemption, certain alternative investments were distributed to AGMH, whose results are reported in the Corporate division. The carrying value of these transferred investments as of December 31, 2024 was $118 million.

Net investment income for 2024 decreased compared to 2023, primarily due to the lower income on Loss Mitigation Securities and lower average asset balances due in part to sale of new general obligation bonds and new bonds backed by toll revenues (together, New Recovery Bonds) received as part of the 2022 Puerto Rico Resolutions, partially offset by higher income related to the distribution of assets to alternative investments from CIVs. The overall pre-tax book yield of available-for-sale fixed-maturity securities and short-term investments was 4.57% as of December 31, 2024 and 4.09% as of December 31, 2023.

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

The Company has a consolidated CLO fund, that has been reported on a one-quarter lag with changes in net asset value (NAV) reported in “equity in earnings (losses) of investees”. In the fourth quarter of 2024, the Company transferred the underlying investments to its fixed-maturity securities, available-for-sale portfolio. Beginning in the fourth quarter of 2024, interest income from the transferred CLOs are reported in net investment income with changes in fair value reported in other comprehensive income.

Other Income (Loss)

The decrease in “other income (loss)” in 2024 compared with 2023 was primarily attributable to the reversal of a previously recorded litigation accrual of $20 million and commutation gains of $10 million in 2023. See Item 8, Financial Statements and Supplementary Data, Note 17, Contingencies, for additional information.

Economic Loss Development (Benefit)

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

•Note 5 for contracts accounted for as insurance;

•Note 6 for contracts accounted for as credit derivatives;

•Note 8 for FG VIEs; and

•Note 9 for fair value methodologies for credit derivatives and FG VIEs’ assets and liabilities.

In order to efficiently evaluate and manage the economics of the entire insured portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. The discussion of losses that follows encompasses expected losses on all contracts in the insured portfolio regardless of accounting model, unless otherwise specified. Net expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for loss and LAE payments, net of: (i) inflows for expected salvage, subrogation and other recoveries; (ii) excess spread on underlying collateral, as applicable; and (iii) amounts ceded to reinsurers. Assumptions used in the determination of the net expected loss to be paid (recovered) such as delinquency, severity, discount rates and expected time frames to recovery are consistent for each sector regardless of the accounting model used.

Current risk-free rates are used to discount expected losses at the end of each reporting period. Therefore, changes in such rates from period to period affect economic loss development and loss and LAE. However, the effect of changes in discount rates is not indicative of actual credit impairment or improvement. The weighted average discount rates used to discount expected losses (recoveries) were 4.38%, 4.09% and 4.08% as of December 31, 2024, 2023 and 2022, respectively.

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

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

by Accounting Model

(1) In 2023, the net expected loss to be paid for FG VIEs primarily related to trusts established as part of the 2022 Puerto Rico Resolutions (Puerto Rico Trusts) and in 2024, the Company satisfied its remaining direct insured obligations and deconsolidated the remaining Puerto Rico Trusts. See Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered).

(2) The increase in BIG is primarily related to downgrades of certain U.K. regulated utility exposures.

Roll Forward by Sector

(1) Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are typically settled 45 days after the end of the reporting period. Such amounts are recorded as reinsurance recoverable on paid losses in “other assets.”

Effect of changes in the risk-free rates included in economic loss development (benefit) was a loss of $4 million in 2024 and a loss of $3 million in 2023.

2024 Net Economic Loss Development

Public Finance: The economic benefit of $9 million for U.S. public finance exposures was primarily attributable to certain healthcare exposures, partially offset by higher expected loss adjustment expenses related to certain Puerto Rico exposures. The economic loss development of $81 million for non-U.S. public finance exposures was primarily attributable to certain U.K. regulated utilities and healthcare exposures.

U.S. RMBS: The net benefit attributable to U.S. RMBS of $75 million was mainly attributable to a $43 million benefit from higher assumed and realized recoveries for secured second lien charged-off loans and a $15 million benefit from higher assumed recoveries for first lien deferred principal balances.

See Item 8, Financial Statements and Supplementary Data, Note 4, Expected Loss to be Paid (Recovered), for additional information.

2023 Net Economic Loss Development

Public Finance: The economic loss development on U.S. exposures in 2023 was $201 million, which was primarily attributable to PREPA and healthcare exposures, partially offset by higher projected recoveries in other municipal exposures.

U.S. RMBS: The benefit attributable to U.S. RMBS of $56 million was primarily attributable to a $53 million benefit related to higher recoveries for secured second lien charged-off loans and a $13 million benefit related to improved performance in certain transactions, partially offset by $17 million of loss development related to the return of certain previously received funds.

Insurance Segment Loss Expense

The primary differences between net economic loss development and the amount reported as “loss and LAE (benefit)” in the consolidated statements of operations are that loss and LAE (benefit): (i) considers deferred premium revenue in the calculation of loss reserves for financial guaranty insurance contracts; (ii) eliminates loss and LAE related to FG VIEs; and (iii) does not include estimated losses on credit derivatives.

Insurance segment loss expense includes loss and LAE on financial guaranty insurance contracts and losses on credit derivatives without giving effect to eliminations related to the consolidation of FG VIEs.

For financial guaranty insurance contracts, each transaction’s expected loss to be expensed is compared with the deferred premium revenue of that transaction. Expected loss to be expensed represents past or expected future net claim payments that have not yet been expensed. Such amounts will be expensed in future periods as deferred premium revenue amortizes into income on financial guaranty insurance policies. Expected loss to be expensed is the Company’s projection of incurred losses that will be recognized in future periods, excluding accretion of discount. When the expected loss to be expensed exceeds the deferred premium revenue, a loss is recognized in income for the amount of such excess. Therefore, the timing of loss recognition in income does not necessarily coincide with the timing of the actual credit impairment or improvement reported in net economic loss development. Transactions (particularly BIG transactions) acquired in business combinations or seasoned portfolios assumed from legacy financial guaranty insurers generally have the largest deferred premium revenue balances. To the extent that a BIG transaction has a large deferred premium revenue, the difference between economic development and loss and LAE may be significant.

While expected loss to be paid (recovered) is an important measure that provides the present value of amounts that the Company expects to pay or recover in future periods regardless of accounting model, expected loss to be expensed is important because it presents the Company’s projection of net expected losses that will be recognized in the consolidated statement of operations in future periods as deferred premium revenue amortizes into income for financial guaranty insurance policies. For additional information on the expected timing of net expected losses to be expensed see Item 8, Financial Statements and Supplementary Data, Note 5, Contracts Accounted for as Insurance.

The amount of Insurance segment loss expense, which includes losses on policies regardless of form, is a function of the amount of economic loss development discussed above and the deferred premium revenue amortization in a given period, on a contract-by-contract basis. The following table presents the Insurance segment loss expense (benefit).

Loss Expense (Benefit)

Employee Compensation and Benefit Expenses and Other Operating Expenses

The increase in employee compensation and benefit expenses in 2024 from 2023 was primarily attributable to an increase in headcount and other employee benefit costs. Other operating expenses increased in 2024 from 2023 primarily due to the write-off of $6 million of intangible assets attributable to insurance licenses in connection with AGM’s merger with and into AG.

Provision (Benefit) for Income Taxes

The tax provision in 2024 includes $13 million of global minimum tax for the Company’s Bermuda subsidiaries. The tax benefit in 2023 was primarily related to the $189 million benefit recognized in connection with the enactment of the 15% Bermuda corporate income tax in December 2023.

The new Bermuda corporate income tax allows for a deferred tax asset associated with an ETA equal to the difference between the fair market value and the carrying value of assets and liabilities of each of the Company’s Bermuda insurance subsidiaries as of September 30, 2023. The ETA is expected to be utilized over 10 to 15 years, depending on the nature of the deferred tax asset component, beginning in 2025. This was partially offset by income tax expense in the Company’s other operating jurisdictions. The Company expects its Bermuda insurance subsidiaries to incur tax which will be offset by the realization of the deferred tax asset beginning in 2025. See Item 8, Financial Statements and Supplementary Data, Note 13, Income Taxes, for additional information.