ASSURED GUARANTY LTD

Strength of the Economy Generally. Global tariffs have increased since the U.S. administration announced a “reciprocal tariff” strategy on April 2, 2025, with the announced objective of rectifying trade practices that contribute to large and persistent annual U.S. goods trade deficits. Since that time, there have been numerous changes to announced tariffs as well as legal actions relating to tariff policies, resulting in uncertainty as to the future levels of U.S. tariffs. For example, the U.S. Supreme Court held on February 20, 2026 that the International Emergency Economic Powers Act does not authorize the President of the U.S. to impose tariffs. However, following this decision, the U.S. administration implemented alternative tariffs effective July 24, 2026, and tariff levels and related trade policies continue to evolve. Some U.S. trading partners have announced or imposed tariffs or other trading restrictions in response to U.S. actions.

According to the advance estimate released by the U.S. Bureau of Economic Analysis, real gross domestic product (GDP) increased at an annual rate of 1.5% in the three-month period ended June 30, 2026 (second quarter 2026), compared to a real GDP increase of 2.1% in the first quarter of 2026. At the end of June 2026, the U.S. unemployment rate, seasonally adjusted, stood at 4.2%, lower than where it started the year at 4.4%.

The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees in its financial guaranty business will default, while a recession, if it were to occur, would make it more likely that obligors whose obligations it guarantees will default. However, a recession may also cause credit spreads to widen as investors seek security, which tends to create new business opportunities for the Company in its financial guaranty business.

Inflation. 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 June 2026, as measured by the Consumer Price Index for All Urban Consumers, was 3.5%, as compared to 2.7% for the 12-month period ending June 2025. According to the United Kingdom (U.K.) Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs rose 2.8% for the 12 months through June 2026, lower than for the 12 months through June 2025. Recent increases in oil prices associated with geopolitical developments in the Middle East have contributed to market concerns regarding future inflation, particularly in economies that are more exposed to imported energy costs, including the U.K.

Generally, inflation reduces the real value of money over time. For obligors whose payments the Company insures, inflation can mean that the real value of their fixed debt payments decreases, potentially making it relatively easier for obligors to service these fixed-rate debts and less likely for them to default. However, if inflation increases operating expenses and revenues or incomes do not keep pace, obligors may find it more difficult to make their payment obligations, even if nominal debt payments remain unchanged. Higher inflation can also lead to tighter monetary policies, which are actions taken by sovereign central banks to reduce the amount of money circulating in the economy, including raising interest rates, which can make refinancing or servicing debt more difficult. In addition, consumer price inflation in the U.K. affects the Company’s reported net par outstanding for certain U.K. exposures with $24.0 billion of net par outstanding as of June 30, 2026, and also affects 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.

The Company’s U.K. bulk purchase annuity (pension risk transfers, PRT) reinsurance business is also subject to U.K. inflation, as the annuity payments under such transactions are typically adjusted for changes in U.K. consumer price or retail price indices, meaning that the projected benefit obligations the Company reinsures increase in an inflationary environment, which in turn can increase the Company’s benefit payments under those reinsurance contracts. The Company holds inflation-linked assets, including index-linked gilts and inflation swaps, to mitigate this inflation exposure.

Interest Rates. The federal funds rate is the rate at which U.S. banks lend to and borrow from each other, is the benchmark for most U.S. interest rates, and tends to influence U.S. mortgage rates. As the federal funds rate decreases, interest rates, including mortgage rates, tend to decrease. From September 2024 through December 2025, the Federal Open Market Committee (FOMC) lowered the federal funds rate from a target range of 5.25% to 5.50% to a range of 3.50% to 3.75%. Most recently, at its July 2026 meeting, the FOMC held the federal funds rate at a target range of 3.50% to 3.75%, stating that it is strongly committed to supporting maximum employment and returning inflation to its 2% objective.

From 2024, the Bank of England’s Monetary Policy Committee (MPC) took actions similar to those of the FOMC to spur economic growth. As inflationary pressures eased and the U.K. economy showed signs of stagnation or mild recession, the MPC kept the Bank of England base rate (Bank Rate) unchanged for most of 2024, before beginning to decrease the Bank Rate in August 2024. In 2025 and early 2026, with inflation being closer to the MPC’s target level and economic growth slowed, the MPC further lowered the Bank Rate several times. As of July 30, 2026, the Bank Rate stood at 3.75%, down from a high of 5.25% in mid-2024. Recent increases in oil prices may contribute to higher inflation expectations, which could influence future Bank of England policy decisions and place upward pressure on U.K. gilt yields, as longer-term rates reflect, among other factors, market expectations regarding future short-term rates and the term premium investors require to hold longer-dated securities.

The level and direction of change of interest rates and credit spreads impact the Company in numerous ways. On the one hand, lower interest rates may increase the fair value of fixed-maturity securities currently held in the Company’s investment portfolio, encourage municipal and infrastructure bond issuance and positively impact the finances of some of the obligors whose payments the Company insures. On the other hand, lower interest rates may decrease the base on which the Company charges up-front premium on most new municipal and infrastructure bond transactions and may also decrease amounts the Company can earn on securities newly acquired for its investment portfolio. Lower interest rates also are often accompanied by narrower credit spreads, which may also decrease the level of premiums the Company can charge for its financial guaranty transactions.

Credit Spreads. 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 4.33% for second quarter 2026, slightly higher to the 4.30% average rate for the quarter ended March 2026 and lower than the 4.47% average rate for the quarter ended June 2025. Meanwhile, the difference, or credit spread, between the 30-year BBB rated general obligation relative to the 30-year AAA MMD averaged 83.7 basis points (bps) for second quarter 2026, which is slightly narrower compared to the 84.3 bps average for the quarter ended March 2026 and narrower compared to the 90.0 bps average for the quarter ended June 2025. The Company believes that wider spreads could permit it to increase its premium rates on new business.

U.S. Residential Mortgage Rates. According to Freddie Mac, the 30-year fixed-rate mortgage rate averaged 6.49% for the week ending June 25, 2026, lower than the 30-year mortgage rate average of 6.77% from one year ago. The National Association of Realtors reported that there was a 2.8% increase in year-over-year existing-home sales from June 2025 to June 2026, and that the median existing-home sales price increased 1.8% from June 2025 ($432,700) to June 2026 ($440,600). Higher housing prices may benefit the distressed residential mortgage-backed securities (RMBS) that the Company insures.

Foreign Exchange Rates. For second quarter 2026, the exchange rates between the pound sterling and the U.S. dollar and between the euro and the U.S. dollar traded within relatively narrow ranges and finished the quarter at levels generally consistent with where they began.

The Company is subject to foreign exchange risk in several areas of its business. First, with respect to the financial guaranty business, the Company guarantees non-U.S. obligations denominated primarily in pound sterling and euros, and also invests in pound sterling and euro denominated investments. Second, PRT reinsurance liabilities are denominated in pound sterling, along with the assets (after hedging) supporting this business. The impact of fluctuations in exchange rates on premiums receivable, financial guaranty loss reserves and PRT liabilities, along with any cross-currency derivatives, is reflected in the Company's consolidated statements of operations, while the impact of fluctuations in exchange rates on the Company’s investments classified as available-for-sale is reported in other comprehensive income.